Good day, and thank you for standing by. Welcome to the Summit Hotel Properties Q4 2023 and Full Year Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Wudel, Senior Vice President of Finance, Capital Markets and Treasurer. Please go ahead.

Thank you, Dede, and good morning. I am joined today by Summit Hotel Properties' President and Chief Executive Officer, Jon Stanner; and Executive Vice President and Chief Financial Officer, Trey Conkling. Please note that many of our comments today are considered forward-looking statements as defined by federal securities laws. These statements are subject to risks and uncertainties both known and unknown, as described in our SEC filings. Forward-looking statements that we make today are effective only as of today, February 29, 2024, and we undertake no duty to update them later. You can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call on our website at www.shpreit.com. Please welcome Summit Hotel Properties' President and CEO, Jon Stanner.

Thanks, Adam, and thank you all for joining us today for our fourth quarter and full year 2023 earnings conference call. 2023 proved to be another highly successful year for Summit, culminating with strong fourth quarter results. For the full year, RevPAR increased 6.6%, which outpaced the broader industry by 170 basis points, and resulted in hotel EBITDA and adjusted EBITDAre growth of approximately 6% and 5%, respectively. We continue to enhance the overall quality of our portfolio through strategic acquisitions while disposing of non-core assets with meaningful near term capital investment needs, and we have methodically refinanced approximately $1 billion in bank debt over the past 10 months, further improving the balance sheet and our ability to execute on important strategic initiatives. Today, Trey and I will discuss our 2023 financial results, our outlook for 2024, and how our recent capital allocation and balance sheet activities position Summit for growth moving forward. Fundamentals continue to improve across our portfolio in 2023 as RevPAR across all segments experienced positive growth despite the normalization of leisure travel witnessed throughout the year, most notably in the summer months. Robust demand in group and negotiated business drove 12% and 7% RevPAR growth in those segments, respectively as travel to urban markets continued to accelerate. Full-year pro forma RevPAR growth of 6.6% was comprised of roughly equal increases in occupancy and average rate. While average daily rates in the portfolio are more than 5% ahead of 2019, occupancy continues to trail prior peak levels, creating meaningful opportunity for continued growth, particularly given our exposure to urban markets that have been slower to recover. RevPAR growth in our portfolio is increasingly driven by midweek demand as weekday RevPAR for the full year increased over 9% compared to 2022, a trend that's accelerated throughout the year…

Thanks, Jon, and good morning, everyone. Throughout 2023, RevPAR within our portfolio improved across all location types, most notably within our urban and suburban portfolios, which produced RevPAR growth of 9% and 8%, respectively for the full year. Growth in our urban and suburban portfolios was driven by several of our larger Sunbelt markets such as Houston, Dallas-Fort Worth and Atlanta, which comprise approximately 25% of our pro forma key count and generated RevPAR growth of 26%, 17% and 13%, respectively, for the full year. Despite this significant growth in 2023, nominal RevPAR in our urban and suburban portfolios remains low 2019 levels, leaving continued opportunity for outsized future growth. Today, our urban and suburban hotels comprise approximately 75% of our pro forma guest room count. Turning to our resort and small town metro assets, full year 2023 RevPAR growth was approximately 3% as leisure demand remained steady but below the peak growth rates experienced in 2022, RevPAR performance in both of these location types continues to perform meaningfully above 2019 levels, a trend we expect to continue. Resort and small town metro assets account for 15% of our pro forma guest room count. Pro forma Hotel EBITDA for the full year 2023 was $260.5 million, an increase of 6% to 2022. This translated to full-year adjusted EBITDA of $190 million, an increase of 5% to 2022. Adjusted FFO for the full year 2023 was $112.8 million or $0.92 share. Moving to the fourth quarter, pro forma RevPAR increased 2.9% year-over-year, an acceleration from our third quarter RevPAR growth of 2.4%, driven by a 2.4% increase in occupancy and a 0.4% increase in average rate. This resulted in fourth quarter market share improving year-over-year by more than 300 basis points to 116%. By comparison, for the full year, RevPAR index…

[Operator Instructions] Our first question comes from Austin Wurschmidt of KeyBanc Capital Markets.

Yes. Good morning, everybody. Jon or Trey, you guys have $73 million listed as held for sale in the balance sheet, which I presume does include the Plano asset you sold earlier this year. But should we just view this as you continue to move down a path towards selling additional assets, maybe even in the near term? And how do we think about use of proceeds? Because, Jon, I believe you did kind of mention that you'll continue to be in a position to pursue opportunities to the extent that they materialize?

Yes, thanks for the question. Good morning, Austin. We did disclose in the 10K, one, that we've moved several assets into the held for sale bucket. We disclosed that we're under contract for the sale of three additional assets for a total sale price of $84 million, combined with what we've already announced in the press release, that bring kind of the total disposition portfolio to about nine hotels and $139 million. The hotels that are under contract that are classified as held for sale, the earnest money associated with those contracts is not fully non-refundable. And so we typically don't publicly announce them or talk through valuation metrics or anything else until they've either closed or the earnest money is non-refundable. I do think what you alluded to is exactly right, Austin. This is consistent with what the strategy has been over the last 12 to 18 months where we've been able to sell some lower RevPAR, lower cap rate type of hotels, albeit in still what is a relatively slow transaction environment. A lot of what we've sold has had pretty significant CapEx needs going forward. I think in the near term you can expect us to continue to use proceeds to pay down leverage and pay down - and delever the balance sheet. As we did say in the prepared remarks, we expect to be a net seller of hotels in the first half of this year and want to make sure we're in a good position as we continue to make progress the year, to be a position to be opportunistic on the acquisition side as well.

So, just to clarify, it's fair to assume that those sales are not captured in your guidance at this point, and that like what you've done before, these are lower cap rate assets that could be used to repay some higher rate debt that you have outstanding?

That's correct.

Fair. And then just last, you've had some markets that have kind of lagged in the recovery. Just curious how those set up this year? The Bay Area assets, many - some you've talked about in the past, but just curious what your outlook is for some of those markets and whether or not some of those may be included in these assets held for sale? Thanks.

Yes, we did kind of outline five markets that have been significantly slower to recover in our portfolio. Those markets being the Bay Area of San Francisco, Minneapolis, Louisville, New Orleans and Baltimore. Collectively, those markets are running about 75% to 80% of 2019 RevPAR levels, and EBITDA is between kind of 50% and 60% depending on the market. So, we do think that there is a lot of upside left in those markets. Many of those markets are still challenged today, but the bar for incremental growth is relatively low. And I think we're optimistic that we're starting to see some green shoots in some markets. New Orleans is having a really, really strong first quarter. The Super Bowl certainly helped, but we had a strong Mardi Gras in New Orleans in the first quarter. I think San Francisco, while the convention calendar is down, we're starting to see some green shoots, even in Silicon Valley, where we're seeing some of the tech business come back, albeit slowly. Again, the bar for growth here is pretty low. Louisville is a market that's got a couple of special event tailwind this year. It's the 150th running of the Kentucky Derby, the PGA Championships at Valhalla this year. So we started to see some green shoots in Minneapolis last year. So it is certainly a focus of ours operationally this year, and we do think that those markets set us up for outsized growth relative to the industry for the year.

It's all helpful. Thanks for the time.

Thanks, Austin.

Thank you. One moment for our next question. And our next question comes from Michael Bellisario of Baird.

Thanks, guys. Good morning.

Good morning, Mike.

Just want to follow up there on some of those markets. Just your 2% to 4% RevPAR guide, how are you forecasting the performance of the wholly owned portfolio that has a lot of those assets versus the GIC portfolio? Is there any outsized lift in those assets that's embedded in guidance? And how should we think about the performance in '24, wholly owned versus JV?

Yes, I think that - one, we do think that those markets will have outsized growth for the year. I think on a blended basis, the expectation is for the portfolios to perform relatively in line with each other. Maybe slightly better performance this year in the wholly owned portfolio than the GIC portfolio. We certainly saw that in the fourth quarter of this year. I do think, as you alluded to, Mike, there's probably more embedded upside in the wholly-owned portfolio just because we have exposure to some of these slower to recover markets. That being said, the portfolio in the GIC portfolio - the performance in the GIC portfolio and the NCI portfolio particularly, has continued to be quite strong. I think four of our top seven markets RevPAR growth wise in 2023 were all Texas markets. And everything that we've identified and that has us excited about the NCI portfolio and its performance, those - the bar is higher next year, but the underlying demographic growth and corporate relocation growth and everything that's driven those properties' performance continues.

Got it. Understood. And then just one more on guidance, the 4% to 5% expense growth range. I think you said 2% cost per occupied room. Maybe that was just for the fourth quarter. But either way, what are you assuming big picture for wages, where does contract labor end in '24 versus '23, insurance, taxes, et cetera? Thanks.

We outline kind of expense - broad expense growth in 2024 at kind of 4% 5%. That is, as you alluded to, some of that is driven by the fact that about two-thirds of our RevPAR growth is forecasted to come from occupancy. So when you break down the expense growth, it's roughly 50-50, the difference between expense growth per occupied room and just incremental occupancy across the portfolio. Our assumption for wage growth is somewhere between 3% and 4% for the year. As we talked about in the prepared remarks, we do think there's the opportunity to continue to reduce our reliance on contract labor and turnover. I think that's where the real dollars are. We saw that in the back half of the year. Our expense growth per occupied room was up less than 1.5% in the back half of the year. A lot of that is the great work the team has done, again, to get rid of some of this contract labor. Our contract labor was actually down year-over-year in the second half of the year. That being said, it's still almost 2 times what it was pre-pandemic. So I don't expect to get all the way back down to where we were in 2019. But incremental progress there should help us mitigate what is still an environment where we still are seeing some inflationary pressure on expenses.

And then just last one for me, just if and when you sell those three hotels, where would pro forma net leverage go? And then just on the acquisition front, I know you mentioned being opportunistic, but any specific markets of interest to you or regions of the country that you're maybe sharpening the pencil on? And that's all for me. Thanks.

Hi, Mike, it's Trey. From a leverage perspective, if you see our guidance, we're really probably in the mid-5% right now. I think when we talk about those asset sales, given the profile of what they are, as Jon kind of outlined, versus what we sold through 2023, you'd probably see leverage in the low-5%. So we could see it moving at probably a little more than a quarter of a turn is kind of how we're looking at it today. I'll turn it back to Jon for the markets.

Yes, on acquisitions, no specific target markets, Mike. You can see that post pandemic, we've bought about a $1 billion of assets. We've been heavily concentrated in the Sunbelt, in some of these market - in some of these mountain markets. We still like the demographics and all the demand and growth drivers in those markets. But ultimately, we're underwriting risk-adjusted returns, and I think we're happy to look maybe not everywhere but almost everywhere for the right opportunity.

Perfect. Thanks for that color.

Thank you. One moment for our next question. And our next question comes from Bill Crow of Raymond James.

Hi, good morning. A couple lines of questions. On the expense front, can you kind of talk about what percentage of your portfolio is doing nightly housekeeping versus pre-Covid? How has that evolved over the last few years?

Yes, Bill, very, very small portion of the portfolio is actually doing nightly housekeeping. Again, I think it's one of the benefits of the model and one of the benefits of being in where we sit with the brands is that the vast majority of our hotels have gone to an opt-in cleaning. Now, we are cleaning more rooms than we were certainly in '20 and '21. You've seen some of these patterns return normal and our length of stays have generally normalized. We don't have these three and four-night length of stays as much as we have in the past, but we're clearly going to see the benefits of the model shifting to an opt-in cleaning model. I'm always hesitant to say forever, but certainly indefinitely, is the way that - and you can see it in our FTE counts. We're running about 80% of our prior peak FTE counts. And a lot of that is driven by the fact that we're not cleaning every night.

Does it make a difference what market you're in and whether they're union or non-union or anything like that as far as what happens at your hotels?

Yes, there's definitely some difference in patterns along BT customers and leisure customers. And certainly, if you're in a union market and you're a union hotel, you've got a different set of rules that you need to play by. You're not seeing nightly cleaning flexibility in those markets nearly as much. Thankfully, we have very, very little union exposure. So we do have a fair amount of flexibility to do this. And I think we're finding the sweet spot around delivering exactly what the guest wants and still creating a very positive guest experience and doing in a way that's the most efficient for us to manage the bottom line.

Great. On the acquisition front and I understand it might be the second half of the year or even later, but I know at one point you were hoping you'd see some broken development deals. And I'm curious whether you're starting to see any of that or whether that was the economic recovery, demand recovery has come back too much to really open that door. And also, you have done a couple of developments, ground-up developments. I'm wondering whether that's an opportunity for capital deployment going forward.

Yes, we didn't see a lot, and we haven't seen a lot in terms of just broken development deals where we could step in and take over the development. And I think somewhat consistent with what we've seen in past cycles, we just haven't seen a whole lot of real distress come through the system. That being said, part of it is we just haven't seen a lot of development. I think one of the silver linings of the industry right now is the lack of supply growth. That has been well documented, but we're in a 1% or sub-1% supply growth environment for the next several years. So kind of by definition, there's not a whole lot of development happening in this environment. We do think that it's potentially an interesting time to selectively look at developments. And we've been historically - as you'll recall, we've been active with our mezzanine lending program. And we think that there's the potential now where there's really high quality projects that can't get done because they can't get financed efficiently. And so, it is a potential use of capital. As we get further out into the year and we get some of these other asset sales completed and something that we're actively looking at.

I'm going to push my luck and see if I can get one more question in on the same topic. And that is, are you starting to see more displacement between the brands trying to enforce their standards and hotels that have deferred capital? Whether you would step in to do more renovation projects of not distressed, but certainly aged assets?

Yes, look we think that it's going to create transaction activity over time. I do think, again, as you alluded to, the brands, rightfully, are going to take a more aggressive approach with owners to try to get their hotels renovated. This has been an undercapitalized, from a CapEx perspective, industry, really since the pandemic. And I think the brands are highly focused on making sure that they have a collection of assets that are maintained appropriately. And so, we spend a lot of time internally trying to be thoughtful around where and how we allocate capital. And as I said earlier, one of the common themes across the hotels that we have sold has been significant capital needs where we just didn't feel like the ROI justified the capital that needed to go into the hotel. The inverse of that, again as you alluded to, is that could create some opportunities. We've always really liked to buy broken assets and kind of fix them. And part of that fix often could be from capital. And I do think that you will see more of those opportunities present themselves over the next 6,12,18 months. And part of that will be driven by the brands.

Great. That's it for me. Thank you.

Thanks, Bill.

Thank you. One moment for our next question. And our next question comes from Chris Woronka of Deutsche Bank.

Hi. Good morning, guys. Jon, I want to ask you about extended stay brands. You guys have some exposure there, right, with a couple of big companies. They've all recently announced new extended stay brands, kind of generally at the lower end than where they've been. Does that create any threat or opportunity for you guys? Is there any kind of pressure to either renovate one of your existing hotels or potentially build a new one of the new brand?

Yes, it is interesting, and I think, as you alluded to, all of the three large brands, Mary, Hilton and Hyatt have all come out with new, what I'll broadly call, mid-scale extended stay hotel options. I do think they're going to fit in different places in kind of the overall chain scale picture over time. We're not a natural developer of those type of properties. I certainly understand from the brand's perspective how they fit and the impetus to try to roll those out. In some ways, I think it creates some opportunities for us in certain markets with potential other brand options. I think at this point in time, we're content to kind of see how the brand rollout happens and assess our ability to take advantage of any of those new brands over time.

Okay. Yes, thanks for that, Jon. And then going back to the asset sales and what you've got kind of under contract, and you mentioned you might hopefully be more aggressive later in the year on the acquisition front if there's opportunities, but interest rate outlook, right, I guess it's a little surprising - is the reason you don't wait until later in the year to sell what you're selling, is that because the CapEx needs have some kind of hard deadline to start? Or is there another factor to - if we think hotel pricing might improve, meaning what you can sell for, cap rates go down later in the year, does it make sense to wait or is there some reason to do it now?

Yes, look, we obviously don't think we've left money on the table by selling now. And I think part of that has been the nature of the assets that we've been selling, have been a little bit - we've found buyers that are a little more focused on room revenue multiples and a little less focused on yields. And I think that's helped facilitate some of these transactions at low cap rates - certainly cap rates well inside where we trade as a public company. I think we want to make sure that we're positioned for taking advantage of acquisition opportunities later in the year. And so the earlier we can do it, the earlier we can show a little progress on deleveraging the balance sheet, we think there is a benefit to that. We certainly do weigh, in any of these transactions, the rationale of going now or waiting. And there have been certain assets that we've entertained sales on that we haven't executed on because we do think we can wait until we get a more normalized - at least into a more normalized interest rate environment to transact. So, it is a balance and we think we've struck the appropriate balance in going now versus waiting.

Okay. Very good. Thanks, Jon.

Thanks, Chris.

Thank you. I would now like to turn it back to Jon Stanner for closing remarks.

Okay. Thank you all for joining us today. We look forward to seeing many of you in Florida in next week and at investor conferences later in the year. Thank you very much.

This concludes today's conference call. Thank you for participating, and you may now disconnect.