Summit Hotel Properties, Inc.

In closing, on behalf of the entire management team of PUSHIN, we'd like to thank you again for your participation in today's call. If you have any further inquiries in the future, please feel free to contact us at pushin.icaasia.com. Thank you.

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Ladies and gentlemen, thank you for standing by, and welcome to the Summit Hotel Properties Incorporated first quarter 2020 earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference call is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your host today, Mr. Adam Woodell. Sir, please begin.

Thank you, Howard, and good morning. I am joined today by Summit Hotel Properties Chairman, President and Chief Executive Officer Dan Hanson, and Executive Vice President and Chief Financial Officer John Stanner. Please note that many of our comments today are considered forward-looking statements as defined by federal security laws. These statements are subject to risks and uncertainties, both known and unknown, as described in our 2019 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today, May 12, 2020, 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.shpreet.com. Please welcome Summit Hotel Properties Chairman, President, and Chief Executive Officer, Dan Hanson.

Thanks, Adam, and thank you all for joining us today for our first quarter 2020 earnings conference call. Yesterday, we reported first quarter results in our press release, including all standard comparable operating measures and financial metrics, which have been rendered largely irrelevant by the dramatic falloff in demand we saw in the middle of March and as widespread closures were implemented to slow the spread of the COVID-19 virus. Therefore, we're going to spend our time today reinforcing the many proactive measures we took to combat the effects of the virus on our business, provide an update on the current operating environment balance sheet, and look ahead to how we envision leading in the future. Over the past two very challenging months, we have prioritized the health and safety of our guests, our brand and management company associates, and our own employees, and I'm quite pleased with the resolve demonstrated by our team managing through this unprecedented crisis. We have been fortunate to speak with many of you in recent weeks and are genuinely grateful for both the concern for our wellbeing and the interest in our business. As the depths of what is certain to be a historic downturn became apparent in March, we swiftly began implementing hotel-level contingency plans focused on right-sizing staffing levels and adjusting service amenity offerings to an exceptionally low occupancy environment. Fortunately, the efficient nature of our operating model has allowed us to keep all but six of our 72 hotels open, with another nine hotels effectively consolidated into adjacent, typically dual-branded hotels. The hotels that remain open are operating with very limited staff and providing only the very basic service and amenity offerings. We have suspended all nonessential capital expenditures for the remainder of the year, along with common dividend distributions, which combined will preserve over $100 million of cash on an annualized basis. We have also taken additional measures at the corporate office, implementing temporary base salary reductions for the majority of our employees and furloughing approximately 25% of the staff. We were very pleased to announce yesterday an amendment to our senior bank credit facilities. John will provide more details on the agreement shortly, But this amendment provides us with an additional $150 million of undrawn funding capacity, a full financial covenant waiver for 12 months, and a modified covenant package beyond those initial 12 months that creates considerable flexibility and runway for our business to recover. As I mentioned, the majority of our hotels remain open today, and despite the incredibly challenging conditions, we are pleased to have found some level of stabilization over the last few weeks. Preliminary April results for our portfolio point to REVPAR declining approximately 89 percent compared to last year, including results from hotels that were closed or consolidated during the month. However, occupancy levels were four full percentage points higher in the second half of the month compared to the first, as certain brand initiatives, including first responder rate programs and our own internal revenue management strategies, proved successful in capitalizing on the limited opportunities. While high teens' occupancy levels may seem trivial, I would remind you that even with 90% year-over-year REVPAR declines, that marginal incremental revenue reduces our monthly estimated cash burn rate from $15 million to $11 million per month. With nearly $300 million of current liquidity, we have well over two years of capital to survive a very draconian and, thankfully, highly unlikely operating scenario. While we are all facing what is undoubtedly an uncertain future and road to recovery, we also believe this will ultimately provide unique opportunities for value creation. We generally share in the emerging consensus that leisure travel broadly and drive to leisure demand more specifically will be the first and fastest segment of business to recover. We stand well positioned to benefit from such a recovery as our efficient operating model has afforded us important flexibility to remain open at the vast majority of our hotels, and a clear pathway to a relatively quick re-ramp of business. Approximately 50% of our pre-crisis business mix was leisure-oriented, while group business, particularly large groups, and international demand make up a disproportionately small portion of our customer base. Before I turn the call over to John, I would like to make a few comments about our brand partners and provide some examples of how they have responded in a constructive manner. As you are probably well aware, the major brand companies have implemented several measures to help support owners through the crisis, including the postponement of brand-mandated capital plans, access to and utilization of FF&E reserve funds for operating expenses, fee relief, and the suspension of some brand standards and quality control audits. More importantly, we have collaboratively begun the very important process of addressing the future operating standards of our business, one in which cleanliness, hygiene, and sanitation will undoubtedly take on a more prominent role. Our belief is a watershed event like this gives us a rare opportunity to address meaningful shortcomings and implement important changes to the day-to-day operations of our hotels. While we are in the very early stages of redefining our model, we remain committed to finding solutions that enhance the long-term profitability of our hotels and delivering on guests' evolving and likely elevated expectations. With that, I will turn the call over to John Stanner, our CFO. Thanks, Dan, and good morning, everyone. In yesterday's press release, we outlined critical amendments to approximately $1.1 billion of debt, which includes our $600 million senior credit facility, as well as two $225 million term loan facilities that are governed by the same set of financial covenants and thus were modified in essentially identical ways. Importantly, these amendments allow for the outright waiver of testing of financial covenants through the first quarter of 2021 and modified covenant thresholds along with annualized testing mechanisms in the last three quarters of 2021 to accommodate what may be a more gradual recovery in our business. We have an ability to draw an additional $150 million under the revised terms of our revolving credit facility, giving us nearly $300 million of total liquidity, including approximately $145 million of unrestricted cash currently on hand. This gives us not only considerable capacity to survive an extended period generating extremely limited revenue, but flexibility to operate in a potentially longer downturn and slower recovery scenario. We also broadly preserved our ability to continue making preferred dividend payments and retain flexibility to renovate hotels in a manner more consistent with our past cadence once demand begins trending towards normalized levels. In consideration for this flexibility, the credit facilities are now secured with pledges of equity from our borrow-based assets and include certain restrictions on uses of cash during the waiver period, including investments, common dividend distributions, and share repurchases. The amendments to these facilities address more than 80% of our current debt balance, and when combined with an absence of debt maturities until November of 2022, position our balance sheet well to withstand the financial ramifications of a severe decline in revenues. Today, our weighted average interest rate is 3.4%, and weighted average term to maturity is nearly four years. We are truly grateful for the support we received from our bank group and proud that our many strong relationships allowed us to work through this process efficiently and successfully. As Dan mentioned, our cash burn rate in a zero revenue scenario is approximately $15 million per month, which is split roughly evenly between covering operating losses at the hotel level and funding corporate cash needs, including all principal and interest payments, corporate G&A, preferred dividends, and non-discretionary capital expenditures. We've seen an encouraging stabilization in occupancy levels in recent weeks, which is reducing our cash burn rate by over 25%, and in turn, adding considerable runway to our liquidity profile, even in this historically low demand environment. As our attention turns increasingly towards a recovery in demand and evaluating reopening the few hotels that are currently closed, we remain focused on adding back labor, services, and amenities gradually and prudently. Less than 10% of the total rooms in our portfolio are closed today, and the majority of those we are planning to reopen over the next 30 days, pending any further changes to local market conditions. Thankfully, our operating model has always relied on relatively less labor, and we believe there is an opportunity, at a minimum on an interim basis, to operate with fewer FTEs at more normalized occupancy levels. While revenues have declined dramatically across the industry, we have continued to gain market share despite the lack of traditional demand. Even before we began to feel the effects of broad travel restrictions, we improved our REVPAR index by nearly 300 basis points in both January and February. Our 7.6% REVPAR index gain in March is likely somewhat skewed by hotel closures in certain markets, but nonetheless, we have been successful capitalizing on opportunities that currently exist. which speaks highly of our revenue management team and augurs well for our ability to re-ramp quickly. Finally, we formally withdrew full year guidance ranges in the middle of March in response to the COVID-19 pandemic. And given the continued uncertainty in our business, we are not in a position to provide updated ranges for the remainder of the year. We will evaluate reinstating guidance as the operating environment continues to evolve over the coming months and quarters. With that, I'll turn the call back over to Dan. Thanks, John. In summary, we are pleased with our business model, our partnerships, and our process to mitigate losses and prepare for the future. And with that, we'll open the call to your questions.

Ladies and gentlemen, as a reminder, to ask a question, you will need to press star then 1 on your telephone keypad. If you wish to withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Chris Waronka from Deutsche Bank. Your line is open.

Hey, good morning, guys. Do you guys have an estimate of maybe what percentage of the portfolio is drive-to, fly-to? I know it's not something you typically ask guests, but if you look at just the location of those hotels, is there any way to ballpark it?

Chris, this is Dan. You know, it's a little hard to get an accurate estimate. I mean, technically, all of our hotels you can drive to as most you can. I think what we see is some of the more traditional locations that maybe haven't been as much of a drive-to market are starting to see some pickup as people may be looking at different modes of transportation and they may be modifying their plans instead of flying somewhere to go somewhere where they can drive to. And that drive to market may have previously been a fly to market. So as we look at it, we think that all of our markets have a component that are visitable in this recovery period. I know that doesn't specifically answer your percentage question, but it's really, there's not a real specific metric that we get through our guess that we could use.

Yeah, yeah, no, fair enough. Also wanted to ask you about kind of how you see rate integrity unfolding going forward, maybe if you look out to July or August, because I think we know that some of the bigger full-service boxes might have higher breakeven occupancy. They have to use rate as a tool. Are you seeing any signs of more severe rate erosion as you look further out, or is it so far holding up pretty well?

I think so far it's held up all right in light of the circumstances we're sitting in. Forward-looking trends are really hard to have any sort of confidence in at this point. I'm not sure how reliable demand forecasts are out beyond the next 30 days, so I think where we line up is that we expect to compete very well with our hotels in our immediate area, whether they're in our comp set or not. For the factors that we've been really positive on our portfolio for the last several years, which is they're great boxes, great locations. They have an average effective age of a little over three years, so they've been renovated. And I think that, we believe, will help us manage rate as best as possible.

Okay, very good. Thanks, Dan.

Thanks, Chris.

Thank you. Our next question or comment comes from the line of Michael Bellisario from Baird. Your line is open.

Good morning, everyone. Morning. Just wanted to dig into... March and April trend a little bit, really kind of better understand the rent card declines. Can you maybe give us a sense of how your urban versus suburban properties fared and then any particular markets that dragged down the overall portfolio's performance would be helpful?

Yeah. Hey, Mike, it's John. You know, I would say, you know, March finished down for the portfolio about 60%. As you would imagine, you know, I think we started to feel the effects in some of the urban markets more quickly than we did in suburban markets. San Francisco probably being the one market that stood out where we saw a quicker decline earlier. I think the trends, and Dan mentioned a little of this in the prepared remarks, I think the trends in April, which you know, our hope will be kind of the worst month. We're worse in the first half of the month than they were in the second half of the month. The occupancy was a full four percentage points higher in the second half of April than it was in the first half of April. Again, I think, you know, generally I would say the suburban portfolio outperformed the urban portfolio, and we've seen a continuation of that trend in slightly higher occupancy levels as we've gotten at the first few weeks of May.

Got it. And can you tell us the six hotels that are closed outright currently?

Sure, Mike. It's Dan. We've got the Hampton Inn and Suites in Silverthorne, Hyatt Place, Minneapolis downtown, the Hyatt Place in Orlando, the Convention Center, and the Hampton Inn Suites, Baltimore, Inner Harbor, Holiday Inn Express, San Francisco, and the Hotel Indigo in Asheville.

Got it. Helpful. And then just last one for me. probably for John, you mentioned $150 million of availability. What are the requirements for you to get that last $50 million? It looks like there's $100 million that's kind of freely available, and then there's a couple more steps you'd have to take to get to that last $50 million. Can you walk us through the mechanics of that?

Yeah, sure. So, you know, I think as we've laid out, you know, we drew $125 million of cash, you know, up and right around quarter end. So we're sitting on $145 million of cash today. In addition to that, we preserved $150 million of incremental borrowing capacity under the facility. The first $100 million, it will be secured by pledges of equity of the borrowing-based assets, and the last $50 million of availability gets secured by outright mortgages on those borrowing-based assets.

Got it. So if you wanted, for whatever reason, you found a use for that $50 million, you'd have to go through the process. That's a little bit more work to get that. It's not as easy and efficient to get the compared to the first $100 million, right?

Yes, that's right. I think the rationale for us was, one, I think for the banks, it's obviously a significant credit enhancement. In our view, between the $145 million we have today and the incremental $100 before that last $50 gets us through, again, a pretty long period of time and a pretty draconian scenario. With $300 million of of liquidity in a, you know, a rev par environment where we run even down 90%, which was kind of the worst month of the year in April. You know, it gets us 27, 28 months of total liquidity. So we've got a fairly long runway. You start getting into kind of, back end of the year 21 and 22 covenants at that point in time. So I think that the liquidity and even getting that last $50 million to the extent that the market dictates it, you know, we do have to give mortgages, but we've got a fair amount of runway before we get to that point.

Got it. Sorry, that $27.28, that's with the extra $100, not the full $150, right?

That's with the full $150.

Got it. Okay, thank you.

Thank you. Our next question or comment comes from the line of Neil Malkin from Capital World Securities. Your line is open.

Everyone, Dan, happy birthday. Thanks, Neil. First question, you know, a lot of people have been talking about how, you know, this pandemic has kind of shifted or swung the pendulum back, you know, toward owners in the brand and owner sort of dynamics. I'm just wondering, you know, or I'd be interested to hear your thoughts in terms of, you know, what that kind of looks like in terms of or how you see that playing out in terms of fees, brand standard proliferation of new brands, and if you think that'll, you know, lead to higher margins than you've seen, you know, before when everything stabilizes.

Neil, it's Dan. Look, I think the brands, as I stated in my prepared remarks, have been very much supportive of taking a hard look at the operating model across the board. I think that we've made great progress in discussions on things that would help the operating model, but that would also meet the expectations, which are, as you would expect, likely elevated for guests. So I do think that on a broad scale that we will come out of this, you know, with an even better operating model. To the extent that we can achieve peak margins, I think a lot of that will have to do with the speed at which rate recovers. But I've actually been very pleased. I sit on a number of advisory boards with the brands, and they have been you know, very much supportive of ways to help, not just during this environment, but in evaluating a longer-term solution to some of the struggles we've had from operations.

Appreciate that. Other one I have is what, I guess, portion of your portfolio is traditional extended stay versus the, I guess, just, you know, traditional select service? And then I Are there anything, you know, that you're seeing from COVID that would maybe make you change or alter in some way your portfolio or capital allocation strategy?

You know, it's Dan again. Our portfolio is roughly, you know, between 20% and 25% extended stay. You know, look, we love that business, and should opportunities be available to you know, for those type of transactions, you know, we would love to continue to grow that part of the portfolio. But, you know, we're very much very methodical on our acquisition. The returns still have to be there. You know, the entry point would have to be right. Locations would have to be right. So that would just be one of the factors we would look at as we continue the evolution of our portfolio.

Okay, I guess last one from me. The MES loans you have on the developments, what have preliminary conversations been like with your partners based on the deterioration and any possibility of potentially that capital stack getting pushed down and you maybe wind up being the equity holder?

John, I probably could share that question. I'd say that, you know, the Mezzalones are with very experienced developers.

I think you may have hit mute.

Hello. Sorry about that. I think we had a little bit of a power outage. Go back to the question on the MES loan. Is everybody still on?

Yes, sir.

Okay. Look, I think that as far as our partners on the MES loans, they're very experienced developers. Their property is in good markets with strong demand generators. And we do have a mechanism to push those out a year or even two. So that's probably more likely. the direction we'd go with those. We haven't given them a forbearance for, you know, the next three months, which, you know, I think is appropriate given the current environment. But we still feel good about the long-term prospects of these particular properties.

Thank you.

Thank you. Our next question or comment comes from the line of Austin Worshmut from KeyBank. Your line is open.

Hey, good morning, everybody. I hope you haven't cut the utility bill at this point, but just into my first question here. In sort of a gradual occupancy, you know, ramp-type scenario, how should we be thinking or what range of flow-through multiples should we be thinking about as you re-ramp costs and services over time? This is a good question. Can you kind of repeat that?

Yes, sure.

Are you talking about occupancy? Well, so if you think about, you know, REVPAR declines and how that flows through to hotel EBITDA declines, sort of a multiple of, you know, EBITDA decline to REVPAR decline, you guys were, you know, 1.7 times, which stood out, versus I think a lot of the peers being north of two and even three times. which maybe speaks to the efficiency of the operating model. You referenced earlier that ADRs have hung in there fairly well, and so as we think about a gradual occupancy ramp in the portfolio, maybe what type of multiple or flow-through should we think about on that incremental occupancy as you also re-ramp costs and services? Yeah, so I'll take a first crack at this. So I think the way that we've looked at it, you know, when we looked at retention in March, you know, our March retention was somewhere between kind of 30% and 35%. And I think March is probably our best indicator at this point, but really only half the month is reflective of operating at what are kind of these very, very lean staffing models. I think April will be the better tell. We don't have final April numbers yet, but my expectation is that, you know, the retention rates as we get through April will be somewhere in kind of 35% to 40% range. So I think we'll have pretty good retention. That probably implies that kind of, you know, somewhere between one and a half and two times, you know, EBITDA losses, a multiple of our loss that you referenced. I think as we think about how revenues flow through going forward. A lot of it's going to be, as you know, the mix between kind of rates and occupancies. And we're in a little bit of a unique circumstance here where this is a lot different scenario than going from, you know, normalized kind of rev pars and growing those 2%, 3%, 5%, whatever it is. At some level, you have to start adding back some of that incremental labor that has been cut. Take managers kind of off the front desk and get them back and bring in some of the more traditional staffing that you have. So I do think we'll see good flow throughs. I think that, again, what we're seeing now in this environment is somewhere between kind of 35% and 40% type retention levels at these low occupancy levels that we sit at today. That's helpful. Appreciate the thoughts. And then I was curious, do you guys have a sense of within your submarkets or comp sets, what percent of those hotels are closed or have suspended operations? Yeah, we've got some sense. I would say the sense that we have is, frankly, probably more anecdotal than what's getting reported by Smith Travel. I think, you know, as most know that, you know, Smith Travel has come out and said that until a hotel is closed for 30 days, it's going to continue to be included as reporting in the comp set. So we're just getting now to the point where some of the hotels that closed later in the month of March or into April are coming out of those sets. I think as reported by Smith Travel, it's in kind of the high single-digit percentage numbers. I think realistically it's likely higher than that, you know, about 8% or 9% of our total rooms are closed. My sense is that the comp sets it's at least that high and probably a little bit higher than that. We should be able to have a more concise answer to that question over the next coming weeks as we continue to get better data from Smith Travel on closures. Okay. No, that's helpful. And then lastly, I think somebody earlier had kind of spoken to break-even occupancy. I'm not sure that you guys gave a figure or not. I might have missed it, but could you give us a sense of where you think break-even occupancy is at both the GOP, hotel EBITDA, and then maybe on a cash flow basis for your portfolio? Sure, Austin, Dan. You know, there's a lot of variables that go into that, you know, clearly at this level. there's not as much labor. And as you continue to reopen and occupancy picks up, there is an added labor cost. And a lot of it is the function of the rate you use. So we think that at a break-even level for hotel-level EBITDA, somewhere between probably 40% and 45% using $100 as a base rate. Obviously, that depends on the market and the labor profile. And the break-even... to cover costs at a corporate level of probably 10 percentage points higher. That does include covering the preferred dividends and CapEx and that as well. Okay, that's helpful. Thanks, Dan.

Thank you. Our next question or comment comes from the line of Bill Crow from Raymond James. Your line is open.

Thanks. Good morning, guys. Dan or John, you think we get back to 19 levels in RevPAR first or margin first?

That's a great question, Bill. I would at this point say RevPAR is probably the easiest way back, but it's really a function of how the operating model changes and evolves you know, a combination of, you know, what the supply picture looks like and our ability to push rate, which, you know, both I believe will be favorable in the future. But I think my perspective would be RevPAR would recover first.

All right. And then how much exposure or demand do you generate from colleges and universities? Do you have a sense for that?

I would say it's, frankly, pretty small. You know, we do have, you know, the hotel in Yale's campus, and we bought a hotel out in Portland that gets some exposure from some of that from the university right there. Yeah, and the Marriott in Boulder. But I wouldn't say it's a particularly large demand generator across the hotel, across the portfolio generally.

Okay. And then thank you for that. Last one for me. And maybe you went through this and I missed it, but how's Memorial Day stacking up? Are you seeing a material increase in demand?

Bill, it's Dan. I think our perspective on Memorial Day is probably going to be more short-term focused. I think that's where the pickup is likely to be. And that's where we're seeing a lot of the successes that we're having currently across the board. So we think that'll be consistent with what we've seen over the last couple weeks.

Yep. Okay. Thank you.

Thank you. Our next question or comment comes from the line of Danny Assad from Bank of America. Your line is open.

Hey, good morning, guys. Can you hear me okay? Yep. Gotcha, Danny. Great. Great. So, Dan, are you hearing about anything suburban property owner distress? And if so, what would that mean for property values and potential M&A as things start to ramp up?

I mean, I think it's fair to say that everybody is in some level of distress right now, particularly the smaller owner operators. I don't know that there is an immediate opportunity regardless of the level of, you know, leverage or operations. I think the banks have generally been supportive of smaller owner-operators in giving them time to get their feedback under them. As far as opportunities, you know, our priority right now is really on the portfolio. And based on our portfolio, the locations, the chain scale, and the operating model. We think there's a lot of value to be created from here simply with that. But to the extent there is an opportunity in the future, we do have as good a relationship with our lenders as anybody in this space. And we've got a terrific partner with GIC, and we could look at things along those lines.

Great. And then more from like a distribution strategy. So once you start ramping back up, what does your distribution mix look like? Do you lean into maybe some channels more than you typically would? Or do you kind of, yeah, that's just going to be a mix? Or is it going to be the same as what it would have been pre-outbreak, I guess?

Well, I think one of the strengths of our portfolio and our operating model is we do have flexibility, where we were probably more of a balanced business versus leisure from an occupancy standpoint. I think there will be more of a bias towards leisure. I think there will be an increased focus on digital as we try to be creative and proactive in driving that business. So, yeah, I think there will definitely be a shift in tactics from our corporate revenue management team and how we go after business and fill rooms.

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

Thanks, Danny.

Thank you. I'm sure no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Well, again, thank you all for your partnership and patience with the power outage. We look forward to connecting soon. Hopefully that will be in person. I hope you all have a terrific day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.