Summit Hotel Properties, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Summit Hotel Properties fourth quarter and full year 2020 earnings conference call. At this time, all participant lines are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would like to hand the conference to your speaker today, Adam Wudel, Senior Vice President of Finance and Capital Market. Please go ahead, sir.

Thank you, Victor, and good morning. I am joined today by Summit Hotel Properties President and Chief Executive Officer, John Stanner. 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 24, 2021, 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 President and Chief Executive Officer, Jon Stanner.

Thanks, Adam, and thank you all for joining us today for our fourth quarter and full year 2020 earnings conference call. As you are all well aware, 2020 was a historically challenging year for our industry, as air travel and business and consumer spending deteriorated significantly. primarily as a result of measures taken to slow the spread of the COVID-19 virus, which led to a previously unimaginable over 35% decline in industry-wide demand. Despite the unusually difficult operating environment, we are pleased to have made tremendous progress on several key initiatives during the year that we believe uniquely and favorably position Summit for Growth. Today, I'll provide a recap of our fourth quarter and full year financial results, along with a few of our more notable accomplishments. and update on current operating trends and our outlook for the business and our company going forward. REVPAR in our pro forma portfolio declined 63.7% in the fourth quarter, essentially on top of a 63.5% decline in the third quarter, as the seasonally slower fourth quarter provided slightly easier year-over-year comparisons that mostly offset marginally lower nominal REVPAR. Our fourth quarter REVPAR declined compared favorably to the REVPAR declines in top 25 and urban markets of 69% and 76% respectively. For the second consecutive quarter, our portfolio was profitable at the hotel level and has been profitable on a cumulative basis since May with an average REVPAR of approximately $40, demonstrating the clear benefits of our efficient and flexible operating models. Our asset and revenue management teams continue to do a remarkable job operating in a low-demand environment as our pro forma portfolio achieved a rev part index of nearly 138% during the fourth quarter, which represents a market share gain of nearly 22 percentage points compared to the fourth quarter of 2019. For the full year, our pro forma portfolio finished with a rev part index of 134%, which represents an increase of more than 19 percentage points. During the fourth quarter, the well-documented trend of weekend occupancy and revpar outperformance continued, as leisure travel remains the primary source of demand throughout our portfolio. Weekend occupancy was 52% during the fourth quarter, which led to revpar levels that were 40% higher than weekdays. With the demand profile at our hotels virtually unchanged from recent quarters, occupancy trends across various location types and chain scales remained fairly consistent in the fourth quarter. Hotels in markets we classify as drive-to outperformed hotels in fly-to markets by nearly 20 percentage points, and hotels located outside of CBD locations fared better than our hotels in downtown locations by a similar margin. Our extended-stay hotels posted fourth-quarter occupancy of approximately 60%, achieving a 74% REFAR premium compared to our non-extended-stay hotels. Urban hotels continue to lag the industry recovery, though occupancy in our urban and CBD portfolio has generally stabilized. Our 42 non-urban hotels achieved nearly 55% occupancy during the fourth quarter and ran over 60% on weekends. And our hotels in resort, suburban, airport, and other locations also performed relatively better during the fourth quarter, each posting occupancies of more than 50%. For the full year 2020, we reported pro forma rep R of $52, which represents a decline of 59.2% year over year. This decline also compares favorably to the declines in top 25 in urban markets of 62% and 68%, respectively. While these revenue declines translated into material erosion in the profitability of our hotels, we were pleased to still report positive adjusted EBITDA at the corporate level for the full year. Partially driven by our team's ability to quickly adapt the operating model of our hotels. By the time lodging demand troughed in April of last year, hotel-level full-time equivalents had been reduced by approximately 85%, leading to a 47% reduction in hotel operating expenses in 2020, which were down over 4% on a per-occupied room basis despite historically low occupancy levels. On an aggregate basis, hotel-level operating and fixed expenses were approximately $140 million lower in 2020 than in 2019, and our hotel EBITDA retention was an impressive 46% from April through year-end, despite over a 70% decline in REVPAR during the same period. Hotel-level operating retention also benefited from our ability to thoughtfully modify services and amenities across the portfolio throughout the year. Thank you for joining us. Thank you for joining us. Thank you for joining us. January operating results were stable, generally in line with December, and we are expecting the beginning of a gradual pickup starting in February. Our performance over President's Day weekend was particularly encouraging, as we had our best weekend and best single night since the start of the pandemic on that Saturday, with a portfolio-wide rev par of nearly $90. The near-term pickup in demand in February has been robust. partially aided by the Super Bowl, President's Day weekend, and some pickup from the winter storms in Texas. And February is now pacing toward being our best month post-pandemic, in line with October of last year. As importantly, pace for March is up significantly from where February stood a month ago. We believe this all bodes well for strong leisure demand as we get into the spring and summer months. Assuming a reasonable timeline and trajectory for the continued recovery in demand, we believe we can be cash flow positive at the corporate level in the latter part of the second quarter. Shifting to the balance sheet, in January, we successfully completed a convertible notes offering that generated gross proceeds of $287.5 million at a 1.5% coupon that matured in February 2026. The notes have a base conversion premium of 37.5%. and as part of the transaction, we entered into capped call transactions that increased the effective conversion premium to 75%, or $15.26 per share. Net proceeds from the transaction totaled $258.7 million, which were used to reduce our outstanding revolver balance to zero and partially pay down our $225 million term loan, maturing in November of 2022, to a balance of $127 million. Earlier this month, we successfully amended our senior unsecured credit facilities to extend the covenant waiver period through March 31, 2022, with modified covenant testing through December 31, 2023. In addition to extending our covenant waiver period, our amendment increases liquidity by providing access to the full availability of our $400 million revolver, which currently has an outstanding balance of $10 million. We also have the ability to utilize $150 million of current liquidity to fund new investments and have an unlimited ability to fund acquisitions with equity issuances. We currently have more than $400 million of total liquidity, which includes approximately $23.5 million of unrestricted cash on hand. Today, our weighted average interest rate is approximately 3.2%. We have no debt maturities until November of 2022. and ample liquidity to repay all maturing debt through 2023. While the current operating environment for our business continues to be challenging, we remain decidedly bullish on the outlook for our industry generally and the future of Summit specifically. All indications point to considerable pent-up demand for travel, particularly leisure travel, and as the continued vaccine rollout leads to lower COVID case counts and related hospitalizations globally. We believe a more normal travel environment will take hold. We are blessed with a tremendous portfolio and an experienced and capable team. Combined with our strong liquidity profile and the flexibility of our balance sheet, we believe we are uniquely positioned to pursue value creation opportunities. One housekeeping note on the timing of the filing of our 10K. Typically, we file our 10K simultaneously with the release of our earnings press release. Kevin Milota, Paul Ruiz, We expect to receive an unqualified opinion on the financial statements provided in our earnings release which will be the same as those included in our Form 10-K. Before I open it up to questions, let me take a brief moment to talk about our recent leadership transition. Many of you have had the opportunity to get to know and work closely with Dan over the years and are well aware of his passion for and dedication to this business. In his transition to his new role as our executive chairman, he leaves a lasting legacy of his success, underpinned by a tremendous track record and an unwavering commitment to transparency and integrity. To me, he has been a role model, a mentor, and an inspiration. And while he remains an important part of our organization, I'd like to publicly thank him for all of his contributions to this industry, our company, and me personally. He certainly leaves a large pair of shoes to fill. We're currently conducting a nationwide search for our next CFO and hope to have an announcement coming over the next several weeks. The rest of our team remains engaged, motivated, and extremely excited about the bright future we have in front of us at Summit. And with that, we'll open the call to your questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. And to withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Neil Malkin from Capital One Securities. You may begin.

Good morning, everyone. John, congratulations. Look forward to hearing your voice. Tell us what happened in the quarter. Good morning, Neil.

Thank you.

Hey, sure, yeah. You know, can you just talk about San Francisco, maybe just kind of in general capital allocation. So your San Francisco portfolio is not really sort of the sort of CBD-heavy portfolio, but, you know, just kind of giving or I wanted to get your thoughts on how you see San Francisco and markets like that that you have exposure to and how you kind of view those markets in this cycle of as it pertains to capital allocation. Given what we've seen in terms of a lot of companies leaving the coastal urban markets for a panoply of reasons, I know usually you say you're market agnostic, but I'd love to get how you're thinking about that as we are in the early stages of recovery.

Sure, yeah. Look, I think to your point, San Francisco has been a market that's obviously a high-profile market for our industry that has had some significant challenges. We're fortunate that we only have one hotel closed in our portfolio, 72 assets, and that hotel happens to be in downtown San Francisco in Fisherman's Wharf. And I think everyone has agreed that the path to recovery there is potentially a little bit longer. We are fortunate that more of our exposure in that city is down closer to the airport and in the Oyster Point sub-market, which is really fueled by a lot of biotech and life science type business that we think comes back faster and in a more robust way, maybe than some of the stuff downtown or at least sooner. I wouldn't certainly write off the and many more. And, you know, part of the struggle that San Francisco is going to have particularly is there's a real distinct lack of international travel today. And so I think ultimately that comes back. I do think, you know, because of those factors, you know, we would certainly underwrite differently today than we would have previously in a market like San Francisco. But, again, I also don't think that it – I think it would be premature to say that demand never comes back into those markets. For us specifically, we're fortunate that we're in the Fisherman's Wharf sub-market because we do think that's a more leisure-oriented sub-market generally and likely one that will come back sooner than some of the other sub-markets downtown.

Yeah, appreciate that. And then, you know, it would be great to get any insight into kind of conversations you've had with GIC, obviously your JV partner. You know, it's been fascinating. obviously pretty non-active. But, you know, I know that you guys have always, you know, when your hallmark is your, you know, very creative strategic capital allocator and, you know, obviously GIC is a long-term vehicle. So wondering if you're, you know, kind of what you guys are thinking about maybe near term or I guess maybe in the second half of this year, you know, priority is there in terms of putting some capital to work. are taking advantage of the way you guys are uniquely positioned.

Yeah, sure. You know, we do have, you know, very, very frequent conversations with GIC. They've been a tremendous partner of ours, you know, really since the inception of the venture. You know, I think, as we've said pretty consistently, we're very fortunate to have this unique vehicle for growth as we look at, you know, what we hope is the beginning of a fairly robust recovery here. and others. As you know, GIC is a long-term vehicle and in many ways they're built for these types of environments where there's some level of dislocation in market pricing. We would like to take advantage of that. I think the first order of business for us is some of what we achieved even earlier this year between doing the convertible deal and amending for the second time our bank facility. Thank you. Thank you.

Sorry, just in terms of that, do you expect that in 2021, acquisitions you make will be exclusively within that venture?

I wouldn't say it's necessarily exclusively in the venture. I do think that is our preferred method for growth at this time. It lowers the capital requirement from our perspective. It creates a fee stream and a promote opportunity that should enhance returns. So I wouldn't say it has to be in the vehicle, but I do think that is our preferred vehicle of growth at this time.

All right. Thanks. Thank you, everyone.

Thank you.

Thank you. Our next question will come from Alishan Warshmit from KeyBank. You may begin. Great. Thank you. Good morning, everybody.

John, you had mentioned an expectation of being cash flow positive. I think you said by the latter half of 2Q. Can you just remind us what REVPAR level gets you to corporate level break-even, either before or after CapEx? And then with expenses presumably increasing along with the ramp in demand and occupancy, how should we think about that relationship between REVPAR growth and expense growth beyond that break-even level? Sure. Yeah, you know, I think what we've kind of said, and this has been consistent, is that, you know, somewhere between kind of a $60 and $70 rev par is where we think we need to get to be great even at the cash flow level. That does include kind of the ongoing maintenance level of CapEx that we've been spending, which has been, you know, somewhere between a million and a million and a half dollars on a monthly basis. and Jonathan Stanner. and our belief on, look, I think one of the things the team did a great job of last year was managing expenses. And so, you know, when we talk about, you know, 70%-ish rep part declines over the last eight or nine months of the year and a retention rate, you know, in kind of the mid-40%, I think that's really positive. I would think we look at it probably more so on a relative basis to 19. I think in and around those levels will continue to persist. As you mentioned, we are going to start to bring... and some level of expenses back that potentially influence that number to some degree as occupancy comes back. But today, where we sit today, we're still running these operations incredibly lean. And we're only going to bring back services and amenities and additional staffing to the extent that the demand is there to support it. Got it. And then in that comment, you know, referencing the meaningful pickup in pace in March, can you put a little more detail around the nature of that, you know, pickup and bookings? Anything regionally to call out or otherwise, just any additional details in that comment would be helpful. Sure. Yeah, you know, our March PACE today sits a little over 30% ahead of where February is. We don't talk a lot about PACE because, as we mentioned also in the prepared remarks, our booking window is really small. But I do think that it is a very positive sign, particularly because we had Super Bowl and President's Day weekend in February. And so I think what you're seeing is, again, more of a continuation of this recovery and leisure demand predominantly. and it's been some of the markets that you would expect, some of the markets that performed better last year, markets like Tucson and Tampa and Phoenix and Silverthorne. We've had a really good quarter. So I would say it's more of a continuation of some of the trends that we saw on the fourth quarter is what's for the most part driving that pace. But it is, I think, encouragingly fairly broad-based.

Got it.

And then if I can, just one more very helpful comment there, but... The Summit team really spent the last cycle turning over the portfolio, you know, evolving the market and even sub-market makeup of your hotels. And so just coming out of the pandemic, you know, there's a lot of discussions around evolving travel trends and what this next cycle holds. And I think Neil touched on it a little bit. But how did this go into your thinking about the future makeup of the portfolio and sort of transactions that you'll pursue? Yeah, look, I think the first thing I would say is that we really love the portfolio that we own today. I think as we sit here and look at how the recovery unfolds and the trajectory and the markets in which it unfolds, I think we feel really good about the 72 hotels that we own today. We have always been big believers in evolution, and I don't think that we necessarily believe we need to transform the business like the business was transformed over the first nine years as a public company, but we do think we'll continue to try to be forward-thinking and thoughtful around how we evolve the business. I think one of the things that we've done well historically as a company has found creative ways to grow the business through transactions, even in markets and times where – it's otherwise been difficult to do. Some of the historical transactions we've done we think have been very forward-thinking in terms of how guest trends are going to evolve, and I think we'll continue to make that a priority.

Great. Thanks for the talk. Our next question will come from the line of Danny Asad from Bank of America. You may begin.

Hey. Good morning, John. My question to you is on rate. So how much of the 35% rate decline that we saw in the fourth quarter, how much of that is the mixed shift of corporate versus leisure? And then to tie that out to what the brand has said about holding corporate negotiated rates steady versus last year and the year before, how should we think about, again, that mixed shift? How would that affect the timing of a rate recovery this cycle?

It's a great question. I think how rates change over the course of the year is something we've spent a lot of time with. To look backwards to start for your question, I do think it was a mix of both change and mix and just overall rate degradation last year that drove rates lower. We've talked about how optimistic and bullish we are on the recovery. I think the one thing that we're watching very closely is rate integrity. We do see some positive signs as we look out into the summer months, particularly in some of the more popular leisure travel periods where we've seen good rates hold, even relative to where they were in 2019. As you alluded to, I think positively most of these corporate negotiated rates have held flat from 2020, which were essentially held flat from 2019. That is a good thing. Most of them or many of them are going to have some level of dynamic pricing associated with them, which and our next question comes from Ryan of

Chris Waronka from Deutsche Bank. You may begin.

Oh, hey, John, and let me add my congratulations on getting into the top seat there. We're glad to have you there. So the question was not – yeah, you bet. The question was on – you know, we've heard a lot of your more full-service-oriented peers – talk about how they have to reshape the operating model, and it seems like a lot of full-service hotels, especially those in suburban airport markets, might look and feel a lot more like select-service hotels going forward. How do you kind of look at that, and are there any concerns there that a full-service hotel becomes more competitive if it has to kind of play a different rate level going forward?

Yeah, look, I think we've always felt one of the advantages that we have has been the efficient nature of our operating model and how efficiently we can operate these hotels. And so when you hear things like full-service hotels trying to operate more like select service hotels, in some ways we take that as a compliment, that the type of hotels and the way that we operate our hotels is a better way to create value and a better path to profitability. And so Look, I think ultimately if they're converting their operating model to look more like operating model, I think location quality of products are going to win out. And we feel really good about the locations we own. And we have a young portfolio. The average age of our portfolio is under four years. Most of the portfolio has been renovated. And so I think we'll continue to compete very, very well with that type of product.

Okay. Fair enough. And then it's probably a for another day later on, but you'll have a CFO in place and understanding that it'll later be a board decision. But as it pertains to dividend, and you guys will probably be in a position to potentially restart something meaningful sooner than some of your peers, what's your high-level view on how important that might be, especially in light of what's going on with interest rates in the market?

Yeah, sure. Look, we've always felt that dividends were an important part of the kind of the total shareholder return story of the company, and we never viewed them as an or. We viewed it as an and. We're obviously in a very unique environment today. I think positively, you know, from a REIT perspective, we're not going to have any near-term need to reinstate the dividend. We'll do so opportunistically. I think, frankly, it's unlikely that that happens this year. But going forward as the business recovers, it is something that, you know, we'll look very closely at as we do with all capital allocation decisions.

Okay. Very good. Thanks, Tom. Perfect. Thanks, Chris.

And once again, that's star one for questions, star one. Our next question will come from Michael Belisario from Bayer. You may begin. Good morning.

Good morning, Mike. Good morning. John, just on the acquisition front, maybe when you're underwriting deals and looking at certain properties today, can you help us understand what metrics are you looking at today when evaluating deals, and then also are you looking at anything differently today versus how you maybe would have looked at it on a pre-pandemic basis?

The methodology is the same. We're typically solving for hold period unlevered IRRs. That hasn't changed. Clearly the starting point from our underwriting perspective has changed. I think that's the primary method that we use to underwrite assets. We want to underwrite to returns that exceed our weighted average cost of capital. Again, the starting point has changed. I think the dynamics in certain markets have changed given what's happened with COVID. And we talked a little bit about the dynamics in, you know, urban and gateway markets and some of these other, and, you know, some secondary markets, Sunbelt markets that likely have a more, a quicker demand recovery. But the overall process hasn't changed. Again, we've been, we've tried to be very prudent capital allocators and solve for returns, again, that exceed our weighted average cost of capital.

and then just on the CapEx front, I'm not sure if you provided us, but can you give us a sense of what you think you might spend in 2021 and then how do you ensure that you keep the market share gains that you've realized so far and or make sure you outspend your comp set given that you're in a better financial position than most other owners today?

Yeah, so we spent about $23 million in CapEx in 2020, 11 of which was in the first quarter kind of projects that were already baked pre-COVID. Where we're at today is we continue to spend maintenance and emergency and necessary type capital, ensure that the properties stay in proper physical condition. I would say that our expectation is to spend and many more. A number of projects, as you alluded to, that we'd like to keep on schedule. We're fortunate to have liquidity to do it, and assuming we get some reasonable pace of recovery, we'd like to continue to make sure that the portfolio stays in good fiscal condition. So the overall level of spending will likely be fairly close to what we spent in 2020. Again, it'll be more back half-weighted than front half-weighted. From a market share perspective, look, as we said, I think the team did a marvelous job last year from a share perspective. You know, we ran 134% rent-a-car index for the year. It was up almost 20 percentage points. I think as nominal rev cars increase, I'm not sure that that level of outperformance is sustainable. I do know that, you know, the team has done and will continue to do a great job finding some of these unique pieces of business. And that's if you really look at what drove the rev car index performance, it was mostly an occupancy share gain. And a lot of it had to do I'm not sure 135 is the new bar for us, but I do feel very strongly that we'll continue to do as good a job as anyone from a market share perspective and continue to run high REF R indices.

Got it. And then just remind me, 2019 market share was in the 110s roughly, right?

Yeah, it was about 115. Got it.

Thank you.

I'm not showing any further questions in the queue. I'd like to send a call back over to Jonathan Stanner, President and CEO, for any closing remarks.

Well, thank you all for joining us today. As you can tell, we're extremely excited about the future of Summit and proud of the many steps we've taken over the last 12 months in what has been a challenging environment to position us well going forward. We look forward to seeing you all, hopefully in person, very soon. Have a nice day.

Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect.