Summit Hotel Properties, Inc.

Thank you for standing by and welcome to the Summit Hotel Properties Q1 2021 earnings call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Adam Woodall, Senior Vice President of Finance, Capital Markets, and Treasurer. Thank you. Please go ahead, sir.

Thank you, Justin, 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, May 5th, 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.shpreeds.com. Please welcome Summit Hotel Properties President and Chief Executive Officer, John Stanner.

Thanks, Adam, and thank you all for joining us today for our first quarter 2021 earnings conference call. Overall, we were extremely pleased with the operating trends we experienced in the first quarter as the gradual and sequential demand improvements we began to see in the summer and fall of last year accelerated beginning around President's Day weekend when REVPAR reached a post-pandemic high of nearly $90. Since then, demand has continued to improve consistently, as March REF PAR finished above $65, which was a 27% month-over-month increase from February. And preliminary April results suggest a REF PAR of nearly $70, representing continued sequential growth, despite transitioning out of peak spring break season. As importantly, our outlook for the broader industry recovery has accelerated in conjunction with these improved demand trends. Progress on vaccine distribution and easing regulatory restrictions, combined with significant pent-up leisure demand, drove our first quarter operating results meaningfully above our expectations even 75 days ago. As a result, our corporate-level cash burn in March was less than $1 million, and we now expect to be very near or cash flow positive in April, two months earlier than we telegraphed on our last earnings call. For the first quarter, we reported pro forma rev par at $53, which is a decline of 45% compared to last year and 59% compared to the first quarter of 2019. However, it also represented a 23% improvement over the fourth quarter of last year and compares favorably to year-over-year rev par declines in the top 25 in urban markets of 48% and 55%, respectively. We also continued to gain market share in the quarter as our REVPAR index increased to 133%, which represented a nine percentage point increase relative to our competitive sets and is still meaningfully above our historical penetration levels. While lodging demand is generally still heavily concentrated in leisure guests, we've experienced strong growth during both weekdays and weekends through the first four months of the year, but particularly in March and April. For example, over weekends in March, our hotels averaged more than 75% occupancy, an approximately $90 rev par, and weekdays averaged more than 50% occupancy for the first time since the onset of the pandemic. Weekdays during March generated an average rev par of nearly $57, which is more than 25% higher than the next best monthly average over the last 12 months. During the first quarter, our nine resort hotels continued to lead the recovery, with first quarter occupancy exceeding 76%. and RevPar exceeding $100. This was driven by a strong March when occupancy ran nearly 85%, and RevPar was over $130 as a result of continued leisure demand growth related to robust spring break travel. Our 42 non-urban hotels achieved more than 60% occupancy during the first quarter, and in March ran more than 70% occupancy for the month and nearly 85% on the weekends. While urban hotels continue to lag the broader industry recovery, our urban assets also benefited from the recent positive trends, reporting post-pandemic highs in occupancy in REVPAR in both March and the first quarter, and exceeding 50% occupancy in April. The outlook for our urban hotels is getting more constructive, and we are scheduled to reopen our Holiday Inn Express in the Fisherman's Wharf District of San Francisco on May 10th, the final hotel in our portfolio to reopen post-pandemic. Encouragingly, we are also beginning to see some progress in our ability to drive better rates across the portfolio. March ADR was 9% higher than February and 14% higher than January. And looking forward, ADR pace in May is 6% higher than where April pace sat 30 days ago. Combined with additional occupancy growth, our May REVPAR pace is up 17% compared to April's pace this time last month. Year-to-date through April, the most robust ADR growth within our portfolio has been among our urban hotels and hotels located in CBD locations, each experiencing ADR growth of approximately 27% from December of last year. Although booking windows remain extremely short and forecasting our business continues to be challenging, we've started to see a decline in the percentage of rooms nights booked near to or on the night of stay. For example, transient occupied room nights booked within 24 hours of stay declined from 37% to 27% from January to March, and nights booked within 72 hours of stay declined from 60% to 50% over that same period. While this still represents an extremely short booking window relative to pre-pandemic standards, we view this as another encouraging trend reflecting a generally healthier demand environment. While demand has returned to a level that allows our hotels to be consistently profitable, certain elements of the operating environment remain challenging. We continue to operate our hotels utilizing a very lean staffing model, which consists of approximately 14 FTEs on average, or less than 40% of pre-pandemic staffing levels. Rehiring hourly staff, particularly in the housekeeping department, has been a well documented challenge across the industry. as enhanced unemployment benefits and additional stimulus checks have created some temporary disincentives to return to work. Despite these challenges and primarily occupancy-driven top-line growth, our asset management team has done a tremendous job controlling operating expenses, which declined more than 4% on a preoccupied room basis compared to the fourth quarter of 2020 and approximately 28% year over year. As a result, for the third consecutive quarter, our portfolio was profitable at the hotel level and has now been profitable on a cumulative basis for the duration of the pandemic with an aggregate rev par of just $41, demonstrating the clear benefits of our efficient and flexible operating model. Our March and first quarter hotel EBITDA of $6.2 million and $7.7 million, respectively, represents the strongest monthly and quarterly hotel level performance post-pandemic. In fact, hotel EBITDA in the first quarter was nearly equivalent to that of the previous two quarters combined, and we anticipate the second quarter to improve sequentially. During the first quarter, we invested approximately $3.6 million in our portfolio on items primarily related to planned maintenance capital. We also completed the last installations of our mobile key and RFID guest room lock initiative that was started last year to provide for a contactless check-in experience that guests are more frequently opting to use. We continue to expect to spend between $20 and $30 million in capital expenditures for the year. But we are evaluating accelerating additional renovations to start as early as the fourth quarter of this year, where we see considerable ROI opportunities supported by improving demand trends. And we can take advantage of still lower than historical occupancies, which will minimize disruption from the projects. On May 1st, we completed the contribution of six wholly owned hotels, totaling 846 guest rooms, into our joint venture with GIC. The valuation of $172 million represents just under $205,000 per key, and after taking into consideration the expected fee stream we will earn for continuing to asset manage the hotels, it equates to an approximately mid-8% cap rate on actual 2019 NOI. The transaction generated approximately $84 million of cash proceeds, which will be used to increase our investment capacity, reduce corporate leverage, and enhance our overall liquidity. We've also agreed with GIC to reset our liquidation promote for all post-COVID investments, including these six assets, which creates a difficult to quantify but meaningful improvement to our economics related to the venture. The joint venture now holds 11 assets with total investments of nearly $450 million, and affirms the commitment from both parties to find unique and opportunistic investments to continue to grow the partnership. We were also extremely active enhancing our balance sheet during the first quarter, including successfully completing a convertible notes offering that generated gross proceeds of $287.5 million at a 1.5% coupon. We used $21 million of the gross proceeds to enter into capped call transactions. That increases the effective conversion premium to 75%, or $15.26 per share. The notes mature in February of 2026. As discussed on last quarter's call, we also amended our senior unsecured credit facilities, which extends the covenant waiver period through March 31st of 2022, modifies covenant testing through year end 2023, and provides access to the full availability of our $400 million revolver, $150 million of which can be used to fund new investments. This acquisition allotment has been increased to over $170 million, following the contribution of the six assets to the GIC joint venture, and the amendments also provide us with an unlimited ability to fund acquisitions with equity issuances. Subsequent to quarter end, on April 29th, we completed an amendment to our $200 million joint venture revolving credit facility. These amendments provide for a waiver of certain covenants through the end of this year, with modified covenant testing through the second quarter of 2023. As a result of recent capital markets activities and transactions, we currently have approximately $440 million of total liquidity, which includes approximately $50 million of unrestricted cash on hand. Today, our weighted average interest rate is approximately 3.3%, and we have no debt maturities until November of 2022 and ample current liquidity to repay all maturing debt through 2023. We also recently announced important additions to our management team and board of directors. Trey Conkling will be joining us on May 17th as our new CFO. I've worked with Trey for more than a decade during his time with Bank of America. and he has proven himself as a well-respected strategic thought leader in the industry and someone that will greatly enhance our team. Previously, we announced that Amina Belouizdad will be joining our board of directors after our annual meeting May 13th. Amina brings a diverse skill set and experience base to our already accomplished board. We're thrilled to be able to attract such great talent to our organization. In closing, we continue to gain enthusiasm on the recovery of our business and the outlook for Summit in particular. While leisure demand remains the primary driver of the early recovery, and all indications point to an incredibly robust summer travel season, signs are also emerging for the return of corporate travel, as case counts and hospitalizations related to the virus decline and vaccine distribution broadens. A more normalized school and work environment looks to be taking shape by at least Labor Day, and while the trajectory of the demand recovery may be more gradual than the leisure components, We are also bullish on the meaningful pent-up corporate and group demand we expect to provide the next leg up in the recovery. And with that, we'll open the call to your questions.