Summit Hotel Properties, Inc.

Ladies and gentlemen, thank you for standing by. My name is Duncan and I will be your conference operator for today. I would like to welcome you to Summit Hotel Properties' second quarter earnings call. All lines have been placed on mute to prevent any background noise. Now, I'd like to turn the conference over to Kevin Milota, Senior Vice President, Corporate Finance. Please go ahead.

Thank you, operator, and good morning. I'm joined today by Summit Hotel Properties' President and Chief Executive Officer, John Stanner, and Adam Wudel, Executive Vice President, Corporate Development. 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, August 6, 2026, and we undertake no duty to update them later. You can find copies of our SEC filings in an 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. Thank you, Kevin, and good morning, everyone.

Thank you for joining us today for our second quarter 2026 earnings conference call. On today's call, we will discuss our terrific second quarter results and our improved outlook for the remainder of the year that together are driving an increase to our full-year guidance ranges. We will also highlight the continued success we have had selling assets, recycling capital, enhancing the overall quality of our portfolio, and strengthening our balance sheet. Operating fundamentals were strong in the second quarter. exceeding our expectations going into the quarter as pro forma rev par increased 5% year over year, driven by a robust 7.1% increase in average daily rate. We were particularly pleased with the breadth of demand we saw across both segments and markets. Hotel EBITDA and our pro forma portfolio increased 7.8% in the quarter, resulting in nearly 90 basis points of margin expansion. As rate-driven rev par growth, and ongoing strong cost controls drove healthy profitability growth. Adjusted EBITDA RE increased 7.7% to $54.8 million and adjusted FFO increased 6.7% to $34.9 million or 29 cents per share in the second quarter. The positive inflation and demand trends we first began to see in March of this year accelerated into the second quarter and continued through July. More specifically, strengthening business transient and group demand is driving robust midweek performance, particularly in urban markets, as average daily rate in our urban portfolio increased 9% in the second quarter, driving an 8% increase in rep part growth and 12% increase in hotel EBITDA. We believe the accelerating urban recovery is reflective of a broader, durable trend as corporate travel budgets are growing, and Paul Ruiz. including Cleveland, Washington, D.C., Indianapolis, Chicago, Charlotte, and New Orleans. Our urban portfolio comprises approximately half of our total rooms in Hotel Ibiza, and the positive momentum we are experiencing in this location type bodes well for our future growth. Our highest-rated demand segments continue to be our best-performing segments, as retail REF PAR increased 10%, corporate negotiated REF PAR increased 7.5%, and Group RevPAR increased nearly 15% in the quarter. These results were even better when we isolate performance to midweek and in urban locations. Retail negotiated and Group RevPAR all increased greater than 15% in urban locations during the quarter. We also continue to benefit from the gradual recovery in government-related demand, as transient government revenue increased 8.3% year-over-year. After being a meaningful headwind for much of the last year. While the government segment remains well below historical levels, accelerating demand patterns are expected to continue in the back half of the year. Collectively, these trends support the narrative that the recent reacceleration in industry fundamentals is increasingly being driven by multiple demand segments across a wide variety of markets. While our portfolio clearly benefited from terrific pricing of power around World Cup games, importantly, demand strength was broad-based across our portfolio, as nine of our markets achieved 10% rev-par growth or greater in the second quarter. Rev-par growth in our non-FIFA markets increased 4.2% in the quarter, which highlights the strength in demand we are seeing outside special events. The RFR growth was positive each month of the quarter, with April and May up 4.5% and 1% respectively, and June accelerated to nearly 10% growth as World Cup-related demand and strong citywide calendars supported outsized ADR gains. The World Cup was a meaningful contributor to our June results, particularly our ability to drive premium pricing around game days. Across our six FIFA host markets, June RevPAR increased nearly 19% over last year, which exceeded our expectations coming into the event. Atlanta, Dallas, and San Francisco were our top-performing World Cup markets in June, all achieving RevPAR growth of over 20% for the month, with Hotel EBITDA increasing 43% year-over-year on a combined basis. We estimate that World Cup demand added approximately 100 basis points to our REVPAR growth in the second quarter. More importantly, as I mentioned, World Cup pricing power only amplified strong underlying trends across our portfolio, as REVPAR growth in our non-FIFA markets increased nearly 5% in June. We are also encouraged by a notable lengthening of the booking window in the second quarter. Bookings made 30-plus days out increased 6% year-over-year and 18% compared to the first quarter, while bookings made 15-plus days out increased over 300 basis points from the first quarter. Conversely, in the week-for-the-week bookings declined 3% and 6% year-over-year and quarter-over-quarter, respectively. This was not just a World Cup phenomenon, as these statistics are similar in both our FIFA and non-FIFA markets. The lengthening of the booking window is an encouraging trend we view as a leading indicator of demand durability. Total revenue in our pro forma portfolio increased 5.2% in the second quarter, supported by continued strength in out-of-room spending. Non-rooms revenue increased 4.9% during the quarter, driven primarily by resort and destination fees, parking, and food and beverage revenue growth. As we've discussed on previous calls, our transformational renovation of the Oceanside Fort Lauderdale Resort continues to drive tremendous growth as total revenue for the hotel increased 31% compared to the second quarter of last year, resulting in a nearly 80% increase in hotel EBITDA. Once again, our operating team did a tremendous job controlling expenses and driving strong profitability growth from rate-driven rep hard growth during the quarter. Total operating expenses increased 4% year-over-year on difficult comparisons to last year. Pro forma hotel EBITDA increased 8% in the second quarter, representing a healthy 54% flow-through on incremental revenue. Total labor costs increased 4.3% year-over-year, reflecting modest wage growth, higher incentive compensation associated with improved hotel-level performance, and increases in hotel employee benefit costs. Contract labor declined another 4% versus the prior year, continuing the favorable trend we have discussed over the last several quarters. Overall, the labor environment remains stable, as turnover continues to be well below what we experienced in prior years. For the full year, we forecast hotel operating expenses to increase approximately 3%, and expect to be able to continue to drive strong flow-through in the second half of the year. We also made meaningful progress strengthening the balance sheet during the quarter. In June, we refinanced our primary corporate credit facility with a new $650 million senior unsecured facility, extending the maturity date of the facility to June of 2031 and lowering our borrowing costs by 20 basis points at our current leverage point. In addition, in May, we amended the mortgage loan encumbering our AC and Element Miami Brickell hotels to reduce the interest rate spread by 30 basis points. When accounting for our swap portfolio, approximately 50% of our pro rata share of debt is fixed, and including our three series of preferred stock, we are over 60% fixed on a pro rata basis. The overall health of our balance sheet is strong, as we currently have significant corporate liquidity with nothing outstanding on our revolving credit facility and no debt maturities until 2028. giving us flexibility to pursue a variety of value creation opportunities going forward. We also continue to successfully sell assets and recycle capital. In late July, we closed on the previously announced sale of our wholly owned Courtyard and Residence Inn Dallas Arlington South hotels for a combined sale price of $19 million. We strategically retained ownership of those hotels through the fee-for-demand window before closing the transaction. which allowed us to capture robust event-driven demand in the Arlington sub-market prior to disposition. The two hotels achieved combined repart growth of over 45% and EBITDA growth of nearly 85% in the month of June. The sale price represented a 5.4% capitalization rate based on trailing 12-month net operating income as of May 31st prior to FIFA-related demand. and we eliminated $7.6 million of near-term capital needs at the two hotels. This transaction reflects our ongoing commitment to recycling capital out of lower growth assets and assets with outsized capital needs and redeploying proceeds to strengthen the balance sheet, increase liquidity and enhance the quality of our portfolio. Since 2023, the company has sold 15 hotels for nearly $220 million. at a blended capitalization rate of less than 5% and eliminated nearly $70 million of capital requirements. The combined rev power for the Seoul hotels was $86, which is an approximate 30% discount to our current pro forma portfolio. The hotel transaction environment is improving, as we have seen a notable recent pickup in activity. During the second quarter, we repurchased approximately 49,000 common shares, and a weighted average price of $4.27 per share. Including our repurchase activity in the first quarter, through June 30th, we repurchased 1.5 million shares for $6.2 million, or a weighted average price of $4.17 per share. And since the inception of the program, we've repurchased 5.1 million shares, which represents over 4% of total shares and units outstanding, for $21.6 million, at an average price of $4.26 per share. On July 28, 2026, our Board of Directors declared a quarterly common dividend of $0.08 per share, representing an annualized dividend yield of approximately 4.6% based on the August 4th closing stock price. The Board also declared the regularly quarterly dividends on our Series E, Series F, and Series E preferred securities. The current common dividend continues to represent a modest payout ratio relative to trailing 12-month AFFO and reflects our ongoing objective of balancing shareholder returns with reinvestment and balance sheet discipline. Turning to our outlook for the remainder of the year, in our earnings press release yesterday, we increased our full-year guidance ranges for REVPAR growth, adjusted EBITDA RE, adjusted FFO, and FFO per share. For the full year, we now expect pro forma rev part growth of 1.75% to 3.25%, an increase of 75 basis points at the midpoint, adjusted EBITDA RE of $175 million to $182 million, adjusted FFO of $95.5 million to $103 million, and adjusted FFO per share of 79 cents to 85 cents. As a reminder, Our previous RevPar Growth EBITDA and FFO ranges included the ownership of the recently sold Courtyard and Residence Inn Arlington Hotels, which were expected to contribute approximately $500,000 in the last five months of 2026. This contribution has been removed, and the revised midpoints of our EBITDA and FFO per share ranges are increasing $3.5 million and 2 cents per share, respectively, after adjusting for these asset sales. Approximately $2 million of our EBITDA guidance increase is the result of stronger-than-expected second quarter results, while the remaining $1.5 million reflects our higher expectations for the second half of the year. Operating trends have continued to improve into the third quarter, as preliminary July rev part growth is expected to finish at approximately 6%. We expect full-year 2026 hotel EBITDA margins to to range from down 25 basis points to up 25 basis points. We're essentially flat at the midpoint, which includes approximately 25 basis points of headwinds from higher property taxes. We believe the revised ranges appropriately reflect both the better-than-expected results we achieved in the second quarter and the more favorable outlook we have for the balance of the year, while remaining mindful that the operating environment is dynamic and our long-term visibility remains limited. We expect pro-rata interest expense, excluding the amortization of deferred financing costs, to be $58 million to $62 million, and preferred distributions, including the Series E, Series F, and Series E securities, to be $18.5 million. There are no additional acquisitions, dispositions, share repurchases, or capital markets activities assumed in the company's full-year outlook beyond those already reflected as of August 5, 2026. From a capital expenditure perspective, our guidance assumes pro-rata capital expenditures range between $55 million to $65 million for the year. Current renovation activity includes projects at our courtyard Scottsdale, Homewood Suites Tucson, Hyatt Place Mesa, and Hyatt House Orlando Universal. Finally, I'd note that the pro-rata fee income we earn under the GIC joint ventures Thank you for joining us today. as new hotel supply growth is expected to remain well below historical averages for several more years and consumer prioritization of travel and experiences provides a secular tailwind that we expect to persist. The ongoing recovery in business travel is increasingly benefiting our urban-centric portfolio, supported by the breadth and depth of demand we are experiencing across our highest-rated segments. We believe these dynamics support continued top line growth and margin expansion through the balance of 2026 and beyond. With a strengthened balance sheet, high quality portfolio, and accelerating operating momentum, we believe Summit is exceptionally well positioned to deliver strong shareholder returns going forward.