Adam Wudel - Vice President of Finance Dan Hansen - President and CEO Greg Dowell - EVP & CFO.

Austin Wurschmidt - KeyBanc Capital Market David Loeb - Robert W. Baird & Co Ryan Meliker - Canaccord Genuity Bill Crow - Raymond James Shaun Kelley - Bank of America Merrill Lynch Wes Golladay - RBC Capital Markets Chris Woronka - Deutsche Bank.

Good day, ladies and gentlemen and welcome to the Summit Hotel Properties Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Adam Wudel, Vice President of Finance. Sir, you may begin..

Thank you and good morning, everyone. I'm joined today by Summit Hotel Properties' President and Chief Executive Officer, Dan Hansen; and Executive Vice President and Chief Financial Officer, Greg Dowell. 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 2015 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today August 3, 2016, 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 Chief Executive Officer, Dan Hansen..

Thanks, Adam. And thank you all for joining us today for our second quarter 2016 earnings conference call. We're thrilled with the results that our diverse portfolio of premium select-service hotels delivered in the second quarter of 2016.

For the quarter, we reported adjusted FFO of $36.5 million, which is a 23% increase over the second quarter of 2015. Our adjusted AFFO per share increased 22.5% from the second quarter 2015 to $0.42 per share.

On a pro forma basis, we posted RevPAR growth of 6.4% in the second quarter, which was above the midpoint of our outlook and as a reminder was on top of 7.6% growth in the second quarter of 2015.

Our RevPAR growth was driven by a 2.4% increase in occupancy to 83% and an average daily rate increase of 4% to $145, both of which partially offset RevPAR by a total of 19 basis points due to renovation displacement. Our same-store RevPAR growth for the quarter was 6.5% compared to the second quarter 2015.

RevPAR was driven by a combination of increases in occupancy, which was up 2.7% and a 3.7% increase in average daily rate. The strength and quality of our portfolio continues to be evident as we again surpassed the Smith Travel Research overall U.S. and upscale RevPAR growth rates by large margins.

Not only has our same-store portfolio now exceeded the Smith Travel upscale RevPAR growth rate for 16 of the last 17 quarters, but it has done so by average margin of nearly 300 basis points, which is truly a testament to our best-in-class revenue and asset management teams.

As discussed last quarter, we expect our RevPAR growth to shift more heavily to rate growth as the year progress from what was 40% rate driven in the first quarter now 60% rate driven in the second quarter.

The strength in our second quarter RevPAR growth was again very broad based, which is what we would expect from the geographic diversification of a high quality portfolio like ours. Four of the strongest markets in the country during the second quarter were Dallas at 12.1%, Los Angeles at 11.1%, Nashville at 10.6% and Phoenix at 9% RevPAR growth.

Combined, the Dallas, Nashville and Phoenix markets make up 17% of our portfolio EBITDA as of June 30 and we were able to outperform the robust RevPAR growth of each market. Our Nashville hotels posted 17.7% RevPAR growth, which surpassed the overall MSA by 710 basis points.

Our Dallas hotels posted 15% RevPAR growth, which beat the overall MSA by 290 basis points and our Phoenix hotels posted RevPAR growth of 13.7%, which exceeded the overall MSA by 470 basis points. Moving on in the second quarter, we were able to sell three hotels at attractive valuations that generated gross proceeds of $25 million.

The first of the three was the 128-guestroom Holiday Inn Express & Suites in Las Colinas, Texas, which was sold in May of 2016 for $10.5 million at a trailing 7.7% capitalization rate and was not part of the 26 hotel transaction with ARC.

The two additional hotels sold during the quarter were the 136-guestroom Aloft in Jacksonville and the 119-guestroom Holiday Inn Express in Vernon Hills, Illinois, which sold for an aggregate sales price of $14.5 million in the trailing 6.1% capitalization rate. These two hotels were a part of the 26-hotel transaction with ARC.

Subsequent to quarter end, we also sold the 122-guestroom Hyatt Place in Las Colinas, Texas, for a total sales price of $14 million at a trailing capitalization rate of 7% in a transaction that was not part of ARC deal.

These dispositions along with the hotel we have under contract and the hotels we've recently acquired continue to demonstrate our ability to strategically recycle capital and create value for our shareholders. With that, I'll turn the call over to our CFO. Greg Dowell..

Thanks, Dan and good morning, everyone. We were very pleased with our second quarter 2016 results. On a pro forma basis, our hotel EBITDA in the second quarter grew to $50.1 million, which was an increase of 10.7% over the same period in 2015.

Pro forma hotel EBITDA margin expanded by 156 basis points to 39.9% compared to 38.3% in the same period of 2015. For the second quarter, our adjusted EBITDA grew to $47.4 million, an increase of $5.7 million or 13.6% over the same period in 2015.

Moving on to our balance sheet, our balance sheet continues to be in great shape and we will continue to strengthen it by reducing leverage, staggering our debt maturities and improving our cost of financing.

At June 30, 2016, we had total outstanding debt of $628.6 million with a weighted average interest rate of 3.84% and a zero balance on our revolving credit facility. We ended the second quarter with net debt to trailing 12-month adjusted EBITDA of 3.3 times.

During the quarter, we successfully completed a $75 million offering of 6.45% Series D preferred stock and contributed the proceeds to our operating partnership to reduce the outstanding balance of our revolving credit facility and for other general corporate purposes, which may include the $50 million redemption of our 9.25% Series A preferred stock in October of 2016.

Until the proceeds are fully deployed, we expect our leverage to be at or slightly below our stated range of 3.5 to 4.5 times. Subsequent to quarter end, we repaid one CMBS loan in the amount of $17 million that had an interest rate of 6.22% and maturity date of November 1, 2016.

There was no prepayment penalty associated with the early repayment and we expect to add the hotel to our unencumbered asset pool in the third quarter. As a result of the loan repayment there are no remaining scheduled debt maturities in 2016.

Over 60% of our portfolio EBITDA is unencumbered and only 2.4% of our total debt is scheduled to mature through 2018. Turning to our outlook, in our release, you'll see that we provided our outlook for the third quarter and for the full year 2016.

For the third quarter of 2016, we are introducing pro forma and same-store RevPAR growth guidance of 1% to 3%. Included in our third quarter RevPAR growth guidance is renovation disruption of $800,000, which is expected to have adversely affect our RevPAR growth by 75 basis points.

Our third quarter adjusted FFO guidance is $27.9 million to $29.7 million or $0.32 to $0.34 per share.

For the full year 2016, we are tampering our RevPAR growth outlook to a range of 3% to 4.5% for both our pro forma and same-store portfolios as a result of softening corporate demand in the second half of 2016 and the limited visibility that continues across the industry.

We are maintaining the midpoint of our adjusted FFO outlook to a range of $115.2 million to $118.7 million or $1.32 to a $1.36 per share. We had incorporated capital improvements of $42 million to $48 million, which includes both renovation and recurring capital expenditures.

Our adjusted FFO guidance incorporates the recent $75 million issuance of our Series D preferred stock, the anticipated $50 million redemption of our Series A preferred stock in October of 2016, the extended sale date of the eight remaining ARCH hotels from July 1 out to October 1 for an aggregate sales price of $77.2 million and the acquisition of a $61.4 million hotel expected to close in August 2016.

With that, I’ll turn the call back over to Dan..

Thanks Greg. In summary, we're very pleased with the consistent results in our portfolio and remain encouraged about 2016 as the continued guest preference of premium select-service hotels; limited supply growth in our submarkets and broad geographic diversification continues to show the benefits of our differentiated investment strategy.

And with that, we'll open the call to your questions..

Thank you. [Operator Instructions] Our first question comes from Jordan Sadler with KeyBanc Capital. You may begin..

Hey, good morning, guys. It’s actually Austin Wurschmidt here.

I was just wondering if you could provide a little bit of additional detail on the RevPAR reduction in the second half of the year, understand some of the softness in the corporate side that you talked about, but maybe speak a little bit more broadly on specific geographies as well as what you're seeing in the leisure segment?.

Sure Austin. This is Dan. I think, clearly July was a soft month for the industry as you know and the third quarter is always weighted more heavily on the back end, specifically September. So with a slow start and limited visibility, we really thought like a tempered outlook is warranted.

If we look out in the quarter, some of the things that are headwinds obviously are Houston not that that’s a big part of our portfolio, but we expect that continued and even more recent decline in energy to continue to create challenges in that market. And then New Orleans declines in the convention phase for July and August, we think is a headwind.

September is phasing up a little bit at this point, but again with the limited visibility it's just real hard to forecast that far out..

Thanks for that.

And then was the 75 basis points impact, is that to the third quarter, was that originally planned in your guidance and what’s the impact on the full year RevPAR growth numbers?.

Yeah. That’s factored in our guidance..

So it was in the original guidance plan..

Yes..

Okay.

And then just lastly, I guess given some of the challenges and lack of visibility, how are you thinking about additional capital recycling given it must be a little bit more difficult to underwrite in the current environment?.

Really it’s opportunistic. We don’t have a specific goal. It’s on a case-by-case basis. Very active in the market as we always are looking for what we would call hidden gems that have strong going in yields with value-creation opportunities on top of that.

But the recycling of capital being able to buy at cap rates better than what we sell, we think is a great way to continue to create value in this environment..

Can you provide any additional detail on the pending acquisition, either expected cap rate, brand, geography etcetera?.

We're not able to disclose the full details at this point under the confidentiality of the purchase and sale agreement. So I think you should just assume similar going in yield of the last 40 or 50 deals we've done and be assured their value-creation drivers on top of that. So we’d expect to provide full details post closing by the end of the month..

Okay. Thanks for taking the questions..

Thanks..

Thank you. Our next question comes from David Loeb with Baird. You may begin..

Just a follow-up on the new acquisition Dan and good morning by the way, are your plans to use that as part of a 1031 for some of the dispositions that you're working on?.

Yes David thanks, its Dan. It’s great question. That is our intent..

Okay.

And can you give us an update on the disposition activity just like a little more detail about when you think you might sell those remaining eight assets and how?.

Sure, as you all probably know ARC does have until the end of the year to buy the assets, but we do have the contractual right to sell them prior to that date. We have sold to and the eight, the remaining eight are one is under contract and seven or under Letter of Intent. We do have $7.5 million of non-refundable earnest money from ARC.

So we really don’t have an immediate need to sell the hotels and we think there is a natural floor built in with the contract that we have, but we run a full process.

We’re estimating October 1, assuming due diligence proceeds smoothly, but that’s really an estimate for the remaining hotels, but there is a number of different scenarios and how we could allocate those proceeds if somewhere to sell before October 1 or after, but that would be the most likely scenario at this point. .

Okay. Thank you for that and is there current on all of its applications..

They are. They’ve been a very good partner and very transparent and have fulfill all their obligations on time for us..

So that the loan is current and everything is fine..

That’s correct. They’ve been current under payments and on the amortization that they’ve committed..

Okay. Couple more quickly sorry, you talked about in the last quarter the strength on Dallas, Los Angles and Nashville. How about looking forward, which markets do you think will be particularly strong? I guess I left out Phoenix..

Q3 we still see some strength in Dallas, Nashville too. Denver partially on some rooms coming online were out of inventory, but also Minneapolis. Minneapolis has got some strong transient group demand that we think will be a contributor for the third quarter as well..

Okay. Last one I promise, you had amazing margin results, clearly your asset management efforts are proving successful.

Is there more, is there more that you can do is there low hanging fruit or is it going to get harder from here to achieve the same kind of margin results?.

Yes, thanks David. This is Greg, yes Craig and the operations team have done a fantastic job on margin expansion and cost containment. What we said early in the year was that we expect a 25 to 75 basis points and now that we're halfway through the year with 130 basis points of expansion, it's obviously -- it's obviously we're trending above that.

In the back half of the year, we are anticipating an additional 40 basis points of expansion. So as you get towards the back end, end of the year we see some lingering headwinds, but we still see continued growth and trending above the previously stated rents..

Great. Thank you..

Thanks Dave..

Thanks David..

Thank you. Our next question is from Ryan Meliker with Canaccord. You may begin..

Hey thanks. David took most of my questions, so kudos to him I guess, but one thing I just wanted to touch on was you guys are obviously in -- you guys obviously have a deal with AR Capital for the remaining eight hotels. You’ve been marketing some of the other hotels.

Are you seeing any interest for either the entire portfolio or subsets of the portfolio right now to anybody else or is it most likely that you're going to be moving forward with AR Capital and then if you are seeing any interest, are you seeing -- are we seeing any portfolio of premium valuations like we had a couple of years ago or is that still gone?.

Thanks Ryan. It's Dan. I'll try to address that in reverse order. I don’t see a portfolio of premium like we saw in the past, but I do think pricing is consistent with where we started. Now NOI has improved, but maybe cap rates have backed up, I have to turn ourselves.

So nominal dollars we would expect the sales will still be in line with what we originally put it under contract for. We did run a full process on seven of the assets and had quite a bit of interest surprisingly in all seven, but also quite a bit of interest in subsets of the portfolio.

As a reminder of the seven, three of them are in Memphis and seven are in Jackson, Mississippi. So there is some natural alignment to some of the portfolios, but the party that we're negotiating with currently is interested in all seven and we do have one outside that is under contract.

So I think that the shift really in the industry has been away from the usual suspects on the portfolio buyers towards a smaller more owner-operators with private equity backing.

So that I would say the financial buyer has gone away in a large degree and it's more of an operational buyer or a local owner operator that I think is the most likely candidate for asset sales for us..

Okay. So it sounds like there's still at least a reasonable likelihood that these assets will be sold, but not necessarily be sold to AR Capital.

Is that fair?.

That's fair. We're optimistic that we will be able to complete this last phase of the capital recycling. It's not exactly how we expect it to be here or get there, but we make great progress and still see this coming to fruition by the end of the year..

Okay. That's great. And then just real quickly as a follow-up to Austin’s question with regards to guidance.

It sounds to me like you guys had a little bit of a challenging July, how much of that was do you think the July 4 calendar shift versus just underlying trends that are softer? I know I guess forecasting those underlying soft trends or the actual July softness through the remainder of the quarter I guess, help us understand that difference?.

That's a great question Ryan. You’re killing me with the three-part questions but I'll try to get each part of it, but I think clearly some of the softness in the first week in July was the demand at the last week of June kind of pulled some of that demand into the prior quarter.

And we're guiding now I think more in line with what we've seen the last nine to 12 months. We're not underwriting or forecasting with the thought that there's an acceleration in economic activity that with the limited visibility I just don’t think that's prudent.

Yeah I think that the slight softening of demand and really and the lack of pricing go hand in hand. Technology, social media, lack of cancellation policies, poor management company price integrity, supply and brand proliferation those have all contributed to pricing issues. But we've all been dealing with that throughout this cycle.

I think when you combine all those with a little softening in demand, it's exacerbated and that's really in our view what has brought this to the forefront. The notion that all of a sudden, companies are being more thoughtful about their business travel, I think is a bit slot.

I things all the way back since the downturn, companies have tried to be more thoughtful about business travel and I think it's just more prevalent today as we get later in the cycle..

Okay. That's a good color. Thanks Dan. That’s it for me. No more two part questions..

Thanks Ryan..

Thank you. Our next question is from Bill Crow with Raymond James. You may begin..

Hay good morning guys. Believe it or not, I actually have a question or two after the last 10 or 12. Dan, just to clarify, it is your portfolio softness that you are basing your revisions to guidance upon right, it's weaker results in July and thus far into early couple days into August.

It's not -- it's not broader industry concerns right, you're actually seeing it on the ground..

Yes Bill, that's correct. And I think that's a that's a great point. We guided to what some thought was aggressive last quarter and it wasn't based on what our peers were seeing out in the marketplace. It was based upon what we were seeing for our portfolio.

We didn't see at that point the business transient had not exhibited the slowdown and that even if you take the softness of the first week of July out of there to guide aggressively as I said earlier after a month knowing that the back half meaning September is a big contributor just feels a little bit aggressive.

So we felt like tempering that made sense, but it based on what we're seeing in our portfolio..

And Dan, did you give July RevPAR growth and if not or if you did, could you repeat it please?.

We don't provide quarter-by-quarter RevPAR guidance, but I know July and upscale was off 12% the first week up 1.3% the second week if I have that correctly and up 1.9% in the third week. So with the broad diverse portfolio, I think that’s a good benchmark to look at for companies like ours..

Great.

And then finally for me, can you talk quite often about how the cycle supply growth has not thus far impacted your market at least materially? Is that starting to change? Are you seeing the green shoots of new construction out there and how closely do we have to monitor that with somewhat mix portfolio?.

That’s a good question. I think Smith Travel is expecting 1.9% growth for the industry in '16 and maybe little over 2% for '17.

So at this point, it doesn’t appear that supply will be the cycle killer and I think a large portion of that supply grant in the upscale segment, but if you assess it a little bit more thoughtfully, a large amount of that is in New York and other urban markets.

And I think that supply is absorbed for at the expense of some of the older and more tired full service assets, but I think the construction financing is tightened and construction cost continue to rise. So we would expect some of the pipeline continues to get delayed or dropped and for us we've just got good visibility into supply in our markets.

You just can't build a hotel overnight, somewhere between 2.5 to 4 years is what it's going to take for a hotel to come to fruition and most of our markets are insulated.

We've got a fair amount of the brand represented there and one new hotel is in a market or a sub market that we're in, we don’t believe is going to affect our ability to achieve our numbers.

So apologize if that’s a long answer, but it's something we watch very closely, but at this point still don’t see a material effect on our portfolio in the near term..

No. That’s perfect. Thanks for your time Dan..

Thank you. Our next question is from Shaun Kelley from Bank of America. You may begin..

Hey. Good morning.

Probably just one that I have left at this point, but Dan I was wondering if you could just comment on size of deals that you think are able to get done right now? I think you mentioned a little bit around the portfolios early with you guys, but just broader in the transaction markets, sort of what price points are the sweet spots for buyers? And I think as we had talked last time we sat down, there was a level which it has harder like a size at which it was harder to get deals done.

Is that still the case or any signs that that might actually be improving with capital markets?.

Thanks Shaun. Good question. I think what we're seeing now is still a pretty wide buying pool for kind of the $20 million and smaller assets.

We sold some at really strong Cap rates those more regional owner operators, the $25 million to $50 million or $60 million assets more to the institutional quality assets are little bit more of a narrow buying pool and that’s where we're finding the most value creating opportunities. I haven’t seen much change in buyers at the table.

There is still a disparity between buyers and sellers on that rate talks about that narrowing over time. I am not sure that ever narrows as much as everybody hopes, but we're finding ways to try to narrow that gap and part of that is there are just very limited buyers in that kind of $25 million to $50 million or $60 million pool.

So we're one of the few out there and as I said, if we can continue to sell assets at a cap rate that’s attractive and buy at better cap rates with greater growth profiles that we're strongly encouraged to do so..

Seems simple enough. Thank you very much..

Thanks Shaun..

Thank you. Our next question is from Wes Golladay with RBC Capital Markets. You may begin..

Yes. Good morning, guys. Looking at the guidance, you mentioned the soft start to the quarter, the very difficult first week, but then after that we're doing about 2% of the upscale segment and you typically outperformed that segment. So in fact you would be doing at least decent in July.

So are you seeing anything on the forward bookings that is more concerning or is it just the rough start you had in the first week that is really the main driver of the tampered guidance..

It's more of a soft start that gives us more of a tampered outlook. Again September, we think at this point looks to be a solid month for us, but with the limited visibility in the industry and more specifically in select-service, which I thought it was more prudent to have a conservative outlook..

Okay.

And for context what is your typical amount of business you have on the books for call it the next month at this point?.

I don’t know that we have a specific number. It varies from week to week and quarter to quarter.

Typically, our outlook and our forecast is really more of a two to three week outlook and it would be a blend of obviously more appropriate leisure transient and the booking window continues to be short and technology is created an environment where people feel much more comfortable booking more closer to the date of their actual trip.

So I don’t know that I have a more fulsome answer than that..

No. That's good context.

Now looking at ARCH transaction, do you expect the similar pricing for the asset you're trying to resale or could you beat it or take a slightly less just to get certainty of close or how should we look at that?.

I think we look at it -- our expectation would be in the same range as where we have these under contract. There is a part where we would be open to taking a little bit less depending upon where we are in the process in the cycle or in the year. But we feel like their sole value is at or in excess at this point where ARC had them under contract.

So I think we're still very much in expectation that will view as well or a little bit better..

Okay.

And for your acquisition what cap rate are you targeting for an initial yield?.

We're still going in 8% plus yield.

That's been something that's been very important to us in order to create the long-term value and then singing the same tune for five years now that the going in yield is very important and it eliminates a lot of the risk downstream where you may have RevPAR expectations that are below initial underwriting and that's exactly what we're seeing today.

So nothing in our underwriting has changed..

Okay. Thanks a lot..

Thanks, Wes..

Thank you. [Operator Instructions] Our next question is from Chris Woronka with Deutsche Bank. You may begin..

Hey, good morning, guys. Dan, I wanted to ask you on the dividend and I apologize if you already covered it, but I guess how do you look at that given the increased appetite for yield and I guess the 3.8% your add is it's not going to sneeze at, but it's probably touch below the group.

So it looks like you probably have the capacity to bump it up just any thoughts there on direction?.

Yes, Chris. This is Greg. It's a great question and something we take very seriously. We've always said that we look at as far as total shareholder return and not in whole kind of equation. We talk about it every quarter with our Board.

And with a strong performance from our portfolio and consistent cash flow stream, we're excited that we were able last quarter to announce the 13% increase. So as we look to the future, the only guidance we've given and it's still how we look at it, we would anticipate having a 40% to 60% AFFO payout ratio and we're at the lower end of that.

So I think that's kind of where we stand right now as it relates to dividend..

Okay. Fair enough.

And I also want to ask about some of the brand initiative, where do you sense they're sitting now as the cycle is moving on and we've seen some things that that you guys have done on other's product refreshes and I won't use the melody creep term, but where do you think the brand stand? And a second part if I may is just on distribution cost, are you guys kind of watching what's going with the member discounts and do you have as an owner and incurring the distribution cost, do you have an opinion on where that's going?.

Sure. Chris, this is Dan. On the brand initiatives, we're early on even pre-IPO we fought a lot of those, but won some, lost some, but as we look back over the quality of the product and upscale that we have today, many of these initiatives have really played out brilliantly. They’ve created a product that today’s guest love.

It’s a great alternative to a full service hotel and in many instances, even a better experience. So we’ve been over the last three or free years very supportive of the majority of the brand initiatives. We think a lot of heavy lifting is done. The bathroom have all been changed. The lobbies have all been changed.

The F&B offerings and some of the higher end upscale hotels have done well and they’ve been very supportive in making it more robust. So, I wouldn’t say that there won't be any additional brand initiatives, but they’ve really set the bar very high.

And I think it's just created a very viable asset class in that the chain scale and we're pretty excited about it. So, the next step I think for us is to stay ahead of the technology requirements. There are lot of -- its not just about bandwidth anymore.

People are coming as I’m sure many of you on the call with multiple devices and they're all looked up. So access points become more important. So to have a high quality hotel that guest love, I think you have to be very thoughtful about where the capital is spend, where you get the return for that.

So, on the distribution side with the new booking direct, I think there is some great long-term thoughts on how that will benefit the brands and eventually us to be owners much more profitability.

I think there is a little bit of leakage so to speak as some of the existing reward members are also getting those discounts that were -- but I think that washes out over time. So we think it’s a good first step, but I think it’s a long term initiative to direct more business away from the OTAs and at this point we think it’s a positive..

Okay. Very good. thanks guys..

Thanks Chris..

Thanks Chris..

Thank you. I’m showing no further questions at this time. I would like to turn the call back over to Dan Hansen for closing remarks..

Thanks everybody for joining us today. We sincerely appreciate the trust you have in us and we’ll continue to work hard for you by being thoughtful in our capital allocation and continuing to find opportunities to create value in premium upscale select service hotels, which today’s guest love.

Have a terrific day and we’ll talk to you again next quarter..

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day..