Good day, and welcome to the Summit Hotel Properties Q3 2021 Earnings Call. As a reminder, this call is being recorded. I would now like to turn the call over to Adam Wudel, Senior Vice President of Finance, Capital Markets and Treasurer..

Thank you, Michelle, and good morning. I am joined today by Summit Hotel Properties President and Chief Executive Officer, Jon Stanner; and Executive Vice President and Chief Financial Officer, Trey Conkling. 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, November 4, 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.shpreit.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 third quarter 2021 earnings conference call.

In conjunction with our earnings release last evening, we announced the signing of a definitive agreement for a transformational acquisition of 27 hotels, 2 parking structures and various economic incentives from NewcrestImage for a total consideration of $822 million.

I’ll provide more transaction highlights in other details following our prepared remarks for our third quarter financial results, but we are incredibly excited to have the opportunity to acquire these 27 well-located hotels concentrated in high-growth markets.

Overall, we are extremely pleased with the continued acceleration of our improving operating trends in the third quarter, which exceeded our initial expectations and resulted in more than a 25% increase in RevPAR from the second quarter.

Occupancy average daily rate and overall profitability all reached new highs since the onset of the pandemic, and we more than tripled our positive corporate cash flow compared to last quarter.

Demand growth accelerated broadly during the quarter as we sold nearly 7% more room nights in the third quarter than we did in the second quarter, peaking during a historically strong summer travel season in July when occupancy in the portfolio was above 72%.

Although August demand pulled back modestly as expected, we saw a reacceleration in the back half of September when occupancy averaged nearly 70% during the last 2 weeks of the quarter. While leisure demand continues to be the primary driver of our operating results, we remain encouraged by improving corporate transient demand trends.

Negotiated room revenue increased approximately 28% in the third quarter over the second quarter. And while that is admittedly off of a very small base, we’re also encouraged by some of the anecdotal signs suggesting a more robust return of corporate travel is forthcoming.

We reported third quarter pro forma RevPAR of $98, which was more than double our RevPAR in the third quarter of last year and was 24% lower than what was achieved in the third quarter of 2019, a significant improvement from the first half of the year when RevPAR was nearly 43% lower in the second quarter and 59% lower in the first quarter than the comparable 2019 periods.

Importantly, the recovery of average rates accelerated meaningfully during the quarter. As ADR across our portfolio increased 19% compared to the second quarter, and weekday ADR growth outpaced weekend growth by nearly 200 basis points.

Average rates in our urban portfolio increased 24% from the second quarter, and weekday urban ADR grew 27% from the second quarter, which encouragingly reflects some level of rate accretive remixing of our business with corporate travel.

Weekend occupancy was an impressive 80% during the third quarter and averaged 82% in July and September as the recovery continues to clearly be led by exceptionally strong leisure demand.

However, mid-week occupancy also continues to steadily improve, climbing to 64% during the first quarter, a full 5 percentage points higher than the second quarter and the gap between weekday and weekend occupancy continues to narrow. Trey will provide some additional color on our operating results later in the call.

During the third quarter, we completed the previously announced acquisition of the newly built 110 guestroom residence in Steamboat Springs for $33 million.

The extended-stay hotel is the newest hotel in Steamboat, one of only 6 other hotels that have opened in the market since the year 2000, and the first Marriott-branded extended stay product in the market.

Since acquisition, the hotel has performed exceptionally well, generating occupancy and RevPAR of nearly 87% and $161, respectively, and hotel EBITDA margin of 49% for the third quarter. On an annualized basis, this equates to a 9% net operating income yield and less than 3 months of ownership, despite the hotel having been open for less than 1 year.

During the third quarter, we invested approximately $4.2 million in our portfolio on items primarily related to planned maintenance capital.

As we previously mentioned, given our conviction around the long-term improvement in demand trends, we plan to commence several renovations in the fourth quarter of this year and early next year to minimize disruption from these projects.

We expect to spend between $15 million and $20 million in capital expenditures for the year on a consolidated basis. And between $14 million and $19 million on a pro rata basis. With that, I’ll turn the call over to our CFO, Trey Conkling..

Thanks, Jon, and good morning, everyone. During the third quarter, our resort and other nonurban hotels continued to show robust sequential improvement with RevPAR growth of 12% relative to the second quarter of this year, and a nominal RevPAR value exceeding $100.

This subset of the portfolio illustrates Summit’s diversification and broad exposure to the overall lodging recovery as ADR increased 13% to $135 relative to the second quarter on stable occupancy of 74%.

Transitioning to our urban hotels, we were encouraged by the progress in this subset of the portfolio, which, for the first time since the onset of the pandemic experienced meaningful outsized growth relative to our other location types.

RevPAR at our urban hotels increased 43% from second quarter 2021 to approximately $94, primarily on the strength of rate, which increased 24%. As an additional point of reference, in third quarter 2020, our urban portfolio posted a RevPAR of $37, further evidence of the strong rebound experienced year-over-year.

Key factors driving growth in the urban portfolio include increased business activity, professional and college sports attendance and group demand.

As a final point on our urban portfolio, we believe business travel is now in the early stages of its recovery as urban midweek occupancy increased 10 percentage points from the second quarter to 57%, and ADR increased more than $30 to $144 or a 27% increase for the quarter.

This translates to a RevPAR growth rate of 54% versus second quarter for the urban portfolio. To provide a little more insight into the company’s overall third quarter portfolio segmentation, growth in demand was driven primarily by the increases in group business and negotiated business segment, as previously mentioned.

Full week group RevPAR for the company’s total portfolio increased by 76% relative to second quarter 2021, while weekday group RevPAR increased by 100% during the same time frame. Similarly, full week negotiated RevPAR increased by 28% relative to second quarter, while weekday negotiated RevPAR increased by 32%.

Increases in negotiated RevPAR were driven primarily by travel from small and medium-sized business transient accounts. Although booking windows remain short-term in nature and forecasting continues to be a challenge, we’ve experienced a decline in the percentage of room nights booked near to or on the night of stay.

For example, transient room nights booked within 24 hours this day, declined from 23% of total bookings in the second quarter to 21% of bookings in the third quarter. But importantly, nights booked more than 30 days out, increased by 19% during that same period.

While the overall booking window remains shortened relative to prepandemic standards, its expansion represents a definitive trend that started earlier in the year and has strengthened throughout the third quarter.

From a cash flow perspective, continued growth in demand, combined with thoughtful expense management, enabled Summit to generate positive corporate cash flow of $18.5 million in Q3, which was more than triple the corporate cash flow of Q2 2021.

Pro forma hotel EBITDA was $38.8 million in the third quarter, exceeding the previous 2 quarters combined by approximately $5 million. Operating costs per occupied room declined nearly 10% compared to 2019, which drove third quarter gross operating profit margin and hotel EBITDA margin to an impressive 47% and 35%, respectively.

We continue to operate our hotels utilizing a very lean staffing model, which consists of approximately ‘19 FTEs on average or slightly more than 55% of free pandemic staffing levels. Rehiring hourly staff, particularly in the housing housekeeping department has been an ongoing issue across the industry.

Despite these challenges and increasing occupancy levels, our asset management team has done a great job controlling operating expenses, leading to hotel EBITDA retention of 54% when compared to the third quarter of 2019. Finally, turning to the balance sheet.

Our overall liquidity position continued to strengthen during the quarter as the business made substantial progress generating positive cash flow. Additionally, we accessed the capital markets in August, taking advantage of a favorable preferred equity market with the issuance of $100 million of 5 and 7, 8 Series A [ph] perpetual preferred paper.

Proceeds from this opportunistic offering were used to accretively refinance our $75 million, 6.45% Series B preferred stock and to reduce the outstanding balance on our November 2022 term loan to its current balance of $62 million.

This sub term loan remains the company’s only 2022 maturity, and we continue to maintain ample liquidity to repay all maturing debt through 2024 when considering available extension options. With that, I will turn the call back over to Jon to discuss the acquisition of the NewcrestImage portfolio..

Thanks, Trey. We’re thrilled to announce the acquisition of a 27 hotel portfolio from NewcrestImage, which is comprised of approximately 3,700 guest rooms located across 10 high-growth Sunbelt markets in Texas, Oklahoma City and New Orleans.

These hotels are highly complementary to our existing portfolio with premium brand affiliations, excellent locations in strong markets and comprise a relatively new portfolio with approximately 70% of the guest rooms opening since 2015 and more than 1/3 of the guestrooms built in the last 3 years.

The hotel portfolio’s allocated value of $776.5 million equates to approximately $209,000 per key, which reflects a significant discount to replacement costs and results in a stabilized NOI yield of 8% to 8.5%, including underwritten capital expenditures.

Our increased exposure to Sunbelt markets, which will be approximately 60% of our pro forma room count, positions the combined hotel portfolio to benefit from the favorable migration patterns, labor dynamics, corporate relocation activity, return to office trends and general pro business climates in these markets.

In addition to the hotel portfolio, we will be acquiring 2 parking structures, totaling approximately 1,000 parking spaces that serve 2 triplex hotel clusters, one in Downtown Dallas and the other in the emerging mixed-use development of Frisco Station, a thriving North Dallas suburb.

The transaction also includes an allocation to several financial incentives that will be assumed upon closing of the transaction. Our joint venture with GIC will acquire the assets for a total consideration of $822 million, and we will finance the investment with a new $410 million credit facility.

We expect the transaction to be immediately accretive to our earnings and leverage-neutral to our balance sheet. GIC’s 49% equity interest will be a cash contribution totaling approximately $208 million, and our 51% controlling interest will come from a combination of common and preferred op units.

We will issue 15.9 million shares of common op units valued at $160 million. Based on our common stock’s 10-day [indiscernible] as of Tuesday’s closing price equal to $10.09 per share. Pro forma for the issuance, NewcrestImage ownership will be approximately 13% of our total shares outstanding.

The preferred op units totaling $50 million will be issued at a standard $25 par value and pay an annual coupon equal to 5.25%. As part of the transaction, NewcrestImage will have the right to appoint one representative to the company’s Board of Directors.

The transaction would increase our combined room count by over 30% and our total enterprise value by approximately 20%.

Acting as a general partner, on behalf of the joint venture, we will continue to earn fees for our asset management services and expect our stabilized fee stream earned through the joint venture will cover approximately 17% of our in-place cash corporate G&A.

The utilization of common and preferred op units for our 51% equity interest will preserve nearly all of our liquidity of $450 million, leaving us ample runway to pursue additional growth opportunities.

While closing remains subject to customary closing conditions and a formal due diligence period, we anticipate closing to occur later this quarter or early in the first quarter of 2022.

In closing, I’d like to take just a minute to publicly thank our dedicated team here at Summit, our partners at GIC and especially Mehul Patel and the team at NewcrestImage for their tireless work, getting a very important transaction for our company to this point.

We are incredibly excited about the future of our business and believe this transaction, combined with the continued recovery of lodging fundamentals, positions us particularly well to create long-term value for our shareholders. And with that, we’ll open the call to your questions..

[Operator Instructions] First question, we have Austin Wurschmidt with KeyBanc..

So I was wondering, Jon, if you could just give some additional details around the accretion numbers from the transactions with NewcrestImage or maybe even a going-in yield? And then what did you assume upon stabilization as far as hotel EBITDA relative to prepandemic hotel EBITDA?.

Yes, good morning, Austin. Appreciate the question. As we said in the press release, we do expect this to be immediately accretive to our earnings. The kind of the hotel operating statistics that we put forth were between 8% and 8.5% of a stabilized NOI yield. That does include about $40 million of underwritten capital expenditures.

That does not include any benefit that we will get from a fee stream earned through the joint venture, which would add another 30 basis points or so to our overall yields..

Got it.

And then so with NewcrestImage now willing to take op units, it seems to imply that deferred taxes maybe were an important consideration for them, but with them now being your largest shareholder, how should we think about their holding period when the lockup expires?.

Yes. Well, the shares will be subject to a 6-month lockup period. I think that the relationship -- the partnership with Newcrest is expected to be a longer-term one. I can’t speak directly for what their intentions are for the stock.

But I think conceptually, as we talked about putting this deal together, particularly with their representation on the Board, the expectation is for it to lead to a longer-term relationship. And hopefully, they can help us continue to grow the business..

And then just one last one for me.

With the joint venture now, over $1.3 billion of investment, what’s sort of the runway beyond this in terms of continuing to scale up with GIC?.

Yes. As it sits today, it’s about a quarter -- on a pro rata basis, it’s about a quarter of our total asset value. I think we’re very comfortable with where that sits. I think it does give us additional room to continue to grow the venture.

We will be cognizant to make sure that we don’t get to a point where we have an inverted ownership structure where we own more into the joint venture than we do outright. Again, I still think we have runway to grow through the venture. But I also think we’ll be more open to owning -- acquiring assets outright on a go-forward basis as well..

Next question, we have Michael Bellisario with Baird..

Jon, I just want to go back to the kind of underwriting assumptions you made.

Can you just talk about whether it’s a high level or specifics, the ramp-up of EBITDA that you guys expect from this portfolio kind of twofold, given the markets that you’re acquiring and that are probably better performing markets over the near term, but also the fact that a bunch of hotels are new or, I think, at least one is soon to open, what the ramp-up of earnings and EBITDA looks like from this portfolio versus your existing portfolio today?.

Yes. I think it’s a good thing to emphasize, Mike. I mean I think when we look at making kind of apples-to-apples comparison on 2019 metrics, it’s highly difficult because as you pointed out, not only are there a fair number of new assets, about 1/3 of the guestrooms have opened within the last 3 years.

One asset, in particular, the Canopy in New Orleans is not yet open. Some of the -- what we expect to be the higher RevPAR assets, likely the higher EBITDA per key assets are part of the newer portfolio.

So we do expect this to have a different growth profile, a different trajectory, a higher growth profile than the existing portfolio, specifically because of that, as you kind of alluded to..

Got it. And then just maybe big picture.

How do you -- how did you get comfortable with the outsized Texas exposure? And then also the handful of smaller Texas markets that you’ll now have representation and that I think most people outside of Texas are probably not familiar with?.

That’s probably fair. Look, Texas, we think, the dynamics, what’s happening down here, a lot of these are in our backyard. We’re based here. We can see the growth that’s happening in Texas. The migration down here from a people perspective, the corporate relocation activity, the job growth is all very real.

In many ways, Dallas is kind of the epicenter of that growth. And so I think, again, the concentration, particularly in some of these markets is something that we think in the near term is very good from a growth perspective. I will say, while there is a lot of concentration in Texas, about 70% of the portfolio is located in Texas.

It’s a very big state. And the properties are located in fairly distinct submarkets. Amarillo is actually closer to Denver than it is to Austin or Houston. Again, these are -- they’re in a lot of different markets that have different supply-demand dynamics.

And we think, ultimately, we get comfortable with that because of -- it’s just growth profile down here than we think and a lot of these other markets. The Sunbelt, in particular, has, I think, better and different growth prospects. Some of these smaller markets are actually kind of sneaky good little markets.

We didn’t know a lot about the Amarillos of the world, the [indiscernible] of the world, the Tyler, Texases of the world. As we got into the due diligence, I think we got more and more comfortable with -- these are -- while they’re smaller markets, they’re actually very good, smaller markets.

With some of our best acquisitions over the course of the last 3 or 4 years have been in smaller markets, Silverthorne, Colorado is a good example. Tucson, Arizona is a good example. These may not be top 50 or top 25 markets, but they are very good, strong markets with good regional local demand generators..

Got it. And then just last one for me. You guys still have about the same amount of liquidity, and I assume you structured the deal intentionally for that purpose.

Would you expect to remain acquisitive, at least over the near term? Or should we expect a pause for the time being while you digest this big transaction?.

Well, this is obviously going to keep us very busy getting -- first of all, getting the deal closed and then getting the 27 assets integrated into the portfolio. I think, again, one of the good things about the portfolio is while there are 27 assets, they are fairly concentrated. Again, there’s a number of clusters of 2 or 3 assets together.

So I think from an efficiency of managing those assets, it’s going to fit into the model fairly well. You’re right to point out that I think that the work that dray Trey and Adam did to structure the deal in a way that utilizes essentially none of our $450 million liquidity was intentional.

We did want to make sure that we continue to have capacity to grow the business. We will look to continue to do that on an opportunistic basis..

Next, we have Neil Malkin with Capital One..

Congratulations on the transaction. Just maybe a little housekeeping one. Does the 8% to 8.5% cap rate stabilize, does that include some of the potential occupancy margin and EBITDA per room upside? On that one page in your presentation, there’s a difference between sort of your average portfolio and Newcrest.

Does that -- are you guys assuming that? Or is that going to be like gravy to the economy?.

Yes. It does not, Neil. I mean we’ve kind of underwritten on a baseline on a typical standard basis. We do think we’ll hopefully be able to find not only some expense synergies, but also some revenue synergies, particularly where we have assets where there’s significant clusters. That isn’t baked into the 8.85% that we quoted..

Okay. Great. Other one is on labor. You talked about, I think, 19 FTEs, 55% pre-COVID. I’m just wondering if -- obviously, everything is very fluid.

If you’ve sort of retooled or rejiggered how you think about what a steady state headcount looks like at your hotels, just given that we’re pretty far into COVID, pretty far into this new operating environment, you have a lot of experience running at these levels.

I just -- do you maybe believe that you can actually run it like lower levels on when demand comes back than you did 3 to 6 months ago, just given how hard it’s been to get people back on site?.

Yes. Look, I think, we’ll run lower than we did pre-COVID. I think the average FTE count of our hotels was roughly 35 FTEs per hotel, pre-COVID, we’re a little back halfway past that point. So I think we’ll run lower than what we did historically. I think we will continue to add FTEs from where we sit today.

You alluded to the fact that some of this is driven by the difficulties that we have in finding labor today. And I think that we’re still -- the brands are still kind of in the early phases of getting brand standards rerolled out. And so my expectation is that, that FTE count will continue to go up.

But I do think it will stabilize at something lower than where we were pre-COVID..

Okay. Great.

And then if I just could -- maybe, Jon, can you just say, as candidly as possible, kind of what the large portfolio, obviously, very -- all Sunbelt-oriented kind of says from a strategic standpoint about coastal markets, are your coastal markets this cycle over the next 3 to 5 years? I think everyone is really moving to the Sunbelt and sort of recycling out of the coast.

And just curious to get -- how you think that’s going to play out..

Yes. Look, I wouldn’t -- first of all, we’re happy to invest in the Sunbelt. I think that what’s happening, the dynamics that are happening in these markets have been well documented.

I think it’s -- there’s a clear path to above-average growth down here in kind of any metric that you want to cite because of, again, some of the positive dynamics that are happening. I wouldn’t take that to mean that we’ve completely given up on coastal markets. We try to be opportunistic acquirers or capital allocators, regardless of the market.

We’ve talked a lot over the years about being market-agnostic when it comes to allocating capital. At a very fundamental basis, we try to underwrite high-quality assets for -- at risk-adjusted returns that exceed our weighted average cost of capital. We think we found a really compelling opportunity to do that.

I think if you look at our basis in this portfolio at a little over $200,000 a key and compare that to some of the other kind of high-quality, similar type of assets that have traded here over the past 3 or 4 months. I think this stands up very well.

And again, I think, the growth profile here is going to be better than a growth profile we might, in the near term, find another market. I wouldn’t say we wouldn’t go back and buy in coastal markets. Again, I think so as long as we can underwrite to the risk-adjusted returns that are rational that are above our cost of capital, we would do so.

We’ll probably underwrite a different trajectory of the recovery than we would in the Sunbelt, but I wouldn’t read at this that we no longer like the coast..

Next, we have Chris Woronka with Deutsche Bank..

Yes. Jon, you guys always kind of talked about the benefits of scale, and this adds, obviously, significant scale to your platform.

The question is, though, does it also make you more likely to revisit the legacy portfolio and maybe accelerate any pruning that you still wanted to do because this gives you the opportunity to kind of stay at a certain level of assets or EBITDA? Just thoughts on that -- on potential -- potentially recycling other noncore assets?.

Yes. Sure. Look, it is -- we’ve always felt like we have a platform in place here that could be leveraged to take on greater scale. And I think there is a benefit from us having more assets, particularly in some of these better markets. We’ve never been an acquirer for sort of just the sake of scale.

And you can -- as you read the presentation that we put out, as you listen to the prepared remarks, as you listen to even the commentary here in Q&A. Scale is good, it’s a benefit, but it wasn’t the driver of this transaction.

Again, we -- the driver of the transaction was buying high-quality real estate at returns that we felt were very, very compelling. I wouldn’t preclude us from being a seller of assets. Again, I think, we always try to be an opportunistic allocator of capital.

There are a lot of assets in the portfolio today that we really view as noncore that we feel like we have to sell. But if we can sell assets at the right price, we’re certainly open to that..

Okay. That’s helpful. And then I heard the last question about kind of how you view the coast and how this fits in with that.

But I’m going to take that question in a different way, which is, are you also kind of making a call that the labor -- you talked a little bit about it, but the fact that maybe the labor situation in these markets is better, more availability and potentially less pressure on wages going forward? I mean how much -- how important was that kind of in the consideration process?.

Yes. Look, I think these are -- it was a consideration. And I do think the labor dynamics in some of these markets are better. And I think that you’re -- look, I think, there’s labor challenges everywhere. But I think that you’re, obviously, in very much nonunion kind of pro business markets here.

So again, I do think that, that is another positive fact pattern as we look at the portfolio..

Okay. Great. And then last one is just we think about -- I’m thinking about supply select service supply growth broadly for the whole country, not this specific Newcrest portfolio.

What are you guys seeing in terms of stuff that kind of was in process, pre-COVID or was being considered pre-COVID and then it starts to get closer to a shovel in the ground? Now construction costs are at a certain level and labor is harder to find.

Are you seeing stuff in your markets pipelines start to drop or get pushed out further?.

Yes. Look, I think, the stuff that was in the ground or coming out of the ground pre-COVID is going to get completed. I think the new development pipeline has slowed significantly for all the reasons that you kind of alluded to. Construction costs are materially higher than they were, finding labor has challenges.

The supply chain issues that we’ve all been dealing with have been very well documented. So you see it in the national numbers. You see it in the chain scale numbers.

I think our expectation here is that we’re going to be in a window for several years where we’re going to have below average supply growth for the industry and for our markets, in particular..

Next, we have Bill Crow with Raymond James..

Good morning, Bill..

Bill Crow? I think he just withdrew question. So there are no more questions. Please continue, presenters..

Okay. Well, thank you all for joining us today. This is clearly a very exciting time for our business, and we’re very appreciative and thrilled to have the opportunity to work with NewcrestImage on this important transaction. We look forward to speaking with many of you next week at NAREIT. I hope you all have a nice quarter. Thank you..

This concludes today’s conference call. Thank you all for participating. You may now disconnect..