Good day, ladies and gentlemen, and welcome to the Summit Hotel Properties Second Quarter 2017 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Adam Wudel, Vice President of Finance. Sir, you may begin.

Thank you, and good morning. I am joined today by Summit Hotel Properties Chairman, 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 2016 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today, August 3rd, 2017, 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' Chairman, President and Chief Executive Officer, Dan Hansen.

Thanks, Adam, and thank you all for joining us today for our second quarter 2017 earnings conference call. On the operational front, results for the quarter came in below our expectations due to lower rate growth, concentrated in a handful of our key markets. I'll dive into the details of our operating results shortly. But we have always relied on a well-diversified portfolio to hedge our volatility in any given market. And while our results can vary from our forecasts, market by market, and quarter-to-quarter, overall, this has historically blended to predictable results. Unfortunately, in the second quarter, we were adversely affected by concentrations in several of the most challenged markets in the country and faced a particularly difficult year-over-year comparison coming off second quarter 2016 RevPAR growth of 6.4%. On a positive note, our quarterly comparisons ease in the third and fourth quarters, and we believe we are starting to see signs of stabilization in our forecasts. For example, preliminary July results came in right on top of our forecast for the month, which gives us confidence that our portfolio is well positioned going forward. For the second quarter, we reported Adjusted FFO of $35.8 million, a decline of 1.9% as compared to the second quarter of 2016. Our Adjusted FFO of $0.36 per share came in below our guidance range of $0.38 to $0.40 per share. If you recall, we did not update our second quarter or full-year guidance following our equity offering in May. The offering was $0.01 per share dilutive during the second quarter, net of the incremental acquisition activity in the quarter, due to the slight lag we had in deploying the capital. On a Pro forma basis, RevPAR declined 2.4% during the second quarter, which was driven by a 1.7% decline in average daily…

Thanks, Dan, and good morning, everyone. For the quarter, our Pro forma hotel EBITDA came in at $54.6 million, which was a decrease of 7.7% as compared to the same period of 2016. As telegraphed on our last couple of calls, we expected margin headwinds in the first half of 2017 and now see those headwinds continuing into the back half of the year as well, but to a lesser degree. Pro forma hotel EBITDA margin contracted by 215 basis points to 38.8%. Property tax increases accounted for 60 basis points of the contraction, increasing 8.8% quarter-over-quarter, while the remaining 150 basis points of contraction was related to direct hotel operating expenses. During the second quarter, adjusted EBITDA declined to $46.8 million, a decrease of 1.2% over the same period of 2016. Moving on to our balance sheet, our balance sheet continues to be well positioned with no maturities through 2018 and liquidity of more than $175 million as of quarter-end. At June 30, 2017, we had total outstanding debt of $739.4 million with a weighted average interest rate of 3.71%. We ended the quarter with net debt to Pro forma trading 12-month adjusted EBITDA of 3.8 times, which is a comfortable level, based on our stated range of 3.5 to 3.5 times. During the quarter, we repaid a $7.5 million mortgage loan, and as a result, we have no debt maturities scheduled through 2018. Today, nearly 70% of our portfolio EBITDA is unencumbered by mortgage debt, which is proof of the progress we continue to make in enhancing an already flexible balance sheet. As of July 25, we had total outstanding debt of approximately $768.9 million with a weighted average interest rate of 3.67% and total liquidity of approximately $200 million. Turning to our outlook for 2017, in our release, you will see that for the third quarter 2017, we provided AFFO guidance of $0.32 to $0.35 per share, a pro forma RevPAR change of negative 1% to positive 1%, and same-store RevPAR change of negative 2% to flat. Our full-year 2017 guidance for AFFO is being adjusted to $1.28 to $1.34 per share, and Pro forma RevPAR growth of 0% to 1% for our portfolio of 79 hotels, and negative 1% to flat for our same-store portfolio of 65 hotels. Metrics supporting our guidance are provided in our release. We have incorporated capital improvements of $35 million to $45 million, which includes both renovation and recurring capital expenditures. No additional acquisitions, dispositions, or equity raises beyond those previously mentioned are assumed in the third quarter or full-year 2017 guidance. With that, I'll turn the call back over to Dan.

Thanks, Greg. In summary, while our results in the second quarter did not meet our expectations, we remain optimistic about the long-term outlook for our business. We have assembled a portfolio of great hotels with significant upside that we believe is well-positioned to create long-term shareholder value. We have a team of best-in-class operators that work tirelessly to produce superior results and a track record of outperformance. The conviction around our business plan is as strong as ever, and we believe our portfolio is uniquely positioned to cater to the needs of today's, and as importantly, tomorrow's generation of hotel guests. Our ability to execute accretive acquisitions and prudently recycle capital through asset sales remains a core tenet of our value creation strategy, and our balance sheet is in excellent shape. For these reasons, I am more optimistic today than I was even a year ago, and I look forward to what lies ahead for Summit. And with that, we will open the call to your questions.

[Operator Instructions] Thank you, and our first question comes from the line of Wes Golladay with RBC Capital Markets. Your line is open.

Hey, good morning, guys. Can you talk about how you adapted your revenue management system for the second half of the year? It was a rare occurrence for you guys to lose ADR. Is that going to be the case going forward, that you push rates still, or is it just isolated for the select markets?

Thanks for the question, Wes; this is Dan. The revenue management strategies are a pretty fluid process. I wouldn't say that there's one specific thing we're going to be doing different. Each market, even within the market, each hotel may have a different strategy. We have talked in the past about using smaller groups to shrink the box to make it easier to manage those transient guests, and some hotels it's easier to do that. Some of our smaller hotels that maybe only have 100 rooms makes it a little bit more difficult. But I think our continued focus on making sure that we're pricing competitively, we're taking groups to shrink the box where appropriate, and making sure that we've got great dialogue and visibility with our management company is something we'll continue to do. But I wouldn't say there's a holistic shift for the portfolio.

Okay, and then looking at the asset sales, I mean, it looks like you've sold a lot of assets this cycle. Are you at the point where you're done selling the assets, or are you going to look to potentially sell some of the early cycle purchases?

We have sold a couple that we bought early cycle, but I don't think there's anything we look at in our portfolio that we would consider non-core. We look at every asset as an opportunistic way to create value for shareholders. In some of our markets, we get unsolicited and direct calls from local hotel operators, and if that meets our underwriting criteria that we used when we bought the asset and we're continuing to see, in our view, better ways to deploy capital for longer-term growth, we'd certainly be willing to sell more. And I think if you look back over our history, we've sold assets pretty much every year that we've been a hotel company, so I think it's just part of our DNA, recycling capital. So it's not unreasonable to expect us to sell assets year-in and year-out.

Okay, and then last one. For the development, we're seeing across the commercial real estate space a lot of property types with a lot of delays going on, due to labor. Are you pretty much set with your team out there, or are you seeing any turnover on the development side?

No, we're in good shape with our development. We've been doing development prior to being a public company. We've got great internal capacity and experience, so at this point, we're seeing everything being on time.

Okay, thanks for taking the questions.

Thanks, Wes.

Thank you. Our next question comes from the line of Shaun Kelley with Bank of America. Your line is open.

Hey, good morning. Dan, in the prepared remarks, you mentioned a little bit about July coming in right on top of forecast for the month, so hopefully a little closer. So maybe you could just backpedal a minute. Sort of when in the second quarter did you get a sense that things were coming in below forecast, and how did you kind of start to tweak or move operations for that? Maybe we could start there, and then we could talk a little bit more about July.

Sure. I think it was well understood that April was going to be soft because of the Easter shift, and it proved to be a little softer than we expected. We used that as a baseline for building our forecast for the remainder of the quarter and just continued to see deterioration in rate throughout May and into June. So I wouldn't say there was a specific moment where we saw something shift, but it was just continued weakness. And a lot of it had to do with just several of our markets. San Francisco was one. We have assets that are not in the CBD; they're out closer to the airport, and some corporate generators. Minneapolis is a market that has had some supply issues, different than some of the others. And then New Orleans I think was just a little bit softer than expected. But to the original question, I don't think there was a point. It was just kind of a continual slide throughout the quarter.

Got it, and so then, to kind of jump ahead to July, could you give us a little bit more color there? Is it in line with - is your forecast, then, in line with guidance, or are you expecting a different pattern in 3Q where July, August, and September kind of line up differently? And I say that within the context of most of the other people reporting are suggesting to us that July and September will be softer; August is maybe going to be a little bit better. But I think everybody's expecting September to be quite weak.

Yeah, I think Q3 for us is a little bit different than Q2 insofar as we have an easier comp. If you recall, as we said in the prepared remarks, we have a 6.4% RevPAR comp in Q2, which was a big mountain to climb, so to speak. So when we look at July, we don't normally comment on monthly performance inside a quarter, but I think in this instance I'm comfortable saying we were actually slightly positive for July. I know we do have some back half of the quarter challenges with the Jewish holiday shift. That creates some challenging visibility. But we feel good about our forecast and our guidance range.

Okay, no, that's helpful and appreciate the extra color there. And then, my last question is kind of digging into some of the markets that underperformed, and some things like San Francisco and New Orleans we definitely saw coming, and we know some of those headwinds are temporal. So as we think about those five markets that you called out, how much more were those five markets down than the overall portfolio? Kind of saying, excluding those five markets, where would the core portfolio have performed?

If you take those key markets out, we would have been in line with Upscale, probably closer to 1.0%. I think the Upscale was 0.8% for the quarter.

Okay, a 1.0% gain, yeah?

Yes.

Okay, great. That's it for me. Thank you very much.

Thanks, Shaun.

And our next question comes from the line of Michael Bellisario with Baird. Your line is open.

Good morning, guys. Just on the acquisition front, today, how much capacity do you think you have? And then, has your appetite changed at all after all the recent activity that you've completed in the last, call it 120 days or so?

Mike, this is Dan. I think we're still comfortable with the thesis of finding creative acquisitions. We have probably $100 million of capacity that we think is available for use for opportunities that we would come across.

Got it. And then maybe one for Greg, just on the guidance, is it fair to assume that margins are going to be negative in the back half of the year? And then, how should we think about that magnitude, if so, relative to the first half?

Hi, Mike, this is Greg. It's kind of like we discussed on our last call; we anticipated margin headwinds in the first half. We're now kind of seeing that those are going to persist into the second half of the year as well, not quite to the same degree. So much of what's going on with margin is related to RevPAR. Obviously, the effect of an increase in an expense is magnified when you have the RevPAR going down. Direct room costs were something we mentioned as having an effect. Labor and wage increases were responsible for about 90 basis points of the 150 I mentioned of direct hotel expenses in my prepared remarks. There were about 20 basis points of contraction that were related to travel agent commissions. And then I think we mentioned the 60 basis points of property taxes. Something I would point out on those property taxes is we were not far off of budget. We were only $200,000 off of our budget for the quarter. But, again, that is amplified when you take into account the revenue coming down. And there's so many of those property taxes that the increase year-over-year that we mentioned at an 8.0% rate, that those property taxes were baked into the underwrites, because when you buy an asset, it's very likely that it's going to be reassessed, and we bought an awful lot of assets. So, based on our second quarter results and the outlook for the second half, margins are pointing towards contraction of approximately 150 basis points for the full year of 2017. We will continue to see those property tax increases. We expect some moderation in some of the other areas. To break even from a margin perspective, we've always said that about 2% RevPAR growth is where we would need to be, and so the full-year contraction is to be expected. There are always some expenses to be cut, but given where we are in the cycle, cutting any deeper would likely have an effect on the physical quality of the hotel or overall guest experience, and we wouldn't want to be short-sighted in that. So that's kind of how we're looking at margin.

That's helpful. And then, just maybe asking Shaun's question a little differently or just digging into that one a little bit more, can you guys maybe talk about what you missed in the quarter, and then kind of what you learned looking back, and how that maybe has changed your forecasting or the way you think about forecasting in certain weak periods, in certain weak markets?

That's a good question, Mike. I don't want to overdramatize the quarter by referring to it as the perfect storm, but there is a similarity. Our diversity, which is by design, has always been and always will be, in our view, a prudent way to mitigate risk. But there will be times such as the second quarter where that diversity doesn't really show its true benefit. We think it's pretty rare that so many of our key markets align with challenging market fundamentals. And it's also possible at some point that they align very positively, too. So nothing's really shaken our confidence in our business model or our team or our revenue management strategies. I think the takeaway here is that, successes and failures because of new strategies we employ can be magnified if they're in markets we have collective concentration in. So I think we want to be cautious and maybe be focused a little bit more on the magnitude of volatility. But I wouldn't say that the takeaway was we felt like there was anything we did wrong. I think it's more about trying to be more clear on the volatility around those strategies and expectations.

That's helpful. Thanks for that color, Dan.

Thank you. Our next question comes from the line of Ryan Meliker with Canaccord Genuity. Your line is open.

Hey, good morning guys. I wanted to kind of piggy-back off of one of Shaun's questions earlier with regards to the second quarter. Obviously, you guys issued your initial 2Q guidance in early May, and then you had your Investor Day towards the end of May. So was is primarily June that drove you guys to miss your expectations for the quarter, or was there something that wasn't communicated at the Investor Day that you saw in May? Because I would imagine by May 22nd, you at least had numbers for the first half of the month and had a pretty good indication of where the back half of the month was coming in.

Ryan, this is Dan. Yeah, I think it's fair to say June was exceptionally soft for us, leading to the miss in the quarter. We started out, as I said earlier, soft in April. We weren't able to make back some of the ground in May, and June got progressively worse.

Okay, so June really drove the miss. That's helpful. And then the second question I had, obviously, it sounds like July picked up from June, which is positive. But as we look at guidance for 3Q and full-year, obviously, you don't have a ton of visibility into your portfolio, just given your booking windows. But are you taking caution, given the uncertainty that materialized in 2Q into these full-year numbers, or is this really where you guys are budgeting things right now?

I think having caution after second quarter is an obvious thing that we're looking at. We do feel good about the numbers. As you mentioned, visibility has always been a challenge. We've got roughly two weeks of pretty good visibility. But we also have a little bit easier comps, and we did see some signs that give us some confidence in those numbers, notably July performance. But also, in May and June, we actually had some pick-up in local negotiated rate for our corporate travelers, so I think there's some very positive things that we saw over the last couple months, despite the challenging environment.

Okay, and then one last one. You guys have obviously been pretty aggressive on the acquisition front; the initial cap rates look really good. As we look to acquisitions going forward, does the uncertainty that you've seen play out in the second quarter, and you're kind of applying to your portfolio for the back half of the year, impact your underwriting in any way to win new deals? Should we not expect more acquisitions as we go through the next year or so, given those dynamics, or do you think that you'll continue to find opportunities?

No, I think we feel good about our acquisitions. Everything that we bought, we mentioned the great early performance we've seen in Ft. Lauderdale, so no, I don't think second quarter in any way inhibits our activity on the acquisition side. We've had a history of great underwriting and great execution through acquisitions, dispositions, so no, I think we feel really good about our ability to find and source great long-term growth hotels for the portfolio to create value.

All right, that's it for me. Thanks.

Thank you, and our next question comes from the line of Austin Wurschmidt with KeyBanc Capital. Your line is open.

Hi, good morning. Just had a question about your earlier comments, Dan. You mentioned that you're more optimistic than a year ago, and then you also went on to say that you're seeing better ways to deploy capital. So just curious if you could provide some additional detail around those comments.

Sure. I think optimism comes throughout a business cycle, based on not just industry trends, but little things you see in and around hotels and markets. The economy is not bad. It's growing. I think there's some hesitancy and there were some expectations that there were some decisions made in Washington that would give a boost to the economy, which hasn't materialized yet. Occupancy is still very strong. Supply is getting closer and closer to the peak. And we're seeing small things that give us confidence that there's further rate growth to be had. So I think last year, a year ago, we saw more deterioration of fundamentals, and today we sit here with a terrific portfolio. We've invested an incredible amount for a portfolio our size into renovations, which gives us a great runway for growth going forward. So I think it's a function of several key things that give us the confidence that all the decisions we made, from capital allocation and acquisitions and dispositions, put us in a great spot to grow. And I don't know whether industry fundamentals bottomed or they change next week, next month, or next quarter, but we do feel like we've put a lot of work into a great portfolio to perform well over the long term.

Appreciate the comments there. And then, a couple of people have touched on the fact that you've been active capital recyclers and mentioned that you expect to continue that. I'm just curious, what's kind of the right scale for the company for you guys to remain nimble, I guess operationally, but also enjoy some of the benefits of scale?

It's Dan, again. Thanks, Austin, for the question. It's something we spend a lot of time focused on. We've been able to grow significantly in size, but not in number of hotels. So if you think about being able to manage one hotel that's 200 rooms versus two hotels with 100 rooms we feel like we can add a greater amount of value with a box that has more complicated revenue management needs and business demand generators. So I don't think there's a magic size that we're striving to get to. I do think with the team we have in place, with maybe one or two other key individuals in the field we could manage another 30 or 40 hotels, but beyond that, it starts to be a little bit more cloudy on how big you could get and still be able to move the needle.

Thanks for the color. And then last one for me, just back at the investor day you talked about being a little bit opportunistic on the mezz side, and just curious if there are any opportunities you're seeing near term.

There are. We're actually looking at several right now, and we think that's a unique way to add some value and build a pipeline for the future.

And then, can you just remind us in terms of scale, of where you're comfortable in the mezz book?

I think it's maybe one or two opportunities at a time. We never want to be too over-weighted in any one strategy. We think it's more - we're not trying to be a mezz lender. We think it's more of a way, as I said earlier, to build a pipeline. So I think one or two loans is really the most you'd expect from us.

And our next question comes from the line of Chris Woronka with Deutsche Bank. Your line is open.

Hey, good morning guys. Dan, thanks for going over all the color on portfolio. I think I guess we pretty well understand at this point some of the market-specific issues. But also wanted to ask you if we've seen a lot of these I guess you call them two-star or Midscale brands kind of relaunching in recent years, and do you think that's having any impact? I mean, do you think that the stuff below you has actually gotten to a level where guests are starting to - I don't want to say trade down, but starting to just see that price gap and see less variance between the hotel product?

It's a good question. We study that very closely, and I think some of the new brands in the Midscale are competing for a little bit different guest, a much more, in our view, price-conscious guest. I think there are markets where they do have an effect, though, where maybe it's an older, smaller hotel that we have that you have a brand new, Midscale hotel that is advertising a special that people may want to try. So I think it's similar to the analysis of does the high-quality, Upscale that we're buying compete with boutique and full service, and in some respects, even luxury, and I think the answer is yes. I don't think there's a clear-cut guest that will only stay in one star type or chain scale. I think it is a function of great location, a great product, and a great experience by the staff. So I think there will definitely continue to be some cross-demand from guests across all those segments.

Okay, great. And then, with all the dispositions and acquisitions, I know the mix has maybe changed a little bit. Are you guys at all any more kind of exposed to maybe group overflow than you were in the past in some of your I guess kind of more concentrated core markets?

Yeah, I think with our investment in hotels in New Orleans, I think that's a market that has increased our exposure to group and overflow and a few others I think would certainly fall into that same portion of demand. I don't think it was anything that we feel uncomfortable with, but I do think some of those markets that will benefit over time as this group continues to stabilize. In a market like Indianapolis, where you have hotels right there connected to the convention center. Louisville is one where there's two hotels across the street from what is currently a closed convention center, so if that comes back online, we expect some stronger demand there. So I think at the very core, we're very positive about our weightings and allocation there.

Okay, great. And then, I guess when I think back earlier in the company's history you guys had a bunch of stuff that I think you used to call it unseasoned versus seasoned. A lot of the stuff you bought recently is more the stabilized variety, and you've gotten pretty good pricing on it, which helps. But do you see any out there where you can go in and add that value, maybe like you did in the San Francisco Airport? Is there a lot of that stuff out there, or is pretty much everything you're looking at more stabilized?

So every time we look at something, we like to identify, in addition to just the simple going-in yield, some value-add opportunities. Some, it might just be a renovation; some, it may be more operationally. But to the extent we could find brand conversions or deep return renovations, certainly, we would look at those opportunities as well. The expansion development type project we're doing in Orlando is a great one. We have some land we got when we purchased the Hyatt Place directly from Hyatt, and when the timing was right, we thought kind of an expansion to have more of a complex of hotels made some sense. So we think that's going to be a great value-add over time, as well as buying the new AC Hotel in Atlanta. It's a terrific brand that's gaining traction and as that ramps, it's going to be a terrific value-add as well. So I think it's fair to say that there's not one key that we look at, but we're always looking for value-add. They just kind of come in different ways.

Okay, very good. Thanks, Dan.

Thanks, Chris.

Thank you, and our next question comes from the line of Bill Crow with Raymond James. Your line is open.

Hey, good morning guys. Dan, in a weaker month like June, tell me the trend between OTA and brand websites. Are you putting more rooms out, your operators putting more rooms out on the OTAs?

Yeah, it's a balance, but clearly, we try to pick up occupancy where we can, and if we need to do that through the OTAs, that's one way to do that. That typically comes at the expense of rate. One of the things that we struggled with for the back half of May and June was holding rate. In the absence of group to be able to shrink the hotels in a smaller hotel, and I'll use the Four Points in San Francisco as an example, we had a heck of a time holding rate there as we were trying to fill hotels. I mean, we ran in San Francisco 93%, so we were getting occupancy, but it was really at the expense of rate. And truthfully, there are a lot of factors that go into that. In years past, that Four Points was one of only, really, two Starwood properties in the market, the Four Points being the closer one to downtown, and now in the Marriott system, it is one of many more properties. So in this instance, I think there were some factors that drove some weakness there that we hadn't seen in the past.

Okay, that's helpful. Maybe you can update us. I think at NYU, we were talking about Hyatt's threat to pull all of their properties off I think it was Expedia or Priceline. Has that been remedied at this point? Is that still an issue hanging out there? Because it seems like it would have a pretty significant potential impact on your portfolio.

Yeah, well, as of today, they are still on the system, so we haven't looked at the - we've obviously looked at what the effect would be if that would come off. But still being on the system, we've got confidence that they are going to come to a resolution. I think it's been reported that they have had strong negotiations, and we'd expect a resolution in short order.

Great, and then finally for me, Dan, is cancellation policy changes. I don't know whether that's all hit at this point through the second quarter or not, but just wondering what your experience has been with the guests, the more you have kind of instituted this new change policy.

Yeah, I think it's a little too early to maybe give a view on how the guests are reacting. It's obviously a positive. I think it was long overdue, and I think it will take some time to change traveler habits, but I do think it's a positive long term. But I think it's a little early; I don't have a lot of data that I could say how it's really going yet.

Okay, that's it for me. Thanks.

Thanks, bill.

Thank you, and I'm showing no further questions at this time. I would now like to turn the call back to Mr. Dan Hansen, Chairman, President, and CEO, for any closing remarks.

Well thank you all for joining us today, and I wanted to just close by reiterating our confidence in our plan, our portfolio, and our people. Look forward to talking to you again next quarter, and have a great end of the summer.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.