Good day, ladies and gentlemen, and welcome to the Summit Hotel Properties Q3 2018 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's call Mr. Adam Wudel, Senior Vice President of Capital and Financial Markets. You may now begin.

Thank you, Sherry 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, Jon Stanner. Please note that many of our comments today are considered forward-looking statements as defined by federal securities laws. These statements are subject to risks and uncertainties, both known and unknown, as described in our 2017 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today, October 31, 2018, 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 Web-site 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 third quarter 2018 earnings conference call. Yesterday, we reported bottom-line results in line with our expectations coming into the quarter, despite a difficult year-over-year comparison to the third quarter of last year when natural disaster related occupancy boosted our results, which was compounded by some disruption caused by Hurricane Florence. For the third quarter, we reported adjusted FFO of $36.1 million or $0.35 per share, which came in above the midpoint of our guidance range of $0.33 to $0.36 per share. On a pro forma basis RevPAR was unchanged compared to the third quarter of 2017, which consisted of a 1.7% increase in average daily rate, offset by a 1.6% decline in occupancy largely driven by our hotels and markets affected by Hurricanes Harvey and Irma as well as the wildfires in South California. In addition to the markets affected by last year's natural disasters, there were a few markets such as Ashville and Charlotte that experienced disruption from Hurricanes Florence and Michael in September of this year. Several of our markets performed quite well during the quarter, which gives us continued optimism that well-located hotels with great brands and efficient operating models have opportunities for growth. Minneapolis was again one of our better performing markets with our two downtown hotels leading the way with the combined 9.2% increase in RevPAR during the quarter, bringing year-to-date RevPAR growth to an impressive 18.4% at the two hotels. Bottom-line performance has been encouraging at our downtown hotels as well with hotel EBITDA growth of 19% and margin expansion of 230 basis points during the third quarter. Although, we will up against the difficult Super Bowl comparison in the first quarter of next year. We are encouraged by the strengthening market…

Thanks Dan and good morning everyone. For the quarter our pro forma hotel EBITDA was $53.4 million a decrease of 0.2% compared to the same period in 2017 and hotel EBITDA margins contracted 87 basis points to 37.2%. Hotel operating expenses increased just under 4% on a per occupied room basis during the quarter primarily driven by higher labor costs. During the third quarter, our adjusted EBITDARE increased 3.6% to $49.6 million. Our balance sheet continues to be well-positioned with approximately $300 million of current liquidity at an average length of maturity of more than four years. As of September 30th, we had total outstanding debt of $974 million with the weighted average interest rate of 4.3%. At the end of 2018, we intend to repay four mortgage loans that mature in 2019 without penalty and an outstanding balance of $108 million. Following the repayment of these loans, approximately 82% of our hotel EBITDA will be unencumbered, validating our continued efforts to assemble a highly flexible balance sheet. As Dan mentioned, we have continued to make great progress on our capital recycling program with the sale of eight hotels year-to-date for a combined sale price of $106.8 million. After the completion of these transactions, our trailing 12-month net debt-to-EBITDA is approximately 4.6 times on a pro forma basis. On October 26, we declared a quarterly common dividend for the third quarter of 2018 of $0.18 per share or an annualized $0.72 per share. The annualized dividend results in an attractive dividend yield of 6.2% based on the closing stock price as of October 29 and a proven AFFO payout ratio of approximately 54% at the midpoint of our 2018 outlook. We updated our guidance for the fourth quarter and full year in the press release yesterday. Our full year 2018 guidance for adjusted FFO was tied into $1.31 to $1.34 per share. We also updated our pro forma and same store RevPAR growth guidance to 0.25% to 0.75% and negative 0.75% to negative 0.25% respectively. Our full year estimate for capital improvement is expected to be in the range of $60 million to $65 million. For the fourth quarter 2018, we provided AFFO guidance of $0.26 to $0.29 per share and RevPAR growth guidance of negative 3% to negative 1% for both the pro forma and same store portfolio. As a reminder, we faced particularly difficult year-over-year comparisons to the fourth quarter of last year when storm related demand drove RevPAR growth to 5.6%. No additional acquisitions, dispositions, equity raises or debt transactions beyond those previously mentioned or assumed in the fourth quarter or full year 2018 guidance. With that, I'll turn the call back over to Dan.

Thanks, Jon. In summary, we're very pleased with our capital recycling progress in the third quarter as our well diversified portfolio and our acquisition properties continue producing solid results. We continue to be extremely optimistic about the future of Summit. And with that, we'll open the call to your questions.

Thank you. [Operator Instructions] Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets.

Hi. Good morning, guys. Just first question, I know it's only a month into the fourth quarter and clearly the 4Q guide suggests some challenges from the hurricane comps, but how the markets from what you can see so far, how have the markets been impacted up into this point that faced the difficult comps from the hurricane?

Austin, this is Dan. I'll start. I think everything has been kind of in line with expectations. I think that as we've talked about in the past that general underlying fundamentals of business travel and leisure traveler have been solid. There has been some challenges pushing rates and there has been almost market-by-market challenges some as supply, some as renovation, but we feel good about the guide, we feel good about all the work that's been done, it's always difficult when you have a really strong quarter to compare yourself to and with over 5.5% RevPAR growth in Q4 last year, it's a bit of a mound decline so to speak. So, that is all taking effect kind of early in the year and almost implies less growth than perhaps there actually is in the portfolio. So, despite the difficult comp and the challenging fourth quarter, we still feel good about the portfolio. A lot of work has been done with renovations and we have some great acquisitions, we purchased over the last few years. So, we're certainly optimistic more so than the guide would probably imply.

So, saying that they've kind of performed as expected was the RevPAR guidance decrease largely attributable to third quarter performance or is there any other markets in the fourth quarter that are underperforming what you originally anticipated?

Yeah. Hey Austin, it's Jon. I think that the guidance in the fourth quarter is a combination of one of a weaker third quarter coming in towards the low end of our guidance range in a softer fourth quarter than what would otherwise implied when we guided for the third quarter. As Dan mentioned, I think the hurricane affected markets have largely performed in line with our expectation. Now, there has been some other softness throughout the portfolio. Some of that in the third quarter was caused by some storm related disruption in the third quarter of this year, but there are other pockets of weakness, Salt Lake is a market that's been weak for us, Santa Barbara has been a little weaker. We've been a little weaker in Nashville. I wouldn't say that it's any just one market, but more of a combination of a couple and obviously very difficult comps in the fourth quarter.

Okay. Thanks for the added detail. And then just last one for me. Last quarter, you talked about supply in Suburban Boston had created some softness in that market, you announced the acquisition in Watertown, certainly a high-quality well-located hotel, but just curious what your near-term growth prospects are, or outlook is for that market?

Yeah. I think that the supply in Boston that's really had an effect on us has really hurt us more in Waltham and Norwood. When we look at Watertown, we look at it not as a suburban market, more as a submarket of Boston adjacent to Cambridge, and think that is just tremendous growth coming out of that submarket, particularly as it relates to kind of this Arsenal Yards redevelopment that's really going to be a transformational mixed-use development that's right across the street from a relatively new asset. So, I think Boston is a little weaker from citywide convention calendar perspective next year, but I think the growth in that market, there is tremendous growth from the universities from all the life science companies that have moved in there. We believe we've got a great location that's relatively less effective from that suburban supply. Really the only new supply coming in that we see that's going to affect that submarket is, there is a New Hampton being built right across the street that we have a right of first refusal of the purchase. So, we feel good about the market and the location we're in there.

And what's the timing on that right of first refusal?

It's in process of being built. So, I haven't been disclosed the actual time, but true, obviously true construction.

Great. Thanks for taking the time.

Thanks.

Thank you. Our next question comes from Chris Woronka with Deutsche Bank.

Hey, good morning, guys. I just want to ask you as you look at how the year has unfolded we're now almost November, do you think the supply pressures you've mentioned from time to time in certain markets, do you think those are worse than a year ago or are they abating, are they about the same. Just trying to get a sense as to what your broader supply outlook is for your markets heading into the next year?

Chris, this is Dan. Jon and I'll probably share this one a bit. I think that what we've kind of witnessed over the last several years is probably a larger effective new supply in the short-term, but some stabilization and some real benefits from renovation. If you think about one of our goals as we have transformed the portfolio, it's to have the best locations. And while new supply can come into market and disrupt things in the short-term, locations will always matter especially with the proliferation of brands. So, good renovations and good locations I think over time create - as the supply gets absorbed can still lead to great performance. I think Minneapolis is a great example. We had a really challenging year in 2017 as a lot of new supply came on and the market had some dynamics with some special events that helped kind of drive the performance prior to the supply coming online. So, you had some supply and difficult comps. And so far, this year it's been a really solid market for us. Now we do have this Super Bowl which was certainly a tailwind going into the year, but even without the Super Bowl, we've seen our strength and consistency in our performance there. So, as we look at supply, I think there are some markets that probably stick out more than others' markets like Nashville and Austin. Austin was a market that this quarter in particular as noted was up significantly versus the market and the competitive set. So, great general managers in markets with the great property can still drive value. So, I think to sum it up, supply will I think continue to abate and continue to be absorbed and we see that being much less of a headwind going forward than perhaps we have seen in the last couple of years. And part of that is predicated on locations and renovations coming online. So, we do have some markets as we move forward that we could talk through that will probably be shorter term challenge, but - and as we've talked about the high-quality portfolio we have, we think competes very well with new properties coming online.

Okay. That's helpful. And then, I guess similar type of question on the expense front, which is do you think there is a point where you kind of cycle the worst of increases or do you think we're still kind of that's still kind of a moving target and still potentially a pretty meaningful headwind for next year?

I think we should start to cycle some of the challenges we have. I think we're in an environment that many of our general managers and probably management companies haven't experienced before to be honest prolonged lower RevPAR environment where expense management is under higher scrutiny. So, I think because of the efficiency of our operating model. There is not a lot to cut when we start. So, being efficient and being creative on ways to mitigate increases is something we continually challenge not just our asset managers with - but our management companies. So, I'd expect them to moderate overtime. There are some of the efficiencies that we hope to create, but I think it has been a greater headwind than certainly we anticipated this year. And a lot of that has to do with labor. That's probably been the biggest driver of expense growth. But as you'd expect, there is always little things that can be focused on to create some added efficiencies.

Chris, the only thing I would add is just keep in mind that we've talked quite a bit particularly in the first half of the year about increases in property taxes, which have been a big headwind from margins and we look at kind of the first half of the year, we were up 11%, 12% in property taxes. Clearly that's as a result of being very acquisitive in 2017 that headwind goes away in a material way in 2019.

Okay, very good. Thanks guys.

Thanks, Chris.

Thank you. Our next question comes from Michael Bellisario with Baird.

Good morning everyone.

Good morning.

Just wanted to go back to your comments from the press release on earlier just on September weakness and maybe can you strip out Florida, South Florida and Houston and Texas, the hurricane impacted markets, did you guys pin point any segments that were weaker than expected or maybe trend that snuck up on you to have the quarter be weaker than expected in particularly September?

Yeah. Hey, Mike, it's Jon. I think specifically on the question of what the storm impacts were particularly in the third quarter. We had - keep in mind, we had a very difficult confidence and benefits from last year's storm. That was about a 60-basis points headwind for us in the quarter. The storms from this year which were disruptive and thankfully not as damaging as it sounds from last year, we didn't get any pick up from those storms, so it was another 20 basis points of headwind for us in the quarter. so about 80 basis points total between the two storms related to some disruption there. I don't know as we look through on kind of the segmentation analysis if it wasn't any one particular segment that was particularly weaker than others. we talked about some of the markets that were a little bit softer but if it wasn't a need particular segment driving the results lower any type of trend that I think is a read through sort to future quarters.

Got it. And I take it, you've seen some of those things trend in September carryover into October and its more weather and hurricane related, is that correct?

Yeah, again I think the fourth quarter guidance more reflective of a very difficult comp. Again, if you go back and look at kind of implied fourth quarter guide, when we guided in the third quarter and the fourth quarter guide we put out yesterday, it does imply a softer fourth quarter and I think that's the combination, one of hurricane affected market and two just kind of the some of the softness that we saw in September.

Got it. That's helpful. And then maybe just on capital allocation but your stock list underperforming lately kind of talk about how you think about all the options you have today all the way from share repurchases to the other side thinking about potentially developments and kind of your sources and uses of capital going forward.

Yeah, Mike, it's Dan. I think we've consistently been in our view in by many very thoughtful and how we've been in allocating capital. We've recycled a lot of capital. We've raised the dividend. We've issued stock. We really believe that every dollar of capital is precious, and we do believe we're stewards of that capital. So, to the extent, there is an alternative that we haven't used such as a stock buyback. That is certainly not at the table. I think we'd evaluate everything whether it's a read, an acquisition, an investment in renovation where we could drive some incremental revenue - a bar or things like that. I mean everything has - there is a little bit of internal tension and discussion about what the very best use of that capital is. So, I think as a REIT, the expectation by investors is that we're looking at all the options and people should be certain that that is something that we take very seriously and that we'll continue to evaluate each and every quarter as a team and with our board.

Got it. And just last one for me on that same topic, just on the disposition front. Do you think you could continue to sell some of your lower quality, lower growth properties at the same cap rates? Are you hearing anything from buyers about change in value perspective given the rise in interest rates? And then any prospects for a potential portfolio sale or is that appetite is still out there at all?

Yeah. Hey Mike, it's Jon. Look I don't think that we've seen any material correction in private market asset pricing given what's happened with the public market share of prices. So, I still think that we've been net seller this year, I think we've been fairly consistent talking about it being in an environment that's more conducive to selling and buying. I think that same environment persists today. I think we'll continue to opportunistically look to sell assets in the portfolio.

That's all for me. Thank you.

Thanks Mike.

Thank you. Our next question comes from Sean Kelley [ph] with Bank of America.

Hi, guys. Good morning. Jon, I think you sort of already mentioned the demand side of what you guys are seeing out there. But I wanted to go back to maybe some of the thoughts around supply. It seems like you guys think that we're starting to shift from headwind to tailwind on that. Just could you give us a little bit more clarity? Do you think at least in your markets or for Summit portfolio peak supply growth for your property types are more 2018? Is that blended in 2019 kind of when you look at it on a weighted average basis or just how are you thinking about timing? Because we certainly know that overall the construction pipeline has already peaked.

Yeah, it feels like kind of late this year, early next year when we see peak supply growth. It's clearly a market-by-market analysis. When you look at - we've talked a little bit about Minneapolis and the supply that came on their last year and that the market that feels like it's firm for this year. There is still pockets, Nashville is a market where there has been a lot of supply. There is still a lot of supply coming. I think that's a market that stands out to us as one that needs to be watched from a supply perspective. By enlarge, I think it's safe to say that we will see kind of peak headwinds from a supply perspective again late this year, early next year.

It's Dan. The only thing I'd add is if you look at the top 25 markets there has been some consistency and probably likely to see over 2018 and 2019. Some of the usual suspects like a Nashville and Boston and Denver and Houston are all supposed to are expected to have the highest supply growth. So, those are markets that I think would be the likely culprits of any effect of new supply. Having said that, market like Denver has a lot of different submarkets and what new supply coming in downtown may not affect some of the other pockets and unique areas that have at their own demand drivers. But I think those usual suspects are the ones that we're watching very closely.

Great. And do you guys have just sort of ballpark estimate of weighted average supply growth across the portfolio. They're sort of now or let's called it at the end of the year? Or sort of what you're looking forward for 2019?

Yeah, I think ours is fairly in line with what you see from top 25 markets. So, if we've kind a pay the industry growth for both '18 and '19 right around 2%. We paid kind of top 25 market supply growth as closer to 2.5%. And our growth has in line with that. Again, Nashville is probably the one top 25 market that's an outlier for us. Ex-Nashville we're probably closer to the industry average.

Right. And I think the Nashville is an outlier for everybody. And then last thing was being, you mentioned the sort of the just maybe it was a fair way. But sort of the proliferation brands out there. Could you just talk it sort of a high strategic level about as we see more? Let's call it upper mid-scale type brand introductions or even some of these urban targeted brands that we've seen launch very recently. How is that impacting things out there? Is there cannibalization or downshift across some of these bigger brand families that we need to think about or kind of how do you guys kind of think about some of those launches?

Sure. We don't expect the launches to stop. I think there is a narrative around unique types of guests that are looking for a specific and unique opportunity. And that maybe true, and I would say that those kind of niche products that cater to a unique individual looking for specific experience are interesting. But our focus to mitigate a lot of that risk is to be looking at location. And if you look the last dozen or 15 hotels that we have purchased. They have great locations very diverse demand generator. So, while there is a lot of new brands that come out that I think cloud the water so to speak on guest preference. We do believe in the brands both Marriott, Hilton, Hyatt and IH&G are brands that are well distributed. And we think that the great locations and great locations can drive that behavior. We think the loyalty and distribution is a way for these hotels to be successful and think about it not just on the individual brand but more on the family. So, we're big believers in our partners out there. But our way to mitigate the risk is the great locations and great renovations that bring a level of our fantasy to the property that maybe distinct and unique from the average every day suburban kind of upscale hotel. Does that helpful, Sean?

Yeah, it is. Perfect. Thanks guys.

Thank you.

Thank you. And our next question comes from Bill Crow with Raymond James.

Good morning, guys. Let me start with the big picture macro question. Is the labor challenge encouraging, speeding, changing the way that brands are thinking about using technology that to shift labor cost, produce labor cost? Maybe rethinking the way that rooms are clean that sort of thing. Is there anything in the offering that we can be encouraged by the change the margin dynamics?

I know they're talking about it. And as owners were all talking about it as well. I think the greatest component of our challenges in labor are the result of the much of the need for physical contact. And to the extent there is key less entry and opportunities to be efficient with the technology. I think that's important. But we are hospitality industry, we believe in people and to find good people that can provide value and service and engagement with guest where they choose to engage. Whether it's in the lobby or in a check in a continually a challenge. I don't see a future where there are fewer people. I think maybe there will be a future where they'll be utilized a little bit different. But certainly, to your question, there is a lot of discussion going on with the brands and with the owners that how to be efficient, but still deliver a great guest expectation and really be thoughtful about how to engage workers to fulfill their needs as well.

Okay, thanks. And what should more than impact full to your portfolio? Super Bowl and Minneapolis are the Super Bowl in the Atlanta. Kind a how should we think about the first quarter?

I think from a room base we're probably have the heavier waiting in the Minneapolis from an EBITDA base we're more heavily weighted to Atlanta. So, I think it should be the expectation would be more of a tailwind.

Okay. And then finally for me. As you think about your top I don't know 5 or 6 markets. Which ones are definitive are going to be worse next year? Which ones are going to definitively be better next year?

It's still October. So, I'm not sure there is a definitive answer to provide yet. We are very well diversified. So, the difference between a market that has 7% waiting and 5% waiting, I'm not sure that the magnitude of that difference could be quantified as significant. I think that the markets where we've been thoughtful about renovations such as a bolder where a San Francisco, we'd expect to have some significant upside. San Francisco is well understood. I think there's high expectations from everybody there, but I think those are the markets where we've had some disruption that we expect there'd be some great strength and on the convention calendar I mean that all this creates the compression. We do have some markets that like Louisville, which we have two hotels, and which is kind of up and running at full scheme for the convention center, so I think there's some upside there and at Atlanta who also has a fairly strong convention calendar or pace for next year. So, I think there are some markets that we'd expect strengthen but I'm not sure because of the diversification of our portfolio there'd be one big driver. Part of that our thesis is not to have the concentrations in markets that can kind of we saw the earnings so to speak.

Okay. That's it from me. Thank you.

Thanks, Bill.

Thank you. And our final question comes from Wes Golladay with RBC Capital Market.

Hey, good morning guys. Just want to go look at the $108 million you guys might prepay mortgages, it looks like you have a line balance a little over $15 million. Is the plan to issue a term loan and if so what is your cog rate for a new issuance?

We have capacity to do it online. I think that can be the expectation for now, certainly doing it some other capital markets transaction is always an option that will evaluate. But I think for now the safe assumption is that we have the existing capacity to do it on the line.

Okay. And then you have a mezzanine loan that you have out there first option expires end of this year what is the plan with that I guess maybe strategically thinking if the hotel yields more than the current interest on the mezzanine note would you exercise it or are you going to try and take it all the way to the last exploration?

Yeah, the exploration is actually not this year it's next year.

Okay.

Yeah, and I don't know that we'd look at it different than as you've described, I think we want to be thoughtful about our use of capital and where the returns are, are the greatest, so part of it would be a capacity issue, part of it would be almost another underwriting as the option becomes available to look at current market dynamics and current growth potential. But we do look at it as a use of capital like we would anything else. So, I think you should expect us to be in a very thoughtful about any capital investments we make down the road as we look at our options to exercise.

Okay. And then taking one more look into 2019, we've addressed a lot of the issues that appear to be abating from this year, but looking at renovations next year do you have any material, let's call it talking assets that you're going to renovate, or do you have any residual comp issues from the storm in the first quarter next year?

I think I'll talk about kind of the pipeline first. This is Dan. We still have some acquisitions that we have renovations planned for, so I think throughout the year as we've always done, we've kind of look at a $50 million run rate as probably a safe bet. We try to time out the renovations as to minimize disruption and maximize the effects of the investment in the properties. We did have disruption in the second quarter of this year which is unique for us. We typically have most of our disruption in the fourth quarter and in some years the first quarter, so I think that will be a much easier comparison a next year. did that answer your question?

Yeah, that's what I'm talking about more like it was and the renovations are tailwind versus the headwind and you have the high occupancy hotels this year, but I wanted to make sure we didn't have that again next year.

Yeah, what I think it's fair to say that the expectation again kind of with knowing that we're just getting started with budget season. I think the expectation from our end would be that renovation disruption would be a tailwind in 2019 versus the headwind that it was in 2018 particularly as you mentioned two of our larger more significant higher occupancy hotels that were renovated in the first half of the year this year.

And then the distribution residual issue from the comp or 1Q of 2018 from Houston and Florida is that material next year the comp issue?

There is probably some residual. I would say that it's probably - we probably had more pick-up in the first quarter of this year in Florida as a residual and some of that was again this displacement from the Caribbean travel, a leisure travel that there was pick-up in South Florida, particularly in Fort Lauderdale for us. We'll probably create some challenge for a comp. I'm not sure how meaningful that is. Again, we're just getting in the planning season for 2019.

Okay. Thanks a lot, guys.

Thanks, Wes.

Ladies and gentlemen, thank you for participating in today's question-and-answer portion of today's call. I would now like to turn the call back over to management for any closing remarks.

We certainly appreciate you all taking the time together, and as always, we'll continue to work very hard for shareholders, creating value through thoughtful capital allocation and operational enhancement. Our portfolio of high-quality hotels continues to grow, and we continue to see great things in the future for Summit. So, hope you all have a terrific day and we look forward to talking to you again soon.

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