Ladies and gentlemen, thank you for standing by and welcome to the Summit Hotel Properties Q3 2019 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference call is being recorded. [Operator Instructions] I would now like to hand the conference over to today's speaker, Adam Wudel, Senior Vice President of Finance and Capital Markets. Please go ahead sir.

Thank you, Valerie 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 2018 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today, November 6th, 2019 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 third quarter 2019 earnings conference call. We are pleased with the continued relative outperformance of our portfolio compared to the broader industry, the upscale segment, our relevant competitive sets in what continues to be a challenging operating environment. I would like to specifically acknowledge our entire operations team who have been relentless in controlling operating expenses and leading initiatives to create value. For the third quarter, we reported pro forma RevPAR growth of 0.2%, which was driven by a 1% increase in occupancy, partially offset by a 0.8% decrease in rate. Our third quarter results were affected by both Hurricane Barry and Dorian which reduced pro forma RevPAR growth by 50 basis points and disruption from renovation activity during the quarter further reduced pro forma RevPAR growth by 40 basis points. Adjusting for these disruptions, pro forma RevPAR growth was 1% which compares favorably to third quarter results for the total U.S. top 25 markets in the upscale chain scale which reported RevPAR changes of positive 0.7%, negative 0.4%, and negative 0.5% respectively. We've once again gained market share among our competitive sets in the third quarter with an average RevPAR index of 113.7, which represents a market share gain of 149 basis points compared to the third quarter of 2018. This share gain consisted both of occupancy and rate share gains relative to our portfolio's respective competitive sets. Our same-store portfolio posted a RevPAR decline of 0.1% in the quarter, driven by a 0.9% increase in occupancy and a 1% decrease in rate. Excluding hurricane-related and renovation disruption, same-store RevPAR increased 1%. Our strongest performing markets during the quarter were Phoenix, Louisville, Indianapolis, and Boulder. Our four Phoenix Hotels posted a combined RevPAR increase of 26.7% in…

Thanks, Dan and good morning, everyone. For the quarter, our pro forma hotel EBITDA was $48.3 million, a 3.4% decrease from the same period in 2018 and hotel EBITDA margins contracted by 130 basis points to 36%. Excluding the effect of property tax increases, which rose nearly 10% during the quarter, hotel EBITDA margins contracted by 75 basis points. Hotel operating expenses continue to be well managed with quarter-to-date and year-to-date operating expenses increasing just 0.7% and 1.4% on a per occupied room basis respectively. During the third quarter, our adjusted EBITDAre decreased 8.8% to $45.2 million and adjusted FFO per share decreased 10.1% to $0.31 per share, both primarily driven by year-to-date disposition activity. During the third quarter, we closed on the previously announced acquisition of the Hampton Inn and Suites and an adjacent land parcel in Silverthorne Colorado, which kicked off our joint venture with GIC. Additionally, subsequent to quarter end, re-close on the acquisition of four hotels in California and Oregon, in partnership with GIC for a total purchase price of $249 million. The combined purchase price of the five hotels acquired year-to-date equates to an average estimated cap rate of 8.4% on the underwritten net operating income for the full year 2019. These recently acquired hotels have a combined 2019 RevPAR of $162, which is approximately 30% higher than our existing portfolio and an average hotel EBITDA margin of nearly 50%, which is approximately 1300 basis points higher than our portfolio. These statistics are all property level figures and do not include any fee income we will earn as the joint ventures, general partner and asset manager. As Dan mentioned, we also announced the pending sale of our two hotels in Birmingham, Alabama for $21.8 million. The combined purchase price equates to a 6.9% cap rate…

Thanks John. In summary, we are pleased with our third quarter performance and our continued ability to identify and execute on opportunities that we believe position our portfolio for future outperformance. And with that, we'll open the call to your questions.

Thank you. [Operator Instructions] Our first question comes from Austin Wurschmidt of KeyBanc Capital Markets. Your line is open.

Hi, good morning. Dan or John, I guess curious how we should be thinking about the balance between growing the joint venture and managing your leverage levels moving forward within that level or that targeted range you've outlined historically?

Sure, Austin. It's Dan. I think you should look at it as that range of kind of 3.5 to 4.5 times as the real guide post that we've been very focused on for quite some time. Obviously, our capital constraints are more limited than GIC. We'd expect to fund at this point our component of any growth through recycling of capital as we've done in the past.

So, how would you rank the attractiveness of the funding sources when you look at selling assets and then common and/or preferred equity?

Our bias is very strong we're selling assets right now. We've shown an ability to sell assets at very attractive rates and we still think there is a market for that. So I think that's where our focus would be at this point.

Appreciate that. And then just next question, I guess, I was hoping to get a little bit additional detail around the economics of the new mezzanine loan that you closed on this quarter remind us again what your target thresholds are for the mezz book and then could you provide some latest thoughts on either the remaining three loans outstanding whether you think those ultimately get prepaid or you take out the borrowers through an acquisition.

Hey, Austin, it's John. I think as we've said in the past we like this as kind of an ancillary piece of the business. I think where we are today and as you pointed out we now have four different loans outstanding three of which are fully funded feels like around the right balance for us. We do have some period of time over the course of next year with which we would look to potentially exercise those options. I think as we've said kind of over and over, we're only in this to do it for hotels that we would ultimately like to own. And we'll kind of make those evaluations at the time, the options come due over the course of the next year.

And then what was the size of the new loan and the yield that you expect to achieve on that?

The total loan commitment is just under $29 million. We have just under $7 million of that funded at year-end and it carries a 9% coupon.

Great. Thank you.

Sure.

Thank you. Our next question comes from Wes Golladay of RBC Capital Markets. Your line is open.

Yeah, good morning guys. Sticking with that mezzanine debt that you have out there is it all with different developers?

Wes. It's Dan. It's with two separate developers.

Okay. And then going to your acquisitions can you give us your view on what the growth profile is for the assets over the next two or three years what you can do from investing in the assets obviously this year is a little sluggish on the growth relative to what you sold but where do you see the inflection coming.

Are you referencing the new acquisitions.

Yeah, you bought the four assets that brought down your growth profile. But I imagine you're going to have some sort of play book where you can invest and bring the growth up and maybe your view on supply in those markets.

Yeah, I think they are all assets that we feel are very well located. We -- as we've said before, I feel very good about the brands and driving value these particular assets we think would benefit from significant amount of capital. We called out $23 million of renovation capital over the next couple of years for those properties. So we do think there is some considerable upside post renovation. But yeah, they are very well positioned in the market and with very strong brands that we think will continue to lead the market specifically post renovation.

Okay. And then last one for me. When you look to next year how do you view supply in your markets relative to this year?

Yeah. Hey, Wes it's John. I think we look at it fairly consistent with what we're seeing this year, we've talked about kind of industry supply growth in and around 2%. Our portfolio and kind of our top 10 meaningful markets it is probably 40 to 50 bucks basis points north of that more in line with what we're seeing in kind of top 25 and urban markets and our expectation at this time is from next year to shake out generally in line with what we've seen this year.

Got it. Thank you.

Thank you. Our next question comes from Neil Malkin of Capital One Security. Your line is open.

Hey, guys good morning.

Good morning.

Just a question on the Birmingham assets you have teed up that cap rate the disposition cap rate looks really good really low. I'm just – how are you able to achieve those I mean are you selling those in like a 10/31 market is it just like rich doctors using 80% LTV as a floating rate debt. Like how are you sourcing those to get such attractive valuations on inferior assets relative to your go-forward portfolio?

Neil, it's Dan. Look I wouldn't look at these inferior assets. I think these have been good assets for us they performed well. We have a relationship with owners all over the country big and small. This particular owner is very well respected and great operator who has a strong presence in Birmingham. So from a cost and expense standpoint, he can probably do things that we just can't, being a public company, with third-party managers. So what that cap rate represents to us is probably significantly different to him. So I wouldn't look at it as, a buyer that is either unqualified or not paying attention. I think it's just a different profile of a local owner operator that can find value in ways that we can't, because of our structure.

Okay.

That is our job it is to find the right buyer to maximize value. But it's not in any way -- should not be looked at in any way as a reflection on the buyer. Everybody has a different focus and value proposition.

I understood. Thank you for that, clarity. And then, other one for me, could you just maybe highlight the -- your key demand drivers or customer bases in terms of in the leisure transient, business transient. Kind of how those segments have trended in terms of demand or the health of that since July? Any notable takeaways you've seen in terms of degradation or stability, any notable insight that would give you clues or be a Harbinger for things to come potentially?

Yeah. Hey Neal, it's Jon. I think kind of as a continuation from what we saw in the first half of the year, we've seen real pulled up on a relative basis better. I think, when we look at and even some of the kind of corporate negotiated -- again on a relative basis has held up better, where we've seen more of the weaknesses on the transient side and more particularly on the leisure side. Yeah. I think, in the third quarter week day RevPAR outperformed, weekend RevPAR by about 250 basis points.

Sure. I just wonder if leisure for example was weaker, because you had a tough holiday, Jewish holiday comp. And leisure has been so outperformed for quite some time. I didn't know, if there was something in particular or anything that stuck out to you that you're hearing from your property managers, that would you may be rethink how you revenue manage.

Yeah. I think that there is definitely some of that in there kind of parsing out the separate effects of it is very difficult. But I do think that the holiday shift was a piece of it. And again it's been a little bit of a continuation with what we've seen throughout the year. I think your point on it has been a relative out performer in previous periods is also driving a piece of it.

Thanks.

Thank you. Our next question comes from Chris Woronka of Deutsche Bank. Your line is open.

Hey! good morning guys. Wanted to kind of revisit that the RevPAR assumption for the four acquisitions. Is that, I'm trying to do the math quickly, I mean is that one hotel -- is that -- was the RevPAR I guess call it underperformance relative to the rest of the portfolio -- is that one or two of those hotels or is it kind of uniform across the four?

Yeah. Hey! Chris, its John, it is I would say all four are the expectations for them to perform as a group, relatively lower than the portfolio. I would say that weakness is concentrated in Portland. And I think there is a market that's been well understood that has been weak consistent with our expectations going into the deal on the way that we underwrote the acquisitions, at the time that we purchased them.

Okay. And then, can you maybe share with us, I mean even if at a high level just given some of the management fees you are going to be earning on this JV, how does that kind of improve the overall returns, on how you underwrite these JV deals.

Yeah. Look, we haven't Chris -- we haven't disclosed the exact fee stream. And what all comprised of the fee stream. What we have said publicly is that, we do believe that they are meaningful. We've done that mostly kind of out of respect for our partner. I think what you'll see as we progress through the JV in particular is, we get into next year those fees will run through other income on the income statement. They will be more meaningful and allow the ability to articulate in a little bit more detail what comprises those fees as we go forward.

Okay great. And then just wanted to ask on the -- kind of on the brand side, it seems like as we've been hearing from other REITs in the brand companies there has been a little bit of back and forth on market share and I know you guys are obviously in the select service part of the market, but do you think there have been any shifts there maybe because of the Bonvoy program kind of gaining traction or something else. Is there anything notable that's important for you guys?

Chris, it's Dan. I wouldn't say there's anything notable or surprising for us. We've been big believers in the value of loyalty for a long time which is one of the key drivers we believe in the strength of our portfolio. How that shifts over the next three or four or five years with continued proliferation of brands and the upscale brands competing as well, if not better than boutique and upper upscale. I think we’ll kind of prove itself out. But I don't think I've seen anything that would give us any pause in continuing our belief in the strength of the brands growing their loyalty programs. I do believe both Hilton and Marriott and Hyatt and IHG continue to post numbers of growth. There are a lot of different ways to segment that, but we do think that it's a big positive not just for our portfolio, but for the industry.

Okay great. And just I don't have the math in front of me, but if you guys as you see more and more of the Hilton Tru properties open, maybe in some of your markets, do you think they are kind of staying within that swim lanes because I know historically what we saw over time was Hampton Inn grew from what Tru is today to compete with really almost full service hotels. And so I'm just curious as to whether you're seeing Tru in any of your markets and whether it's having a positive or negative impact on any of your properties?

Chris, this is Dan again. I wouldn't say that we've seen any effect in our markets. It's still a relatively new brand. It is creative and unique. I don't know that you have a Tru segment anywhere in the lodging space as you have had traditionally. I think people are looking for new and clean and renovated rooms in great locations, where they want to stay and spend time. So I do think that even the mid scale or upper mid scale brands like Tru will be a competitor. And I think that will be something that we will be focused on. But our properties many of them are custom -- many of them location wise drive higher RevPARs and those barriers with construction costs and renovation costs are likely to keep some of those brands from continuing to seep in there. But so long answer, but we haven't seen a lot from those brands but they're definitely part of the reservation and loyalty programs and should continue to gain traction in markets that are accommodative to those guests.

Okay very good. Thanks guys.

Thank you. Our next question comes from Michael Bellisario of Baird. Your line is open.

Good morning everyone.

Good morning.

First just kind of a housekeeping item on the RevPAR change, the weak RevPAR for those hotels in 2019 what's the tail there. How should we think about any potential impact on your pro forma portfolio into 2020 is it going to be a headwind again and then what sort of magnitude should we be thinking about.

Mike in terms of what we think the portfolio will do in 2020?

Not necessarily what those four hotels will do specifically, but the impact on overall RevPAR growth for the plus or minus 74 hotels or whatever you have in your pro forma site just given that it's a change in mix and on a backward looking basis there is a negative impact that would presume at least in the near term going forward it's also a bit negative impact. Is that correct?

Yeah. I think look -- I think what we have disclosed is that it's about 40 basis point headwind for the full year of 2019. As you know, we're kind of in the middle of going through budgets for next year so for us to quantify anything I think it would be premature, but I do think it's fair to assume that we would expect those acquisitions to be a tailwind next year.

Got it. And then maybe just on those four transactions -- the four hotels and one portfolio transaction, can you maybe give us a little bit of background on how that came about how it was sourced and then what you're seeing more broadly in the pipeline today in terms of pricing and quantity?

Yeah. This was unlike the other acquisition this was a broker deal. This was part of a larger portfolio that was for sale. We looked at a much larger portfolio and kind of weren't interested in the larger portfolio and really focused on these four assets we felt like these four assets kind of fit the profile of what we were looking for and fit the profile of how we wanted to grow the JV with GIC, so they checked a lot of boxes for us. I think we felt fortunate that we were able to kind of carve them out of the larger portfolio. Beyond that I think we continue to see opportunities out there, it's more difficult, I would say that the transaction market has remained fairly stable again despite the fact that fundamentals remain fairly tepid.

Thank you. Our next question comes from Bill Crow of Raymond James. Your line is open.

Hey, good morning. Are you seeing anything on the leading edge that we can't see that might indicate you're giving any relief on the labor cost front maybe lower turnover or anything like that. Any markets in particular that might be helping you a little bit instead of hurting you?

Bill, it's Dan. I wouldn't say that there is anything on the leading edge. I think it's just a market-by-market very boots on the ground commitment to try to find good employees at fair wages and minimize the contract labor and the turnover that comes along with that. We've made quite a bit of progress through the portfolio, getting our contract labor less than 10% of the payroll. But I think to offset that is a very strong focus on the whole expense side, which we've been implementing of an expense forecasting process over the last year that's helped us keep expenses in control. So I don't know that I would say there is a definite solution that we have uncovered out there other than a market-by-market approach to really trying to find the right employees. I think the markets with greater supplier are going to continue to be the more challenging ones, but I think we've had some success stabilizing so far this year.

And what are the trends on property taxes, do you anticipate that the increases are going to be as great in the next 12 months as they have been over the last 12 months?

Yes. Hey, Bill its John. I think we're looking at kind of mid single-digit increase in property taxes this year. It's been kind of right in line with our expectations going into the year. You know, absent the recent transaction activity, I would have expected it to be on a fairly similar trajectory in 2020 clearly there is going to be some Prop 13 considerations for the assets that we just bought in California next year, which potentially could put some pressure on property taxes for 2020.

Dan, the full service guys have leaned heavily on fees to sustain their EBITDA this year. It's not something that you're able to do as easily you just talk about the opportunity to implement or increase in place fees?

There is -- Bill there is a few opportunities out there that we're exploring. You know, I think, that our offering model is a little bit different and unique and to provide -- legitimately provide those -- charge those extra fees there has to be an offering made and our operating model is such that it's very much rooms-based focus. So and that's what we like we like the efficient operating model that drives the higher margin. So to the extent there are few properties in true resort markets that we could add a fee to certainly we would consider that, but I wouldn't expect it to be a huge driver for us because of our operating model.

Okay. Apologize, I have one more question here for you and that it is – it does feel like Marriott and Hilton have separated themselves on the sheer size of the platform the number of brands and the loyalty programs, membership and I'm just wondering on the margin does that change your preference for brands when you're looking at acquisitions all else equal.

Yes. If all else equal clearly the strongest loyalty program is the one that is probably is the easiest to underwrite. Unfortunately, all is never equal. So I think, we have continually tried to be somewhat agnostic and understand that certain brands may have a less contribution either in loyalty or even public perception of value, but to take that all into consideration and pricing. So we're still driving after the same returns and we can get a better return because of certain dynamics whether it's need for capital or repositioning we wouldn't just be focused on one brand versus another for that reason.

All right. Thanks. I appreciate the time.

Thanks, Bill

Thank you. I'm showing no further question at this time. I'd like to turn the conference back over to Dan Hansen for any closing remarks.

Well, thank you all for joining us today. Our goal of creating long-term shareholder value through opportunistic capital investment and relentless asset management remains unchanged and our portfolio is in the best shape we've ever had. We're very well positioned for the future. And on behalf of the entire Summit team, we wish you a joyous holiday season and look forward to talking to all of you individually, if you'd like to have any direct conversations to answer any questions. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.