Ladies and gentlemen, thank you for standing by and welcome to the Summit Hotel Properties Incorporated First Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your host today, Mr. Adam Wudel. Sir, please begin.

Thank you, Howard 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 2019 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today, May 12, 2020 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 first quarter 2020 earnings conference call. Yesterday, we reported first quarter results in our press release, including all standard comparable operating measures and financial metrics which has been rendered largely irrelevant by the dramatic fall-off in demand we saw in the middle of March as widespread closures were implemented to slow the spread of the COVID-19 virus. Therefore, we are going to spend our time today reinforcing the many proactive measures we took to combat the effects of the virus on our business, provide an update on the current operating environment, balance sheet and look ahead to how we envision leading in the future. Over the past two very challenging months, we have prioritized the health and safety of our guests, our brand and management company associates and our own employees. And I’m quite pleased with the resolve demonstrated by our team, managing through this unprecedented crisis. We have been fortunate to speak with many of you in recent weeks and are genuinely grateful for both the concern for our well being and the interest in our business. As the depths of what is certain to be a historic downturn became apparent in March, we swiftly began implementing hotel level contingency plans focused on rightsizing staffing levels and adjusting service amenity offerings to an exceptionally low occupancy environment. Fortunately, the efficient nature of our operating model has allowed us to keep all but six of our 72 hotels open with another nine hotels effectively consolidated into adjacent typically dual-branded hotels, the hotels that remain opened are operating with very limited staff and providing only the very basic service and amenity offerings. We have suspended all non-essential capital expenditures for the remainder of the year, along with common dividend…

Thanks, Dan and good morning everyone. In yesterday’s press release, we outlined critical amendments to approximately $1.1 billion of debt, which includes our $600 million senior credit facility as well as two $225 million term loan facilities that are governed by the same set of financial covenants and thus were modified in essentially identical ways. Importantly, these amendments allow for the outright waiver of testing of financial covenants through the first quarter of 2021 and modified covenant thresholds along with annualized testing mechanisms in the last three quarters of 2021 to accommodate what maybe a more gradual recovery in our business. We have an ability to draw an additional $150 million under the revised terms of our revolving credit facility, giving us nearly $300 million of total liquidity, including approximately $145 million of unrestricted cash currently on hand. This gives us not only considerable capacity to survive an extended period generating extremely limited revenue, but flexibility to operate in a potentially longer downturn and slower recovery scenario. We also broadly preserved our ability to continue making preferred dividend payments and retain flexibility to renovate hotels in a manner more consistent with our past cadence once demand begins trending toward normalized levels. In consideration for this flexibility the credit facilities are now secured with pledges of equity from our borrowing base assets and include certain restrictions on uses of cash during the wafer period, including investments, common dividend distributions and share repurchases. The amendment to these facilities, address more than 80% of our current debt balance. And when combined with an absence of debt maturities until November of 2022, position our balance sheet well to withstand the financial ramifications of a severe decline in revenues. Today, our weighted average interest rate is 3% and weighted average term to maturity is nearly…

Thanks, Jon. In summary, we are pleased with our business model, our partnerships and our process to mitigate losses and prepare for the future. And with that, we will open the call to your questions.

[Operator Instructions] Our first question or comment comes from the line of Chris Woronka from Deutsche Bank. Your line is open.

Hey, good morning guys. Do you guys have an estimate of maybe what percentage of the portfolio is drive-to fly-to, I know it’s not something you typically ask guests, but if you look at just the location of those hotels or any way to ballpark it?

Hey, Chris, this is Dan. It’s a little hard to get accurate estimate. I mean, technically all of our hotels you can drive-to as most you can. I think what we see is some of the more traditional locations that maybe haven’t been as much of a drive-to market are starting to see some pickup as people may be looking at different modes of transportation. And they may be modifying their plans instead of flying somewhere to go somewhere where they can drive-to. And that drive-to market may have previously been a fly-to market. So as we look at it we think that all of our markets have a component, that are visitable in this recovery period. I know that doesn’t specifically answer your percentage question, but it’s really – there is not a real specific metric that we get through our guests that we could use.

Yes. No, fair enough. Also wanted to ask you about kind of how you see rate integrity unfolding going forward, maybe if you look out July or August, because I think we know that some of the bigger full service boxes might have higher breakeven occupancy have to use rate as a tool. Are you seeing any signs of more severe rate erosion as you look further out or is it so far holding up pretty well?

I think so far it’s held up alright in light of the circumstances we are sitting in. Forward-looking trends are really hard to have any sort of confidence in at this point. I am not sure how reliable demand forecasts are out beyond the next 30 days. So, I think where we line up is that we expect to compete very well with our hotels in our immediate area whether they are in our comps set or not. For the factors that we have been really positive on our portfolio for the last several years which is they are great boxes, great locations, they have an average effective age of a little over three years, so they’ve been renovated. And I think that we believe will help us manage rate as best as possible.

Okay, very good. Thanks, Dan.

Thanks, Chris.

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

Good morning, everyone.

Good morning.

Just wanted to dig into March and April trend a little bit, really kind of better understand the RevPAR declines. Can you maybe give us a sense of how your urban versus suburban property is fared? And then any particular markets that dragged down the overall portfolio’s performance will be helpful?

Yes. Hey, Mike, it’s Jon. I would say March finished down for the portfolio about 60%. As you would imagine, I think we started to feel the effects from some of the urban markets more quickly than we did in suburban markets, San Francisco probably being the one market that stood out where we saw a more – a quicker decline earlier. I think the trends and Dan mentioned all of this in the prepared remarks, I think the trends in April, which were our hope will be kind of the worst going forward, worse in the first half of the month than they were in the second half of the month. The occupancy was the full four percentage points higher in the second half of April than it was in the first half of April. Again, I think generally, I would say the suburban portfolio outperformed the urban portfolio and we’ve seen a continuation of that trend and slightly higher occupancy levels as we’ve gotten in the first few weeks of May.

Got it. And can you tell us the six hotels that are closed outright currently?

Sure. Mike, it’s Dan. We’ve got the Hampton Inn & Suites in Silverthorne; Hyatt Place, Minneapolis Downtown; The Hyatt Place in Orlando; The Convention Center and the Hampton Inn & Suites, Baltimore, Inner Harbor; Holiday Inn Express, San Francisco and the Hotel Indigo in Ashville.

Got it. Helpful. And then just last one for me, probably for Jon. You mentioned $150 million of availability. What are the requirements for you to get that last $50 million? It looks like there is $100 million that’s kind of freely available and then there is a couple of more steps you would have to take to get to that last $50 million. Can you walk us through the mechanics of that?

Yes, sure. So I think as we have laid out we drew $125 million of cash up and right around quarter end, so we’re sitting on $145 million of cash today. In addition to that, we preserved $150 million of incremental borrowing capacity under the facility. The first $100 million, it will be secured by pledges of equity of the borrowing base assets and the last $50 million of availability get secured by outright mortgages on those borrowing base assets.

Got it. So if you want it, but for whatever reason you found a use for that $50 million, you’d have to go through the process that’s a little bit more work to get that, it’s not as kind of easy and efficient to get there compared to the first $100 million, right?

Yes, that’s right. I mean, I think the rationale for us was, one I think for the banks it’s obviously a significant credit enhancement. In our view, between the $145 million we have today and the incremental $100 million, before that last $50 million gets us through, again a pretty long period of time in a pretty draconian scenario. With $300 million of liquidity and a RevPAR environment where we run, even down 90%, which was kind of the worst month of the year in April gets us 27-months, 28-months of total liquidity. So we’ve got a fairly long runway. You start getting into kind of back-end of the year ‘21 and ‘22 covenants at that point in time. So I think that the liquidity and even getting that last $50 million to the extent that the market dictates it. We do have to get mortgages, but we’ve got a fair amount of runway before we get to that point.

Got it, sorry, that 27 to 28, that’s with the extra $100 million, not the full $150 million, right?

That’s with the full $150 million.

Got it. Okay. Thank you.

Yes.

Thank you. Our next question or comment comes from the line of Neil Malkin from Capital One Securities. Your line is open.

Hey everyone. Dan, happy birthday.

Thanks, Neil.

First question, a lot of people have been talking about how this pandemic had kind of shifted or swung the pendulum back toward owners in the brand and owner sort of dynamic. I’m just wondering, I’d be interested to hear your thoughts in terms of what that kind of looks like in terms of – or how you see that playing out in terms of fees, brand standard, proliferation of new brand? And if you think that will lead to higher margins than you’ve seen before when everything stabilizes?

Neal, it’s Dan. Look, I think the brands, as I stated in my prepared remarks, have been very much supportive of taking a hard look at the operating model across the board. I think that we’ve made great progress in discussions on things that would help the operating model, but that would also meet the expectations, which are, as you would expect, likely elevated for guests. So I do think that on a broad scale that we will come out of this with an even better operating model to the extent that we can achieve peak margins. I think a lot of that will have to do with the speed at which rate recovers. But I’ve actually been very pleased. I sit on a number of advisory boards with the brands and they have been very much supportive of ways to help not just during this environment, but in evaluating a longer term solution to some of the struggles we’ve had from operations.

I appreciate that. Other one I have is, what I guess, portion of your portfolio is traditional extended stay versus the – I guess just traditional select service? And then are there anything that you’re seeing from COVID that would maybe make you change or alter in some way your portfolio or capital allocation strategy?

Neil, it’s Dan again. Our portfolio is roughly between 20% and 25% extended stay. Look, we love that business. And should opportunities be available for those type of transactions, we would love to continue to grow that part of the portfolio. But we’re very much – very methodical on our acquisition. The returns still have to be there. The entry point would have to be right. Locations have to be right. So that would just be one of the factors we would look at as we continue the evolution of our portfolio.

Okay. I guess last one for me, the mezz loans you have on the development, what have preliminary conversations been like with your partners based on the deterioration? And any possibility of potentially that capital stack getting pushed down and you maybe want to be in the equity holder?

Jon, I probably could share that question. I’d say that there – mezz loans are with very experienced developer.

I think you may have hit mute.

Hold for just a second. The back-up line is open, just a second.

Hello, sorry about that. I think we had a little bit of a power outage. I’ll go back to the question on the mezz loan. Is everybody still on?

Yes, sir.

Okay. Look, I think as far as our partners on the mezz loans, they are a very experienced developers, their property is in good markets with strong demand generators and we do have a mechanism to push those out a year or even two. So that’s probably more likely the direction we’d go with those. We have given them forbearance for the next 3 months, which I think is appropriate given the current environment, but we still feel good about the long-term prospects of these particular properties.

Thank you.

Thank you. Our next question or comment comes from the line of Austin Wurschmidt from KeyBanc. Your line is open.

Hey, good morning, everybody. I hope you haven’t got the utility bill at this point. But just into my first question here. In sort of a gradual occupancy ramp side scenario, how should we be thinking or what range of flow through multiples should we be thinking about as you re-ramp costs and services over time?

Austin, can you kind of repeat that?

Yes, sure.

Are you talking about occupancy or...

Yes. Well, so if we think about RevPAR declines and how that flows through to hotel EBITDA decline sort of a multiple of EBITDA decline to RevPAR decline, you guys were 1.7x, which stood out versus I think a lot of the peers being well north of 2x and even 3x, which may be speaks to the efficiency of the operating model. You referenced earlier that ADRs have hung in there fairly well. And so as we think about a gradual occupancy ramp in the portfolio, maybe what type of multiple or flow through should we think about on that incremental occupancy, as you also re-ramp costs and services. Does that make sense?

Yes. I’ll take a first crack at this. So I think the way that we’ve looked at it, when we looked at retention in March and our March retention was somewhere between 30% and 35%. And I think March is probably our best indicator at this point. But really only half the month is reflective of operating at what are kind of these very, very lean staffing model I think April will be the better tell. We don’t have final April numbers yet. But my expectation is that the retention rates as we get through April will be somewhere kind of 35% to 40% range. So I think we’ll have pretty good retention that probably implies that kind of somewhere between 1.5x and 2x EBITDA losses, a multiple of RevPAR loss that you referenced. I think as we think about how revenues flow through going forward, a lot of it’s going to be, as you know, the mix between kind of rates and occupancies. And we’re in a little bit of a unique circumstance here where this is a lot different scenario than going from normalized kind of RevPARs and growing those 2% or 3%, 5% whatever is your – at some level you have to start adding back some of that incremental labor that has been cut, make managers kind of off the front desk and get them back and bring in some of the more traditional staffing that you have. So I do think we’ll see good flow through. I think that, again, what we’re seeing now in this environment is somewhere between kind of 35% and 40% type retention levels at these low occupancy levels that we sit at today.

That’s helpful. I appreciate the thoughts. And then I was curious, do you guys have a sense of within your submarkets or comp sets, what percent of those hotels are closed or have suspended operations?

Yes. We’ve got some sense. I would say the sense that we have is, frankly, probably more anecdotal than what’s getting reported by Smith Travel. I think as most know that Smith Travel has come out and said that in total hotels is closed for 30 days, it’s going to continue to be included as reporting in the comp set. So we are just getting now to the point where some of the hotels that closed later in the month of March or into April are coming out of those sets. I think as reported by Smith Travel, it’s in kind of the high-single-digit percentage number. So I think realistically it’s likely higher than that. You know about 8% or 9% of our total rooms are closed. My sense is that the comp set that’s at least that high and probably a little bit higher than that, we should be able to have a more concise answer to that question over the next coming weeks as we continue to get better data from Smith Travel on closures.

Okay, no, that’s helpful. And then lastly I think somebody earlier had kind of spoken to breakeven occupancy. I’m not sure that you guys gave a figure or not, I might have missed it. But could you give us a sense of where you think breakeven occupancy is at both the GOP, hotel EBITDA and then maybe on a cash flow basis for your portfolio?

Sure. Austin, it’s Dan. There is a lot of variables that go into that. Clearly, at this level, there is not as much labor. And as you continue to reopen and occupancy picks up, there is an added labor costs. And a lot of it is a function of the rate to use. So if we – we think that at a breakeven level for hotel level EBITDA, it’s somewhere between probably 40% and 45% using $100 as a base rate. Obviously, it depends on the market and the labor profile. And the breakeven to cover cost at a corporate level probably 10 basis per – 10 percentage points higher. That does include in our covering the preferred dividends and CapEx in that as well.

Okay. That’s helpful. Thanks, Dan.

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

Yes, thanks. Good morning, guys. Dan or Jon, do you think we’d get back to ‘19 levels in RevPAR first or margin first?

That’s a great question, Bill. I would at this point say RevPAR is probably the easiest way back, but it’s really a function of how the operating model changes and evolves, a combination of what the supply picture looks like and our ability to push rate, which both I believe will be favorable in the future. But I think my perspective would be RevPAR would recover first.

Alright. And then how much exposure or demand do you generate from colleges and universities? Do you have a sense for that?

I would say it’s frankly pretty small. We do have the hotel in the off-campus and we bought a hotel out in Portland that gets some exposure from some of that – from the University right there. And yes, with the Marriott in Boulder. But I wouldn’t say it’s a particularly large demand generator across the hotel, across the portfolio generally.

Okay. And then – thank you for that. Last one for me, and maybe you went through this, and I missed it. But how is Memorial Day stacking up? Are you seeing any material increase in demand?

Bill, it’s Dan. I think our perspective on Memorial Day is probably going to be more short-term focused. I think that’s where the pick-up is likely to be. And that’s where we’re seeing a lot of the successes that we’re having currently across the board. So we think that will be consistent with what we’ve seen over the last couple of weeks.

Yes. Okay. Thank you.

Thank you. Our next question or comment comes from the line of Dany Asad from Bank of America. Your line is open.

Hey, good morning, guys. Can you hear me okay?

Yes. Got it, Dany.

Great. So Dan, are you hearing about any suburban property owner distress? And if so, like what would that mean for property values and potential M&A, as you know, things start to ramp up?

Yes. I mean, I think it’s fair to say that everybody is in some level of distress right now, particularly the smaller owner operators. I don’t know that there is an immediate opportunity regardless of the level of leverage or operations. I think that banks have generally been supportive of smaller owner-operators and giving them time to get their feedback under them. As far as opportunities, our priority right now is really on the portfolio. And based on our portfolio, the locations, the chain scale and the operating model, we think there is a lot of value to be created from here simply with that. But to the extent there is an opportunity in the future, we do have as good a relationship with our lenders as anybody in this space. And we’ve got a terrific partner with GIC, and we could look at things along those lines.

Great. And then more from like a distribution strategy, so once you start ramping back up, what does your distribution mix look like? Do you lean into maybe some channels more than you typically would or do you kind of – yes, that’s just going to be a mix or is it going to be the same, as you know, what would have been pre-outbreak I guess?

I think one of the strengths of our portfolio and our operating model is we do have flexibility where we were probably more of a balanced business versus leisure from an occupancy standpoint. I think there will be more of a bias toward leisure. I think that would be an increased focus on digital as we try to be creative and proactive in driving that business. So yes, I think there will definitely be a shift in tactics from our corporate revenue management team and how we go after business and fill rooms.

Great. That’s it for me. Thank you.

Thanks, Dany.

Thank you. I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to management for any closing remarks.

Well, again, thank you all for your partnership and patience with the power outage. We look forward to connecting soon, hopefully that will be in person. Hope you all have a terrific day. Thank you.

Ladies and gentleman thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.