Ladies and gentlemen, thank you for standing by and welcome to Summit Hotel Properties Q2 2020 Earnings 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 may be recorded. I would now like to hand the conference to your host, Senior Vice President of Finance, Adam Wudel. Sir, please go ahead.

Thank you, Wati, 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, August 6, 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 second quarter 2020 earnings conference call. The second quarter was extraordinarily challenging for the industry as demand deteriorated to historically low levels and the typical booking window shorten considerably. Yet, we are encouraged by the trend of consistent, week over week occupancy increased at our hotels throughout the second quarter and into July. RevPAR declined 83% during the second quarter but improved sequentially each week throughout the quarter as June RevPAR declined 75% compared to the nearly 90% decline we saw in April. When excluding the 15 hotels that were closed at various times during the quarter, occupancy was approximately 46%. Occupancy was over 41% across the total portfolio in July, nearly 30 full percentage points higher than the first two weeks of April when demand dropped and our preliminary July results point to a 67% year-over-year decline. In addition to the increase in occupancy, our market share gains were substantial in the quarter as we finished with a 143% RevPAR index. More than 20% percentage points higher than the first quarter and nearly 30 percentage points higher than the same period in 2019. Weekends began to perform much better than weekdays as the quarter progressed, driven by a relaxation of the mandatory stay at home orders resulting in an increase in leisure travel particularly in drive-to markets. In June, weekend occupancy exceeded weekdays by nearly 10 full percentage points, averaging over 41% occupancy for the month and resulting in a 30% premium to our weekday RevPAR. Weekend occupancy at our hotels located in the markets we considered as drive-to surpassed 50% in June and this trend has accelerated as these hotels achieved 58% occupancy during the weekends for the month of July. Our second quarter results and…

Thanks Dan, and good morning everyone. In June, we amended our $200 million Joint Venture credit facility that allows for the temporary waiver of financial covenants, through March 31st of 2021 and modifies the testing of certain covenants through June 30th of 2022 to accommodate what may be more gradual recovery. This followed the amendment of our corporate revolving credit and term loan facilities, which provides for $115 million of additional borrowing availability. Combined with $120 million of unrestricted cash on hand, we currently have approximately $270 million of total liquidity. These two amendments address more than 85% of our current pro rata debt balance and position us well to withstand a prolonged period of low demand. Today, our weighted average interest rate is slightly under 3.5% and weighted average term to maturity is approximately 3.5 years with no maturities until November of 2022. The efforts our asset management team made to mitigate the sudden demand shock that began in the middle of March, including rightsizing staffing levels and adjusting service and amenity offerings resulted in strong retention of just over 40% in the second quarter. This has reduced our monthly cash burn rate for between 10 and $12 million per month to approximately $7.5 million for the month of June and closer to $7 million in July. At these levels our projected liquidity runway has increased to approximately 38 months adding over a full year of runway since we've reported first quarter results. Additionally, our portfolio breakeven RevPAR at the hotel level is between $35 and $40. We nearly met the low end of this range in June and exceeded the high end of this range in July. Our efficient operating model, which is less labor-intensive and oriented more towards transient and leisure demand has allowed us to keep…

[Operator Instructions] Our first question will come from the line of Michael Bellisario from Baird. You may begin.

Dan, can you just first talk maybe a little bit our brand standards what the brands in your operating partners are allowing you to do in terms of flexibility and then when do you see that flexibility may be switching back and it's becoming more stringent, so to speak as occupancy continues to pick up?

Sure. It's Dan. Look, I think it's still evolving. There has been a lot of work being done around cleaning, to protect the safety of our guests and our employees. So there is a lot more frequent cleaning being done in public spaces. We're not cleaning stay-overs unless requested. We're trying to position sanitizing stations for hands in high traffic areas. The food and beverage offerings have generally been grab and go, and some of our markets that we're getting higher occupancy, we're starting to bring back some additional level of offering. I think what we're trying to work with the brands in the management companies on as occupancy comes back, what is the right mix of amenities and staffing to do that. So I think that is continuing to evolve. Our hope and expectation is that our highly efficient model as a today becomes even more highly efficient with procedures and offerings that still meet guest expectations, give them a sense of safety, but also kind of rewards them much closer to some of the things they were liked about the consistency of the brands in the past. So hopefully that's helpful.

It is. Thanks. And then just switching gears, just on the transaction market. What are you guys thinking in terms of potentially selling assets in terms of raising capital and bolstering the balance sheet and then also what you're seeing for pricing based on what's in the market today?

Sure. Look, I think it's a little early for the tactical execution of acquisitions, dispositions. I think people are still trying to find out value and forecasting, is challenging in a good environment, and even more so today. We would like to be in a position to take advantage of opportunities as they come up. We're certainly not opposed to selling assets for the right price and the right market, like our portfolio today, but as we look out in the future, clearly, we've got a great partner with GIC. We've got a history of doing creative things with structure to create value for shareholders. So nothing currently I would say, but certainly, we remain patient and interested.

Thanks. And then just one more housekeeping item on that point. You guys had a contract termination payment during the quarter, is that related to a disposition from a prior year or is that something that fell apart during the second quarter?

That was a disposition several years ago, of a small asset with the brand that we were anticipating being able to reallocate that into a new contract, but we're never able to do so.

Our next question is from the line of Neil Malkin from Capital One. You may begin.

A lot of the lodging REITs like you have been successful at reducing cash burn, be it opening up more hotels but predominantly, it seems like it's on the expense side. Just wondering if you can go into a little bit of detail on kind of the top three or four things that you guys are doing that you either didn't think you could do before or are doing more efficiently? Any kind of information in that regard would be helpful.

Yes, hey Neil, it's John. Well, I'm not sure that there is anything that we were, we were unclear, uncertain that we could do. I mean, I think we have been successful reducing the cash burn and first, first and foremost yeah, that's a result of just better occupancy in occupancy improvements over the course of several months. I think we've done a really good job and many of the team has done a fantastic job of continuing to run with a really efficient, really lean workforces. We reduced our FTE accounts from, call it early March levels to by about 80%, we're still running with FTE count down 70% from kind of peak. So I think the, I think from a retention perspective and an expense control perspective, we've done a really good job continuing to operate hotels and what isn't a normal environment, but a higher occupancy environment still is very lean models. And I guess the last point I would make, I think from a revenue management perspective, the teams again done a really nice job. We're running really high-index of 140% plus RevPAR index is kind of finding unique pieces of business across these markets to help create some occupancy in an environment where demand continues to be very well.

Appreciate that. In terms of your markets and performance, in July as COVID cases kind of creep back up, did you see meaningful deterioration or where did you see deterioration in your portfolio? Could you pinpoint if that it was mainly sort of coastal cities, urban locations or was it sort of all the same more uniform drop off regardless of sub-location or market?

So I would say, the first thing I'd clarify is we really didn't see a pullback. We have seen a sequential demand increase, every week really since the middle of March, which is encouraging. What I would describe it as we have seen kind of the rate of growth to the rate of improvement is slow as we got into July. I think there's a few things going on there. Clearly some of that is driven by a resurgence in cases, particularly in Summit markets of the virus. And we did see particularly around the 4th of July where we had relatively high expectations for the portfolio markets like Fort Lauderdale for example, where they closed the beach and we have less short-term pickup in that market than we otherwise would. And we've also seen more hotels open particularly full-service hotels. So that kind of shadow supply or new supply, if you will, that's come on it is absorbing some of the incremental demand. And then look we're just -- we're naturally operating at higher levels of occupancy. There is still a low from a historical context. But when we look at sequential improvements, the bar is little bit higher because we are operating in somewhat higher occupancy levels. I think there is kind of three or four factors that are all feeding that again. We haven't seen a pullback in demand. We're just really seeing more of a slowdown in the rate of improvement.

And the last one, are you seeing any indication? I think you mentioned it briefly about business, the business travel, or business transient. Is it happening more in a local or regional level in terms of more smaller businesses? Or are you seeing that I guess however small that return is it sort of uniform between the large multinationals? How does that bifurcated, if at all?

Yes, I would say the corporate demand that we've seen. As I think, as we described it in the prepared remarks is sporadic. It's unique, it's local I probably can describe it as kind of submarket or asset-specific today. I wouldn't see say that we've seen any type of broader general increase of corporate demand as we said. I think our expectation is for when that comes back has probably been pushed back to some degree. It's better than it was. I mean, we're certainly off of trough levels that we saw late March, early April. But I wouldn't say [technical difficulty] we need redemption of corporate demand of some of the unique pieces a bit that we have [technical difficulty] which would certainly have helped.

Our next question comes from line of Austin Wurschmidt from KeyBanc. You may begin.

I was wondering if you guys could provide an update specifically on the three mezz loans that are fully funded as to kind of next steps following the end of the 90-day interest payment deferral that I believe lapsed in mid-July?

Yes, so we've extended the deferral period through September 15th of this year. I think as we indicated on the last call, the expectation is, there are extension options contemplated in the deal, both for the option in the two loans that are in place for the deal. I think at this point our expectation is that we will those extra -- those options will be exercised and we'll continue to address it as we move forward throughout next year.

I appreciate the update. And then just, as you think a little bit longer term with some of the talk of the rise of the suburbs and what's going to happen with some of these urban centers post COVID. What are your high-level thoughts around portfolio positioning and any changes in strategy that you'd consider on the other side? And then on top of that, just curious how you think as supply coming out of this, what is sort of the supply picture look like from a geographic and sort of submarket perspective as well?

Austin it's Dan. Look, I think our portfolio probably more than anybody else's has evolved continually to address. First of all opportunities. And second of all shift in guest preference. I think as things have changed here would we shy away from urban and try to focus more on suburban. It's really more of an opportunity that is there is something that is impaired. Is it an urban market that could act more like a suburban market, for example, we have a few markets today that are very core urban-like Atlanta, Charlotte and Portland that have had very strong weekend demand recently. And so they're acting a little bit different than maybe your typical urban hotel might. So I think each one has to stand on its own. And we've always looked at a mix of business and leisure demand. So I wouldn't say that it was, it has categorically changed our view on the future, but it will continue to be a factor. When we look at supply, I think there is still a fair amount in the pipeline. My sense is that many of those will get opened if they haven't broken ground yet. My sense that they will continue to get pushed off. Construction starts I think broadly has slowed but material prices are really mixed, lumber is still incredibly high along with copper, so labor hasn't quite broken yet. So I don't think as a whole we'd expect supply beyond what is going to get pushed out over the next 12 months to 18 months will be much of a factor, which I think bodes well for us and our locations.

I appreciate the thoughts there. And the last one for me, and sorry if this overlaps, a little bit with Neil's question, but the 1,000 basis points of improvement in urban markets that you referenced in the July from June. What was the biggest driver of that improvement? Do you think it's that's sticky demand in that there is continued I guess upside in those locations as you look out into the whatever booking window. It is you do have any visibility that you do have?

I think we had a couple of unique markets probably most -- so first of all I'd say most of the improvement has been driven. Yeah, I think as we mentioned on the weekends. The two markets that probably stand out more than others are Portland ironically enough, in Charlotte to a lesser extent. So we have seen improvements as I mentioned earlier. I think we continue to feel good about the booking window is very sure but the data that we do have on the books. I think we feel good about it. There is obviously concerns about what happens post Labor Day, particularly in some of these core of our markets, but the trends in the urban markets in particularly, in part, because they started from a lower basis have actually improved quicker than we otherwise seen. So I think we feel good about what's happening. A lot of that driven by a couple of, a couple of these markets Charlotte and Portland in particular.

Our next question comes from the line of Bill Crow from Raymond James. You may begin.

Going back a few questions just get a little bit more detail competitive supply that might have been shut down. How much of that is still shutdown?

Bill, it's. Dan, I don't know that we've got a sense for either a percentage basis as we look out in the market, I think the majority has been open and operating at levels with limited staffing as ours. So I wouldn't say there is a material effect on closures out there at least from the data that we've been able to see.

So there's not a lot of phantom supplies to hit you in the next few months?

Yes. Bill, one thing I would just add to that is I think when you look at across our competitive sets, particularly as the Smith Travel defined competitive set as Dan said, most of those have remained open. There have been instances where you've got particularly urban markets where you've got some full service, bigger box hotels that have remained -- that have remained closed. That the timing of that, of those reopening, is sort of uncertain, but I think again, I think for the most part, most of our hotels and most of our directly competitive hotels have stayed open for the majority of the crisis.

All right. Jon, you talked about a slowing in the growth of demand as the number of cases ticked up. We're starting to see a little bit better data on the TSA front over the past week or so, I'm just wondering as the cases stabilize and maybe there is a passenger time where folks decide they need to travel, but are you see an uptick more recently, especially in some of those markets in the Southeast and Southwest that kind of led us into the slowdown of 30 days now or so?

Yes, look, yeah, we haven't seen the first thing I'd say is we really didn't see a huge fall off. We saw, as you mentioned kind of the slowing of the rate of improvement. I think things have held stable. We can continue to see improvement. We continue to have kind of a sequential week-over-week improvement in demand. We're only kind of five days into August. But I think what we've seen in August, particularly the weekend, the first weekend of August continued to be strong. So I wouldn't say we've seen a huge acceleration by any means. But I don't think that, again, at some of these states get past kind of P cases and as you said the TSA stats continue to prove, we have seen the continuation of very solid leisure demand, particularly on the weekends.

One more question from me. The select service in your portfolio in particular has had an advantage that it hasn't had exposure to union labor. But with the City Council's taking a very pro-union stance in this reopening process. I'm just wondering how big a headwind that's going to be in your markets especially West Coast markets; Chicago also?

Bill, it's Dan. Look, I do think it is a headwind. Obviously that affects us much less we -- since we have one union hotel. But those negotiations continue to go on and I think everybody is trying to find that right balance of what that cleaning standard should be in time allotted and benefits and unfortunately, there's a lot of moving parts there, but I do think that that will continue to be a headwind, especially in the larger, more union-dominated markets.

Our next question will come from the line of Wes Golladay from RBC Capital Markets. You may begin.

This is Steve on for Wes. Just a follow-up Austin's question about the mezzanine loans. Those three hotels, are they open? And if they are, are they generating operating results comparable to the other hotels in your portfolio?

Yes to both. They are open and I'd say, they are generally performing in line with the rest of the portfolio.

Thank you. And I'm not showing any questions at this time. I'd like to turn the call over to, sorry, Dan Hansen for closing remarks.

Thank you. I really wanted to close with a couple of things, first of all, I do believe and I believe quite strongly that we're all social beings and we want to see people and have experienced that hasn't changed. In fact, I think the takeaway from all this will be a validation that not Zoom be a part of the future, but it is just a part and it is just a tool and that social contact is critical to health and happiness. And I don't think that's just a leisure comment either. I think business is done with relationships that develop over many years and that connectivity many times just goes beyond an interaction or a deal or structure and into something much more. So, I am very bullish on travel on the industry and in particularly bullish on Summit. And I want to just really to summarize once again why, why we are so confident in our future. First, our flexible operating model has shown one of the great strengths during this crisis. Our cash burn has improved by nearly 40% providing three-plus years of runway. We do continue to gain market share, showing the strength of our operations team. We have no debt maturities until late 2022. Our properties are young. They're renovated and need minimal CapEx. And lastly but most important you've got a management team here at Summit that you can trust. So I appreciate you dialing in today. We look forward to talking soon, hopefully, that will be in person. So have a terrific day.

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