Summit Hotel Properties, Inc. Q2 FY2025 earnings call

• Overall execution in Q2 was pleased despite challenging environment, with growth in market share, prudent expense management, and balance sheet strengthening through refinancing and share repurchases.
• Same-store RevPAR declined 3.6% with demand trends stabilizing sequentially. RevPAR index was 115%, NCI portfolio had 114% index.
• Operating expenses increased 1.5% year-over-year, with labor cost management efforts.
• $15.4 million spent on repurchasing 3.6 million shares, representing a discount to trading price and reducing shares outstanding by ~3%.
• Refinanced properties, including AC Element hotel in Miami with a new $58 million mortgage and GIC Joint Venture Term Loan, reducing borrowing costs.
• Completed renovations and expansions, including Onera Fredericksburg's 23-unit expansion.

Same-store RevPAR declined 3.6% in the second quarter, within the expected range of a 2% to 4% decline, predominantly driven by a 3.3% decline in average daily rate. Occupancy declined less than 0.5% compared to the prior-year period, ending at 78%, our second highest nominal occupancy in the past 5 years. RevPAR index grew by nearly 150 basis points to 115%, with the NCI portfolio achieving 114% index. Operating expenses increased 1.5% year-over-year or 2% on a per occupied room basis. Second quarter adjusted EBITDA was $50.9 million, and adjusted FFO was $32.7 million or $0.27 per share.

• Expect RevPAR decline magnitude to moderate in Q3, with current forecast at ~3% decline. Full-year adjusted EBITDA and AFFO per share expected to be within 1% to 2% of initial figures despite RevPAR growth ~200 basis points below initial target.
• Reduced full-year 2025 capital expenditure to $60 million to $65 million on a pro rata basis.
• Pro rata interest expense, excluding amortization of deferred financing costs, expected to be $50 million to $55 million, Series E and F preferred dividends ~$16 million, Series E preferred distributions $2.6 million.

• Challenging operating environment with pricing sensitivity in certain key markets and demand segments.
• Narrowing booking window and heightened price sensitivity starting in March, coinciding with government policy-related disruption.
• Government-related demand declined over 20% year-over-year, and net inbound international travel remained under pressure, declining ~18% from Q2 last year.

Q: Just a quick question on the buybacks in the quarter. The $15 million, was that -- you stopped there just for managing cash flows and leverage? Or was that just more proactively in the beginning of the quarter before the stock price improved?

A: Some of it was just driven by timing of where we were in the quarter and as we started to get closer into earnings. Obviously, we're pleased with the execution on the share repurchase during the quarter. We're happy to have it as a tool -- as a capital allocation tool going forward. We tend to kind of continue to be opportunistic around its usage. And obviously, in the near term, we're focused on getting a couple of the asset sales that I mentioned closed to fund the repurchased activity.

Q: I was hoping maybe we could dive in just a little bit deeper on bucketing some of the changes in demand that you saw either through the quarter or maybe thus far in Q3 in terms of corporate transient, leisure weekday, weekend. And if you can talk a little bit about how visibility on each of those buckets looks relative to maybe last year.

A: Yes, sure. Thanks, Chris. Appreciate the question. Look, I would say largely, we did see some pressure in some of the higher-rated segments and channels in our business. So our retail demand was down year-over-year in the second quarter. It did kind of force us to remix. As we mentioned, occupancy remains relatively stable. We ran nearly 80% occupancy for the quarter. But we did see some pressure in some of the higher-rated channels and took more advanced purchase type business to build a base of demand, which we hope that we could yield off of in the quarter. As I mentioned, the booking window remains really narrow. Our reservations made kind of outside 30 days are down, our reservations made inside 30 days are up and the week for the week are up pretty significantly year-over-year. We're booking close to 65% of our transient bookings within 2 weeks of stay. So that visibility just generally is less than it was before. Again, I do think that the team has done a really good job finding the business that's available, and we're doing with an eye to try to maximize our GOP. And so when you combine that with the great work we've done managing expenses, I think that we've kind of optimized what we could do on the bottom line given some of the softness and the demand trends we're seeing in certain higher-rated segments.

Q: Just a quick question on the buybacks in the quarter. The $15 million, was that -- you stopped there just for managing cash flows and leverage? Or was that just more proactively in the beginning of the quarter before the stock price improved?

A: Some of it was just driven by timing of where we were in the quarter and as we started to get closer into earnings. Obviously, we're pleased with the execution on the share repurchase during the quarter. We're happy to have it as a tool -- as a capital allocation tool going forward. We tend to kind of continue to be opportunistic around its usage. And obviously, in the near term, we're focused on getting a couple of the asset sales that I mentioned closed to fund the repurchased activity.

Q: I was hoping maybe we could dive in just a little bit deeper on bucketing some of the changes in demand that you saw either through the quarter or maybe thus far in Q3 in terms of corporate transient, leisure weekday, weekend. And if you can talk a little bit about how visibility on each of those buckets looks relative to maybe last year.

A: Yes, sure. Thanks, Chris. Appreciate the question. Look, I would say largely, we did see some pressure in some of the higher-rated segments and channels in our business. So our retail demand was down year-over-year in the second quarter. It did kind of force us to remix. As we mentioned, occupancy remains relatively stable. We ran nearly 80% occupancy for the quarter. But we did see some pressure in some of the higher-rated channels and took more advanced purchase type business to build a base of demand, which we hope that we could yield off of in the quarter. As I mentioned, the booking window remains really narrow. Our reservations made kind of outside 30 days are down, our reservations made inside 30 days are up and the week for the week are up pretty significantly year-over-year. We're booking close to 65% of our transient bookings within 2 weeks of stay. So that visibility just generally is less than it was before. Again, I do think that the team has done a really good job finding the business that's available, and we're doing with an eye to try to maximize our GOP. And so when you combine that with the great work we've done managing expenses, I think that we've kind of optimized what we could do on the bottom line given some of the softness and the demand trends we're seeing in certain higher-rated segments.

Q: Got you. And then on the expense side, obviously, a lot of work being done this year. So a little bit easier comps on top line for -- as we go into next year. But just given the expense management this year, probably more difficult comps next year. And I'm just curious, where else -- what other levers do you see that you can pull to sort of maintain that low expense growth?

A: Well, I think the team has done just a tremendous job managing expenses. And this didn't start in the second quarter. I mean this really started -- to going back to last year where the team has really done a good job managing expenses tightly in a lower RevPAR growth environment. If you look at our results year-to-date, our expenses are up 1.5%. I think despite the fact that we've had some bigger challenges on the top line, and a lot of that just has to do with demand segmentation exposures. Our performance at the hotel EBITDA level year-to-date, I think, stands up very favorably when you compare it to a lot of peers that have reported. So I think that we'll continue to manage expenses very prudently. I think it also just highlights the efficiency of our operating model and our ability to maintain margins in lower RevPAR or in this case, modestly declining RevPAR environment. Our EBITDA margins are down about 160 basis points year-to-date. I wish it were positive, but I would say, given the environment, we're really quite proud of that statistics. And I'm highly confident that our team and our third-party managers will continue to manage expenses prudently.

Q: Staying on the expense topic, you guys mentioned in the opening prepared remarks that retention has been stronger. Has the labor pool changed at all in recent months? And on the contract labor topic, when would you expect if -- I don't know, over the next year or few years, when would you close that 200 basis point gap? And how much in annual savings would that potentially result in?

A: Logan, it's Trey. Look, I'd say from a contract labor perspective, that -- or our employee base more generally, I think that we've obviously seen a base that's much stickier now versus probably 2023 and 2022. And we would expect that with what you're seeing kind of in the employment dynamic that's been released in the kind of broader country perspective that our employee base should be stickier going forward. That kind of 40% decline that we referenced on the call has really come much more into focus over the -- I'd say, the first 6 months of this year. So we feel really good about kind of where our employee base is. As it relates to contract labor, we've kind of been around that 10% number over the last -- probably 6 to 9 months. And so it seems to have held there at this point. Sometimes contract labor isn't a bad thing. I'd say in certain markets that we have, some of the contract labor is actually quite sticky. It's not as -- there's not as much turnover associated with it as you would think. My sense is that it's something that we'll be able to improve on modestly. We're probably 250 basis points away from where we were in 2019. But we'll probably continue to chip away at that, and there should be some incremental improvement, I think, over the next 12 months.

Q: You guys mentioned you have two assets under contract for sale. I guess just how are you thinking about acquisitions versus dispositions going forward? And what types of assets or markets are you interested in both acquiring or disposing assets in?

A: Yes, sure. I would say that -- in the near term, we're obviously focused on the two assets that we have under contract for sale and getting those closed. I think you should expect us to be a net seller of assets for the year, including those assets. And part of that is really meant to: one, fund the share repurchase program as we spoke about; and, two, continue to deleverage the balance sheet. It's still a fairly light transaction market, I would say. We've been focused on selling noncore assets that are in need of capital expenditures that we just don't feel -- or we feel like we have kind of a higher use or better return of capital on that capital spend. So I think you should expect the two sales that we hope to get completed here later in the third quarter, early in the fourth quarter to look a lot like the sales we've done over the previous 2 years, both from a noncore perspective and kind of what that yield profile is. And as always, we'll try to remain opportunistic both on the acquisition and disposition side going forward.

Q: government exposure created some headwinds for you guys in 2Q. As we look into the back half, have you seen it get worse, stabilize or better? And should we expect these headwinds to continue to put pressure on RevPAR growth through the balance of the year?

A: No. I think what we've seen is stability in government really from kind of what was a really rapid contraction beginning in April -- or March and April, I should say. We have seen it stabilize in the second quarter. We expect it to remain relatively stable in the third quarter, admittedly at lower levels than it was before. And while we are optimistic that we'll see some growth in government maybe into the fourth quarter and 2026, at this point in time, we do feel like that demand segment is stable, and it's kind of incorporated in what we've given from an outlook perspective for the quarter and year.

Q: Is the lower CapEx guidance related to timing? Or are you actively deferring some projects to 2026 as we move through this softer RevPAR growth environment?

A: Yes. Some of it's timing -- some of it is just related to -- we have a couple of asset sales that -- both of which needed significant renovations. And so our expectation is that we'll sell those assets rather than renovate them.

Q: what do you need to see, you think, for kind of the remixing opportunity to become a little bit of a lift to ADR, now that you've seen kind of conditions stabilized. I think you referenced some sequential improvement through the quarter. And hopefully, that's given sort of the operators and asset managers a little bit of time to adjust to the changing demand conditions. But what is it you think -- or what segment do you think that's going to kind of provide maybe a lift to ADR over the next several quarters?

A: Look, I think broadly speaking, the industry just needs to see overall better demand trends. We've been in kind of this flattish demand environment. Demand actually contracted across the industry in the second quarter. And so I think as you start to see demand patterns improve, and I think that can be all segments or any of the segments, you're going to see that translate into better pricing power. We obviously were forced to remix some business in the second quarter. We do think, again, some of those trends are going to continue into the third quarter. Longer term, I do think our ability to leverage better pricing will be driven by just broader demand growth within the industry. And again, the one thing I want to emphasize, Austin, is despite the fact that we've seen some pricing headwinds in the second and third quarters. What it's done on the bottom line, our ability to mitigate that on the bottom line, our expectations kind of for our full-year EBITDA and FFO metrics are down 1% to 2%. And so again,我think the team has done a good job managing this environment. We do remain optimistic that we're going to see better kind of demand patterns across the industry. And I think our portfolio, in particular, is certainly well positioned to take advantage of that.