INN (2025 - Q2)

Good day, and thank you for standing by. Welcome to the Summit Hotel Properties, Inc. Q2 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Kevin. You may begin. Kevin Mi

Thank you, operator, and good morning. I'm joined by Summit Hotel Properties' President and Chief Executive Officer, Jon Stanner; and Executive Vice President and Chief Financial Officer, Trey Conkling. 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 SEC filings. Forward-looking statements that we make today are effective only as of today, August 6, 2025, 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' President and Chief Executive Officer, Jon Stanner.

Thanks, Kevin, and thank you all for joining us today for our second quarter 2025 earnings conference call. We were pleased with our overall execution in the second quarter despite what proved to be a challenging operating environment, highlighted by our ability to continue to grow market share across our portfolio, manage operating expenses prudently and strengthen our balance sheet through successful refinancing activity and accretive share repurchases. On today's call, we will provide details on these activities as well as additional commentary on the current operating environment and the outlook for our industry, and the Summit portfolio more specifically. Our second quarter operating results were tempered by difficult comparisons to the second quarter of last year and pricing sensitivity in certain key markets and demand segments. For the quarter, same-store RevPAR declined 3.6%, within the expected range of a 2% to 4% decline, predominantly driven by a 3.3% decline in average daily rate. We experienced a narrowing in the booking window and heightened price sensitivity beginning in March, which coincided with the first signs of government policy-related disruption. These trends continued in the second quarter for several of our demand segments, resulting in an unfavorable shift of room night mix to lower-rated segments. Overall demand across the portfolio remained stable as occupancy declined less than 0.5% compared to the prior-year period. Second quarter occupancy of 78% represented our second highest nominal occupancy in the past 5 years, trailing only our comparable metrics from a year ago. As expected, special events and the Easter holiday shift into April of this year were significant drivers of the year- over-year decline in portfolio RevPAR. Several high-rated events held in the second quarter of 2024 were particularly impactful to our year-over-year comparisons, including the solar eclipse, which drove outsized demand in Austin, Dallas, Indianapolis and Cleveland the Men's and Women's NCAA Final Fours, which benefited Cleveland and Phoenix, respectively. The U.S. Olympic trials for gymnastics and swimming, which were held in Indianapolis and Minneapolis and the simultaneous running of the 150th Kentucky Derby and PGA Golf Championships, which were hosted in Louisville. In total, these events benefited over 30% of our portfolio and created a 125 basis point headwind to RevPAR growth for our results this quarter. Additionally, government-related demand, which represents approximately 5% to 7% of our total room nights declined over 20% year-over-year in the second quarter and net inbound international travel remained under pressure, declining approximately 18% from the second quarter of last year. Encouragingly, demand patterns broadly stabilized and improved sequentially throughout the quarter, and we have not experienced the incremental deterioration of demand or meaningful acceleration in cancellations and attrition observed in previous downturns. April RevPAR declined 4.4% in our same-store portfolio, partially driven by the Easter holiday shift as well as several of the special events mentioned previously. May RevPAR declined 3.9% and June RevPAR declined only 2.6%. While RevPAR trends actualized lower than we expected going into the quarter, we were pleased with our ability to grow market share and effectively manage expenses, two of the more controllable operating metrics that receive increased attention during periods of declining demand. During the second quarter, we grew our RevPAR index by nearly 150 basis points to 115%, which is among the highest levels we've achieved post pandemic. We continue to see meaningful improvements in the NCI portfolio specifically, which achieved 114% index in the second quarter, representing a 240 basis point increase year-over-year and a 130 basis point increase from the first quarter. For reference, that portfolio's RevPAR index was just over 100% when it was acquired in the first quarter of 2022. And these gains reflect the tremendous job our team has done developing, implementing and executing successful revenue strategies for those assets. Our asset management team and management company partners also continue to do an exceptional job managing operating expenses, which increased only 1.5% year-over-year or 2% on a per occupied room basis in the second quarter. Year-to-date, operating expenses have increased a modest 1.5% on relatively flat occupancy, limiting EBITDA margin contraction to 160 basis points year-over-year. Trey will provide more details on expense trends later in this call. Given the significant dislocation we experienced in the stock price early in the second quarter, our Board of Directors approved a $50 million share repurchase program to opportunistically return capital to shareholders. During the second quarter, we repurchased 3.6 million shares for $15.4 million, representing an average price of $4.30 per share. This represents a discount of approximately 15% to our current trading price and has reduced our shares outstanding by approximately 3%. In addition, the repurchases were executed at an implied dividend yield of 7.4%, which is approximately 120 basis points above our borrowing cost, making them accretive to our overall cash flow profile. As we telegraphed on our first quarter earnings call, we intend to fund share repurchase activity with proceeds generated from asset sales. We currently have two hotels under contract for sale, both of which are non-core assets. The combined sales price for these hotels reflects a blended yield comparable to the 10 properties we have sold over the past 2 years. While we do not yet have nonrefundable deposits and thus do not classify these assets as held for sale, we are optimistic that both sales will close later in the third quarter or early in the fourth quarter. The disposition proceeds from the two asset sales would exceed what has been funded to date to repurchase shares and continue our path to deleveraging the balance sheet. Before I turn the call over to Trey, let me provide some perspective on our operating outlook for the remainder of the year. While we expect the operating trends experienced in the second quarter to generally continue into the third quarter, we believe the magnitude of RevPAR decline will moderate from the second quarter levels in our portfolio. July RevPAR declined approximately 3.5% in our same-store portfolio year-over-year. However, we are optimistic we will realize incremental improvements in August and September. Encouragingly, we have seen modest gains in our forward pace trends in recent weeks, and our third quarter outlook is ahead of where we were for the second quarter at this time 90 days ago. Our current forecast for the third quarter reflects a RevPAR decline of approximately 3%. While demand patterns are broadly stable, our booking window has narrowed in recent months, and we are experiencing more pace volatility than normal, even considering the typical short-term booking nature of our business. This has made forecasting increasingly challenging and widened the range of potential outcomes for the year. On our last earnings call, we suggested in-place operating trends were tracking toward the low end of the guidance ranges we provided in February as part of our year-end 2024 earnings report for adjusted EBITDAre and Adjusted FFO and FFO per share. Current operating trends now point us to metrics modestly below the low end of that range, driven exclusively by softer second quarter results and reduced expectations for the third quarter. We expect operating trends to improve in the fourth quarter as demand stabilization is augmented with greater macroeconomic and policy clarity and a stronger industry group and convention calendar. It is important to highlight that our expectations have moderated more on the top line than the bottom line as we continue to benefit from aggressive expense management and the share repurchase program, which has mitigated the effects of lost revenue on per share metrics. At the beginning of the year, the low end of our ranges suggested 1% RevPAR growth would equate to $184 million of adjusted EBITDAre and $0.90 per share of AFFO. We now believe full-year adjusted EBITDA and AFFO per share can finish within 1% to 2% of those initial figures on RevPAR growth that is approximately 200 basis points below the initial growth target. As a reminder, every 1% change in full-year RevPAR growth in our portfolio equates to approximately $4 million of adjusted EBITDAre and $0.03 of adjusted FFO per share. Over the long term, we continue to emphasize the ongoing prioritization of travel as an important component of discretionary spending and the lack of new hotel supply growth. The silver lining in periods of demand uncertainty and rising construction costs is the positive effect it has on limiting the new hotel supply pipeline. 2025 will represent the second consecutive year our industry has grown supply less than 1% or roughly half its historical growth rate. Our expectation is for these conditions to continue for several more years, and we are likely in the nascent stages of a period of historically low supply growth for new hotels. This lack of supply growth will ultimately amplify the benefits of a more constructive demand and pricing environment over the next several years. With that, I'll turn the call over to Trey.

Thanks, Jon, and good morning, everyone. Despite broader RevPAR headwinds, several of our key markets were strong performers during the second quarter. San Francisco and Chicago, for which RevPAR increased 18% and 10%, respectively, continue to reflect resilient group and business transient demand that is partially offsetting slower leisure and government trends. We are particularly encouraged by the signs of recovery we are seeing in San Francisco and Silicon Valley and the potential for these markets to continue to experience outsized growth. In addition, our Florida portfolio delivered a strong performance in the second quarter, with all three of our core markets: Orlando, South Florida, including Fort Lauderdale and Miami; and Tampa, posting robust year-over-year RevPAR growth. In Orlando, RevPAR increased 9%, driven by healthy leisure demand following the opening of Universal's new Epic Universe theme park, alongside solid corporate demand, particularly from construction-related crews supporting the development. Tampa posted a 5% increase in RevPAR, benefiting from solid group and special event-driven demand throughout the quarter. And in Miami, our Brickell properties delivered RevPAR growth of 16% as strong demand enabled our teams to successfully drive mix shift into higher-rated channels. Finally, Pittsburgh delivered a strong quarter with RevPAR growth of 11%. Performance was supported by robust citywide convention activity in May and June, complemented by a diverse lineup of concerts and the U.S. open at Oakmont, which collectively drove elevated leisure demand across the market. Strength in these markets was offset by a challenging quarter for several of our largest markets. In particular, Dallas, Atlanta, Phoenix and New Orleans, all experienced RevPAR contraction greater than the overall portfolio during the quarter, driven by significant renovation displacement and difficult year-over-year comparisons. In all of these markets, we believe the future operating outlook is far more positive than second quarter results. While overall Dallas RevPAR declined in the quarter, it is important to remember that performance is highly specific to each submarket. The Grapevine and Downtown submarkets were impacted by slower convention calendars, which pressured average daily rates during the quarter. Downtown, in particular, is impacted by the ongoing disruption related to the convention center expansion. While this is creating a headwind to current performance, longer term, we believe the larger modernized convention center will provide a significant lift to the downtown submarket. For example, Dallas is set to host multiple World Cup events next year, and the renovated convention center will serve as the global media hub for the North American tournament, driving substantial demand during the second and third quarters of 2026. Our Frisco hotels delivered another strong quarter with RevPAR growth of nearly 4%, all of which came through average daily rate gains, supported by sustained strength in corporate demand. Looking ahead, we are particularly excited about the opening of the Universal Kids Resort in 2026, and we believe our hotels in this submarket are well positioned to benefit from the resulting increase in family leisure travel. Frisco continues to be at the center of the fastest-growing corporate relocation market in the country, and the Frisco Station submarket is in the early stages of a long-term growth cycle. For example, during the second quarter, the Health & Wellness District within Frisco Station commenced groundbreaking of an 85,000 square foot medical center that will be part of a broader 35-acre district, which will further add to the depth and diversity of demand generators in this market. Our results in Atlanta, New Orleans and Phoenix also weighed on our overall RevPAR growth for the quarter, though Atlanta and New Orleans were impacted by displacement due to renovation disruption. Phoenix, in particular, faced a difficult comparison to last year due to the Men's Final Four. Looking forward, future convention center pace is up double digits in Phoenix and New Orleans, and we expect our newly renovated hotels in all three markets to provide additional lift to results upon completion. Despite modest RevPAR headwinds, food and beverage and other revenues increased 9% and 3%, respectively, in the second quarter. Food and beverage benefited from the reconcepting of the Oceanside Fort Lauderdale, including its oceanfront bar and restaurant as well as a pilot program to charge for breakfast at certain of our hotels. Other revenues were driven by the implementation of resort and parking fees. We expect continued growth in both of these departments, in particular, food and beverage through the balance of the year. As Jon previously mentioned, successful expense management continued in the second quarter with pro forma operating expenses increasing 1.5% year-over-year or 2% on a per occupied room basis as the company realized incremental progress across our labor structure. Our asset management team and hotel managers have successfully focused on managing wages, reducing hotel reliance on contract labor and improving employee retention. Hourly wages, excluding contract labor, increased just 1.2% compared to second quarter 2024. The company continues to benefit from reductions in contract labor, which declined by 13% on both a nominal and per occupied room basis versus second quarter 2024. Contract labor now represents 10.5% of our total labor costs, which is over 700 basis points below peak COVID era levels, but 250 basis points above 2019 levels, suggesting the opportunity for further improvement. We also continue to see improvement in employee retention, which results in improved productivity in the hotels and reduced training costs. Turnover rates in the second quarter have declined nearly 40% from peak COVID era levels. Below GOP, the company realized a tailwind in the second quarter from insurance expense. However, increased property taxes more than offset those insurance savings, a trend we expect to continue for the balance of the year, mostly driven by favorable property tax appeals and refunds received in 2024. We continue to be encouraged by expense trends in our portfolio and how the current baseline cost structure positions the company for future bottom line growth. Second quarter adjusted EBITDA was $50.9 million. Second quarter adjusted FFO was $32.7 million or $0.27 per share as the company continues to benefit from lower interest expense and a lower share count resulting from our accretive share repurchase activity during the quarter. From a capital expenditure standpoint, through the first 2 quarters of the year, we invested $35 million in our portfolio on a consolidated basis and $30 million on a pro rata basis. Recently completed and ongoing renovations include the Oceanside Fort Lauderdale Beach, Courtyard Grapevine, Residence Inn Atlanta Midtown, Hampton Inn & Suites Silverthorne, Mederty Residence Inn and the Scottsdale/Old Town Hyatt Place. In our press release yesterday, we announced the completion of the 23-unit expansion at Onera Fredericksburg, our luxury landscape hotel located in Texas Hill Country. Prior to the expansion, Phase 1 of the property generated a year-to-date RevPAR of $360 and hotel EBITDA margins of nearly 50%, demonstrating the attractive nature of its low-labor-efficient operating model. The expansion offers multiple new units that merge innovative architecture and nature. In addition, the property now offers a multiunit lodge to accommodate group events and outings as well as an additional pool, commissary and other guest enhancements. We have underwritten unlevered yields in the low to mid-teens related to the Onera Fredericksburg expansion, and we believe there is significant upside in the operating performance of this hotel given its unique location in the rapidly growing Fredericksburg market. Turning to the balance sheet. We continue to be proactive in extending maturities, reducing borrowing costs and enhancing corporate liquidity. In May, we refinanced our AC Element hotel in Miami's Brickell neighborhood with a new $58 million mortgage. The hotel's strong performance allowed the partnership to realize over $12 million of incremental proceeds. The new loan has a fully extended maturity of May 2030 at an interest rate of SOFR plus 260 basis points, which represents a 40 basis point reduction in spread versus the prior loan. In connection with the new AC Element mortgage, we entered into a 3-year swap that fixes SOFR at 3.57%. In July, subsequent to quarter end, we refinanced our $396 million GIC Joint Venture Term Loan that funded the acquisition of the NewcrestImage portfolio in January 2022. The new $400 million term loan has a fully extended maturity of July 2030 and an interest rate of SOFR plus 235 basis points, which represents a 50 basis point reduction in spread versus the prior loan. We estimate annual interest savings of approximately $2 million related to these two refinancings. When combined with the $275 million delayed draw term loan that closed in March 2025 and which will be used to retire the $288 million convertible notes in February 2026, the company has no debt maturities until 2028. Due to our interest rate management efforts, our interest rate exposure continues to be effectively hedged with a swap portfolio that has an average fixed SOFR rate of approximately 3.1% and 75% of our pro rata share of debt is fixed after consideration of interest rate swaps. When accounting for the company's Series E, F and Z preferred equity within our capital structure, we were 80% fixed at quarter end. With liquidity of over $310 million, an average interest rate of 4.6% and an average length to maturity of over 4 years when adjusting for the three previously referenced 2025 financings, we believe the company is well positioned to navigate any near-term volatility in operating fundamentals as well as to take advantage of potential value creation opportunities. On August 1, 2025, our Board of Directors declared a quarterly common dividend of $0.08 per share, which represents a dividend yield of over 6% based on the annualized dividend of $0.32 per share. The current dividend rate continues to represent a modest payout ratio of approximately 35% based on the company's trailing 12-month AFFO. The company continues to prioritize striking an appropriate balance between returning capital to shareholders, investing in our portfolio, reducing corporate leverage and maintaining liquidity for future growth opportunities. As Jon previously highlighted, while we remain confident in the long-term outlook for both the industry and our portfolio, near-term fundamentals are being negatively impacted by broader macroeconomic uncertainty. Based on second quarter results and our outlook for the third quarter, our full year performance is currently tracking modestly below the lower end of guidance ranges provided in February 2025 for adjusted EBITDA, adjusted FFO and adjusted FFO per share. From a nonoperational perspective, we expect pro rata interest expense, excluding the amortization of deferred financing costs, to be $50 million to $55. Series E and Series F preferred dividends to be approximately $16 million and Series E preferred distributions to be $2.6 million. From a capital expenditure perspective, we are reducing our full year 2025 spend to $60 million to $65 million on a pro rata basis, which represents a $2.5 million reduction at the midpoint. It is worth noting that over the past 3 years, we have invested over $250 million in capital expenditures on a consolidated basis, resulting in a portfolio that is in excellent physical condition. This capital investment affords us the flexibility to preserve optionality on certain renovations without risking meaningful downward pressure on overall operating results. The previously referenced nonoperational estimates do not include any additional acquisition, disposition or capital markets refinancing activity beyond what we have discussed today. Finally, the increased size of the GIC Joint Venture results in net fee income payable to Summit covering approximately 15% of annual pro rata cash corporate G&A expense, excluding any promote distributions Summit may earn during the year. And with that, we will open the call to your questions.

[Operator Instructions] The first question today will be coming from the line of Austin Wurschmidt of KeyBanc. And the next question will be coming from the line of Daniel Hogan of Baird.

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?

Yes. 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.

Got it. And then just quickly, I noticed the manager transition in the 10-Q. Are there any improved economics on that or any operating efficiencies going forward that you get with those two hotels?

Similar economics. We just did it mostly to kind of focus operations, but yes, the economics will remain the same.

And the next question will be coming from the line of Chris Woronka of Deutsche Bank.

I appreciate all the color so far. 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, that would be terrific.

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.

Okay. Makes sense. And then as a follow-up, this is a little bit more of an involved question. But yes, I think we've all seen some of these soft brands and newer select-serve brands that brand companies keep creating. And I think our view is, you -- I have talked about this before, there's really only one brand for these companies, and it's their loyalty program. And so even though that's not new supply, it's just different supply, I feel like it may be competitive with a lot of your select-serve assets. And so -- the question is, do you think the industry -- and I know it's very fragmented, but do you think there's going to come a point of time where the industry has to go to brand companies and say, enough is enough? And is there any -- why do you think that hasn't been done yet if it hasn't been?

Well, yes. Look, the first thing I'd say, as it relates to the soft brands, is I think that they're on attractive options for owners just broadly. I mean this is essentially what we've created with our renovation in Fort Lauderdale, where we've taken a courtyard and we've really taken it up market. And we believe that the location of that asset and the opportunity that, that creates, there's some real rate opportunity and I think a really high ROI on that type of invested capital. I think we all know that the brands are incentivized to grow distribution and grow net units. I think that when we look at the supply picture more broadly, it's something that we look at very favorable, frankly. Now the core brands -- the main brands are obviously capturing the vast majority of that supply growth. But year-to-date supply growth in the industry is about 0.5%. As I mentioned in our prepared remarks, we think it's going to grow less than 1% or less than half of its annual growth rate for a couple of years in '24 and '25. And we really think those trends are going to continue as we get out 2, 3 or 4 years. And so we feel really good about the supply picture longer term. We think that's part of a very key component to what makes us constructive and positive on the longer-term outlook for the business.

Okay. Appreciate that, Jon. Just if I could sneak one more quick one in on the Onera expansion in Texas. Is that something -- I think we've talked about this before where you guys might be able to [indiscernible] almost secondary platform to the portfolio. So the expansion is interesting. Obviously, the returns are there or you wouldn't be doing it. Are there other -- just stick with this expansion? Or are there other things on your radar kind of in that glamping segment?

Yes. We -- look, we do love the business. We've talked about that a lot over the course of really the past several years from when we started with the first investment out in Fredericksburg. And I think just to kind of emphasize what Trey said, well, we do think what we have out there is incredibly special. We're running really high RevPARs. We're doing it with a very low labor model. The margins are really attractive. And most importantly, as you alluded to, the yields and return profile is incredibly attractive. And so we look at it very much like another hotel, as kind of a very natural extension to our more traditional hotel base. We do have one mezzanine loan outstanding that's been disclosed. We'll have more to discuss on that, I think, over the next coming quarters. But we do like the business, and I do think we intend to continue to be opportunistic around finding ways to grow within that segment.

And the next question will be coming from the line of R.J. Milligan of Raymond James.

Jon, you mentioned the shorter booking window. 3Q is a little bit weaker than -- or trending a little bit weaker than expected. I was just curious to follow up on a previous question in terms of the fourth quarter and as we look into next year and what gives you that confidence that we're going to see that recovery in the fourth quarter, maybe bucket it between group and what you're seeing on the transient side and then also what the 4Q comps look like?

Yes, sure. Well, look -- the first thing I'd just kind of reemphasize is, we have seen an encouraging stabilization in demand. And our expectations where we sit today is for the third quarter to perform a little bit better than we did in the second quarter from a RevPAR perspective. Now some of that is our comps are easier in the third quarter than they were in the second quarter. And we spent a lot of time talking about special events comps, which we knew were going to create a difficult headwinds for us in the second quarter. I think, by and large, what you're seeing in the third quarter is a softer group calendar for the industry, and that's putting some downward pressure on rates. And I think that's been consistent with both the brand companies and all of our peers that have reported so far in the third quarter. I do think those calendars are more constructive as we start to look out into the fourth quarter of the year. I think certainly, when you look at our portfolio, we're definitely optimistic when we look into next year. One, we've created some easier comps in the middle part of this year. We also think things like the World Cup are going to be really nice boost to our demand profile as we get into next year. And we'll continue to emphasize, there just isn't any supply in our key markets. And so as we start to see some recovery in demand, we think that's going to amplify the benefits of a more robust pricing environment.

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?

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.

And our next question is coming from the line of Logan Epstein of Wolfe Research.

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?

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.

Got it. And switching to the transaction market. 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?

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.

And our next question is coming from the line of Austin Wurschmidt of KeyBanc.

It's Josh Friedland on for Austin. Can you hear me?

We got you.

All right. So I mean, 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?

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.

Okay. Helpful. And 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?

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.

And then, Jon, it's Austin here as well. Just had one, I guess, on what it is -- 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?

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, I 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.

Thank you. This does conclude today's Q&A session. I would like to turn the call back over to Jon Stanner, CEO, for closing remarks. Please go ahead.

Well, thank you all for joining us today for our second quarter earnings call. We look forward to speaking to many with you -- many of you in the coming weeks. Have a nice day.

Thank you all for attending today's conference call. You may now disconnect.