Service Properties Trust (SVC) 2005 Q3 法說會逐字稿

Good day and welcome to the Hospitality Properties Trust third quarter 2005 financial results conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, Trish. Good afternoon, everyone. Joining me on today's call, our second quarterly conference call are John Murray, President and Chief Operating Officer, and Mark Kleifges, Chief Financial Officer. The agenda for today's call includes a presentation by management followed by a question-and-answer session. Before we begin today's call I would like to read from our Safe Harbor statement.

Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Federal Securities Laws. These forward-looking statements are based on HPT's present beliefs and expectations as of today, November 7, 2005. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission regarding this reporting period. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Forms 10-K and 10-Q, filed with the Securities and Exchange Commission, and in our Q3 Supplemental Operating and Financial Data, found on our website at www.hptreit .com. Investors are cautioned not to place undue reliance upon any forward-looking statements. And with that, I would like to turn the call over to John Murray.

Thank you, Tim. Good afternoon, and welcome to our third quarter 2005 investor conference call. This morning's earnings announcement was a positive one as HPT reported FFO per share for the quarter of $0.97, which represents quarter-over-quarter FFO per share growth of 9% versus last year. It is important to note that this gain comes despite a 7% increase in weighted average shares outstanding as a result of our 4.7 million share offering in June, 2005. This performance was driven by RevPAR increases which averaged 8.5% across the portfolio. RevPAR at 298 hotels is tracking ahead of the overall industry. Its fundamentals continue to improve. Importantly, essentially all of the RevPAR growth this quarter was driven by rate increases. The strong topline growth, coupled with healthy flow through resulted in an increase in cash available to pay HPT's returns and rents of over 11% compared with the third quarter of 2004. RevPAR increased in all regions this quarter, and across all portfolios except Carlson and across all brands except Carlson, Radisson and Country Inns & Suites branded hotels. As we discussed in our call last quarter the Carlson managed properties have been undergoing a comprehensive capital refurbishment and rebranding program, and accordingly, their performance this quarter is not surprising given the significant number of rooms out of service for renovations.

As you know this August and September the Gulf Coast was devastated by two very significant hurricanes, Katrina and Rita. HPT has only one hotel in New Orleans the Residence Inn. This property was only minimally impacted physically, had no hurricane-related flooding, and is currently fully operational and very busy housing local business people, disaster relief workers, insurance adjusters and related contractors. A couple of our hotels in the Houston area were evacuated when Rita approached, but reopened only a day or two later with minimal damage. HPT's hotels were insured for their losses and business interruption. Our hotels were not negatively impacted and we continue to receive our minimum rents and returns from our tenants and managers of those hotels. In fact, our best performing region in terms of RevPAR growth for the quarter was the west south central region which includes Arkansas, Louisiana, Oklahoma and Texas. This reflects the increased room demand caused by evacuees, as well as the influx of relief workers, insurance-related business, following these natural disasters.

As our RevPAR has continued to grow, our operators have done an effective job managing profit margins which are up 1% year-to-date versus last year. As a result of this improving performance, HPT's minimum return and rent covered ratios have generally continued to improve this quarter. We believe the best way to look at coverage, the amount by which hotel cash flow exceeds HPT's minimum rents or returns, is on an annual or rolling 12-month basis. As you can see from the chart on Page 25 of our Supplemental Information package, four but one of our 10 portfolios, the coverage has shown a steady improving trend each quarter since the third quarter of 2004. The only exception to this was the Carlson portfolio and the decline there reflects the weakness of the Prime hotels brand during 2004 and early 2005, solid by the effective of the current repositioning of those hotels to the Carlson family of brands.

In other positive events for HPT, in October our debt ratings were upgraded by Standard & Poor's and Moody's investor service to BBB and Baa2 from BBB- and Baa3 respectively. These upgrades resulted in immediate savings on borrowings on our revolving credit facility as our interest rates have been reduced to LIBOR plus 65 basis points from LIBOR plus 80 basis points. Additionally, these improved ratings should enable us to raise debt capital for future acquisitions at a more favorable rate than we could have otherwise. During our last conference call we were questioned about our dividend policy and the outlook for dividend increases as the economy, the lodging sector and HPT continued to experience recovering fundamentals. On October 6th, HPT raised its quarterly common dividend to $0.73 per share, or $2.92 per share annually. While this is not a dramatic increase, it should be noted that HPT never reduced or eliminated its dividend during the recent down turn. Our dividend provides an attractive yield when compare to other hotel REITs and REITs generally. Our Board of Trustees evaluates our dividend policy on a quarterly basis and will continue to do so.

Last quarter, we told you we had authorized the sale of our Prime Hotel in Atlanta, which was being managed by Carlson. This sale was completed in September. We recently completed negotiations with Carlson for a replacement property for this portfolio and on November 1st, HPT acquired a three-year-old, 84-room Country Inns & Suites Hotel in suburban Minneapolis for $4.1 million. We continue to look for opportunities with and for cost them to grow this portfolio and the HPT Carlson relationship. We discussed the Hyatt acquisition of the AmeriSuites brand on our last call and Hyatt has since made announcements unveiling the new Hyatt Place brand concept. The conversion of AmeriSuites to Hyatt Place will be a gradual transition that carries into 2007 for the brand as a whole. The first phase of that process will be the rooms renovation. At this time, we expect that all 24 of HPT's AmeriSuites will complete their room's renovation in 2006, but the lobby transition will not be completed until mid 2007. This is a major undertaking by Hyatt, its owners and franchisees and is still a work in process. However, if they can position these hotels to compete head-on with Courtyard and Hilton Gardens, this will be a significant success. Keep in mind that to the extent HPT provides funding for this rebranding our owner's priority return will increase.

The acquisition environment remains highly competitive with some large assets trading at cap rates below 5 and 6%. There is a high volume of both portfolio and single hotel offerings in the market at this time, and HPT has been actively evaluating these opportunities. Our transaction structure and underwriting standards don't always carry us to the winner's circle, but our structure and standards have served us well over the past 10 years. We are committed to our business model and intend to remain disciplined and complete transactions that we believe will provide HPT attractive returns throughout lodging cycles. Early indications are that RevPAR growth has continued at a healthy pace through October, and lodging industry analysts, such as, PWC and Smith Travel are forecasting that these trends will continue at least through 2006. Nonetheless, it is important to recognize that HPT's portfolio of hotels cater to business travel, which is generally reduced during the holiday seasons of late November and December.

As we discussed on our last call, HPT's second and third quarters are its strongest because its hotels are busiest from March through October with relatively weakness around the year-end holidays and the cold winter months. Furthermore, it remains unclear how continued interest rate hikes by the Federal Reserve Board may affect the business climate and economy, or how high energy costs may affect business and leisure travel and individual disposable income. Despite these uncertainties, HPT is cautiously optimistic about a lasting recovery. Especially since new supply growth remains muted. I will now turn the presentation over to Mark Kleifges, our CFO, to discuss the quarter's financial results in more detail.

Thank you, John. Revenues for the quarter ended September 30, 2005, were $221.7 million, which is a $49.7 million increase over 2004 revenues for the comparable period. The increase in revenues was primarily the result of our February and May 2005 acquisitions of 13 hotels from InterContinental, as well as the general increase in revenues at most of our hotels due to continued improving lodging industry conditions during 2005. Hotel operating expenses for our managed hotels in 2005 were $134.9 million, which is a $40 million increase over 2004. Like the increase in revenues, the hotel operating expense increase was primarily the result of a larger number of managed hotels in 2005 due to our acquisition activities. Interest expense in 2005 increased over 2004, by $3.6 million, which is primarily due to higher average borrowings, partially offset by a slightly lower weighted average interest rate during the three months ended September 30, 2005.

Our weighted average outstanding debt balance and interest rate was $936.1 million and 6.6%, and $699.5 million and 6.8% for the three months ended September 30, 2005, and 2004 respectively. General and administrative expenses increased in 2005 by $550,000 over 2004. This increase is due principally to the impact of additional hotel investments during 2005. Net income available for common shareholders was $28.7 million, or $0.40 per share for the third quarter, compared to $28.8 million, or $0.43 per share for the same quarter last year. The weighted average number of common shares outstanding totaled $71.9 million in the 2005 third quarter, compared to 67.2 million for the third quarter of 2004.

Funds from operations for the third quarter were $69.7 million, compared to $60 million for the third quarter of 2004, a 16% increase. On a per share basis, FFO increased 9% from $0.89 per share to $0.97 per share in the 2005 third quarter, despite a 7% increase in the weighted average number of shares outstanding. The increase in FFO was driven by our 2005 acquisition activity and the improved operating performance of our hotel portfolio. FFO for the third quarter included $6 million of deferred percentage rent and deferred hotel operating income, compared to $2 million for the 2004 third quarter. As a reminder, under the terms of our management agreements, our right to share in the operating results of our hotels in excess of the minimum returns due to us is based upon annual calculations. As John mentioned, typically the operating results for our hotels are strongest in the second and third quarters, and weakest in the first and fourth quarters, with the fourth quarter generally being the weakest. As an illustration of this, FFO in 2004 decreased sequentially by 5% between the third and fourth quarter because deferred hotel operating income declined from a positive $1.1 million to a negative $2.1 million. In early October, we declared a common dividend to $0.73 per share which represents 75% of our FFO for the quarter. This compares favorably to an FFO payout ratio of 80% in the 2004 third quarter.

Turning to the asset side of the balance sheet, cash and cash equivalents totaled $51.5 million at September 30, 2005, which includes $32.4 million of cash escrowed for future improvements to our hotels. During the quarter, we sold one hotel for a net proceeds of $3.2 million, and made $22.9 million in capital improvements to our hotels. Subsequent to quarter end, on November 1st, we acquired a Country Inns & Suites Hotel for $4.1 million. On the liability side, HPT is $921.5 million of unsecured senior notes and only one $3.8 million mortgage. As John mentioned our senior unsecured notes have been upgraded by Moody's to Baa2 and by Standard & Poor's to BBB, and we've been investment grade-rated since 1998. Our first term debt maturity is in 2008. As of September 30, 2005, we had $8 million outstanding on our credit facility. Today we have zero outstanding on our revolving credit facility with the full $750 million available to be drawn for acquisitions and general business purposes. On a book basis today debt-to-total-capital is approximately 33%, which falls within our target range of 30 to 40%. On a market basis, debt to total capital is approximately 23%.

In the third quarter of 2005, our EBITDA to total fixed charges coverage ratio was 4.8 times, and we are currently comfortably within the requirements of our public debt covenants. We expect to use cash balances, borrowings outstanding under our revolving credit facility and net proceeds from offerings of debt or equity securities to fund future property acquisitions. In summary, the third quarter was highlighted by continuing positive RevPAR trends in our portfolio, the benefit to shareholders of increases in our ratings by both S&P and Moody's, and the Board's decision to raise the dividend level. Overall, we believe that HPT's high quality portfolio of 298 hotels, strong agreement terms with major hotel operating companies, solid balance sheet, and attractive dividend yield with low payout ratio are compelling reasons for those with a long-term view to invest in HPT. That concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you. [OPERATOR INSTRUCTIONS]. We will take our first question from William Acheson, Merrill Lynch.

Thank you very much. Gentlemen, is it possible to delineate how much the extra occupancies from the storms helped in the third quarter? In terms of the bottom line.

We haven't separately calculated that. So I don't have an answer for you.

Yes, that's complicated, Bill, because it depends really on where you were in a particular waterfall on a contract, so it is a rather complex calculation to come up with. So we don't have that.

Okay. In terms of energy costs at the hotels, I know the structure of your operating agreements insulates you to a large degree, but it is very different than say most other residential types of property where the operation has to foot the bill for heating all the rooms and all the common areas, et cetera. Is it possible to say what your exposure to natural gas being up 100% per decatherm and electricity going up in many markets? How much of your FFO exposure is there?

Well, again, our contracts do provide us some protection because of our minimum rents and returns. And heat, light and power only makes up 3 or 4% of our income statement for each of our hotels. So we do expect that those energy costs will be up this year, versus last year, but we think our RevPAR increases are going to surpass -- easily surpass those increases in energy costs and so we're not expecting -- net-net, we're not expecting a negative impact from it.

In your supplemental, I tried to figure out how many rooms were out of service due to the Carlson renovation, but I'm coming up with a number way too low. Do you have that figure, how many rooms are out of service on a rolling basis?

Yes, on average in the quarter it was about 35% of the rooms were out of service.

Okay. And then what is the total budget for the rebranding and renovation at the Carlson properties?

The current forecast for that is $30.7 million and the work is expected to be completed in April of 2006.

Thank you very much.

And I will take our next question from Jay Leupp, RBC Capital Markets.

Hi, here with Brett Johnson. Good morning. Could you talk some about re-development activity going forward where you see the best opportunities, and also, the highest returns? And maybe give us some compare and contrast in terms of what you're seeing in the acquisition market between today's acquisition cap rates, particularly at the high end business hotels and re-development within the portfolio?

I guess I will take the -- on the re-development side, the only re-development programs that we have going on involve the Carlson portfolio and the AmeriSuites portfolio which we've discussed. This is going to be about -- just over 30 million invested principally in the next six -- within the next six months on rebranding what were Prime Hotels into Radisson and Country Inns & Suites, and Park Plaza Hotels. We expect with those capital improvements that performance and rent coverage will improve dramatically going forward. The other portfolio is the 24 AmeriSuites that we own, and Hyatt has announced that they are going to change the brand name of AmeriSuites to Hyatt Place. They're going to be making some pretty significant changes to the way the rooms are designed, taking out some of the furniture, going with flat screen TVs, opening up the room, changing the furnishings and making it a little bit more stylish and hip. They are going to be changing the lobbies after they get the rooms done. Again, in an effort to make the lobby a place where guests, business travelers principally will feel comfortable sort of hanging out, sort of like maybe a Starbucks cafe, and that's going to be an expenditure in the 30 to $40 million range, it probably will take through the 2000 middle of 2007 before that is completed. Otherwise, there aren't any repositionings that are in our portfolio at this time.

In terms of the acquisition front, there is a -- it is a very significant amount of capital chasing transactions -- people are looking at different things when they're coming up with cap rates. Not all of these hotels were generating cash flow that the acquirers thought was the ongoing level of cash flow that could be expected. So saying what the cap rates are, it is, -- in the buyer's mind is a little bit hard to say, but we've seen cap rates that, based on our calculuses is in the 2 and 3% range. We've seen just a couple of days ago Deutsche Bank report that said that the strategic paid almost a million dollars a key for their investment in Hotel Del Coronado in San Diego. But, again, in that particular situation there are a lot of other opportunities in terms of adding spa and adding condo rooms and maybe time share and other things. But I think it is fair to say that cap rates on average seem to be more in the 6, 7, 8% range, lower than they have been over the past several years.

Okay. And then Adam, can you talk some about anymore specific plans you may have for your InterContinental Hotels, both from a branding and positioning standpoint, as well as future growth in that area?

Well, we got John Murray and Mark Kleifges here. Adam is not on the call. But we're not planning on changing the brands in our InterContinental portfolio. There is going to be $25 million spent, some of that has started to be spent, and there is another 15 to 20 million that is still in the pipeline for a number of different changes to those hotels. For instance, there is going to be a complete redo of the tower in Puerto Rico, some changes to the restaurants and public space and meeting space to the InterContinental in Puerto Rico. They're going to be upgrading the casino in Puerto Rico. In Toronto, they've been upgrading their meeting space. They're embarking on a rooms renovation, making the restaurant and lounge area a little bit more hip, where it was sort of a staid, conservative sort of pub experience previously. So those are indicative of the types of changes that we see. The hotels in InterContinental Hotels in Austin and Houston had been through some pretty significant upgrades prior to our acquisition, so I don't see major capital being spent there.

Good. Thank you.

[OPERATOR INSTRUCTIONS]. We will go next to William Truelove with UBS.

Hey, guys. About the investment at the AmeriSuites conversion to the Hyatt brand, the $30 million roughly -- are you still going to earn your 10% minimum return on that?

Yes. Well --.

I want to make sure because I knew you said your minimum return was going to increase, but I thought it was around 10%. I wanted to make sure that was right.

Yes, there is a small piece of carryover, capital commitment, I believe it was approximately $8 million, between 6 and $8 million that we had agreed with Prime that we would provide to those hotels without a return. But all the capital after that, which we expect will be in the $30 million range, 25 to $30 million will be with the 10% return, that's correct.

And my other question is, in the amount that you're exceeding your minimum returns on the various portfolios that you have, can you highlight at least two or three of those portfolios that are outperforming the minimum payments by a wide margin? And how much those were? To just help us modeling each one of these individual portfolios a little bit better.

Sure. We had about -- in deferred hotel operating income in the third quarter, we had about $4.9 million. The three largest components of that were the IHG Candlewood portfolio at about $2.5 million, the Marriott management agreement at about 1 million 450, and the InterContinental, 13, or InterContinental number three portfolio, the 2005 acquisition at about $760,000.

Right. And are there caps on those amounts? I believe one of those has a cap perhaps on an annual basis; is that correct?

Well, I think you're referring to Candlewood where we had the catch-up in the second quarter.

Oh, that's right. Yes.

And there it is -- there is various stages in that waterfall. One of the stages of the waterfall, which is where we are right now has a $10 million annual cap on it, so each quarter we can record -- we get up to $2.5 million of that.

Right, which is what you're recording here in the third. Okay. Thank you very much. That was very helpful.

Thanks.

[OPERATOR INSTRUCTIONS]. We will go next to Gustavo Sarago with FBR Financial Bank.

Hi, good afternoon. I was hoping you could maybe follow-up on Will's question regarding the AmeriSuite's conversion or maybe clarify. Is the 30 million above the 6 to 8 million carryover that you're talking about with regard to spending on the repositioning of those assets?

They're still working on the exact plans.

Okay. Because --.

The 30 million, there will be at least 30 million spent on the hotels and the 30 million includes the -- .

The 6 to 8 carryover?

Yes.

Our new money that -- as we often refer to it that will earn the 10% return will be in the range, depending on where the ultimate costs come out, between 17 and $22 million.

Okay. I'm just curious, because if I do the math right, you have about just under 3,000 rooms and it looks like it is around 10,000 a key, and I guess I've been hearing higher numbers on the conversion from Hyatt and several press releases.

Well, that's -- those numbers that we're just talking about, that is the Carlson portfolio.

Okay. So on the AmeriSuites, what do you think the conversion there is? Or you haven't really provided any guidance?

We haven't provided any guidance yet. We're still working through that budgeting process with Hyatt, and would be hopeful that we would have some guidance on where we see that cost being at the time of our fourth quarter call.

Okay. And --.

I think you're right though, that the numbers that have been --.

Floating around.

Floating around are higher than 10,000 a key.

Okay. When you look at the RevPAR performance out of the Hyatt or the AmeriSuites, I guess, the 9% for the quarter or 12% year-to-date, is that mostly driven by rate as you mentioned on your prepared remarks? Or is there an occupancy component and do you have a sense of how much is being contributed by each driver?

It is mostly driven by -- it is entirely this quarter driven by rate.

Rate this quarter. But on a year-to-date basis, does it --?

On a year-to-date basis, ADR for that portfolio is up 9.7%, and occupancy is up 1.3 points.

Okay. You could provide any color possibly on some of the expectations for the brand relative to say the Courtyard or SpringHill Suites product, like how much of a RevPAR gap Hyatt expects to close between the new Hyatt Place and say its peers?

Well, if you look for the quarter, Hyatt's RevPAR for these 24 hotels was around $50 and if you look at our portfolio of 53 Courtyards, the RevPAR for that portfolio is just over $75. If they could close that gap --.

Pretty meaningful.

HPT and Hyatt would both be very happy.

Okay, one last question. You mention in your supplement that your strategy is to acquire portfolios maybe because of the ability to stabilize cash flows. Do you find any of the Hyatt-owned assets which is approximately 60 in total or around that number to be attractive and a potential source for future growth in your portfolio?

We have a good relationship, we think, with Hyatt. We've talked to them about those assets. And we think that we would be a logical buyer should they decide to sell. I think at this point, they're still trying to get their arms around the repositioning and so we -- we're not --.

But you like the markets that those assets are in and they would fit well with your portfolio?

I think they would fit well with our portfolio. As we're portfolio investors, today, if I looked at those 60 hotels I'm virtually certain that there are some hotels out of those 60 that we wouldn't like the markets that they're in. But five years from now, some of those markets will have changed and some of the ones we like today will have changed. So that's sort of the beauty of doing portfolio investments.

Okay. Thank you very much.

And at this time, it appears we have no further questions. I would like to turn the call back over to Mr. Murray.

Okay. Thank you very much for joining us for today's third quarter conference call. We look forward to speaking with you on our fourth quarter conference call and year-end conference call. Thank you very much.

Thank you. That does conclude today's call. You may disconnect at this time.