Service Properties Trust (SVC) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the Hospitality Properties Trust fourth quarter 2005 earnings results conference call. Today's 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, Jessica. And good afternoon, everyone. Joining me on today's 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 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 Federal Securities laws. These forward-looking statements are based on HPT's present beliefs and expectations as of today, February 9, 2006. 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 and10-Q filed with the Securities and Exchange Commission and in our Q4 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 fourth quarter 2005 investor conference call. This morning's earnings announcement was a positive one as HPT reported FFO per share for the quarter of $0.91. This represents quarter-over-quarter FFO per share growth of 7.1% versus last year. This increase comes despite a 7% increase in shares outstanding as a result of our 4.7 million share offering in June of 2005. This performance was driven by RevPAR increases in the fourth quarter, which averaged 11.6% across the portfolio. This quarter's RevPAR growth at HPT's hotels exceeded industry average growth by 170 basis points and our full year 2005 RevPAR growth of 9.2% exceeded industry average by 80 basis points. Importantly, approximately 80% of HPT's RevPAR growth this quarter was driven by rate increases. The strong topline growth coupled with healthy flowthrough resulted in an increase in cash available to pay HPT's returns and rents of over 24%, compared with the fourth quarter 2004. RevPAR increased in all regions this quarter and across all of our portfolios, and across all of our brands except Country Inn & Suites and Park Plaza.

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. We expect these renovations to be completed during the second quarter of 2006 and for operating performance to improve thereafter. Our RevPAR performance this quarter was led by the West, South Central and East, South Central regions reflecting, in part, the continuing after affects of hurricane Katrina. As with last quarter, we have not specifically quantified the effect that the Katrina disasters had on this quarter's results, but we don't think it's material. The fact is, that in recent years FEMA and insurance industry-related room nights have been significant demand generators for HPT's hotels. This year, the benefit in hotels were in the West, South Central and East, South Central Smith Travel regions. In the prior year we saw a substantial benefit in the South Atlantic states, particularly after four hurricanes crossed Florida within a one-month period in 2004.

As our RevPAR has continued to grow our managers have done an effective job managing profit margins, which are up two percentage points this quarter to 42.5% versus 40.5% last year. As a result of this improving performance, HPT's minimum return and rent coverage 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 for all but one of our 10 portfolios, the coverage has shown a steady improving trend each quarter since the fourth 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 followed by the affect of the current repositioning of those hotels to the Carlson Family brands.

We discussed the Hyatt acquisition of the AmeriSuites brand on our last call and Hyatt has continued to fine-tune their plans for converting our AmeriSuites to the Hyatt Place brand. The conversion of HPT's AmeriSuites guest rooms to Hyatt Place guest rooms will begin in April. We expect five of our hotels to be completed during the second quarter, six during the third quarter, eight during the fourth quarter of 2006, and the balance during the first quarter of 2007. The lobby renovations will track a quarter behind the room renovations. The total cost of this conversion is currently expected to be $60 million. Keep in mind that to the extent HPT provides funding for this rebranding, our owners priority return will increase. As we've stated previously, if Hyatt can position these hotels to compete head-on with Courtyard and Hilton Gardens and make up the roughly $30 RevPAR gap that currently exists, this will be a significant financial success for Hyatt and HPT.

In the past two quarterly calls we have discussed the highly competitive acquisition environment and told you that while we continue to adhere to our investment strategy of acquiring hotel portfolios, we would also acquire single assets when we could add them to existing portfolios. During January we announced two transactions. On January 6th in a single asset transaction, we acquired the Harbor Court Complex in Baltimore's Inner Harbor for $78 million. The primary component of this complex is the 195-room Harbor Court Hotel, which is the only five-star hotel in Baltimore and [Best] of Hampton's, the only five-star restaurant in Baltimore. This is the hotel of choice in Baltimore for discerning guests from corporate executives to celebrities and foreign dignitaries. We will rebrand the Harbor Court Hotel as the InterContinental Harbor Court Baltimore during the first quarter of 2006. This rebranding is expected to benefit the hotel through increased marketing, the benefits of InterContinental's Priority Club Guest Affinity Program, improved rate -- room rate management and more efficient operations without sacrificing service. This hotel was added to our portfolio management contract with IHG that includes four other InterContinental Hotels, and our initial guaranteed owners priority yield will be 8% in 2006 and 8.5% thereafter. In addition, we may receive an additional second priority return -- percentage priority return and net cash flow after IHG's management fees are paid.

On January 25th, in a more traditional portfolio transaction, we announced that we agreed to acquire nine hotels with 2,712 rooms for $196.2 million. With the closings for eight of the nine effective on January 20th, and one hotel resort -- one resort hotel in Jamaica delayed pending certain tax and regulatory approvals. Two of these hotels were acquired from IHG and seven from one of IHG's franchisees. All nine hotels will be managed by IHG going forward with eight of the nine included on the single guaranteed management contract and the resort in Jamaica on a guaranteed lease. The hotels include five Crowne Plaza Hotels; a Holiday Inn Select Hotel, which we expect to rebrand as a Crowne Plaza; two Staybridge Suites Extended Stay Hotels; and a SunSpree Resort in Montego Bay, Jamaica. During the next few years, HPT will invest an additional $20 million in these hotels to fund capital improvements, as well as $4.8 million in credits for capital projects received from the seller. These are well-located, well-branded hotels, seven of which have not had sufficient capital investment and maintenance. Our acquisition cost of $72,000 per key, is well below replacement costs. And our initial coverage of guaranteed returns and rents on this transaction based on 2005 actual performance is approximately 1.15 times. Once HPT and IHG invest the necessary capital in these hotels, we expect to see significant improvement in the performance of these assets.

Early indications of our RevPAR growth has continued at a healthy pace in January and lodging industry analysts, such as, PwC and Smith Travel, are forecasting that these trends will continue through 2006, perhaps even through 2008. As we discussed in our last call it's important to recognize that HPT's portfolio of hotels caters to business travel, which is generally reduced during the first and fourth quarters. As a result, HPT's second and third quarters are its strongest because its hotels are busiest from March through October with relative weakness around the year-end holidays and cold winter months. Given our strong 2005 performance, HPT is optimistic about a lasting recovery, especially since new supply growth remains muted. I'll now turn the presentation over to Mark Kleifges, our CFO.

Thanks, John. Revenues at our 109 leased hotels were up 10% during the fourth quarter and cash flow available to pay rent increased 19.3% from the comparable 2004 period. Rent coverage at our four leased hotel portfolios range from 0.99 times to 1.46 times for the year ended December 31, 2005. Revenues at our 189 managed hotels increased 11.7% during the fourth quarter and cash flow available to pay HPT's minimum returns increased 28.2%. Returned coverage at our six managed hotel portfolios ranged from 0.9 times to 1.25 times for the year ended December 31, 2005. Net income available for common shareholders was $46.3 million or $0.64 per share for the fourth quarter, compared to $33.9 million or $0.51 per share for the same quarter last year. The weighted average number of common shares outstanding totalled 71.9 million in the 2005 fourth quarter, compared with 67.2 million for the fourth quarter of 2004; a 7% increase.

Funds from operations for the fourth quarter were $65.5 million, compared to $57.4 million for the fourth quarter in 2004. On a per share basis, FFO increased 7.1% from $0.85 per share to $0.91 per share in the 2005 fourth quarter. FFO for the full year was $263.2 million, compared to $233.9 million in 2004. On a per share basis, FFO for the full year also increased 7.1% from $3.52 per share to $3.77 per share. The increase in FFO was driven by our 2005 acquisition activity and the improved operating performance of our hotel portfolio. FFO for the 2005 fourth quarter included $1.4 million or $0.02 per share of percentage rent and hotel operating income above our guaranteed minimum returns. This represents a $2.9 million increase over the 2004 fourth quarter when our share of hotel operating profits and percentage rent actually declined by $1.5 million. For the 2005 year, percentage rent and our share of operating profits in excess of our guaranteed minimum returns totalled $17.5 million or $0.25 per share, compared to $4.2 million in 2004. The greatest contributor to this significant growth was our Candlewood Suites portfolio, which performed at a high level throughout 2005 with a 14.9% RevPAR increase and a 20% increase in cash flow available for the payment of HPT's minimum return. In early January we declared a common dividend of $0.73 per share, which represents 80% of our FFO for the quarter. This compares favorably to an FFO payment ratio of 85% in the 2004 fourth quarter. For the 2005 year our FFO payment ratio was 77%.

Turning to the asset side of the balance sheet, cash and cash equivalents totalled $47.6 million at December 31, 2005, which includes $29.1 million of cash escrowed for future improvements to our hotels. During the quarter we acquired the Country Inn & Suites Hotel in suburban Minneapolis for $4.1 million and made $36 million of capital improvements to our hotels. For the 2005 year we made $89 million of capital improvements and believe HPT owns one of the best maintained hotel portfolios in the country. On the liability side, HPT has $925 million of unsecured Senior Notes and only one $3.8 million mortgage and our first term debt maturity is in 2008. As we discussed on last quarter's call, in October our Senior Unsecured Notes were upgraded by Moody's to Baa2 and by Standard & Poor's to BBB flat. We've been investment-grade rated since 1998 and we continue to be the only investment-grade rated hotel REIT.

As of December 31, 2005 we had $35 million outstanding on our credit facility. As John mentioned, subsequent to year end we announced transactions to acquire a total of 10 hotels for a combined purchase price of $274.2 million. To date, we have closed on $244.2 million and we funded these acquisitions with borrowings under our revolving credit facility. We have one hotel for $30 million, which we expect to close on later this year. On a book basis, debt-to-total capital was approximately 34% and on a market basis debt-to-total capital was approximately 24% at December 31, 2005. EBITDA in the fourth quarter of 2005 was $83.2 million, which is a 16.4% increase over 2004. Our EBITDA to total fixed charges coverage ratio was 4.6 times and we are currently comfortably within the requirements of our public debt and revolver covenants. We expect to use cash balances, borrowings under our revolving bank credit facility, and net proceeds from offerings of equity or debt securities to fund future property acquisitions. In summary, the fourth quarter and the 2005 year were highlighted by continuing positive RevPAR increases, improving coverage ratio trends in our portfolio, and solid FFO per share growth. Looking to 2006, we're off to an active start with over $270 million of announced acquisitions and are optimistic about the outlook for the lodging industry and HPT. That concludes our prepared remarks, Operator, we're now ready for questions.

Thank you, Mr. Kleifges. [OPERATOR INSTRUCTIONS]. And we'll take our first question from Will Truelove with UBS. Go ahead, please.

Hi, this is Michelle Ko for Will Truelove. Good quarter, guys.

Thank you.

I was just wondering if you could provide us some details on your recent acquisition of the nine hotels in terms of margins overall, RevPAR, and coverage ratios?

Well, we don't disclose a lot of that information by hotel, but I can give you some information. I think we disclosed in the prepared remarks for that coverage was 1.15 times based on the actual 2005 performance. And the RevPAR for those hotels is about $68, the rate is about in the 110 -- 105 to 110 range on average across the hotels and the occupancies, in the 55 to 60% range.

Okay, great. Thanks very much.

[OPERATOR INSTRUCTIONS]. And we'll now go to Jeff Donnelly with Wachovia Securities. Go ahead, please.

Hey, guys. Actually just a follow-up to that one, I was curious for those assets, the seven that you acquired from FelCor and the two from IHG, are those going to be put into I'll call it "IHG Lease No. 3" or are they going to be dropped down on an existing IHG?

No, that's a -- that will be a separate portfolio with IHG. It's actually IHG No. 4.

Oh, okay. I guessed wrong off the cuff. I guess, any other aspects then maybe of that lease structure that you can share with us that are pertinent to the modeling side?

I guess it's -- the structure is very similar to the structures we've done in our other deals with InterContinental, and operating expenses get paid first in the waterfall, then CapEx reserve, then a return -- base priority return to HPT that's in the first year about 8% of our investment amount and 8.5% after that. And then there's a 3% management fee that's paid to InterContinental, and then there's -- if you get beyond that in the waterfall, there's a second priority that gets paid to HPT, I believe $750,000, then there's an opportunity for IHG to earn additional 2% management fee, then there's a third priority to HPT, and then it goes on like that.

Okay. And then just setting aside Carlson for a moment, that lease, what's your expectation when you look at the trailing 12-month lease coverage ratios, as we kind of roll through '06, is it possible that all the leases, except for Carlson could be in the black as soon as the end of Q1 '06, or do you think it might take a little longer? For that to happen.

We did -- we do point out that it tends for us to have the first and fourth quarters are the two weakest. Usually the fourth quarter is the weakest of the four. We're expecting to see continued improvement across our portfolio and January has been off to a very strong start from a RevPAR perspective. So we're optimistic as I think you can see in our Supplemental Report and as I think you may even have noted in your report this morning that we're not that far off in those portfolios from one-time's coverage. So it's possible.

And you think in the Carlson's lease it's going to take some time after those renovations are completed in the second quarter to see a turn, if you will, in that lease?

Well, if you look at the RevPAR for the whole portfolio, I think this is the first quarter where RevPAR for the Carlson portfolio was up, and that reflects the fact that most of the Radisson's are now done, but the Country Inn & Suite and Park Plaza repositionings are still in the thick of it, in terms of the repositioning. And so as they get closer and closer to being completed and the hotels seem less and less like construction zones, they'll be more attractive to guests. And so I think we'll start seeing some improvement during the second quarter, but the full -- all the pistons won't be firing until probably the third quarter.

Okay, and just one last question, actually Mark you went through this, but you seem to have certainly some capacity on your balance sheet under your covenants, some dry powder for acquisitions. Could you talk about just the volume of transaction opportunities, maybe you're looking at and give some color on just deals in the marketplace, any kind of themes you see out there?

It's -- there [are] still a lot of transactions out there, Jeff. They range, we've got several portfolio transactions that were evaluating, they range from 100 million transaction for a small group of hotels to totals of north of $1 billion. We're not -- we don't think we're the only ones looking at these portfolios. And if you look at our growth over the years, we've -- I think almost every year, if not every year -- we've made at least one significant portfolio acquisition. This year we've already made a single asset transaction, as well as a portfolio transaction. It's early in the year, so we're optimistic there'll be more this year. But if you look back at last year we did a $425 million transaction in February, and then we didn't complete another acquisition for the remainder of the year. So our timing has always been lumpy and it's difficult to predict exactly. Because even once you get a letter of intent, you never know what's going to happen in diligence and so we're not at that stage in any of the things we're looking at right now. But we are actively looking at a number of of portfolios, as well as individual hotel acquisitions that might be added to existing portfolios. But again, we're one of many bidders in the marketplace today and we do have a more conservative structure than -- and a more conservative approach to the business than some of our competitors, so it's difficult to predict.

Most of our -- when we win it isn't always because we're the highest price. It's -- a lot of times it's because of the relationship or because of our ability to structure a deal that might have been a little bit more complicated for somebody else. Like the Harbor Court transaction there were more components to the building than just the hotel. In the deal that we did with -- these last two deals that we've done with IHG, those hotels were outside of the United States. So I think relationships and the ability to structure complex transactions is what's going to help us set ourselves apart from the competition. Plus our -- as you mentioned, our great access to capital, so we can do larger transactions. People never question whether HPT will have a financing contingency.

Actually, you touched on something that I was curious about. Do you think with private capital whether it's Blackstone or Colony and others out there, just seem to be so rich with cash. I mean do you think HPT can be competitive maybe on some of those larger deals or when it comes down to -- I guess all the cost of your funds versus theirs?

Yes, I mean it really comes down to what the seller is trying to achieve. I mean a seller who is going to sell out to Blackstone or Colony Capital is really looking for an exit. And a seller who sells to HPT is showing long-term commitment to their brand and their group of hotels. So it's really a different sort of -- for different sellers at different times each one is the right way to go. But we rarely walk away from a deal after having been neck and neck with an opportunity fund for a transaction.

Well, -- and actually, just one last question then is whether or not HPT is involved or not, I'm just curious in your own personal opinion. Is do you think by the end of 2006 we'll have fewer hotel REITs out there than we have -- than we started the year with? Do you think some will go away one way or another?

Yes, I believe that's correct. I mean it's been no secret that a number of them have explored business combinations in the past, and some of those haven't been done because of leverage issues, some of them haven't been done because of performance issues. But you know that the tide is rising, there's been a significant amount of sales by some of those REITs that have enabled them to pay down debt. So I think there are maybe more attractive targets out there now than there were a year ago.

Okay. Thanks, guys.

[OPERATOR INSTRUCTIONS]. We'll take our next question from Smedes Rose with Calyon Securities. Go ahead, please.

Hi, could you just repeat the schedule for converting the AmeriSuites product?

Yes, they're going to -- let me make sure I get this right. There's going to be five that we expect to complete the room reduce in the second quarter, six will be completed during the third quarter, eight we expect during the fourth quarter of 2006, and the balance will be done during the first quarter of 2007. And then once -- the focus will be to do the rooms' renovation first, and then begin at the lobby and public space renovations right after that. And so that will sort of track the following quarter.

Okay. Thank you.

And at this time, Mr. Murray, I'll turn the call back over to you for any additional or closing remarks.

Okay. Thanks for joining us on the fourth quarter conference call. We'll be presenting it at CSFB Debt Conference in April and hope to see you all there. Thank you very much.

Thank you. Again, that does conclude today's conference call. We appreciate your participation and you may now disconnect.