Service Properties Trust (SVC) 2006 Q2 法說會逐字稿

Welcome to today's Hospitality Properties Trust second quarter 2006 earnings results conference call. [OPERATOR INSTRUCTIONS] Now at this time, I would like the turn the conference over to Tim Bonang, Manager of Investor Relations. Mr. Bonang, please go ahead.

Thank you, and good afternoon, everyone. Joining me on today's call are John Murray, President; 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 Securities Litigation Reform Act of 1995and federal securities laws. These forward-looking statements are based on HPT's present beliefs and expectations as of today, August 2, 2006. The Company undertakes no obligation to revise or publicly release the results of revisions to forward-looking statements made in today's conference call other than through filings with the Securities & 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 Form 10-K filed with the Securities & Exchange Commission and in our Q2 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 second quarter 2006 investor conference call. This quarter's earnings announcement was very positive. HPT reported FFO per share for the quarter at $1.14. This represents quarter-over-quarter FFO per share growth of 16.3%. Second quarter performance was driven by RevPAR increases, which averaged 11% across all 308 hotels that were open both periods.

This quarter's RevPAR growth at HPT's hotels exceeded industry average growth by 270 basis points and approximately 93% of HPT's RevPAR growth was driven by rate increases. The strong revenue growth, coupled with healthy flow-through, resulted in a 13% increase in cash available to pay HPT's returns and rents, compared with the second quarter of 2005. RevPAR increased in all regions again this quarter and across all of our portfolios and across all of our brands, except our full-service Marriott hotels where weakness in St. Louis and the clean-up process following first quarter flooding in Kuaui hampered results.

Our RevPAR performance this quarter was led again by Canada and the west South Central region. But as in previous quarters, the growth was broad based. Every region was up at least 6% and in five of the nine Smith Travel regions and in Canada, our hotels turned in double digit RevPAR growth. As our RevPAR has continued to grow, our managers have done an effective job managing profit margins, which were up 200 basis points this quarter. As a result of this revenue and margin performance, HPT's minimum return and rent coverage ratios have continued to improve.

In terms of portfolio updates, the Carlson portfolio continues its steady improvement following the rebranding of the Prime Hotels to the Carlson family of brands. During the second quarter,k we substantially completed the renovation and rebranding process. This $35 million project was completed generally in line with its original budget and time line. This quarter, RevPAR at our Carlson branded hotels was up over 35% and cash available to pay HPT's priority return increased 26.5% over the 2005 quarter.

With respect to the Hyatt conversion of AmeriSuites to Hyatt Place, the first conversions began in May. We expect one of our hotels to be completed during the third quarter, 11 during the fourth quarter, and the balance during the first two quarters of 2007. The total cost of this conversion is currently expected to be approximately $65 million.

As HPT provides funding for this rebranding, our minimum return will increase. If Hyatt Place successfully makes up the RevPAR gap that currently exists between it and the Courtyard and Hilton Garden brands, this will be a significant financial success. That said, with the Hyatt Place conversions now in full swing, we anticipate that at any given time over the next four quarters as many as 25% of our AmeriSuites rooms may be offline. As a result; occupancy levels, revenue performance and coverage of HPT's returns for this portfolio are expected to be reduced during that time.

HPT's asset managers have been and will continue to be very busy. We regularly challenge our operator to say find opportunities to increase revenues, identify cost savings, establish best practices identified at other hotels and seek new business opportunities. For example, we've had discussions with IHG about rebranding the recently acquired Holiday Inn Select in Houston as a Crowne Plaza and this will likely occur during the first quarter of 2007.

Similarly, we've had very preliminary discussions with Marriott about the possibility of developing a destination spa at our Kauai Marriott and upbranding that hotel to the J.W. Marriott brand. At the same time, HPT's asset managers are monitoring the scope, timing and costs associated with a variety of ongoing capital projects. Including the Hyatt place rebranding renovations, mentioned previously, and numerous projects at the Crowne Plaza and InterContinental hotels we acquired in 2005 and earlier this year. We believe these various efforts continue to add value to HPT's 310 hotels.

To date in 2006, we have acquired 12 hotels with 3,282 rooms for approximately $328 million. 10 of these hotels in are now part of a single portfolio. And two were single asset purchases added to existing contracts with IHG. Three of these hotels with about 900 rooms and over 23,000 square feet of meeting space were acquired during the second quarter for $84 million. We're especially pleased with the portfolio we acquired from IHG and FelCor core earlier this year, which had RevPAR growth of 16.4% this quarter and margin growth of 340 basis points versus last year.

As we complete certain renovations, we expect to see continued improvement in performance. Unfortunately, because we have not been able to obtain the necessary regulatory approvals in Jamaica, HPT and IHG have agreed to discontinue efforts to complete the previously announced $30 million purchase leaseback transaction for the Montego Bay Holiday Inn SunSpree Resort.

Although we continue to confront the highly competitive acquisition environment, we remain committed to our investment strategy of acquiring hotel portfolios and single assets when we can add them to existing portfolios. We are encouraged that there remains a high volume of activity and we are actively evaluating a number of portfolio opportunities and single hotel acquisitions. Given the competitive environment, it is not possible to predict if we will be the successful bidder in any of these situations.

RevPAR growth appears to be continuing and lodging industry experts are forecasting that industry fundamentals are likely strong through 2008. Over the past six to twelve months we have seen signs of wage pressure, as well as significant increases in energy and insurance costs. Thus far in 2006, due to an expanding economy and only modest new hotel supply growth, our hotels have been able to increase revenues well in excess of the cost increases.

Given HPT's positive results for the second quarter, we are optimistic about continued strong performance. I will now turn the presentation over to Mark Kleifges, our CFO.

Thanks, John. During the second quarter, RevPAR of 109 leased hotels increased 10% in profit margins increased 160 basis points. Cash flow available to pay rent at our leased hotels increased 16% from the comparable 2005 quarter, resulting in improved rent coverage for each of our four leased hotel portfolios.

Because of seasonality, we believe the best way to evaluate coverage is on an annual or rolling 12 month basis. For the twelve months ended June 30, 2006, rent coverage ratios for our leased hotel portfolios ranged from 1.17 times to 1.53 times. During the second quarter, RevPAR, at our 199 managed hotels that were open for both periods, increased 11.4% and profit margins increased 220 basis points. Cash flow available to pay HPT's minimum returns increased 11% from the comparable 2005 quarter, resulting in improved return coverage ratios at six of our seven managed hotel portfolios.

During the second quarter, returned coverage ratios were greater than 1 times for all seven our our managed hotel portfolios. And for the 12 months ended June 30, 2006, return coverage ratios for these portfolios range from 0.98 times to 1.46 times. For the 12 months ended June 30, 2006, only our Staybridge portfolio at 0.99 times and our Carlson portfolio at 0.98 times had return coverage below 1 times. Our current expectation is for both of these portfolios to be at greater than 1 times coverage for the 2006 year.

Our Hyatt portfolio did experience a slight decline in rolling 12 months coverage, as a result of approximately 9% of the portfolio's rooms being out of service for renovations in connection with the conversion to the Hyatt Place brand. As John mentioned, we expect this trend to continue for the remainder of the year as the pace of renovations increases. Should coverage for this portfolio fall below 1 times, we will continue to be paid our minimum return by Hyatt under the terms of our management agreement.

Net income available for common shareholders was $33.5 million or $0.47 per share for the second quarter, compared to $20.5 million or $0.30 per share for the same quarter last year. Last year's quarter included a $7.3 million or $0.11 per share loss on impairment. The weighted average of common shares outstanding totaled 72 million in the 2006 second quarter, compared with 68.4 million for the second quarter of 2005, a 5.3% increase.

EBITDA in the second quarter of 2006 was $104.9 million, which is a 21.7% increase over 2005 second quarter EBITDA of $86.2 million. Funds from operations for the second quarter were $82.4 million, compared to $67.2 million for the second quarter of 2005. On a per share basis, FFO increased 16.3% from $0.98 per share to $1.14 per share in the 2006 second quarter. The increase in 2006 second quarter FFO was primarily the result of increased minimum returns and rents under our 11 operating agreements and the increase in our share of operating profits in excess of the minimum returns at our managed hotels.

Minimum returns and rents were $86.8 million in the 2006 second quarter, a 12% increase over the 2005 second quarter. This increase resulted primarily from our 2005 and 2006 acquisition activity and increased annual minimum returns and rents due to our funding of capital improvements at certain of our hotels. FFO for the second quarter includes approximately $11 million or $0.15 per share of hotel operating income above the minimum returns at our managed hotels. This compares to $6.3 million or $0.09 per share in the 2005 second quarter.

Our Candlewood portfolio and 14 hotel InterContinental portfolio were the greatest contributors with $4.1 million and $3.3 million of additional returns, respectively, in the 2006 second quarter. As a reminder, our share of operating profits is typically highest in the second quarter. Looking to the third quarter, we expect significantly lower year-over-year growth in our share of hotel operating profits at our managed hotels primarily because of greater portion of the excess cash flow will be retained by our hotel managers as base and incentive fees. In early July, we raised our quarterly common dividend to $0.74 per share or $2.96 a share per year. Our FFO payout ratio was 68% for the six months ended June 30, 2006.

Turning to our balance sheet and liquidity. Sash and cash equivalents totaled $47.1 million at June 30, 2006, which includes $30.2 million of cash escrowed for future improvements to our hotels. During the quarter, we acquired three hotels for $84 million and made $26.6 million of capital improvements to our hotels. Through the 2006 second quarter, hotel improvements totaled $56.5 million. And we expect to make additional improvements of between $65 million to $85 million during the remainder of 2006.

On the liability side of the balance sheet, HPT has $1.2 billion of unsecured senior notes, which includes the 275 million of 10 year 6.3% senior unsecured notes we issued during the second quarter. On a book basis, debt to total capital was approximately 41%. And on a market basis, debt to total capital was approximately 29% at June 30, 2006. Our EBITDA to total fixed charges coverage ratio was 4.5 times. And we're currently comfortably within the requirements of our public debt and revolver covenants.

As of June 30, 2006, we had $85 million outstanding on our revolving credit facility. Subsequent to the end of the quarter, on July 21, we sold 2 million common shares raising net proceeds of $83 million, which we used to repay all amounts outstanding on our $750 million revolver. On July 28, the underwriters exercised their 300,000 share over allotment option, resulting in additional net proceeds of $12.5 million.

In summary, the second quarter of 2006 was highlighted by continued above-industry average RevPAR increases, improving profit margin and coverage ratio trends in our portfolio and solid FFO per share growth. Looking to the remainder of 2006, we are optimistic about the outlook for the lodging industry and HPT. That concludes our prepared remarks. Operator, we're ready to take questions.

[OPERATOR INSTRUCTIONS] Our first question will come from Will Truelove with UBS.

Hi guys, and very good quarter. My question is about the additional returns above the minimum. I know you highlighted two of the amounts, 4.1 million for Candlewood and 3.3 million for the 14 others. Are there any other -- can you just run us through the remaining portfolios and the additional amounts that were earned in the quarter?

Sure. The Marriott portfolio was about 1.6 million. The Staybridge portfolio, $575,000. The InterContinental number four, our newest portfolio about $1.2 million. And the AmeriSuites portfolio about 150,000.

Thanks so much. Appreciate it.

[OPERATOR INSTRUCTIONS] We'll next go to Michael Salinsky with RBC Capital Markets.

Good afternoon, guys. Congratulations on a good quarter by the way. Quick question. Do you guys -- could you just talk a little in general what you're seeing in the acquisition markets right now? I know you guys had a very nice growth pace in the first half of the year. As you look ahead to the second half of the year, what you're seeing right now?

Sure. We see a number of current hotel owners, whether they're pension plans, individual loaners, opportunity funds that are reaching the end of their hold periods or just an opportunity to make a quick flip based on what they perceive as a seller's market; so we're seeing a pretty strong level of opportunities out there. And we're seeing it on both a portfolio and an individual hotel basis. The biggest obstacle we face is that in most cases everybody else is seeing the same transactions and there is a significant amount of capital chasing those transactions. And we have a pretty set strategy and we're not willing to make investments that we're not going to cover our capital costs.

So I think we're probably a little more conservative than some of the other investors that are out there today. And we don't see ourselves buying at 5 caps. So, it is difficult to predict the level of acquisitions for the balance of the year. We do have very good relationships with some significant management companies including Carlson, Hyatt, IHG and Marriott. And we're hopeful that we'll do more but we're not giving any guidance of additional acquisitions.

Okay. Fair enough. The second question, then, there has been some talk of slowing in the leisure demand sector by a couple of your peers. Have you seen any of this in your portfolio thus far in the quarter?

The quick answer would be that we haven't really seen slowing in our leisure. But I would really caveat that in a big way by saying that the vast majority of HPT's hotels are -- cater to the business traveller. We have a big swath of our portfolio is extended stay hotels located near corporate business parks, our Courtyards or hotels designed for the business traveller. We really don't get a great deal of our demand from leisure guests. So, we're probably not the best barometer to gauge how to gauge us against the others in terms of leisure demand. We did see early in July, a little bit -- the first week of July in particular because the 4th fell on a Tuesday which is typically one of the best business transient guest nights, we did see a slight fall-off in that first week of July. But otherwise, we're pretty happy with the performance we're seeing at our hotels.

Great. Thank you, guys.

Our next question comes from Smedes Rose with Calyon Securities.

Hi. It is Smedes. My question is just a little bit more on the acquisition front. Are you guys seeing -- are prices stabilizing at all? You said you're not going to buy at 5 cap rates. So is that -- do you feel like that's kind of as low as we can get here or however you look at your typical -- when you're looking at acquisition opportunities or what sort of is the pricing like relative to where it was maybe a year ago or three months ago?

I don't see it getting -- I don't see prices -- I think there has been some stabilization. I don't see cap rates continuing to fall from where they were last quarter or the quarter before. But it is difficult to tell exactly where people's cap rates are. We've been seeing them, depending on the asset quality and what encumbrances might be on the properties, we've seen cap rates that appear to us to range between 5% and 9%. So, it is a pretty wide margin there.

I am sorry. Go ahead.

But it is always difficult to tell exactly what the benchmark is. If you're not looking at trailing numbers, then you're looking at numbers you made up. And so you don't know -- projected 2006, projected 2007, projected 2008. It is sort of meaningless, in my view, to sort of quote what the cap rate was on that because there is a lot of assumptions built into those sort of calculations.

Is the volume of hotels that you're seeing pretty stable in terms of the amount of deals that are coming across your desk or do you feel like there is -- what I am wondering, if the prices are stabilizing and if volume were going up, that would imply maybe prices start to fall but do you just feel like it is sort of a similar flow of activity out there?

It is a similar flow.

Yes.

We haven't seen any drop off. It is not always a constant flow. But it is -- I would say we've looked probably at just as many deals this the second quarter as we did in the first or the fourth quarters.

Okay. Thank you.

Our next question comes from Jeff Donnelly with Wachovia Securities.

Good afternoon, guys. John, actually your comment on converting the Kauai Marriott to J.W. just leads me to wonder; if HPT has other opportunities within its portfolio, I will call either value-added asset management opportunities or whether it's redevelopment or repositioning or even opportunities to sell attractive assets individually; is that something that you guys monitor? And what flexibility do you have to swap assets in and out of those portfolios to the extent those opportunities exist?

Well, there is a few questions embedded.

Sorry.

I will start with the first big one, which is; are there other opportunities? And again we've only had preliminary discussions with Marriott about Kauai Marriott, so don't go modeling a rebranding on that hotel. A big component of our portfolio lies in Courtyards, Residence Inns, Staybridge Suites, Hyatt Places that really don't lend themselves to easily to conversions to other brands. In fact, going from an AmeriSuites to a Hyatt Place for 24 hotels is going to cost $65 million.

We do have a number of InterContinental and Crowne Plaza Hotels that we purchased this year. We have a couple of other Marriott hotels. I don't think the Marriott that we own in St. Louis or in Nashville can really benefit from a rebranding up. I think the InterContinentals that we own are at the top of the scale already.

We do look at some of the Crowne Plazas and there is another Holiday Inn Select or two we may be over time could make into Crowne Plazas. I think the long and short of it is in the scheme of the 310 hotels we own, it is probably less than 10% that could be -- where that's an opportunity.

What about on the asset sales side? I recognize you have a lot of limited service oriented hotels. The redevelopment might not always be the play but given where the capital markets are or property markets are for hotels, I wonder if there are other select circumstances out there where effectively you're better off selling an asset than holding it? And I recognize your strategy has always been to go for a portfolio leased approach, but --?

Well, you set many up for that answer, then. It is complicated because of our portfolio structure to pull individual hotels out of transactions. And if and when we were to do that, we would be, in most cases, we would have to sell them encumbered by the brand and management agreement terms. So that, in some respects, might put a hat on the number of interested parties bidding for them.

So, the other thing that I would point out is, one of the reasons that we do portfolio transactions is because we have longer than a three or five year hold period. We sign longer-term agreements. And having been in business now for a little over 10 years, I can point to a number of hotels that at different points in the cycle over the past few years, you would have said we should sell this hotel. And we look at them today and they're producing tremendous cash flow and we're glad we didn't.

So, the long and the short of it is that, from time to time, there may be hotels that we dispose of because the markets moved away from them and there may may be hotels that we swap out of for different hotels of the same brand with our operators; but I don't see us as an active seller.

Okay. Just one question is, Mark, I recognize trailing to coverage levels are really best to look at. But I do have a question concerning the quarterly coverage for the Carlson and Hyatt portfolios and I know there is some noise there. But is there something behind the, I will call it, year-over-year dip in coverage in those portfolios and Q2 '06 versus qiew05?

You're talking about Carlson and Hyatt? Hyatt is the easy one. We had about -- because we started the conversion process this quarter, we had about 9% of the rooms were out of service during the quarter.

Okay.

So, that's the reason there. Carlson is we're really just coming out of a period where there was significant number of rooms out of service. And I think you'll only see that coverage ratio one-way going forward and that's up on a quarter over quarter basis.

Okay. Great. Thank you.

And with that, there are no further questions. I would like the turn the conference back to John Murray for a closing remark.

Thank you very much. I appreciate you all joining us for our call today. And we'll see you next quarter.

Thank you. This does conclude today's conference call. We'd like to wish everyone a good day.