Service Properties Trust (SVC) 2006 Q3 法說會逐字稿

Good day and welcome to the Hospitality Properties Trust Third Quarter 2006 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, Tom, 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 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 1, 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 Form 10-K filed with the Securities and Exchange Commission and in our Q3 supplemental operating and financial data found on our Web site at www.hptreit.com. Investors are cautioned not to place undue reliance on any forward-looking statements.

And now I would like to turn the call over to John Murray.

Thank you, Tim. Good afternoon and welcome to our third quarter 2006 investor conference call.

Earlier today HPT reported FFO per share for the quarter of $1.05. This represents quarter over quarter FFO per share growth of over 8%. Third quarter performance was driven by RevPAR increases which averaged more than 7% across our 308 hotels that were open both periods. This quarter’s RevPAR growth at HPT's hotels exceeded industry average growth by 110 basis points. Consistent with the industry, our RevPAR growth rates have declined from the level of growth experienced over the past few quarters.

There were many factors contributing to this including the midweek timing of the July 4 holiday, record high gasoline prices coupled with renewed air travel restrictions during the summer demand months, the lack of crisis related room demand which was significant from Katrina and Rita in September of 2005, and a slowing level of economic growth in the U.S. generally.

Also HPT has continued its efforts to maintain its hotels to a high standard and accordingly our hotels were impacted by seven Courtyard reinventions, various capital projects at our Crown Plaza hotels and the Hyatt Place rebranding process. Nonetheless our growth exceeded industry averages and all of HPT’s RevPAR growth was driven by rate increases which rose 8.4% and offset a one percentage point drop in average occupancy. Despite this modest decline this quarter our occupancy level is at nearly 75%, or well above the industry average. We believe RevPAR gains for the balance of 2006 and 2007 will continue to be primarily driven by rate increases.

Revenue growth coupled with a healthy flow through resulted in a 7% increase in cash available to pay HPT’s returns and rents compared with the third quarter of 2005. RevPAR increased across all of our portfolios except Hyatt where the rebranding process to convert AmeriSuites to Hyatt Place began on 12 hotels and Homestead due largely to soft demand in the South Atlantic region. RevPAR was up for all of our brands except Hyatt and Homestead as noted and our Holiday Inns where occupancy dropped in our Houston and suburban Atlanta hotels representing a reduction in Katrina related business.

RevPAR performance this quarter improved in all regions except Canada and was led by the Pacific region. As in previous quarters, the growth was broad based with four of the nine Smith Travel regions generating double-digit RevPAR growth. As our RevPAR has continued to grow our managers have done an effective job managing profit margins which were up 120 basis points this quarter. As a result of this revenue and margin performance HPT’s minimum return and rent coverage ratios have generally continued to improve.

Our first Hyatt Place completed its conversion from an AmeriSuites in September and 11 other hotels are currently in the renovation process this quarter. The balance are expected to be completed during the first half of 2007. 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. Hyatt Place successfully makes up the RevPAR gap that currently exists between it and the Courtyard by Marriott brand; this will be a significant financial success.

Most specifically, YTD RevPAR for our 71 Courtyard by Marriott hotels is about $83, while YTD RevPAR for the AmeriSuites is about 52. Hyatt can make up that $31 difference and assuming 50% flow through, annual cash flow would increase by approximately $16 million. In addition to the prior to return increases resulting from funding these renovations, HPT’s contract allows it to capture 50% of cash flow in excess of its priority return.

We are just now getting into the 2007 budget process for both capital spending and operations. Thus far we are pleased by early indications from our managers that above average RevPAR gains all rate driven are expected to continue into 2007. These gains are expected to be more moderate in 2007 than this year but still above historical averages. Preliminary estimates from our operators are in the 6 to 8% range. In addition, despite some pressure on costs, our managers are also expecting to continue to see margin expansion in 2007.

To date in 2006 we have acquired 12 hotels with 3,282 rooms for approximately $328 million. Ten of these hotels are now part of a single portfolio and two are single asset purchases added to existing contracts with IHG. The portfolio we acquired from IHG and FelCor earlier this year had RevPAR growth of 11.2% this quarter and margin growth of 330 basis points versus last year. As we complete certain renovations we expect to see continued improvement in performance.

On September 18 we announced we had agreed to purchase TravelCenters of America Inc. or TA from a group of private equity investors for a total consideration of approximately $1.9 billion. TA owns and operates a cross-country network of 162 fuel service and hospitality areas along the U.S. interstate highway system. When this transaction is closed we will transfer TA's operating business to a subsidiary which will be spun out to our shareholders in an in-kind distribution to create a separately traded public company, or New TA. Substantially all of TA’s real estate will be retained by HPT and leased to New TA under a long-term agreement.

As we discussed during our conference call on December 19 we believe the benefits of this transaction for HPT and its shareholders include accretion in FFO beginning in the first year following permanent financing of $0.10 to $0.15 per share in addition to the value of the spin out distribution. Diversification of HPT sources of revenue, increased security of HPT's cash flow because TA’s business doesn't follow the lodging business cycle, growth opportunities organically and by acquisition or development, a well capitalized tenant that owns the leading brand in its sector and a secure lease for assets with high barriers to entry in irreplaceable locations.

Although TA represents a significant acquisition for us, we remain committed to acquiring hotel portfolios and individual hotels when we can add them to existing portfolios. We are encouraged that there remains a high volume of hotel activity and we are actively evaluating a number of portfolio opportunities and single hotel transactions. Given the competitive environment for hotel acquisitions it is not possible to predict that we have been a successful bidder in any of these situations.

In summary given HPT’s positive results for the third quarter and our operator’s preliminary outlook for the future we are optimistic about continued strong performance through 2007. I will now turn the presentation over to Mark Kleifges, our CFO.

Thanks, John. During the third quarter RevPAR at our leased hotels increased 5.2% and profit margins increased 40 basis points. RevPAR and operating profit margin growth at our leased hotels for the quarter were constrained by our Homestead portfolio which experienced a 4.2% RevPAR decline and our lease for 53 Courtyard hotels which had relatively flat margins quarter over quarter. Our Homestead portfolio has a high concentration of properties in the greater Washington DC area, which has been a relatively soft market throughout 2006.

Growth in the Courtyard portfolio gross margin was restrained by the seven hotels undergoing renovations during the third quarter. Despite modest margin expansion cash flow available to pay rent at our leased hotels increased 5.7% from the comparable 2005 quarter and is up 14.1% YTD. For the 12 months ended September 30, 2006, rent coverage ratios for our leased hotel portfolios remained strong with coverage ranging from 1.2 times to 1.51 times.

During the third quarter RevPAR of our managed hotels that were open for both periods increased 8.2% and profit margins increased 180 basis points. Cash flow available to pay HPT's minimum returns increased 7.8% from the comparable 2005 quarter and is up 12.9% YTD. During the third quarter trailing 12-month coverage ratios improved at five of our seven managed hotel portfolios. As John mentioned earlier 12 of the 24 hotels in our Hyatt portfolio were in the process of conversion from AmeriSuites to Hyatt Place hotels during the quarter. And as a result coverage for this portfolio declined to 0.6 times for the quarter and 0.92 times for the trailing 12 months.

Our current expectation is for this portfolio to continue to be below one times coverage for the next several quarters as a result of the conversion process. As a reminder even with coverage for this portfolio below one times we will continue to be paid our minimum return by Hyatt under the terms of our management agreement.

The strongest performance this quarter was from our Carlson portfolio which benefited from the recent completion of renovations at 11 of the portfolio’s 12 hotels. For the third quarter RevPAR for the Carlson portfolio was up 61.4%, cash flow available to pay HPT’s returns was up 246% and trailing 12 months coverage was above one times for the first time since the second quarter of 2005. For the 12 months ended September 30, return coverage ratios for our managed portfolios ranged from .92 times to 1.49 times with only the Hyatt portfolio below one times coverage.

EBITDA in the third quarter was $99.2 million, which is a 13.8% increase over 2005 third quarter EBITDA of $87.2 million. Funds from operations for the third quarter were $77 million compared to $69.7 million for the third quarter of 2005. On a per share basis, FFO increased 8.3% from $0.97 per share to $1.05 per share in the 2006 third quarter. In early October we declared a quarterly common dividend of $0.74 per share or $2.96 a share per year. Our FFO payout ratio was 69.1% for the nine months ended September 30, 2006.

The increase in FFO was primarily the result of increased minimum returns and rents under our 11 operating agreements. Minimum returns and rents were $87.6 million in the 2006 third quarter, a 12.3% increase over the 2005 third quarter. This increase resulted primarily from our 2006 acquisition activity and the increased annual minimum returns and rents due to our funding of capital improvements to our Carlson and Marriott branded hotels. FFO for the third quarter includes approximately $5.4 million, or $0.07 per share, of additional returns at our managed hotels and percentage rent in our leased hotels.

This compares to approximately $6 million, or $0.08 per share in the 2005 third quarter. This quarter over quarter decline is due primarily to the strong performance of our hotels during the first half of 2006, which accelerated our recognition of certain additional returns due to us under our management agreements into the 2006 second quarter. Looking to the fourth quarter we expect to return to solid year over year growth in additional returns and percentage rents. However, we typically earn our lowest level of additional returns in the seasonally slower fourth quarter.

Turning to our balance sheet liquidity, cash and cash equivalents totaled $46.8 million at September 30th, which includes $29.8 million of cash escrowed for future improvements to our hotels. Through the third quarter, we have made approximately $98 million of capital improvements to our hotels and we expect to make additional improvements of between 20 to $25 million in the fourth quarter.

On the liabilities side of the balance sheet debt to total capital on a book basis was approximately 39% and on a market basis debt to total capital was approximately 25% at September 30. Our EBITDA to total fixed charges coverage ratio was 4.4 times for the third quarter. As of the end of the quarter we had $13 million outstanding under our revolving credit facility and availability of $737 million.

As John mentioned, the TravelCenters acquisition we announced in September is expected to close in early 2007. We have arranged a commitment for interim financing for the acquisition and we anticipate long-term financing through the issuance of both debt and equity securities.

The record date for the planned spin-off distribution, material terms of the proposed lease between HPT and the spun-out operating company, pro forma information for HPT and the operating company and other information with respect to TravelCenters and the transaction will be included in SEC filings we expect to make before year end.

In summary, the third quarter of 2006 was highlighted by continued above industry average RevPAR increases, improving profit margins and coverage ratio trends in our portfolio and solid FFO per share growth. Looking ahead we are optimistic about a strong finish to 2006 and are excited about the benefits and opportunities presented by the TravelCenters acquisition.

That concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you, sir. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] We’ll take our first questions from Jeff Donnelly with Wachovia Securities.

Good afternoon, guys. Just a couple of questions, the first on TA and Mark, I apologize if this might seem repetitive. Do you expect the anticipated revenues and EBITDA for that entity for '06 to vary widely from where they were in '05?

Jeff, we really can't give a whole lot more information than we have on TA at this point. As you know we have to file a registration statement for the securities that we are going to spin out. And similar to an IPO situation, we've been advised by counsel that we have to limit our discussion of TA to what we had in the initial press release until such time we file that form S-1. So I'm unfortunately going to have to pass on answering that question at this time.

I'm guessing that my next question is off limits, which I was going to ask you do you guys have an estimated value of that entity or how you thought about valuing that entity that you are going to spin out?

I just can't talk about that right now. Once we get the S-1 on file, we will be able to answer everyone's questions and I'm sure after everyone has an opportunity to read that document there will be questions, so.

Sure. Just to be clear, though, that's going to -- will happen simultaneously with closing?

Yes.

Okay. And switching gears, I guess I would love to hear a little bit more about what you guys are looking at in the acquisition market. I guess, part one, John, maybe you guys could talk about, I guess I’d call it more traditional acquisitions, whether they are single assets or small portfolios, and then around pricing and what kind of activity you are seeing. And then part two I guess maybe larger transactions continue to be I guess they call it rumors around there, persistently of consolidation among either the public REITs or even some of the larger brands. And I know you can't speak to specific companies or deals, but I would expect HPT might have some knowledge there and I wasn't sure if you were seeing efforts out there to consolidate some of the public companies.

Well, yes, that was a big question.

Sorry.

You're right, we don’t comment on specific acquisitions. In most cases you have to sign confidentiality agreements anyway. But there are several, more than three hotel companies that are in the process of, that are north of $0.5 billion, frankly several that are north of $1 billion or multi-billion dollars transaction possibilities for branded hotel companies and their management entities. And we have information on a number of those.

Whether we will ultimately decide to pursue them or not is a question mark. But there are portfolios out there ranging from groups of Marriott and Hilton branded hotels that are in the three to 10 hotel portfolio size and then there's companies out there with greater than, in excess of 100 hotels that are for sale. So we think that we look at -- we probably don't see every single deal that comes down the pike but we think we look at more than 90% of them. So you can guess from there how many of them we are looking at.

In terms of potential REIT transactions, I don't think it's not a secret that there have been a number of REITs that are still publicly traded today that at one point or another were a party to M&A efforts that didn't finally occur. And we think that at the right price all of those same REITs would trade again today. So I'm not surprised that there are rumors. We, as you know are a portfolio investor and most of the other existing REITs don't enter into portfolio transactions the way we do and so it's difficult for us to get our arms around acquiring one of our competitor REITs, for that reason, among others.

What has been the change do you think in cap rates or price per key -- prices maybe in the last three to six months, have you seen it continue to move in one direction or the other?

My sense is that they have sort of stabilized. For a long time they were -- the per-key prices were increasing and cap rates were declining. But I think that with apparent softening in the economic growth prospects for the country and uncertainty about where the Fed is going with interest rates near term and longer term and other world events out there, elections, I think that people have stopped, investors have stopped being, pushing the aggressiveness to new heights. There is a still -- there’s a lot of capital chasing hotel deals. And so I haven't seen -- I haven't sat back and said, wow, here's a reasonable request. I think the pricing expectations are still high and I think I would still characterize it as apparently a sellers market. But I don't see it getting any worse than it was, say in June.

Okay, thanks, guys.

[OPERATOR INSTRUCTIONS] We’ll go next to Will Truelove with UBS.

Hey guys, good quarter. Mark, maybe you can just help us with the additional rent payments by portfolio type, if you could go through that for us.

Yes, this quarter the three largest, I’ll give you the three largest components. On the additional return side, Candlewood was $2.5 million in the third quarter. Our Marriott 35 hotel portfolio was 845,000, and Carlson was 649,000. On the percentage rent side, our 53 Courtyard host portfolio was the highest at 871,000.

And then just finally to top that area off, you say that the fourth quarter it's seasonally weaker which of course is the hotel industry in general. So can you just remind us what the additional total rents, maybe on a combined basis, were in the fourth quarter of last year.

In the fourth quarter of last year we had additional returns under our management agreements of 489,000 and percentage rent under our leases of 894,000.

Okay, great. Thanks so much.

Yes.

And once again, ladies and gentlemen there are no questions in our queue. [OPERATOR INSTRUCTIONS] And it looks like we do have a question from Michael Salinsky with RBC.

Good morning, guys. A quick question with regards to the TA portfolio. I’m assuming you've been in contact with the rating agencies. As you look to add that portfolio given the greater stability of the cash flows in regard to the tripling net leases there, do you look, do you believe you will be able to run at a higher leverage level or you look to maintain essentially a leverage neutral basis in order to maintain your current credit rating?

Well, I think we've, well, first stepping back in terms of just so everyone understands what happened after we announced the TA transaction. After our announcement Moody's affirmed our Baa2 rating. S&P put our BBB rating on credit watch with negative implications. As we talked about on our call discussing the TA transaction back in September, we planned, our long-term financing for this transaction for all the pro forma numbers we discussed on that call we assumed a 50/50 debt equity mix. So I think you can kind of -- we are not going to stray materially from our historical leverage ratio as a result of that transaction.

Despite the fact that we do believe it improves the credit quality of HPT due to the reasons that John talked about in terms of diversifying our revenue sources away from Marriott and the high concentration that we currently have with Marriott and Intercontinental as well as the fact that TA's revenue streams do not follow the same cyclical that the lodging industry, the same cycle that the lodging industry does. So we think it improves HPT from a credit perspective, but we do not expect to see a significant change in our leverage ratios, going forward.

Okay. And then I guess the second question. Given the strong results from the Carlson portfolio and what you are looking for from the Hyatt portfolio, kind of, as we look out over the next 12 to 18 months, I mean, should we expect additional portfolio repositioning or do you think at this point it's maybe limited to maybe one or two one-off properties essentially?

Yeah, I think the only wholesale changes were the Carlson portfolio and the conversion of the AmeriSuites to Hyatt Place. Beyond that I think we mentioned on the call on our last quarterly call that we may rebrand the Marriott Kauai to a JW Marriott and may rebrand a Holiday Inn Select in Houston to a Crown Plaza. But beyond that, those items we would be, we are not expecting to make any significant brand changes.

Great. Thanks, guys.

And there are no further questions at this time. I would like to turn the call back over to Mr. Murray for any closing remarks.

Okay. Thanks for joining us on today's third quarter conference call. As you probably are aware we will be at the Marriott annual convention in San Francisco next week and hope to see many of you there. Thanks a lot.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.