Service Properties Trust (SVC) 2006 Q4 法說會逐字稿

Good day, and welcome to the Hospitality Properties Trust Fourth Quarter 2006 Earnings 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, Allison, and good morning, everyone. Joining me on today's call are John Murray, President, and Mark Kleifges, Chief Financial Officer. John and Mark will make a short presentation, which will be 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 22, 2007. 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 report 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 Q4 supplemental operating and financial data found on our website at www.hptreit.com. Investors are cautioned to not place undue reliance upon any forward-looking statements.

Now, I would like to turn the call over to John Murray.

Thank you, Tim. Good morning and welcome to our fourth quarter 2006 earnings call. Earlier today, HPT reported FFO per share for the quarter of $1. This represents quarter over quarter FFO per share growth of 9.9%. Fourth quarter performance was driven by RevPAR increases which averaged 5% across our 308 hotels that were open both periods. This quarter's RevPAR growth in HPT's hotels fell short of industry average growth by a point, largely because 12 of our Amerisuites were being rebranded as Hyatt Place hotels during the quarter.

Nonetheless, our absolute occupancy and RevPAR continued to exceed industry averages by significant margins, and all of HPT's RevPAR growth during the fourth quarter was driven by rate increases, which rose 8.9% and offset a 3.5% drop in average occupancy. RevPAR increased across all of our portfolios except Hyatt, as noted previously, and Homestead, due largely to soft demand in the greater Washington D.C. area and Atlanta. RevPAR was up for all of our brands, except Hyatt and Homestead, as previously noted, and our Holiday Inns, where occupancy dropped in our Houston and suburban Atlanta hotels, again representing a reduction in Katrina related demand.

RevPAR performance this quarter improved in all regions except for South Atlantic, which declined 1.5%. The Mountain and Pacific regions and Toronto each showed double-digit RevPAR growth. We saw weakness against prior year comparisons in the Washington, D.C. area because there was little activity in Congress as a result of the November elections and year-end holidays, and reduced citywide group demand in Baltimore. The RevPAR decline in the South Atlantic and essentially flat RevPAR in the West South Central regions, also reflect declining occupancy in some of the markets that benefited most from Katrina displacement and other hurricanes in 2005.

Nonetheless, our managers continued to do an effective job managing profit margins, which were up 100 basis points this quarter. As a result of this revenue and margin performance, HPT's annual 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 were in the renovation process during the quarter. Three more should be completed this month and another seven in March. Five additional hotels began their renovations this month. The balance are expected to be completed by the end of the third quarter. Only one renovation has been completed, but indications thus far are that the new Hyatt Place is being well received.

As an example, for the 28 days ended February 11, 2007, the Atlanta Airport Hyatt Place's occupancy index is up versus last year over 15%. Its RevPAR index is up 19% and its RevPAR or yield index is up 37% from 82 to 113. We recently completed the 2007 budget process for both capital spending and operations. We are pleased by indications from our managers that above average RevPAR gains, primarily rate driven, are expected to continue into 2007. These gains are expected to be more moderate in 2007 than in 2006, but still above historical averages.

Our operators are generally forecasting 7 to 9% RevPAR growth in 2007. In addition, despite some cost pressure, our managers are also expecting to continue to see margin expansion in 2007. At the same time, we are actively monitoring the scope, timing, and costs associated with a variety of ongoing capital projects, including the Hyatt Place rebranding renovations previously mentioned, and numerous projects at the Crowne Plaza and Intercontinental hotels we acquired in 2005 and 2006. Great effort is being taken to manage capital projects to minimize business interruption at our properties.

In 2006, we acquired 12 hotels with 3,282 rooms for approximately $328 million. 10 of these hotels are now part of a single portfolio, and two were single asset purchases added to existing contracts with ISG. In September 2006, we agreed to purchase TravelCenters of America, Inc., or TA, from a group of private equity investors for a total consideration of approximately $1.9 million.

TA owned and operated a cross country network of 163 fuel, service, and hospitality areas along the U.S. Interstate Highway system. On January 31, 2007, we closed on this transaction and spun out TA as a separately traded public company with the ticker "TA" and listed on the American Stock Exchange. Substantially all of TA's real estate, 146 TravelCenters, was retained by HPT and is now leased to TA under a long-term lease agreement. We are optimistic about the prospects for investment growth in the travel center business, as this is a fragmented business that may benefit from consolidation and branding.

As we discussed previously, we believe the benefits of this transaction to HPT and the shareholders include accretion in FFO per share beginning this year, in addition to the value of the spinout distribution, diversification of HPT's sources of revenues, increased security of HPT's cash flow, because TA's business doesn't follow the lodging business cycle, growth opportunities by acquisitions and organically, 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.

Today, 70% of our portfolio is hotels and 30% is TravelCenters. In addition, we now have 12 portfolio agreements with six well-respected operators and no single operator represents more than one-third of our portfolio.

In summary, given HPT's positive results for the fourth quarter and full year 2006, we are optimistic about continued strong performance in 2007 and we intend to continue growing both our hotel and TravelCenters businesses.

I will now turn the presentation over to Mark Kleifges, our CFO.

Thanks, John. During the fourth quarter, RevPAR from 109 leased hotels increased 3.5%, but profit margins declined 40 basis points, and as a result, cash flow available to pay rent at our leased portfolios decreased 1.4% for the quarter. RevPAR and operating profit margins at our leased hotels for the quarter were constrained by our Homestead portfolio, which experienced a 7.5% RevPAR decline and a 13.7% decrease in cash available to pay rent.

Our Homestead portfolio has a high concentration of properties in the greater Washington, D.C. and Atlantic markets, which were both soft markets in the fourth quarter. Even with this weaker performance, rent covered for the Homestead portfolio remained strong at 1.2x for the quarter and 1.46x for the year.

Turning to the performance of our leased hotels for the full year, RevPAR was up 7.5%, cash flow available to pay rent increased 9.4%, and rent coverage ratios remained strong ranging from 1.2x to 1.5x.

During the fourth quarter, RevPAR on our 199 managed hotels that were open for both periods increased 6.3% and cash flow available to pay minimum returns increased 6.4%. For the year, RevPAR increased 9.9% at our managed hotels, and cash flow available to pay HPT's minimum returns increased 11.3%. During 2006, return coverage ratios improved at six 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 declined to .42x times for the quarter and .8x for the year. Our current expectation is for this portfolio to continue to be below 1x coverage for the next several quarters as a result of the conversion process. Although coverage for this portfolio is below 1x, 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 early 2006 completion of renovations at 11 of the portfolio's 12 hotels. For the fourth quarter, RevPAR for the Carlson portfolio was up 56.3%, cash flow available to pay HPT's returns was up 393%, and 2006 coverage was 1.36x for the portfolio. For the full year, return coverage ratios for our managed portfolios, excluding the Hyatt portfolio, ranged from 1.07x to 1.5x.

EBITDA in the fourth quarter of 2006 was $97.6 million, which is a 17.3% increase over 2005 fourth quarter EBITDA of $83.2 million. For the year, EBITDA increased just over 18% to $394.9 million. Funds from operations for the fourth quarter were $75.6 million, compared to $65.5 million for the fourth quarter of 2005. On a per share basis, FFO increased 9.9% from $0.91 per share to $1 per share in the 2006 fourth quarter. FFO for the full year was $307.7 million, compared to $263.3 million in 2005. On a per share basis, FFO for the full year increased 11.4% from $3.77 per share to $4.20 per share.

In early January, we declared a quarterly common dividend of $0.74 per share, or $2.96 a share per year. Our FFO payout ratio was 70.2% for 2006. The increase in 2006 fourth quarter FFO was primarily the result of increased minimum returns and rents under our 11 operating agreements. Minimum returns and rents were $88.2 million in the 2006 fourth quarter, a 12.9% increase over the 2005 fourth quarter. This increase resulted primarily from our 2006 acquisition activity and increased annual minimum returns and rents due to our funding of capital improvements to our Carlson and Marriott branded hotels.

FFO for the fourth quarter also includes approximately $3.7 million, or $0.05 per share of additional returns and percentage rent. This compares to approximately $1.4 million, or $0.02 per share in the 2005 fourth quarter.

Turning to our balance sheet liquidity, cash and cash equivalents totaled $580.6 million at December 31, 2006, which includes $27.4 million of cash escrowed for future improvements to our hotels. The large cash balance at year-end includes net proceeds from our sale of 12 million common shares in December in connection with the financing of the TravelCenters acquisition. In 2006, we made approximately $130 million of capital improvements to our hotels, and we expect to make improvements of between $100 to $120 million in 2007.

On the liability side of the balance sheet, debt to total capital on a book basis was approximately 33% and on a market basis, debt to total capital was approximately 22% at December 31, 2006. Our EBITDA to total fixed charges coverage ratio was 4.4x in the 2006 fourth quarter.

As John mentioned, on January 31 we completed our acquisition of TravelCenters for approximately $1.9 billion. Upon completion of the acquisition, we restructured the TravelCenters business and distributed all of the common shares of our subsidiary, TravelCenters of America, LLC, or TA, to our shareholders. In connection with the acquisition and restructuring, we retained 146 TravelCenters located in 39 states and certain related assets with a total value of approximately $1.7 billion, which we now lease to TA.

Since late December, we have completed two common equity offerings and one preferred equity offering, raising net proceeds of approximately $1.14 billion to partially finance the acquisition. As of today, $883 million remains outstanding on the bridge loan arrangement we established in connection with this transaction. And we anticipate long-term financing this balance, primarily with the issuance of debt securities. You should also note in connection with the spin-off of TA, we expect to record a charge of between $2.5 to $3 million in the 2007 first quarter related to costs associated with the spin-off.

In summary, 2006 was highlighted by continued RevPAR increases, improving profit margin and coverage ratio trends in our portfolio and solid FFO per share growth. Looking to 2007, we are optimistic about the lodging industry fundamentals and are excited about the benefits and opportunities presented by the TravelCenters acquisition.

That concludes our prepared remarks. Operator, we're ready to take questions.

Thank you. (Operator Instructions.) And we'll take our first question from Nap Overton with Morgan Keegan. Please go ahead.

Good morning. What would you say--like, say about the outlook for your dividend in light of the accretion that we talked about on the TA acquisition?

Well, we just closed the TravelCenters acquisition in January and we haven't completed the permanent financing. We still have, as Mark mentioned, about $883 million outstanding on a bridge facility. So our Board--whenever our Board meets, they discuss the dividend and whether or not to raise it. And they'll continue to do that each quarter. But at the present time, we're not providing any guidance in terms of the timing of the next dividend increase or the amount of that.

Okay. And has the environment or the market for potential investments changed in terms of yields available since your last discussion of that?

I'd say on the hotel front, we think that the--it's our impression that prices aren't continuing to increase and cap rates are not declining any longer. But there's--they were already at aggressive points. And they--prices remain high. So there's still a significant amount of capital chasing hotel acquisitions. And so, it's--I would say it's still a seller's market out there. But it doesn't seem to be getting any worse than the last time we discussed this.

On the TravelCenters side, similar to my comments about the dividend, since we just closed on the transaction and have been largely focused on getting it closed up through January 31, we haven't really actively delved into the acquisition environment there. Although we're already seeing interest in individual one-offs and mom and pop type operations that are interested in discussing a possible sale. So we expect that there'll be some activity and we'll be able to be a consolidator in the industry, but it's sort of too early to predict the volume there.

Okay. Thanks.

Thank you.

(Operator Instructions.) We'll go next to Smedes Rose with Calyon Securities. Please go ahead.

Hi. Good morning. When is the next Board meeting?

Typically--Smedes, typically our Board meets after the end of each quarter, so we can--and at that point we take up the discussion of dividends for the just completed quarter.

Okay. And then, John, you've talked about this a little bit, but when you--you said the pricing of assets seems to have leveled out a little bit. But in terms of the--I guess sort of the flow across your desk of things for sale, is it sort of even with [what] it was say a year ago in terms of the number of deals that are being shown to you, or what does that sort of look like?

I'd say the volume has not slowed at all. There's a couple of very significant multi-billion dollar portfolios that are on the market. There's seemingly an endless supply of one or two type transactions. So we signed a confidentiality agreement, so I can't tell you what all of them are. You probably have--.

--Oh, come on--.

--A good idea. You probably have a good idea what most of them are anyway in terms of the portfolios. But I'd say it's a very active market.

Okay. And then, just do you have any thoughts on sort of the supply outlook? It seems like the backlog of limited service hotels has increased relatively rapidly. Do you see those sort of flowing into the construction side of the pipeline anytime soon?

We do see developments starting to creep up. Maybe it's because we're sitting here in Boston. But we see it creeping up, not just on the select service suburban hotels, but also on downtown hotels in a number of markets, Boston being one of them. But I guess we think that in terms of the pace of new supply coming out of the ground, it's not going to have really a noticeable effect on 2007. There might be some effect in 2008. But that remains to be seen. Right now, it looks like it's staying below historic averages.

Thank you.

I might add to that - the Hyatt Place conversions are moving actively. But they're--the speed isn't picking up. It's a time consuming and costly process, even just to do a redevelopment and a rebranding. So I think that that will help keep new supply [muted] as well.

Okay. Thank you.

We'll take our next question from Rod Petrik with Stifel. Please go ahead.

Good morning, John. Can you--you have a few months here of experience with TravelCenters. Any change in the outlook for the coverage ratio on your minimum rent?

I don't think we have any change in our outlook. I'll let Mark discuss that more.

Yes, Rod. I don't think we have any change in terms of our outlook. We're still comfortable that TA will cover the rent through operations in 2007.

Well, you--at one point did you mention 1.2x coverage?

Well, it depends how you look at it. If you look--if you go back, unfortunately with TA as a public company, we can only talk about information that's out in the public market, which right now is September of '06 information. But if you look at coverage at the property level, which is how we look at coverage for the hotels, it's at about 1.4x for the nine months ended 9/30/06 on a pro forma basis. So--

--And then--so that's before corporate G&A?

That's before corporate G&A and the like. But--so, the coverage ratios that--I think the 1.2 we talked about, I think you're going back to our initial conference call probably when we announced the TA transaction about--I think we talked about, if my recollection is correct, a [1.115] coverage after corporate and other costs in 2007.

What about the thought process as to how you went about determining the capitalization for the company?

Well, there are a variety of factors at play there. We wanted to make sure that we had a tenant that was well capitalized that had--.

--So you've funded it with what? 200 million?

200 million of cash.

How did you come up with that number?

It's a mix of art and science. We wanted to make sure that we were going to be paid. We also wanted to make sure that we had a--that--in order to achieve some of the operating results that TA would like to achieve, they need to be able to acquire their inventory and pay for it after they receive it - things like that. So they need to be a substantial company to their suppliers so--.

--How much working capital was required.

I think if you look historic--the historical balance sheets of TA, they've typically run in the 50 to 70 million of net working capital, if my memory serves me.

So broadly, you've got about 1x coverage on your rent after the working capital account loosely?

Yes, I guess if you want to look at it that way.

Well, how should I look at it?

That's as good a way as any.

Okay, thanks.

We'll take our next question from Dennis Forst with Key Bank. Please go ahead.

Good morning. I had a question about the conversions of Amerisuites to Hyatt Place. You mentioned that they are costly. Can you give us an idea of the time involved, the amount of money involved. And then, if you would repeat what that one conversion had done. I think--did you say the occupancy was up 15 percentage points in the 28 days ended mid-February?

No, I said that--well, there were a bunch of questions there.

Yes.

I said that the occupancy index--Smith Travel--for all hotels that participate in the Smith Travel reporting publishes data for each hotel compared to its competitive set in its particular market. And the--so there's an occupancy index that's generated--a rate index and a RevPAR index. And the occupancy index--so its performance relative to its competitors in its specific market, increased 15.3%. Its rate index, again, compared to its specific competitors, increased 18.9%. And its RevPAR index increased 37.1%.

In terms of absolute changes, the occupancy was up about 8% while the market was down about 6%. The rate was up in that 28-day period versus the same period last year. The rate was up 24.5% versus the comp set, which was up about 4.5%. In terms of what's being done, there's a complete change in the--changeover in the room, including flat screen TVs and granite countertops and changed--more stylish furnishings, a complete redo of the lobby, enhanced food and beverage operations.

The cost over the portfolio is estimated to be about $70 million. On a hotel-to-hotel basis it varies a little bit, but it's $2 to $3 million a pop. And it takes from soup to nuts kind of a--it's a three-month sort of process.

Terrific. Thanks for the help.

And there are no further questions standing by at this time. I would now like to turn the conference back over to John Murray for any closing remarks.

I'd just like to thank you all for joining us, and we'll see you next quarter. Thanks.

Thank you for your participation in today's conference. You may disconnect at this time.