Service Properties Trust (SVC) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Hospitality Properties Trust second quarter 2007 financial results conference call. This call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to the manager of Investor Relations, Mr. Tim Bonang. Please go ahead sir.

Thank you Ruthy, and good afternoon 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, August 1, 2007. The company undertakes no obligation to revise or publicly release the results of any revisions that are forward looking statements made in today's conference call other than through filings with the securities and exchange commission regarding this reporting period. In addition, this call may contain non-GAAP numbers including funds from operations, or FFO. A reconciliation of FFO in net income, is available in our supplemental package found in the investor relations section of our website. 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, our form 10-Q, which we expect to file tomorrow, and our Q-2 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, 2007 earnings call. Earlier today, HPT reported FFO per share for the quarter of $1.19. This represents quarter over quarter FFO per share growth of approximately 4.4%. Second quarter RevPAR growth averaged 4.4% across our 308 hotels that were open both periods. RevPAR growth at HPT's hotels, was below industry average growth, bye 1.3 percentage points due to several factors. First, the New Orleans Residence Inn, that is part of our 19 hotel Marriott portfolio, suffered significant negative year-over-year Katrina related performance comparisons. Second, seven of our Michigan hotels that rely in large part on business from the automotive industry -- so our RevPAR declines in excess of 10%. Finally, 14 of our 18 homestead studio suites hotels experienced RevPAR declines this quarter due to both weak occupancy and declining rates. Importantly, all of HPT's RevPAR growth during the second quarter was driven by rate increases which rose 6.1% and offset a 1.2 percentage point drop in average occupancy. Our average RevPAR index which compares our hotels to their closest competitors in the markets where they are located is over, 111. Going-forward, following the sale of the Homestead portfolio, which had a RevPAR index of 70 and upon the continued ramp up of our Carlson and Hyatt place portfolios, we expect to see this performance measure grow. RevPAR increased across all of our portfolios except Homestead and Crestline. RevPAR was up for all of our brands except Homestead and Residence Inn, principally due to the New Orleans impact. The RevPAR increase across several brands, including Courtyard, Residence Inn and Staybridge Suites, and Candlewood Suites was, weaker than we would have liked. This appears to be due to lower levels of business travel in some suburban areas particularly in Michigan and new or significantly renovated competition in some markets. Although 16 of the hotels in the Hyatt portfolio were under renovation during some or all of the second quarter, RevPAR for the portfolio was up 5.9% versus last year. In June alone, our Hyatt place RevPAR was up 19.3%, almost triple the industry growth average. RevPAR performance this quarter improved in all regions, the modest RevPAR gains in 3 of the central regions were due largely to Hyatt place conversions, the New Orleans Residence Inn and weakness in Michigan. The south Atlantic regions 2.4% RevPAR growth, reflects the impact of the homesteads which make up 18 of our 94 hotels in that region and declined 7.9% this quarter. New England RevPAR growth, at 3.4%, reflects reduced extended stay demand and more difficult competition. Mountain, East South Central and Pacific regions each showed strong RevPAR growth. Our Arizona and Colorado hotels led the mountain states to nearly double-digit RevPAR growth at 9.7%.

During the quarter our managers continue to effectively control operating expenses and as a result across our hotel portfolio, profit margins improved 46 basis points this quarter versus last year. Cash available to pay HPT's minimum returns increased 2.7% this quarter versus last year, despite FF&E reserves ramping up at two of our IHG portfolios, as well as increases in insurance and property taxes. HPT's annual minimum return and rent coverage ratios, have generally remained strong with only the Hyatt portfolio below [one times] coverage. In June we sent the notice of default and lease termination to the tenant under our lease for 18 Homestead Studio Suite hotels. Last week we resolved that dispute with the sale of the 18 Homesteads for approximately $205 million. This is a positive for HPT on a number of fronts. We were uncomfortable with the level of leverage employed by the current owners of Extended Stay hotels the ultimate parent behind Homestead. And this allows us to avoid possible future problems. We will record a gain of about $95 million in the third quarter, bolstering our book equity at a time when we prefer not to issue comment. We have used the proceeds to reduce borrowings on our credit facility. Partially funding our Petro Stopping Centers acquisition. Also, we believe it improves the quality of our portfolio as our Homesteads, though well located, were exterior corridor economy extended stay assets. As noted previously, the performance of these hotels over the past year has been trending in the wrong direction and at an increasing pace. We believe the pricing, roughly an 8% cap on the rent we were receiving and over $85,000 per key, is attractive for these assets.

During the second quarter, eight more Hyatt place conversions were completed. Performance of these assets post conversion, has been strong and the concept continues to be well received by guests. Three more properties were converted to Hyatt place in July. Other notable improvements in our portfolio included the Chandler Radisson, where revenues were up 75% versus last year following its first quarter rebranding. Our Carlson portfolio continues to show double-digit RevPAR growth increasing occupancy and rates. Our managers have indicated that above average RevPAR gain,s all rate driven, are expected to continue for the balance of 2007. Our operators are now generally forecasting 5% to 7% RevPAR growth in 2007. Forecast a weak first quarter on difficult comparisons, gradual improvement, second quarter and stronger growth in the second half.

In addition, despite some cost pressure, our managers are also expecting to continue to see margin expansion. Accordingly we are optimistic about the balance of 2007 for our hotel properties. When we purchased travel centers of America Inc.-- or TA, in January, we told you that we were optimistic about the prospects for investment growth in the travel centers business as this is a fragmented industry that may benefit from consolidation and branding. On may 30th, we purchased 40 additional travel centers from Petro Stopping Centers or Petro, another large and well respected operator of full service travel centers for approximately 655 million. Simultaneously, TA acquired the operations and franchise business of Petro. The 40 travel centers acquired by HPT are leased to TA under long term triple net lease that is similar to our lease for the 146 TA travel centers. We expect to continue to see opportunities to be a consolidator. Today, 62% of our portfolio by invested, is in hotels and 38% is in travel centers. We have 12 portfolio agreements with five well respected operators and no single agreement represents more than one third of our portfolio. In summary, given HPT's positive results for the second quarter, we are optimistic about continued strong performance for 2007 and we intend to continue growing both our hotel and travel centers businesses. I'll now turn the presentation over to Mark Kleifges our CFO, who will provide more detail about our results for the quarter and our financial condition.

Thanks, John. During the second quarter RevPAR at our 109 leased hotels, increased 1%, profit margins increased 58 basis points, and cash flow available to pay rent increased 1.2% compared to the prior year. RevPAR and operating profit margins at our leased hotels for the quarter, were constrained by difficult Katrina comparisons, especially for our New Orleans Residence Inn and our recently disposed of Homestead portfolio which experienced a 7.9% RevPAR decline and a 13.9% decrease in cash available to pay rent. For the last 12 months, return coverage ratios for our leased hotel portfolios ranged from 1.18 times to 1.54 times. During the second quarter RevPAR at our 199 managed hotels that were open for both periods, increased 6.4%, profit margins increased 60 basis points and cash flow available to pay our minimum returns increased 3.7%. As John mentioned earlier, 16 of the 24 hotels in our Hyatt portfolio, were in the process of conversion to Hyatt Place hotels during the quarter and as a result, cash flow available to pay our minimum return declined approximately 33% from the prior year resulting in coverage of only 0.58 times for the quarter. Our expectation is for this portfolio to continue to be below one times coverage for the next couple quarters as a result of the conversion process. As you know, although coverage for this portfolio is below one times, we 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 continues to benefit from the 2006 renovations at 11 of the portfolios, 12 hotels. In addition, as John noted, the Chandler, Arizona Park Plaza hotel was converted to a Radisson in mid January. For the second quarter, RevPAR for the Carlson portfolio was up 15%. cash flow available to pay HPT's returns was up 35%. And coverage was 1.64 times. For the last 12 months, return coverage ratios for our managed portfolios, excluding the Hyatt portfolio, ranged from 1.08 times to 1.55 times.

Turning to our travel center portfolios, as we said last quarter, our discussion of operating results for our travel centers, will always lag by a quarter because TA does not release quarterly operating results until after our earnings call. Rent coverage for our TA travel center portfolio for the 12 months ended March 31, 2007 was 1.5 times. We calculate coverage for our travel center portfolios consistent with our hotel portfolios, property level revenues less property level expenses divided by the rent due to us. During the 2007 first quarter, comparable company operated TA travel centers, experienced a 1% decline in fuel volumes and a 3.2% increase in non-fuel revenues compared to the prior year. More importantly, cash flow available to pay our rent increased 10.7% in the first quarter compared to the prior year. On a pro forma basis, rent coverage on our recently acquired Petro travel centers portfolio would have been 1.33 times for the trailing 12 months. I should also point out that in June, Travel Centers of America completed a common share offering that raised approximately $200 million and significantly improved the capital structure of our tenant.

HPT's EBITDA in the second quarter of 2007 was $152.3 million, which is a 45% increase over 2006 second EBITDA of $104.9 million. For the first six months of 2007, EBITDA has increased 84.5 million or 43%. Funds from operations for the second quarter were $111.5 million for the second quarter of 2006. On a per share basis, FFO increased 4.4% from $1.14 per share to $1.19 per share in the 2007 second quarter. The weighted average number of common shares outstanding totaled $993 million in the 2007 second quarter compared to $72 million in 2006. Our FFO payout ratio was approximately 64% in the second quarter. Minimum returns and rents were $137.6 million in the 2007 second quarter, a 59% increase over the 2006 second quarter. This increase resulted primarily from our two travel center leases and increased annual minimum returns and rents due to our funding of capital improvements to our Carlson, Hyatt and Marriott branded hotels in 2006 and 2007. FFO for the second quarter also includes approximately %9 million or $0.10 per share of additional returns and percentage rent. This compares to approximately $12.5 million or $0.17 per share in the 2006 second quarter. In 2006 our additional return of percentage rent income in the second quarter was significantly higher than in the third quarter. As we discussed on last quarter's call. In 2007, we expect this income to be more evenly distributed between the second and third quarters.

Turning to our balance sheet and liquidity, cash and cash equivalents totaled $42.2 million at June 30, 2007, which includes $30.7 million of cash escrowed for future improvements to our hotels. Through the second quarter, we have made approximately $67 million of capital improvements to our hotels and $11 million of improvements to our travel centers. We expect to make additional improvements to our properties of between $30 and $50 million during the remainder of 2007. On the liability side of the balance sheet, debt to total capital on a book basis was approximately 50% and on a market basis, debt to total capital was approximately 39% at June 30, 2007. Our EBITDA to total fixed charges coverage ratio was 3.7 times in the 2007 second quarter. As John mentioned, on May 30, we completed our acquisition of 40 travel centers from Petro Stopping Centers for $655 million. We financed this acquisition by borrowing under our revolving credit facility. In July, these borrowings were partially reduced with the $189 million of net proceeds from the sale of our Homestead hotel portfolio. As of today, we have $448 million out on our revolving credit facility.

In summary, the second quarter of 2007 was highlighted by the expansion of our travel centers portfolio with the Petro Stopping Centers acquisition. Continued RevPAR and FFO per share increases and strong coverage ratios in our portfolio. Looking ahead for the balance of 2007, we are optimistic about the lodging and travel center industry fundamentals. That concludes our prepared remarks, we're ready to open it up for questions.

(OPERATOR INSTRUCTIONS) We will Pause just a moment to assemble our queue. We'll take our first question today from Celeste Brown with Morgan Stanley.

Hello, guys, good afternoon.

Hello Celeste.

Just two questions, first -- just based on the, I guess the one quarter ago number and then your trailing 12-month number. There's some pretty pronounced seasonality in terms of coverage rate -- or what we should expect from coverage ratios on the travel center business. Does that make sense?

Yes, it follows -- sort of follows along with the lodging industry in that the first and fourth quarters are going to be the weaker two quarters, with the second and third the strongest quarters from a cash flow performance standpoint.

Okay. And then maybe this is putting you on the spot and you're not going to want to answer this. But you know -- I know you don't give guidance and your managers have talked about the year being back end loaded with the fourth quarter particularly stronger. Are you more or less comfortable with that expectation right now just given that RevPAR has picked up in the last couple weeks?

I think that we're comfortable with the numbers that the managers have given us. You know, there's -- we have a range of properties and a range of markets and the economy's been pretty spotty. So, you know, I mean, even if you look at the Smith travel data that came out today. There's -- I think out of the top 26 markets, 16 of them have lost occupancy over the last 28 days. So, you know, there's -- the performance is uneven around the country. So, you know, we think that the fact that we have well located hotels, strong brands, and strong management companies, we don't have any reason to doubt the expectations. We are seeing performance start to increase.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) We'll go next to Matt [Overton] with Morgan Keegan.

Yes, just a couple questions. The -- I know you've answered this question before, but the Hyatt Place conversions are expected to be completed when?

We expect that they'll be substantially complete by year end. There may be one or two of the properties that are doing some final punch list items into the first quarter, and there are a couple of properties out of the 24, a couple of the AmeriSuites that we're currently talking to Hyatt about, where we're not sure that we want to necessarily convert those to Hyatt Place, that's something that we're in -- just in the early stages of considering. So it may be that we only end up converting 22 of the 24. But those that we're definitely converting should be, for the most part, complete by year end.

Okay. All right. And then one would have expected you to raise some additional equity capital following the Petro acquisition, and then of course we've had the plummeting and stock prices, and then throw into the mix some potentially or perhaps nervous debt rating agencies or fidgety. And so it -- could you just comment about your whole -- your outlook there and what your view is on the company's need to raise capital in terms of debt ratings and so forth and so on?

Yes, Matt, this is Mark. We don't feel any urgency in terms of the need to go out. And particularly given the volatility or both the equity and debt markets today. We have about $300 million still available under our line. And that's the nice thing about having $750 million dollar revolver, is times like this, you know, it gives us flexibility as to when we access the capital markets. So, we're not feeling any pressure and we like, I think most other companies that -- that have a need for long term capital are more or less taking a wait and watch approach right now.

Can you do that indefinitely? Or not?

Well, I don't know about indefinitely. But we believe we have sufficient time where we can do it.

Okay. All right. Okay. Thanks very much.

Sure.

Our next question today will go to William Truelove with UBS.

Great, thanks. Same question as always for me, can you give us the breakdown of the additional rents by the portfolio or at least the main contributors of that?

Sure, I'll give you the largest contributors, Candlewood was $2.9 million, the intercontinental number four agreement was $184 million. The Marriott management contract was a million 65, and the host Courtyard lease was a million 72.

Right. Thanks so much, guys.

Sure.

Thank you.

We'll go next to William [Lyslinski] with RBC capital markets. Its Lyslinski, but thank you though.

Good afternoon, guys. A quick question, what we're seeing in the markets right now, have you seen any change in the amount of fund flows into the hotel space? And secondly, are you seeing any change cap rates with the -- what we're seeing in the CNBS markets as of late?

I think it's really too early to say if there's been a change in funds flow or cap rates. Certainly, it's only just recently that Flag Stone announced they're buying Hilton, so arguably there's a tremendous amount of capital flowing towards lodging related acquisitions and you know, I don't know how much money is burning holes in other opportunity funds' pockets, but, you know, we think that the choppiness that we've seen of late in the CNBS markets may cause that type of activity to be a little bit more subdued. And it's because we can't tell the extent of the fund flows, it's difficult yet to get a good sense of where cap rates are going, I think you know just like buyers like HBT are watching and trying to assess where things are going to shake out, sellers probably are too. So, I don't expect to see an immediate significant change in cap rates. I am hopeful that they'll become a little bit more conservative, though.

Okay. I mean, are you guys still bidding actively right now on hotel portfolios as well as travel centers? Given the current market environment?

Yes, we are, I would say frankly, that we look at more hotel acquisitions than we do travel center, potential investments. And that's been the case for the balance of the year, frankly. But the returns that we've been able to achieve on the travel center side have been greater and we haven't been the winning bid in auction situations which is most of what we've seen on the hotel side.

Okay. And the final question, how much additional investment capacity do you believe you have on your balance sheet right now before you would need to source some external funding?

$Well, I think Mark just said, we have roughly 300 million , give or take available on our credit facility today. So, that's the amount that we have immediately available without either taking advantage of the accordion feature on the revolver or accessing the debt or other

If you were to expand that, though, would you still be able to be within all the covenants of your investment grade status?

Well, I don't think we could go to a billion 5 -- according and borrow all of it. I mean I haven't run those numbers to be honest with you Mike.

Thanks, guys.

Yep.

We'll go next to Doug Rothschild with Scoggins.

I just wanted to ask on the travel sector side, I noticed that for the first time in a while the trucking volumes have -- are slightly negative, I think around 1%. What could effect on the rental coverage be from that?

You know, I think trucking volumes may have less to do with our rent coverage than -- well -- I guess I'm not sure necessarily that there's a correlation. We -- the largest percentage, you know 80% of the revenues at TA roughly come from fuel sales which generate roughly 20% of their cash flow, and 20% of their revenues is the other ancillary businesses that come from having -- for lack of a better word a captive audience in the -- at their truck stops. The professional truck drivers you know, have substantial amount of time that they spend at these travel centers and they spend money in restaurants and convenience stores and the repair shops and those categories have a lot more to do with our rent coverage than sort of the volumes do. So, I mean, I think the first quarter results that Mark mentioned earlier we saw a slight drop in fuel volumes and an increase in non-fuel sales and roughly a 10% increase in our cash flow available to pay rent, so I guess we're not at this point we're not concerned about the trends you mentioned affecting our coverage.

Yes, particularly given the -- you know, we didn't go into those leases with 1-0 coverage, both leases have sufficient coverage. One at about 1.5, one at about 1.3 times on a trailing 12-month basis. So, we're very comfortable with our coverages on those leases.

Thank you.

Sure.

Our next question will go to a follow-up from Matt Overton with Morgan Keegan.

Just a follow-up question on the cap rate question and not asking you what you've seen. But has -- what has occurred in the capital markets in recent weeks, in the last couple months, impacted what you're willing to pay for a dollar of hotel cash flow? And have you changed what you're willing to pay for it or do you plan to change it in the near future?

Well, if we reach a determination that has been a permanent change and that debt markets are going to have CNBS markets are going to show more constraint. And have higher standards and higher spreads and if we think that the equity markets are going to trade in today's range, then we would need to achieve a higher cap rate. But that's one of the reasons why we're, as Mark mentioned earlier, why we are sort of watching and waiting, because we're not sure if this is just a couple weeks where we'll have some choppiness, while people try to get a better understanding of the sub prime lending mess or if this is a longer term phenomenon. So -- so it's hard to get pinned down on that.

Okay but you have not made any specific changes in the transactions that you're currently bidding on?

No, not at the present time our modeling has not substantially changed in terms of how we're valuing potential investments.

Thanks, John.

At this time, ladies and gentlemen, there are no additional questions. I'm going to turn the call back to Mr. Murray for any closing remarks you may have sir.

I would just like to thank you once again for joining us today and we look forward to speaking with you again next quarter. Thank you.

Ladies and gentlemen, this does conclude our conference, we appreciate your participation, you may disconnect at this time.