Service Properties Trust (SVC) 2007 Q3 法說會逐字稿

Good day, and welcome to the Hospitality Properties Trust third quarter 2007 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, Anthony 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, November 7, 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 then 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 to net income is available in our supplemental package found in the Investors Relations section of the company's website. Actual results may differ materially from those projected in forward-looking statements. Additional information containing factors that could cause those difference is found in the company's Form 10-K filed with the Securities and Exchange Commission and in our Q3 supplemental operating and financial data found on our website at www.hptreit.com. Investors are cautioned not to place undue reliance on this forward-looking statements.

With that I would like to turn the call over to John Murray.

Thank you, Tim. Good afternoon and welcome to our third quarter 2007 earnings call.

Earlier today, HPT reported FFO per share for the quarter of $1.21. This representatives quarter-over-quarter FFO share growth approximately 15%. Third quarter RevPAR growth averaged 6.3% across our 290 hotels that were open both periods. RevPAR growth at HPT's hotel exceeded industry average growth and once again driven by rate growth, which accounted for 84% of the RevPAR increase. Occupancy increased modestly to 75.7%. RevPAR growth this quarter benefited from strong higher placed performance and double digit growth at our full service Intercontinental, Marriott and Radisson hotels. Offsetting these results was the negative impact of poor comparative performance at our New Orleans Residence Inn, weaker than expected occupancies at our Extended Stay Hotels, and renovation projects at 8 of the Crowne Plaza hotels we acquired in 2006. Our average RevPAR index, which compares our hotels to the closest competitors in their market is over 114. Following completion of various capital project and stabilization of the higher placed portfolio we expect it see this measure grow.

RevPAR increased across all of our portfolios except the IHG four portfolio where we had eight Crown Plaza hotels under renovation and the host lease of 18 Residence Inns which had two hotels under violation and experienced a decline in long-term stays. RevPAR was up for all brands except Residence Inn principally due to the New Orleans impact and decline at long-term stays at several hotels due to scheduled renovations, loss of training business for certain mortgage lenders in California and increased competition. The RevPAR increase across several brands including Candlewood Suites and TownePlace Suites was weaker then we would have liked. This appears to be due to lower business travel in some suburban areas, particularly in Michigan and newly significantly renovated competition in some markets.

Although six of the hotels in the higher portfolio were under renovation during some or all of the third quarter and none of the converted hotels have stabilized at this point, RevPAR for the portfolio is up 17.6% versus last year. Some of the properties in this portfolio are under renovation during the third quarter of last year but our RevPAR comparison to last year may be of limited value. That said, for the 12 hotel which completed renovations prior to June 30, 2007 third quarter RevPAR was up 25% versus pre-renovation levels.

RevPAR performance this quarter improved all regions. The RevPAR gains in the two West Central regions were con strained largely due to higher place conversions and the New Orleans Residence Inn. The mid-Atlantic region's growth was constrained by Crowne Plaza and Hyatt Place renovations. The Mountain, East South Central and Canada each showed strong RevPAR growth.

Profit margins for our hotels improved 230 basis points this quarter versus last year. Cash available to pay HPT's hotel minimum rents and returns increased by 8.9% versus last year, despite FF&E reserves ramping up at two of our IHG portfolios and increased property taxes. HPT's annual minimum rent and return coverage ratios have generally remained strong with only the higher portfolio below one times coverage.

During the quarter, five more Hyatt Place conversions were completed, and additional property was converted to Hyatt Place in October. Of the remaining four former AmeriSuites in this a portfolio our current expectation is that one will be converted to Hyatt Place during the fourth quarter and one during the first half of 2008. We are currently evaluating the possible sales of the remaining two properties which we do not believe will generate sufficient returns invested capital if converted.

Our Carlson portfolio continues to show strong RevPAR growth increasing both occupancy and great as Carlson stabilizes property performance following the conversion of these hotels to their Radisson and Country Inn & Suites brands. As we continue to actively asset manage the portfolio, we're considering the sale of one hotel with limited growth opportunities. As we informed you last quarter, in July we sold our portfolio of 18 Homestead Studio Suites for $205.5 million to affiliates of Extended Stay Hotel's new owners. The net proceeds were used to reduce borrowings on our credit facility. Transaction resulted in a gain for HPT of about $95 million this quarter. But more importantly, we rebelieve the transaction improves the quality of HPT's hotel portfolio and cash flow as we move forward.

The recent disruption in capital markets has impacted lodging real estate activity. Both the cost and availability of capital have been effected, and mortgage underwriting standards have become more conservative. While we have seen both single asset and portfolio transactions collapse in this environment, it appears sellers believe this will be a short-term phenomenon. Accordingly we have not yet seen sellers adjust pricing expectations. If the Fed continues to reduce interest rates, the treasury's efforts to help institutions with troubled mortgage loans are successful, and the economy continues to grow, hotel fundamentals will remain at levels above historical experience. Nonetheless we expect a pause in the pace of hotel transaction activity for a couple of quarters as both buyers and sellers take a wait and see approach to the current uncertainty.

Turning to our travel centers business, 2007 has been a challenging year in the industry. Prior year periods benefited from very strong housing development activity, stronger auto sales, and an unprecedented flow of supplies and relief aid to the Gulf Coast. This year we have seen a collapse in the housing market, uncertainty about consumer spending, which has led to to more conservative inventory levels at many retail business and a weak car market. The impact on this on the trucking industry, TA's primary customer, was a 4.5% reduction in truckload mileage and 3.4% reduction in tonnage in the first half of '07 compared to 2006. Despite these slowing industry conditions, rent coverage remains healthy. We believe TA with its strong brands, well located sites and superior service offering, is well positioned to outperform its competition in a slowing economic environment. Through September, we have funded approximately $16 million of capital projects at our travel centers. Most of these funds have been invested in bathroom and shower upgrades, the addition of truck service bays and quick restaurant and general refresh expenditures involving lighting and HVAC punishments. As TA continues its travel incentives refresh program and also continues with the integration of the petro stopping business both corporate level and site level synergies are expected.

We remain excited about the travel center business and the growth opportunities and relative return its provides. With its greater scale we expect TA to continue to identify opportunities to seek better volume purchasing contracts and otherwise increase efficiencies and margins. At the same time TA's size has created a reasonable level of interest among smaller owners of travel centers around the country in becoming part of the TA system. We're optimistic therefore that this will lead to future growth opportunities for HPT.

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

Thanks, John.

During the third quarter, RevPAR of our three leased hotel portfolios increased 5.6%, profit margins increased 140 basis points and cash flow available to pay rent increased 6.6%. Performance this quarter for our leased hotels was led by our 53-hotel Courtyard portfolio with a 7.1% RevPAR increase and a 14.9% increase in cash flow available to pay rent. RevPAR and operating profit margins at leased hotels for the quarter were con strained by poor comparable performance at our New Orleans Residence Inn will RevPAR declined 36% and declining Extended Stay occupancy at our other 23 leased Residence Inn where average RevPAR increased less then 1%. For the last 12 months, return coverage ratio for our leased hotel portfolios ranged from 1.18 times to 1.58 times.

Performance was stronger during the third quarter for our seven managed hotel portfolios with a RevPAR increase of 6.5%, a profit margin increase of 260 basis points and 10.1% increase of cash flow available to pay our minimum returns.

As John mentioned earlier, six of the 24 hotels in our Hyatt portfolio were in the process of conversion to Hyatt place hotel during the quarter. As the conversion process nears completion, cash flow available to pay our minimum return during the third quarter increased approximately 27% from the prior year. Coverage was 0.6 times for the quarter and our expectation is for this portfolio to continue to be below one times coverage until the second quarter of 2008. The strongest performance this quarter for our managed hotels was from our 13 hotel Intercontinental portfolio with a 10.6% increase in RevPAR and a 19% increase in cash flow available to pay HPT's minimum returns. This portfolio's performance was led by our Intercontinental hotels in Houston, Baltimore and Toronto. For the last 12 months, return coverage ratio for our managed portfolios, excluding the Hyatt portfolio ranged from 1.08 times to 1.57 times.

As John discussed both freight tonnage and mileage declined during the first half of 2007 and as a result of these slowing industry actions our travel center properties have experienced declines in cash flow available to pay rent during this period. Despite this weakness in the trucking industry, our TA portfolio has performed relatively well, with fuel volumes down only 0.3%, non fuel revenues up 2.7% and cash flow available to pay rent down 2.3% during the first half of 2007. The performance of our petro portfolio has been somewhat weaker with fuel volumes down 2.6%, non fuel revenues up 2.2% and cash flow available to pay rent down 12.9% during the first half of 2007. Despite these declines, coverage remains solid at 1.45 times for our TA portfolio and 1.28 times for our petro portfolio for the 12 months ended June 30, 2007.

Turning to HPT's consolidated operating results EBITDA in the third quarter of 2007 was $159 million, which is a 60% increase over 2006 third quarter EBITDA of $99.2 million. For the first nine months of 2007, EBITDA has increased $144.4 million or approximately 49%. Funds from operations for the third quarter were $113.6 million compared to $77 million for the third quarter of 2006. On a per share basis, FFO increased 15% from $1.05 to $1.21 per share in the 2007 third quarter. The weighted average number of common shares outstanding totaled 93.9 million in the 2007 third quarter compared to 73.6 million in 2006. Our FFO payout ratio was approximately 64% for the the third quarter.

Minimum returns and rents were $145 million in the 2007 third quarter, a 66% increase over the 2006 third quarter. This increase resulted primarily from our two travel center leases and increased annual minimum returns in rents due to our funding of capital improvements to our Hyatt and Marriott branded hotels in 2006 and 2007 partially offset by the the elimination after July of rent from the Homestead portfolio which we sold this quarter. FFO for the third quarter also includes approximately $9.4 million or $0.10 per share of additional returns of percentage rent. This compares to approximately $5.4 million or $0.07 per share in the 2006 third quarter. In 2006, our additional return in percentage rent income in the second quarter was significantly higher than in the third quarter where as in 2007, this income was more evenly distributed between the second and third quarters. The largest contributors this quarter were our Candlewood and IHG #3 portfolios with $3.7 million and $2 million of additional returns respectively. Through the third quarter of 2007, additional returns and percentage rent totaled $25.5 million, a 16% increase over 2006.

Turning to our balance sheet and liquidity, cash and cash equivalents totaled $29.2 million at September 30, 2006, which includes $25.7 million of cash escrows for future improvements to our hotels. Through the third quarter, we have made approximately $99 million of capital improvements to our hotels, and $16 million of improvements to our travel centers. We expect to make additional improvements to our properties of between $20 million and $30 million during the remainder of 2007.

On the liability side of the balance sheet, in September, we sold $350 million of 6.7% unsecured senior notes and used the net proceeds of approximately $344 million to reduce borrowings on our reduced credit facility. During the third quarter we also used the $189 million of net proceeds from the sale of our Homestead hotels to reduce borrowings under our revolver. Outstanding borrowings on our revolver were $137 million at the end of the quarter. As of September 30, 2007 our debt to total capital on a book basis was approximately 48% and on a market basis debt to total capital was 38%. Our EBITDA to total fixed charges coverage ratio was 3.5 times in the 2007 third quarter.

In summary, the third quarter of 2007 was highlighted by continued RevPAR and FFO per share increases and strong coverage ratios in our portfolio.

That concludes our prepared remarks. Operator, we're ready to open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS)

Our first will go Jeff Donnelly with Wachovia.

Hi. Good afternoon, guys. John, can you talk a little more specifically on what your view is on the state of the economy and I guess the industry? Do you think we're going to into recession and more specifically are you anticipating to see RevPAR growth in '08 to fall short of some of the guidance we've heard from the major brands out there?

As we look at the economy today, we believe that because of some of the actions taken in terms of rate cuts and things that -- although the pace seems to be slowing from where it's been over the past few years, the economy's still going to be growing. RevPAR is still going to be growing even still at a pace above historic averages. But we do think it's going to be slowing from the past few years. I don't really want to comment on the brands are managing their hotels everyday, most of them and so I think, depending on their markets and where they've renovated and things, they may have reason to have certain projections. I don't really want to comment specifically on that but we're comfortable with a belief that RevPAR growth next year is going to not be quite as strong as it was this year but still better then historic averages.

And I'm curious. Have you guys considered playing elsewhere in the capital structure for hotels, I mean for example, there are a few hotel high yielding preferred out there from companies that are privatized or mortgage or lending opportunities. Is that something you guys have considered?

No, we're pretty focused on just on ownership, 100% ownership. We don't like joint ventures. We don't like providing mezzanine debt, putting ourself in a position where maybe there's a higher return but where you're behind in the returns of other folks. We think we're pretty good at identifying good operators, good brands, good locations and we just would like to buy real estate and be long-term owners.

And just one last question -- it sounded like from your comments that we should expect acquisition activity for you guys to trail off in the next few quarters. Is that mainly due to sellers' expectations? Or I guess I would have expected that with the cost of financing up so significantly in the last two weeks, particularly at the highest tranches, you could argue that the relative value if you will of your sale/leaseback or preferred management structure would make you look sort of more attractive versus a financing out option for some holders out there?

Yes, I guess I agree with -- I agree with your analysis there. I think my point is that I'm not sure that the sellers, after only a couple of few months of the current market situation, if they believe this is going to last for a long period of time. I think if the current situation persists through the first and second quarters of next year, I think the sellers will gradually become more receptive to the fact that the market has changed and you'll see -- potentially see a lot more activity on the hotel front from HPT. We still expect. We've grown every year. We've grown quite a bit this year with travel center acquisitions. We expect we'll do more travel center acquisitions. We probably invest $100 million a year just in capital projects at various hotels in our portfolio. So I think there will be a significant amount of investment next year in any case, but if the market conditions continue as they are today, I think you'll see much more hotel activity out of us then you've seen this year.

Actually if I could ask one followup. I think Tom O'Brien in the past has made it sound like Travel Centers business was historically owned by more mom and pop operators out there. Do you think these credit market issues could create some stress there and create opportunity for you guys?

Yes, I think that there are a number of factors that are going to be create opportunity there and I think it's mostly -- there are a couple of large players besides TA, but I think that there's a lot of mom and pops who own one or two half a dozen properties. And I think when they see the current economic conditions as well as when they see the scale of companies like TA that they need to compete with who have -- who have a very wide breadth of relationships with the major fleets and have good relationships with independent truckers and have a very good service offering in terms of restaurants and quick service restaurants and convenient stores. I think that there will be an increasing trend towards those operators throwing in the towel, so to speak.

Thanks, guys.

And for our next question we'll go to William Truelove with UBS.

HI, guys. I know you went through it a little bit quickly but can you talk about the payments above the minimum by the different portfolios? Thanks.

Sure. The leader board, if you will for this quarter, was the Candlewood portfolio generated almost $3.7 million above the minimum. Our Intercontinental #3portfolio, almost $2 million above the minimum and then our host lease for the the 53 Courtyards produced almost $1.1 million of percentage rent this quarter.

All right, thanks so much.

Sure.

(OPERATOR INSTRUCTIONS)

We'll now take our next question from Napp Overton with Morgan Keegan.

I was wondering. Your adherence to your own imposed capital structure targets and leverage targets part of what would constrain you from the acquisition front leading to a lower transaction volume, and you did not complete a stock sale after the last of the petro acquisition and just what are your thoughts on the capital structure at this point?

Well, I think if you look at our capital structure today versus where we've traditionally run the company in terms of debt to equity, we're probably at the higher end of that range but we're very comfortable being at that range. We're also a much larger company with more diversified cash flows then we've historically been. Obviously, if we were to do a very large transaction, another petro or something, there would most likely have to be some type of equity component preferred or common equity involved in a transaction of that size. We do have, however, capacity to do smaller one-off-type acquisitions without raising equity today.

Thanks.

There haven't been any transactions that we've passed on because of concerns about our mix of debt or equity or our capital structure. We've got a lot of fire power on our revolver and ability to expand that.

Okay. Thanks.

And for our next question we'll go to David Brag with Merrill Lynch.

Good afternoon. Just wanted to revisit the topic of cap rates and I know you touched on it. But are you able to cite any specific examples from recent months of transaction where you have seen repriced or have seen Cap rates move up to some degree and perhaps could you discuss the Homestead portfolio sale now in hindsight where the cap rate on that might be versus five months ago?

Well, I can tell you, I guess the quick answer to the first part of your question is no. We've seen transactions that have come apart but we haven't seen them come back together again. So, I guess there's an expectation on our side and I think an expectation on the part of many potential investors on the hotel front that cap rates need to adjust and ought to adjust and -- but there are sellers, individual hotels that we've looked at where transactions have fallen apart and the seller is still looking for the same price that they had under contract or thought they had under contract with the previous buyer. So, I don't know if those sellers are going to sit on the sidelines for an extended period or if they're going to wake up and smell the coffee more quickly. But I don't think investors -- I don't think logical hotel investors are going to continue to invest at the same cap rates that they were investing at. Again, I just haven't seen that much transaction activity since the credit markets went a little crazy.

In terms of the Homestead portfolio, I think we are in a unique position there. So, I think if we sold that portfolio today we would probably get the same price for it as we got when we sold it because we had a default situation from our tenant in the way that transaction came together. So, but I think that in retrospect, all of the things being equal, we got a good cap rate on that transaction. We're happy with the level of proceeds that we got. It was the only portfolio of exterior corridor hotels. They're about ten years old on average. They were well located, but we think it was -- it all came together well. We're happy with how that transaction went.

Okay, just one more question for you. There was that -- the reason behind that sale but you also just indicated, the potential willingness to sell a couple of other individual assets. Might this indicate a strategic shift over the next year or so and an increased willingness to dispose of assets at this time?

I think we always look at our portfolios and evaluate whether they -- we should hold them long-term or not. We were very concerned about the on going credit quality of the ownership behind the Homestead and Grandeur Extended Stay Hotels entity and that's why we decided to sell that portfolio. We don't think that the two hotels that are AmeriSuites, that could be Hyatt Place, we don't think the returns they're going to generate as Hyatt Places are going to ramp up like at rest of the Hyatt Place portfolio will and so we think it's a good time to exit those two properties. We've got one property in north Phoenix that's in the Carlson portfolio that I think both Carlson and HPT agree is sort of limited both because of its location and because of how the Phoenix market works that it's just never going to be a stellar -- it's never going to do much better then it is now regardless of what brand or capital we put into it. So, but we have -- we think very good portfolios. We think we have good locations. We think we have strong brands. We know that our operators are good operators. So we're not really contemplating actively selling portfolios or pieces of our portfolios other then those ones we discussed.

Okay. Thank you.

We'll now take our next question from Michael Salinsky with RBC Capital Markets.

Good afternoon, guys. I know you don't give future guidance but given the Hyatt Place conversions you've done in the portfolio be I think you also mentioned you are doing work with the Crowne Plaza portfolio assets as well. A number of the operators have got into basically 5% to 7% RevPAR growth. Would you expect to be above that next year?

Well, you're right, we don't give guidance. We are just now at the very early stages of the budgeting process for next year and I guess I would contrast our portfolio with some of the other portfolios that some of the other REITs have out there. Ours is a much larger portfolio. We have 292 hotels but they're mostly -- it's weighted much more towards select service hotels. We expect to see very strong growth out of the Hyatt Place portfolios and out of the full-service hotels of Crowne Plazas, the Intercons, Marriotts, Radissons. But, for instance, we own 76 Candlewood hotels and a dozen TownePlace suite hotels which are mid-priced hotels without food and beverage and when you factor it all in, I think that we're probably somewhere in that 4 to 6, 5 to 7 range. I would probably say, again, without having seen all of the final budgets probably more in the 4 to 6% would be my expectation because as I mentioned on an earlier question, I think that we expect good growth but moderating more then it has in the past couple of years.

Okay. Also, you have $150 million of debt maturing in the first quarter of next year. What are your plans with regard to refinancing that at this point?

We're obviously evaluating that. We also have about $86 million of preferreds that are callable in December of this year. So we're evaluating a number of different things to do from a capital market standpoint; and obviously in today's markets you know it's very tough to pinpoint exactly what you're going to do looking as far out as March of next year.

And then finally, as you -- you've talked about $100 million of capital improvements this year. As you start to begin the process of budgeting for next year, I mean, do you have a pretty good backlog of projects you're expecting for next year or should we expect to drop off, essentially, from this year's volume?

This year has probably been high because we've redone or are in the process of redoing eight of the ten Crowne Plazas and because we've been spending quite a bit of money on the Hyatt Place conversions. So I would expect it to probably come down but when you have 292 hotels and 185 Travel Centers there, there will be capital, we are in discussions and I think we've mentioned this in past quarters and every thing moves a bit more slowly in Hawaii, but we are in discussions with Marriott about the possibility of building spa, a full service world class as they call it spa at our hotel in Kauai which could by itself be in the $20 million to $25 million range. Depending on how the timing of that works out would impact things. But generally speaking, I would expect the amount of CapEx next year to be less then what it was this year.

Okay. Thanks, guys.

It appears there are no further questions at this time so I would like to trun the call back over to you, Mr. John Murray, for closing and additional remarks.

I would like to thank everybody for joining us today and remind you that we'll be at NAREIT next week and we look forward to seeing some or all of you there. Thank you very much.

That does conclude today's teleconference. Thank you for your participation. You may now disconnect your lines.