Service Properties Trust (SVC) 2008 Q1 法說會逐字稿

Good day, and welcome to the Hospitality Properties Trust first quarter 2008 financial 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, 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 we will 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 May 6th, 2008.

The Company undertakes no obligation to revise or publicly release the results of any revisions of the 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 nonGAAP numbers including funds from operations or FFO. The recollection of FFO and net income is available in our supplemental package filed in the investor relations section of our website. Actual results may differ materially from those projected in forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Form 10K filed with the SEC and our Q1 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 first quarter 2008 earnings call. Earlier today HPT reported FFO per share for the quarter of $1.18. This represents quarter-over-quarter FFO per share growth of approximately 9%. First quarter RevPar growth averaged 2.3% across our 291 hotels. RevPAR growth at HPT;s hotels exceeded industry average driven by rate increases which rose 3.7% and offset a 1.3% point drop in average occupancy. RevPAR growth was aided by continued impressive improvement at our Hyatt Place hotel and strong performance at our Staybridge Suites hotels. Balancing these results was declining performance at our 18 Residence Inns portfolio and 76 Candlewood hotels.

As the economy has continued to weaken we have seen reduced training related extended stay demand in some markets. Several Residence Inns including our downtown Chicago hotel were also being renovated during the quarter. Overall we are pleased that our portfolio has continue to achieve above average rate gains without materially sacrificing occupancy despite the economic slow down and the Easter holiday. As I've said before in large part this performance reflects our strong locations, strong brands, well maintain assets and quality management. Further evidence of this can be seen at the local market level in the average RevPAR index for HPT's hotels which has increased 270 basis points for the first quarter of 2008 to over 119. RevPAR performance this quarter improved in most regions with the strongest regional performance seen at our hotels in Canada and east southcentral region driven by strong results at our six Nashville area hotels.

Balancing the strong results were the mid-Atlantic and west northcentral regions which felt the impact of reduced demand in the suburban New Jersey and Philadelphia markets and Minneapolis and Kansas City suburbs respectively. The strongest portfolio performance came from the Hyatt Place portfolio which continues to benefit from the ramp-up of the 21 hotels that converted from AmeriSuites to Hyatt Place last year. The comps from 2007 reflect the conversion construction period, but in a challenging market Hyatt achieved positive coverage on our minimum returns more quickly than expected despite still having one AmeriSuites hotels to convert and two in the sales process. Profit margins improved at our Hyatt Place properties from approximately 25% in a 2007 quarter to over 40% in the 2008 quarter.

In other portfolio changes, in early February we sold the Park Plaza hotel in north Phoenix for $8 million and effective January first we changed the Kauai Marriott hotel from a managed to a leases hotel. The hotel is now leased by a subsidiary of Marriott for annual base rent of approximately $5.5 million. The rent is subject to annual CPI adjustment and expires in 2019 unless renewed. Marriott has four 15-year renewal options. The Kauai Marriott has unfortunately been impacted by natural disasters and economic cycles resulting in lead coverage statistics and a burden on our other Marriott three portfolio hotels. Recently Marriott acquired the gulf course adjacent to the hotel and has significant vacation ownership and timeshare development planned to expand and enhance this resort. Marriott and HPT agreed to change our contractual arrangement because of many factors. First, the hotel need a room renovation as well as public area, pool and other upgrades to remain competitive with other luxury hotels in Kauai. Second, Marriott's resort expansion may have long-range positive implications for our hotel but in the interim will likely cause disruption. Third, the hotel is going to become a much smaller part of this resort and its future success may depend on the success of Marriott's golf, timeshare, and vacation ownership businesses.

In an effort to balance the perceived future risks and opportunities, we agreed to a lease guaranteed by Marriott and with annual CPI based escalations, securing the safety of our cash flow, but also giving Marriott the opportunity to achieve upside if the overall project is successful. In connection with the new lease we have committed to fund the hotel renovations currently estimated to cost approximately $45 million in return for rent increases as funded. We have also agreed subject to review of acceptable plans to fund a development of a spa at the resort which HPT will own. As this spa project is funded by HPT our guaranteed base rent will increase. In the meantime our Marriott three portfolio without Kauai should show better coverage of HPT's returns and have a better balance CapEx reserve to ensure that those 34 hotels are well maintained.

Despite slower growth and increased operating cost our hotel managers maintain margins close to 2000 levels, softer by 15 basis points in the 2008 quarter. Importantly HPT's annual minimum return and rent coverage ratios have generally remained strong with below one time coverage only in the Hyatt Place portfolio and the Marriott Kauai for the 12 months ended March 31st. Our managers project the RevPAR growth all rate driven will continue for the balance of 2008. These gains are expected to be more moderate in 2008 than they were in 2007. As the economy weakens, supply growth will exceed demand growth, so we expect the rate increases will be offsetting occupancy declines for the balance of 2008 as it did in the first quarter. Our hotel operators continue to forecast low single digit percentage RevPAR growth for 2008 and are generally expecting a weaker first half of 2008 due to challenging economic conditions with stronger growth in the second half based on group booking activity. In addition despite some cost pressures our managers are also expecting to continue to hold margins in 2008. There's cautious optimism, but each of our operators also has contingency plans ready for implementation if necessary if this downturn is deeper or more prolonged than they expect.

Today 60% of our portfolio minimum returns and rents are from hotels and 40% comes from our TravelCenter leases. As many of you know HPT's quarter results are more quickly than TAs and we can only discuss TAs result through year end 2007. Many of you have listened to or read the transcript of TA's fourth quarter 2007 conference call. With hindsight it's no surprise that TA's 2007 results were less than what HPT expected when we acquired our 145 TA TravelCenters and 40 Petro stopping centers. TA encountered the perfect storm of a dramatically weaker economy, the collapse of the housing market and record fuel costs. TAs management team at that time may not have realized the depth and severity of this downturn and its impact on their business. That is water under the bridge now.

The important fact is that TAs management team has taken a number of steps to maintain fuel margins and appropriately match staffing and other expenses with the level of business activity they are experiencing. They've also stopped discretionary capital spending. On the expense side, much of the cost savings were implemented in late March, so the impact will not be noticeable until the second quarter and beyond. Additionally the first quarter is generally the slowest for TA, reflecting various factors including the retail business cycle and more challenging weather conditions in much of the country.

At year end TA had approximately $150 million of cash on hand, availability under its line of credit of approximately $70 million, and access to CapEx reimbursement from HPT. We funded the second $25 million installment of HPT's capital commitment to TA which does not affect rent in April. Clearly these are challenge times for TA and the trucking industry, its primary customer. However we believe that TA is adequately capitalized to work through the challenges and that the initiatives they have taken to mitigate the impact of current economic conditions will meet with success, probably not in the first quarter, but as the year unfolds. Also we believe if these already announced plans prove insufficient TA has another initiatives which can be implemented if necessary. However, I reiterate that rent reductions are not on our agenda.

One final point regarding TravelCenters, this quarter we purchased from a third party the land and several other buildings associated with our Petro stopping center in Sparks, Nevada, which had been subject to a ground lease for $42.5 million. The seller operated an adjacent casino, motel, an office building and had substantial parking on the parcel that included our Petro site. The rent obligation for TA has resulted in this transaction essentially unchanged, as the seller has sublet the casino, motel and office building back. I'll now turn the presentation over to Mark Kleifges, our CFO.

Thanks, John. During the first quarter performance of our leased hotel portfolios declined versus last year with RevPAR basically flat, profit margins down 150 basis points and a 4.9% decrease in cash flow available to pay rent. RevPAR and operating profit margins at our leased hotels for the quarter were negatively affected by our Residence Inn portfolio which has three of its 18 hotels under renovation and experienced lower occupancy at several other hotels. For the last 12 months rent coverage ratios for our leased hotels portfolios range from .76 times for our Kauai Marriott hotel to 1.62 times for our Courtyard portfolio. First quarter performance was stronger at our managed hotel portfolios with RevPAR up 3.6% and a 73 basis points increase in profit margins. Cash flow available to pay our minimum returns increased by 6.9% for the quarter with increases of 13% and 18% for our Staybridge and IHG number three portfolio respectively. For the last 12 months return coverage ratios for our managed hotel portfolios ranged from .7 times for our Hyatt portfolio to 1.66 times for our Carlson portfolio.

As John mentioned earlier our Hyatt Place portfolio continues to generate strong top-line growth and was able to achieve positive coverage of minimum returns this quarter more quickly than we expected. Rent coverage for our TravelCenter portfolios for the 12 months ended December 31st, 2007, were 1.26 times for the TA portfolio and 1.08 times for the Petro portfolio. We calculate coverage for our TravelCenter portfolios consistent with our hotel portfolios, property level revenues less property level expenses divided by the rent due us. For the 2007 year, performance at our 182 comparable TravelCenters was weak with fuel gross margin and volumes down 10.5% and 4.2% respectively Nonfuel revenues and gross margin were both up 1.9 year-over-year primarily on the strength of TAs truck repair business. TA will be reporting their first quarter 2008 results next week. Typically the first quarter is the weakest quarter of the year for TA and few in any trucking companies have reported strong results for the quarter, so we would expect to learn that weak fuel volumes persisted through the 2008 first quarter.

HPT's EBITDA in the first quarter of 2008 was $156.4 million, which is a 19.6% increase over 2007 first quarter EBITDA of $130.7 million. Funds from operations for the first quarter were $110.9 million compared to $98.5 million for the first quarter of 2007. On a per share basis, FFO increased 9.3% from $1.08 per share to $1.18 per share in the 2008 first quarter. The weighted average number of common shares outstanding totaled 93.9 million in the 2008 first quarter compared to $90.8 million in 2007.

Our FFO pay out ratio was 65.2% for the first quarter. Minimum returns and rents were $145.1 million in the 2008 first quarter, a 27% increase over 2007 first quarter. This increase resulted primarily from our 2007 TravelCenters and Petro acquisitions and commencement of the two related leases with TA. FFO for the first quarter also includes approximately $5 million or $0.05 per share of additional returns and percentage rent. This compares to approximately $7.2 million or $0.08 per share in the 2007 first quarter. The decline from 2007 resulted primarily from the decrease in cash flow available to pay us additional returns at our IHG number four portfolio and our Candlewood portfolio. These cash flows declines were the result of schedule increases and FF&E reserves for the IHG portfolio and base management fees for the Candlewood portfolio.

Turning to our balance sheet and liquidity, cash and cash equivalence totaled $74.9 million at March 31, 2008 which includes $45.5 million of cash escrowed for future improvement to our hotels. During the quarter we made approximately $22.4 million of capital improvements to our hotels, and we expect to make additional improvements of between $70 million and $90 million during the remainder of 2008. In April, we reimbursed TA for $25 million of capital improvements to our TravelCenters. On the liability side of the balance sheet, during the quarter we retired $150 million of maturing senior notes with borrowings under our revolving credit facility. HPT's debt to total capital on a book basis was approximately 49% and on a market basis debt to total capital was approximately 43% at the end of the quarter. Our EBITDA to total fixed charges coverage ratio was 3.5 times in the 2008 first quarter. That concludes our prepared remarks. Operator, we are now ready to open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS) Please allow one moment for the first question. And our first question is from William Truelove of UBS. Please proceed with your question.

Hey, guys. I have got a couple of questions. The first one, on the $42 million purchase in the quarter, you said that was a ground lease. Where does -- where will the P&L impact happen? Which line item -- are we reducing an expense or what -- wasn't really income for TA.

No. In our income statement, Will, it will simply result in additional rental income. No other impact on our income statement other than obviously the cost of borrowing under our revolver to fund it.

Yes. Yes. Okay. Alright. Good to know. And then second of all here is sort of a complicated question I guess. One you are going to love. On TravelCenters, can you talk about ways in which -- or scenarios in which HPT maybe lending money to TA in order to help TA end up paying the rent? We get tons of questions about trying to figure out scenarios where you are lending money to TA and they turn around and then pay it and how that could build up over time. Can you talk about what scenarios they are and sort of your thoughts about that happening? Thanks.

I'm not sure what's out there in the marketplace, but we are two publicly traded companies. And if we were lending money or if TA was borrowing money, I think we both need to disclose that. And furthermore if we are lending money to TA so they can pay the rent I'm not sure we can recognize income for that. So I guess my short answer is it not happening. So I can't really describe any -- I can't really describe it any further than just to say it's not happening and we have expectation that it will.

Alright. Thanks for the clarity.

Thank you. Our next question is from Jeff Donnelly of Wachovia. Please proceed with your question.

Good afternoon, guys.

Hi Jeff.

John, I'm interested maybe as the follow up to Will's question what you think about TA's other initiatives are. Because maybe a little involved but the unit volume the trucking among the major generators of trucking traffic, like vehicle sales, home building buying, retail inventory, continue to be down, I think 10%, 20% year-over-year and that has persisted since the end of the first quarter. And I guess it's a way of saying that I would expect that cash burn that we saw at TA in Q4 will continue in Q1 as you guys have suggested, but it could accelerate beyond that, and I'm curious beyond the cost cutting actions they've taken what sort of solutions could be out there to overcome some of those trends.

Well, I guess I'd start off by saying that I would expect that they're going to -- I know that they are working hard to make sure that the changes that they've already announced are implemented quickly and are felt throughout the organization, and that they are going to be watching as closely as everybody else -- more closely than anybody else to make sure -- to see if they are having the desired effect or not. And -- but in terms of other things that they could do, I think probably the best people to answer that are the folks at the TA, because we don't manage the properties. But I can tell you for instance every single one of the TravelCenter sites and Petro sites is a 24-hour a day, 365-day-a-year business in every single one of its business units.

No matter what time of day you show up at any given TravelCenter site, there will be -- if there are four truck service bays there, will be mechanics in those service bays. If there's four fast food, quick service restaurants, there will be a manager and staff at each one of those. There will be a management team and staff at the sit-down restaurant. There will be people in the convenient store. And there will be people overseeing the fuel islands. I may be even be missing some people I'm not sure.

But I think just like you see after 9/11 when there was a downturn and you saw standards become relaxed in the hotels and concierge lounge be replaced by coupons for discounted breakfast, and the number of people at the concierge desk or doormen or things be reduced. I think that TA could also take steps like that where they could maybe only operate one or two rather than four fast-food restaurants, or maybe at certain times of the day only operate the quick serve restaurant and not the sit-down restaurant or vise versa. And that maybe at certain hours of the day they can keep a mechanic in the truck service area to take care of emergencies, but not necessarily have full staffing 24 hours a day. So I think there are a lot of initiatives like that. I don't know which ones will offer the biggest bang for the buck and I don't know that there may not be other steps that TA feels that they could take in addition to or even maybe before some of the things that I've discussed. But I think they are going to have an earnings call next week so you could ask them if you -- That would probably be a better question for them.

It probably will. And -- but what you are alluding to is maybe head count changes beyond what they've already announced thus far potentially?

That's correct.

And then I'm curious, Mark --

Modifying the number of hours. There's a lot of hourly employees in some of these locations.

Makes sense. Mark, I'm curious on the $25 million payment to TA, where does that show up in the financial? Does that just flow through the assets?

Yes. Yes.

And on the capital expenditures I think you guys mentioned that they ceased making discretionary CapEx investments there. Do you guys know how much they've spent or how much you've contribute to them year to date or what you anticipate they would spend in full year 2008 for CapEx on the TravelCenters?

I don't know Jeff off-hand what their numbers -- they did -- I just don't recall. They did give some guidance on that on the their call. I just don't recall the number. In terms of our commitment to fund though, we funded -- we are committed to fund $25 million each lease year. We made the first payment installment in 2007, and then as we mentioned in our prepared comments we made the second lease year installment of $25 million in April.

And I'm curious for yourselves, for HPT, what is your total capital expenditures budget in 2008? And are you able to break that down between what you guys will fund and collectively what your managers will fund?

We think that for the remainder of this year, that on the hotel side we probably have another $70 million to $90 million, and I would think that we will fund above the FF&E reserves between $45 million and $65 million of that total.

And last question. Actually, this is for John. I think you were at a conference earlier this year where you were saying there were I guess three to four portfolios I guess in the market with roughly say a dozen or two dozen hotels in them. Any update on transactions opportunities out there in the market and where pricing is sorting out?

Yes. I guess the last part of that first. I don't think the pricing is sorting itself out yet. All four of those portfolios as far as I can tell are still on the market. There's other portfolios that are out there that brokers on some of the -- some of those four portfolios are responding -- I don't want to say that there's -- every now and then I get emails regarding follow up that sound like there may be some desperation because there's not only do they own hotels that they are seeking to sell, but they are also developing hotels. And so I think for some of the smaller operators as the capital markets remain challenging, they are having a tougher time financing their ongoing business.

There may be more that come to market in the near term, but anyway we are not comfortable that we've really sort of felt the bottom in terms of where pricing will settle out, so we are still taking a waiting to see approach to what is out there. We think probably cap rates have dropped 100 basis points, they've come up at least 100 basis points, and in some areas maybe a couple hundred basis points. But we don't want to get in too early. I don't see us missing opportunities. There's been very little transaction flow. So I think we are better off waiting to see how things shake out.

Yes. Thanks. That's helpful.

Thank you. (OPERATOR INSTRUCTIONS) And your questions will be taken in the order received. And our next question comes from Mark Roberts of Roberts & Company. Please proceed with your question.

Can you give us a sense on the increase in or decrease in occupancy in the various hotels, are you starting to see the weakness more in the higher end business class hotels or more in some of the lower priced long-term Residence and some that are used for travelers?

I think in this quarter we probably -- we have a big portfolio and it's very geographically diverse. So it's been a little bit of a mix. But this quarter for sure it seemed to affect our Residence Inn and Candlewood hotels more so than some of our other portfolios. And in particular in those -- the shortest tier occupancy seem to be okay and the longest tier occupancy seem to be okay, but sort of that one week to three week, the seven to 30 day occupancy seem to be the more challenging for our Candlewoods and Residence Inns, which we attribute to reduced training business mostly.

So from your standpoint, you wouldn't feel confident saying that there's a decline in business travel or a specific decline in vacation type travel? You are seeing it more in specific geographic and types of occupancies?

I think we mostly have business hotels. We do. We have some that are focused on leisure travelers like Kauai and our intercontinental in San Juan, which has a mix, but we are mostly business hotels. So I would say to the extent that we've seen dips in occupancy it's business related by and large.

Okay. Thank you.

Okay. Thank you. Our next question is from William Truelove. Please proceed with your question.

Just one follow up. In terms -- can you break down whereby the portfolio type the additional rent that was earned beyond the minimum --

Sure, Bill, I'll give you the larger components. The Candlewood portfolio or IHG number two, $1.428 million, the Carlson portfolio, $1.65 million. And those were additional returns. And then under our Courtyard Marriott number one portfolio we earned $988,000 of percentage rent in the quarter.

Alright. Thanks so much.

Thank you. And our next question is from Celeste Brown of Morgan Stanley. Please proceed with your question.

Hi, guys. Could you just talk about the seasonality this year of the additional returns, should be similar to last year or thinking about lodging is lagging maybe it will trail off as the year goes on?

That's a tough one to answer, Celeste. Obviously we have a leading indicator in the TravelCenter and that's been pretty weak, and we've been watching the results of our hotels, and the pace has been declining, but it's still -- we are still seeing some decent growth, I think relative to the industry as a whole. And our operators, they are cautiously optimistic and they seem to be holding on to a belief that the second half will be stronger than the first half. So we're -- I guess we are continuing to expect to see growth and to see it waited probably more towards the third quarter. The fourth quarter is always one of the weaker quarters. The second quarter I think will be similar to what we are seeing right now.

Okay. Thank you.

Thank you. There are no further questions. I'd like to turn the call back over to Mr. John Murray.

Thank you all very much for joining us today. I'll remind you that we're going to be presenting at the NAREIT Institutional investor conference in June and we look forward to hopefully seeing you all there. Thank you.

Thank you. This concludes the conference call. Thank you, everyone, for joining. You may now disconnect.