Service Properties Trust (SVC) 2010 Q1 法說會逐字稿

Good day and welcome to the Hospitality Properties Trust first quarter 2010 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 Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you and good afternoon. 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. I would also note that the recording and retransmission of today's conference call is strictly prohibited without prior written consent of HPT.

Before I 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 10, 2010. 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, or SEC.

In addition, this call may contain non-GAAP numbers including Funds from Operations or FFO. A reconciliation of FFO to net income, as well as components to calculate AFFO, PAD, or FAD are available in our supplemental package found in the Investor Relations section of the Company's website.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Forms 10-Q and 10-K filed with the SEC, and in 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 now I would like to turn the call over to John Murray.

Thank you, Tim. Good afternoon and welcome to our first quarter 2010 earnings call.

Today, HPT reported first quarter FFO per share of $0.76. Focusing on HPT's hotel investments, first quarter RevPAR declined 4.1% across our 289 hotels, driven by a 4.3 percentage point increase in average occupancy, to 64.2%, and a decline in average daily rate of 10.5% to $91.67. RevPAR increased in Canada and New England, but declined in all other regions compared with the 2009 first quarter. Our higher place portfolio RevPAR gained 3.2% this quarter, and has now overcome the historic RevPAR dominance of our Courtyards among upscale hotels. RevPAR declined at our TownePlace Suites and Candlewood Suites brands, with each down 8.5%. The mid-priced, extended-stay hotel segment continues to suffer from cannibalization by upscale extended-stay hotels. Maintaining rate integrity remains a challenge, especially for our select service brands, as suburban full service hotels continue to aggressively package room rates and other amenities to drive occupancy, resulting in a trade-up effect in some markets, particularly those lacking group demand. Although RevPAR at our hotels declined in the first quarter of 2010 for the seventh consecutive quarter, we are encouraged that room demand seems to be picking up, and with increasing occupancy, comparable year-over-year rate trends are also gradually improving.

Looking at the trend in occupancy during the past five quarters, occupancy was down over 8 percentage points in the first two quarters of 2009, down 6.6 percentage points in Q3, down only 1.7 percentage points in Q4, and positive 4.3 percentage points this quarter. Looking at ADR over the same period, the quarterly comps were generally negative in the teens for each quarter of 2009, and down a less negative 10.5% in the first quarter of 2010. In the month of March, occupancy was up 6.6 percentage points and rate was down 7.8%, resulting in a RevPAR increase of 1.6%. This is the first year-over-year monthly increase in RevPAR for our hotel portfolio since July of 2008. Too early to celebrate the recovery, but revenue trends are headed in the right direction.

While the economy appears to be slowly recovering, and year-over-year comparisons are improving faster than we had previously projected, we don't expect positive quarter-over-quarter RevPAR for our hotels until the second half of this year. Updated projections by our managers for 2010 now generally indicate flattish RevPAR , but there is a high level of uncertainty. Because booking windows remain short, it has been very difficult for our operators to accurately project monthly revenue until the month is nearly over. Nonetheless, there is a renewed sense of optimism as a result of the significant jump in demand during March.

The outlook for flow-through of projected increases in revenue to hotel level cash flow is less encouraging. Incremental cost savings are difficult for our operators to achieve, especially when demand is so hard to predict accurately. In fact, there is growing cost pressure in areas such as wages and benefits. Also, as occupancy is improving, largely without average daily rate increases, this too has and will continue to cause margin pressure. Accordingly, 2010 hotel net operating income is still expected to decline versus 2009, even if the latest forecasts prove accurate. Despite this, our hotels are participating in the recovery and will gradually return to past levels of cash flow. because of their attractive locations, high quality, and recognized brands.

Although none of our hotel portfolios generated positive coverage of our minimum rents returns this quarter, we were paid our full contractual rents and returns under each hotel agreement except from two Marriott portfolios. We continue to be paid less than the required periodic minimum return on rent amounts required under the Marriott Number Three and Number Four agreements, and have drawn on their related security deposits for the deficient amounts. Based on our projections and the budgets prepared by our operators, we expect less than one times coverage of our hotel rents and returns in 2010. Our hotel portfolios security deposits and guarantees were not designed to last indefinitely during a lodging downturn as deep or prolonged as the one we're operating in today. If economic growth does not pick up pace as expected and if the increase in lodging demand does not continue or result in ADR growth, some of our security features may ultimately be exhausted. However, we believe the existing guarantees and deposits will be sufficient to offset minimum return and rent shortfalls in 2010 for all of our agreements, including the Marriott Number Three and Number Four agreements. 2011 and beyond remains difficult to predict with confidence at this time, given limited booking windows and the early stage of the demand recovery.

Turning to our TravelCenter investments, this morning TA reported first quarter 2010 financial performance which reflects continued economic weakness in the US economy, but which showed further improvement in fuel volume trends. Fuel volumes were up this quarter, were up 8.9% quarter-over-quarter across HPT's 185 TravelCenters, compared to a 3.5% increase in the fourth quarter of 2009, and a 4.2% decline in the third quarter of 2009. Per gallon diesel margins have remained steady with the 2009 fourth quarter. Although these past two quarters are the seasonally weakest for TA, it is apparent that TA continues to face headwinds, with fuel volumes and cash flow dramatically below 2006 peak levels. At March 31, TA had approximately $155 million of cash on hand, availability under its line of credit, access to additional CapEx reimbursement from HPT, and the ability to defer up to $5 million of rent per month through December 2010. We remain hopeful that TA's working capital issues have been successfully addressed and that TA may be heading down the road to recovery. However, while TA has demonstrated the ability to pay us rent at the reduced amount, keep in mind that, despite the 8.9% quarter-over-quarter increase in fuel volume at our TravelCenters in the first quarter, volumes remain 19.4% below first quarter 2007 levels. So TA's ability to pay us the full contractual rent beginning in 2011 remains dependent on continued economic recovery.

HPT remains one of the most secure hotel REITs in the industry, and we have maintained our investment grade rating throughout this difficult economic environment. The availability of attractive hotel investment opportunities has been disappointing, but is noticeably picking up during 2010. While the flow of acquisition opportunities we are seeing has increased, the willingness of lenders to extend or modify troubled situations continues. We believe this is artificially distorting the market, causing a supply demand imbalance, such that hotels which are trading are trading at overly aggressive pricing. We intend to remain a disciplined investor. We are ready for growth opportunities. We have an undrawn, fully available, $750 million revolver, strong cash flow, $6.4 billion of unencumbered property and no significant debt maturities until 2012. This remains a challenging economic environment, and we intend to continue to aggressively asset manage our real estate investments, maintain our strong capital base and liquidity, and grow our real estate portfolio.

I'll now turn the presentation over to Mark

Thanks, John.

Hotel level cash flow available to pay our minimum rents and returns declined $11.6 million, or 19.6% quarter-over-quarter, while revenues declined $9.5 million or 3.6%. Hotel cash flow available to pay our minimum rents and returns as a percentage of revenue declined 3.7 percentage points versus the 2009 first quarter, to 18.6%. This decline in margin was due primarily to higher wage and benefit costs resulting from increased occupancy, higher repair and maintenance expenses, and the step-up in the FF&E reserve percentages for certain of our hotel portfolios in 2010. As John noted, 2010 first quarter rolling 12 month coverage of our minimum returns and rents was below one times for all of our hotel agreements, and while we expect this trend to continue throughout 2010, we believe our available credit support is more than adequate to cover the expected current year shortfalls. Information regarding security deposit and guarantee balances for all of of our agreements at the end of the first quarter is included in note 12 of our Form 10-Q, which we filed earlier today.

Turning to our TravelCenter portfolio, cash flow available to pay rent at our TravelCenters decreased $17.7 million or 27.1% from the 2009 first quarter. Fuel volumes and non-fuel revenues increased 8.9% and 1.2% respectively, quarter-over-quarter. However, per gallon fuel margin and non-fuel gross margin percentage both declined and flight level operating expenses increased compared to the prior year. Property leverage coverage for the 12 months ended March 31 was 1.04 times for our TA Centers, and 0.93 times for our Petro Centers. Both of these coverage amounts have been calculated based on contractual rents and exclude the impact of the rent deferral agreement. Earlier today, TA reported first quarter 2010 corporate level EBITDAR of $33.2 million, and TA's EBITDAR coverage of contractual rent at the corporate level for the first quarter was approximately 0.55 times. Adjusting rent for the deferral agreement, coverage of cash rent was 0.72 times for the seasonably weaker first quarter.

Turning to HPT's operating results for the first quarter, this morning we reported FFO of $94.3 million, or $0.76 per share. EBITDA was $139.6 million in the first quarter, and our EBITDA to total fixed charges coverage ratio for the quarter remains strong at 3.1 times. On February 22, HPT paid a cash dividend on our common shares of $0.45 per share. Our FFO payout ratio was 59% for the 2010 first quarter. On April 15, we announced a regular quarterly dividend for the second quarter of $0.45 per share which is payable on or about May 25.

With respect to our balance sheet and liquidity, at quarter end we had cash and cash equivalents of $150.5 million, which included $33.6 million of cash escrowed for future improvement to our hotels, and had no outstanding borrowings on our $750 million revolving credit facility. Turning to our 2010 capital needs, in April we repurchased at face value $139.1 million of our 3.8% convertible senior notes pursuant to a cash tender offer. We expect to recognize a loss on debt extinguishment of about $5.2 million in the second quarter as a result. We used our existing cash balances for the repurchase. For the remainder of 2010, we have only one $50 million debt maturity in July and our next term debt maturity is in 2012.

As discussed on last quarter's call, 2010 capital spending for most of our hotel portfolios will be limited to amounts available in the FF&E reserves. However, we are planning renovations this year at 27 Courtyards in our Marriott Number One portfolio, and 11 Residence Inns in our Marriott Number Two portfolio. As a result, we expect to make CapEx fundings in excess of the FF&E reserves for these two portfolios of approximately $103 million in 2010, of which we funded $7.7 million in the first quarter. In addition, under our lease with TA, we are committed to fund an additional $5.4 million of capital improvements to our TravelCenters.

In closing, we are encouraged by the recent signs of increased demand at our hotels and TravelCenters, and believe HPT is well positioned to manage through the remainder of this difficult period and take advantage of attractive growth opportunities. Operator, that concludes our prepared remarks. We're ready for questions.

Thank you. (Operator Instructions).

Our first question today comes from David Loeb of Robert W. Baird.

Good morning my time, good afternoon your time.

John, I'm sure you're reluctant to negotiate with TA via conference call, but can you give us just a little bit of insight into the way you're thinking about the end of rent deferral and the due date coming up on the currently deferred rent? And any insight into what the Board may be thinking? I know TA that is effectively a sister company and was created from HPT, but still family squabbles can exist. If you could give a bit of a view of the way your Directors are looking at that, as well, that would be very helpful.

Well, thanks for that question.

We -- TA was spun off from HPT, and so we do have a close relationship with TA. But I guess I would start my answer by saying that there's no squabble going on at the present time, because there's no discussion going on currently regarding restructuring that deferral agreement or our lease arrangement with TA under either lease. You know, I think the way we're looking at things right now is we're seeing a lot of signs that the economy is starting to improve. These past two quarters for TA have been the two that are historically the weakest, and although the margin -- cents per gallon margin that TA has achieved on the diesel sales is probably not the trend that we would have liked, a lot of that trend has to do with unusual pricing for diesel fuel in 2008 and the first quarter of 2009.

So we're still trying to get a good read on what stabilized margins are there. And so I think at this point, long story short, is it's a little too early, we believe, to reach the conclusion that anything needs to be amended. We're hopeful that this next quarter and following quarters show continued improvement as the economy continues to improve and that they're able to make the payments as we go forward. And I don't know that I have -- that I want to put words in the mouth of our trustees in terms of where they are. I think they spent -- our independent trustees and TA's independent trustees -- spent a lot of time negotiating on behalf of their respective shareholders, and I'm not sure, frankly, that either side is currently looking forward to having to do that again. So --

Well, just to follow up, John, I appreciate all of that. Tom O'Brien on the TA conference call said, among other things, and I'm quoting, "a resolution of the rent deferral agreement arrangement has to come". So I hear that, and his other comments as well, as that obviously he said one possible resolution is that they pay full rent and they pay you what they owe. He implied something like that. But he also was implying that there could be other possible resolutions. And clearly that's in TA's interest, but I just was hoping you'd give a little more color on the appetite within HPT and among HPT's trustees for something that's more forgiving as opposed to less forgiving.

I think at the present time we would like Tom to go with his first answer, in his call this morning. And I don't think, at this point, that our Board and management feels like they have enough color from enough of this year and enough of the strong quarters, to make a determination that any leniency, if you will, is necessary. So I think we'll see how the year plays out and when we have further information, we'll certainly share that with -- on these calls. But at the present time, I don't think that anyone here is contemplating a meeting to discuss those sort of changes.

Great. Got it. Thank you for your candor on that.

Yes.

(Operator Instructions).

Our next question today comes from Michael Salinsky of RBC Capital Markets.

Good afternoon.

Sticking along those same lines, I mean TA being the most pressing, just wonder if you guys were in open discussions with Marriott right now regarding Marriott Three and Four, whether you're having active discussions, and what you're kind of looking for right now, if and when the portfolio -- if and when those security deposits do exhaust?

It's probably a similar answer I would give you for Marriott. We talk with Marriott at least once a week, I would say. I'm on one of their owner advisory councils, so I meet with them periodically. We do a lot of business with them. We have 125 hotels in five different portfolios. And I think they've made their position clear that they're going to -- on those two portfolios, until they got better clarity on the business, they're going to continue to pay the cash flow, and while they're doing that, we're continuing to draw on the deposits. And based on our outlook from our projections as well as theirs, we believe that the security that we have is enough, and what's more, as we go through the year, it really started probably during the third or fourth quarter, but we've -- each successive month, when we get revised forecasts pretty much from all our operators, but certainly from Marriott, they're looking better and better each month. So, we think that a recovery is taking hold.

First quarter, is again -- well, the fourth and first quarters are typically weaker for the lodging space, and we're expecting to see, as the economy improves and as we move into the second and third quarters, that we're going to see better performance in these hotels. And so we're hopeful that we turn the corner and we're not -- I wouldn't say that anything has really changed since the last time we talked about this. We've drawn a little bit more on the deposit, but we think we've also drawn closer to the time where we turn the corner on performance. So we're hopeful that the deposits are sufficient.

Okay. That's helpful.

Just a quick question then, in terms of -- you're spending a decent amount on your Marriott One and Two portfolios. Maybe you already reinvested in the Marriott Three and Four, or is that CapEx something you're looking to do later down the line for those?

We regularly invest in all of our hotels. I don't have the schedule in front of me on the timing, but there are some Courtyards in those portfolios and they're newer, so they don't -- they're not -- they're just a different vintage, if you will, than the 53 Courtyards that are in the Marriott One portfolio. But I think it's fair to say that Marriott would probably like us to renovate the lobbies in those -- in the Courtyards in the Marriott Three and Four portfolios, just because it will give more power behind their refreshing business lobby. But I don't see us doing that until after -- I don't see us investing additional capital for something like that, until they're paying the full returns again.

Switching gears, on the acquisition side, just curious if you guys are seeing any portfolio opportunities yet, and when you expect pricing to begin thawing.

We have seen a few portfolios. We're looking at one seriously right as we speak. And it's difficult to say on pricing, because there's a lot of capital out there, a lot of equity chasing potential hotel transactions. And in my opinion, because of the sort of extend and pretend policies among lenders, not as much supply has come to the market as you would typically see.

So I think if there was really a free market, and banks had to take write-offs for their bad loans instead of just extending them, there would be a greater supply of -- a better matching of supply and the equity looking to acquire hotels. And so prices wouldn't be being bid up as much, and cap rates wouldn't have come down as far as they seem to. We're looking at cap rates for a lot of the transactions that we've seen in the last six months, the cap rates have been pretty similar to the cap rates we saw in 2007. So, anyway, we are looking at a couple of transactions. We think that we will make an acquisition -- we're hopeful we'll make an acquisition this year. We're looking at a couple of different things. But we're looking at one portfolio currently, and we'll just have to see. It's too early to say if it's going to be something we're successful with or not.

That does it for me, guys. Thanks.

Thanks.

And our next question comes from Michael [Arroyan] of Sun Life Financial.

Hi, guys. I missed the first part of your call, but one question that came to mind in listening to your answer regarding the Marriott leases is, is there any reason why -- maybe you pinpointed sort of why those properties are underperforming, or just within the rest of the Marriott properties that you sort of oversee, or -- is there any sense for why that's happening, or has Marriott given you any clarity onto that?

No, it's -- I don't think they're down materially differently than any of our other portfolios. They're being affected by the tremendous dropoff in demand and ADR weakness that followed, as a result of this recession. And it just happens that we have -- we have different contract terms in each of our portfolios, and these were two that had security deposits where they made the decision that they were just going to pay us the cash flow and count on us using the security deposit, rather than terminating them. And so far, that's what we've done.

Right now, obviously your option is, I mean, you could if you wanted to, find another tenant. But it doesn't make sense, if you're collecting security deposits, to do that. But once those run out, or if they run out, is that something you might consider? And how hard would it be to find someone as a suitable replacement? I'm just wondering if those properties are some how inferior, and that's why Marriott seemingly doesn't care as much about them.

I think Marriott cares a lot about them and they're not inferior. So I'll put that out first. I think that it wouldn't be all that hard to find a replacement manager if that's something we wanted to do. But keep in mind, that Marriott's base management fee is subordinated to our return, and if we brought somebody else in to manage the properties, they would want to be paid to manage the hotels.

Okay.

So we're not sure that anybody else would manage any better than Marriott in these circumstances, but we are sure that we'd have to pay them. So at the present time we're -- the status quo doesn't seem so bad.

Even though -- and that's still in effect, even though they're technically -- I don't know if default is the right word, but not sort of fully living up to the requirements of the lease. That still kicks in for them, even if you went to another tenant?

I think the answer is yes. I'm not sure I completely followed your question there --

My thought is that, if they're say not paying minimum rents and you have to go with their security deposits, I would have thought that there would be some type of breach in the lease agreement, as a result of them not paying.

There is -- we have the ability to terminate the management contract.

Right.

And find a replacement manager.

Okay.

But, like I said, we would have to pay somebody else when we found them, and so -- Marriott's one of -- they're one of the best management companies in the world. We don't think that these properties are not generating sufficient cash flow because they're not good managers. It's because of the economy. So, we wish they were paying us the full amount instead of making us draw on the deposits, but when the recovery firms up, they'll be replenishing the security deposit. So it will all work out. It's a timing thing, really.

Just help me out here. In terms of the other Marriott properties that you guys have, I mean, those ones are obviously paying the minimum rents, correct?

We have Marriott Kauai is on the Marriott -- is the Marriott Number Five 5 transaction, and they're paying under a guarantee there, Marriott is. And in the Marriott One and Marriott Two portfolios, we have Host Marriott and Crestline as tenant and subtenant,and they're funding the shortfalls, because they've got security deposits that are substantial and that they don't want to put at risk. So --

Okay.

But the cash flow is below the minimum, from the hotels themselves.

I'm just trying to understand why they've chosen those properties to not -- you know what I mean?

I've done the best I can trying to -- you know, it's different agreements with different hotels and I think you should -- you need to ask Marriott, I guess, if you want a better answer than that. The cash flow isn't there and it was an uncertain economic time, and Marriott said well, you know, there's a security deposit so we're going to take the risk.

Okay. All right. Thanks.

And our next question comes from Ryan Meliker of Morgan Stanley.

Hello, guys.

Just a real quick question for you. Just commenting on a couple of things you said earlier in this call. First, you had mentioned that you're looking at a portfolio right now, and then second you had said that in the current environment you think it would be difficult to find a replacement for Marriott that you wouldn't have to pay. Does that mean that when you're looking at underwriting new acquisitions today, you're looking at having a base management fee that is not subordinate to an owner priority return in your underwriting analysis?

No, it means that when we're underwriting it, we're underwriting at a value where the owner and the manager both make money.

Right. So but does that mean that -- I mean, I'm assuming you're doing a discounted cash flow analysis to some degree. Does that incorporate a management fee?

Yes. I don't know that I want to go into the details of the particular deal that we're looking at, but yes, it would anticipate management fee to the manager, but subordinate to our return.

Okay. But still subordinate to your return. That's what I wanted to know. Thanks a lot.

Whether we -- whether that gets achieved, like I said, we haven't bid yet, so --

Right.

And having no further questions in queue, I'd like to turn the conference back over to John Murray for any additional or closing remarks.

Thank you all for joining us today, and we look forward to hopefully seeing you at the NYU conference in a month or so. Thanks.

That does conclude today's conference, ladies and gentlemen. Again, we appreciate everyone's participation today.