Service Properties Trust (SVC) 2011 Q3 法說會逐字稿

Good day, and welcome to the Hospitality Properties Trust third quarter 2011 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 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. The recording and retransmission of today's conference call is strictly prohibited without prior written consent of HPT.

Before we get into today's call I'd like to read our Safe Harbor statement and set some ground rules concerning certain questions. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on HPT's present beliefs and expectations as of today, November 7, 2011. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission, or SEC.

In addition, this call may contain non-GAAP financial measures, including normalized funds from operations, or normalized FFO. A reconciliation of normalized FFO and EBITDA to net income, as well as components to calculate AFFO, CAD, 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 Q3 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.

As you may know, last week HPT announced its plan to purchase 2 Royal Sonesta hotels. These hotels are being purchased as part of a complex transaction from the merger of Sonesta International Hotels Corporation into Sonesta Acquisition Corporation. Sonesta International is a publicly-owned company listed on the NASDAQ. The transaction which will result in HPT's acquisitions of these hotel, will be the subject of a proxy to be distributed to Sonesta International's shareholders after it is declared effective by the SEC. HPT has been advised not to comment on any of the economics or other details of its acquisition of the 2 Royal Sonesta hotel, beyond what is stated in HPT's press release. HPT does not intend its comments today to be a solicitation of votes for the merger. Such a solicitation can only be made by a proxy statement which has been declared effective by the SEC. For more information about the proposed merger and HPT's acquisition of the Royal Sonesta hotels, please refer to Sonesta International proxy statement and other documents which have been or will be filed with the SEC by Sonesta International, Sonesta Acquisition Corporation, or HPT.

And now I'd like to turn the call over to John Murray.

Thank you, Tim. Good afternoon and welcome to our third quarter 2011 earnings call.

Today, HPT reported third quarter normalized FFO per share of $0.79, a 3.6% decrease from the 2010 third quarter normalized FFO per share of $0.82. Focusing first on our TravelCenter investments, this morning TA reported strong quarterly results, with third quarter 2011 net income of $20.7 million. This compares to net income of $4.5 million in the 2010 third quarter. TA's third-quarter performance included a modest increase in fuel volume, continued strong per gallon fuel margins, and significant increases in non-fuel sales and gross margin. Property level rent coverage for HPT's TravelCenters was nearly 2 times for the quarter. In addition to its strong operating results, TA's financial position remains sound, with approximately $130 million of cash on hand at quarter end.

Turning to HPT's hotel investments, third quarter RevPAR increased 7.7% across our 288 hotels, driven by a 2.6 percentage point increase in average occupancy, to 77%. And a 4.1% increase in average daily rate, up to $93.24. Compared with the 2010 third quarter, RevPAR increased in all regions, with double-digit gains in the New England and Pacific regions driven by strong revenue performance at our hotels in Massachusetts and California, but only modest improvement in the South Atlantic region, driven by weaker performance in Virginia, Georgia and the Carolinas. Our Country Inn Suites and Candlewood Suites both generated RevPAR growth in excess of 10% this quarter versus last year.

During the quarter, there were 12 hotels under renovation, including 9 Courtyards in our Marriott Number 1 portfolio; and 3 Hyatt Place hotels. In addition, renovation, planning and project scope meetings are ongoing, and orders have been placed so that additional renovation projects can begin in the fourth quarter and early 2012 in our Marriott 234 and IHG portfolios. Average daily rate growth was 4.1% in the third quarter of 2011 and has increased in each hotel portfolio and each brand this quarter; compared to last year, as our operators continue to manage guest mix to reduce discounted business.

Despite an unsteady economic environment, we have seen consistent occupancy rate and RevPAR improvement each month in 2011 compared to 2010, and we continue to press our managers to focus on revenue management. Our managers' fourth quarter 2011 RevPAR forecasts for our hotels are in the range of 6% to 7%. There is cautious optimism about ongoing margin recovery as a result of constrained supply growth and continued steady increases in demand, average daily rate, and GOP margins. Although sluggish economic growth has intensified uncertainty about the pace of the lodging recovery, we have yet to see indications of a decline in hotel room demand.

The 2012 capital and operating budget process is under way currently. So it's too early to comment on expectations other than to say our 2012 results are likely to be choppy due to substantial renovations and the timing of hotel sales. However, with the economy recovering at a modest pace, this seems like the right time to complete renovations and position ourselves well as economic momentum returns. In fact, RevPAR and GOP margin growth for the 40 HPT hotels that have completed renovations in 2010 or the first half of 2011 have exceeded HPT's portfolio as a whole.

As we have previously communicated, for most of 2010 and the first half of 2011, we were focused on amending our relationships with TA, Marriott and IHG. Since then, our focus has been on the renovations to 50 Marriott and 88 IHG branded hotels, the sale and rebranding efforts related to hotels being removed from our Marriott and IHG agreements, and on growth of our hotel portfolio. On November 3, HPT announced plans to acquire the entities that own the Royal Sonesta Hotel in Cambridge, Massachusetts and the leasehold interest in the Royal Sonesta Hotel in New Orleans, Louisiana, for approximately $150 million. The Royal Sonesta Cambridge is a 400-room hotel, with 2 restaurants and approximately 22,000 square feet of meeting space, that sits on the banks of the Charles River at the start of Memorial Drive. The Royal Sonesta New Orleans is a 483-room hotel with 5 food and beverage and entertainment outlets, and approximately 20,000 square feet of meeting space. HPT expects to prepay an existing mortgage encumbering the Cambridge hotel, and the mortgage amount is included in the purchase price I just mentioned.

The hotels are managed by Sonesta International Hotels Corporation. The acquisition of these 2 hotels is part of a larger transaction in which an affiliate of our manager will acquire Sonesta. HPT will acquire the entities that own the Cambridge and New Orleans hotels. Sonesta will continue the management of the Cambridge and New Orleans hotels for HPT. Completion of the transaction, which is expected to occur in the first quarter of 2012, is subject to approval of Sonesta's common stockholders and certain other customary closing conditions. Following the closing of this transaction, the Sonesta management team will be available to operate other hotels for HPT, including certain hotels HPT now owns and is considering rebranding, and hotels it may acquire in the future.

Before I turn the call over to Mark, I want to provide an update on the Marriott and IHG properties that will be removed from those portfolios in connection with the contract amendments we completed earlier this year. On the 20 Select Service Marriott Hotels, offers are due this week, and we hope to select a buyer and enter a sale agreement by year end, and complete the sale during the first half of 2012. Offers on the full-service Marriott will be due in early December. The timing to close is expected to be the first half of 2012, as well. With respect to the IHG hotels, we are in discussions about rebranding some of the hotels with a hotel company that would mark another new manager relationship for HPT. We are also considering rebranding some of the IHG hotels with Sonesta. Currently, none of the IHG hotels are listed for sale.

I will now turn the presentation over to Mark to provide further detail on our financial results.

Thanks, John.

First, let's review the third quarter operating results for our hotel properties. Revenues for our hotel portfolio increased $20.5 million, or 7.1% versus the prior year. Our strongest performing portfolios were our Carlson and Marriott Number 1 portfolios, with RevPAR increases of 12.4% and 7.8%, respectively. RevPAR for our recently amended Marriott 234 and IHG portfolios increased 7.3% and 7.2% respectively, quarter-over-quarter.

With all of our hotel portfolios experiencing gains in both occupancy and ADR this quarter, GOP and cash flow margins each increased. Gross operating profit increased by $13 million, or 12.7% quarter-over-quarter; and our GOP margin percentage increased 185 basis points to 37.4%. More importantly, net cash flow available to pay our minimum rents and returns increased by approximately $18.7 million, or 30.5% versus last year. The largest increases were in our IHG and Carlson portfolios, which produced net cash flow increases of 51% and 28% respectively, quarter-over-quarter. About 0.5 of the improvement in net cash flow for the IHG portfolio was due to the temporary elimination of the requirement to escrow FF&E reserves under the amended agreement.

With the improvement in hotel net cash flow, coverage of our minimum returns in rents on a rolling 12-month basis improved from the prior quarter for all of our portfolios. In the third quarter, our IHG portfolio had 0.97 times coverage, and our Marriott Number 1 portfolio, 0.96 times coverage. During the third quarter, we applied the security deposits we hold in connection with our Marriott 234 and IHG agreements to cover payment shortfalls of $2.8 million and $355,000 respectively. We currently expect the IHG security deposit to be sufficient to cover any additional payment shortfalls before the portfolio returns to 1 times coverage.

The remaining security deposit for our combined Marriott portfolio will be fully utilized in the 2011 fourth quarter. Thereafter, if cash flow was less than our minimum returns, Marriott will fund the difference up to 90% of our minimum return, subject to a cumulative cap of $40 million. We currently expect this guarantee to be sufficient to cover up to 90% of any additional payment shortfalls before the portfolio returns to 1 times coverage. At quarter end, all other payments due under our hotel operating agreements were current. Information regarding our security deposit and guarantee balances at quarter end is included in our Form 10-Q, which will be filed tomorrow.

Turning to our TravelCenter portfolio, performance continued to improve this quarter, with property level EBITDAR up $3.7 million, or 3.9% versus the 2010 third quarter. Both fuel volume and per gallon fuel margin increased this quarter, resulting in a 4.8% increase in fuel gross margin compared to the 2010 quarter. Non-fuel revenue and gross margin increased 8.1% and 5.8% respectively, quarter-over-quarter. Property level rent coverage for the quarter was 1.99 times for our TA Centers, and 1.89 times for our Petro centers. Earlier today, TA reported third quarter 2011 corporate level EBITDAR of $83.1 million, a 4.1% increase from the 2010 third quarter. TA's EBITDAR coverage of total cash rents at the corporate level for the third quarter was 1.6 times; and based on the amended lease terms would have been 1.25 times for the trailing 12 months.

Turning to HPT's operating results for the third quarter, this morning we reported normalized FFO of $98 million, or $0.79 per share. This compares to third quarter 2010 normalized FFO of $101.1 million, or $0.82 per share. The decrease in normalized FFO was primarily the result of the loss of income from the temporary elimination of FF&E reserves for the IHG portfolio, partially offset by increased minimum rents and returns for certain of our portfolios. IHG FF&E reserves included in net income and normalized FFO in the 2010 third quarter were $6.5 million, or $0.05 per share. For fourth quarter modeling purposes, you should note that IHG FF&E reserves were $6.1 million in the 2010 fourth quarter.

EBITDA was $139.6 million in the third quarter; and our EBITDA to total fixed charges coverage ratio for the quarter remains strong at 3.4 times. In August 2011, HPT paid a cash dividend on our common shares of $0.45 per share. Our normalized FFO payout ratio was 56.7% for the 2011 third quarter.

With respect to our balance sheet and liquidity, at quarter end we had cash and cash equivalents of $48.2 million, which included $41.7 million of cash escrowed for improvements to our hotels, and had only $115 million of borrowings outstanding on our revolving credit facility. In September we closed on a new $750-million unsecured revolving credit facility, which matures in September 2015, and includes an option for HPT to extend the facility for 1 year. Interest paid on drawings under the new facility are at LIBOR plus 130 basis points.

During the third quarter of 2011, we made capital fundings in excess of FF&E reserves of $4.9 million to fund the ongoing renovations at certain Courtyard hotels included in our Marriott Number 1 portfolio, and expect to fund an additional $8 million in the fourth quarter. In connection with the planned renovations at our IHG and Marriott 234 hotels, we made no fundings in the third quarter, and expect to fund approximately $54 million, and $11 million respectively, in the fourth quarter. During the third quarter, we also made capital fundings under our leases with TA totaling $9.7 million, and expect to fund between $10 million and $20 million in the fourth quarter.

In closing, we remain optimistic about the prospect of continued improvement in the operating results at our hotels and TravelCenters, and are excited about our renewed focus on growing our business.

Operator, we're ready to open it up for questions.

(Operator Instructions) Dan Donlan, Janney Capital Markets.

Just a quick question on the Marriotts. The 21 that you guys are looking to sell, how many rooms is that in total?

It's 2,923.

And then how many rooms for the IHG?

The 42 hotels that we're considering either selling or rebranding have 6,757 rooms.

And then the contracts with Marriott 1, it looks like that expires in 2012. But Marriott has renewed that agreement to operate those hotels for another 12 years, I believe, through 2024. What's the intention, or is there any ability for the agreement there to look similar to 2, 3 and 4? In other words, will there be some type of security deposit placed on those assets once host does not renew?

At the present time, the existing contract is the contract. So, they've elected to extend it. So, absent some other reason for negotiating alternate terms, I think you should assume that the contract will not change.

So, the cash flows will just flow directly from the portfolio into the REIT?

Right. And the terms are -- the minimum return under the management agreement will be the same amount that the minimum rent is today under the lease with host. And base fees will continue to be subordinated to the payment of our minimum. But there won't be any credit support.

And then going back to the potential asset sales, would you anticipate a special dividend or something like that, if you do get done what you'd like to get done?

I think the plan that we've described in the past, and which is still the plan, would be to use, even though the timing may differ, but to the extent there's proceeds from the sale of the properties, we'll either pay down the borrowings under the revolving credit facility or use those funds for anticipated capital improvements to the hotels we're holding onto.

And then lastly, on Sonesta, you mentioned that you might use them as an operator on some of the hotels that you could potentially rebrand. I'm just curious, in looking at their portfolio, it looks like more resort type of properties, as well as cruise ships, and they only own 3 assets in North America. Are you comfortable with their experience level in the assets that you would potentially rebrand, because it doesn't seem like they have any limited select service experience in the US?

Before I answer that question, I just want to say that we made some opening comments about what we can and can't say. And it's unusual for HPT to discuss transactions before they've closed. And so it does put some limits on what we can say here. But I would say in the hotels that are currently IHG flagged that we have the opportunity to either sell or rebrand, there's a mix of full-service and select-service hotels. And we're still in the process of deciding which ones we may rebrand with Sonesta, which ones we may rebrand with another company we're in discussions with.

Once we've made those decisions, and once our 8-K and Sonesta's proxy are all out in the public for everybody to read and interpret, we'll be able to provide more details on those decisions. But the good news about Sonesta is, as you point out, its relatively small size in the US, that provides a lot of flexibility for us. So, I think I'll just leave it at that.

Okay, thank you, that's it for me.

Jeff Donnelly, Wells Fargo.

I'll start actually on the dispositions front. John, I think in the last conference call, you said you were expecting a call for offers in Q3 with hopefully closings in Q4 on the Marriott properties. And maybe it's just my own interpretation, but it sounds like you're hopeful for Q1 closings. Is it fair to say that the hiccup in the capital markets were really -- interrupted the plans to sell assets? I'm trying to understand -- did you have buyers lined up and they tried to retrade? Or did you just not see buyers? Or curious what the state of things are right now.

We did have some discussions with a particular buyer on the 20 Select Service hotels, and decided ultimately not to go forward with them. And so we had delayed the timing of a call for offers. And it was around that same time that the capital markets were fairly volatile. Anyway, we think this is a good time to be calling for the offers, and we're optimistic that there will be a number of portfolio bidders.

So, that was actually a transaction that might have been the portfolio in its entirety, rather than mini portfolios or single asset sales?

Yes. Just like we like to be portfolio investors, it's a lot easier to sell as a portfolio, as long as your pricing's in the right range. And we expect that there will be a number of portfolio bidders again this week.

And I'm curious, how are the folks financing this transaction? Is it, generally speaking, pretty highly levered? How are they going about it? I'm just curious, generally speaking, what's their source, as well?

I hate to count other people's money. The folks who bid, to the extent that their, say, private equity sources teaming with third-party managers, submit offer letters telling you that they've got all the cash in their front right pocket, and there's no financing contingency, and it doesn't matter where the capital markets are. But the reality is that most hotel buyers, really, maybe with the exception of HPT, use secured debt. And so, whether they use it immediately or a little bit later after a transaction closes, the state of the capital markets for mortgage financings plays an important role in those decisions for the buyers, I'm pretty certain.

To change gears, what happens if these hypothetically don't get sold? I'm curious, are you under the gun to get the renovations of the core assets started at some point? I'm wondering if there's a scenario where you could be caught holding non-core assets for a long period of time, and this is supposed to be the source of funding for renovations next year.

We don't have any guns to our head. If you look back, when we were negotiating this transaction with Marriott, and the one with IHG, at the time we had a revolver that was going to mature in October. And so, while we're very confident that we were going to be able to renew the revolver without any problem, we didn't want to have commitments for substantial renovations to IHG properties and substantial renovations to Marriott properties hanging over our head during those negotiations with the banks on the new revolving credit facility. And that's why we identified hotels.

We went through the list of hotels in each portfolio, and identified a sufficient number of hotels that could be sold so that the estimated sales proceeds roughly equaled the amount of capital required for the rest. But it wasn't that we felt like we had some dogs in the portfolio that we had to dump. We think all the hotels have good brands. And so, if we're unable to find an acceptable purchase price during this call for offers, then we do have the option of putting the capital into the properties ourselves, and having them continue to be part of the portfolio with Marriott. So, that's an option, I think, that we feel like we have as opposed to a -- and that we're willing to go forward with if necessary. But it's not a gun to our head.

Just a last question on Sonesta. Don't worry, it won't be about financial terms. Just from your response before, it sounded like there was a possibility that some hotels, full-service hotels in your portfolio, could be rebranded to the Sonesta brand. You mentioned, or maybe alluded to, there may be some select service. Does that imply that a brand might be created for them under Sonesta? Or are you just not that far down the road yet?

I would say it's fair to assume that we may rebrand some hotels to Sonesta. But in terms of whether there's going to be new brands or anything, I'd like to just leave that for another call.

Okay, thank you.

Ryan Meliker, Morgan Stanley.

Just a couple quick follow-ups to Jeff's. Looks like between the total CapEx that you guys have guaranteed to IHG and Marriott through your contractual obligations, that's around $400 million. And then you've got another $150 million in this acquisition of the 2 Sonesta properties. I am just wondering -- is there a specific deadline that the $400 million in CapEx has to be completed by for IHG and Marriott?

There's not a specific deadline, Ryan. We're in the process of scheduling out all that CapEx. I think you'll see, as I mentioned, we're going to fund some of it in the fourth quarter, and then we'll fund each quarter in 2012, but some of it is going to push into 2013. So, the whole $400 million or so that we've committed to, it's not all going to be funded in the fourth quarter of '11 and 2012.

Much of the timing -- there are mutual discussions going on, as you would expect, between HPT and Marriott and IHG, because there's certain times of the year when it's the better times to be renovating, and other times when you don't want to suffer the displacement from the renovation. So, the timing is very much mutually agreed between HPT and its managers.

I think it's important to point out -- we only had $115 million out on our $750 million revolver at quarter end. So, we feel very good about our ability to meet our funding requirements.

So, Mark, does that mean that if, for one reason or another, your dispositions get delayed a couple of quarters, and you're looking at funding another $100 million to $200 million in 2012 before you get the cash flows from your dispositions, plus you've got the $150 million in investment in the Royal Sonesta properties, you would be comfortable using your line to fund that for the short term?

Yes, for the short term.

So, then to ask that another way, what leverage level is going to give you comfort, even if it is just short term, until you resolve the dispositions, and given the uncertainty in the capital markets? Are you willing to max out the revolver or go to 5 or 6 times levered for a short period of time while you're doing this?

We've always operated the Company with debt to total book capitalization in the 40% to 50% area. It's in the low 40%s, probably 40%, 41% today. So, we have some room to increase leverage. But ultimately, we're going to finance the business consistent on a long-term basis with a mix of debt and equity, as we always have.

And then one other question with regards to the Sonesta acquisition -- and don't worry, I won't ask any number questions either. Just big picture view, John, I'm hoping you might be able to walk us through some of the discussions that might have taken place inside the boardroom, as the Board got together with this acquisition. Given that it seems like, and you can correct me if I'm wrong, that RMR is the entity sponsoring the SAT acquisition company. So basically, you're buying assets from RMR, which obviously some could consider a conflict of interest. So, I just wanted to see, could you walk us through how that was thought through, and why it's not an issue?

What I would just say there is that because there was an affiliate involved, we engaged third-party valuation experts that provided our independent trustees with information on where they thought values were for the hotels. And the transaction was reviewed by the independent trustees. And so, I think at this point, before the proxy is filed, which goes into the whole history of the transaction, that I'd like to leave it at that.

Fair enough, thanks a lot, guys.

(Operator Instructions). Michael Salinsky, RBC Capital Markets.

Just going back to Ryan's question, if we think about the $400 million of total outlays for the 2 renovations, what's the CapEx plan as you're putting it together for '12? Just as we're looking at the sources and uses for next year.

We're still working through the final scheduling. I would say that the Marriott will be in the range of $50 million to $70 million, probably, next year. And IHG, $180 million to $230 million kind of range. We're still scheduling all that out.

Okay, that's helpful. Second of all, you guys have historically used minimum return guarantees to limit downside risk there. With the Sonesta transactions, should we expect a similar kind of lease structure there? Or is that one where you want to set it up more like a traditional restructure?

I think what I'll say there is that I think tomorrow we hope to file an 8-K that will have a lot more information regarding the management contract. But for now, you should assume it will be a contract that's similar to typical hotel industry management contracts, and without credit support.

Third, just in terms of financing, you guys got the line done. Can you give us a sense of where you're seeing in terms of financing right now, what you're hearing from the banks in terms of just spreads, LTVs, things of that nature? I know you guys don't do mortgages, but I'm just curious as to what you're seeing in the bank and unsecured market.

The secured market, I can't give you a whole lot of color on because we don't really spend a whole lot of time monitoring that. But in the investment grade unsecured public note market, as you probably know, the first investment grade REIT transaction went off last week, and went off well. That's the first transaction in about 3 months. It's probably too early to say the market's open for all REITs until you see probably a BBB minus credit go out and do a $250 million, $300 million deal without large new issued concessions. On the bank term loan market, I think that market's still relatively strong for the right credits. And I think HPT's one of those right credits. So, I think the bank term loan market is also open for us.

Okay, that's helpful. Appreciate it, guys.

And there are no further questions in queue. Back to you, Mr. Murray.

All right. Thank you very much for joining us today. We're hopeful that between now and next week's NAREIT conference there will be some additional filings that are done to provide a little bit more color on the transaction involving Sonesta. And that we'll be able to provide more details when we meet up with you in Dallas. Thank you very much. Have a good day.

Thank you. That concludes our conference for today. Thank you for your participation, and using AT&T executive teleconference service. You may now disconnect.