Service Properties Trust (SVC) 2011 Q4 法說會逐字稿

Good day, and welcome to the Hospitality Properties Trust fourth quarter and year-end 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. I would note that the recording and retransmission of today's conference call is strictly prohibited without prior written consent of HPT.

Before we begin today's call, I would 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, February 29, 2012. 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. 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 Form 10-K to be filed with the SEC, and in our Q4 supplemental operating and financial data package found on our website at www.HPTREIT.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. Before I turn the call over to John and Mark, you should be aware that TravelCenters America or TA has not completed it's year-end reporting. Accordingly, the Company's remarks today will not refer to TA's fourth quarter or full-year 2011 results, and we will not take questions related to TA's fourth quarter or full-year 2011 performance. Now I'd like to turn the call over to John Murray.

Thank you, Tim. Good afternoon, and welcome to our fourth quarter 2011 earnings call. Today HPT reported fourth quarter normalized FFO of $0.78 per share. As Tim mentioned, we are not yet able to update you on TA's performance for the fourth quarter or full-year. As you may recall, TA's performance was very strong through the first three quarters of 2011, with EBITDAR of $21.8 million, or 11.5% year-over-year at our 185 travel centers. Because TA is not a large, accelerated filer under SEC reporting rules, it has until March 15 to report.

Turning to HPT's hotel investments, fourth quarter RevPAR increased 6.9% at our 288 hotels, driven by a 1.2 percentage point increase in average occupancy to 67.2%, and a 4.9% increase in average daily rate to $94.63. Compared with the 2010 fourth quarter, RevPAR increased in all regions with double-digit gains in the New England and Pacific regions due to strong revenue performance at our hotels in Massachusetts and California, but only modest improvement in the [West, North Central] and South Atlantic regions as a result of weaker performance at our hotels in Virginia, Georgia and the Carolinas. Our Park Plaza, Country Inn & Suites, Courtyard, SpringHill Suites and TownePlace Suites branded hotels each generated RevPAR growth in excess of 10% this quarter versus last year.

During the quarter, we had 41 hotels under significant renovation, including 9 hotels in each of our Marriott portfolios, 18 hotels in our IHG portfolios, 4 Hyatt Place hotels and 1 Radisson. The impact of these renovations, primarily from reduced occupancies because rooms were out of service was significant, as RevPAR was up 8.6% on a comparable basis for non-renovation hotels, and was down 5.3% at comparable renovation properties. Average daily rate growth was 4.9% in the fourth quarter of 2011, and increased in each of our hotel portfolios, and for 12 of our 14 brands this quarter compared to last year, as our operators continue to manage guest mix and push rate during peak travel periods.

Despite an unsteady macroeconomic environment, we have seen consistent occupancy rates and RevPAR improvement each month in 2011 compared to 2010, and we continue to press our managers to focus on revenue management. Our manager's 2012 RevPAR forecast for our hotels are in the range of 5% to 8% increases, and the average GOP margin increase is forecast to be 200 basis points. There is cautious optimism about ongoing lodging recovery, as a result of constrained room supply growth, continued steady room demand, and increases in room rates and GOP margins. Although below trend economic growth continues to create uncertainty about the sustainability of a lodging recovery, we continue to see steady growth, and a greater share of that growth from rate than occupancy which improves margins.

Our planned 2012 and 2013 capital program is extensive, with approximately 170 of our 288 hotels scheduled to be renovated during that period. Our 2012 results are likely to be choppy due to these renovations, and the timing of hotel brand conversions. However, with the economy recovering at a modest pace, this is a good time to complete renovations, and position ourselves well as economic momentum returns. We are very pleased with the operating performance of the 47 hotels that we renovated in 2010 and the first three quarters of 2011, with RevPAR up 18.9%, and GOP margin up 800 basis points at these hotels in the fourth quarter.

I should point out that, notwithstanding, our RevPAR performance during Q4 2011, when about 40 hotels were under renovations, and our managers' 2012 RevPAR growth expectations which I mentioned a moment ago, first quarter 2012 RevPAR performance will do well, to be flat to 2011. We have tried to schedule as many renovations projects as possible during periods when they may create the least disruption to hotel's performance. Accordingly many projects, at least 55, will be under way during the first quarter of 2012, and the negative impact may offset or exceed the growth from properties not under renovation. Also as our plans related to possible conversions are formalized, we may add additional renovations during 2012 and 2013.

In November 2011, 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 $150 million, or approximately $170,000 per key. We closed on this acquisition on January 31, 2012. The Royal Sonesta Cambridge is a 400 room hotel with two 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 five food and beverage and entertainment outlets, and approximately 20,000 square feet of meeting space that sits on a full city block along Bourbon Street in New Orleans Historic French Quarter.

HPT repaid an existing mortgage encumbering the Cambridge Hotel as part of the purchase price noted previously. The acquisition of these 2 hotels is part of a larger transaction, in which an affiliate of our manager acquired Sonesta. Sonesta has continued as manager of the Cambridge and New Orleans hotels for HPT, and Sonesta's management team is available to operate other hotels for HPT, including certain hotels HPT now owns and may rebrand and hotels it may acquire.

Before I turn the call over to Mark, I wanted to provide an update on the Marriott and IHG properties that may be removed from those portfolios, in connection with the contract amendments we completed in 2011. We have not received acceptable offers on the portfolio of 20 select Service Marriott Hotels. Although several potential buyers continue to evaluate the portfolio, we are considering retaining some or all of the hotels, as part of the Marriott 234 agreement. We have a sale agreement on the St. Louis Airport Marriott for $35 million, and the buyer is currently conducting diligence. The closing is expected to occur in the first half of 2012.

With respect to the IHG hotels, we are in discussions about rebranding 20 of the hotels with a hotel company that would be a new third-party brand manager relationship for HPT. We are also considering rebranding between 15 and 20 of the IHG hotels with Sonesta brands. Currently, none of the IHG hotels are listed for sale, but we may decide to sell a small group of them. I will now turn the presentation over to Mark to provide further detail on our financial results.

Thanks, John. First let's review fourth quarter operating results for our hotel properties. Revenues for our hotel portfolio increased $18.6 million or 6.3% versus the prior year. Our strongest performing portfolios were our Marriott No. 1 and Marriott 234 portfolios, with revenue increases of 14.6% and 7.9%, respectively. RevPAR for our IHG portfolio increased 3.9% quarter-over-quarter.

As John noted, revenue growth at a number of our hotels this quarter was negatively impacted by renovation activity. Both gross operating profit, or GOP, and cash flow margins increased in the 2011 fourth quarter for our hotel portfolio as a whole, but results were mixed on an individual portfolio basis. In total, GOP increased by $10.7 million or 11.1% quarter-over-quarter, and our consolidated GOP margin percentage increased 150 basis points to 34%. More importantly, net cash flow available to pay on minimum rents and returns increased by approximately $15 million or 28% versus last year.

The largest increases in cash flow were in our Marriott No. 1 and IHG portfolios, which produced increases of 51.8% and 29.2%, respectively, quarter-over-quarter. The improvement in net cash flow for the IHG portfolio of $6.1 million, was due entirely to the cash flow benefit resulting from the temporary elimination of the requirement to escrow FF&E, as property level cash flow was negatively impacted by renovation activity at 18 hotels during the quarter. Net cash flow for our Hyatt and Carlson portfolios declined a total of $819,000 or 15.9% from the 2010 quarter.

Turning to coverage of our minimum returns and rents for the 2011 fourth quarter, our Marriott No. 1, Marriott 234, and IHG portfolios each had coverage of around 0.7 times, which was a significant improvement from coverage of about 0.5 times for each portfolio in the 2010 quarter. During the fourth quarter, we applied the remaining $247,000 security deposit we held for the Marriott 234 portfolio, and Marriott made payments of $9.1 million under it's guarantee. During the quarter, we also applied the security deposit we hold in connection with our IHG agreement to cover payment shortfalls of $8.4 million.

We currently expect the IHG security deposit to be sufficient to cover any additional payment shortfalls, before the portfolio returns to 1 times coverage. As the Marriott deposit is now exhausted, going forward, if cash flow is less than our minimum returns, Marriott will fund the difference up to 90% of our minimum return subject, subject to a cumulative guarantee 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 year-end, all other payments due under our hotel operating agreements, and our TA leases were current. Information regarding our security deposit and guarantee balances at year-end is included in our Form 10-K which will be filed later today.

Turning to HPT's operating results for the fourth quarter, this morning we reported normalized FFO of $96.8 million or $0.78 per share. This compares to fourth quarter 2010 normalized FFO of $104.5 million or $0.85 per share. The decrease in normalized FFO was primarily the result of the loss of income due to the temporary elimination of FF&E reserves for the IHG portfolio and higher income tax expense, partially offset by a net increase in minimum rents and returns versus the prior year quarter. IHG FF&E reserve income, included in net income and normalized FFO in the 2010 fourth quarter was $6.1 million or $0.05 per share. EBITDA was $138.5 million in the fourth quarter, and our EBITDA to total fixed charges coverage ratio for the quarter remained strong at 3.3 times. In November 2011, HPT paid a cash dividend on our common shares of $0.45 per share. Our normalized FFO payout ratio was 57.4% for the 2011 fourth quarter.

With respect to our balance sheet and liquidity, at year-end we had cash and cash equivalents of $58.5 million, which included $50.2 million of cash escrowed for improvements to our hotels, and had $149 million of borrowings outstanding under our revolving credit facility. During the fourth quarter of 2011, we made capital fundings in excess of FF&E reserves of $51.8 million, to fund the ongoing renovation at certain hotels included in our Marriott No. 1, Marriott 234, and IHG portfolios. In connection with planned renovations at our IHG and Marriott 234 hotels, we expect to fund improvements of approximately $227 million and $75 million, respectively in 2012. During the fourth quarter, we also made capital fundings under our leases with TA totaling $23.6 million, and we currently expect to fund approximately $75 million for improvements in 2012.

Turning to our recent financing activities. In January 2012, we completed an offering of 11.6 million shares of 7.125% Series D Preferred shares, raising net proceeds of approximately $280 million. We used the net proceeds of the offering to fund our January 2012 acquisition of the two Sonesta hotels, to fund the February 13, 2012 redemption of all of our outstanding 8.875% Series B Preferred shares for $86.3 million, plus accrued distributions, and funded $23 million for renovations to our hotels. As of today, we have only $185 million outstanding under our $750 million credit facility. In closing, we remain optimistic about the prospect of continued improvement in the operating results at our hotels and travel centers, and are excited about our renewed focus on growing our business. Operator, we're ready to open it up for questions.

(Operator Instructions).

And we have a question from the line of Jeff Donnelly with Wells Fargo. Please go ahead.

Good afternoon.

Hi, Jeff.

I guess to start off, I just wanted to get a better understanding of -- I guess the thinking around not proceeding with some of the sale of non-core hotels. Was that because of the hiccup that we saw in the credit markets, that it's going to take a little longer? Or is it maybe because you had a little, let's say, price discovery, and just found the prices weren't what you thought, or maybe you're better off taking on the renovations yourselves, and putting them back out? I just wanted to get a better understanding of that.

I'm just going to say, yes. (Laughter).

All of the above?

I think that there was, definitely there was some price discovery. And I think that that price discovery was impacted by the dislocation in the credit markets. So it's not -- it's probably easiest to finance a portfolio of Marriott hotels, than maybe any other select service grouping, but it is still a challenge to do that. And the groups that were bidding on the portfolio were not willing or able to come to the pricing that we found satisfactory. So we have -- there's still a couple of parties that are taking a look. But if I had to put odds on it today, I would say that we'll probably keep those hotels in the Marriott 234 portfolio and renovate them. The only thing I would not say yes to, is just that last part. I think once we cross the bridge that we're going to keep them in and fix them up, then we're going to keep them in for the longer haul.

Timing was different when we renegotiated the agreements earlier last year. We were also about to redo our revolving credit facility, and didn't want to have a lot of capital commitments out there, when we were trying to redo our revolver. But now that we've got the revolver done, we're more confident about our ability to raise the capital for the renovations. And we're pretty confident that once the capital is put into the properties, they'll perform pretty well, based on the results we've seen at the ones that we've done already. So I think we'll probably keep them for the longer term, if we keep them.

I'm curious, just given that maybe the opportunity that's kind of created in the marketplace, meaning like the pullback in the credit markets -- since your core business used to be sort of sale leaseback, sort of form of almost providing a 100% -- you could argue LTP type financing. I guess given that maybe it's difficult to get max proceeds right now in the market, have you ever contemplated being like a mezzanine, or participating second mortgage lender to hoteliers in this environment, in trying to help portfolio borrowers get proceeds that they want, at maybe spreads that are attractive for you?

We've looked at -- we've considered that a couple of times, and we've decided it's just not -- it's not really our core business. There's a lot more monitoring that needs to take place if you're a lender. And being in the mezzanine position, after being an owner for 17 years is just not as attractive to us. So I don't see us going in that direction.

And for the New Orleans hotel, I'm sorry, but can you remind us what is entailed in getting the ground lease there extended? Is that an easy thing? Is that going to be difficult? I guess how are you thinking about it?

We don't really know yet, because we haven't engaged in that process. It's -- longer term, it is our plan to try and acquire the land under the hotel. But we haven't actually engaged in any of those sort of discussions at this point. So it's -- in theory, that's all it should take is entering into the discussions, and agreeing on a price. But how hard or easy that will be, remains to be seen.

And just one last question, is -- just over time, I think HPT has kind of absorbed a little more operating risk, than it did certainly a decade ago. Has there ever been any contemplation of maybe reworking it's -- I guess I'll call it, fee arrangements with RMR. because I think when they were set up, and it was much more of sort of, I'll call it a stable portfolio, and it was sort of paid for off of asset value is one thing. But now that there's more operating risk, and I'm just wondering is the pay for performance structure make more sense, or does RMR have like the asset management folks it needs, given you are taking a little more operating risk on. Does that come up in the Board meetings at all? I guess, what thoughts do you have there?

Well, I would say that, we're not currently contemplating changing the fee arrangements. We don't think that -- there have been clearly been changes over time, as REIT rules have changed, and our business has morphed a little bit. But our transaction structure is still a -- it's still a very structured transaction with security and subordination of fees. And so, I think it's -- although it's changed, it's probably stayed more than the same, than it's changed. And so we regularly have discussions with our Board members, where we compare our advisory fees, together with our other G&A costs to the cost that our competitors, and other healthcare and triple net REITs pay, in terms of their own G&A costs. And we think our returns have generally been good. And our -- those costs for us, relative to our peers and other REITs have been very fair. So I think we'll continue to do business the way we have.

Okay. Great. Thank you.

(Operator Instructions).

Our next question is from the line of Dan Donlan with Janney Capital Markets. Please go ahead.

Thanks. Good afternoon. I just wanted to talk a little bit now about the Marriott properties, now [maybe] staying in the portfolio. What does that mean for your CapEx plans for those assets, as well as the ones that you had planned to renovate anyways? How -- where does that additional capital come from, because I believe you were going to use the sale proceeds to then renovate the ones that you were going to keep?

Well, the -- I'd say a rough estimate today of what the capital requirement would be on those other 20 hotels, is in the $40 million to $50 million range. And I guess I'll let Mark speak to the, where does the capital come from for that.

Dan, it may be make sense to step back, and take a look at all of our uses and anticipated sources of cash for the year. As I said, we have $185 million out on the revolver today. We've got about $79 million of convertible senior notes that are putable to us in March. And we've got $101 million of senior notes due mid July, so we've got about $180 million of debt coming due this year. For Marriott 234, we expect to fund, as I mentioned $75 million this year. We funded $4.5 million already through today, so let's say we have $71 million left there. IHG, I said, we were going to fund $227 million this year. We've funded $18 million through today, so about $209 million left there. And $75 million of improvements at TA, which brings us to call it, $355 million of capital fundings.

We've got the host deposit that we'll have to give back at year-end, assuming there are no defaults under that lease, which is $50.5 million. So that brings you to total uses of about $585 million on the sources side. We've got the sale of St. Louis, which will hopefully close in the first half of the year, and bring in roughly $35 million. We've got obviously, free cash flow that we generate during the year. For 2011, we generated free cash flow before CapEx fundings above the FF&E reserves, of about $100 million. So that brings you -- if we put all of that on our revolver, that would take the revolver to about $635 million. As John mentioned, there could be -- there will be incremental money to the extent, we keep the 20 Marriott hotels in, and there is incremental capital to the extent we convert, rebrand any of the 42 [Intercon] hotels. So you add all that up, and we could be fully drawn on our revolver, which is not a position we obviously want to be in. We want to maintain liquidity. So I think the next thing that we're looking at -- we did the preferred offering. And I think the next source of capital that we're looking very seriously at is the bank term loan market.

Okay.

That market remains very strong, and so that's probably the next avenue that we're going to go down.

Okay. Very, very helpful. And then, can we talk a little bit about the -- with you potentially keeping these new Marriotts, do they -- how does that change with -- does the contract change at all? And can you use the -- I think the deposit that you have with Marriott, if those hotels are -- fall short of the minimum rents, does that go against those cash flows as well?

The agreement when we restructured it, in the middle of last year with Marriott on that transaction, contemplated the possibility that we might not find an acceptable selling price. And so, we really don't need to change any features of the agreement to keep those in. And to the extent that there's shortfalls in the portfolios, cash flow relative to our returns, the guarantee is available to cover the shortfalls, regardless of whether the 20 are in or out.

Okay, okay. All right. I'll circle back in the queue, if I think of anything else. Thank you.

Thanks.

And we have a question from the line of Philip Martin with Morningstar. Please go ahead.

Good afternoon, everybody. Just following up on a previous question. Arguably HPT has had a business model with higher operating risk. How does this translate into higher returns for you? Can you characterize that for us a bit, especially in light of an environment right now where there's going to be some potential opportunities out there, which will carry more risks, but potentially pretty attractive return potential. Just trying to understand that a bit more.

Well, it's our plan to grow the historical -- it's our plan to grow our business in two ways. One is with a more structured transaction, which we've historically done.

Okay.

And I think in those transactions, we'll get a minimum return that's perhaps at a slightly higher level, than something in the generally in the sort of 8% range. And then participation in upside, after our manager receives his or her fees, and with some credit support, and like typical, similar to what we've typically done.

And then we have the Sonesta affiliation. And we intend to grow the Sonesta brands. And we're trying to identify hotels in attractive markets that are available for -- unencumbered by brand and management, or they can be acquired unencumbered, so that we can convert them to the Sonesta brand, and grow that brand over time. And we think that that will be -- there will be some more risk, because the properties -- our returns will ebb and flow as the cycle changes, but it's not going to be the material component of our portfolio. So we think it will provide nice growth characteristics during positive times in the cycle, and hopefully not that much down side during the more challenging times in the cycle.

Philip, I think it's also important to remember, as we've migrated from the triple net structure to the TRS lease management contract structure, we've also been able to build in the opportunity, or built the opportunity into our contracts, to participate in cash flows above our minimum returns, whereas in the triple net environment, all we could earn were percentage rents. So there's clearly more upside potential in the management contract structure for us, than there was in the triple net structure.

Okay. And that partially answers my next question. You feel -- certainly, the environment the last several years, and even going forward is a bit different, to say the least. And do you feel you are getting paid as much for taking incremental risk today as you were? And it sounds like the structures you now have in place are different and allow that. But do you feel you're getting the same premium, in the same risk premium?

I guess we feel like we're achieving an appropriate balance of risk and reward. We feel like we're at an early stage in the recovery right now. It's been a couple years, maybe of recovery, but because of the economy's been recovering slowly, it -- we think there's still quite a bit of growth. Either because, in the next couple years, performance is going to really ramp up,or because it's going to be a little bit longer cycle this time. But we feel like we've structured our agreements, so that our down side is as covered, as we can get it. And our upside is as attractive, as we can get it. So we think we're doing reasonably good deals.

And the incremental opportunities that you're pursuing, or at least seeing are -- I'm assuming these are more of a value-add nature. And -- would that be fair, a fair characterization, and is that where your interests primarily lie?

We're actually seeing a combination of properties that need renovations, and in that respect are value-adds. As well as hotels that are, and have been reasonably well-maintained, where owners are either just looking to exit the business, or looking to align with a different capital partner, or try out -- maybe they've been independent, and maybe willing to align themselves with a new or perceived new smaller brand, to see if that might create different opportunities. So I think we're prepared to fix up hotels, if they're well-located and fit where we want properties. But certainly, if strong cash flowing hotels that are available, are attractive to us as well. And we're seeing both.

Yes, and then obviously, the risk/reward profiles are extremely different. And -- well, it's something I can -- I'll follow up with you on. But my last question, in your prepared remarks, you mentioned varying degrees of certainly year over year RevPAR and cash flow growth and operating performance, but what portfolio or assets have done, or have been the most stable operationally during the down cycle? Marriott 1, 2, 3, 4 or IHG? Can you just give us a little sense of that?

That's a tough one. I think select service hotels have lower fixed costs.

Okay.

So they've tended -- this last downturn was pretty severe, and all our hotels saw performance decline dramatically. The select service hotels I think, were able to react a little bit better to that, at least initially, by -- because they had lower fixed costs, and they had a more variable structure to their cost. But if you take for example, a Candlewood Hotel, if you only have, say, 10 to 15 full-time equivalent employees, and the economy goes to hell --

Okay.

-- there is only so much -- you need to keep staff in the hotels. There's only so much you can cut after a point. So I think our hotels all sort of hung in there pretty well, and are going to come back.

Yes, and to John's point, I think if you look at the two pure select service portfolios, the Marriott No. 1 and Hyatt portfolios, that they, if you look at it purely on a coverage basis, although their coverage went down significantly along with everything else, they probably held up the best.

Okay. Okay. Thank you.

Yes.

We have a follow-up question from the line of Dan Donlan with Janney Capital Markets. Please go ahead.

Thank you. Just curious, John, what type of disruption are you anticipating for 2012, from the various renovation plans that you are doing at some of your assets, and how much of that do you think spills over into 2013?

Well, I would say, that we've studied closely the periods when the hotels do better and worse. And -- we've made great effort to try and renovate hotels that have very weak occupancies during January and February, to do the renovations then. And in hotels that are maybe in, say the Phoenix area, just to use an example, where it's 150 degrees in the shade in the summer months, we try to schedule renovations in those parts of the country during the summer, where they are likely to displace less business. And so, while there will be displacement, and there will be negative effects, the RevPAR forecasts that we mentioned in prepared remarks, and the margin increases that were mentioned, those numbers were developed by our operators, contemplating the renovations. So overall, our expectation is that 2012 will still be a year where we see somewhere in the 5% to 8% RevPAR growth, and a couple hundred basis point margin improvement. And so our coverages in each of our portfolios is expected to improve. How many, if any, get to 1 times coverage by the end of the year, given all that's going on, is a question mark. But we feel good, at least at this point in the cycle, that we're going to still have a good year, despite all the disruption.

Okay. Very helpful. Thank you.

Thank you.

(Operator Instructions).

It looks like we don't have any more questions. So I would just like to thank everybody for joining us on today's call, and we look forward to seeing many of you in New York next week. Thank you.

Thank you. And ladies and gentlemen, this will conclude our conference call for today. We thank you for your participation, and for using AT&T Executive teleconference service. You may now disconnect.