Service Properties Trust (SVC) 2012 Q1 法說會逐字稿

Good day and welcome to the Hospitality Properties Trust First-Quarter 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, 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 re-transmission 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. Today's conference call contains forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on HPT's present policies and expectations as of today, May 7, 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 the filings with Securities and Exchange Commission or SEC.

In addition, this call may contain non-GAAP financial measures including normalized funds from our operations or normalized FFO. The 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-Q to be filed with the SEC and in our Q1 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.

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

Thank you, Tim. Good afternoon and welcome to our First-Quarter 2012 Earnings Call. Today, HPT reported first-quarter normalized FFO of $0.78 per share. Focusing first on our travel center investments, first-quarter performance at HPT's 185 travel centers included continued strong per gallon fuel margins on flat fuel volumes and increases in non fuel sales and gross margin. Property level rent coverage for HPT's travel centers was approximately 1.3 times for the quarter, up from approximately 1.2 times in the 2011 quarter. In addition to its improved operating results, TA's financial position remains sound with approximately $95 million of cash on hand at quarter end.

Turning to HPT's hotel investments. First-quarter Rev PAR decreased 0.5% at our comparable 288 hotels. And increased 0.4% at our 290 hotels, including the two new Royal Sonesta Hotels. Driven by a 3.5 percentage point decrease in average occupancy to 64.1% and a 5.9% increase in average daily rate to $100.88. During the quarter, we had 86 hotels under renovation for all or part of the period, including one hotel in our Marriott Number One portfolio; 25 hotels in our Marriott 234 portfolio; 52 hotels in our IHG portfolio; seven Hyatt Place Hotels; and one Radisson. The impact of these renovations, primarily from reduced occupancies because rooms were out of service, was significant as Rev PAR was up 5.6% quarter-over-quarter for the 204 non renovation hotels, but was down 14.6% at the 86 comparable renovation properties. GOP margins at the 204 non renovation hotels increased 160 basis points.

Average daily rate growth for our 290 hotels was 5.9% in the first quarter of 2012 and increased in each hotel portfolio and for 14 of our 15 brands this quarter, compared to last year as our operators continued to manage guest mix and push rate during peak travel periods. Despite an unsteady macroeconomic environment and excluding renovation hotels, we have seen continued occupancy rate and Rev PAR improvement in 2012 as we did in 2011 and we continue to press our managers to focus on revenue management and cost control. Our managers' 2012 Rev PAR forecast for our hotels are in the range of 5% to 8%. There is optimism about the ongoing lodging recovery as a result of constrained supply growth, continued steady demand, and increases in average daily rate and GOP margins. Although modest economic growth continues to create uncertainty about the sustainability of this recovery, we continue to see steady growth and a greater share of that growth from rates and occupancy which helps margins.

Our planned 2012 and 2013 capital program is extensive, with approximately 200 hotels expected to be renovated during that period. Our 2012 and 2013 results are likely to continue to be choppy due to these renovations and the timing of hotel brand conversions. We are pleased with the operating performance of the 36 hotels that completed renovations in 2011, with Rev PAR up 14.3% and GOP margin up 580 basis points at these hotels in the first quarter of 2012 versus 2011. We told you last quarter that first-quarter Rev PAR would be flat because of the volume of renovation activity.

There will continue to be renovations in the second and third quarters, but the pace will slow compared to this past quarter. We expect 73 hotels will be under renovation during all or parts of Q2, but only about 20 in Q3 and Q4. Renovation activity is expected to pick up again in the first quarter of 2013. We have tried to schedule as many renovation projects as possible for periods when they may create the least disruption to hotel performance. Nonetheless, there will be projects underway during each quarter and the impact will partially offset growth from properties not under renovation. Our managers' 2012 Rev PAR growth expectations, which I mentioned earlier, reflected these renovations disruption expectations.

As we told you during our year end call, we closed on the Sonesta acquisition on January 31, acquiring the 400 key Royal Sonesta Hotel in Cambridge, Massachusetts, and the leasehold interests in the 483 key Royal Sonesta Hotel in New Orleans, Louisiana, for $150.5 million. The acquisition of these two hotels was 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. This quarter, Rev PAR at the Cambridge and New Orleans Royal Sonesta's increased by 49.3% and 22.5% respectively. Gross operating profit increased 153% and 34% respectively. The out-sized gains in Cambridge partially reflect the fact that one of the two rooms towers was under renovation in the first quarter of 2011, but also the hotel's great location and reputation and strong Boston lodging fundamentals.

New Orleans is having a great year with a strong convention calendar and citywide events like the NCAA Final Four. As a leading Hotel in New Orleans, the Royal Sonesta has obviously benefited from these activity levels. Part of our strategy in acquiring the two Sonesta hotels and establishing an affiliated relationship with Sonesta, was to enable us to have improved growth opportunities. We have previously reported on rebranding opportunities. Since the closing of the Sonesta transaction, we have given notice to IHG of our intent to convert the Crown Plaza Hilton Head into Continental Baltimore, Staybridge Suites Burlington, Massachusetts, and The Crown Plaza Philadelphia to Sonesta brands.

The Hilton Head conversion was completed on April 27 and is now operated by Sonesta as the Sonesta Hilton Head Resort. The Baltimore Hotel will become a Royal Sonesta. The Burlington Hotel will become a Sonesta ES Suites, Sonesta's new upscale extended stay brand. And The Philadelphia Hotel will become a Sonesta. Renovations are planned at each of these hotels. We are currently evaluating possible one-off acquisitions in key cities to continue to grow the Sonesta relationship.

Before I turn the call over to Mark, I want 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 decided not to sell the portfolio of 20 Select Service Marriott Hotels. We are in discussions with Marriott regarding the budgets and timing for renovating these 20 hotels. We currently have a sale agreement on the St. Louis Airport Marriott for $35 million and the buyer is completing diligence. The closing is expected to occur in the second quarter 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 15 additional IHG hotels to Sonesta Brand. HPT and IHG have agreed to retain and renovate three Candlewood Hotels which had been considered for sale or rebranding.

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

Thanks, John. First let's review the first-quarter operating results for our hotel properties. As John discussed, we had 86 properties or about 30% of our hotels under renovation for all or part of the first quarter. As would be expected, this level of renovation activity had a negative impact on the operating results of our hotel portfolio with revenues at our 288 comparable hotels down approximately $920,000 or less than 0.5% versus the prior year quarter. Results were more favorable if you exclude hotels under renovation during the first quarter, with revenues that are remaining 202 comparable hotels up $8.7 million, or 4.2% quarter-over-quarter. Our strongest performing portfolio was our Marriott Number One portfolio with a continuing increase of 6.4%, while revenue for our IHG portfolio which had 52 properties under renovation decreased 4.2% quarter-over-quarter.

Our newly acquired Royal Sonesta Hotels in Cambridge and New Orleans generated revenue increases of approximately 42% and 18% respectively for the months of February and March. Renovation activity also took its toll on hotel profitability with gross operating profit for our comparable hotels down $4.1 million or about 4% quarter-over-quarter. And GOP margin percentage down 130 basis points to 33.3%. Excluding hotels under renovation during the quarter, GOP increased $5.5 million or 8.1% and GOP margin percentage increased 120 basis points to 34% for our comparable hotels.

Our Marriott Number One portfolio, which had only one hotel under renovation during the quarter, performed very well with a 14% increase in gross operating profit and a 280 basis point increase in GOP margin percentage. Cash flow available to pay our minimum rents and returns for our comparable hotels increased $2.5 million or 4.5% quarter-over-quarter. Excluding hotels under renovation, cash flow available to pay our minimum rents and returns increased $10.2 million or about 27% from the 2011 first quarter. Our Marriott Number One portfolio contributed the majority of this increase with cash flow up 24% from the prior year quarter.

Turning to coverage of our minimum returns in rents, for the 2012 first quarter our Marriott 234 and IHG portfolios had coverage of around 0.5 and 0.7 times respectively relatively unchanged from the 2011 quarter. During the first quarter, Marriott made payments to us of $6.9 million under its guarantee of the Marriott 234 portfolio. During the quarter, we also applied the security deposit we hold in connection with our IHG agreement to cover payment shortfalls of $16.3 million. We currently expect the IHG security deposit to be sufficient to cover any additional payment shortfalls before the portfolio returns to one times coverage.

Because the Marriott security deposit is exhausted, if cash flow is less than our minimum returns Marriott will fund the difference up to 90% of our minimum return, 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 one times coverage. At quarter end, all other payments due under our hotel operating agreements were current. Information regarding our security deposit and guaranteed balances at quarter end is included in our Form 10-Q which will be filed tomorrow.

Turning to our travel center portfolio, performance continued to improve this quarter with property level EBITDAR at our 185 centers up $8.8 million or 15% versus the 2011 first quarter. Fuel volumes remained relatively steady and per gallon fuel margin increased this quarter resulting in a 9.2% increase in fuel gross margin compared to the 2011 quarter. Non fuel revenue and gross margin increased 6% and 2% respectively quarter-over-quarter. Property level rent coverage improved from the 2011 first quarter and was 1.29 times for our TA Centers and 1.39 times for our Petro Centers. Earlier today, TA reported first-quarter 2012 corporate level EBITDAR of $49.7 million, an 11.6% increase from the 2011 first quarter. TA's EBITDAR coverage of total cash rents at the corporate level was 0.92 times for the seasonably weak first quarter. On a trailing 12 month basis, coverage was strong at 1.33 times.

Turning to HPT's operating results for the first quarter, this morning we reported normalized FFO of $96.4 million or $0.78 per share. This compares to first quarter 2011 normalized FFO of $102.4 million or $0.83 per share. The decrease in normalized FFO was primarily due to the loss of $6.4 million of income as a result of the temporary elimination of FF&E reserves for the IHG portfolio and a $3.7 million increase in preferred distributions due to our January 2012 Series D preferred share issuance. These decreases were partially offset by a $6.6 million increase in our minimum returns and rents versus the prior year quarter. EBITDA was $142.3 million in the first quarter and our EBITDA of total six charges coverage ratio for the quarter remained strong at 3.1 times. In February, HPT paid a common dividend of $0.45 per share. Our normalized FFO payout ratio was approximately 58% for the 2012 first quarter.

With respect to our balance sheet and liquidity, at quarter end, we had cash of $148 million, which excludes $60 million of cash escrowed for improvements to our hotels and had no outstanding borrowings on our revolving credit facility. During the first quarter of 2012, we made capital fundings in excess of FF&E reserves of $62.6 million related to the ongoing renovation of the hotels in our Marriott 234 and IHG portfolios and to fund improvements to our Sonesta Hotels. In connection with planned renovations at our IHG and Marriott 234 Hotels, we expect to fund improvements of approximately $172 million and $42 million respectively during the remainder of 2012. During the first quarter, we also made capital fundings under our leases with TA totaling $13.1 million and we currently expect to fund up to an additional $75 million of improvements to our Travel Centers in 2012.

Turning to our recent financing activities. In January, we completed an offering of 11.6 million shares of our 7.125% Series D preferred shares raising net proceeds of approximately $280 million. We used a portion of the net proceeds to fund our January acquisition of the two Sonesta Hotels for approximately $151 million. In February, we redeemed at par all of our outstanding 8.875% of Series B preferred shares for approximately $86 million. In March, we entered into a five year, $400 million unsecured term loan which bears interest at LIBOR plus 145 basis points. This loan is prepayable at any time without penalty. Also in March, we repurchased approximately $71 million of our 3.8% convertible senior notes that became putable to us. Approximately $8 million of these notes remain outstanding. Finally in April, we redeemed at par all of our 6.85% senior notes due in July 2012 for approximately $103 million. As of today, we have approximately $94 million of cash on hand and no amounts outstanding under our $750 million credit facility.

In closing, we remain optimistic about the prospect of continued improvement in the operating results at our Travel Centers, as well as the positive impact our extensive renovation program will have on the future performance of our hotels.

Operator, that concludes our prepared remarks. We're ready for questions.

(Operator Instructions) Jeffrey Donnelly.

Good morning, or good afternoon, guys. What is the rent coverage and RevPAR of the four IHG hotels that are going to be pulled out of IHG and put into Sonesta?

The rent coverage is about 0.8 times. I don't know the RevPAR off the top of my head.

And do you guys have a sense of how much you will be investing in the remaining IHG portfolio, assuming that they all remain with IHG?

Well, we know that for the hotels that are definitely staying with IHG, we know that we have another $172 million -- $171 million, $172 million this year. And there will be additional moneys in 2013, and we're firming up those estimates.

And just from a practical standpoint, how do you guys end up negotiating the arrangements with Sonesta, just considering that RMR is sort of on both sides of the transaction? Do you guys have to get a third party involved? I'm just curious from a logistical standpoint.

The valuations and exit rates for hotels that were part of the IHG arrangement were negotiated with IHG. And many were then shared with our independent trustees who approved the IHG amendments. So, we have approval to remove those and rebrand those properties at those values or higher. So, it was approval by our independent trustees.

And just one last question -- I don't know if you guys have it, but I think you said in your release that at the end of the quarter, from the Marriott 234 agreement, there was $24 million of guarantees or deposits left. Do you have a sense of where that stands today, like maybe in early May or at the end of April?

No. We're in the process of updating those numbers through -- I think the Marriott's on the 13-period system. So, we're going to provide -- in our Q, when we file it tomorrow, we'll provide an update through the most recent period.

Okay. Great. Thanks, guys.

(Operator Instructions) David Loeb.

John, I'm not sure you really answered the question that I thought Jeff was asking, and I was interested in that, so, let me ask it a different way. When you're negotiating a management arrangement for a newly rebranded Sonesta Hotel, who negotiates that?

There was a negotiation that took place at the time that we were acquiring Sonesta, and we engaged an outside consultant to do a benchmark study of third-party management contract terms in the hotel industry. And based on that benchmarking study that was done by an independent firm, our independent trustees signed off on contract terms that were within those parameters. And also on a pooling agreement, so that as we converted hotels from the IHG portfolio to the Sonesta portfolio, if we decided to do that, that the new rebranded hotels would fall under that same -- those same contract terms and become pooled together.

Okay. So, basically any additional contracts that you signed with Sonesta, any hotels that are rebranded will have those same terms as the initial ones?

Yes, I think that's what everybody should expect going forward. Unless there's something particularly different, we can go -- we could run that by -- a new scenario by our independent trustees. But I think we've got a -- there was an extensive study done, and I think that both sides are comfortable with the terms. And they look very similar to most other third-party hotel-management contracts that you see among all REITs out there.

Okay. And then in the supplement, it talks about -- it actually has a number in for annual minimum return, minimum rent for the Sonesta One, Sonesta Two, which I guess are now two hotels but soon going to more. Is that really only relevant in measuring whether HPT has the right to terminate Sonesta?

To terminate, as well as for purposes of calculating when the manager would qualify for incentive fees under the contract?

Okay. So, at 1.0 coverage, that's the threshold for incentive fees to kick in?

Correct. And keep in mind, as John mentioned, the pooling agreement. So, all hotels managed by Sonesta, with the exception of the New Orleans leased hotel, will be pooled for purposes of calculating whether we've received our minimum return.

Got it. Okay. That does make sense. So, as you go forward -- I guess this is another thing that maybe Jeff was getting around the edges of. But as you take hotels out of IHG where there is a minimum return requirement, and put them into Sonesta where there's not, except for the calculation, or basically where you're floating relative to the market as any other REIT TRS leased hotel would be, do you expect in near term or the intermediate term that there will be a decrease in the cash flow coming from that?

Well, for the four hotels that we have announced that we're going to rebrand, there will be a shortfall initially because the minimum return under the IHG contract will be reduced by $9.9 million. And as I said, those hotels were covering at about 0.8 times on a trailing 12-month basis. So, there's a shortfall there. If you look at all of the hotels combined that we're thinking of converting potentially to the Sonesta Brand, they actually -- hotel cash flow over on a trailing 12-month basis is greater than the amount our minimum return under the IHG contract will be reduced. So, if we convert all of the hotels that we're considering, there will be no -- at least based on historical cash flows, there will be no decline in our cash flow.

And, in fact, an increase in your cash flow, if I heard your numbers right.

Based on historical numbers, yes.

Right, okay.

But we will be renovating all of the properties within six months after conversion, so that's another reason why there will be a drop-off.

Okay. So, that makes sense. There would be a drop-off during renovation, but presumably you would expect to have an increased return from those going forward, albeit with a slightly higher risk profile.

Yes.

And for the hotels that you may decide to retain in Marriott or Intercontinental, am I looking at the math right to say that you'll keep the 8% or 9% minimum return on those, but any additional dollars that you put into renovate those under those systems will also carry that 8% or 9% minimum return?

That's correct.

That sounds like a good deal. Great. That's all I had. Thank you.

Dan Donlan.

Thank you. Was just curious on the four hotels that you guys are rebranding as Sonesta. Why did you decide to rebrand those? And then secondly, what portion of the guests were being derived from the IHG reservation systems?

It was a combination of art and science in terms of the timing and which hotels went first. And it involved -- to some extent, it involved negotiation with IHG. Contractually we were required to convert the Hilton Head property first. The other properties we converted based on the timing that seemed to work best for Sonesta. There was a few different reasons why that would work out better. Sonesta currently manages larger full-service hotels -- the Royal Sonesta brand here in the US. And so, converting hotels like Baltimore that fit nicely into that type of hotel asset worked best. So, that's why Baltimore was one of the next ones, where Sonesta has created a new upscale extended-stay brand. And so, that's one of the reasons -- and Burlington is the closest hotel to Sonesta's headquarters here in Boston, so, that's why Burlington was next. Philadelphia, again, it's a large center city hotel close to Baltimore and close to Boston. And so, it was really for ease.

The second part of the question was -- I'm sorry?

Yes, just what portion of the guests -- and I guess really Baltimore and Philadelphia, what portion of the guests are generated through the IHG system?

It varies, but it was probably in the 30%-ish range.

Okay. And then as you go forward, are these test cases to a degree with Sonesta and how you guys decide to rebrand future hotels? Yes, I guess it would seem to me, given Sonesta's full-service experience that the Crowne Plazas might be better rebrands for Sonesta initially. Is that a fair assumption for us to be making or --?

Well, there are more hotels that are potential -- that are under the Staybridge brand right now that are potential conversion candidates. And I think that, not having created a new brand, there will be an effort to get a little bit of mass within that brand. So, I think you'll see a mix of Staybridge and Crowne Plaza conversions.

Okay. And then, I might have missed this, because I got disconnected from the call. But I think you guys were talking with another major brand about potentially rebranding hotels -- some of your hotels in maybe the IHG portfolio. What's going on there?

We're still in the process of negotiating documents. We're hopeful that will move forward, but we don't have a firmly committed deal. We have an agreed-term sheet and documents that are going back and forth that covers 20 hotels. We're hopeful that we'll be able to complete and announce that transaction this quarter. But until it's done, it's not done.

Okay. That's it for me. Thank you.

Wes Golladay.

Hello, good afternoon, guys. You mentioned the potential for acquisitions. Can you give us some color on the size of your pipeline, and what markets you might be looking at?

Well, we're looking at a number of different possible alternatives. And the footprint that we're initially laying out with the Sonesta brand runs really from the Boston market where they are today, down through New Orleans and to Houston. But primarily along the coast. And so, our initial focus with acquisitions that are going to go to the Sonesta Brand is going to focus on key markets where we don't have that representation today. So, we've been looking at hotels in New York, Washington DC, Miami, and those will probably be the markets that get the most attention for Sonesta now. Obviously, we won't ignore opportunities that come up in Chicago or San Francisco. But the focus is really on the east coast right now to -- as we increase the awareness for the Sonesta brands.

Okay. And on the term loan, you guys currently have that floating. Is the game plan to leave that float for a while, or are you guys looking at permanent financing on that?

I think the game plan right now is to allow that to float. We think the interest rate environment on floating rate debt is very favorable today. We don't see that changing in the near term. However, if our view changes, we can prepay that any time; and if we decided to do that, we'd probably issue senior notes to take it out.

Okay. Thanks for the questions, guys.

At this time, I have no further questions. I'll turn it back over to Mr. John Murray.

Thank you all for joining us today. We look forward to seeing you at NAREIT or the NYU Hotel Conference in New York later next month. Thanks.

Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation, and for using AT&T Executive Teleconference Service. You may now disconnect.