Service Properties Trust (SVC) 2013 Q1 法說會逐字稿

Good day, and welcome to the Hospitality Properties Trust first-quarter 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 will note that the recording, retransmission and transcription of today's conference call is strictly prohibited without the prior consent of HPT.

Before we begin today's call, I'd 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 other securities laws. These forward-looking statements are based on HPT's present beliefs and expectations as of today, May 7, 2013. The Company undertakes no obligation to revise or publicly release the results of any revisions 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 adjusted EBITDA to net income, as well as components to calculate AFFO, are available in our supplemental package found in the investor relations section of the Company's Web site.

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 Web site 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. Good afternoon and welcome to our first quarter 2013 earnings call. Today, HPT reported first-quarter normalized of $0.74 per share.

Focusing first on our TravelCenter investments, this morning TA reported first quarter EBITDA of approximately $57 million, a 15% increase from the 2012 quarter. First-quarter performance at HPT's 185 TravelCenters included increases in per gallon fuel margins and non-fuel sales in gross margin. These increases were partially offset by the lower fuel volumes due in part to TA's season to supply fuel on the wholesale basis to certain franchisees.

TA continues to be a customer focused leader in the industry as demonstrated by the recent agreement with Shell to begin providing natural gas fuel dispensers ant TravelCenters nationwide. Making it possible for natural gas powered trucks to travel cross-country able to refuel when necessary.

Turning to HPT's hotel investments. First-quarter RevPAR was up 6.8% this quarter across all of HPT's hotels. Excluding the four hotels acquired since 2012, comparable hotel RevPAR was up 7.2%.

Ongoing hotel renovations in our 2012 conversion hotels continue to negatively impact our results. Excluding acquisition and renovation hotels, RevPAR was up 10.3% this quarter and excluding acquisitions, renovations and conversions, RevPAR was up 15% quarter-over-quarter. The strong performance, which was comprised of both occupancy and rate gains, reflects very strong results at the 120 hotels that completed renovations in 2012 with RevPAR gains of 25.8%. This helps to offset performance at our renovation and conversion hotels which experienced RevPAR declines of 10.3% and 17.4% respectively.

In addition to renovation and conversion activity affecting comparability in HPT's portfolio, comparisons this quarter were also impacted by the leap year of 2012 and the Easter and Passover holidays falling in the first quarter of 2013 versus second quarter of 2012. Importantly, HPT's hotel performance post renovation is increasing at a pace which is now offsetting the effects of ongoing renovation and conversion activity, allowing our portfolio to exceed industry average performance.

The strong performance has been driven largely by our extended hotels renovated in 2012. Our Candlewood Suites, Staybridge Suites, Residence Inns and TownePlace Suites grew RevPAR combined 31% in the first quarter. Extended stay hotel renovations accounted for over three quarters of our hotels under renovation in 2012.

We expect 27 hotels will be under renovation during all or part of the second quarter, 28 in the third quarter and 37 in the fourth quarter of 2013. Renovation activity throughout 2013 will be principally at our Sonesta and Wyndham hotels, but also to a lesser extent in our Marriott 234 and IHG portfolios. Also, during the second half of 2013, a greater percentage of the hotels being renovated will be larger full-service hotels. So the impact of renovations will continue to be significant throughout 2013.

We told you last quarter that our managers 2013 RevPAR forecast for our hotels are generally in the 5% to 7% increase range and GOP margin percentage increases are generally forecast to be in the 100 to 200 basis point range. Based on first-quarter comparable RevPAR growth of 7.2%, GOP margin increased 110 basis points. In the strength of renovated hotels, our operators remain comfortable with these forecasts.

In terms of acquisitions, in January we signed a purchase agreement to buy the 426 room Atlanta Marriott Gwinnett Place for $29.7 million. We plan to rebrand this hotel at the Sonesta Gwinnett Place and combine this hotel with the Sonesta Number 1 portfolio. We expect to close on this purchase later in May.

In February, HPT reached agreement on the letter of intent with NH Hoteles in Spain for investments in Latin America, Europe, and New York totaling approximately $375 million. On April 24, NH Hoteles notified us that they were unable to obtain the necessary consent from their existing bank synergy to allow NH to complete this transaction as planned. We are currently in discussions with NH regarding possible alternatives to the previously announced terms. While we are hopeful this becomes a relationship that enables us to enhance our growth, we can provide no assurance that any transaction will be completed with NH.

We continue to see a healthy pipeline of hotel acquisition opportunities. We face a competitive landscape with other REITs and institutional investors also seeking acquisitions, but we are optimistic that we will continue to generate accretive acquisition growth. There is modest optimism about the lodging cycle due to continued low room supply growth and steady demand. This allows for increases in room rates and expansion of GOP margins, particularly as we move toward the fully renovated hotel portfolio. Accordingly, we are optimistic about anticipated 2013 operating results as the large and growing number of renovations are completed at our hotels.

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

Thanks, John. First, let's review first-quarter operating results for our hotel properties.

As John discussed, operating results for our hotel properties continue to be affected by our renovation and rebranding efforts. In the 2013 first-quarter, we have 39 hotels under renovation for all or part of the quarter compared to 86 hotels in the 2012 first quarter. In addition, results of the hotels we rebranded during the second and third quarters of 2012 were down substantially versus last year's first quarter.

RevPAR at our 77 comparable hotels under renovation during the quarter were rebranded during 2012 was down 12% on an 8.5 drop in occupancy and an ADR increase of slightly less than 1%. On the other hand, RevPAR at our 209 comparable hotels not under renovation this quarter and not rebranded during 2012 was up 15% versus the prior year quarter on a 6.4 percentage point increase in occupancy and ADR growth of 4.4%.

This significant RevPAR increase was driven in large part by the performance of our 86 hotels that were under renovation during the 2012 first quarter with RevPAR up 32.8% at these hotels on occupancy and ADR gains of 14.1 points and 6.5% respectively. Our portfolios with the highest RevPAR growth this quarter were our Marriott 234 and IHG portfolios with quarter over quarter increases of 11.7% and 17.8% respectively.

Although our renovation and rebranding activities also had a negative impact on hotel profitability this quarter, these declines were more than offset by improved results at our other hotels. Gross operating profit for our 285 comparable hotels increased $7.3 million, or 7.7% quarter-over-quarter, and GOP margin percentage increased 110 basis points to 35.1%.

Turning to 2012 first-quarter coverage of our minimum returns and rents, cash flow available to pay our minimum returns on rents increased $6.9 million, or 11.1% quarter-over-quarter. Despite this improvement, coverage remains below one time for all of our Sonesta Number 2 agreement this quarter and on a trailing 12 month basis, below one times for all but our Marriott Number 1 and Sonesta Number 2 agreements. Information regarding all of our security deposits and guaranteed balances at quarter end is included in our Q1 supplemental and our Form 10-Q which will be filed tomorrow.

Turning to our TravelCenter portfolio. Property level EBITDA this quarter at our 185 TravelCenters was up $3.5 million, or 5% from the 2012 quarter. Fuel and non-fuel gross margin increased 9.6% and 3.4% respectively quarter-over-quarter.

Operating expenses in the 2013 quarter were 5.1% higher than the prior year quarter. Property level rent coverage for the 2013 first-quarter was 1.3 times for our TA centers and 1.34 times for our Petro Centers. Earlier today, TA reported first quarter 2013 EBITDA of approximately $57 million, a 14.6% increase from the 2012 quarter. TA's EBITDA coverage of cash rents remained strong at 1.37 times on a trailing 12 month basis.

Turning to HPT's consolidated operating results for the first quarter. This morning we reported normalized FFO of $92.6 million, or $0.74 per share. This compares to first quarter 2012 normalized FFO of $96.4 million, or $0.78 per share.

The 4% decline in normalized FFO from the 2012 quarter is due primarily to the lower returns earned this quarter from our Marriott Number 1 portfolio and from our Sonesta hotels that were rebranded during 2012. As a reminder, our Marriott Number 1 portfolio converted from leased to managed at the start of 2013 and is now impacted by seasonality. These declines were partially offset by increased minimum returns in rents under our Marriott 234, IHG, and TA agreements due to our funding of capital improvements and the impact of our 2012 hotel acquisitions.

We paid a $0.47 per share dividend in the quarter and our normalized FFO payout ratio was approximately 64%. Adjusted EBITDA was $136.4 million in the 2013 first-quarter, and our adjusted EBITDA to total fixed charges coverage ratio for the quarter remained strong at 3.2 times.

Turning to this quarter's financing activities, in March we sold 16.1 million common shares, raising net proceeds of approximately $394 million that we used to repay amounts outstanding under our revolving credit facility. Debt to total book capitalization at the end of the quarter was approximately 44%, down from 50% at year end.

Next, I will provide our quarterly update on where HPT stands with its capital funding commitments and liquidity. We have agreed to fund up to $123 million for renovations to the 68 hotels in our Marriott 234 agreement. During the first quarter, we funded $14.6 million and we expect to fund the remaining $30.4 million later this year. We have agreed to fund up to $290 million for renovations to the 91 Hotel Center Intercontinental agreement.

We made no fundings during the first quarter, but we expect to fund the remaining $77.2 million later this year. We have agreed to fund up to $93 million for renovations to the 21 hotels in our Wyndham agreement. During the first quarter, we funded $10.1 million and we expect to fund the remaining $74.3 million later this year. We have agreed to fund up to a $195 million to renovations to the 20 hotels included in our Sonesta Number 1 agreement. During the first quarter, we funded $15.9 million and we expect to find an additional $111 million in 2013 and the balance of approximately $57 million in the first half of 2014.

Finally, we funded $22.7 million for improvements to our TravelCenters during the first quarter, and we expect to find another $55 million to $60 million for improvements over the remainder of 2013. With respect to our liquidity, at quarter end we had cash of approximately $18 million, which excludes $38 million of cash escrowed for improvements to our hotels. And had $740 million available under our $750 million revolving credit facility to fund our capital commitments and future acquisitions.

In closing, we remain optimistic about the prospect of continued strong operating results at our TravelCenters, as well as the positive impact our extensive renovation program will have on the long-term performance of our hotels. Operator, we are ready to take questions.

Thank you.

(Operator Instructions)

Ryan Meliker, MLV.

Hi, good afternoon, guys. Just a couple questions here. First, with regards to the NH transaction, can you give us any color on what the potential for it staying alive in some form is or whether you think there's a possibility [you don't find it likely? Just any color on how that could transpire would be helpful.

Unfortunately, Ryan, I really can't handicap it. There are ongoing discussions between NH and their bank group and there are ongoing discussions between HPT and NH. All I can say is it may happen, it may not.

I will give you more color in the next month or so. But I really can't today.

And given that response, it's safe to assume that you are not holding a portion of your capacity on your revolver for the purpose of potentially acquiring those assets or doing some type of deal with NH, you'll cross that bridge when you come to it. Is that fair to say?

Yes, I think. Ryan, this is Mark. Recall that the largest part of that transaction, the original transaction, was a loan on the European hotels.

Our plan was to always fund that loan with a euro borrowing. So if that part of the transaction were to be resurrected, we would continue to anticipate funding that once again with the euro borrowing. So we have plenty of capacity with our revolver to deal with the remaining parts of the NH transaction, as well as our capital commitments for this year and any other potential acquisitions that arise.

That's helpful. And then just a quick follow-up.

Your stocks had a great run this year, up 29%. It's the best performing lodging stock in the group.

Just wondering, given where your stock is, is there the potential for you to use your stock as currency to continue to grow the portfolio? Does your pipeline look rather robust right now? Any color on how that could transpire the rest of the year would be helpful.

We have a very active acquisition pipeline. We are looking at a number of possible transactions. We have, as we usually do, a number of initial round or early stage letters of intent that are out to possible sellers.

Traditionally, when we make an offer to acquire a hotel, we do so without any financing contingency. And we close initially with using our revolving credit facility and then use a roughly equal mix of debt and equity to refinance that revolver long term. I think that's what we will do on the deal that we have pending right now. If they come to fruition, we will close using our revolver and then look at the capital markets at that time and see what the best way to fund them is.

Fair enough. Would you say that pipeline is more robust than it was three or six months ago or about the same?

I would say probably slightly more robust with the caveat that, of course, the last time that we spoke, the NH transaction seemed to be on subject to budgets. Now it seems more uncertain.

Fair enough. All right. Thanks for the color. I will jump back in queue with anything else.

(Operator Instructions)

Bryan Maher.

Good afternoon, guys. Quick question on the hotel renovations and repositioning. When do you think that the bulk of that will be completed?

Well, we have already done, last year alone, 20 hotels. We are going to do roughly an equal amount this year, so there will be some renovations that carry over into 2014, but the majority of it will be done by the end of this year.

Okay. Thank you.

There are no further questions. Please continue.

Thank you for joining us on today's call. We look forward to seeing you in a few weeks at the NYU conference of NAREIT. Thanks.

Ladies and gentlemen, that does conclude our conference today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.