Service Properties Trust (SVC) 2013 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Hospitality Properties Trust fourth quarter 2013 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 Director of Investor Relations, Katie Strohacker. Please go ahead.

Thanks, Lisa. Good afternoon, everyone.

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. As a reminder, the recording, re-transmission and transcription of today's conference call is prohibited without the prior written consent of HPT.

Before we begin, I would like to read our Safe Harbor statement. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on HPT's present beliefs and expectations as of today, February 25, 2014.

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 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 HPT's website at www.hptreit.com. Actual results may differ materially from those projected in these forward-looking statements.

Additional information concerning factors that could cause these differences is contained in our Form 10-K, to be filed Thursday with the SEC and in our supplemental operating and financial data found on our website. Investors are cautioned not to place undue reliance upon any forward-looking statements.

Finally, before I turn the call over to John and Mark, you should know that TravelCenters of America has not completed its year-end reporting and accordingly, our remarks today will not refer to TA's fourth quarter or full-year 2013 results. We will not respond to questions related to TA's fourth quarter or full-year 2013 performance.

Now I would like turn call over to John Murray.

Thank you, Katie. Good afternoon and welcome to our fourth-quarter 2013 earnings call.

Today, HPT reported fourth-quarter normalized FFO of $0.71 per share. As Katie noted, we have not yet been able to update you on TA's performance for the fourth quarter and full year because they've not yet reported their results.

As you may recall, TA's performance improved during the first three quarters of 2013 with EBITDAR of $4 million, or approximate 2% year over year. Year to date through September, TA's business reflected modest declines in fuel volume due to a steady pace of economic recovery in the US, conservation efforts and a change in customer mix. These declines were more than offset by improved per gallon diesel margins.

As a result, TA's fuel gross margin had increased 3.4% year to date through September compared to 2012. [Non-fuel] revenues and gross margin were up 7.9% and 7%, respectively, year to date through September compared to 2012. TA has managed through a difficult recession, changing business inventory and shipping strategies and conservation efforts by its customers. We believe TA is well-positioned for growth and will remain a leader in its industry.

Turning to HPT's hotel investments, fourth quarter RevPAR was up 7.9% across HPT's 287 comparable hotels. Ongoing hotel renovations continue to impact our results. Excluding non-comparable hotels and the 25 hotels under renovation during the quarter, RevPAR was up 8.9% this quarter.

The strong top-line performance, which was comprised of both occupancy and rate gains, reflect strong results at the 186 hotels that completed renovations from 2011 through the third quarter of 2013, with RevPAR gains of 11.2%. This helped to offset performance of the 25 renovation hotels this quarter, which experienced RevPAR declines of 3.1%, all from lost occupancy. 23 of the 25 comparable hotels under renovation this quarter were Wyndham and Sonesta conversion hotels.

Our hotels were negatively affected this quarter by reduced government business, including the impact of the October government shutdown, with a measurable impact focused on specific regions, but primarily in Washington, DC, Maryland and Virginia. We estimate the negative impact of our Virginia hotels alone reduced our total portfolio RevPAR by approximately 0.5%.

We also experienced difficult comparisons in the mid-Atlantic states for non-repeat Superstorm Sandy business and we estimate the negative impact of this on our total portfolio was approximately 1% in the fourth quarter. On the positive side, we continue to see strong performance in the West and Southwest, particularly in San Francisco and Houston.

Once again, HPT's hotel performance post-renovations offset the effects of ongoing renovation activities and allowed our portfolio to exceed industry average RevPAR performance. The strong performance has been driven largely by our Candlewood Suites, Extended Suites, Extended Stay Hotels, our SpringHill Suites, InterContinental, Crowne Plaza Hotels, and the Clift Hotel in San Francisco.

HPT's 140 comparable non-renovation extended stay hotels grew RevPAR by 10.3% in the fourth quarter of 2013 compared to 2012. Our 28 comparable non-renovation full-service hotels grew RevPAR 11.7% this quarter over last year's quarter. Our 94 comparable non-renovation select service hotels grew RevPAR 5.1% this quarter, in line with industry average.

While our extensive portfolio renovation program has begun to wind down, we expect 27 hotels will be under renovation during the first quarter and 21 in the second quarter of 2014. Renovation activity in 2014 will be principally at Sonesta and Wyndham hotels.

Looking forward to 2014, our operators are generally optimistic about the year ahead, as high occupancies and continued steady demand are expected to allow strong rate growth. Supply growth, while picking up, remains below historic average levels. Hotels along the West and East Coast are expected to lead the way, especially those in and around top 25 markets.

In addition, most of our hotels in our portfolio will have been significantly renovated, so our product quality is very good as we head into 2014. [2014] RevPAR forecasts versus 2013 for our hotel portfolios vary quite a bit by portfolio. However, across our 291 hotels, including 31 hotels expected to be renovated in 2014, our managers are budgeting an average RevPAR increase of between 6% and 7% due to renovated hotels, continued US economic growth and aggressive revenue management.

Similarly, budgeted GOP margin changes vary by portfolio, but the average expected GOP margin percentage increase is between 115 and 200 basis points, to an average of approximately 38% across the portfolio. These results are based on intensive asset management, manager cost control and continued monitoring with [amended decree]. We are off to a good start. So far in 2014, as January RevPAR was up an average of 8.1% across HPT's 291 hotels, with our IHG portfolio, in particular, performing exceptionally well.

As we've mentioned before in September, we agreed to acquire a 223 room full-service hotel in Orlando for $21 million. The hotel is on the property adjacent to the Sonesta ES Suites Hotel HPT owns in Orlando and we plan to convert this hotel to a Sonesta hotel when we add it to our portfolio agreement.

This acquisition remains in due diligence while the seller completes certain capital expenditures. Currently, our expectations are that we will close on this acquisition during the second quarter of 2014.

We continue to see healthy pipeline of hotel acquisition opportunities. We face competition for our acquisitions from private equity investors, other REITs and institutional investors. But we expect to continue to generate accretive acquisition growth.

However, we will maintain our discipline. When we acquire select service assets, we try to do so in a portfolio contract format with all of them renewals, [pulled FFO] in new reserves and subordinated management fees. When we look at full-service hotels, we will acquire one-off hotels if they can be added to existing portfolios.

We remain optimistic about this launching cycle due to low to moderate room supply growth and steady demand. This allows for increases in room rates and GOP improvement, particularly as we continue to move towards a fully renovated hotel portfolio.

This, in turn, creates confidence to increase our dividend, which we did in October. Our management and trustees will continue to evaluate the dividend rate on a quarterly basis.

Before I turn the call over to Mark, I wanted to update you on the recent government -- governance change at HPT. Last quarter, we discussed proposed changes to our management agreement with REIT Management and Research that have been completed and became effective in January 1 of this year. We believe these changes further align management's financial interest with those of our shareholders.

The changes include: first, we are now paying the base management fee on the lower of our historic property cost or HPT's total market capitalization. Previously, the base management fee was determined by the start property cost alone. Second, we are now paying 10% of the base management fee to RMR in common shares instead of 100% in cash.

Third, we are now calculating RMR's incentive management fee based upon the relative out-performance of HPT's total return as compared to the total return of the SNL REIT Hotel Index, instead of the growth of HPT's cash available for distribution per share. The incentive management's fee will be measured on a rolling three-year period and no fee will be paid if the total return per share of HPT is negative. If earned, these incentives will be paid entirely in HPT shares at the best rate over three years and the shares are subject to a claw back in the event of a financial restatement.

I'll now turn the call over to Mark.

Thanks, John.

First, let's review fourth quarter operating results for our hotel properties. Operating results at our 287 comparable hotels were strong this quarter, with RevPAR up 7.9% and 340 basis point increase in GOP margin percentage. Hotel operations were impacted by renovations again this quarter.

25 of our comparable hotels and one non-comp hotel were under renovation for all or part of the current quarter, compared to 33 comparable hotels in the prior-year quarter. RevPAR at our 262 comparable hotels not under renovation this quarter was up 8.9% versus the prior-year quarter on a 4.4 percentage point increase in occupancy and ADR growth of 2.1%. This RevPAR out-performance was driven in part by the 33 hotels that were under renovation during the 2012 fourth quarter, with RevPAR at these hotels up 25.2% in the current quarter on occupancy and ADR gains of 12.5 points and 3.2%, respectively.

Our portfolios with the highest RevPAR growth this quarter were our IHG and Marriott 234 growth portfolios, with increases of 17% and 7.3%, respectively, versus the prior year quarter. Although our renovation activities had a negative impact on hotel profitability this quarter, these declines were more than offset by the strong performance of our other hotels.

Gross operating profit for our 287 comparable hotels increased $17.9 million, or approximately 18% from the 2012 quarter and GOP margin percentage increased 340 basis points to 35.6%. As has been the case all year, performance of our InterContinental portfolio was outstanding this quarter, with gross operating profit up almost 31% and GOP margin percentage up 470 basis points versus the 2012 quarter.

Turning to 2013 fourth quarter coverage, cash flow available to pay our minimum returns and rents this quarter increased $14.6 million, or approximately 21% from the 2012 quarter. As a result of this growth, portfolio-wide coverage for our hotels this quarter increased to 0.75 times compared to 0.64 times in the 2012 quarter. For the year, hotel cash flow available to pay our minimum returns and rents increased $46.7 million, or approximately 14% from the prior year.

As a result, trailing 12-month coverage improved in 2013 versus 2012 for six of our nine agreements. In addition, coverage exceeded 1 times for two of our agreements in 2013 and these portfolios include approximately half of our 291 hotels. Information regarding all of our security deposit and guaranteed balances at quarter end is included in our Q4 supplement's.

Turning to our TravelCenter portfolio, as Katie and John have already noted, TA has not yet reported its fourth-quarter results so we can only discuss results through the third quarter. Property level EBITDAR through the third quarter at our TravelCenters was down 3.1% from the 2012 period due primarily to lower fuel volumes. However, property level rent coverage remained strong at 1.6 times for both our TA Centers and Petro Centers.

Year to date through the 2013 third quarter, TA generated EBITDAR of $231.4 million, a 1.8% increase from the 2012 period. TA's EBITDAR coverage of cash rents and interest was 1.31 times for the nine months ended September 30, 2013.

Turning to HPT's consolidated operating results for the fourth quarter, this morning, we reported normalized FFO of $103.3 million compared to normalized FFO of $93.9 million for the 2012 fourth quarter. The 10% increase in normalized FFO from the 2012 quarter, is due primarily to increases in our annual minimum returns and rents that resulted from our hotel and TravelCenter capital improvement funding, and the impact of our recent hotel acquisitions.

Fourth quarter 2013 normalized FFO per share of $0.71 was down from $0.76 for the 2012 fourth quarter, due to a higher weighted average share count in the 2013 quarter. We paid a $0.48 per share common dividend in the quarter and our normalized FFO payout ratio was approximately 67%. Adjusted EBITDA was $145.7 million in the 2013 fourth quarter and our adjusted EBITDA to total fixed charges coverage ratio for the quarter remained strong at 3.4 times and debt to adjusted EBITDA was only 4.6 times at year end.

Turning to our recent capital market activities, in November, we sold approximately 9.8 million common shares at a price of $28 per share, leaving net proceeds of $262 million, which we used to repay borrowings on our revolving credit facility. In January 2014, we amended our $1.15 billion unsecured credit facilities agreement, which includes our $750 million revolving credit facility and our $400 million term loan.

The amended extended our revolving maturity date by almost three years to July 2018 and lowered its annual interest rate by 20 basis points. It also extended the maturity date of our term loan by approximately two years to April 2019 and reduced its annual interest rate by 25 basis points. Finally, in February 2014, we redeemed at par our $300 million of 7 7/8% senior notes due in August 2014.

Next, I'll talk about an update on where HPT stands with its capital funding commitments and liquidity at year end. Since we began our hotel renovation program in 2010, we have completed renovations at 231 hotels at a total cost of approximately $700 million.

The annual minimum returns and rents under our hotel operating agreements have increased by $58 million as a result of our funding of these renovations. To complete this program, we expect to fund an additional $168 million in 2014 and $33 million in 2015, to renovate a total of 34 hotels. In addition to our hotel renovation funding, we expect to fund approximately $80 million of improvements to our TravelCenters in 2014.

With respect to our balance sheet and liquidity, at year end, we had approximately $22.5 million of cash, which excludes $30.9 million of cash escrowed for improvements to our hotels. Our debt to total book capitalization at the end of the year was approximately 47% and we had no amounts outstanding under our $750 million revolving credit facility.

In closing, we remain optimistic about the prospect of continued, improved operating results, including the positive impact our extensive renovation program is having on the performance of our hotels.

Operator, we are ready to open it up for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Wes Golladay from RBC. Please go ahead.

Good afternoon, everyone. Looking at the Wyndham portfolio, how do you see that playing out with the coverage -- with that -- with those assets, in light of the renovations? When do you think it will have a chance to get 1 times coverage by the end of year?

Well, as we mentioned, this past quarter, most of hotels in that portfolio were under renovation and during this quarter, many of the hotels will be under renovation as well. So there's -- we expect to see a considerable amount of improvement as we go through 2014, but I think it's too early to say that we would hit 1 times coverage.

It's possible, but I wouldn't predict it at this point. Some of the renovations are going on during our peak season and the like, so it's -- they've got their work cut out for them.

Okay, and then just looking at the overall portfolio, you guys have been getting pretty good, large RevPAR gains, mainly due to the occupancy and I think you were talking about pushing the ADR gains in the -- for 2014. Do you think you can get about two-thirds of your gains or is that too optimistic from the ADR gains? Two-thirds of the RevPAR growth?

I think the hotels that have been renovated prior to 2013, we should expect about two-thirds of the growth to be coming from growth in rates. For the hotels that were renovated in 2013, they will still be more heavy weighting towards occupancy gains, I think. So probably, it will be 50/50.

Okay and lastly, you mentioned the Sandy headwind in the fourth quarter. Will that persist into the first quarter?

Yes, it will. I think you'll see it taper off -- it shouldn't affect second and third quarter but it will affect, particularly for our Marriott 234, our Sonesta and I believe even our Hyatt portfolios were impacted by -- didn't have quite a bit of business last year as result of Superstorm Sandy.

Okay, I will hop back in the queue. Thanks.

Thank you.

(Operator Instructions)

We have a question from Ryan Meliker from MLV & Company.

Hi. Good afternoon, guys. Just a quick one on the dividend. Obviously, I know you guys announced a minor raise recently on the dividend. But with the CapEx program largely winding down, I know it's never over, but the majority of your major renovations in the rear view mirror by the back half of this year, how is the Board going to think about the dividend?

I mean, certainly from an AFFO standpoint, you've got a lot of coverage here. It seems like it would be an opportunity -- that might be an opportunity to grow the dividend. Is the Board thinking about it from that perspective or more focused on taxable income or some other metric?

Each quarter when we consider the dividend, we try to consider all the metrics. We look at what our capital needs are, what our cash needs are, what the alternative uses of available free cash are, what -- whether our tax situation and compliances, renovation needs, acquisition needs. We balance all of those things.

We also look at what the competitive landscape is in terms of dividend rates and share prices. So there's a lot of factors that go into it.

I think -- Ryan, I think this year, probably some of the shift and their focus will be more on how coverage is improving and how much more is expected to improve in each of our operating agreements, as well as monitoring how well we're able to grow some of our credit support. We have the ability under several of our operating agreements to replenish security deposits and guaranteed balances, and I think that will be an increasing focus of the Board as they evaluate the dividend going forward.

That's helpful. I guess one of the reasons why I ask about that is, if I go back two or three years, your stock has -- the stock performance has been relatively flat. Obviously, you've got -- you've given out nice dividends so your investors are getting their returns.

But now with the shift in terms of the management contracts and how RMR is going to get paid, does that incentivize you guys to raise the dividend a little bit more to maybe see the stock price perform a little bit better or does that incentivize the Board, I guess, in that regard, it's more them than you?

I don't think -- corporate governance changes are going to materially affect the way we decide on what our dividend payment is going to be.

All right. Fair enough. That's all for me. Thanks a lot, guys. Nice quarter.

Thanks, Ryan.

Thank you.

(Operator Instructions)

There are no further questions at this time. I would like to turn the conference over to John Murray.

Thank you very much for joining us today. I'm not sure if any of you are going to be at the Wells Fargo Real Estate Conference tomorrow in New York, but we'll be presenting there. Thank you.

We [won't] be presenting. We'll be (multiple speakers) having one-on-one meetings there.

Thanks.

Thank you. That concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.