Service Properties Trust (SVC) 2014 Q1 法說會逐字稿

Good day, and welcome to the Hospitality Properties Trust Q1 2014 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 our Director of Investor Relations, Katherine Strohacker. Please go ahead, ma'am.

Thank you. 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. The recording, retransmission, and transcription of today's conference call is prohibited without the 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 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 6, 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 the Company's website.

Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Form 10-Q filed today with the SEC and in our supplemental operating and financial data found on our website at www.HPTReit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements.

Before I turn the call over to John, you should be aware that TravelCenters of America has not completed its year-end 2013 or first-quarter 2014 reporting, and accordingly the Company's remarks today, with respect to TA's operating results, will be limited and we won't be able to respond to questions related to TA's first-quarter 2014 performance. With that, I'll turn the call over to John Murray.

Thank you, Katie. Good afternoon, and welcome to our first-quarter 2014 earnings call. Today, HPT reported first-quarter normalized FFO of $0.75 per share. As Katie noted, we are not yet able to update you on TA's performance for the full year 2013 nor first quarter 2014, because they have not yet reported their results. TA is working to complete its filings as soon as possible and we will then be able to update our disclosures on their performance. TA remains current on its rent payments to HPT.

Turning to HPT's hotel investments, first quarter RevPAR was up 10.1% across HPT's 289 comparable hotels. Ongoing hotel renovations continue to impact our results. Excluding non-comparable hotels and the 18 hotels under renovation during the quarter, RevPAR was up 11.6% this quarter. The strong top-line performance, which was comprised of both occupancy and rate gains, reflects strong results at the 61 hotels that completed renovations during 2013 with RevPAR gains of 29%. This helped to offset performance at our 18 renovation hotels this quarter, which experienced RevPAR declines of 4.2%, all from lost occupancy. 12 of the 18 comparable hotels under renovation this quarter were Wyndham and Sonesta Hotels.

This was an especially tough winter from Philadelphia to Toronto, and our Mid-Atlantic, New England, and Canadian regions each showed RevPAR declines. In addition to the harsh winter, our Mid-Atlantic region was negatively impacted by difficult Superstorm Sandy comparisons, which caused RevPAR at our New Jersey hotels to decline 8.2% in the first quarter of 2014. On the positive side, we continued to see strong RevPAR performance in the East North Central, Pacific, and South Atlantic regions, up 19.2%, 14.7%, and 13.3%, respectively.

While the hotels renovated during 2013 had the most significant positive impact on first-quarter 2014 performance as they ramped back up, we are encouraged that our hotels renovated in earlier periods continue to experience above-market level growth, as well. The 120 hotels that completed renovations in 2012 grew RevPAR 10.8% and expanded margins by 140 basis points this quarter. Also, our comparable portfolio strong performance this quarter was balanced across property types.

Among our comparable full service hotels, RevPAR and gross profit margin percentage were up 12.4% and 460 basis points respectively. Among our select service hotels, RevPAR and gross profit margin increased 7.4% and 30 basis points respectively. Finally, among our extended stay hotels, RevPAR and gross profit margin percentage jumped 10.6% and 180 basis points this quarter. While our extensive portfolio renovation program has begun to wind down, we expect 22 hotels will be under renovation during the second quarter, 13 in the third quarter, and 2 in the fourth quarter of 2014. This renovation activity will be principally at our Sonesta Hotels.

Looking forward, our operators are generally optimistic about the year ahead as high occupancies and continued steady demand are expected to allow strong rate growth. Hotels along the West and East coasts are expected to lead the way, especially those in and around top 25 markets. In addition, most of the hotels in our portfolio have now recently been significantly renovated, so our product quality is very good as we move through 2014.

Despite our strong first-quarter performance, the first quarter contributes the least to the full-year performance, and accordingly, our managers have not materially changed their forecast for full year 2014. However, based on the strong first quarter, we now expect an average RevPAR increase of between 6% and 8% and an average GOP margin percentage increase of 175 to 225 basis points across our comparable hotel portfolio for the full year.

Turning to disposition and acquisition activity, in February, we terminated the purchase agreement related to a previously announced full service hotel in Orlando. We were unable to resolve diligence issues there. On March 31, we agreed to acquire a 240-room hotel in Fort Lauderdale, Florida in an adjacent parcel of land for $65 million. We have completed the diligence and expect to close on this acquisition at the end of May. The hotel was completely renovated, with essentially all new systems and design in 2010 and is currently an independent lifestyle hotel. We plan to convert this hotel to a Sonesta hotel to take advantage of Sonesta's strong South Florida reputation. Aside from new signage, there's very little capital expected to be needed for this hotel in 2014 or 2015.

In addition to the 240 ocean-facing guest rooms, the hotel has approximately 9,000 square feet of top floor meeting space with amazing ocean views. There are two restaurants, three bars, an infinity pool, and fitness center. The cap rate on 2013 cash flow on the hotel component of this acquisition was 6.7% and we expect Sonesta to generate improved results due to their brand awareness in South Florida; however, there will be some one-time conversion costs in 2014.

We continue to see healthy pipeline of hotel acquisition opportunities. We face competition for acquisitions from private equity investors, other lodging REITs, and institutional investors, but we expect to continue to generate acquisition growth. We will maintain our discipline. When we acquire select service assets, we try to do so in a portfolio contract format with all-in on renewals, pooled FF&E reserves, and subordinated Management fees. When we look at full service hotels, we will acquire one-off assets if they can be added to existing portfolios.

We remain optimistic about this lodging cycle due to the 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 April of 2014. Our Management and Trustees will continue to evaluate the dividend rate on a quarterly basis. I'll now turn the call over to Mark.

Thanks, John. Operating results at our 289 comparable hotels were strong this quarter, with RevPAR up 10.1% and a 230 basis point increase in GOP margin percentage. Hotel renovations continued to have both a positive and negative impact on hotel operations this quarter. RevPAR at our 271 comparable hotels not under renovation this quarter was up 11.6% versus the prior-year quarter on a 5.5 percentage point increase in occupancy and ADR growth of 3%.

This quarter's results benefited from the RevPAR outperformance of the 39 hotels that were under renovation during the 2013 first quarter, with RevPAR up 32.4% at these hotels on occupancy and ADR gains of 14.1 points and 5.3% respectively in the current quarter. This strong performance was partially offset by the weak results at the 18 hotels under renovation this quarter, with RevPAR down 4.2% at these hotels on lower occupancy. Our portfolios with the highest RevPAR growth this quarter were our Wyndham and IHG portfolios, with increases of 18.3% and 17% respectively versus the prior-year quarter.

Growth in hotel profitability was also strong this quarter, with gross operating profit for our 289 comparable hotels up $18.9 million, or approximately 17.6% from the 2013 quarter, and GOP margin percentage up 230 basis points to 35.6%. Our IHG portfolio continued its outstanding performance this quarter with gross operating profit up over 28% and GOP margin percentage up 380 basis points versus the 2013 quarter.

Turning to 2014 first-quarter coverage, hotel cash flow available to pay our minimum returns and rents this quarter increased $8.9 million or approximately 12% from the 2013 quarter. As a result of this growth, coverage for the quarter under seven of our nine agreements improved versus the prior-year quarter and portfolio-wide coverage for our hotels increased to 0.74 times from 0.7 times in the 2013 quarter.

The improvement in coverage between periods was mitigated by the $6.5 million or 6.1% increase in minimum rents and returns that resulted from our funding of hotel improvements and the scheduled increases in FF&E reserve escrow requirements under our IHG and Marriott 234 agreements. Despite these increases, coverage was 1 times for our IHG agreement this quarter and four agreements had coverage above 0.8 times for the seasonally weak first quarter. Information regarding all of our security deposit and guarantee balances at quarter-end is included in our supplemental.

Turning to HPT's consolidated operating results for the first quarter, this morning we reported normalized FFO of $112.7 million compared to normalized FFO of $93.2 million for the 2013 first quarter. The increase in normalized FFO from the 2013 quarter is due primarily to a $10.2 million increase in minimum returns and rents and a $5.6 million increase in FF&E reserve contributions. First-quarter 2014 normalized FFO per share of $0.75 was up from $0.74 for the 2013 first quarter.

The more limited growth in normalized FFO per share was due to the impact of a higher weighted average share count in the 2014 quarter, as a result of our March and November 2013 equity issuances. We paid a $0.48 per share common dividend in the quarter and our normalized FFO pay out ratio was approximately 64%. Adjusted EBITDA was $155 million in the 2014 first quarter, a 12.7% increase from the 2013 quarter. Our adjusted EBITDA to total fixed charges coverage ratio for the quarter remained strong at 3.8 times and debt to adjusted EBITDA was only 4.4 times at quarter-end.

Turning to our recent capital markets activities, in January, we amended our $1.15 billion credit facilities agreement, which includes our $750 million revolving credit facility and $400 million term loan. The amendment extended our revolver maturity date by almost three years to July 2018 and lowered the annual interest rate by 20 basis points. The amendment also extended the maturity date of our term loan by approximately two years to April 2019 and reduced the annual interest rate by 25 basis points. In February, we redeemed at par our $300 million of 7 7/8% senior notes, and in March, we issued $350 million of 4.65% senior notes due in 2024.

Next, I'll provide an update on where HPT stands with its capital funding commitments and liquidity at quarter-end. To complete our hotel renovation program, we expect to fund improvements of $170 million in 2014, which is a $2 million increase from our previous estimate and a $33 million in 2015. We funded $36 million of these improvements in the first quarter. In addition to our hotel renovation fundings, we expect to fund approximately $80 million of improvements to our travel centers in 2014, of which $6 million was funded this quarter.

With respect to our balance sheet and liquidity, at quarter end, we had approximately $33.8 million of cash, which excludes $26.9 million of cash escrowed for improvements to our hotels, and we had no amounts outstanding under our $750 million revolving credit facility. Our debt to total book capitalization at the end of the quarter was 47.5%. In closing, we remain optimistic about the prospect of continued strong operating results, including the positive impact our extensive renovation program is having on the performance of our hotels. With that, operator, we're ready to open it up for questions.

(Operator Instructions)

We'll go to the line of Jeff Donnelly with Wells Fargo.

Good afternoon, guys. Mark, I might have missed it. You were mentioning some of the figures for the support of the strong RevPAR in Q1. What was the RevPAR for the segment of hotels that were not under renovation in either 2014 or 2013? I'm just trying to carve those out?

Let me see if I have that handy. We've sliced the portfolio about 90 ways. I don't know if I have that with me. John do you have that?

That might be the 91st way.

Okay, well I can follow-up with you afterwards on that.

Yes, we can talk later.

And maybe you could just talk in some broad strokes about just how the renovations from -- that were completed in 2013 are faring versus your internal budgets? Are things on track or where are they varying?

I'd say that we're more or less on track, which is why the forecasts that were done, the budgets that were done for 2014 compared to the reforecasts that were done at the end of the quarter are not materially different. We are tracking where we were expecting to. There's pluses and minuses built into those numbers, things that were unexpected.

We didn't expect as harsh a winter. We had a fair amount of expenses as a result of utility increases and snow removal costs that probably detracted about 90 basis points from our margins, but we also got stronger RevPAR performance from the hotels renovated in 2012 than we were expecting. So all in all, we're about where we expected we would be.

And just to switch topics. I don't know if you had seen this but Susser Holdings had recently been acquired -- its gas stations are going to be acquired by an entity that is going to place them into a MLP-type structure. Do you guys ever give any consideration to monetizing the gas stations, maybe while they are performing well? Because some investors out there think that it's been a source of pressure on your multiple over the years. If you look at that transaction, at 10 to 11 times EBITDA, think that's appealing to you guys?

The short answer is that we have not looked at that. TA is -- our strongest rent coverage is in TA, and frankly, they've, up through the third quarter, which we can talk about, their revenue management has been at least as good as any of the hotel managers we have. Their cents per gallon increases have been pretty impressive since the recession, so I know that there are some investors who have trouble with both the travel centers and hotels in the REIT, but we are not currently looking at separating them.

I'll jump back in the queue. Thanks, guys.

Thank you. We'll move along to the line of Ryan Meliker with MLV Company.

Hey, good afternoon, guys. A couple things. First of all, with regards to TA, do you guys have any concern about their ability to fund rents, either going forward or currently, given the fact that it sounds like they've got some accounting issues that have precluded them from filing their K? I'm just wondering if there's going to be implications with regards to their lending covenants? Obviously it's not going to be easy for them to raise equity if they need to over the next 12 months. So how do you balance the fact that they are your best coverage coupled with 35% of your EBITDA, with the fact that now they've got some material challenges with regards to their funding?

Well first off, we don't have any concerns with TAs ability to pay for the rent. The principal issues that they're dealing with, and obviously we have to limit our comments to what they've disclosed publicly, but they have some very, very complex income tax accounting that they're working through. TA is in a net operating loss position as a Company and they've historically put a valuation reserve up against that NOL that, because of their improved operating performance over the last couple of years, they're required to reverse that valuation reserve under GAAP.

And in working through that, there's some very, very complex tax regulations that may limit how much NOL they get to record and over what periods they can utilize that NOL, so that's the primary thing they're working through, Ryan. It's nothing -- the delay in financial statements isn't due to some other more troubling issue and the core business remains solid and we have absolutely no concerns with respect to rent. In terms of their liquidity, they did disclose that they received waivers, I believe, it's for the 10-K through the end of May from their banks, and with respect to the first quarter, I believe it's through the end of June, but you can double-check those with the filing they made last week.

Okay and then would there be concerns on your part if they went through those deadlines and still hadn't filed the required SEC filings?

Well, given the nature of the accounting issues, I would think, even if they met -- if they were unable to meet those deadlines -- I would think that the banks would provide additional waivers. Obviously I can't, I haven't had any discussions with the banks. I can't confirm that. But given the nature of the issue, the fact that its non-cash, it's a future benefit to TA, the NOLs, I just don't think, no, I don't think that would cause me a whole lot of concerns. I'm also optimistic they are going to be able to meet those deadlines.

Okay. That's helpful. Then with regards to Orlando and Fort Lauderdale, can you just give us more color on why you walked away from Orlando, what it is you found that you didn't like? And then with Fort Lauderdale, a 6.7% cap rate seems relatively low given your capital structure and cost of equity. What made you get comfortable with that? How high do you really think that could be on a more stabilized basis once you get Sonesta in there?

On the Orlando property, there was -- the seller owned a couple of hotels that were adjacent to one another and there are some systems that were shared by the two buildings and the cost to separate them was prohibitive and time consuming and we just couldn't wait any longer, so we decided to pass.

Got you.

The hotel in Fort Lauderdale, I agree that's a lower cap rate than you've seen on some other acquisitions that we've done. It's an unusual property in that it -- first of all, it was recently, effectively, in 2010 gutted and rebuilt, so all the systems are new, the design is fresh and attractive, so we don't expect to need to put any capital into that property for a long time. It's also right on the ocean, it's right across the street from the beach.

The Fort Lauderdale market is improving significantly. The airport in Fort Lauderdale is being expanded. They're adding a runway, partially to accommodate flights that are being -- that are going over time to be diverted from Miami into Fort Lauderdale because Miami, frankly, is too busy with international flights. So the Fort Lauderdale market is perhaps not as strong as Miami, but it's a four-season market, and there's a lot of businesses and demand generators there, and so we expect that we will be north of an 8% cash return out of that property, possibly in 2015 but assuredly in 2016.

And is that non-levered or a levered cash return?

Sorry?

Was that an unlevered or a levered cash return?

Unlevered.

Unlevered. Great, that's it for me, thanks guys.

Thank you. We'll go to the line of Wes Golladay with RBC Capital Markets.

Hey, good afternoon everyone. Looking at the Wyndham portfolio, you had pretty strong RevPAR at 18.3% RevPAR growth. The coverage is still a little light there. Is there one-time expenses flowing through that -- the strong RevPAR not flowing through to the bottom line? Can you comment on that?

There are a lot of different things that went on in that portfolio. There were a number of properties that were under renovation during part of the first quarter. There's an unusual weighting of properties in our Wyndham portfolio that are in the northern parts of the United States, including in Illinois and Michigan, and so they were some of the hotels that beared the brunt of the unusually harsh winter, besides the renovation activity. I don't have the numbers exactly for the Wyndham portfolio, but we had across our portfolio, we had something like 16% increase in utilities because of the harsh winter and we had about a 22% or 23% increase in costs for snow removal and so that had a negative impact across the portfolio, but certainly had an outsized impact on Wyndham.

Okay. So going forward, Wyndham, it looks like is going to be relatively one of your better performers on the RevPAR front and we should expect a little bit better bottom-line performance going forward?

Yes, Wes, you should see a significant improvement starting in the second quarter from a coverage perspective.

Okay, and then looking at the Sonesta, I know you have more renovations. When do you think that bottoms out? You'd be lapping against some renovations as well, so is that enough to get it going in the right direction or do we have to wait til probably 2015 to really accelerate that one?

It's more a 2015 story. We had seven hotels under renovation in the first quarter and coverage was relatively flat quarter versus the prior-year quarter. We're going to have 16 hotels under renovation for all or part of the second quarter and 13 for all or part of the third quarter and then it winds down to just two in the fourth quarter. So Q2 and Q3, there's going to be a lot of renovation disruption. We are seeing positive results and growth in cash flow at the non-renovation hotels, so that's going to offset some of that renovation disruption, but I don't think it's unreasonable to assume flattish coverage year-over-year for the Sonesta portfolio and then see coverage start to improve in [2015].

Okay and then looking at the IHG portfolio, it looks like at the beginning of the year, they added more to the deposit. Can you walk us through what's going on there and is it always a soft guarantee of around $30 million for you, or can you give some color on that?

On the security deposit?

Yes, it looks like they funded additional money -- or gave you additional money on January 6?

It was a minimum deposit maintenance requirement that was in our agreements. And while IHG expected to easily hit those maintenance levels at year-end in this year and next year because of seasonality, there was concern that possibly in the first quarter of this year and possibly in the fourth quarter, they might dip below those maintenance levels. So out of an abundance of caution, they asked if we would give them some relief. We said that we would do so if they put up additional deposit amounts, we would reduce the threshold on a two-for-one basis. As it turns out, this quarter, they had coverage.

Yes. It appears that this is the seasonally soft quarter so it looks like they are going to be okay this year?

Yes.

Okay. Thanks a lot for taking the questions.

It's not an indication of a problem. It's everybody just being cautious.

Okay. Thanks a lot.

(Operator Instructions)

We'll go to the line of Bryan Maher with Craig-Hallum Capital Group.

Good afternoon, guys. Quick question. Maybe taking a different [tactic] with TA, since I covered TA and I agree with the comments that you made earlier. As it relates to the now over 30 properties that they, over the past couple years, acquired on their own balance sheet, renovated, repositioned, and are ramping EBITDA nicely, would you consider or do you think about at all, building upon your portfolio, once they have new travel centers that have reached a stabilized EBITDA?

We have certain rights of first refusal when they acquire properties and most of the properties that they've been acquiring needed to be -- were turnaround stories and that's why we haven't taken advantage of the rights that we had. But we are, as I mentioned earlier, we don't have any issues with our TA investments and if TA were to come to us and ask us to acquire additional sites, I don't see any reason why we wouldn't consider that.

That's interesting to know. And then also, what would be your appetite for other non-hotel investments, excluding TA, excluding hotels. Do you look at other non-hotel investments and what categories might those be in?

We are not looking at, and I don't anticipate us looking at other non-lodging related property types.

Okay thanks, John.

(Operator Instructions)

We have no further questions in queue. I'll turn the conference back over to John Murray for closing remarks.

Thank you very much for joining us on our call today. We hope to see you at the upcoming NYU Hotel Conference and NAREIT in June. Thanks again.

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