Service Properties Trust (SVC) 2014 Q2 法說會逐字稿

Good day and welcome to the Hospitality Properties Trust second-quarter financial results conference call. This call is being recorded. I would now like to turn the call over to the Director of Investor Relations, Katie Strohacker, for opening remarks and introductions. Please go ahead at this time, ma'am.

Thanks, Steven. 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. Just a reminder that 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, August 11, 2014. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statement 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 these differences are contained in our Form 10-Q to be 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 statement.

Before I turn the call over to John and Mark, you should be aware that TravelCenters of America's first- and second-quarter 2014 reports on Form 10-Q remain pending as of today, and accordingly, the Company's remarks today, with respect to TA's operating results will be limited and we will not respond to questions related to TA's first- or second-quarter 2014 performance. We understand that TA [believes and may be] fully current with its financial reporting beginning with a report related to the 2014 third-quarter. With that, I would like to turn the call over to John.

Thank you, Katie. Good afternoon and welcome to our second-quarter 2014 earnings call. Today, HPT reported second-quarter normalized FFO of $0.87 per share, as we continue to reap the benefits of the extensive hotel renovation program that began in 2011.

As Katie noted, we are not yet able to update you on TA's performance for the first- or second-quarters of 2014 because they have not yet reported their results for those periods. 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, second-quarter RevPAR was up 8.5% across HPT's 288 comparable hotels. Ongoing hotel renovations continue to impact our results. Excluding non-comparable hotels and the 21 hotels under renovation during the quarter, RevPAR was up 11.2% this quarter.

This 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 21.3%, and the 120 hotels that completed renovations during 2012, with RevPAR gains of 9%. This helped offset performance at our 21 renovation hotels this quarter, which experienced RevPAR declines of 18.5%, all from lost occupancy.

15 of the 21 comparable hotels under renovation this quarter were Sonesta-branded hotels. We have now completed five Sonesta renovations, each of which has been well-received in the market. We are hopeful that the current renovation program, coupled with Sonesta's efforts to increase brand awareness, will lead to meaningful occupancy and rate gains later in 2014 and 2015.

While three of the five newly renovated Sonesta hotels are ES Suites that just completed their renovations, the full-service Sonesta in Hilton Head and Royal Sonesta Houston completed renovations in May 2013 and January 2014, respectively. Hilton Head's 2014 second-quarter RevPAR increased 82% over last year's quarter and GOP margin percentage jumped from 1.4% to 40.1%. In Houston, which just completed renovations last quarter, RevPAR was up 8.8%, and GOP margin jumped 690 basis points versus the 2013 quarter, to 26.4%.

The second-quarter started slowly due to the timing of the Easter holiday in April of 2014, which negatively affected our primarily business hotels. The long winter in many parts of the country also weighed on April's results. Nonetheless, for the entire quarter, we continued to see strong RevPAR performance across the Midwest, in the South Atlantic states, and along the West Coast, all with double-digit gains.

Our Wyndham portfolio had a strong quarter, with RevPAR growth of 19.2% and GOP margin percentage up 340 basis points versus second-quarter 2013, as Management's focus shifted from completing renovations to delivering on operations and improving guest mix. We expect strong results to continue for this portfolio and improving group dynamics will also benefit the Wyndham portfolio's full service hotels.

While the hotels renovated during 2013 had the most significant positive impact on second-quarter 2014 performance as they ramp back up, we are encouraged that our hotels renovated in earlier periods continue to experience above-market level growth as well. For example, excluding all hotels renovated since second-quarter 2013, the remaining 217 hotels in our portfolio grew RevPAR 8.6% and improved GOP margin percentage by 150 basis points to 44.2% this quarter.

Also, our comparable non-renovation portfolio's strong performance continues to be balanced across property types. RevPAR and gross profit margin percentage among our comparable non-renovation full service hotels were up 13.2% and 420 basis points. Our select service hotels were up 9.1% and 90 basis points. Our extended stay hotels were up 11.1% and 240 basis points, respectively, this quarter.

While our extensive portfolio renovation program has begun to wind down, we expect 15 hotels will be under renovation during the third-quarter, eight in the fourth-quarter, and three in 2015. This renovation activity will be principally at our Sonesta hotels. Looking forward, our operators are optimistic about to balance of 2014, as high occupancies and continued steady demand enable strong rate growth.

Hotels along the West and East Coast and around top 25 markets continue to lead the way. In addition, most of the hotels in our portfolio have now recently been significantly renovated, so our product quality is very good as we continue through 2014. Based on the strong first half of 2014, we now expect an average RevPAR increase of between 7% and 9% and an average GOP margin percentage increase of 200 to 250 basis points across our comparable hotel portfolio for the full-year versus 2013.

Turning to disposition and acquisition activity, in April, we sold the Sonesta ES Suites in Myrtle Beach for net proceeds of $4.2 million. The location was seasonal and capital investment needs were significant, which caused us concern about its long-term value within the portfolio.

On May 30, we acquired a 240-room hotel in Fort Lauderdale, Florida, and an adjacent parcel of land for $65 million. This hotel was completely renovated in 2010 with essentially all new systems and a bright lifestyle design. We converted this hotel to the Sonesta Fort Lauderdale Hotel, taking advantage of Sonesta's strong South Florida reputation.

Aside from the new signage and IT equipment, very little capital is needed for this hotel over the next couple of years. The hotel has 240 ocean-facing guest rooms, approximately 9,000 square feet of top-floor meeting space with amazing ocean views, two restaurants, three bars, an infinity pool, and a fitness center.

We continue to see a healthy pipeline of hotel acquisition opportunities; however, competition is substantial, especially in large cities along the East and West Coasts. The debt markets are wide open for hotel financing and we are seeing terms reminiscent of 2007 in some cases, even buyers going hard upon signing a purchase and sale with no diligence period.

We intend to remain disciplined. When we acquire select service assets, we try to do so in a portfolio format with credit support, [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 steady demand as economic growth, albeit slow, continues. We expect continued rate growth and GOP margin improvement, particularly with our nearly fully renovated hotel portfolio. We are monitoring supply growth, which is picking up pace, but not yet a headwind.

As performance continues to increase, more portfolios reach or exceed 1 times coverage and our renovation capital needs subside, there should be confidence to continue to increase our dividend, as we did most recently in April 2014. I will now turn the call over to Mark.

Thanks, John. Operating results at our 288 comparable hotels were strong this quarter, with RevPAR up 8.5% and 200 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 267 comparable hotels not under renovation this quarter was up 11.2% versus the prior-year quarter, on a 3.6 percentage point increase in occupancy and ADR growth of 6.2%.

This quarter's results benefited from the RevPAR outperformance of the 41 hotels that were under renovation during the 2013 second-quarter, with RevPAR up 34.2% at these hotels on occupancy, and ADR gains of 10.9 points, and 15.1%, respectively, in the current quarter. This strong performance was partially offset by the weak results at the 21 hotels under renovation this quarter, with RevPAR down 18.5% at these hotels on lower occupancy.

Our portfolios with the highest RevPAR growth this quarter were our Wyndham and IHG portfolios, with increases of 19.2% and 11.3%, respectively, versus the prior-year quarter. Growth in hotel profitability was also strong this quarter, with gross operating profit for our 288 comparable hotels up $21 million, or approximately 14.1% from the 2013 quarter and GOP margin percentage up 200 basis points to 41.5%. Our InterContinental portfolio continued its outstanding performance this quarter, with gross operating profit up over 15% and GOP margin percentage up 180 basis points versus the 2013 quarter.

Turning to 2014 second-quarter coverage, hotel cash flow available to pay our minimum returns and rents this quarter increased $11.2 million, or approximately 9.8% 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 1.09 times compared to 1.04 times in the 2013 quarter.

The improvement in coverage between periods was mitigated by the combined $5.1 million, or 4.7% increase in minimum returns, that resulted from our funding of hotel improvements and scheduled increases in FF&E reserve escrow requirements under our IHG and Marriott 234 agreements. Despite the negative impact of these increases, six of our nine hotel agreements had coverage above 1 times for the 2014 second-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 second-quarter, this morning we reported normalized FFO of $129.7 million compared to normalized FFO of $109.2 million for the 2013 second-quarter. The increase in normalized FFO from the 2013 quarter is due primarily to the $11.1 million, or 7.1%, increase in minimum returns and rents earned this quarter, and a $6.3 million increase in FF&E reserve contributions.

Second-quarter 2014 normalized FFO per share of $0.87 was up a strong $0.09, or 11.5%, from the 2013 second-quarter. We paid a $0.49 per share common dividend in the quarter and our normalized FFO payout ratio was only approximately 57%.

Adjusted EBITDA was $170.7 million in the 2014 second-quarter, an 11.1% increase from the 2013 quarter. Our adjusted EBITDA-to-total fixed charges coverage ratio for the quarter remains strong at 4.3 times, and debt-to-adjusted EBITDA was only 4.1 times at quarter-end.

In July, we announced we would redeem at par our $280 million of 5 1/8% senior notes due in 2015 on August 15. We plan to initially fund this redemption with borrowings under our revolving credit facility and expect to permanently fund it with a new, unsecured senior note issuance later this year.

Next, I will provide an update on where HPT stands with its capital funding commitments and liquidity at quarter-end. We funded $40 million of hotel improvements in the second-quarter, and to complete our hotel renovation program, we expect to make additional fundings of $94 million in the second half of this year and $33 million in 2015. In addition to our hotel renovation fundings, we funded $16 million of improvements to our travel centers this quarter, and expect to fund an additional $58 million during the remainder of 2014.

With respect to our balance sheet and liquidity at June 30, we had approximately $15.5 million of cash, which excludes $29.2 million of cash escrowed for improvements to our hotels, and we had only $40 million outstanding under our $750 million revolving credit facility. Our debt-to-total book capitalization at the end of the quarter was 48%.

In closing, we remain optimistic about the prospect of continued strong operating results, including the continued positive impact our extensive renovation program is having on the performance of our hotels. Operator, we're ready to open it up for questions.

(Operator Instructions)

Our first question will come from the line of Ryan Meliker of MLV & Company. Please go ahead.

That good afternoon, guys. First of all, nice quarter. It looks like REVPAR really is continuing to hold up following the renovations, so kudos to you for making that happen. But with regards to what you mentioned on the call, you had indicated that your outlook now is for 7% to 9% REVPAR growth for the full year, which obviously is better than where it was a quarter ago and a quarter before that.

But it's also -- you are at 8.9% through the first half of the year, implying that things might be decelerating in the back half of the year Obviously, we're not seeing so much of that from the STR numbers out so far in 3Q. Just wondering if it's just that you think the renovation disruption -- or the renovation benefits are going to start to wind down a little bit in the back half of the year? Is that what's driving that?

Well, it is an increase in our expectations. I'd want to point that out, first of all. You always try and give would you think is a realistic expectation, but tempered by the level of uncertainty. There are a number of renovations that are taking place across a number of hotels, so we're feeling very confident about the quality of our portfolio and how our REVPAR performance has been ranking versus the rest of the industry, so we're confident, but we don't want to over-promise.

Got you. So you are continuing to expect benefits from the renovations still to hold on at current pace through the rest of the year?

Yes.

Okay. That's helpful. And then the second question I had was just with regards to TA, and I know you can't give color specifically on TA's results, but can you talk to us a little bit about -- you guys obviously work closely with TA, both externally managed by RMR, at what point does this start to become a bigger concern for HPT, given I know they filed their K, but we're still now two quarters in arrears?

Ryan, this is Mark. The best way to characterize it is, TA, if you recall, the 10-K was delayed principally due to some tax accounting matters. Those have been resolved. The way I would characterize where they are today, is they're in catch-up mode, with closing out the first and second quarter, getting the independent accountants through those two quarters, getting the audit committees of the Board through the quarters.

So they're really in catch-up mode. As Katie mentioned in the opening remarks, they're hopeful that they will be caught up by Q3, and that will be -- this will be the last time we have to talk about this. We continue to receive property-level data for our travel centers and we continue to be pleased with the performance of the properties.

Obviously, you guys are still getting the cash flow from the rents, so that's certainly a positive. What I was wondering is, obviously, it took a long time for the K to get filed. It got filed, there were no real issues, obviously, to HPT that were a result, but it has now been two months since that was filed and we still don't have the 1Q 10-Q.

I'm just starting to question whether, does the external manager not have the staff on board to make this happen, and if that's the case, are you seeing any implications with regards to HPT and maybe a staff -- resources moving more towards TA to try to get things caught up, which might limit your growth profile? Or any other implications from the external manager that might be impacting HPT?

The TA structure versus HPT structure is a little different. We do have the business management agreement with RMR, and RMR, as well as our hotel managers, are responsible for pulling together our numbers. TA has its own management team, its own accounting team. That work is not performed by RMR, so I don't see any implications to HPT.

All right. That's it from me. Nice quarter. Thanks a lot.

(Operator Instructions)

And we have a question from the line of Wes Golladay of RBC Capital Markets. Please go ahead.

Good morning, or good afternoon, guys. What are you seeing in your pipeline? Is it more full service? More select service? Can you give us any indication of maybe what contracts you would be able to have the most deal activity with for the balance of the cycle, based on your current pipeline?

I would say today we're seeing, in terms of the opportunities that are attractive to us, we're probably looking at more full-service opportunities. The select-service opportunities that we've seen have not had the types of structuring that we're comfortable with. So -- but we've been looking at a fair amount of both, but we haven't looked for long at a number of the select-service portfolios and have, instead, focused more closely on some of the full-service opportunities.

It really just depends on the markets and the types of hotels, whether we -- which existing partner or new partner we look at an opportunity with. We're looking at one currently that would be -- if it happens, would be with a new partner. We've looked at one -- we looked in the past two quarters, we've looked at deals with several of our other partners and just so far, only the acquisition in Fort Lauderdale has occurred.

So it's broad based. In any given market, some of the brands that we have may have a full portfolio of brand locations already. So even if you think a hotel might make a good Marriott, if there's already Marriotts and Renaissances and AC and Ritzes, then it doesn't really matter.

Okay, and with the one you're looking at, would that be more of a value-add or would it be a core hotel at the moment, with similar type of returns as the existing contracts?

As I indicated in the prepared remarks, we don't intend to really change our stripes in terms of our structuring. And historically, we've tried to buy hotels that are functioning pretty well and cash flowing, as opposed to big turnaround stories.

Okay. Thanks for taking the questions, and nice quarter.

Thanks, Wes.

Our next question in queue will come from the line of David Loeb of Baird. Please go ahead.

It's still morning for me, John. Wes asked something that was in the direction I wanted to ask. You commented about competition for single-asset purchases. But when you're looking at portfolios, are you just seeing substantially more competition from private equity, non-traded REITs than you were, say, a year or two years ago?

We are seeing more competition. The private equity sector has gotten more comfortable with select-service assets than it was perceived that it used to be, but that's not the reason why we haven't been more active there.

We like portfolios of hotels where they're effectively a group of hotels on one contract, so you have some leverage in the transaction, as opposed to a collection of 20 or 30 or 40 individual contracts. To us, there's difference between a group of hotels and a portfolio of hotels. We like portfolios. Groups of one-offs, private equity can have those.

Fair enough. Thank you.

Thanks.

(Operator Instructions)

Thank you very much for joining us on today's call. Appreciate it.

All right, ladies and gentlemen, that does conclude our conference call for today. On behalf of today's panel, I would like to thank you for your participation in today's conference call and thank you for using AT&T. Have a wonderful day. You may now disconnect.