Service Properties Trust (SVC) 2014 Q4 法說會逐字稿

Good day and welcome to the Hospitality Properties Trust fourth quarter 2014 financial results conference call. This call is being recorded. I would like to turn the call over to the Director of Investor Relations, Katie Strohacker, for opening remarks and introductions. Please go ahead.

Thank you and good afternoon, everyone. On today's call, John Murray, President; and Mark Kleifges, Chief Financial Officer, will make a short presentation which will be followed by our question and answer session.

First, I want to note that the recording, retransmission, and transcription of today's conference call is prohibited without the prior written consent of HPT. I'll also note that 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 belief and expectations as of today, February 27, 2015. 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. Actual results may defer materially from those projected in these forward-looking statements.

Additional information concerning factors that could cause such differences is contained in our Form 10-K to be filed later today with the SEC and in our supplemental operating and financial data found in the Investor Relations section on our website at www.hptreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements.

In addition, this call may contain non-GAAP financial results, including normalized funds from operations or normalized FFO, reconciliation of normalized FFO and adjusted EBITDA to net income, as well as components to calculate AFFO are available in our supplemental package.

Before I turn the call over to John and Mark, you should be aware that Travel Centers of America's fourth quarter 2014 report on Form 10-K will not be filed until early March and, accordingly, the Company's remarks today with respect to TA's operating results will be limited to results through September 30, and we will not respond to questions related to TA's fourth-quarter 2014 performance.

With that, I will turn the call over to John.

Thank you, Katie. Good afternoon and welcome to our fourth-quarter 2014 earnings call. Today, I'm going to comment on a few financial highlights and the drivers behind them and update you on our hotel renovation program and the positive impact on our portfolio. I will also discuss our recent investment activity and conclude with a few thoughts surrounding our outlook for 2015. After that, I'll turn the call over to Mark for a more detailed look at our quarter's financials.

This morning, HPT reported fourth-quarter normalized FFO of $0.81 per share. That reflects the steady execution of our strategy to own a geographically diverse portfolio of well-maintained hotels and travel centers operated under long-term management and lease agreements. Once again, we benefited from our 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 fourth quarter of 2014 because TA is not scheduled to report the year-end results until early March. The third quarter was strong for HPT's TA sites, with increased per gallon fuel margins more than offsetting lower fuel volumes sold, which resulted from increased efficiencies and the Company's decision to forgo certain lower margin fuel sales. Non-fuel margins and operating expenses were up modestly. As a result, third-quarter property-level EBITDA increased 3.7% and TA's coverage of our rent in the third quarter of 2014 was 1.79 times, up from the 2013 third quarter despite higher rent in 2014.

Through three quarters, 2014 was shaping up to be the best year of performance in the history of TA. While fourth quarter is seasonally weaker than the second or third quarters for TA, we are hopeful the effect of declining fuel prices and operating initiatives may have allowed TA's solid 2014 performance to continue.

Turning to HPT's hotel investments: Fourth quarter RevPAR was up 10.4% across HPT's 290 comparable hotels. This above-industry performance, which was comprised of both occupancy and rate gains, reflects strong results of the 61 hotels that completed renovations during 2013, with RevPAR gains of 15.1%; and the 19 hotels that completed renovations during the first three quarters of 2014, with RevPAR gains of 27%. While the hotels renovated during 2013 and early 2014 had the most significant positive impact on this quarter's performance, we are encouraged that our hotels renovated in earlier periods continued to experience above market level growth as well. Our 118 hotels renovated in 2012 grew RevPAR 7.9%, and the 30 hotels renovated in 2011 grew RevPAR by 9.1%.

Also, our comparable nonrenovation 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 15.2% and 470 basis points, select service hotels were up 7.6% and 40 basis points, and our extended stay hotels were up 10.7% and 100 basis points respectively this quarter.

Our portfolio is comprised principally of hotels catering to business travel, and business transient travel continues to be the driver of our growth. However, this quarter we also saw increased group business as a result of many of our full-service hotels having completed renovations and increased leisure business as our hotels have done a better job filling in weekend nights. Improving group trends generally have led to increased compression, which has benefited our near urban full-service hotels.

Eleven of the 16 comparable hotels under renovation this quarter were Sonesta-branded hotels. We have now completed 17 Sonesta renovations, each of which has been well-received in its market. For the quarter, Sonesta portfolio revenue is up $8.1 million or 15.7% versus fourth quarter 2013, and hotel level EBITDA was up $3.3 million, a 55% increase from the prior-year quarter. However, with 11 hotels in the portfolio impacted by renovations during the fourth quarter, there is still noise in the portfolio's numbers. Sonesta's performance continues to improve. We are hopeful that the current renovation program, coupled with Sonesta's efforts to increase brand awareness, will lead to continued meaningful occupancy and rate gains in 2015.

The fourth quarter continues the positive momentum we have developed over the past several quarters. The strong performance was broad-based. Our Wyndham portfolio, for example, had a very strong quarter, with RevPAR growth of 29.7%, and GOP margin percentage up 460 basis points versus fourth quarter 2013, as Management's focus has shifted from completing renovations to driving performance. We expect strong results to continue for this portfolio. Improving group dynamics will also benefit the Wyndham portfolio's full service hotels.

While our extensive portfolio renovation program is nearly complete, we expect eight hotels will be under renovation during 2015. Renovations at five Sonesta ES suites and our Baltimore Royal Sonesta are expected to be completed during the first quarter, and our New Orleans Royal Sonesta renovation is expected to be completed during the third quarter. We will also be renovating the Wyndham Hamilton Park in New Jersey.

When you own 291 hotels, there is a constant renovation process which recurs on a cycle. There will be other hotels renovated in 2015, funded primarily from FF&E reserves. The eight hotels I have just mentioned summarize the final stages of what we have been referring to as our renovation program over the last few years, involving all of our Marriott-, IHG-, Wyndham-, and Sonesta-branded hotels.

Turning to transaction activity -- in January, HPT agreed to acquire the 300-room Holiday Inn and Suites Rosemont in Illinois, near the entrance to Chicago's busy O'Hare Airport, for $35.5 million. We anticipate investing approximately $6 million of renovation capital during the first 24 months post-acquisition. The pricing reflects an approximate EBITDA multiple of 10 1/2 times projected Year One performance. We have completed our diligence procedures and expect to close on the transaction during March. The hotel will be added to our existing portfolio management contract with IHG on similar terms.

We continue to see healthy pipeline of hotel acquisition opportunities, and we are working diligently on a number of them. However, competition is substantial and some of our expectations are aggressive, especially in the top ten cities and along the coast. We intend to remain disciplined.

Looking forward, we and our operators are optimistic about 2015. Our operators are budgeting full-year RevPAR growth generally in the 6% to 8% range, and GOP margin percentage improvement of 150 to 200 basis points versus 2014. Both Wyndham and Sonesta are budgeting double-digit RevPAR gains due to more recent renovations. The past two years our portfolio should be near the high end of the ranges. We remain optimistic about this lodging cycle due to steady demand as economic growth continues. We average 74.7% occupancy across our 291 hotels in 2014 despite renovation activity. We are well-positioned for continued rate growth and GOP margin improvement, particularly with our nearly fully renovated hotel portfolio.

We are monitoring supply growth, which is getting back near historic run rates, and continuing to grow. Our expectations assume that the current economic expansion continues its path and doesn't encounter material unexpected shocks. One month is not a trend, but early indications confirm our outlook as 2015 has started well for our 291 hotels. January RevPAR was up 10% compared with industry average RevPAR growth of 8.6%. Importantly, ADR growth was 8.1%. Once again, growth was strong across service levels and portfolios.

I'll now turn the call over to Mark.

Thanks, John.

Operating results at our 290 comparable hotels were strong this quarter, with RevPAR up 10.4% and a 200 basis point increase in GOP margin percentage. As in previous quarters this year, post-renovation lift had a greater impact on hotel performance than displacement caused by renovation activity. RevPAR in our 274 comparable hotels not under renovation this quarter was up 11.3% versus the prior year quarter on a 2.6 percentage point increase in occupancy and ADR growth of 7.2%.

This quarter's results benefited from the RevPAR outperformance of the 17 hotels that were under renovation during the 2013 fourth quarter, with RevPAR up 24.1% at these hotels, and occupancy and ADR gains of 6.3 points and 13.1% respectively in the current quarter. This strong performance was partially offset by the weak results at the 16 hotels under renovation this quarter, with RevPAR down 9.2% at these hotels on lower occupancy. Our portfolios with the highest RevPAR growth this quarter were our Wyndham, Sonesta, and Marriott 234 portfolios, with increases of 29.7%, 16.2%, and 10.3% respectively versus the prior year quarter.

Growth in hotel profitability was also strong this quarter, with gross operating profit for our 290 comparable hotels up $19.9 million or 16.6% from the 2013 quarter, and GOP margin percentage up 200 basis points to 36.2%. Our Wyndham and Sonesta portfolios had the strongest quarters, with gross operating profit up 62.5% and 55.5% respectively versus the 2013 quarter. For the year, RevPAR at the 284 hotels we have owned since 2007 was $81.18, up 4.3% from peak 2007 RevPAR for these hotels. GOP margin percentage, however, remains 470 basis points below 2007 levels, suggesting opportunity for further growth in cash flows as our hotels continue to ramp up post-renovation.

Hotel cash flow available to pay our minimum returns in rents this is quarter increased $11.4 million or 13.6% from the 2013 quarter. As a result, coverage for the quarter under seven of our nine agreements improved versus the prior year quarter, and portfolio-wide coverage for our hotels increased 0.82 times compared to 0.75 times in the 2013 quarter. For the full year 2014, portfolio-wide coverage improved to 0.93 times from 0.85 times in four of our nine hotel agreements, which account for approximately half of our annual hotel minimum returns and rents, had coverage above 1 times in 2014.

Turning to HPT's consolidated operating results for the fourth quarter, this morning we reported normalized FFO of $121.5 million compared to normalized FFO of $101.3 million in the 2013 fourth quarter. The increase in normalized FFO was due primarily to the $8.2 million or 5.4% increase in minimum returns and rents earned this quarter and the $7.1 million increase in income from hotel manager FF&E reserve contributions. On a per share basis, fourth quarter 2014 normalized FFO was $0.81, a 15.7% increase from the 2013 fourth quarter. We paid a $0.49 per share common dividend in the quarter and our normalized FFO payout ratio was only 60.4%. Adjusted EBITDA was $164.2 million in the 2014 fourth quarter, an 11.8% increase from the 2013 quarter. Our adjusted EBITDA to total fixed charges coverage ratio for the quarter remains strong at 4.1 times and debt to adjusted EBITDA was only 4.3 times at quarter end.

Turning to our capital commitments and liquidity at year end: we funded $42.4 million of hotel improvements and $24.2 million of Travel Center improvements in the fourth quarter. We currently expect to fund approximately $56 million of hotel improvements and between $60 million and $75 million of Travel Center improvements in 2015. With respect to our balance sheet and liquidity at December 31, we had approximately $12 million of cash, which excludes $34 million of cash escrowed for improvements to our hotels; and had only $18 million outstanding under our $750 million revolving credit facility. Our debt to total book capitalization at the end of the year was 48.7%.

Operator, that concludes our prepared remarks. We're ready to open it up for questions.

(Operator Instructions)

The first one of David Loeb with Baird.

Good morning my time. Good afternoon your time.

I wanted to ask just about the acquisition market broadly and whether the appetite from the brands for doing your kind of partial limited total guarantee transactions is any more interesting today than it was last quarter, last time I asked?

We've always been very interesting. We've looked at transactions with several of the brand companies that we currently do business with during the course in the last couple of quarters. We've -- there was one during the fourth quarter where we were unsuccessful with one of the brands that we do business with and -- out on the West Coast, and we were successful with this one near O'Hare, and when we're working on others so it continues to -- for the right transaction that has strategic significance, our transaction structure is something that our partners are still willing to do.

Okay. And on the Holiday Inn Rosemont, what are your thoughts about branding post renovation?

Our current plan is to keep it branded as it is. It's a hotel that caters to the road warrior. It's a Holiday Inn and Suites. It has about 75 or so suite rooms that are specifically designed for small business meetings. They have -- the parlor room has boardroom tables.

They're set up for people to come in and do interviews and have small business meetings and then get back out on the road. So I think it's probably the right brand for the hotels. It's a very nice Holiday Inn. It could be a brand, say, to a Crowne Plaza, but it probably doesn't have enough large meeting space. So, bottom line is, right now the plan is to keep it The Holiday Inn and Suites.

With the Intercontinental brand leaving that market, was there any interest in making that an Intercontinental or perhaps an Even, which they clearly like a lot?

Not currently. It's a very nice hotel but, primarily a rooms product and a nice leased food and beverage operation, but it doesn't have the right mix of meeting space to be an Intercontinental. Perhaps someday it could be an even if ISG wants to go in that direction. I think it's best-suited to its current branding.

Great. That helps. Thank you very much.

Thank you.

(Operator Instructions)

And we'll go to Ryan Meliker with MLV & Co.

Good afternoon. Looks like operating results are coming in pretty nicely for you these days.

Just a quick question: I'm curious what your take on it would be.

As I'm sure you're aware, TA has an activist investor that suggested the sale of some of their real estate in a sale lease back transaction. I know you guys aren't in a position to comment on their activist investor, but can you comment on HPT's desire to increase their scale of exposure to TA by buying some of those assets from them?

Yes, I will comment specifically on the letter that was published, but I think on each of the last couple of quarter calls we've been asked about Travel Centers and we've indicate that we're not opposed to buying more Travel Centers. So, if TA was to approach us regarding a sale lease back transaction for additional Travel Centers I'm sure that that's something that we would seriously consider.

Okay. Great. So, I guess the only reason why you haven't acquired more assets from TA over the past two years is just because they haven't been looking to sell? (Multiple speakers) agree with terms et cetera?

They've actually been acquiring Travel Centers themselves, mostly ones that needed to be repositioned and where they could add service businesses or add restaurant capacity and other amenities. And we weren't interested in -- we have a right of first refusal on those types of opportunities because of the structure of our lease, and we didn't feel like we wanted to be in the position of owning turnaround properties in the Travel Center space, but we like the Travel Center business and we are willing to own more of them. And if TA turns -- is complete with their repositionings, we would be happy to consider it.

All right. Great. That's all for me. I appreciate the candid responses John.

Our next question's from Arthur Winston with Pilot Advisors. Please go ahead.

Thank you. Great quarter.

I apologize, but I got confused when you talked about the Travel Centers results, given that the 10-K hasn't been published. Were those figures from the third quarter or the fourth quarter? Again, I apologize because I know you went over this.

It's third quarter information, the last information TA has publicly disclosed.

So you repeated all the third quarter stuff and you said nothing about their fourth quarter?

Correct.

Okay. And just curious, why don't you wait to make your full report until after they report? Would it be easier?

Because we are a large accelerated filer. We have an earlier filing requirement with the SEC than they do.

Oh, okay. Thank you very much.

You're welcome.

And to the presenters, no further questions in queue.

Thank you very much for joining us today. We look forward to seeing you soon.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.