Service Properties Trust (SVC) 2015 Q1 法說會逐字稿

Good day and welcome to the Hospitality Properties Trust First Quarter 2015 Financial Results Conference Call. This call is being recorded. I would like to turn the call over to the Director of Investor Relations, Catherine Stryker, for opening remarks and introductions. Please go ahead ma'am.

Thanks, Brad 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 a question-and-answer session. Just a reminder, recording, retransmission and transcription of today's conference call is strictly prohibited without the prior written consent of HPT. Before we begin today's call, I would just 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, 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. 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 to be filed today with the SEC and in our supplemental operating and financial data. Found once again on the website at wwwhptreit.com, investors are cautioned not to place undue reliance upon any forward-looking statements.

And with that, I'll turn the call over to John.

Thank you, Katie. Good afternoon and welcome to our first quarter 2015 earnings call. Today, I'm going to provide a summary of our quarterly performance including investment activity in our outlook for the balance of 2015. And I'll turn the call over to Mark for more detailed look at the quarter's results.

This morning, HPT reported first quarter normalized FFO of $0.83 per share, that reflects a steady execution of our strategy to own a geographically diverse portfolio, a 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 2010.

Starting with performance in our travel center investments, first quarter results were very good at HPT's travel centers. With strong per gallon fuel margins and steady fuel volumes sold, resulting in fuel gross margins increasing by $15.5 million or nearly 20%. Non-fuel margins increased 6% and operating expenses increased only 1%. As a result, first quarter property level EBITDA increased by $24.3 million, were 28.7% compared to the first quarter of 2014. As the effect of reduced fuel prices and operating initiatives of [our] TAs record 2014 performance levels to continue into 2015.

Turning to HPTs hotel investments, our renovation program is nearly complete. Since the beginning of 2010, we spent approximately $886 million on significant guest room and public space improvements at 267 hotels and this has contributed to nine consecutive quarters of above industry average RevPAR growth for the Company.

First quarter RevPAR growth was 10.1% across HPTs 290 comparable hotel. This performance, which was 82% rate driven reflects strong growth at the 26 hotels with the completed renovations during 2014 with RevPAR gains of 24.1% and the 59 hotels are completed renovations during 2013 with RevPAR gains of 12.4%. Hotels renovated in each of 2010, 2011 and 2012 continued to experience above industry level growth as well. HPT's asset management team is working closely with operators to maximize and sustained rate growth and we believe the RevPAR results reflect these efforts.

The first quarter continue the positive RevPAR and growth momentum we have developed over the past couple of years and performance was broad based across many of our agreements. Our Wyndham portfolio, for example, increased RevPAR 21% and GOP margin percentage over 600 basis points versus first quarter 2014. Attributable to strong gains in both our full service and extended stay hotels. We expect improved results to continue for this portfolio throughout 2015 as the more recently renovated and converted hotels in the portfolio ramp up performance.

Our cost in portfolio's first quarter RevPAR increased 16% and GOP margin percentage improved 650 basis points versus first quarter 2014. This portfolio has two hotels in the Phoenix market that generated RevPAR growth of 20% or more this quarter due in part to the Super Bowl. Cost and solid performance was broad based however, has five other portfolio hotels also generated double-digit RevPAR growth.

The Sonesta portfolio's comparable first quarter RevPAR increased 14.5% and GOP margin percentage improved 650 basis points versus first quarter 2014. This week, we began room renovations at the Royal Sonesta in New Orleans and are in the process of the final ES Suites renovation in Somerset, New Jersey.

The management team at Sonesta is focused on improving operations and brand awareness and this is reflected in their comparable portfolio revenue growth up $5.8 million or 12.8% versus first quarter 2014. As well as the hotel level EBITDA growth up $3.7 million or approximately 167% over the prior year quarter.

However, with seven hotels in the portfolio impacted by renovations during the first quarter, there is still noise in the portfolios results. Sonesta's performance continues to improve and we are hopeful that re-concepted hotels, outstanding guest service and increased brand awareness will lead to continued significant revenue and EBITDA improvement in 2015 and beyond.

Our portfolio's strong performance continues to be balanced across property types. RevPAR and gross profit margin percentage among our comparable full service hotels were up 12.6% and 540 basis points. Our comparable select service hotels were up 9.9% and 290 basis points and our comparable extended stay hotels were up 8.3% and 260 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 again saw increased group business as a result of improving group dynamics and many of our full-service hotels having completed renovations and increased leisure business as our hotels have done a better job attracting weekend business.

Improving group trends have also led to increased compression, which has benefited our near-urban select service hotels.

Turning to transaction -- transaction activity. In March, HPT closed on the acquisition of the 300 room Holiday Inn & Suites Rosemont near Ohio Airport for $35.5 million. We anticipate investing approximately $7 million of renovation capital later in 2015 and in 2016. The hotel was added to our existing portfolio management contract with IHG. In March, we agreed to buy the 364 key Crowne Plaza Denver Downtown in Denver, Colorado for $77.3 million. The pricing reflects an approximate EBITDA multiple of 10 times projected year one performance. The Crowne Plaza Denver Downtown is a well located CBD hotel two blocks from the convention center and it has approximately 9,000 square feet of mini space, two food and beverage outlets and substantial structured parking. This Crowne Plaza will be added to our 92 hotel portfolio with IHG when we close in mid-May. Under the terms of this agreement with IHG, we will receive an owners' priority equal to 8% of our investment plus the share of the upside from the hotel after IHG's management fee and FF&E reserve. We expect to complete a full renovation during the first two years of ownership at an additional investment of approximately $30 million.

We continue to see a healthy pipeline of hotel acquisition opportunities and we are working diligently on a number of them. However, competition is substantial and we cannot predict with certainty, the volume or timing of future acquisitions. We and our operators are optimistic about 2015, as we told you in February, our operating budgeted 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 budgeted double-digit RevPAR gains due to more recent renovations. While our operators are running ahead of expectations through the first quarter, concerned about the first quarter's sluggish GDP growth and the fact that the second and third quarter performance exerts the greatest influence on full-year results. Of course, there are operators to be conservative regarding changes to their full year 2015 forecast. However, both RevPAR and GOP margin percentage growth have been revised slightly more favorably.

We remain optimistic about this lodging cycle due to steady demand as economic growth continues. With high occupancy levels we are well positioned for continued rate growth and GOP margin improvement, particularly with our renovated hotel portfolio.

I'll now turn the call over to Mark.

Thanks, John. Operating results at our comparable hotels were strong this quarter with RevPAR up 10.1%. A 370 basis point increase in GOP margin percentage and 28.1% growth in cash flow available to pay HBT's minimum returns and rents. RevPAR at our 273 comparable hotels not under renovation this quarter was up 11.1% versus the prior year quarter, on a 1.8 percentage point increase in occupancy and ADR growth of 8.4%. This quarter's results benefited from the RevPAR outperformance of the 7 hotels that were under renovation, during the 2014 first quarter. With RevPAR up 21.5% at these hotels on occupancy and ADR gains of 5.9 points and 11.5% respectively in the current quarter.

RevPAR at the 17 hotels under renovation during this quarter was down 5.6% on lower occupancy. Our portfolios with the highest RevPAR growth this quarter were our Wyndham, Carlson and Sonesta portfolios with increases of 21%, 16.2% and 14.2% respectively versus the prior year quarter. RevPAR was up 20.3% at the 15 Sonesta hotels not undergoing renovations during the quarter.

GOP margin percentage for our comparable hotels increased 370 basis points from the 2014 quarter to 38.9%. Our Carlson and Sonesta portfolios had the strongest margin growth in the quarter, with gross operating profit margin percentage up 650 basis points for both portfolios versus the 2014 quarter. Our Wyndham portfolio also had a strong quarter with GOP margin percentage up 610 basis points.

The combination of strong RevPAR growth and GOP margin expansion resulted in a $23.4 million or 28.1% increase from the 2014 quarter in cash flow available to pay our minimum returns and rents. As a result, cash flow coverage of our minimum rents and returns improved for all nine of our hotel agreements versus the prior year quarter and portfolio-wide coverage increased to 0.93 times for the quarter and 0.98 times for the trailing 12 months.

Operating results at our Travel enter portfolio were also strong this quarter, with property-level EBITDAR of $24.3 million or 28.7% from the 2014 quarter as a result of fuel and nonfuel gross margin increases of 19.9% and 6% respectively. Property-level rent coverage for the 2015 first quarter was 1.94 times for our TA lease and 1.9 times for our Petro lease.

Earlier today, TA reported consolidated EBITDAR of $105.7 million for the 2015 first quarter, a 41.2% increase from the prior year quarter. TA's consolidated EBITDAR coverage of cash rent and interest was very strong at 1.62 times for the first quarter.

Turning to HPT's consolidated operating results for the first quarter. This morning, we reported normalized FFO of $126 million compared to normalized FFO of $113.1 million in the 2014 first quarter. The increase in normalized FFO was due primarily to the $11.1 million increase in minimum returns and rents earned this quarter, with the largest increases generated from our Sonesta, Marriott No. 1 and TA agreements. On a per-share basis, first quarter 2015 normalized FFO was $0.83, a 9.2% increase from the 2014 first quarter.

We paid a $0.49 per-share common dividend in the quarter and our normalized FFO payout ratio was only 58.3%. We also recently announced that beginning with the dividend for this quarter to be paid later this month, our quarterly common dividend was increased to $0.50 per share.

Adjusted EBITDA was $168.6 million in the 2015 first quarter, an 8.8% increase from the 2014 quarter. Our adjusted EBITDA to total fixed charges coverage ratio for the quarter remained strong at 4.2 times and debt-to-adjusted EBITDA was only 4.3 times at quarter-end.

Turning to our capital commitments and liquidity at quarter-end. We funded $19 million of hotel improvements and $20.2 million of Travel Center improvements in the first quarter. We currently expect to fund an additional $51.7 million of hotel improvements and $60 million of Travel Center improvements, during the remainder of 2015.

With respect to our liquidity, at March 31, we had approximately $15.6 million of cash, which excludes $36.5 million of cash escrowed for future improvements to our hotels and had $661 million of availability under our $750 million revolving credit facility.

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

Jeff Donnelly, Wells Fargo.

Good afternoon guys. Just a question actually, I was curious how you guys are thinking or do you think about share repurchases. I bring it up just because in the past year, I think you guys have had very good lift in your hotel operating performance, even away from the hotels that have completed renovation. And also TA got a very strong past year, but this stock is very -- basically flat versus a year ago. And I guess I'm curious to, does the board contemplate a share repurchase instead of purchasing assets? I'm just wondering how you guys are thinking about that capital allocation question.

We are not currently considering a share buyback program. We do consider that periodically in our board meetings as a possible use of our capital. We -- there are a lot of different factors that go into share buybacks. We haven't historically pursued that avenue and I don't really see it happening in the near term. I think we feel like there are acquisition opportunities that could be more positive than in fact of share repurchases. The rating agencies aren't fans of share repurchases and -- cycle is kind of long in the tooth. This isn't necessarily the best time to be reducing your equity base.

Yes, I think, yes. I think John's right on there. We want to continue to have a focus on growing the size of our portfolio. We think there's a lot of opportunities out there. But at the same time, we want to maintain our strong balance sheet and investment grade ratings and those two just don't go together, stock buybacks and growing and maintaining the balance sheet strength.

Does that mean that to the extent then if you continue to acquire, we should sort of think that'll you either be leveraged neutral or even sort of use acquisitions to delever further?

I wouldn't say delever further. I think, we're at quarter-end, our debt-to-total book capitalization was about 49.5%. So we're at the high end of the 45% to 50% leverage we like to run the company at. Having said that, we're comfortable running it, with that level of leverage. And if you kind of look at, we have one acquisition under contract and about $112 million or so of capital that we plan to invest in improvements to our hotels and Travel Centers during the rest of the year and we can really cover those cash needs through free cash flow. So I think absent any additional acquisitions this year, we're going to kind of be leverage neutral at the end of the year. So I don't really see it this time any need for the company to access the capital markets because now if we're successful with additional acquisitions later this year, as I said, we want to maintain that 45% to 50% leverage. So the likelihood is we would have to access the capital markets at some point.

And just one last question. I'm just curious, how do you think about the opportunity for large portfolio acquisitions? In prior years, there used to be sort of these big sort of deals usually done in conjunction with brands. And if you look, there could be some options out there. There's a few obvious single owner-operator brands, some of the bigger global brands are officially or unofficially exploring strategic alternatives. I'm just wondering if you think some of that could give rise for consolidation and the situation where HPT could play a role? Or do you think, there's odds of a transaction like that down the road that are, I should say, are there higher odds of a transaction like that down the road, do you think, or is that not likely?

That was a big question. We have always liked to do portfolio transactions in the select-service space. Many of the portfolios, that we've seen over the last couple of years have been what I've referred to as groups of hotels as opposed to portfolios the way we consider them. They haven't been on a single cross-collateralized single contract. They've been many hotels in one transaction, but they're all individual contracts. And so that's why we haven't been an active portfolio acquirer over the past couple of years. But we have -- the portfolio transactions we have done have been largely done because they made strategic sense for both us and the seller and oftentimes it was a brand. So I think, if there is consolidation of one type or another or brands -- brand management companies that are seeking to go more asset-like than they currently are, those would be opportunities for HPT to be a business partner with those -- in those opportunities. But -- and I expect we will see some of that. Typically, there has been more consolidation in the lodging space, as we get later-and-later into the cycle and we've been into the cycle for a number of years. So we'll see how it plays out. But we're not looking at anything like that currently so.

Wes Golladay, RBC Capital Markets.

Looking at Sonesta, it had a good quarter on the GOP margins going up 650 basis points. Just trying to get a sense of how much runway you have for that portfolio, where are your expectations for the GOP margins this year and the potentials there over the next 2 years for that portfolio?

Well, we don't give property-specific data like that traditionally, but the Sonesta portfolio has been undergoing a lot of renovations. As we mentioned, there were seven hotels under renovation this quarter. We just -- in the first quarter, we had a few carryover punch list-type items at several hotels. We just started the major component of the renovation in New Orleans. In the first quarter, we did the Desire restaurant, which may be the one of the most famous corner restaurants in the city. The room renovation just started on Monday and we'll take the better part of the year through October or so. So there'll be disruption to that business in various ways this year. So we expect that the properties that have completed their renovations are going to continue what's been a fairly strong ramp-up and we expect that the New Orleans property will be able to continue to push rate and continue to maintain a very high occupancy, which it has historically once it comes back out of the renovation. We're lucky to be able to get that renovation done during the slower time of the year for them. And so we expect the performance is going to continue to improve over the next couple of years pretty nicely.

Okay, it seems like that's a -- that portfolio, that could immediately move the numbers for you guys going forward. So I'm just trying to gauge the amount of disruption, which you'll probably get back and then some going forward. Any idea of the magnitude of the disruption in the last year or so?

I'm not sure that I have a great answer for that question. I don't think you're going to see a lot of disruption in terms of bottom line contribution from the New Orleans renovation because they get -- the majority of their bottom line contribution comes from the period from January 1 through [Jazz Fest], which is now behind them and then in October, November, December time frame. So I don't think their renovation is going to negatively impact performance. So we expect to see them continue to move towards the owner's priority coverage amount steadily. We don't -- I don't think they're going to get there this year probably, but they'll get pretty closer but we have several quarters I think of additional margin expansion ahead of us with that portfolio, if things go as planned.

Okay. So maybe a fair assumption to kind of get the growth profile correct and for the modeling would be maybe getting closer to the one by next year for the full year, would that be a good assumption you think?

Yes, one for 2016 you're saying?

Yes.

Yes. We're not going to get there this year. No.

Okay, as long as we can kind of hint with it with next year. That makes sense, guys. Thanks for the color.

(Operator Instructions)

Sorry, we're just taking questions today from (inaudible) analyst. So I think we'll turn the call back over to John for some closing remarks. Thanks, Brad.

Thank you very much for joining us on the call today and we look forward to seeing you at the NYU and NAREIT Conferences coming up in a couple weeks. Thank you.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive TeleConference Service. You may now disconnect.