Service Properties Trust (SVC) 2015 Q2 法說會逐字稿

Good day, and welcome to the Hospitality Properties Trust second-quarter financial results conference call. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Katie Strohacker, Director of Investor Relations. Please go ahead.

Thanks, Carrie, and good morning, 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. Please note that the recording, retransmission and transcription of today's conference call is prohibited without the prior written consent of HPT.

I would like to point out 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 beliefs and expectations as of today, August 10, 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 later today with the SEC, and in our supplemental operating and financial data found, once again, on our website at www.HPTREIT.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 Murray.

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

This morning, HPT reported second-quarter normalized FFO of $0.98 per share, that reflects the continued execution of our strategy to own a geographically diverse portfolio of well-maintained hotels and travel centers operated under long-term management lease agreements. Once again, we benefited from our extensive hotel renovation program that began in 2010.

Starting with performance in our travel center investments, second-quarter results reflected continued strong performance at HPT's travel centers, with increasing fuel volumes sold, and nonfuel sales and margin growth. While per-gallon fuel margins were strong, they declined quarter-over-quarter as expected, due to challenging comparable periods marked by declining oil prices. Second-quarter property level rent coverage for the quarter remained strong at 1.73 times.

Turning to hotels, second-quarter RevPAR growth was 10.7% across HPT's 290 comparable hotels -- well above industry growth levels for the 10th consecutive quarter. This performance, which was 76% rate-driven, reflects strong growth at the 26 hotels that completed renovations during 2014, with RevPAR gains of 31.2%, and the 59 hotels that completed renovations during 2013, with RevPAR gains of 12.1%.

Our asset management team has been working closely with our hotel managers to maximize and sustain ADR growth. And we believe our RevPAR results reflect these efforts.

The second quarter continued the positive RevPAR and margin growth momentum we have developed over the past couple of years. And strength was broad-based, with eight of our nine hotel operating agreements exceeding the hotel industry's RevPAR performance, and all nine of our hotel operating agreements exhibiting GOP margin improvement.

The Sonesta portfolio's comparable second-quarter RevPAR increased 23.4%, and GOP margin percentage improved 7.1 percentage points versus the second-quarter 2014 to 34.4%. The Royal Sonesta New Orleans and the Somerset New Jersey ES Suites were under renovation throughout the quarter, while three other Sonesta hotels completed renovations during the quarter.

Nonetheless, portfolio revenue was up $10.4 million or 17.8% versus second-quarter 2014, and hotel level EBITDA was up $6.6 million or approximately 59% over the prior-year quarter. However, with five hotels in the portfolio impacted by renovations during the second quarter, operations are not yet where we want them. Sonesta's performance continues to improve. And we are hopeful that reconcepted hotels, outstanding guest service, and increased brand awareness will lead to continued significant revenue and EBITDA improvement.

Our Wyndham portfolio increased RevPAR by 14% and GOP margin percentage over 190 basis points versus second-quarter 2014, attributable to double-digit gains in both our full-service and extended-stay hotels. We expect above-industry results to continue for this portfolio throughout 2015, as the more recently renovated hotels in the portfolio ramp up performance.

Our Carlson portfolio's second-quarter RevPAR increased 12%, and GOP margin percentage improved 350 basis points versus second-quarter 2014. All but two hotels in this portfolio exceeded industry RevPAR growth during the quarter, with the largest increased experience at the Radisson National.

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 11.4% and 370 basis points. Our comparable select service hotels were up 8.7% and 220 basis points, and our comparable extended-stay hotels were up 11.6% and 260 basis points, respectively, this quarter.

Turning to transaction activity, in May, we acquired a 364-room full-service hotel located in Denver, Colorado for $77.3 million. We expect to complete a full renovation during the first two years of ownership at an additional investment of approximately $13 million. This Crowne Plaza branded hotel was added to our existing portfolio management contract with IHG.

In July, we acquired nine extended-stay hotels with 1,094 suites located in eight states for $85 million. We converted these hotels to the Sonesta ES Suites hotel brand and added these hotels to our management agreement with Sonesta. We expect to invest approximately $45 million to substantially renovate these hotels in connection with their conversion to the upscale extended-stay Sonesta ES Suites hotel brand.

In June, we acquired 12 travel centers and certain assets related to 10 other travel centers for an aggregate purchase price of $227.9 million. Also in June, we sold five travel centers to TA for $45 million and recognized a gain on sale of $11 million. Annual net rental increases from both the purchase and sale activities that occurred in June related to this transaction was $15.7 million. In connection with the same transaction agreement with TA, we expect to acquire two additional travel centers and certain other assets later this year for $51.5 million, and to acquire and lease back five development properties for a purchase price equal to estimated development costs of no more than $118 million in 2016 and 2017.

Also in June, we announced a transaction involving our manager, REIT Management & Research, or RMR, where we acquired a 16.2% economic interest in our manager in exchange for $57.8 million, and also amended our management agreements with RMR to extend the term for 20 years. As part of the purchase of RMR, we issued 1,490,000 shares of HPT, valued at $45.2 million, and the remainder of the purchase price was paid in cash. The shares we issued are subject to 10-year lockup agreements with the historical owners of RMR.

As part of this transaction, we have agreed to distribute half of our RMR shares to our shareholders as a special dividend. And RMR has agreed to facilitate this distribution by filing a registration statement with the SEC and by seeking a listing on a national stock exchange. We currently expect to complete the distribution of RMR shares to our shareholders by the end of 2015, but we cannot distribute the shares until RMR's registration statement is declared effective by the SEC.

We believe this investment in our manager was made at a compelling price, and we believe the transaction benefits HPT and its shareholders. Specifically, we believe this transaction further aligns the interest of RMR management, HPT, and our shareholders; provides greater transparency; and allows us to continue benefiting from a low-cost management structure.

Looking ahead, we and our operators are optimistic about the second half of 2015. As we told you in February, our operators 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. And our operators are running ahead of expectations through the second quarter. And accordingly, both RevPAR and GOP margin percentage growth for 2015 have been revised more favorably.

Currently, our operators are anticipating second half RevPAR growth generally in the 7% to 9% range, and GOP margin percentage improvement of 200 to 250 basis points versus the same period in 2014. 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 will now turn the call over to Mark.

Thanks, John. Operating results at our comparable hotels were strong this quarter, with RevPAR up 10.7%, a 290 basis point increase in GOP margin percentage, and 19.4% growth in cash flow available to pay HPT's minimum returns and rents. The 10.7% RevPAR growth this quarter at our comparable hotels was driven by a 1.9 percentage point increase in occupancy and ADR growth of 8.1%. This quarter's results benefited from the RevPAR outperformance of the seven hotels that were under renovation during the 2014 second-quarter, with RevPAR up 31.4% at these hotels on occupancy and ADR gains of 11.3 points and 13.1%, respectively, in the current quarter.

RevPAR at the nine hotels under renovation during this quarter was down 4.2% on lower occupancy. Our portfolios with the highest RevPAR growth this quarter were our Sonesta, Wyndham and Carlson portfolios with increases of 22%, 13.8% and 12.2%, respectively, versus the prior-year quarter. RevPAR was up 38.2% at the 16 Sonesta Hotels not undergoing renovations during the quarter. All of our hotel portfolios exceeded their respective previous peak Q2 RevPAR performance this quarter.

GOP margin percentage for our comparable hotels increased 290 basis points from the 2014 quarter to 44%. Our Sonesta and Carlson portfolios had the strongest margin growth in the quarter, with gross operating profit margin percentage up 650 and 350 basis points, respectively, versus the 2014 quarter.

The combination of strong RevPAR growth and GOP margin expansion resulted in a $24.6 million or a 19.2% increase from the 2014 quarter and cash flow available to pay our minimum returns and rents. As a result, cash flow coverage of our minimum rents and returns improved for eight of our nine hotel agreements versus the prior-year quarter, and portfolio-wide coverage increased to 1.28 times for the quarter and 1.03 times for the trailing 12 months.

All but Sonesta, Wyndham and our Marriott Kauai hotel are above 1 times' coverage on a trailing 12-month basis. We also had $15 million [sic, see press release, "14,976"] of guarantee and security deposit replenishments during the 2015 second-quarter.

Operating results of our travel center portfolio were positive this quarter, with property level EBITDA up $1 million or 0.9% from the 2014 quarter. Fuel margin declined 5% quarter-over-quarter as a result of a decline in per-gallon margin, which was only partially offset by a 1.3% increase in total gallons sold. The decline in per-gallon fuel margins was due to the rise in fuel prices that occurred during the quarter.

Nonfuel revenue and margin growth at our travel centers was strong this quarter, with increases of 5.7% and 7.7%, respectively, versus the 2014 quarter. Property level rent coverage for the 2015 second-quarter averaged 1.73 times for our five TA leases.

Last Thursday, TA reported consolidated adjusted EBITDAR of $93.3 million for the 2015 second-quarter, a 3.8% decline from the prior-year quarter. The decline was due primarily to lower per-gallon fuel margins as well as integration costs associated with recent acquisitions. TA's consolidated adjusted EBITDAR coverage of cash, rent and interest was still strong at 1.41 times for the second quarter.

Turning to HPT's consolidated operating results for the second quarter, this morning, we reported normalized FFO of $146.9 million compared to normalized FFO of $129.7 million in the 2014 second quarter. The $17.2 million or 13.3% increase in normalized FFO was due primarily to the $15.8 million increase in minimum returns and rents earned this quarter, with the largest increases generated from our Sonesta, IHG and TA agreements.

On a per-share basis, second-quarter 2015 normalized FFO was $0.98, a 12.6% increase from the 2014 second-quarter. We paid a $0.50 per share common dividend in the quarter, and our normalized FFO payout ratio was only 51.1%. Adjusted EBITDA was $189.8 million in the 2015 second quarter, a 10.3% increase from the 2014 quarter. Our adjusted EBITDA to total fixed charges coverage ratio for the quarter remained strong at 4.6 times, and debt to adjusted EBITDA was only 4.1 times at quarter-end.

Turning to our capital commitments and liquidity at quarter-end, we funded $12.3 million of hotel improvements and $20.2 million of travel center improvements in the second quarter. We currently expect to fund an additional $48.9 million of hotel improvements and $34.6 million of travel center improvements during the remainder of 2015.

With respect to our liquidity at quarter-end, we had approximately $18.4 million of cash, which excludes $39.1 million of cash escrowed for improvements to our hotels, and $431 million of availability under our revolving credit facility. Debt to total book capitalization was approximately 51% as of June 30th.

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

(Operator Instructions). David Loeb, Baird.

Mark, I want to start with the balance sheet. You've rarely been over 50% debt to book. You've got a lot of commitments to acquisitions. You had the July acquisitions and other stuff in the pipeline. What's your thought about the level of debt, relative to equity, and what you might do to change that in the quarters ahead?

Yes. So, as I mentioned in the prepared remarks, debt to total book capitalization was about 51% at quarter-end. As you know, we generally want to run the Company at 45% to 50% debt to total book capitalization. If you look out at second half of this year, we will probably, with our acquisition pipeline and capital improvement fundings, add another $100 million of incremental debt by year-end, which would take us up to just under 52% debt to total book capitalization.

You know, while we, at some point, David, need to raise equity and bring leverage back down to the 45% to 50% range, as you and others on the call are well aware, REIT stocks and lodging stocks in particular have not performed well over the last several months. So, it's just not an opportune time for us to access the capital markets.

We are very comfortable running the Company at this level of leverage. We have plenty of liquidity left on our line. Our credit metrics are still very strong. So, I guess the way to sum it up is we're in wait-and-see mode and we will wait until the markets are more favorable before we address our leverage.

Is the Board more comfortable holding more leverage for an indeterminate amount of time?

Yes. I mean, if you look, we still have one of the strongest balance sheets in the REIT space. And with plenty of liquidity, plenty of coverage on our interest rate, EBITDA to interest rate coverage ratio, so we don't feel any pressure to do anything before the markets turn more favorable.

Okay. And, John, one operational question. Sonesta clearly had a very good quarter, seasonally strong but still some disruption. When do you think that you will have four quarters that come out to a year above 100% coverage, 1.0 coverage? Is that still several quarters away? Is it further out in the future?

I don't think they're going to have 1 times' coverage in the current year, they didn't forecast that. We're hopeful that, because they are seeing strong improvement, that they may get there next year. But we've also added just recently nine additional hotels. So we are expecting they'll be closer to the 1 times' coverage on a comparable basis next year, but probably not for those nine. Because those nine will be under renovation during the year, so.

But getting closer. By the four quarters ending fourth-quarter 2016, do you think that the comparables will be pretty close?

Yes. I think that's a reasonable expectation.

Okay. Great. Thank you.

Jeff Donnelly, Wells Fargo.

Actually just sticking with the extended-stay transaction you just did, I think you're going to be all-in for those hotels, I think, around $120,000 a key. I was curious, John, how that compared to pricing for extended-stay hotel transactions managed by other brands like Marriott, Hilton or ESA?

Well, I mean, every hotel is different. Right, Jeff? I think that our cost is less, even all-in. And what I've seen, there's been a number of other lodging REITs that have bought one-off extended-stay hotels. I've seen prices per-key in excess of $200,000 a key. So being at $125,000 is good.

In fairness, these are older generation of former Residence Inns and Homewoods, so you would expect them to trade at a more favorable price than the most current generations. I haven't studied the other REITs' individual select service acquisitions that closely to get an exact comparison for you, but I think that this is, all-in, is pretty favorable cost per-key metrics.

And I apologize if I missed it -- how are you guys thinking about, like, the yield on cost after the renovation for these assets?

Well, we expect after they stabilize post-renovation, that we will get at least an 8% cash return on the investment.

Okay. And then --

Next year, we won't, because that's predominantly when those nine hotels will be under renovation. But we are seeing good coverage from our other extended-stay hotels that we've rebranded to Sonesta ES Suites. Their coverage has improved nicely. And they've been pretty well-received in the marketplace, because they are a very good value.

And for modeling purposes, are you able to give folks an estimate of what sort of either EBITDA or disruption you expect from those hotels in 2016? I know they're going to be undergoing renovation. I'm just trying to think of -- just to be accurate with our estimates, maybe an estimate of what you thought they would have produced and the disruption you expect?

I don't have that handy for the call. We are expecting -- if my memory is correct, we are expecting that coverage for those nine hotels will be in the 5-ish-% level next year, because of renovation displacement. And then in the year following, that they will get to better than 1 times' coverage.

And I can follow-up with you off-line on that. And maybe a question for Mark. I'm not sure you will be able to help me here, we might have to follow-up off-line, is -- we were actually very close, I think, on your topline revenues, but the expenses came in a little bit higher than we would've typically anticipated. I'm just curious if anything might've changed in your expense level at the corporate or hotel level that would have led to the higher expenses than we were expecting? Or maybe we can follow-up --?

Yes. Nothing comes to mind, Jeff. It'd probably make sense that we talk off-line and -- so I'm just not familiar with what you were modeling.

Understood.

But we'd be more than happy to talk to you off-line.

Okay. Understood, thanks.

Yes.

Ryan Meliker, Canaccord Genuity.

First of all, nice quarter. Nice to see double-digit RevPAR growth again. First question with regards to RevPAR growth, I think your last couple of quarters, you had indicated that your initial budgets from your operators were in the 6% to 8% RevPAR growth range for the first half of the year. Seems like while some guys were concerned that 2Q came in lighter than expected, you guys are now tracking over 10% for the first half of the year.

Was this in line with what your operators were expecting for the first half of the year for your portfolio? Or is a little elevated? Should we expect things to moderate pretty dramatically in 3Q and 4Q?

I would say that this quarter, our operators did a little bit better than expected. Actually, in the first quarter, they did better than expected. But the first quarter is weaker than -- one of the weakest quarters of the year, so we were reluctant to increase estimates then.

But since we exceeded -- since our operators exceeded expectation again in the second quarter, we have upped our estimates so that we are expecting second half RevPAR growth of 7% to 9%, and which is up from the 6% to 8% that they had been forecasting. And we are expecting 200 to 250 basis point GOP margin percentage improvement, which is up from 150 to 200 basis points, as of the beginning of the year.

That's helpful. Thanks. And I'm assuming (multiple speakers) because of the calendar disparities?

I just have it for the whole --

Okay. That's fair enough.

-- and I haven't broken it down by quarter. We expect both quarters to be strong, though.

No, that sounds good. Second thing I wanted to ask you guys about was, obviously, there's no gun to your head in terms of reducing leverage immediately. But as you alluded to with David, it sounds like you will be patient about tapping the equity markets. Would you look at potentially moving forward with asset sales if the equity markets continue to be misaligned with private markets for hotels?

We are not currently looking at any dispositions. It's a possibility. We evaluate our portfolio on a regular basis, at least quarterly with our Board.

And Ryan, keep in mind that under the structure of our agreements, all of our hotels and travel centers are subject to long-term agreements. So there more or less has to be an agreement on -- with the manager or tenant to sell also. So, it's a little more complicated for us to cherrypick our portfolio, if you will, to sell assets than it is with another REIT without our agreement structure.

No, that's understood. And then a couple quick little things. When you guys announced the TA deal, I think, back in May, you said you were expecting $30.2 million in incremental rents. As we think about the phased closings of those assets, is it reasonable to assume that that $30.2 million in annualized rents will be evenly distributed for each property that you acquire?

Yes. More or less, yes.

All right. That's helpful. And then also I was curious, I didn't see, in the income statement or the balance sheet, anything associated with the asset from the RMR stake that you took or the income generated from the RMR stake. I'm just wondering where that shows up?

Are you talking about the income?

Yes. On both income statement and the balance sheet.

Well, on the income statement, it's -- it will be accounted for under the cost method, which means from an income statement standpoint, the only thing that will flow through our income statement is dividend income. On the balance sheet, it's in other assets.

Okay. It's in the other asset line. That's helpful. All right. That's all for me. Thanks a lot.

All right.

(Operator Instructions). Bryan Maher, Brean Capital.

So you stepped up to the plate again with some more TAs. And I'm curious, with respect to their significant and increasing acquisition of C stores, once they get folded into the TA portfolio, is that an avenue that you would consider going down in the future, picking off large portions of those?

No, Bryan. We are not planning to invest in C stores. We've told investors before we do like the travel centers, but we are not planning to be acquirers of C stores.

All right. That's it. Thanks.

I am showing no further questions on this end. So, this would conclude our question-and-answer session. I would like to turn the conference back over to John Murray for any closing remarks.

Thank you very much for joining us on the call today.

And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a terrific day.