Service Properties Trust (SVC) 2015 Q4 法說會逐字稿

Good morning and welcome to the Hospitality Properties Trust fourth-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, Senior Director of Investor Relations. Please go ahead.

Thanks, Kerry. 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 security laws.

These forward-looking statements are based on HPT's present beliefs and expectations as of today, February 24, 2016. 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-K to be filed later today with the SEC and in our supplemental operating and financial data found, once again, on our website at the be www.hptreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements.

Before I turn the call over to John and Mark, you should be aware that TravelsCenters of America's fourth-quarter 2015 report on form 10-K will not be filed until mid-March, and accordingly the Company's remarks today, with respect to TAs operating results will be limited to results through September 30. And we won't respond to questions related to TAs fourth-quarter 2015 performance.

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

Thank you, Katie. Good morning and welcome to our fourth quarter 2015 earnings call.

It was another strong operating quarter for HPT. This morning I'm going to provide a summary of our performance, discuss our investment activity and our outlook for 2016 and then Mark will provide a more detailed look at this quarter's financial results.

Earlier today, HPT reported fourth-quarter normalized FFO of $0.54 per share, a decrease of 33.3% compared to the $0.81 reported in the fourth quarter of 2014 due primarily to the $62.3 million, or $0.41 per share incentive management fee recognized this quarter. The incentive fee is based on HPT's total shareholder return outperformance, compared to the SNL hotel REIT index, over the two-year period ending December 31,2015.

Excluding the impact of the incentive fee, normalized FFO for the quarter would have been $143.3 million, or $0.95 per share, which we believe reflects the continued execution of our strategy to own a diverse portfolio of well-maintained hotels and travel centers operated under long-term management and lease agreements. Our recently renovated, primarily upscale, portfolio and our continued asset management focus on revenue and flow through improvement, driving rate, as well, as occupancy, were the principal drivers of our hotels portfolios strong performance during the quarter.

As Katie noted, we are not able to update you on TAs performance for the fourth quarter 2015, because they will not report results until mid-March. Third quarter results for HPT's travel centers reflected continued strong performance with increasing fuel volumes and non-fuel sales and margin growth.

Third quarter per gallon fuel margins, though strong, declined versus the same period in 2014 as expected due to the very favorable purchasing and pricing environment in 2014. Property level rent coverage for the year-to-date through September 30, 2015, was a healthy 1.8 times.

Turning to our hotels, fourth quarter continued our positive RevPAR and margin growth momentum with RevPAR growth of 6.2% across HPT's 291 comparable hotels. 140 basis points above industry growth levels this quarter. This marks the 12th consecutive quarter where we've exceeded industry RevPAR growth.

This performance, which was 83% rate driven, continued to be broad-based, not dependent only on recent renovations. Hotels renovated in 2010 through 2013 produced RevPAR growth of 6.4% this quarter, 160 basis points above industry average RevPAR growth.

This quarter's strong ADR growth resulted in continued margin expansion with GOP margin percentage of 210 basis points from the 2014 quarter. This represented a healthy 76% flow-through of this quarter's revenue [index].

Hyatt led the HPT portfolios in the fourth quarter, increasing RevPAR by 14.5% and GOP margin percentage by 540 basis points. This strong performance reflects 2014 renovations of five of the portfolio's 22 hotels, leading to a 10.7% increase in occupancy, as well as improved revenue management from shifting mix and charging higher rates for rooms on higher floors, and double-digit growth in Food & Beverage revenue following rollout of revised menus in the third quarter. Our Carlson portfolio increased RevPAR by 7.4% during the quarter, as strong gains and transient contract and group rates drove overall rate growth of 7.6%.

Our Marriott number one portfolio continued its strong performance during the fourth quarter. RevPAR increased 6.8% and GOP margin percentage improved 170 basis points versus the fourth quarter of 2014. Driving this was small group business, which was strong across all geographies, and positive mix shift from negotiated corporate rate room nights to higher rated retail transient nights. This contributed to a 4.7% increase in rate during the quarter.

Our Sonesta portfolio's comparable fourth quarter RevPAR increased 4.5%, and comparable hotel GOP margin percentage improved 3.7 percentage points versus the fourth quarter of 2014 to 25.4%. The Royal Sonesta New Orleans was under renovation for all of the 2015 fourth quarter. Excluding this hotel, and the nine Extended Stay hotels that we acquired in July, Sonesta's 20 comparable, non renovation hotels increased RevPAR by 12.1%. Our comparable Sonesta ES hotels, once again, drove the portfolio's performance, as the hotels continue to regain occupancy following last year's renovation activity.

RevPAR at our full-service Sonesta hotels was negatively impacted by the Royal Sonesta New Orleans renovation and the Royal Sonesta Houston, as a result of the soft energy sector. Our hotel portfolio's strong performance continues to be balanced across property types. RevPAR and gross profit margin percentage among our 157 comparable extended-stay hotels were up 7.5% and 200 basis points respectively.

Our 95 comparable select service hotels were up 8.5% and 200 basis points. Our 37, full-service, comparable hotels, that were not under renovation during the quarter, were up 6% and 270 basis points respectively. Ain each of these cases, REIT was a principal driver behind growth.

Turning to transaction activity, in January, HPT agreed to acquire the luxury boutique Hotel Monaco in the center of downtown Portland, Oregon, for a purchase price of $114 million. This hotel has 221 rooms, a successful Red Star Tavern restaurant about, over 8,000 square feet of meeting space, and a full-service spa.

The Hotel Monaco will be added to our management contract with IHG and IHG will provide an additional security deposit to us of $9 million. The initial yield to HPT on a net cash investment will be a 8.7% and we currently expect to close in March. There are no material near-term renovation plans with respect to the Monaco, as it is in good condition and won't be rebranded.

In February we closed the previously announced acquisition of two extended-stay hotels with 262 suites located in Cleveland and Westlake, Ohio for $12 million. HPT converted these hotels to the Sonesta ES Suites brand and added them to our management agreements with Sonesta.

Looking ahead, we and our hotel managers are optimistic about 2016. Industry experts seem to be forecasting RevPAR growth in the 5% to 5.5% range for 2016, down slightly from 2015 RevPAR growth, but still well above historic long-term average growth rates. Our operators are budgeting full-year 2016 RevPAR growth generally in the 5% to 7% range, and our GOP margin percentage improvement of 100 to 150 basis points versus 2015.

We're continuing to benefit from renovations that have impacted 90% of our hotel portfolio. Our hotel portfolio's high 75.6% average occupancy positions our managers well to continue to improve average daily rate and guest segmentation, which translates to GOP margin improvement and increased EBITDA.

We are monitoring supply growth, which is near historic run rates and continuing to grow. Much of the recent new supply growth has been concentrated in a limited number of primarily urban markets and we do not expect supply growth to be a major headwind to HPT's hotel portfolio performance in 2016. Our expectations assume that the current economic expansion continues its path and doesn't encounter material, unexpected shocks.

January 2016 RevPAR increased 4.4% in HPT's 291 comparable hotels, exceeding industry RevPAR growth by 200 basis points. January is typically one of the weakest month's of the year for portfolio so it's difficult to draw any conclusions from these early results, other than to believe we are on track for another year of industry outperformance.

I will now turn the call over to Mark.

Thanks, John.

Operating results at our comparable hotels were strong again this quarter with RevPAR up 6.2%, a 210 basis point increase in GOP margin percentage, and growth in cash flow available to pay HPT's minimum returns and rents of 15.4%. The 6.2% increase in RevPAR this quarter was driven by a 1.1 percentage point increase in occupancy and ADR growth of 4.6%.

This quarter's RevPAR growth benefited from the outperformance of the seven hotels that were under renovation during the 2014 fourth quarter, with RevPAR up 30.1% at these hotels, but was also impacted by the 19.2% decline in RevPAR at the five hotels under renovation during the quarter. Our portfolio's with the highest RevPAR growth this quarter were our Hyatt, Carlson, and Marriott number one portfolios, with increases of 14.5%, 7.8%, and 6.8% respectively versus the prior-year quarter. RevPAR was up 12.1% this quarter at the 20 comparable Sonesta hotels not undergoing renovations during the quarter.

GOP margin percentage for our comparable hotels increased 210 basis points from the 2014 quarter to 38.2%. Of our portfolio's, Hyatt and Wyndham had the strongest margin growth this quarter with gross operating profit margin percentage up 540 and 510 basis points respectively versus the 2014 quarter.

The combination of strong RevPAR growth and GOP margin expansion resulted in an $11.9 million, or 12% 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 hotels agreements versus the prior-year quarter and portfolio-wide coverage increased to 0.92 times for this traditionally weaker quarter and 1.07 times for the trailing 12 months.

All but our Sonesta and Wyndham portfolio's and our Marriott Kauai hotel were above one times coverage on a trailing 12-month basis. This strong performance resulted in net guarantee and security deposit replenishments of $24.7 million during 2015.

Turning to HPT's consolidated operating results for the fourth quarter, this morning we reported normalized FFO of $81.1 million compared to normalized FFO of $121.5 million in the 2014 fourth quarter. The $40.4 million, or 33.2% decrease in normalized FFO, was due to the impact of the $62.3 million, or $0.41 per share of incentive management fee expense recognized and the 2015 quarter.

Excluding the impact of incentive management fee expense, normalized FFO for the quarter, compared to the same period in 2014, increased 18% to $143.3 million, or $0.95 per diluted share. This increase was due primarily to the higher level of minimum rent and returns earned in the 2015 quarter, as a result of our hotel and travel center acquisitions, our funding of capital improvements to our hotels and travel centers and the improved operating results of certain of our hotels.

Adjusted EBITDA was $123.7 million in 2015 fourth quarter, a 24.7% decrease from the 2014 quarter. Excluding the impact of the $62.3 million of incentive management fee expense, adjusted EBITDA for the quarter, compared to the same period in 2014, increased 13.2% to $186 million.

Turning to our capital commitments, we funded $34.1 million of hotel improvements and $29.7 million of travel center improvements in the fourth quarter. We currently expect to find $81.4 million of hotel improvements and $150 million of travel center improvements in 2016. Our hotel funding amounts cover planned renovations at 14 hotels, the majority of which are scheduled to be completed during the first half of the year.

In addition to our TA improvement funding, in 2016, we expect to purchase three of the five newly developed travel centers we previously agreed to acquire and lease back to TA, for an aggregate purchase price of $78 million. We currently expect to acquire these properties in the first, second, and fourth quarters of 2016.

With respect to our liquidity and recent financing activities, we had approximately $13.7 million of cash, which excludes the to $51.2 million of cash escrowed for improvements to our hotels at year-end. In December, we amended the agreement governing HPT's revolving credit and term loan facilities, which resulted in the maximum amount of borrowings available under our revolving credit facility to increase from $750 million to $1 billion.

As of December 31, debt-to-total-book-capitalization was approximately 53.9% and debt-to-total-gross-book-value of real estate was only 39.8%. Earlier this month, we issued $750 million of unsecured senior notes, which included $400 million of 4 1/4% notes due in 2021 and $350 million of 5 1/4% notes due in 2026. The net proceeds from these offerings were approximately $732 million.

On February 9, we gave notice that we would redeem, at par, in March all $275 million of our 6.3% senior notes due in June of this year. We have no additional debt maturities until March 2017.

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

(Operator Instructions)

Our first question comes from Ryan Meliker of Canaccord Genuity. Please go ahead.

Hey, good morning. I was hoping you could give us a little bit of color on your CapEx plans for 2016. I just want to make sure that we model that out right, given the impacts that it has on your minimum rents for [spreading] anything (inaudible) out Sonesta. Thanks.

As I mentioned of the prepared remarks, we are going to -- currently we expect to spend -- to fund $81.4 million at our hotel portfolios on $150 million at our travel center facilities. The $81.4 million of hotel improvements, $48 million of that is at our Sonesta portfolio, $17.8 million at our InterContinental portfolio and the rest is spread between our Marriott number one, Marriott 234, and Wyndham portfolio's.

The amounts for Sonesta that would be the renovation of the nine Extended Stay properties we acquired during 2015 as well as the two properties that we recently closed on. And then the InterContinental fundings were principally related to renovations at the two properties we acquired in Denver and outside of Chicago during 2015.

And then in terms of how the total CapEx spend of $231.4 million is going to fall out during the year, and obviously this is subject to change, as you know projects never seem to go as planned. But we currently anticipate $55 million in the fourth quarter, $62 million in the second quarter, $51 million in the third, and $63 million in the fourth.

All right. That's exactly what I was looking for. That is really helpful. And then I was just wondering, you bought three properties since the end of the quarter. What is your appetite for continued growth in the portfolio whether it be on the hotel side of the travel center side?

Given a -- some of the concern surrounding where are in the lodging cycle, I know your portfolio's doing well and imagine you probably feel like it will continue to do well. So, maybe that's less of a risk. But also, just given some of the challenges with where you guys are from a leverage prospective limiting some of your capacity for growth without equity issuance.

Sure, I will answer that. Our leverage is a little bit higher than we would like it to be. So we are being very cautious about acquisition opportunities. But we are continuing to underwrite opportunities that we see because we don't want to miss any, especially good opportunities.

And so we're continuing to closely monitor transaction activity but acting as though we may not have the kind of capital market access that we've enjoyed over the last 20 or so years, that we may have to wait a little bit longer for equity prices to be at the right spot. So, being very cautious.

But we are -- and we have commitments obviously to acquire some to be developed travel centers and we have not closed on the Portland transaction yet. So those will -- we have the capacity for, and those will go forward and -- but I expect that our external growth will slow this year.

Okay. That's helpful. One of the thoughts I had, and I'm curious what your take on it is, we continue to hear that the CMBS markets are pricing private equity out of select service portfolio acquisitions today. We've seen several select service portfolios pulled off market over the past few months.

Seems like a lot of the public REITs are not really interested in acquiring those types of assets today. I'm just wondering what your appetite is for some of those larger scale opportunities and how willing you would be to move some of the -- take on added leverage in the short-term with the idea that down the road you might be able to issue equity to reduce leverage.

I cannot speak -- my knowledge of where the CMBS market is, as it relates to private equity is -- you're probably closer to that than I am. So, I'm not going to touch that part of the question. But the -- we don't have an appetite for the portfolios of select service assets that I think you may be referring to.

As I mentioned on prior calls, we see those as collections of individual assets, not portfolios. And so they don't fit the type of transaction structure that we believe is warranted for investments in that type of asset. So we are not currently looking, and I don't expect us to be looking at portfolios like that.

Okay. Thanks, John. And then one last one. You ended the quarter at 53.9% debt-to-total-book-capitalization, I know you've mentioned that a little higher than where you would like to be but you're comfortable there. Where does the comfort level start to become uncomfortable? We talking 55%, 60%, just wondering how much real runway you guys have from the [FASB] perspective before you start to want to make a change to the capital structure?

Yes, I think -- Ryan, this is Mark. I around that 55% debt-to-total-book-capitalization, 40% to 45% of gross value of real estate in that neighborhood is where we'll cut things off.

Thanks. That's all for me.

Our next question comes from Bryan Maher of FBR & Company. Please go ahead.

Good morning, guys. So, Ryan took all the good questions. But if we could just drill a little bit deeper -- a little bit more color when you are out looking at acquisitions, who are you typically running into these days?

Since most of the lodging REITs are seemingly out of the market. We are hearing mixed signals from private equity buyers. But clearly there are some transactions going on out there as a number of the REITs we cover are selling and listing hotels. So can you give us a little bit more color on what the environment is there for acquisitions?

I can try. The brokers don't often give us a list of who we are competing against so it's somewhat speculation. But there are a number -- there are private equity firms that are out looking for hotel transaction opportunities. There are a number of sovereign wealth funds and other foreign capital forces that are looking at the US as perhaps the most stable real estate market to invest in. And so that's attracting them and I think they are looking at the hotel space, unlike where the capital markets here seem to be pricing things I think they're looking at the hotels spaces having multiple years to run in terms of its continued recovery.

So, we're also seeing high net worth individuals in certain markets bidding on properties. And some pension insurance money chasing transactions as well. So there's still depth to the market. There's perhaps less buyers chasing individual transactions or portfolio transactions today than there was one year ago. But if you want to sell the property, you will have more than one bid.

So, two things on your comments. One, you commented that some of these potential buyers are looking at still multiple years left in the cycle which is something that we would agree with and have written about. What are your thoughts as it relates to the length of the cycle?

Well, I look at supply growth as just now getting to historical long-term average run rates in 2016. I look at ignoring the fact that we expect to have stronger RevPAR growth than Smith Travel or PKF are projecting or PWC are projecting for 2016. Their projections are in around 5% for this year and in the 4.5% the 5% for next year, both of which are more than 50% higher than historical long-term run rates for RevPAR growth.

And then typically, the industry continues even after you have historical RevPAR growth dropping to average levels and supply growth at or above average levels. Typically you still see because of high occupancies, you still see continued rate growth beyond that for a couple of years. And so -- and with rate growth comes increased profitability because it's the most profitable way to grow revenues.

So we expect not just to see 2016 and 2017 as good years but probably a couple years beyond that. Obviously I don't have a crystal ball and you never know what kind of unusual shock may occur, but absent any crazy economic change around the world someplace impacting the US, I expect that we have three to five years of continued good performance in the hotel space.

And then just lastly going back to the acquisition environment. Are you seeing any easing up on pricing when you're looking around, relative to what you might have thought 6 or 12 months ago?

Yes. I think we have seen price expectations and the reality of transactions pricing at lower levels. I think that during the November/December/January time frame, there is cap rates. In my view have moved up almost a percentage point.

Okay. Thanks a lot, John.

Our next question comes from David Loeb of Baird. Please go ahead.

Good morning, John. I actually want to follow-up on one of Ryans. You were really clear -- both you and Mark were really clear about balance sheet and what your long-term intentions are. But what I want to ask is what happens if the stock market stays depressed, concerned about the outlook for the lodging sector until we get into a downturn.

In the last downturn, which was obviously really severe, you have an investment grade balance sheet, you still do, but you still had to cut your dividend. So, what is your thought on your ability to ride out the cycle with this higher level of leverage?

Well, I think it sounds to me like you're not even looking with a glass half empty. It seems like your glass is completely empty.

If you read my research I think you'd (multiple speakers)

The premise behind your question seems like completely disconnected with reality. So it makes it hard question to answer.

Can I follow (multiple speakers)?

We are not riding out a downturn or riding out a recession. We are outperforming the industry at its point in the cycle where the industry continues to outperform its long-term averages. So, I expect that we will continue to build our security.

I expect that if we are the only ones who continue to outperform that our share price will continue to outperform on a relative basis and we will be in a position where we are better able to access the capital markets than our competitors. And if we are not the only ones who are outperforming then the stock market's going to come realize that it is mispriced and all of our share prices are going to come back.

But I do not, at the current time, believe that the equity markets have reached a long-term correction or that they are going to stay where they are because investors are going to realize that they're missing opportunities if the prices stay where they are. So, if a year from now the world has permanently changed obviously we will reevaluate.

We try to keep in touch with where the market is day-to-day but for -- at the time being, we believe that the equity markets are mispricing what industry expectations ought to be. And we feel like we're well enough capitalized and conservatively enough leveraged that we can easily ride through the current environment until things become more appropriately priced.

David, in terms of -- you brought up the dividend in your discussion and I think our dividend as I know you know is well covered even on a CAD/FAD basis even with the impact of the incentive fee in there, our payout ratio was only around 70% for 2015. So we feel good about our ability, if and when the downturn does come, to whether it from a dividend perspective.

Yes, look, John, and Mark, I agree with your outlook and that's what I've been saying in my research. I agree that the market is missing opportunities today, I guess the premise of the question was more of a what if a worst-case scenario does play out. So I appreciate your discussion of that.

Just one quick follow-up, Mark, your distribution was taxable income. So do you have continued pressure to payout that level of dividend going forward or do have leverage you could pull if you wanted to pay less dividend?

I'll be honest with you, I haven't done the analysis assuming we pay a lower dividend. But I would think that the tax laws do provide you flexibility in ways to get around one-off, one year's where you have a distribution issue.

You obviously can't -- there aren't enough levers to pull where you could do it for multiple years consecutively but if we ever got to that position, we could deal with it. But you are right, our distribution was 100% ordinary income this year which tells you that -- which confirms that our payout ratio is relatively low.

Okay. Can I ask a little more on acquisitions and dispositions?

Sure.

On the acquisition side, what do see as by IHG's willingness to do deals per Kimpton Hotel's given that there are some of those on the market? And I know dispositions are more complicated, but have you considered that or what circumstances would make you consider potentially selling some assets.

I don't think it's appropriate really for me to speak to IHG's appetite. I do know that they would like to grow the Kimpton brand and to the extent that any of their -- any of the Kimpton Hotel's that are on the market to be sold by their current owners might be available unencumbered, that they would like to keep their brand size as it is and growing. So what steps they take to do that I won't say.

In terms of dispositions, because of our portfolio structures as you noted, it's more complicated for us. We have to sell assets because we have -- just as we keep our managers for being able to cherry pick at renewal times against us, we sort of afford them the same protections in the other direction. So, it's not an easy process to sell assets, but we do, nonetheless, consider it on a regular basis whether there is hotels that make sense for both our manager and ourselves to prune from portfolios.

And we have, from time to time, sold some and we may continue to, but at the present we don't have any that we've identified to sell at this time. Our returns a pretty good on the hotels that we own and they're in pretty good shape, so we feel like the returns we're getting on most of our existing portfolio is better than the returns we could get from alternative investments.

Great. Thank you.

Our next question comes from Wes Golladay of RBC Capital Markets. Please go ahead.

Good morning, guys. With a $1 billion line of credit now would you run a higher line balance throughout the year? And right now, post arm our payment and assuming acquisitions and the retirement of the debt, is your line balance roughly around $175 million pro forma?

Pro forma? Well, today we have got nothing out on the line today and have probably $170 million of cash. Obviously, next month we are going to redeem the $275 million of notes so we'll borrow $100 million or so on the line to do that. And then Monaco will borrow a little over $100 million to do that. So that will take us up to a couple hundred million out on the line.

And would this be a balance you would want to run the rest of the year? Or would you look to cap the debt markets one more time?

I think it really depends how high the revolver balance gets and what the markets themselves look like. Part of the reason for having a large credit line is to afford us the flexibility to cap the markets when we think they're favorable. So I think a lot of that is just be dependent on what's out on the line in our view of the unsecured debt markets.

Okay. Real quick, how do you view your cost of capital. Because we talk about the dividends being well covered, yet you have about 8.5% yield (inaudible) at least the AFFO yield around 12% and the cost of debt long-term around 5.5%, gets you just under 9% on a blended 50/50 basis for the WAC. Some of these acquisitions they still seem to be and the height 8%s. Are you expecting a lot of growth for these assets are you going to start requiring more when you buy stuff -- at least a higher initial yield?

I assume you're calculating that WAC off the current share price, right?

Correct, yes.

Yes, and I think what we've tried to be clear about is it is not our intent to issue equity at the current share price. So, when we look at what we'd like to -- where we'd like issue or would be comfortable issuing equity, we're comfortable with the yield on the assets versus our blended cost-to-capital.

Okay. Thanks a lot.

Yes.

And this concludes our question-and-answer session. I would now like to turn the conference back over to John Murray for any closing remarks.

Thanks everyone for joining us. We may see some of you at the Wells Fargo real estate conference later today and tomorrow. Otherwise, thank you for your time.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.