Service Properties Trust (SVC) 2016 Q2 法說會逐字稿

Good day and welcome to Hospitality Properties Trust second-quarter financial results conference call and webcast. All participants will be in listen-only mode.

(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.

Thank you. 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 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 belief and expectations as of today, August 9, 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 investigator 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 10Q 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.

With that, I will turn the call over John.

Thank you, Katie.

Good morning, and welcome to our second quarter 2016 earnings conference call. It was another strong operating quarter for HPT, which reflects the continued execution of our strategy to run a diverse portfolio of well-maintained travel centers and hotels, predominantly select service and extended stay hotels in the urban locations operated under long-term lease and management agreements. A geographically diverse, recently renovated, primarily upscale portfolio and our continued asset management focus on revenue and flow-through improvement were the principal factors behind our hotel portfolio's performance during the quarter.

Among this quarter's highlights, normalized FFO per share increased year over year by 10.1% to $1.09. Comparable hotel RevPAR growth of 4.9% exceeded the hotel industry's performance for the 14th consecutive quarter. Cash available for our minimum rents and returns for the comparable hotel portfolio increased by $11.4 million, or 7.6%. This enabled the replenishment of credit support associated with certain agreements totaling $19.7 million.

Our normalized FFO payout ratio declined to approximately 47%. Free cash flow was use to help fund renovations and acquisitions, and we acquired three full service travel centers for total consideration of $46.2 million.

Our second quarter normalized FFO of $1.09 per share represents a 10% increase compared to the $0.99 reported in the second quarter of 2015, due primarily to the impact of HPT's hotel and travel center acquisitions and improved hotel operating results. Second quarter results for HPT's travel centers reflected declining fuel volumes sold and per-gallon fuel margins that were down 1.2% versus the comparable 2015 period. An increase in nonfuel gross margin of $7.3 million more than offset the fuel margin decline and partially offset increases to operating expenses and rent. Property level rent coverage for the last 12 months through June 30, 2016 was 1.6 times.

Turning to our hotels, the second quarter continued our positive RevPAR and margin growth momentum, with RevPAR growth of 4.9% across HPT's 292 comparable hotels, well above industry growth levels again this quarter. This RevPAR growth, which was approximately 75% rate driven, continued to be broad based.

For example, our 223 hotels that is were renovated from 2010 through 2013 increased RevPAR by 4.6%. The rate growth resulted in continued margin expansion with comparable GOP margin percentage up 110 basis points from the 2015 quarter. This represented a 74% flow through of this quarter's revenue increase. As a result, coverage of the minimum rents and returns also continued to improve.

Highest RevPAR growth led the HPT portfolios in the second quarter, increasing by 7%, driven by strong occupancy and rate growth, which benefited from renovation comparables for five hotels in last year's second quarter. Highest enhanced revenue management system with predictive demand capabilities and a continued focus on their high floor initiative contributed to the positive topline results. However, GOP margin percentage remained essentially flat due to increased travel agent commissions from OTA use and the one-time benefit cost true-ups.

Our Wyndham portfolio increased RevPAR 5.5%, led by the Wyndham full service hotels and group business this quarter. RevPAR growth was driven by occupancy, while average rate was flat, negativity impacted by market conditions in Chicago and Houston. GOP margin percentage for the portfolio improved 180 basis points, attributable to savings associated with rooms and food and beverage labor costs and other expense controls. Wyndham continues to implement a rooms labor savings initiative at our extended stay hotels, assisted by analysis conducted with HPT's asset management teams, resulting in lower housekeeping costs per occupied room.

Our Marriott No. 234 portfolio increased RevPAR by 5%, evenly split between rate and occupancy gains and led by strong results at our Courtyard and SpringHill Suites brands. Revenue performance was aided by our Emeryville, California Courtyard, which had strong performance against the renovation of period comparison. Extended Stay results benefited from mix shift to shorter length of stay from the 30 day plus tier, where rates are lower.

Our Sonesta portfolio's comparable second quarter RevPAR increased 7.9%, the comparable hotel GOP margin percentage improved 270 basis points versus the second quarter of 2015 to 37%. Our comparable Sonesta ES hotels once again drove the portfolio's performance following recent renovations and a mix shift to shorter lengths of stay. Across the Sonesta portfolio, rate increases were recognized across all major segments, including transient, group and contract.

The Royal Sonesta New Orleans experienced double-digit RevPAR growth, driven largely by occupancy gains postrenovation. The hotel's positive performance came despite a rainy, poorly attended jazz fest, fewer citywide events and energy sector weakness, which weighed on the hotel's rate growth. Energy sector weakness also continues to weigh on results at the Royal Sonesta Houston and the Houston ES Suites.

Our Carlton portfolio's RevPAR decreased by 0.6% during the quarter due to the loss of project and training business that was completed and the timing of certain customer mix change initiatives. To Carlton's credit, although revenue declined modestly, GOP improved slightly through expense management. Across property types, RevPAR and gross profit margin percentage were strongest among our select service portfolio, our 95 comparable select service hotels were up 5.2% and 90 basis points. Our 157 comparable extended stay hotels were up 5% and 50 basis points. In both cases, rate was the principal driver of the growth. RevPAR at our 40 comparable full service hotels was up 4.5% and margins improved 160 basis points.

Turning to transaction activity, in June, HPT acquired from TA three Petro-branded travel centers located in Illinois and Indiana for an aggregate purchase price of $46.2 million. In July, we entered into an agreement to acquire a full service upscale hotel located in Silicon Valley for a purchase price of $52 million. This hotel offers 236 guest rooms, a popular restaurant providing locally sourced menu, and over 4,000 square feet of meeting space. It is conveniently located near San Jose and Santa Clara with convenient freeway access.

HPT is currently conducting its due diligence on this property, including with respect to our ability to expand the hotel's meeting space. We currently expect to add this hotel to our management agreement with Sonesta. We are being very selective as we consider additional hotel acquisition opportunities. In light of weakened global economic conditions and modest domestic growth, we believe hotel pricing may moderate.

Looking ahead, we and our hotel managers remain optimistic about 2016, although our operators have modestly reduced expectations to account for certain trends, like slightly weaker retail transient room nights, fewer citywide meetings, reducing compression nights and continued energy-related weakness. Industry experts continue to forecast RevPAR growth in the 4% to 4.5% range for 2016, above historic long-term average growth rates.

Our operators are forecasting full-year 2016 RevPAR growth generally in the 4% to 5% range, and GOP margin percentage improvements of 100 basis points to 150 basis points versus 2015. This implies steady high occupancy and continued above industry average RevPAR growth, driven primarily by rate growth for the balance of 2016.

We're continuing to benefit from renovations that have impacted most of our hotel portfolio. Our hotel portfolio is high, 80.7% average occupancy during the quarter positioned our managers well to continue to improve average daily rate and delivered continued GOP improvement and increased EBITDA.

We continue to monitor supply growth, which is near historic run rates. While much of the new supply remains concentrated in limited number of urban markets, it is a broader issue impacting occupancy and rate growth and an increasing number of (technical difficulty). However, we do not expect supply growth to be a material headwind to HPT's hotel portfolio performance in 2016.

I will now turn the call over to Mark.

Thanks, John.

Starting with the performance of our travel center investments, property level operating results for the 2016 second quarter improved slightly versus the prior year quarter. For the quarter, per gallon fuel margin was down 1.2% and gallons sold declined 3.6%, resulting in a 5% fuel margin decline versus the prior year quarter. Our travel centers did continue to grow nonfuel revenue and nonfuel gross margin, which increased 0.9% and 3.4% respectively versus the prior year. Approximately 74% of the total gross margin of our travel centers during the quarter was from the less volatile nonfuel segment of the business.

Site level operating expenses increased only 0.9% versus the prior year. As a result of these changes, first quarter property level EBITDAR of our travel centers increased by $1.6 million, or 1.5% compared to the second quarter of 2015. Annual minimum rent under our travel center leases remains well covered at 1.64 times for the second quarter and 1.59 times for the 12 months ended June 30.

Operating results at our comparable hotels were strong again this quarter, with RevPAR up 4.9%, a 110 basis point increase in GOP margin percentage and growth in cash flow available to pay HPT's minimum returns and rents of 7.6%. The 4.9% increase in RevPAR this quarter resulted from ADR growth of 3% and a 150-basis point increase in occupancy. The portfolios with the highest RevPAR growth this quarter were our Hyatt, Wyndham and Marriott No. 234 portfolios with increases of 7%, 5.5% and 5% respectively versus the prior year quarter. RevPAR was up 7.9% this quarter at our 22 comparable Sonesta hotels.

GOP margin percentage for our comparable hotels increased 110 basis points from the 2015 quarter to 45.1%. Of our portfolios, Wyndham and Marriott No. 1 had the strongest margin growth in the quarter, with gross operating profit margin percentage up 180 basis points and 110 basis points respectively versus the 2015 quarter. GOP margin percentage at our comparable Sonesta hotels increased 270 basis point this quarter.

The combination of strong RevPAR growth and GOP margin expansion at our comparable hotels resulted in $11.4 million, or 7.6% increase from the 2015quarter in cash flow available to pay our minimum returns and rents. The portfolios with the largest increases in cash flow were our Wyndham, Marriott No. 1 and Hyatt portfolios, with increases of 7.9%, 7.3% and 6.3% respectively. Cash flow available to pay our minimum returns in rents increased 24.7% at our comparable Sonesta hotels.

Cash flow coverage of our minimum rents and returns improved for seven of our nine hotel agreements versus the prior year quarter and portfoliowide increased to 1.34 times for current quarter and 1.09 times for the trailing 12 months. Coverage for our comparable Sonesta hotels was 1.24 times for the quarter.

The above 1 times coverage for several of our hotel portfolios resulted in net guarantee and security deposit replenishments of $19.7 million during the second quarter. Our Marriott No. 1 and IHG agreements also generated a total of $9 million of payments to HPT in excess of our minimum returns this quarter.

Turning to HPT's consolidated results for the second quarter, this morning we reported normalized FFO of $165.7 million compared to normalized FFO of $148.1 million in the 2015 second quarter. On a per share basis, second quarter 2016 normalized FFO was $1.09, a 10% increase from the 2015 second quarter. This increase was due primarily to the impact of HPT's travel center and hotel acquisitions and the continued improvement in operating results at certain of our hotels.

Adjusted EBITDA was $216 million in the 2016 second quarter, a 13% increase from the 2015 quarter. As a reminder, when calculating both normalized FFO and adjusted EBITDA during the first three quarter of the year, we add back any estimated incentive business management fee expense recorded in our GAAP financial statements. We include incentive fee expense in the fourth quarter FFO and EBITDA calculations when the actual expense amount for the year, if any, is none.

In July, we announced a regular quarterly dividend of $0.51 per common share, or $2.04 per share per year. The normalized FFO payout ratio was approximately 47% in the 2016 second quarter.

Turning to our capital commitments, we funded $20.4 million of hotel improvements, and $34.5 million of travel center improvements in the second quarter. We currently expect to fund an additional $69 million of hotel improvements and $58 million of travel center improvements in 2016. We also expect to acquire two newly developed travel centers in the third and fourth quarters of 2016 at a total cost of approximately $46 million.

With respect to our balance sheet and liquidity, at June 30 we had approximately $20.3 million of cash, which excludes $61.4 million of cash escrowed for improvements to our hotels and had $68 million of availability under our unsecured revolving credit facility. As of quarter end, our debt to total gross book value of real estate was 40.8% and our adjusted EBITDA to total fixed charges coverage ratio remains strong at 4.6 times.

Operator, we are now ready to open up the call for questions.

Thank you. We will now begin the question and answer session.

(Operator Instructions)

Ryan Meliker, Canaccord Genuity

Good morning, guys. Looks like you guys had a pretty nice quarter, congratulations. I had a couple of quick ones. One is the recurring question that seems to come up every quarter, which is your leverage is a little bit elevated relative what you have disclosed your targets at. Stocks now performed really well this year, up 23% or so year to date. At what point do you look to try to pair down that leverage?

Ryan, this is Mark. As we have stated on past calls, we're comfortable operating the Company at current leverage levels and don't feel any pressure to raise equity capital. That said, we have also noted on past calls our desire to decrease leverage at some point through an equity offering when we thought we could do so at an attractive cost to capital. You are right, the stock has performed very well this year, up 22%,23% year to date, and we will continue to evaluate and dialogue with our Board on our capital strategy.

Okay. Mark, if I recall correctly, your target leverage is at 45% to 50% total debt to total book assets, but you are comfortable running up to 55%, which you guys are obviously below that level now; is that correct?

Yes. And we think the more relevant way to look at it is total debt to gross value of real estate. We're about 40.8% at the end of the quarter. That leverage level really hasn't moved much in last several quarters. Year to date, we have funded most of our capital outlays through free cash flow, and we think we can fund the majority of our capital needs for the rest of the year through cash flow.

And then if you are look at leverage more on a debt to book value of asset, book value of real estate, where is the comfort zone on that?

Well, we have historically operated between 35% and 40%, so we're slightly above that right now, and at some point we would want to get back within that target range.

But that's how we should think about leverage more so than debt to book value of assets, okay.

Yes.

That's helpful. Great, and then the second question I had was, can we talk a little bit about Sonesta? You guys just announced you are buying another asset, converting it to Sonesta. Sonesta in the quarter had RevPAR that was negative. How is that portfolio tracking relative to your expectations?

I know that there's obviously some renovations going on that can skew some of those quarterly results, so I just wanted to get your input on, are you feeling confident with that brand, are you feeling confident with that portfolio? Are you not seeing the challenges that we keep hearing from other smaller brands across the industry that just don't seem to be gaining share, especially now with Hilton and Marriott launching their member rates initiative? Any thoughts on how you feel about Sonesta?

Yes, Ryan. This is Mark. I will throw out a few numbers and I will let John add some commentary on the latter part of your question. I think it is important to look at the Sonesta portfolio and split it between the 22 comparable hotels that have been renovated and the 11 ES Suites properties that are currently undergoing renovation. If you just look at the 22 comparable hotels that have been renovated, we're very pleased with the performance. RevPAR was up 7.9% at those properties this quarter, cash flow available to pay our returns is up almost 25% and coverage was 1.24 times.

The overall performance of the portfolio, when you look at the stats that we publish in our Q and the supplement and the press release, they're obviously being skewed by the 11 properties under development -- under renovation where we had declines in RevPAR and declines in cash flow this quarter. John, I don't know if you want to comment some on some of the brand-related questions.

Yes. There's no question that Marriott and Hilton and some of the other large brands are very powerful and their rewards programs are compelling for many of their many guests, many frequent travelers. But there are also a lot of business and leisure travelers who are looking for something a little bit different, looking maybe for a slightly higher level of service. And brands like Sonesta and similar size brands, I think to be competitive, go perhaps out of their way to add an extra layer of hospitality and try to make guests feel a little bit more special. And it seems to be paying off in our Sonesta hotels, and it is not easy, but I think we're pretty happy with how Sonesta has been doing in the comparable hotels once the renovations are completed. So we think that there is -- there continues to be room in the lodging space for smaller brands that have a more personal connection with their guests.

Great. That's helpful, and I appreciate all of the insight on the numbers in quarter from Mark. That was really good color to give us an understanding of how these things are performing. That's it for me. Thanks.

Thanks.

(Operator Instructions)

Bryan Maher, FBR & Company.

Good morning, John and Mark. John, you made some interesting comments on Hyatt. I think you called it like a predictive booking program or something along those lines, which helped lead to the outperformance in the quarter, can you elaborate on that a little bit?

Well, I think that they have continued to enhance their revenue management programs, and they have got internally developed revenue management systems that look at various factors in terms of where market occupancies and rates are. And where in past cycles and past years, where demand has been coming from in terms of the segments and just the general, the total amount of demand that they should expect. So when -- they're a little bit better able to have conviction about raising rates, holding rates, when they believe that they should be expecting better demand. And so that is -- it's kind of simple actually, but it has been particularly effective for them lately in this quarter.

And then you made some comments with respect to industry outlook for this year, as it relates to the prognosticators, and I guess you are talking about maybe PWC and STR. And then you talked about the HPT's operators and their outlook of 4% to 5% RevPAR. Was that related to their brands or your hotels specifically?

That was related to our hotel, hotel portfolio specifically.

Okay. And then lastly for me, when you look at acquisitions and having just done three TAs and one hotel, is your bias toward TAs the next 6 to 12 months, or do you not have a well thought out where you want to go with acquisitions and you are just being opportunistic?

I am not going to set myself up for the not well thought out part of it. We have a well thought out strategy. We've -- the transaction that we announced last June with Sonesta had some development tail on it, and we have been executing on that --TA, I'm sorry. But otherwise, our acquisition growth focus is on hotels. And we have been looking at transactions not just with Sonesta, but with IHG and others, and we expect to continue to make hotel acquisitions. We had a hotel under contract earlier in quarter, but as a result of diligence, ran into some CapEx issues that were needed to be addressed by the seller and we had to let that property go. We're looking at the hotel in Silicon Valley, again, it is diligence. It may or may not happen. But we are focused on adding hotels to our portfolio and we will continue to do so.

Thanks, John.

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

Thank you very much for joining us today.

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