Service Properties Trust (SVC) 2016 Q4 法說會逐字稿

Good day and welcome to the Hospitality Properties Trust fourth-quarter 2016 financial results conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity for analysts to ask questions.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Katie Strohacker, Senior Director of Investor Relations.

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 for analysts. 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, March 1, 2017. 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 on our website at www.HPTREIT.com. Investors are cautioned not to place undue reliance upon any forward-looking statements.

With that I'll turn the call over to John.

Thank you, Katie. Good morning and welcome to our fourth-quarter 2016 earnings call.

Earlier this morning we reported fourth quarter normalized FFO of $93.4 million or $0.57 per diluted share, an increase of 5.6% compared to the $0.54 reported in the fourth quarter of 2015. Starting with our Travel Centers. Fourth quarter results for HPT's 198 Travel Centers reflected reduced diesel fuel volume sold and flat cents per gallon diesel fuel margins versus the comparable 2015 period resulting in a 4.5% or $3.8 million decrease in fuel margin. TA managed their fuel business well amidst rising fuel prices during the quarter and if you exclude the tax credit in last year's quarter fourth quarter 2016 fuel margin would have increased relative to the same period last year. Non-fuel gross margin increased $3.8 million led by improvements in the stores, quick service restaurants, and repair shops. Property level rent coverage for the quarter was 1.51 times, down from 1.58 times in the 2015 quarter, due to a 5.4% increase in rent to HPT, a result of increased investments.

Now turning to our hotel investments. For the year, HPT's comparable RevPAR growth of 3.6% exceeded industry average and met operator forecasts we discussed last quarter. However, fourth quarter comparable RevPAR growth was only 0.6%. In addition to the seasonality typical of the fourth quarter, certain of our hotel markets were impacted by renovations and accelerating room supply growth. Reduced city-wide events and continued weakness in the energy sector also negatively impacted RevPAR growth. Our operators' efforts to push average daily rate and optimize mix coupled with the headwinds I just described caused comparable occupancy to decline this quarter to 70.1%.

Despite modest RevPAR growth, comparable GOP margins increased 12 basis points versus the 2015 quarter to 38%. Coverage of annual minimum returns and rents at our hotels declined to 0.86 times for the quarter from 0.92 times in 2015. Our Marriott number one courtyard portfolio had the weakest revenue growth this quarter with RevPAR decreasing by 1.5% driven by declines in occupancy due to renovations and increased supply. GOP margin percentage slipped by 36 basis points.

There were six hotels under renovation in the portfolio during the quarter compared to none in the 2015 quarter. In addition, our hotels in Pittsburgh, Syracuse and Boston have been impacted by supply growth reducing compression night benefits. Fortunately, coverage of the Marriott number one agreement remained above one times for the quarter and was 1.37 times for the year.

Our Hyatt portfolio RevPAR declined 0.5% year-over-year driven by a 2.6 percentage point decline in occupancy that offset 2.9% growth in rate. This portfolio also experienced renovation and supply headwinds. Hyatt had eight hotel under renovation this quarter compared to none during the fourth quarter last year. Continued high levels of room supply growth in Austin negatively affected our Hyatt Place Austin. Hyatt's GOP margin percentage declined by 85 basis points.

Carlson's results reflected essentially flat occupancy and daily rate versus the year-ago quarter. Soft demand at our Carlson hotels in Phoenix, Seattle, and Sunnyvale caused the use of OTA channels to maintain occupancy levels but at lower rates. Increased supply and hotels in need of renovation were the primary drivers. Carlson increased GOP margin percentage by 291 basis points and increased cash flow available to pay our return by 12.1% versus the 2015 quarter.

Our Sonesta portfolio's comparable fourth quarter RevPAR increased 4.7% and comparable hotel GOP margin percentage improved 152 basis points versus the fourth quarter 2015. Comparable RevPAR growth exceeded industry average driven by nine Sonesta ES Suite hotels and the Royal Sonesta New Orleans which continued to ramp up from their recent renovations. Energy sector weakness continues to weigh on results at the Royal Sonesta Houston and Houston ES Suites. In addition, this quarter, the Sonesta Hilton Head was closed for five days due to Hurricane Matthew and the Sonesta ES Burlington had over half of its rooms out of service due to a fire. Excluding these four hotels, the 18 Sonesta hotels that completed renovations prior to 2016 had comparable portfolio RevPAR growth of 8.2% and GOP margin percentage was up 360 basis points.

Across property type, performance was best at our 166 comparable extended stay hotels where RevPAR increased 3.6% and GOP margin improved by 119 basis points, driven by rate as well as occupancy, benefiting from the post renovation ramp-up of non-Sonesta ES Suite conversions. Revenue flow-through to GOP was a strong 86%.

RevPAR at our 95 comparable select service hotels was down 1.1% and margins decreased by 28 basis points. Softer select service results were due primarily to our Marriott Courtyard hotels which had supply growth and renovation issues as well as eight Hyatt Place renovations.

RevPAR at our 41 comparable full service hotels declined 1.1% with a 1.9% gain in rate offset by a 210 basis point decline in occupancy. Full service performance reflects the impact of Zika fears in San Juan, weaker performance at the Clift in San Francisco due to the Moscone renovation and expansion, and renovations at the Wyndham Hamilton Park and Nashville Airport Marriott.

Turning to transaction activity. In early December we closed the previously announced acquisition of an independent full service hotel with 236 rooms located in Milpitas, California for $46 million. HPT converted this hotel to the Sonesta brand and added it to our management agreement with Sonesta. We plan to invest approximately $15 million in the renovation of this hotel over the next 12 months to 18 months to bring to Sonesta standards.

In February we closed on the previously announced acquisition of Hotel Allegro, a Kimpton hotel with 483 rooms located in Chicago, Illinois for $85.5 million. We added this hotel to our agreement with InterContinental and we obtained an additional $6.9 million security deposit for this property.

In November HPT entered into an agreement to acquire a luxury boutique hotel in Seattle, Washington for $71.6 million. This 121 room hotel will be added to our agreement with IHG. We are currently completing diligence on this property.

In December HPT advised Morgans that the closing of its merger with SBE Entertainment Group without HPT's consent was in violation of the Morgans agreement and we filed an action in California for unlawful detainer against Morgans and SBE. We are currently in discussions with Morgans and SBE regarding this matter and are currently pursuing remedies which may include terminating the Morgans agreement. This hotel represents approximately 1% of portfolio rents and returns and coverage for 2016 was 1.01 times.

Looking to 2017, we and our hotel managers have tempered expectations from last quarter to account for weaker than expected transient room nights and fewer compression nights. As renovation activity, supply growth, and energy sector weaknesses continued to impact occupancy levels and ADR growth. Industry experts now forecast RevPAR growth in the 2.5% range for 2017 just under historic long-term average growth rates. Our managers are projecting that for 2017 we will continue to experience steady occupancy and a more modest evidence level of rate increases such that RevPAR growth may be 1.5% to 2.5%. GOP margins should hold steady or improve modestly versus 2016. We're continuing to benefit from a well maintained geographically diverse hotel portfolio.

I'll 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 fourth quarter improved slightly versus the 2015 quarter. Fuel gross margin decreased $3.8 million or 4.5% versus the prior year quarter, as a result of a 3.7% decline in total gallons sold and the effect of an $8 million biodiesel tax credit that was recognized in the 2015 fourth quarter. TA believes the decline in gallons sold is due primarily to increased fuel efficiency, new competition, and some of softness in freight volume. Per gallon gross margin was flat year-over-year, but would have been higher if not for the prior year tax credit. Our Travel Centers continued to grow non-fuel revenue and non-fuel gross margin, which increased 0.8% and 1.8%, respectively, versus the prior year. Non-fuel gross margin totaled $210.9 million in the 2016 fourth quarter and accounted for approximately 72% of the total gross margin of our Travel Centers during the quarter.

Site level operating expenses were well controlled, decreasing 0.5% versus the prior year. As a result of these changes, fourth quarter EBITDAR of our Travel Centers was $102.6 million, a 1% increase compared to the fourth quarter of 2015. Minimum rent under our travel center leases remained well covered at 1.51 times for the seasonably weaker fourth quarter and 1.58 times for the full year.

Operating results at our comparable hotels were mixed this quarter with RevPAR up 0.6%, a 12 basis point increase in GOP margin percentage, and a decline in cash flow available to pay HPT's minimum returns and rents of 4.2%. The 0.6% increase in RevPAR this quarter resulted from ADR growth of 1.9% and a 90 basis point decrease in occupancy.

The portfolios with the highest RevPAR growth this quarter were our comparable Sonesta hotels, Marriott 234, and Wyndham portfolios with increases of 4.7%, 1.5%, and 0.8%, respectively, versus the prior year quarter. Excluding the Wyndham full service Hamilton Park hotel, which was under renovation during the fourth quarter, RevPAR at this portfolio would have increased by [3.7%] versus the prior year quarter.

In regards to our Sonesta portfolio, RevPAR was up 37% this quarter at our nine ES hotels that competed renovations in the second and third quarters of 2016. RevPAR increased only 1.9% at our 22 Sonesta hotels renovated prior to 2016 as a result of weak performance of our two Houston hotels due to market conditions, the impact of Hurricane Matthew on our Hilton Head property and out-of-service rooms at our Burlington, Massachusetts ES hotel due to a fire. RevPAR increased 8.2% versus the 2015 quarter at the remaining 18 hotels.

Our Marriott number one and Hyatt portfolios experienced RevPAR declines of 1.5% and 0.5%, respectively, versus the prior year quarter, due to a combination of increased supply and demand softness in certain markets as well as the impact of renovations.

GOP margin percentages for our comparable hotels increased 12 basis points from the 2015 quarter to 38%. Of our portfolios, Carlson and our comparable Sonesta hotels had the largest increases in GOP margin in the quarter, up 291 basis points and 152 basis points, respectively, versus the 2015 quarter. While Wyndham and Hyatt had the weakest margin performance in the quarter with gross operating profit margin percentage down 274 basis points and 85 basis points, respectively, versus the 2015 quarter. Both portfolios were negatively impacted by renovation activity during the quarter.

Gross operating of profit for our comparable hotels decreased approximately $173,000 or 0.1% from the 2015 quarter. The combined impact of the small decline in gross operating profit and a $4.5 million or 9.4% increase in below the GOP line items resulted in a $4.7 million or 4.2% decrease from the 2015 quarter and cash flow available to pay our minimum returns and rents for our comparable hotels. The increase in below the line items were primarily the result of higher real estate taxes and property insurance deductibles, as well as higher FF&E reserve escrows which are deducted in calculating cash flow available to pay our minimum returns and rents. The two portfolios with increases in cash flow were our Carlson and Marriott 234 portfolios, with increases of 12.1% and 1.1%, respectively. The two portfolios with the largest percentage declines in cash flow were our Wyndham and comparable Sonesta portfolios, with decreases of 16.7% and 13.8%, respectively.

Cash flow coverage of our minimum rents and returns declined for six of our nine hotel agreements versus the prior year quarter and portfolio wide coverage declined to 0.86 times for this traditionally weaker quarter. Portfolio wide coverage for the year was 1.1 times and this strong performance resulted in net guarantee and security deposit replenishments of $31.2 million during 2016. All but our Sonesta and Wyndham portfolios and our Marriott Kauai hotel were above one times coverage in 2016.

Turning to HPT's consolidated operating results. Normalized FFO was $93.4 million in the 2016 fourth quarter, a 15.2% increase from the 2015 quarter. The increase was due primarily to the minimum rents and returns we earned from our acquisitions and improvement funding since October 1, 2015 and lower incentive business management fee expense realized in 2016. Excluding the impact of incentive business management fee expense from both periods, normalized FFO increased 1.7% to $145.8 million in the 2016 fourth quarter.

On a per share basis, fourth quarter 2016 normalized FFO was $0.57, a 5.6% increase from the 2015 fourth quarter. Excluding the impact of incentive business management fee expense from both periods, normalized FFO per share was $0.89, a 6.3% decline from the 2015 fourth quarter. This decline was a result of the 8.4% increase in HPT's weighted average share count versus the 2015 quarter due to our common share offering in August.

Adjusted EBITDA was $137 million in the 2016 fourth quarter, a 10.7% increase from the 2015 quarter. Again, excluding the impact of incentive management fee expense from both periods, adjusted EBITDA for the quarter increased 1.8% to $189 million. Our adjusted EBITDA to total fixed charges coverage ratio for the quarter was 3.2 times and debt to annualized adjusted EBITDA was [5.8] times at year end. Excluding the impact of incentive business management fee expense, our adjusted EBITDA to total fixed charges coverage ratio was 4.5 times and debt to adjusted EBITDA was 4.2 times.

Turning to our capital and acquisition commitments. We funded $32.1 million of hotel improvements and $34.6 million of travel center improvements in the fourth quarter. In 2017 we expect to fund $63.2 million of hotel improvements including $32.7 million in the first quarter. We also expect to fund $80.7 million of travel center improvements in 2017 including $20.1 million in the first quarter. We expect to complete the $71.6 million acquisition of the Seattle, Washington hotel during the first quarter and to acquire the one remaining newly developed Travel Center at a purchase price equal to its development cost not to exceed $29 million in the second quarter.

Turning to our balance sheet and recent financing activities. As of year end our debt to total gross assets was 34.6%. At December 31, we had $10.9 million of cash which excludes $60.5 million of cash escrowed for future improvements for our hotels. In January HPT issued $600 million of senior notes which included $200 million of 4.5% senior notes due in 2023 and $400 million of 4.95% senior notes due in 2027. The net proceeds from these offerings were approximately $594 million. In February we redeemed at par all $290 million of our 7-1/8% Series D preferred shares. As of today, we have only $60 million outstanding on our revolving credit facility and no debt maturities until January of 2018.

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

Thank you. We will now begin our question-and-answer session.

(Operator Instructions)

Our first question comes from Ryan Meliker with Canaccord Genuity.

Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. I just had a couple things I wanted to touch on.

I think the first thing was you guys, obviously, have been relatively acquisitive. It looks like IHG has been the big winner with you with regards to some of these Kimpton properties, along with Sonesta. I'm just curious, I know you guys tend to focus on acquisitions, where you're able to get your minimum rent and minimum returns contracts in place.

Are IHG and Sonesta really the only two companies that are receptive to doing deals like that at this stage, or have you seen interest from other parties as well?

We have a dialogue with a number of our operators. It's a challenge. Our contract is the most secure contract of the lodging REITs and many of the other types of hotel owners. So if a hotel manager can find a way to grow their business without being as committed and without having as much alignment of interest with its owners, then they may choose to go in that direction.

We have a good relationship, obviously, with Sonesta because it's a related party. But also with IHG we've got a very large portfolio. We've worked strategically together for many, many years now. We both understand how our operations work and how the contracts work, and it's been mutually beneficial. So those have been the easiest ones to grow.

But I think over the course of this next year, you'll see other transactions taking place with other operators in our portfolio. So I don't think you should expect only to see growth with IHG and Sonesta, but you will continue to see probably more growth there than with others.

That's good color. Thanks.

Then can you give us any color with regards to the Milpitas asset and what happened as to why you guys decided to walk away?

I think there may be some confusion there. We walked away from an acquisition in Dallas, in Addison.

I'm sorry, Addison, not Milpitas. I'm sorry, yes.

I don't want to -- there are confidentiality agreements and the like. It was a result of diligence is probably just the best way to say it. The Milpitas transaction is still going forward.

I got them confused. My apologies.

One other thing I wanted to ask about. With regards to the Morgans litigation over the Clift, is your goal in that litigation to take over control of the asset; or is your goal something different?

I think because there is litigation in place and discussions going on between the parties that it's best that I leave that one alone. Those are --

Assuming in the litigation you filed something in terms of what you're seeking for damages, all right?

No, no --

No? Okay. Fair enough.

Just real quickly, lastly, it looks like if I look at some of the coverage ratios, the Marriott 234 and the Hyatt properties continue to have relatively narrow coverage. I know they're both post renovations. So I'm just wondering if there's any concern with regards to those coverage levels and the limited corporate guarantees from both of those, if and when we hit a downturn that you'll end up seeing reduced fees from them.

Which were the two portfolios, Ryan?

I was referring to the Marriott 234 at 1.14 times trailing 12-month coverage and then t he Hyatt portfolio at 1.16 times.

I think we feel good about both of those. The security under Marriott as of year end, we've got the limited guarantee of call it $30.7 million, as well as about $16.5 million security deposit. That security deposit increased by about $10 million in 2016 as a result of coverage being above 1 times. My expectation is that it will continue to build in 2017. So I feel good about where we are on that contract.

With respect to Hyatt, we ended up at year end with about $18.3 million under that guarantee. That guarantee grew by about $3.6 million during 2016 as a result of cash flow in excess of 1 times coverage. I'd expect it to continue to grow during 2017. So I feel good about where we stand on that portfolio also.

Okay. That's helpful. The Sonesta properties, how are those performing that have come out of renovation thus far?

I think, as I mentioned in the prepared remarks, if you look at the nine hotels -- the nine ES hotels where we completed renovations in the second and third quarters of 2016. RevPAR was up 37% at those properties in the fourth quarter, and we expect them to continue to ramp up in 2017.

Where performance came in below I'd say our expectations was on the 22 hotels that were renovated in 2015 or prior. There, that portfolio was really negatively impacted by four properties. The two Houston properties, one is the full service hotel in Houston, and then we have an ES in Houston, due to that market being where it is. Our ES hotel in Burlington had a fire in November and has about half the rooms out of service right now. And then our Hilton Head Sonesta, the impact of Hurricane Matthew. Those four hotels had RevPAR declines of about 24% during the fourth quarter.

So if you kind of back them out and look at the remaining 18 hotels, coverage was up year over year. RevPAR growth was pretty decent at 8.2%. So we feel pretty good about that.

Looking forward, I think Hurricane Matthew is behind us at Hilton Head. Burlington, those rooms are going to be out of service probably until sometime in the second quarter. Then Houston is what it is. But the rest of the portfolio should continue to ramp up in 2017.

All right. Great. That's helpful. That's it for me. Thanks, guys.

Thank you.

(Operator Instructions)

Our next question comes from Tyler Batory with Janney Capital Markets.

Please go ahead.

Thank you. Good morning, everyone.

Just a quick question for you of on the travel center improvements. You said $80 million of those in 2017. I think it was maybe a little bit lower than in years past. Can you maybe just talk about what's going on there and maybe how that might trend in the future?

I guess I'd characterize it that last year was probably a little higher than normal. I think we've averaged about $80 million, if you kind of exclude 2016. The reason 2016 was higher was just that there were a number of projects going on related to re-imaging stores and some things around fuel islands that has been completed for the most part. Therefore, we're back down to what I would call a more typical run rate on capital for the TA properties.

Okay. That's helpful. Thanks for that clarification there.

Then just as a follow-up on the Wyndham agreements. When you look out towards 2017, do you expect that portfolio to get back to 1-time rent coverage, or do you think it's maybe going to stay below 1-time in 2017?

That portfolio was at 0.9 times in 2016. It continues to or was impacted in the fourth quarter. We've got a full-service hotel in Houston that had a significant decline in RevPAR and cash flow. Unfortunately, I don't see that market bouncing back. But the year-over-year comps will get a lot easier there.

The other thing that impacted that portfolio in the fourth quarter was the Florham Park full-service hotel was under renovation. That will be under renovation through the first quarter of 2017. So I think the first quarter will probably be weak.

But I would expect coverage to get a lot -- as I said, it was at 0.9 times coverage in 2016. I'd expect it to get closer to 1 times coverage. Not sure it will quite get there due to the impact of Florham Park in Houston in 2017, but it will be closer than it was in 2016.

Okay. That's great. That's all from me. Thanks.

Our next question comes from Bryan Maher with FBR & Co.

Please go ahead.

I wanted to drill down a little bit more on Tyler's question on the TA improvement, the $80 million run rate. Are these all improvements that TA is making that you're basically reimbursing them for? Can you give us some examples there as to what those kind of run rate $80 million projects would be?

My guess is that $80 million would increase their rents by $6 million to $7 million, roughly 8%. Or are those items that are kind of CapEx items that you do kind of regularly because you own the properties that you don't get a bump in rent on.?

Our leases with TA are triple net leases. TA is responsible for all capital. We have certain criteria that we've established. TA has the right under the lease to ask us to purchase capital improvements they've made to the properties. We don't have the obligation to purchase those improvements, but we have the right to do so under the lease.

The projects vary by year, but we have certain criteria. We're only going to buy longer-lived assets from them. Typically it's an asset with a seven-plus-year life. When we do purchase those assets, the minimum rent under our leases goes up by 8.5% of our purchase price.

Can you give me an example of something that they've put to you that you've turned down over the years? Because if rent's going to go up 8.5%, I can't fathom a situation where you'd be so inclined to turn it down.

I don't know if there's anything we've turned down. I think we've established the criteria of what we're interested in purchasing, and that's what TA presents to us. So if they decide to put new chairs in a restaurant, we're not going the buy chairs.

No, I understand that. They would be stupid to do that and pay 8.5% in perpetuity. That being said, any time they put a capital project to you if they're going to guarantee an 8.5% basic rent increase forever and ever Amen, I don't know why you would turn that down.

I look at TA's rent going up to HPT quarter in/quarter out. You have to start to wonder what's being done and what's being bought because it's an awful lot of money that's being spent there.

The reason we want the right to turn it down, Bryan, is there may be a time where we have a better use for our capital or we have limited access to capital. We don't want the obligation that we have to make those purchases. That's the reason for the flexibility that we've built into the lease.

I agree with you that as of today, there's no reason we would turn down an opportunity to purchase those improvements.

Just a follow-up question. It was said on yesterday's TA call that roughly 90 competitive travel centers were built last year by Pilot Flying J and Loves. Yet TA with you were only involved in a couple; let's say two or three.

Do you have thoughts as it relates to the growth of travel centers in the country relative to kind of a lack of growth of new builds in the TA system? Would you like to see them doing more new builds, or are you kind of indifferent?

I think we're relatively indifferent. TA has a nationwide footprint. I think they've got distribution in the vast majority of the states. So if they decide that they have a spot that they want to fill in along the interstate that benefits their relationships with fleets or other customers and we can work with them, we're happy to work with them.

But we don't feel like there's any shortcoming in their current distribution network. So we're not pushing them to grow their network, and we're not out looking for sites for them. We're focused on hotel investments; and when TA comes to us with ideas, we consider them.

Thanks, John. Thanks, Mark.

Thank you.

Our next question comes from Michael Bellisario with Baird.

Please go ahead.

Good morning, everyone.

Good morning.

Just wanted to follow up on Bryan's question a little bit on capital allocation and kind of the hotel versus travel center tradeoff. Are you seeing any opportunities to acquire more travel centers, or is that really a case-by-case basis in what TA brings to you? Or is it because the hotel acquisitions that you're underwriting, particularly with IHG, have such good returns?

We're committed to buy one more travel center location that's being developed currently. That will happen probably in the second quarter. We don't, as a rule, go out looking for travel center acquisitions ourselves. If TA comes to us with an opportunity, we consider it.

Our acquisition focus is on hotels, and we look at opportunities that might work for any of our operators. We had a hotel that we ended up terminating that was going to be with Carlson that was going to grow that relationship. We've grown with IHG. We've grown with Sonesta.

We continue to look at opportunities with those three, as well as other operators in our portfolio and outside of our portfolio. So that's our main focus. It does come down to whether we can get the kind of contracts that we like and the returns that we feel we need.

Can you remind us of -- I may have missed it -- the acquisition yields on Milpitas, the Allegro in Chicago, and the Seattle too?

The transactions with IHG, they're going to pay us an 8% return on our purchase price. The going-in cap rate on the Milpitas transaction was a number that would sound high. It was a double-digit going-in cap rate based on historic EBITDA. But it was a hotel that hadn't been renovated in over 10 years, and it needs a substantial investment.

The $15 million we're going to invest there is equal to about one-third of what the purchase price was. So we're hopeful that we're going to get a return off of 8% and then increasing over that once the renovations are completed.

Did that cover the works?

Yes. Then just switching gears lastly to Sonesta. What's the path to 1 times coverage, and is the big wild card really just an improvement in Houston?

Clearly, an improvement in the energy sector would be very, very helpful. There are two hotels in Houston that have really been suffering. As Mark mentioned earlier and I mentioned, there was a fire in one of our hotels in Burlington, Mass, which has historically been a very strong market. Half the rooms in that hotel will be out of service for the first half of the year. Once those are back online, that will help.

Improvement in the New Orleans market, the Royal Sonesta New Orleans has been a critical part to that portfolio. It's a very successful, very large property. It was under renovation for a substantial part of 2016. It's been ramping up nicely following the completion of the renovation, and we're hopeful that too will help. Then the ramp-up from renovations at the other extended-stay properties should also help.

I don't know if you want to add to that, Mark?

No, I think you hit on the strong points. The two Houston hotels are about 9% of the total minimum returns under that agreement. Obviously Houston is important.

As John said, New Orleans is still ramping up -- during 2016 was ramping up post renovation. That's the largest minimum return amount in that agreement. So as that hotel continues to ramp up in 2017, we should see improvement in the coverage numbers for the Sonesta agreement.

What percentage is New Orleans?

Oh, let's see if I have that here. It's about, call it 12%.

Thank you. That's all from me.

Thank you.

At this time, we have no further questions. I would like to conclude the question-and-answer session. I would like to now turn the conference back to John Murray for any closing remarks.

Thank you, everybody, for joining us this morning. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.