Service Properties Trust (SVC) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Hospitality Properties Trust Third Quarter 2017 Financial Results Conference Call. (Operator Instructions) And please note that today's 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 with analysts. Please note that the recording, retransmission and transcription of today's conference call is prohibited without the prior written consent of HPT.

I'd 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, November 8, 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-Q to be filed later today with the SEC and once again 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.

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

Thank you, Katie. Good morning, and welcome to our third quarter 2017 earnings call. Earlier this morning, we reported third quarter normalized FFO of $175.5 million, an increase of 8.2% compared to the third quarter of 2016. On a per share basis, normalized FFO of $1.07 per share represents a 3.9% increase compared to the 2016 quarter.

Starting with performance in HPT's travel centers. Fuel margins decreased by $7.4 million or 8.4% in the third quarter, reflecting reduced fuel volume sold and lowest cents per gallon diesel fuel gross margins compared to 2016. Nonfuel gross margin increased $1.1 million, or 0.5% and site-level operating expenses decreased by $7.4 million or 3.8%. Mark will explain these changes in a moment. Property-level rent coverage for the quarter was a strong 1.72x despite HPT's rent increasing 4.2% compared to 2016 due to increased investments -- due to our increased investments.

Turning to performance in HPT's hotels. Third quarter 2017 comparable RevPAR declined by 0.4% versus the 2016 quarter and comparable GOP margins declined by 72 basis points versus the 2016 quarter to 42.7%, reflecting lower revenues and increased wages, benefits and travel agent commissions. Aggregate coverage of our annual minimum returns and rents at all our hotels was 1.19x this quarter, down from 1.27x since 2016. There are many factors that impacted third quarter results, including room supply growth, market weakness due to convention renovations in San Francisco and Miami, reduced occupancy and renovation hotels, holiday shifts, nonrecurring political conventions, hurricanes and Western wildfires. While our hotels are geographically diversified, many are in or near the top 25 markets, and sometimes, concentrations temporarily work against us. Specifically, this quarter, we had 30 hotels representing 7.5% of our minimum returns in the quarter's top-performing markets of Houston, Orlando, Tampa, Nashville and Detroit; but 43 hotels representing 15.4% of our returns in the underperforming markets of Philadelphia, Minneapolis, New Orleans, Chicago and Dallas. These outperforming and underperforming markets change quarter-to-quarter. So we note that our revenue market share, as measured by Smith Travel competitor set indices, have remained stable with premiums in occupancy, rate and RevPAR quarter-over-quarter across our portfolio. Our hotels remain leaders in their markets.

Our Hyatt portfolio reported above-industry revenue growth this quarter, with RevPAR increasing by 2.2% led by occupancy increases of 1.7 percentage points and rate growth of 22%. For the Hyatt portfolio, cash flow available to pay our minimum return increased by 3.8% versus the 2016 quarter and coverage improved to 1.17x.

Our Wyndham portfolio's RevPAR performance improved to 0.4% growth in the third quarter as a 2.8% increase in rate was offset by a 1.8 percentage point decline in occupancy. This portfolio's improvement reflects improved performance at the recently renovated Hamilton Park Hotel in New Jersey. Additionally, our Wyndham Houston hotel benefited from increased demand related to relief work following Hurricane Harvey. Wyndham's cash flow available to pay our minimum return was essentially flat this quarter versus last.

IHG's comparable hotel RevPAR was flat this quarter. Our full-service hotel results were mixed with strong performance with our InterContinental hotels, driven by post-hurricane activity in Austin, Texas and San Antonio, Puerto Rico -- I'm sorry, San Juan, Puerto Rico and weaker performance at our Crowne Plaza hotels due to factors that included loss of higher-rated group business at our Miami hotel and reduced demand from the Secret Service at our White Plains hotel.

Our Marriott No. 1 Courtyard portfolio had the weakest revenue performance this quarter, with RevPAR decreasing by 2.6% driven by rate and occupancy declines of 1.9% and 50 basis points, respectively. GOP margin percentage declined 123 basis points. Headwinds included increased room supply growth and renovations at certain hotels. Excluding the 3 hotels that were under renovation during the quarter, the decline in RevPAR for the portfolio is only 0.2%. Efforts to shift sales and revenue management strategies into improved corporate negotiated business trends for this portfolio are gradually helping to improve this quarter -- this portfolio's revenue performance. With coverage of 1.26x for the last 12 months, Marriott No. 1 is among our most secure hotel portfolios.

Our Marriott 234 revPAR was down 0.7% this quarter, with a 1.1% increase in rate offset by 140 basis point decrease in occupancy. Fewer citywide events in Atlanta, San Antonio and Chicago and weak group demand negatively impacting our Residence Inn and TownePlace Suites hotels, respectively.

Our comparable Sonesta hotel RevPAR declined 0.3% this quarter due to a 3.2% decline in rate, partially offset by a 220 basis point increase in occupancy. More than half of the year-over-year declines were attributable to weak group results at the Sonesta Gwinnett, which was under renovation during the quarter; and Sonesta Philadelphia due to tough comparisons from the democratic convention last year. Additionally, our Fort Lauderdale hotel experienced soft demand trends this quarter with many storm-related cancellations.

Turning to transaction activity. In August, we acquired 2 Crowne Plaza hotels in Columbus, Ohio and Charlotte, North Carolina and added them to our management agreement with IHG. The 419-room Crowne Plaza & Lofts hotel acquired for $49 million with 8,400 square feet of function space, 1 food and beverage outlet and is attached to both the Columbus Convention Center and Nationwide Insurance Company headquarters. The last portion of the hotel will be converted to IHG's Indigo brand.

The 300-room Crowne Plaza Charlotte Executive Park, acquired for $44 million, has 15,500 square feet of function space and 2 food and beverage outlets. As of September 30, the IHG security deposit had reached its cap of $100 million. In September, we acquired 14 extended-stay hotels with 1,653 suites, located in 12 states for $138 million. We rebranded these hotels to the Sonesta ES Suites brand and added them to our management agreement with Sonesta.

Turning to dispositions. In August, we sold the 159-room Radisson in Chandler, Arizona for $9.5 million and the 143-room Country Inn & Suites in Naperville, Illinois for $6.6 million. In September, we sold the 209-room Park Plaza Bloomington, Minnesota for $8.5 million. These 3 transactions resulted in a gain on sale of $9.3 million. As previously announced, the net proceeds from these sales will be used to fund the renovations of the remaining hotels in the Carlson portfolio. In addition, we have agreed to provide up to an additional $35 million for renovations if requested.

HPT's minimum returns will not be reduced in connection with these sales but will increase to the extent when the $35 million of renovation funding takes place.

Looking ahead, we and our hotel operators remain cautiously optimistic. Our managers are projecting that for the rest of 2017, we will experience increased rate growth and occupancy growth versus earlier in 2017 as demand improves and recently renovated portfolios continue to ramp up. For the year, our managers are, for the most part, maintaining their forecast for hotel occupancy and rate, such that comparable RevPAR growth in 2017 may be 0.5% to 1% with GOP margins in the flat to down 50 basis point range.

I'll now turn the call over to Mark.

Thanks, John. Starting with the performance of our travel center investments. Lower site-level operating expenses and a modest increase in nonfuel gross margin offset the decline in fuel gross margin, resulting in a slight improvement in operating results from the 2016 quarter. For the quarter, fuel gross margin for our travel centers decreased $7.4 million or 8.4% versus the prior year quarter as a result of the 2.7% decrease in fuel sales volume and a 5.9% decrease in cents per gallon margin. The fuel volume decrease in the third quarter resulted primarily from continued truck fuel efficiency gains. The decline versus the prior year in per gallon fuel margin was due primarily to the absence of the federal biodiesel fuel tax credit program in 2017 and increasing fuel cost trends in the quarter. Fuel gross margin per gallon for HPT sites was still a strong $0.183 in the 2017 third quarter.

Nonfuel revenues increased 0.7% versus the prior year, due primarily to growth in storage off-sales, partially offset by a decline in restaurant revenues, which were negatively impacted by brand conversions of several full-service restaurants. Our travel centers grew nonfuel gross margin 0.5% versus the prior year to $231.7 million, which accounted for approximately 74% of the total gross margin dollars of our travel centers in the quarter. Site-level operating expenses declined 3.8% versus the prior year, due in part to the reversal of $4.2 million of increased transaction fees that TA incurred in the first and second quarters of 2017 and that were the subject of litigation between TA and a fuel card provider. TA reversed these previously expense fees in the third quarter due to a favorable September court ruling. Excluding this reversal, site-level operating expenses still declined by approximately 1.6% versus the prior year due to certain cost control initiatives TA has implemented.

As a result of these changes, third quarter property-level EBITDAR of our travel centers increased by $1.1 million or 0.9% compared to the third quarter of 2016. Annual minimum rent under our travel center leases remained well covered at 1.72x for the third quarter and 1.51x for the 12 months ended September 30.

Operating results at our comparable hotels were generally soft this quarter, with RevPAR down 0.4%, a 72 basis point decrease in GOP margin percentage and the decline in cash flow available to pay HPT's minimum returns and rents of 2.4%. The 0.4% decrease in RevPAR this quarter resulted from a 0.2% decrease in ADR and a 0.2 percentage point decline in occupancy. The portfolios with the highest RevPAR growth this quarter were our Hyatt and Wyndham hotels, with increases of 2.2% and 0.4%, respectively, versus the prior year quarter. Our Marriott No. 1 and Marriott 234 portfolios had the weakest RevPAR performance, with declines of 2.6% and 0.7%, respectively, versus the prior year quarter. Both quarters -- both portfolios were negatively impacted this quarter by renovations. GOP margin percentage for our comparable hotels decreased 72 basis points from the 2016 quarter to 42.7%. Of the portfolios, our Carlson comparable had the largest increase in GOP margin percentage in the quarter, up 112 basis points, while our comparable IHG and Marriott 1 portfolios had the weakest margin performance in the quarter, with gross operating profit margin percentage down 137 and 123 basis points, respectively, versus the 2016 quarter. Gross operating profit for our comparable hotels decreased approximately $4 million or 1.9% from the 2016 third quarter. The decline in gross operating profit, combined with a 0.4% decline in below the GOP line deductions, resulted in a $3.8 million or 2.4% decrease from the 2016 quarter in cash flow available to pay our minimum returns and rents. The 2 portfolios with the largest percentage increase is in cash flow for our comparable Carlson and Hyatt portfolios, with increases of 4% and 3.8%, respectively. The 2 portfolios with the largest percentage declines in cash flow were our comparable Sonesta and Marriott No. 1 portfolio, with decreases of 7.9% and 5.3%, respectively.

Cash flow coverage of our minimum rents and returns declined for 6 of our 9 hotel agreements versus the prior year quarter and portfolio-wide coverage declined to 1.19x for this quarter and 1.05x for the last 12 months. However, with coverage above 1x for several of our portfolios, security deposit and guarantee balances continued to be replenished. At the end of the third quarter, our security deposit and guarantee balances totaled $212.5 million, a $44.4 million increase from the start of the year.

Turning to HPT's consolidated operating results. Normalized FFO was $175.5 million in the 2017 third quarter, a $13.3 million or 8.2% increase from the 2016 quarter. The increase in normalized FFO was due primarily to the $9.7 million or 5% increase versus the prior year in minimum returns and rents and a $3.9 million increase in additional returns, which represent HPT's share of hotel portfolio cash flow in excess of our minimum returns.

On a per share basis, third quarter 2017 normalized FFO was $1.07, a 3.9% increase from the 2016 third quarter. HPT's weighted average share count for the quarter was up 4.4% versus the 2016 quarter, due to our August 2016 common share offering.

Adjusted EBITDA was $223.5 million in the 2017 third quarter, a 6.2% increase from the 2016 quarter. Our adjusted EBITDA to total fixed charges coverage ratio for the quarter was 4.8x and debt to annualized adjusted EBITDA was 4.5x at quarter end. Our normalized FFO payout ratio was 48.6% in the 2017 third quarter.

Turning to our capital improvement fundings and commitments. We funded $34 million of hotel improvements and $12.5 million of travel center improvements in the third quarter. We currently expect to fund $32.5 million of hotel improvements and $16.1 million of travel center improvements in the fourth quarter, and 25 hotels will be under renovation for all or part of the quarter.

Looking ahead to 2018, we currently expect to fund between $180 million and $220 million of hotel and travel center improvements, with the majority of the hotel improvements related to properties we have acquired this year.

Turning to our balance sheet and liquidity. As of quarter end, debt was 40.8% of total gross assets and we had $458 million outstanding under our revolving credit facility. In October, HPT issued $400 million of 3.95% senior notes due in 2028. The net proceeds from this offering were approximately $388 million. Also, in October, HPT redeemed at par all $350 million of our 6.7% senior notes due in 2018. As of today, we have $330 million outstanding on our revolving credit facility and no term debt maturities until April 2019.

And with that, operator, we're ready to open up the call for questions.

(Operator Instructions) And the first questioner today will be Michael Bellisario with Baird.

Just kind of big-picture question, mostly focused from the hotel side. Kind of can you give us kind of your thought process on how you're thinking about and getting comfortable with underwriting new deals, looking at new investments, deploying more capital today when, in your current portfolio, you're seeing flattish RevPAR growth and flat to deteriorating margins?

Sure. I guess, I'd address the latter comments. First, we don't expect to see those weak RevPAR and declining margins to continue. So we do believe that the trend will start changing in the fourth quarter, and we're expecting that negative RevPAR will become a thing of the past after we get through this quarter. So -- but we're looking at the portfolio right now, and we are seeing a lot of headwinds from supply growth. Not just supply that remains to come on in 2018 or 2019, but there's -- the markets -- many markets still absorbing hotels that were built this year or last year. And so that makes underwriting more complicated. And so we're being a little bit more conservative about how we invest and we're being careful about who we invest with. And so we think that the prices that we're investing at on a per key basis and in terms of the going-in yields are conservative. We think that they're going to be attractive after we completed our renovations. And we're only looking at a couple of potential acquisitions currently and not sure that they'll even necessarily go forward. But we are dialing back our acquisition pipeline. We're seeing a lot of activity and potential transactions. But we have a lot of renovations, as Mark said, that we're going to be working on during the course of next year related to the pretty healthy level of acquisitions we made this year. So I think that we're going to a little bit more of a wait and see on where the hotel industry is going.

That's helpful, and you kind of answered my follow-up there on the pipeline. And then just one other question, maybe for Mark on the balance sheet. Is there really anything left for you guys to do maybe proactively before that April '19 maturity you mentioned?

Not really. We redeemed the high-cost preferred back in February this year. As soon as we could redeem at par, the 6.7% notes due next year, we took care of that. So the April '19 maturity is actually our bank term debt loan, and I wouldn't be surprised if we address that maturity early next year.

(Operator Instructions) And the next questioner today will be Bryan Maher with B. Riley FBR.

So just to be clear, there was no real damage to any of your properties to speak of?

Yes, that's more or less correct, Bryan. We had -- we have about 45 rooms out of service at the Courtyard at Houston Hobby Airport. We have -- we had a couple of hotels in Hilton Head and Fort Lauderdale's, 2 Sonestas that were closed for a couple of days for one of the hurricanes. But the damage there was not in excess of the deductible and insurance. There was a significant amount of damage to the InterContinental in San Juan, but that's a leased hotel. And despite the damage, there was a fair amount of business from relief workers following the Hurricane Maria because of our hotels, one of the few places on the island that had -- because of its generator had power and had running water despite the storm and despite what you hear on the news. So even though they had damage, their results were pretty good. All in all, we dodged the storms very well.

Okay. And then one of your competitors, albeit a really small one, is having some success particularly on the RevPAR front by going after kind of newer select-service hotels, upscale ones, in kind of the MSAs 20 through 60. Is that anything that you spend some time on? I know it's hard to move the needle for you guys now at onesie-twosie select service. But what are your thoughts on that strategy as a way to incrementally grow in an otherwise kind of tough market?

For us, especially on select-service assets, we really have a strong preference for portfolio growth. And as you said, with well over 300 hotels now and over 45,000 hotel rooms, it's hard to move the needle with a couple of small acquisitions. We like select-service assets that have 125 to 175 hotel rooms. A lot of the -- when you get into the smaller markets, you start to see a lot more of what I would consider more sort of small franchisee-sized hotels that tend to be more in the 75- to 100-room properties. And we think that you want to be a little bit bigger. So when we see portfolios that are in those markets, we don't object to being in some of those -- some of the markets you referenced. But we don't -- we haven't specifically targeted them and I don't think we're going to in the near term.

And then just lastly on the TA front. I know that you guys really haven't done a lot since that you announced the acquisitions back in mid-'15 and subsequently closed on those properties. But in light of where TA's stock has been trading, have you given any further consideration to maybe taking down 5 or 10 of their travel centers? And have you reconsidered at all their c-store portfolio, if and when, it gets to a stabilized level that is attractive, taking down 50 or 100 or 150 or those?

I think we've said on the last couple of calls in response to questions like that, that we are not currently evaluating any additional travel center acquisitions. I think that they're -- I'm not sure what the exact -- the best word to use here, but they're content with the portfolio that they currently own. And there's benefits to them for their own borrowing capacity and things like that to own some properties. And we're not -- we don't think c-stores is the right type of investment for HPT. I don't anticipate getting into the c-store business.

(Operator Instructions) And there looked to be no further questions, so this will conclude the 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 today, and we look forward to hopefully seeing many of you at the NAREIT next week in Dallas. Thank you.

And the conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.