Service Properties Trust (SVC) 2018 Q2 法說會逐字稿

Hello, and welcome to the Hospitality Properties Trust Second Quarter 2018 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, ma'am.

Good afternoon. On today's call, John Murray, President and CEO; 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, August 9, 2018. 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 through 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 afternoon. This morning, we reported second quarter normalized FFO of $1.07 per share, an increase of 0.9% compared to $1.06 reported in the second quarter of 2017, due primarily to the increased minimum rents and returns resulting from prior year hotel acquisitions and owner-funded capital improvements at our hotels and travel centers and improved operating performance at our comparable Sonesta portfolio.

Starting with performance at HPT's travel centers, total margin increased by $9.7 million or 3.1% in the second quarter due to a $12.6 million or 5.2% increase in nonfuel margin, offset by a $2.8 million or 4% decline in fuel margin due to modest fuel volume declines and lower per gallon fuel margins in the 2018 second quarter.

Site-level operating expenses increased $1 million or 0.5% compared to 2017. Mark will provide more details on these changes in a moment.

Property-level rent coverage for the quarter was 1.69x, up from 1.6x in last year's quarter despite HPT's rent increasing 2.5% compared to 2017 due to our increased investments.

Turning to performance at HPT's hotels. Second quarter 2018 comparable RevPAR increased by 2% versus the 2017 quarter, driven by rate growth. A relative underperformance versus the industry average reflects a combination of HPT's hotels -- hotel rooms being concentrated in the upscale chain scale, which had the lowest RevPAR growth of all chain scales this quarter, new hotel rooms supply growth and an increased number of hotels under renovation.

Comparable GOP margins were relatively flat versus the 2017 quarter at 43.7% as increased food and beverage profitability and lower IT expenses were offset by increased wage and benefit costs. Aggregate coverage of annual minimum returns and rents at all our hotels was 1.22x this quarter, down from 1.26x in 2017.

All of the comparable hotel renovations were soft-good renovations to refresh lobbies and guestrooms and were funded from our FF&E reserves.

Factors that positively impacted second quarter results included strong performance at our comparable full-service hotels, which benefited from improved group demand, and increases in food and beverage revenues, in particular at our IHG, Wyndham and Sonesta portfolios.

Faced with only modest RevPAR growth in the 2018 quarter, our operators did a nice job controlling expenses to help maintain margins. Our comparable Sonesta portfolio grew RevPAR 3.4% this quarter, led by occupancy increases of 2.5 percentage points. Group revenue growth increased significantly at our comparable Sonesta portfolio in both the full-service and extended-stay portfolios.

Performance was driven by a ramp-up in the extended-stay hotels that were acquired in 2015 and subsequently renovated. These hotels increased RevPAR by 5.9%.

Comparable Sonesta portfolio GOP margin percentage improved by 145 basis points and cash flow available to pay our minimum return increased 5.3%. IHG's comparable hotel RevPAR increased 2.3% driven by a 4.1% increase in rate, partially offset by a 1.5 percentage point decrease in occupancy.

Excluding the Anaheim Holiday Inn, which had a pipe burst that caused 177 rooms to be out of service, our comparable full-service portfolio outpaced the industry this quarter with 5.3% RevPAR growth, partially offset by supply-driven weakness at our Candlewood extended-stay hotels where RevPAR increased 0.2%. Comparable portfolio GOP margins remained strong at 44.8%, and coverage was relatively flat from last year at 1.32x.

Our Marriott 234 portfolio RevPAR increased 1.6%, while GOP margin percentage was approximately flat from last quarter. Supply growth, non-repeat group business at certain Towneplace Suites hotels and renovation activity negatively impacted growth this quarter. Coverage of the required annual returns of this portfolio was 1.3x for the quarter, unchanged compared to coverage this time last year.

Our Marriott No. 1 portfolio RevPAR increased 1.3% year-over-year, lagging the industry average, primarily due to hotel renovations and supply growth in the Boston and L.A. suburban markets. HPT's asset managers and Marriott are currently engaged in strategies to increase sales support in the Boston market and yield optimization in the L.A. market. At 1.52x coverage this quarter, Marriott No. 1 remains among our best covered agreements.

Our Wyndham portfolio RevPAR decreased by 2.9%. Wyndham is investing in certain marketing measures to drive more business through its own brand platform and reduce reliance on higher cost OTA channels. This caused retaliatory OTA dimming, which coupled with weak corporate negotiated demand and supply growth resulted in RevPAR declines at the full-service hotels and our Hawthorn Suites. We believe these OTA challenges have now largely been resolved. And with the spin-off and La Quinta transactions completed, we hope to see renewed focus on our portfolio.

During the 3 months ended June 30, 2018, Wyndham continued to pay HPT 85% of the minimum returns due under the management agreement or approximately $1 million less than the contractual amounts due.

Our comparable Radisson portfolio experienced a RevPAR decline of 0.6%, driven by occupancy declines of 2.5 percentage points offset by rate increases of 2.8%. Renovation displacement in San Diego and Brooklyn Center accounted for the weaker performance. Excluding these 2 hotels, RevPAR would have exceeded industry RevPAR gains, led by strong group revenue growth.

HPT's asset management team is working with Radisson on yield management plans to limit displacement on the remaining 6 hotels that will undergo renovations in the near future so that post renovation, they can share shift -- they can shift share and maximize rate lift.

Turning to investment activities. On May 8, the lease agreement of the Clift Hotel was terminated. Morgans surrendered possession of the hotel to HPT and it was rebranded as the Clift Royal Sonesta Collection Hotel and added to our management agreement with Sonesta. This hotel is in need of a significant renovation, which is scheduled to begin later this year and continue into 2020.

In June, HPT acquired a 360-room Radisson Blu Hotel in downtown Minneapolis for $75 million and added it to HPT's management agreement with Radisson. The hotel features 29,000 square feet of flexible meeting and event space and the FireLake Grill House & Cocktail Bar. This hotel is the flagship for the Radisson Blue brand in the United States. This acquisition increases our Radisson portfolio to 9 hotels and materially improves its quality.

Also in June, HPT acquired a Staybridge Suites extended-stay hotel with 117 suites in Baton Rouge, Louisiana for $15.75 million and added it to our management agreement with IHG. This hotel is located adjacent to the LSU Campus, walking distance to many local restaurants and is 5 miles from Baton Rouge's Convention Center.

Looking ahead, our managers continue to project that for 2018, we will experience growth through rate improvement such that comparable RevPAR will increase 1% to 2%, with GOP margin percentage in the flat to down 50 basis point range, largely due to increased wages and benefit costs. We will continue to see supply growth, renovation impacts and wage-related cost pressures. The combination of active asset management, strong brands, good location and continued regular capital investment give us confidence that our operations will meet their projections.

I'll now turn the call over to Mark.

Thanks, John. Starting with the performance of our travel center investments, property-level EBITDAR in the 2018 second quarter was 7.8% higher than the 2017 quarter due primarily to increases in nonfuel revenues and nonfuel gross margin percentage.

For the quarter, fuel gross margin decreased by $2.8 million or 4% primarily as a result of a slight decline in fuel sales volume and a lower per-gallon gross margin in the 2018 second quarter. The fuel volume decline was due to the continued effects of fuel efficiency gains and increased competition, partially offset by TA's fuel pricing and marketing strategies, while the decline versus the prior year in cents-per-gallon margin was due primarily to higher loyalty program costs.

Nonfuel travel center revenues increased 3.8% versus the prior year due primarily to growth in truck service and reserved parking; and nonfuel gross margin percentage increased 80 basis points from the prior year quarter to 60.9%. As a result, our travel centers grew nonfuel gross margin $12.6 million or 5.2% versus the 2017 quarter to $255.7 million. And non-fuel sales generated approximately 79% of total gross margin dollars of our travel centers in the quarter. Site-level operating expenses increased 0.5% versus the prior year, due primarily to increased labor costs associated with the increase in nonfuel revenues.

Second quarter property-level EBITDAR of our travel centers increased by approximately $8.7 million or 7.8% compared to the second quarter of 2017. Annual minimum rent coverage under our travel center leases was a strong 1.69x for the second quarter compared to 1.6x last year.

Turning to operating results at our 305 comparable hotels this quarter. RevPAR increased 2%, GOP margin percentage increased by 8 basis points and cash flow available to pay HPT's minimum returns and rents increased by 1.3%. The 2% increase in RevPAR this quarter resulted from a 2.5% increase in ADR, partially offset by a 0.5 percentage point decrease in occupancy. Excluding the impact of 11 hotels under renovation during the quarter, comparable hotel RevPAR growth was 2.3%.

The portfolios with the highest RevPAR growth this quarter were our comparable Sonesta and comparable IHG portfolios, with increases of 3.4% and 2.3%, respectively, versus the prior year quarter.

Our Wyndham and comparable Radisson portfolios had the weakest RevPAR performance with declines of 2.9% and 0.6%, respectively, versus the prior year quarter. Our Radisson portfolio had 2 hotels under renovation during the quarter.

GOP margin percentage for our comparable hotels increased 8 basis points from the 2017 quarter to 43.7% and gross operating profit increased approximately $6.1 million or 2.7% from the 2017 second quarter.

Of our portfolios, the comparable Sonesta and Hyatt portfolios had the largest increases in GOP margin percentage in the quarter, up 145 basis points and 96 basis points, respectively; while our Wyndham and Marriott No. 1 portfolios had the weakest margin performance in the quarter, with GOP margin percentage down 409 basis points and 34 basis points, respectively, versus the 2017 second quarter.

The growth in gross operating profit for our comparable hotels was partially offset by the $3.9 million or 6.7% increase in below-the-GOP-line costs, resulting in a $2.2 million or 1.3% increase in cash flow available to pay minimum returns and rents versus the prior year quarter. The increase in below-the-GOP-line expenses was due primarily to higher real estate taxes and insurance costs.

The 2 portfolios with the largest percentage increases in cash flow were our comparable Sonesta and Hyatt portfolios, with increases of 5.3% and 4.4%, respectively.

The 2 portfolios with the largest percentage declines in cash flow were our Wyndham and comparable Radisson portfolios, with decreases of 16.7% and 3.6%, respectively.

Cash flow coverage of our minimum rents and returns for our 305 comparable hotels improved slightly to 1.28x for the 2018 quarter compared to 1.27x for the prior year quarter.

Coverage for all 325 of our hotels declined to 1.22x from 1.26x in the prior year quarter due to 14 of our 20 noncomparable hotels undergoing renovations for all or part of the 2018 quarter.

With coverage for the 2018 quarter above 1x for all but 2 of our agreements, the balances of available security deposits and guarantees were replenished by $15.7 million during the quarter. The balance of available security deposits and guarantees at quarter-end was $227.4 million.

Turning to HPT's consolidated financial results. Normalized FFO was $176.2 million in the 2018 second quarter compared to $173.6 million in the 2017 quarter. Normalized FFO per share was $1.07 for the second quarter, an increase of $0.01 or 0.9% from the 2017 quarter. This increase was due primarily to the $8.6 million or 4.2% increase in minimum returns and rents, partially offset by a $2.2 million decline in additional returns and a $3.6 million increase in interest expense.

Adjusted EBITDA was $226.9 million in the 2018 second quarter, a 3% increase from the 2017 quarter. Our adjusted EBITDA to total fixed charges coverage ratio was 4.7x for the quarter, and debt to annualized adjusted EBITDA was 4.6x at quarter-end.

Turning to our capital improvement fundings and commitments. We funded $25.1 million of hotel improvements and $15.7 million of travel center improvements in the second quarter. For the remainder of 2018, we expect to fund approximately $145 million of hotel improvements and $22.8 million of travel center improvements. The majority of these improvements are expected to be funded from operating cash flow. We plan to have 29 hotels under renovation for all or part of the 2018 third quarter, 15 of which are comparable hotels.

Turning to our balance sheet and financing activities. As of quarter-end, debt was 41.2% of total gross assets and we had $89.8 million of cash, including $73.3 million of cash escrowed for future improvements to our hotels.

In May, we amended the credit agreement governing our $1 billion unsecured revolving credit facility and $400 million unsecured term loan, resulting in a 10-basis-point reduction of the LIBOR premium on borrowings for both the credit facility and the term loan and the extension of the maturity dates to 2022 and 2023, respectively. At quarter-end, we had $122 million outstanding on our credit facility and no debt maturities until 2021.

Operator, that concludes our prepared remarks. We'd like to open the call up for questions, please.

(Operator Instructions) And the first question comes from Bryan Maher with B. Riley FBR.

Regarding Morgans and the Clift property, are you just done with them now, like there's no more Morgans we need to read about in the releases or the supplementals?

That's correct, yes.

And then regarding that property, what type of renovation work is going to be done? How much do you think you will spend? And how long do you think it will take?

The renovation will be extensive. There is a significant amount of facade work, building systems work, public space and guest room renovations. So we expect to start with model rooms later this year. We've already been through the planning for that. So they're in the process of ordering the materials and building out the model rooms and -- but because how extensive it is, it probably won't be completed until sometime in 2020. The permitting process is long and complicated in San Francisco as well. So that's currently our best estimate. And we think that we're still working on developing the budget. A lot of the building systems are still being evaluated, but it's going to be at least $60 million.

Okay. And then when we look at the occupancy year-over-year declines in the second quarter of roughly 2 percentage points, I know some of that was related to renovations; some was new supply. Would you put the breakout of that 2%? How much would be renovation? How much would be supply? Just kind of a guess.

Well, we had -- there was a dip during -- a pretty decent dip during May in occupancy at the Clift Hotel associated with the conversion from a Morgans to Sonesta, but I would say that coupled with renovations was probably what, Mark?

So on the comparable portfolio, occupancy was down 0.4 points. In the 20 noncomp hotels, it was down 20 or so points.

Did that answer your question?

Yes, it did. On the Wyndham agreement, that seems to continue to be pretty soft. What are your thoughts there for those 22 hotels? At what point do you come to the conclusion that things aren't getting really better and you want them to, and maybe it's time to think about a change. I mean, clearly, you guys have put in place Sonesta for those types of purposes many years ago. What is the thought process internally on Wyndham? How long does that get to drag on?

Well, we have an agreement with Wyndham, which they are living up to -- both sides are living up to. So there is no, so, unilateral right to do something different there. I think that the properties at Wyndham started with and the properties at Sonesta started with right after the last recession were a pretty challenged group of properties. And a couple of the properties in this portfolio were in markets like Houston and Dallas where they've had some challenges between weakness in the energy sector and the effects of some significant natural disasters and hurricanes. So I think we're giving them -- Wyndham -- the benefit of the doubt. I think before back to there being 2 main properties, Chicago and Hamilton Park in New Jersey that make up about half of the performance of that portfolio. And on the revenue side, the New Jersey property is ramping up well. It's -- this past quarter, it's had some issues on the expense side that needs to be worked out. I think that, long story short, now that Wyndham has their spin-off done and now that they have their acquisition of La Quinta done, they have the ability to be a little bit more focused. And I think that they have -- because of the larger scale, they have more levers to pull in terms of trying to apply different strategies to the Hawthorns and the full-service hotels to improve performance. So I'm optimistic that we're going to see things get better at the Wyndham portfolio in the second half. And I think that if Wyndham was -- if Wyndham felt differently about it, then they wouldn't -- they would be taking a different approach, rather than just operating and continuing the way they have. So we're optimistic that we're going to turn the corner there.

TA this week talked about ramping up growth for TA Express properties, which I'm sure you know will be slightly smaller versions of what they have now. How interested is HPT in getting involved in the TA Express business in helping that to grow?

We don't presently have an interest in investing in TA Express properties. We haven't even seen one yet. We're not looking at TA sites generally. We're looking at -- to the extent we're looking to do more than complete the renovations in the hotel portfolio, then we're looking at hotel acquisitions that where we can do add-ons and try to improve the existing portfolios. So my impression is that -- at TA is that while they may own some of the smaller scale travel centers, but that's going to be a bit of an engine for a franchising push.

(Operator Instructions) And the next question comes from Michael Bellisario with Baird.

Just on the 2 hotel acquisitions, can you maybe provide underwritten EBITDA multiples or cap rates that you guys expect there in year 1?

Yes, we underwrote the Radisson Blu at about an 8% cap rate on projected 2018 EBITDA; and the ES Suites was underwritten -- I mean, the Staybridge Suites, I'm sorry, in Baton Rouge was underwritten with about a 10.5% cap rate on 2017 actual cash flow.

That's helpful. And then just on your one Hawaii property and that agreement, maybe specifically, anything changed your thinking on the better results, finally above 1x coverage for the first time in a handful of years?

I mean, we're very happy to see it above 1x coverage after quite a bit of time. I think a lot of that is driven by the volcano on one island essentially shutting off tourism there. Also increased airlift into Kauai, which has definitely helped our hotel. And I think the fact that there is a number of resorts in the Caribbean that remain closed has also caused more travelers from -- particularly from the East Coast of the United States to decide on Hawaiian vacations. So I think there's several different reasons why performance has improved. I think Marriott's done a good job managing the hotel there this year. There's no question about it and their increased scale from having merged with Starwood is also beneficial. Whether that is a long-term change or just a shorter-term phenomenon is -- remains to be seen. But in terms of the relationship between Marriott and HPT, we've -- we're in continued discussions regarding the future of that property, but no resolution has been found yet.

And then I assume, there is no major impact as yet from the M&A that's going on currently on the Marriott timeshare side?

Marriott timeshare.

No.

No impact.

No impact from that.

And as there are no more questions, I would like to return the call to John Murray for any closing comments.

Thank you very much for joining us today. We look forward to seeing some of you soon.

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