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Executives

Carlynn Finn

John G. Murray - Principal Executive Officer, President, Chief Operating Officer, Assistant Secretary and Executive Vice President of Reit Management & Research LLC

Mark Lawrence Kleifges - Chief Financial Officer, Principal Accounting Officer, Treasurer and Executive Vice President of Reit Management & Research LLC

Analysts

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

Ryan Meliker - MLV & Co LLC, Research Division

William C. Marks - JMP Securities LLC, Research Division

Bryan A. Maher - Craig-Hallum Capital Group LLC, Research Division

Hospitality Properties Trust (HPT) Q4 2012 Earnings Call March 1, 2013 10:00 AM ET

Operator

Good day, and welcome to the Hospitality Properties Trust Fourth Quarter and Year-End Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Senior Manager, Carlynn Finn -- I'm sorry, Senior Manager of Investor Relations, Carlynn Finn. Please go ahead.

Carlynn Finn

Thank you, and good morning. Joining me on today's call are John Murray, President; and Mark Kleifges, Chief Financial Officer. John and Mark will make a short presentation, which will be followed by a question-and-answer session.

The recording and retransmission of today's call is strictly prohibited without the prior written consent of HPT. Before we begin, today's call, I'd like to read our Safe Harbor statement and set some ground rules concerning certain questions. 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, 2013. 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 within the Securities and Exchange Commission or SEC. In addition, this call may contain non-GAAP financial measures, including normalized funds from operation or normalized FFO. A reconciliation of normalized FFO and adjusted EBITDA to net income, as well as components to calculate AFFO, CAB or FAD 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 containing factors that could cause those differences is contained in our Form 10-K filed with the SEC and in our Q4 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.

Before I turn the call over to John and Mark, you should be aware that TravelCenters of America has not yet completed its year end reporting and accordingly, the company's remarks today will not referred to TA's fourth quarter or full year 2012 results, and we will be unable to take questions related to TA's fourth quarter or full year 2012 performance.

Now I'd like to turn the call over to John Murray.

John G. Murray

Thank you, Carlynn. Good morning, and welcome to our fourth quarter 2012 earnings call. At the outset, I'd like to apologize for changing our call from Wednesday to today. Appreciate you joining us.

Today, HPT reported fourth quarter normalized FFO of $0.76 per share. As Carlynn mentioned, we are not yet able to update you on TA's performance for the fourth quarter or full year. Because TA is considered an accelerated filer under SEC reporting rules, it has until March 15 to report. As you may recall, TA's performance was very strong through the first 3 quarters of 2012, with EBITDA up $16.9 million or 8% year-over-year. Year-to-date through September, TA's business had reflected modest declines in fuel volumes due to the slow growth economy, driver conservation efforts and fuel and renovations. But the negative effect of the volume declines was more than offset by strong per gallon diesel margins. As a result, TA's fuel margins had increased almost 10% year-to-date through September compared to 2011. Nonfuel revenues and gross margin were up 5.9% and 3.1% respectively year-to-date through September compared to 2011.

Focusing on HPT's hotel investments, our fourth quarter was negatively impacted by 33 hotels that were being renovated, causing rooms to be out of service. Also, although Wyndham and Sonesta have been working to gain back occupancy and rate at their rebranded hotels, the rebranding has continued to negatively impact our RevPAR performance.

RevPAR growth for our 214 comparable hotels not under renovation and not rebranded in 2012 increased 8.4%, the result of a 1.5 percentage point increase in occupancy to 68.8% and a 6.1% increase in ADR to $101. Our expectation is that operations will not fully stabilize at the rebranded hotels until after renovations are completed in 2013 and early 2014. Please remember these rebranded hotels account for only about 9% of HPT's minimum returns, and we have credit support for the Wyndham branded component of that.

We expect 43 hotels will be under renovation during all or part of the first quarter, and 39 in the second quarter of 2013. Renovation activity is expected to continue throughout 2013 principally at our Sonesta and Wyndham Hotels, but also to a lesser extent in our Marriott 234 and IHG portfolios. Also during the second half of 2013, a greater percentage of the hotels being renovated will be large or full-service hotels, so the impact of renovations will continue to be significant throughout 2013. We have tried to schedule renovation projects for periods when they may create the least disruption to our hotel performance.

Our manager's 2013 RevPAR forecast for our hotels are generally in the 5% to 7% increase range, with Sonesta expecting flat results -- flat RevPAR due to renovation activity and IHG expecting growth from the teams following substantial completion of renovations. GOP margin percentage increases are generally forecast to be in the 100 and 200 basis point improvement range, but the Wyndham and IHG portfolios are more than twice the high end of that range. On average across the hotel portfolio, GOP margin percentages are expected to increase by 310 basis points. These may sound like lofty expectations given the soft RevPAR and margin performance during most of the renovation and conversion wave [ph] in 2012. However, hotels renovated in 2011 and in the first 3 quarters of 2012 had fourth quarter RevPAR and gross margin percentage growth of 8.1% and 330 basis points and 12.5% and 430 basis points, respectively. In addition, in January of 2013, our comparable hotels, excluding the 30 under renovation, grew RevPAR 11.7% and excluding renovations and conversion hotels, grew RevPAR by 16.2%. There is modest optimism about the lodging cycle due to continued room supply growth and steady demand. This allows for increases in room rates and expansion of GOP margins, particularly as we move towards a fully renovated hotel portfolio.

In terms of acquisitions, on November 1, 2012, we closed on the acquisition of the 348 room Hotel 71 in Chicago for $85 million, which we discussed on our third quarter call. It was added to our Wyndham portfolio management agreement. On December 19, 2012, we acquired the leased fee interest in the 372 room Clift Hotel in San Francisco for $120 million. The Clift is long-term leased to Morgans Hotel Group under a triple net lease that runs to 2103.

Current rent is approximately $6 million annually and there are CPI-based increases every 5 years subject to certain limits. The next scheduled rent increase is in 2014 when rent will increase by a minimum of 20% and a maximum of 40%. Well known for its classic elegance since its development in 1915, the Clift Hotel is a luxury 372 room lifestyle hotel in the Union Square section of San Francisco.

On January 17, we signed a purchase agreement to buy the 426 room Atlanta Marriott Gwinnett Place for $31 million. We are currently in the midst of completing our diligence procedures. Assuming the acquisition closes, it is our plan to rebrand this hotel as the Sonesta Gwinnett Place and combine this hotel with the existing 20 hotel Sonesta portfolio.

On Wednesday of this week, HPT announced it reached agreement on a letter of intent with NH Hotels of Spain for hotel investments in Latin America, Europe and New York, totaling approximately $375 million. There are 3 components to the terms outlined in the letter of intent, including the purchase of 5 hotels in Latin America from NH for $70 million, the mortgage financing of 4 NH owned and managed hotels in Europe for EUR 170 million and a joint venture to acquire and renovate a hotel in New York for up to $80 million. The Latin American hotels are located in Mexico, Chile, Uruguay and Colombia. European hotels are in Spain, Belgium and The Netherlands. The New York hotel is located in Midtown on Madison Avenue. HPT's minimum return in Latin America and interest rate on the European mortgage loans is 10% of its investment, it's return in New York is 8%. NH Hotels will continue to manage the hotels in Europe and Latin America and Sonesta and NH will jointly brand and operate the New York hotel. We have agreed to a letter of intent. The binding and transaction agreements remain to be negotiated and the entire transaction is subject to diligence. Assuming these steps are completed without issue, the closing of the 3 components are expected to occur later in 2013. We are hopeful this becomes a long term strategic relationship that enables us to enhance our growth, especially in South and North America.

We continue to see a healthy pipeline of hotel acquisition opportunities and are looking at both single property transactions and portfolios. We face a competitive landscape with other REITs and institutional investors also seeking acquisitions, but we're optimistic that we will continue to generate steady acquisition growth to our existing and new portfolio relationships in 2013. We're also optimistic about anticipated 2013 operating results as a large and growing number of renovations are completed at our hotels.

I'll now turn the presentation over to Mark to provide further detail on our financial results.

Mark Lawrence Kleifges

Thanks, John. In the fourth quarter, operating results for our hotel properties continued to be negatively affected by our renovation and rebranding efforts. As John discussed, we had 33 of our hotels under renovation for all or part of the fourth quarter. In addition, results of the 39 hotels we rebranded during 2012 were down substantially versus last year's fourth quarter.

During the fourth quarter, revenues at our 214 comparable hotels not under renovation and not rebranded during the year were up 8.4% versus the prior-year quarter on strong ADR growth. On the other hand, we experienced quarter-over-quarter declines in revenue of 1.9% at hotels under renovation during the quarter and 17.8% at hotels rebranded during 2012. These declines were largely the result of lower occupancy. Our portfolios with the highest revenue growth this quarter, were our Carlson and Marriott No. 1 portfolios, with quarter-over-quarter revenue increases of 11.3% and 10.2% respectively.

Although our renovation and rebranding activities also had a negative impact on hotel profitability this quarter, the positive results of recently renovated hotels more than offset these declines. Gross operating profit for our 285 comparable hotels was up $5.8 million or 5.5% quarter-over-quarter, and GOP margin percentage increased 80 basis points to 35%. Results were much stronger at our comparable hotels not under renovation during the quarter or rebranded during 2012, with gross operating profit up $15 million or 18.4% for the quarter and GOP margin percentage up 340 basis points to 41.3%.

Turning to 2012 fourth quarter coverage of our minimum returns and rents. Despite the impact of our renovation and rebranding activities, cash flow available to pay our minimum returns and rents increased approximately $7 million or 10.4% from the 2011 fourth quarter. Our Marriott 234 and IHG portfolios had fourth quarter coverage of 0.87x and 0.73x, respectively. During the fourth quarter, Marriot advanced $4.9 million under its guarantee resulting in a remaining balance of $26 million at year end. During the quarter, we utilized $11.9 million of the IHG security deposit to cover cash flow shortfalls, resulting in an available security deposit balance of $26.5 million at the end of the quarter. Information regarding all of our security deposit and guaranteed balances at quarter end is included in our Form 10-K, which will be filed later today.

At year end, our lease with Host for our Marriott No. 1 portfolio expired, and effective January 1, these hotels are managed by Marriott under a combined management agreement. The agreement does not provide credit support. As a result, payment of our minimum returns going forward will be solely dependent on hotel cash flow and will also be impacted by seasonality. Our minimum return under the management agreement is the same amount as minimum rent was under the lease. The portfolio did have 1x coverage in 2012, and therefore, this change is not expected to have a material impact on our 2013 operating results.

Turning to HPT's consolidated operating results for the fourth quarter, this morning, we reported normalized FFO of $93.9 million or $0.76 per share. This compares to fourth quarter 2011 normalized FFO of $96.8 million or $0.78 per share. The decline in normalized FFO from the 2011 quarter is due primarily to the temporary elimination of the FF&E reserve for our Marriott agreement and lower returns earned from certain of our hotels that were rebranded during 2012. These declines were partially offset by increased minimum returns and rents resulting from our funding of capital improvements to our hotels and TravelCenters, the impact of our 2012 acquisitions and lower income tax expense.

Adjusted EBITDA was $134.1 million in the fourth quarter, and our adjusted EBITDA to total fixed charges coverage ratio for the quarter remains strong at 3.2x. We paid a $0.47 per share dividend in the quarter and our normalized FFO payout ratio was 62%.

On the renovation front, I'd like to provide an update on where HPT stands at the end of the year with its capital funding commitments and liquidity. We have agreed to fund up to $123 million for renovations to the 68 hotels in our Marriott 234 agreement. As of the end of 2012, we have funded $78 million, and we expect to fund the remaining $45 million in 2013. We have agreed to fund up to $290 million for renovations to the 91 hotels in our InterContinental agreement. As of the end of 2012, we have funded $213 million and we expect to fund the remaining $77 million in 2013. We have agreed to fund up to $93 million for renovations to the 21 hotels in our Wyndham agreement. As of the end of 2012, we have funded $9 million, and we expect to fund the remaining $84 million in 2013.

We have also agreed to fund up to $195 million for renovations to the 20 hotels included in our Sonesta No. 1 agreement. As of the end of 2012, we have funded $11 million. We expect to fund $127 million in 2013, and the balance in the first half of 2014.

Finally, we funded $77 million for improvements to our TravelCenters in 2012. We expect to fund approximately $80 million for improvements in 2013.

With respect to our balance sheet and liquidity, at quarter end, we had cash of approximately $20 million, which excludes $41 million of cash escrowed for improvements to our hotels and had $430 million available under our $750 million revolving credit facility to fund our capital commitments and future acquisitions.

In closing, we remain optimistic about the prospect of continued strong operating results at our TravelCenters, as well as the positive impact our extensive renovation program will have on the long-term performance of our hotels.

Operator, we are ready to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jeff Donnelly from Wells Fargo.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

A few questions on the NH transaction you guys did. Is the decision to invest more aggressively, I guess, outside the U.S., a sign that you feel that asset prices in the U.S. are no longer as attractive as they maybe once were for investment?

John G. Murray

Well, first I want to say that it's just a letter of intent. We haven't documented the deal or closed any part of it. So there's a lot of diligence and work to be done. But it's not a sign that we're losing faith or unhappy with pricing in the U.S. We've bought -- in the fourth quarter, we bought a couple of hotels in Chicago and San Francisco and agreed to buy one in the Atlanta area. So we're finding hotels that we think are attractively priced here. But we think there are opportunities to establish strategic relationships with other companies and so that paved the way for enhanced growth opportunities down the road. So we think the NH opportunity gives us some growth here with the joint venture in New York, but also opportunities in Latin America and possibly Europe going forward.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Yes, I recognize that these aren't closed, but just as it relates to the loan that you contemplate on the European hotels. Can you talk about -- or are you able to talk about what the agreed values on the hotels and maybe what their earnings performance is? Because I'm just trying to understand how that EUR 170 million loan pencils out on, maybe like, a loan-to-value or debt yield basis.

John G. Murray

Yes. Right now we're in the diligence period, and we are subject to confidentiality agreement so unfortunately I can't talk about those sort of metrics at this point. Once we hopefully get through the documentation and close, then we will be able to provide full disclosure of that sort of information.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Because like you said you have mentioned getting a little more active on acquisitions in the fourth quarter. If -- does that leave you to think, I guess, if there'll be activities in picking up -- we've been hearing this from brokers out there, does that lead you to think you might end up revisiting -- bringing some of the noncore assets that you had contemplated in selling in 2011 back to a market as we move through 2013 you will begin to finish up some renovations?

John G. Murray

Right now, we're not contemplating bringing any hotels to the market. The ones that we had on the market that were Marriott-branded properties, we've -- we're in the throes of renovating. We were expecting -- we've seen some pretty good post renovation growth coming out of the hotels we have renovated, and we're expecting to see the same out of those 18 hotels. So it's not our plan at this juncture to look to sell anything.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

And just -- and one last question. I know -- I recognize this pertains to a -- I guess I'll call it a sister company, but given the corporate action that you've given to reading about it, at Commonwealth, they are the, I guess, one scenario out of many where the board at Commonwealth could be compelled to explore alternatives to avoid their own legal risk. I know this doesn't involve HPT directly, but have you guys considered that maybe an outcome on that side could have implications on governance for HPT down the road or is it too premature to make those sort of decisions?

John G. Murray

I don't really want to comment on that whole chain of events that transpired this week with one of our affiliates. I would just say that we think we have good corporate governance at HPT, and we're not at all fearful of challenges to it.

Operator

Our next question comes from the line of David Loeb.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

A few kind of follow-up to Jeff's questions. John, given that you're only in letter of intent and you're not willing to talk about too much detail about the NHH deal, why did you announce it? Was NHH going to announce it anyway?

John G. Murray

Yes. So our agreement with them is part of a larger series out transactions for NH. In particular NH reached agreement with a Chinese company that's in the airline and tourism business called HNA. And HNA Group was making a 20% investment in the equity of NH. So the combination of the HNA transaction and the HPT transaction taken together is relatively transformative for NH at this stage, and they needed to make an announcement. So we were concerned that if they announced our deal, there will be selective disclosure. So typically we would not have announced this transaction. We would have agreed to a letter of intent and then worked on our diligence and the documentation, and then announced it was once we had a binding agreement. But because NH had to announce, we felt compelled to do so as well. That's principally the reason why our conference call was delayed a couple of days.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

We knew there had to be some good reason even if you couldn't tell us then what it was. If you can't talk about the specifics of the deal, can you talk a little bit about what your return hurdles are in different scenarios and how you balance return hurdles and credit corporate support?

John G. Murray

Well, I think I mentioned in the remarks that the returns in Latin America and Europe are expected to be 10%. The returns in New York expected to be 8%. When you do business outside of the U.S., there are taxes that you have to consider and foreign-currency issues. We think that we've found ways to mitigate those, so that our returns on this transaction will be as good as the returns we're getting on other transactions. But I guess I'm reluctant to go further than that at this point.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

I won't get any more out of you about risk or credit or I think that side of the equation.

Mark Lawrence Kleifges

We'll be willing to talk in much greater depth on this transaction once it's -- if and when it becomes final.

John G. Murray

I would say that these are all -- all of these hotels are in the capital cities of the countries where they're located with the exception of one hotel in Mexico, which is in a market that's sort of like maybe their Houston. It's where their largest state-owned petrochemical company PEMEX is based. It's a major port city, and so we think that all of these locations are very strong locations.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

Okay. Just kind of a broader general question. Mark, you mentioned you had ample room on the line to fund upcoming transactions and CapEx. The recent and future acquisitions alone, assuming you close, were on the order of, I guess, $0.5 billion, $526 million. Is your intention to fund all of that on the line, or do you have a different idea about long-term funding? And kind of the follow-up on that is, what's the impact that all of this would have on your distribution requirement and on the dividend?

Mark Lawrence Kleifges

There's a few questions in there. Let's, I guess, step back first and kind of look at where we are from a commitment standpoint. As I outlined in my prepared remarks, we have about $450 million of funding requirements this year under our hotel and TA agreements. We've also got the $31 million Gwinnett Marriott acquisition. So I guess firm commitments there 400 -- call it $445 million. And we have the possible NH transaction for $375 million. So that brings us to total possible commitments of about $820 million. As we disclosed in the press release, the $170 million euro loan would be funded with a euro borrowing by us. So that takes call it $225 million of the $820 million off the table and leaves us with $595 million. Let's say we generate $95 million of cash flow during -- free cash flow during the year. That leaves us with $0.5 billion of funding. We've got $430 million available under the revolver at the end of the year. So under that scenario we're short. So I think it's pretty clear net aspect that we're going to have to go and visit the capital markets at some point during 2013. If you look at our balance sheet and leverage, at year end, we're at about a 50% debt to total book capitalization, which is the high end of where we like to operate the company. We like to be in that 40% to 50% debt to total book capitalization. So I think it's fair to say that we'll, in all likelihood, assuming the NH transaction takes place, but during 2013 we'll be accessing both the debt and most likely the equity markets.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

So that could be common or preferred or you really mean common?

Mark Lawrence Kleifges

It could be either.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

Okay, and impact on the dividend?

Mark Lawrence Kleifges

Yes, in terms of our distribution requirements, we haven't worked through all that yet. We have at, I think coming into the year, we have some cushion on our payout requirements. So I don't think that the tax side of it will drive our need to make distributions. However, we are in the business of making distributions. So our board will continue to evaluate the distribution level each quarter and as our renovation activity gets closer to its end game and if we continue with our successful acquisition pace, then dividend increase would be something I could see then considering.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

But does seem like if you did the NH transaction, that's a big increment to taxable income. Am I missing something on that? Is there a disproportionate...

Mark Lawrence Kleifges

No, it is. Just it's -- we always evaluate the ability to make a distribution based on cash flow, right? And the tax requirements are based on taxable income where you get the large benefit in the real estate industry of depreciation. So just because you're earning a lot of money doesn't mean you're creating a lot of taxable income if you structure things right.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

Okay, and one final question, maybe more for John. On the RevPAR response to the rebranding in the fourth quarter, what do you think the prospects are once those assets stabilize? Do you think you grow some of that back or are these just -- are the new brands just different RevPAR kinds of hotels?

John G. Murray

Our current expectation is we grow it back. They're heading in that direction. They have a ways to go. But that is our definite expectation is the thing. You grow back to where they were before they were rebranded and then continue to grow from there. And I'm optimistic that, that will happen.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

You think that's a 1 year trend or does that take a couple of years?

John G. Murray

I think it takes a couple because most of the hotels are going to be under renovation for a decent part of this year. Some of them -- some of the full-service hotels for both Wyndham and Sonesta will be renovated towards the end of this year or beginning of 2014. And then there'll be a ramp up period after that. So obviously, Wyndham is a stronger, better-known brand, so I would expect that their pace would be a little bit faster than Sonesta's, which is a smaller, perhaps less well known brand today.

Operator

Our next question comes from the line of Ryan Meliker.

Ryan Meliker - MLV & Co LLC, Research Division

Just, I guess, a quick question, a little bit of a follow-up for what David had mentioned. And Mark, you indicated that you might have to tap into the capital markets at some point this year just with your leverage levels at the high end of the current range. Can you give us an idea of a, where you're comfortable or where you'd like to see that level be at the -- after you tap into the capital markets. And then, b, if there are more acquisition opportunities that maybe when you tap into the capital markets you might want to build in some, I guess, some buffer into that level just to give us an idea of what we could be expecting throughout the course of the year.

John G. Murray

Yes. Well, I guess, first off, I'd say that we're in no -- we don't have a gun to our head to do anything in the near-term given what we have available to us under the revolver today. And as I've said, I think many times in the past, we like to operate the company with debt to total book capitalization between 40% and 50%. Where we end up within that range is going to be influenced by the strength of the capital markets themselves, our view of where the capital markets are going in the near-term, as well as what we think the horizon looks like in terms of additional acquisition opportunities. So I can't -- I'm not really in a position here to lock in to where we want to end up 2013 except to say within that range of 40% to 50%. I think if you go back in time, we've been pretty consistent at running the company along those metrics.

Ryan Meliker - MLV & Co LLC, Research Division

Sure. I guess, what I'm trying to get at is, are you guys more inclined to do one large equity raise or maybe do one equity raise near-term to get you to within the range that you're looking for if these acquisitions close, but then be forced to do more equity raises if you guys do move forward with more acquisitions?

John G. Murray

Ryan, I think decisions -- capital -- decisions on capital market transactions are driven by the facts at the time you decide to execute on one, and whether there even is an equity offering is something that will be determined down the line.

Ryan Meliker - MLV & Co LLC, Research Division

Okay, fair enough. And then the second question I apologize if I missed this, but it sounded like you said that the Clift Hotel was a $6 million lease payment that will have CPI step ups. That seems to be on the $120 million acquisition price of 5% yield on your investment. What's going to get that to your target investment hurdles that, I guess, you look at? I'm assuming 5% is way below what you guys are looking at certainly given your cost of equity.

John G. Murray

That is a return that's gotten below where we would like it to be, but there are built in adjustments to the rental rates, and in particular in 2014, there'll be a minimum increase of at least 20%, which will move the return closer to -- from 5% to 6%, and then there'll be subsequent increases after that. We feel like it's a good investment in terms of cost per key, and it's a good investment in a very strong market in San Francisco. And we think we've added an attractive price and with interest rates low, we're willing to go a little bit below our normal hurdle rates to get a hotel of this quality. And we think that it's being well operated by Morgans today.

Ryan Meliker - MLV & Co LLC, Research Division

I guess you mentioned it going up from a 5% -- a 5% yield to a 6% yield, but still seems drastically below what you're generally looking at from a yield perspective and certainly where your cost of equity is. I understand that it can be an attractive market, and it can be a good deal, I guess, so to speak, but at the same time if your cost to fund outweighs your yield on those funds, I question how you guys think about whether that's a prudent investment for your shareholders and if you're going to be doing anything, that will get that yield higher than the 5% to 6% that we just talked about.

John G. Murray

We think that -- we take a long-term view of acquisitions and we expect that interest rates are going to be very low for the next couple, few years. We think that the returns on this hotel are going to grow and over the longer haul, it's going to have more impressive returns than what you're seeing today. What happens with the hotel going forward and what changes may occur will just be a matter of subjectiveness. Right now the hotel's triple net lease for a long-term to Morgans Hotel Group and they are current in their rent payments. And unless that changes, there isn't that much that we're going to do to change what's happening there.

Ryan Meliker - MLV & Co LLC, Research Division

Okay, but if they weren't current in the rent payments at some point in time, you might be interested in choosing another path to that property?

John G. Murray

I think it's a very attractive hotel on a good location and that if there was ever a default that we would have various options without -- I don't have much doubt about that.

Operator

Our next question comes from the line of Will Marks.

William C. Marks - JMP Securities LLC, Research Division

Just had some broad operating questions. I guess first, I know you don't give guidance, but any thoughts it seems like the range is kind of 5% to 7% for the industry and do you concur with that and will your redevelopments cause much good disparity from that?

John G. Murray

As I mentioned, most of our operators have come in, in the 5% to 7% range, and we're very comfortable with those ranges. I think if you ask me if I thought they were likely to come in towards the higher end or lower end, I think I would probably say that we expect that they might be more -- if they miss, they'll miss towards the higher end because, for instance, IHG is expected to be much higher up in the teens for RevPAR growth. The only portfolio that is below that sort of 5% to 7% range is on the Sonesta brands where virtually every one of their hotels will be under renovation during 2013. So they're expecting across the portfolio flat RevPAR. But otherwise, we're pretty optimistic. As I mentioned, our January RevPAR growth has been very, very strong at hotels that have been renovated and those that haven't been rebranded. So we feel pretty good about where our number is going to come out this coming year. None of us have a crystal ball. So obviously there's changes going on in Washington and there's budget cuts happening. And so that may have some modest impact on performance, but because of the renovations and because of low supply growth and because the economy continues to chug along, which we expect will continue, we're optimistic.

William C. Marks - JMP Securities LLC, Research Division

And where do these type of ranges put your coverage?

John G. Murray

We're expecting RevPAR to increase and margins to increase, so we're expecting a couple of years for it to improve. I don't -- we don't typically provide guidance on where we expect coverage to come out.

Mark Lawrence Kleifges

But our expectation is that we'd see, despite the continued renovation disruptions, that we'd see improved coverage across all of our portfolios in 2013.

Operator

[Operator Instructions] Our next question comes from the line of Bryan Maher.

Bryan A. Maher - Craig-Hallum Capital Group LLC, Research Division

I think you might have answered my question earlier on, but I wanted to talk a little bit about TA and with what they're doing there seeking out underperforming possibly distressed truck stops that they can renovate, reposition, rebrand as TA and get the EBITDA of those properties up as they build out their portfolio. So my question would be to you, as they do that, is there any interest on HPT's part to buy one or a basket of more mature, stabilized truck stops that TA has acquired on their own going forward, or do you think that you're pretty filled out on the acquisition front on the hotel side?

John G. Murray

Our primary focus is on hotel acquisitions. However, if TA were to come to us with one or more mature TravelCenters that they had ramped up and that had proven cash flows, we would not be against acquiring those and adding those properties to existing leases or a new lease. But it's not really our focus right now. The properties that TA has bought as you mentioned have been sort of underperforming turnaround opportunities, and -- so they've got some work to do before that would become an issue for us.

Bryan A. Maher - Craig-Hallum Capital Group LLC, Research Division

Okay, and then secondarily, just on the NH Hotels deal, can you tell us how that deal kind of came about? Did they approach you? Did you approach them? Was it a broker deal?

John G. Murray

It came about over a long period of time and there have been bankers involved at various points. But I think that, if I remember back, that we approached them.

Operator

There are no further questions in the queue. I'd now like to turn the call back over to John Murray. Please go ahead.

John G. Murray

Thank you, all, very much for joining us today and again I apologize for moving the date on you, but appreciate you being with us.

Operator

That does conclude our conference for today. Thank you for your participation and using AT&T Executive Teleconference service. You may now disconnect.

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