Hospitality Properties Trust (NYSE:HPT)
Q4 2013 Earnings Conference Call
February 25, 2014, 01:00 PM ET
Katie Strohacker - Director, Investor Relations
John Murray - President and Chief Operating Officer
Mark Kleifges - Treasurer and Chief Financial Officer
Wes Golladay - RBC
Ryan Meliker - MLV & Company
Ladies and gentlemen, good day and welcome to the Hospitality Properties Trust fourth quarter 2013 financial results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Katie Strohacker. Please go ahead.
Thanks, Lisa, and good afternoon, everyone. 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.
As a reminder, the recording, retransmission and transcription of today's conference call is prohibited without the prior written consent of HPT.
Before we begin, I would like to read our Safe Harbor statement. 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, February 25, 2014. 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 HPT's website at www.hptreit.com. Actual results may differ materially from those projected in these forward-looking statements.
Additional information concerning factors that could cause these differences is contained in our Form 10-K to be filed Thursday with the SEC and in our supplemental operating and financial data found on our website. Investors are cautioned not to place undue reliance upon any forward-looking statements.
Finally, before I turn the call over to John and Mark, you should know that Travel Centers of America have not completed its yearend reporting and accordingly our remarks today will not refer to TA's fourth quarter or full year 2013 results, and we will not responding questions related to TA's fourth quarter or full year 2013 performance.
And now, I would like to turn the call over to John Murray.
Thank you, Katie. Good afternoon and welcome to our fourth quarter 2013 earnings call. Today, HPT reported fourth quarter normalized FFO of $0.71 per share. As Katie noted, we are not yet able to update you on TA's performance for the fourth quarter and full year, because they've not yet reported their results.
As you may recall, TA's performance improved during the first three quarters of 2013, with EBITDA of $4 million or approximately 2% year-over-year. Year-to-date through September, TA's business reflected modest declines in fuel volume, due to a steady pace of economic recovery in the U.S. conservation efforts and a changing customer mix.
These declines were more than offset by improved per gallon diesel margins. As a result, TA's fuel gross margin had increased 3.4% year-to-date through September compared to 2012. Non-fuel revenues and gross margin were up 7.9% and 7% respectively, year-to-date through September compared to 2012.
TA has managed through a difficult recession, changing business inventory and shipping strategies and conversation efforts by its customers. We believe TA is well-positioned for growth and will remain a leader in its industry.
Turning to HPT's hotel investments. Fourth quarter RevPAR was up 7.9% across HPT's 287 comparable hotels. Ongoing hotel renovations continue to impact our results. Excluding non-comparable hotels and the 25 hotels under renovation during the quarter, RevPAR was up 8.9% this quarter.
The strong topline performance, which was comprised of both occupancy and rate gains reflect strong results at the 196 hotels that completed renovations from 2011 through the third quarter of 2013, with RevPAR gains of 11.2%. This helped offset performance at our 25 renovation hotels this quarter, which experienced RevPAR declines of 3.1%, all from lost occupancy. 23 of the 25 comparable hotels under renovation this quarter were Wyndham and Sonesta conversion hotels.
Our hotels were negatively affected this quarter by reduced government business, including the impact of the October government shutdown with the measurable impact focused in specific regions, primarily in Washington D.C., Maryland and Virginia. We estimate the negative impact of our Virginia hotels alone reduced that total portfolio RevPAR by approximately 0.50%.
We also experienced difficult comparisons in the Mid-Atlantic states from non-repeat Superstorm Sandy business, and we estimate the negative impact of this on our total portfolio is approximately 1% in the fourth quarter. On the positive side, we continue to see strong performance in the West and Southwest, particularly in San Francisco and Houston.
Once again, HPT's hotel performance post-renovation offset the effects of ongoing renovation activity and allowed our portfolio to exceed industry average RevPAR performance. The strong performance has been driven largely by our Candlewood Suites and Staybridge Suites extended stay hotels and SpringHill Suites, InterContinental, Crowne Plaza Hotels and the Clift Hotel in San Fransico.
HPT's 140 comparable non-renovation extended stay hotels grew RevPAR by 10.3% in the fourth quarter of 2013 compared to 2012. Our 28 comparable non-renovation full-service hotels grew RevPAR 11.7% this quarter over last year's quarter. Our 94 comparable non-renovation select service hotels grew RevPAR 5.1% this quarter, in line with industry average.
While our extensive portfolio renovation program has begun to wind down, we expect 27 hotels will be under renovation during the first quarter and 21 in the second quarter of 2014. Renovation activity in 2014 will be principally at our Sonesta and Wyndham hotels.
Looking forward to 2014, our operators are generally optimistic about the year ahead, as high occupancies and continued steady demand are expected to allow strong rate growth. Supply growth, while picking up, remains below historic average levels.
Hotels along the West and East Coast are expected to lead the way, especially those in an around top-25 markets. In addition, most of the hotels in our portfolio will have been significantly renovated, so our product quality is very good as we head into 2014.
2000 RevPAR forecast versus 2013 for our hotel portfolios vary quite a bit by portfolio. However, across our 291 hotels, including 31 hotels expected to be renovated in 2014, our managers are budgeting an average RevPAR increase of between 6% and 7% due to renovated hotels, continued U.S. economic growth and aggressive revenue management.
Similarly, budgeted GOP margin changes varied by portfolio, but the average expected GOP margin percentage increase is between 150 basis points and 200 basis points to an average of approximately 38% across the portfolio. These results are based on intensive asset management, manage our cost control and continued monitoring of amended decree.
We are off to a good start. So far in 2014, as January RevPAR was up an average of 8.1% across HPT's 291 hotels, with our IHT portfolio in particular performing exceptionally well.
As we've mentioned before, in September, we agreed to acquire a 223 room full service hotels in Orlando for $21 million. The hotel is on the property adjacent to the Sonesta ES Suites Hotel, HPT owns in Orlando, and we plan to convert this hotel to a Sonesta Hotel and add it to our portfolio agreement. This acquisition remains in due diligence, while the seller completes certain capital expenditures. Currently, expectations are that we will close on this acquisition during the second quarter of 2014.
We continue to see healthy pipeline of hotel acquisition opportunities. We face competition for acquisitions from private equity investors, other REITs and institutional investors, but we expect to continue to generate accretive acquisition growth. However, we will maintain our discipline.
When we acquire select service assets, we try to do so in a portfolio contract format with all non-renewals, pooled FF&E reserves and subordinated management fees. When we look at full service hotels, we require one-off hotels, if they can be added to existing portfolios.
We remain optimistic about this lodging cycle due to low-to-moderate room supply growth and steady demand. This allows for increases in room rates and GOP improvement, particularly as we continue to move towards a fully-renovated hotel portfolio.
This in turn creates confidence to increase our dividend, which we did in October. Our management and trustees will continue to evaluate the dividend rate on a quarterly basis.
Before I turn the call over to Mark, I wanted to update you on our recent governance change at HPT. Last quarter, we discussed proposed changes to our management agreement with Reit Management & Research that have been completed and became effective in January 1, 2014. We believe these changes further align management's financial interest with those of our shareholders.
The changes include, first, we are now paying the base management fee on the lower of our historic property cost or HPT's total market capitalization. Previously, the base management fee was determined by historic property cost alone. Second, we are now paying 10% of the base management fee to RMR in common shares, instead of 100% in cash.
And third, we are now calculating our margin incentive management fee based upon the relative outperformance of HPT's total return as compared to the total return of the SNL REIT Hotel Index, instead of the growth of HPT's cash available for distribution per share.
The incentive management fee will be measured on a rolling three-year period, and no fee will be paid, if the total return per share of HPT is negative. If earned, the incentive fee will be paid entirely in HPT shares at best ratably over three years and the shares are subject to a clawback in event on a financial restatement.
I'll now turn the call over to Mark.
Thanks, John. First, let's review fourth quarter operating results for our hotel properties. Operating results at our 287 comparable hotels were strong this quarter, with RevPAR up 7.9% and a 340 basis point increase in GOP margin percentage.
Hotel operations were impacted by renovations again this quarter. 25 of our comparable hotels and one non-comp hotel were under renovation for all or part of the current quarter compared to 33 comparable hotels in the prior-year quarter.
RevPAR at our 262 comparable hotels, not under renovation this quarter, was up 8.9% versus the prior-year quarter on a 4.4 percentage point increase in occupancy and ADR growth of 2.1%. This RevPAR outperformance was driven in part by the 33 hotels that were under renovation during the 2012 fourth quarter, with RevPAR at these hotels of 25.2% in the current quarter on occupancy and ADR gains of 12.5 points and 3.2%, respectively.
Our portfolios with the highest RevPAR growth this quarter were our IHG and Marriott 234 portfolios, with increases of 17% and 7.3%, respectively, versus the prior year quarter.
Although our renovation activities had a negative impact on hotel profitability this quarter, these declines were more than offset by the strong performance of our other hotels. Gross operating profit for our 287 comparable hotels increased $17.9 million or approximately 18% from the 2012 quarter and GOP margin percentage increased 340 basis points to 35.6%.
As has been the case all year, performance of our InterContinental portfolio was outstanding this quarter, with gross operating profit up almost 31% and GOP margin percentage up 470 basis points versus the 2012 quarter.
Turning to 2013 fourth quarter coverage. Cash flow available to pay our minimum returns and rents this quarter increased $14.6 million or approximately 21% from the 2012 quarter. As a result of this growth, portfolio-wide coverage for our hotels this quarter increased to 0.75x compared to 0.64x in the 2012 quarter.
For the year, hotel cash flow available to pay our minimum returns and rents increased $46.7 million or approximately 14% from the prior year. As a result, trailing 12-month coverage improved in 2013 versus 2012 for six of our nine agreements. In addition, coverage exceeded 1x for two of our agreements in 2013 and these portfolios include approximately half of our 291 hotels. Information regarding all of our security deposits and guaranteed balances at quarter-end is included in our Q4 supplementals.
Turning to our travel center portfolio. As Katie and John have already noted TA has not yet reported its fourth quarter results, so we can only discuss results through the third quarter. Property-level EBITDAR through the third quarter at our travel centers was down 3.1% from the 2012 period due primarily to lower fuel volumes.
However, property-level rent coverage remains strong at 1.6x for both our TA centers and Petro centers. Year-to-date, for the 2013 third quarter, TA generated EBITDAR of $231.4 million or 1.8% increase from the 2012 period. TA's EBITDAR coverage of cash rents and interest was 1.31x for the nine months ended September 30, 2013.
Turning to HPT's consolidated operating results for the fourth quarter. This morning, we reported normalized FFO of $103.3 million compared to normalized FFO of $93.9 million for the 2012 fourth quarter. The 10% increase in normalized FFO from the 2012 quarter is due primarily to increases in our annual minimum returns and rents that resulted from our hotel and travel center capital improvement fundings and the impact of our recent hotel acquisitions.
Fourth quarter 2013 normalized FFO per share of $0.71 was down from $0.76 for the 2012 fourth quarter due to a higher weighted average share count in the 2013 quarter. We paid a $0.48 per share of common dividend in the quarter, and our normalized FFO payout ratio was approximately 67%.
Adjusted EBITDA was a $145.7 million in the 2013 fourth quarter and our adjusted EBITDA to total fixed charges coverage ratio for the quarter remained strong at 3.4x and debt-to-adjusted EBITDA was only 4.6x at yearend.
Turning to our recent capital market activities. In November, we sold approximately 9.8 million common shares at a price of $28 per share, raising net proceeds of $262 million, which we used to repay borrowings on our revolving credit facility.
In January 2014, we amended our $1.15 billion unsecured credit facilities agreement, which includes our $750 million revolving credit facility and our $400 term loan. The amendment extended our revolving maturity date by almost three years till July 2018 and lowered its annual interest rate by 20 basis points.
It also extended the maturity date of our term-loan by approximately two years to April 2019 and reduced its annual interest rate by 25 basis points. Finally, in February 2014, we redeemed at par our $300 million of 7.875% senior notes due in August 2014.
Next, I'll provide an update on where HPT stands with its capital funding commitments and liquidity at yearend. Since we began our hotel renovation program in 2010, we have completed renovations at 231 hotels at a total cost of approximately $700 million.
The annual minimum returns and rents under our hotel operating agreements have increased by $58 million as a result of our funding of these renovations. Complete this program we expect to fund an additional $168 million in 2014 and $33 million in 2015 to renovate a total of 34 hotels. In addition to our hotel renovation fundings, we expect to fund approximately $80 million of improvements to our travel centers in 2014.
With respect to our balance sheet and liquidity, at yearend we had approximately $22.5 million of cash, which excludes $30.9 million of cash escrowed for improvements to our hotels. Our debt-to-total book capitalization at the end of the year was approximately 47% and we had no amounts outstanding under our $750 million revolving credit facility.
In closing, we remain optimistic about the prospects of continued improved operating results, including the positive impact our extensive renovation program is having on the performance of our hotels.
Operator, we are ready to open it up for questions.
(Operator Instructions) Our first question comes from the line of Wes Golladay from RBC.
Wes Golladay - RBC
Looking at the Wyndham portfolio, how do you see that playing out, the coverage with those assets in light of the renovations? When you think it will have a chance to get 1x coverage by the end of the year?
Well, as you mentioned, this past quarter most of the hotels in that portfolio were under renovation. And during this quarter, many of the hotels will be under renovation as well. So we expect to see a considerable amount of improvement as we go through 2014, but I think it's too early to say that we would hit 1x coverage. It's possible, but I wouldn't predict it at this point. Some of the renovations are going including RFP and alike.
Wes Golladay - RBC
And then, just looking at the overall portfolio, gives them again a pretty good large RevPAR gains mainly through the occupancy and I think you were talking about pushing the ADR gains for 2014. Do you think you get about two-thirds of your gains or is that too optimistic from ADR gains -- two-thirds of the RevPAR growth?
I think the hotels that have been renovated prior to 2013 you should expect about two-thirds of the growth to be coming from growth in rate. For the hotels that were renovated in 2013, they'll still be more heavy-weighting towards occupancy gains I think, so probably maybe 50-50.
Wes Golladay - RBC
And lastly, you mentioned the Sandy headwind in the fourth quarter. Will that persist into the first quarter?
Yes, it will. I think you'll see it taper-off. It shouldn't affect second and third quarter, but it will affect particularly for our Marriott 234, our Sonesta and I believe even our Hyatt portfolios were impacted by -- they had a quite a bit of business last year as a result of Superstorm Sandy.
We have a question from Ryan Meliker from MLV & Company.
Ryan Meliker - MLV & Company
Just a quick one on the dividend. Obviously, I know you guys announced a minor raise recently on the dividend, but with the CapEx program largely winding down, I know it's never over, but the majority of your major renovations in the rearview mirror by the back half of this year, how is the board going to think about the dividend? I mean, certainly from an AFFO standpoint, you've got a lot of coverage here. It seems like it would be an opportunity, there might be an opportunity to grow the dividend. Is the board thinking about it from that perspective or more focused on taxable income or some other metric?
Each quarter when we consider the dividend, we try to consider all the metrics. We look at what our capital needs are, what our cash needs are, what the alternative uses of available free cash are, where our tax situation and REIT compliance is, renovation needs, acquisition needs, we balance all those things. We also look at what the competitive landscape is in terms of dividend, rates and share prices. So there is a lot of factors that go into it.
Ryan, I think this year probably some of the shift and their focus will be more on how coverage is improving and how much more it's expected to improve in each of our operating agreements as well as monitoring how well we're able to grow some of our credit support. We had the ability under several of our operating agreements to replenish security deposits and guaranteed balances. And I think that will be an increasing focus of the board as they evaluate the dividend going forward.
Ryan Meliker - MLV & Company
I guess one of the reasons why I asked about that is, if I go back two or three years, your stock performance has been relatively flat. Obviously, you've given out nice dividends, so your investors are getting their returns. But now with the shift in terms of the management contracts and how RMR is going to get paid, does that incentivize you guys to raise the dividend a little bit more to maybe see the stock price perform a little bit better or does that incentivize the board, I guess in that regard, it's more them than you?
I don't think that corporate governance changes are going to materially affect the way we decide on what our dividend payment is going to be.
And there are no further questions at this time. I would like to turn that conference over to John Murray.
Thank you very much for joining us today. I'm not sure if any of you are going to be at the Wells Fargo Real Estate Conference tomorrow in New York, but we'll be presenting there. Thank you.
Thank you. That concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
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