Stephen Schafer – Vice President Investor Relations
Richard Smith – President, Chief Executive Officer
Andrew Welch – Executive Vice President, Chief Financial Officer
William Marks – JMP Securities
Susan Berlinger – J.P. Morgan
FelCor Lodging Trust Inc. (FCH) Q1 2010 Earnings Call May 4, 2010 12:00 PM ET
I would like to welcome everyone to FalCor’s first quarter earnings conference call. (Operator Instructions) Mr. Steve Schafer, you may begin your conference.
Good morning to everyone on the call. With me this morning are Rick Smith, President and CEO and Andy Welch, Executive Vice President and Chief Financial Officer. They will address the current operating environment, results for the quarter and our outlook. Following their remarks, we will take your questions.
Before I turn the call over to Rick, let me remind you that with the exception of historical information, the matters discussed on this conference call may include forward-looking statements within the meaning of the Federal Securities laws. Forward-looking statements are expressions of current expectations and are not guarantees of future performance. Numerous risks and uncertainties in the occurrence of future events could cause actual results to differ materially from those currently expected. These risks and uncertainties are described in FelCor’s filing with the Securities and Exchange Commission. Although we believe our current expectations to be based upon reasonable assumptions, we cannot assure you that our expectations will be attained or that actual results will not differ materially.
With that, I’ll turn it over to Rick.
Thanks, Steve. Good morning. Thank you for joining us for our call this morning. Well things have certainly begun to move in a much more positive direction earlier in the year than we expected. In the first quarter, we vastly exceeded our internal expectations.
We also exceeded consensus analyst expectations. Based on the analyst original estimates, we were $5 million better on EBITDA and $0.08 better on FFO per share. In our last month, the analysts took their number up. Based on the most recent numbers, we still performed better, up approximately $2 million in EBITDA and $0.04 in FFO per share. Our revenue was also significantly better than expected, down only half a percent during the quarter.
We continue to gain market share with a slight increase during the quarter. Given the substantial increases over the past two years, we knew maintaining the premiums in our markets was going to be a challenge, so we are very pleased with this increase.
We also had extremely good positive flow through to budget. Based on the incremental revenue to budget, the flow through to EBITDA was 63%. Considering that the increase in revenues was primarily due to occupancy, and some in F&B, this is exceptional. Thus, we significantly exceeded every metric that we look at and continue to operate the hotels at a very high level.
While the occupancy trends have improved significantly, demand has not yet reached the point globally where we can achieve significant mix change and push rates further on key days of the week. There are pockets where we have started to affect some change, but it will be some time before this happens portfolio wide.
Until this happens, our margins will be impacted from lower average rate and higher occupancy. However, we expect that rates will begin to come positive sometime in the second half of the year.
All market segments started trending up to budget and prior year in February with major positive movement in March. Importantly, group room nights increased 8% and corporate transient room nights increased 12% to prior year during March.
Overall, for the quarter, group increased 1% and transient 10% with corporate transient up 7% all to prior year. While our highest rated corporate segment was still down to prior year, the decrease diminished as the quarter progressed, down 4% for the quarter, but only 1% in March, and was offset by the pickup in corporate negotiated demand.
These trends were evident in many of our top markets. For example, most of our hotels in San Francisco had RevPAR growth due to higher corporate transient demand across many industry types in San Francisco as that market was up 17%.
All of our hotels in Atlanta, which grew 9% grew RevPAR as a result of higher corporate transient pent up demand and was more city wide compared to last year.
Minneapolis at 6%, Boston at 4% and Philadelphia at 5% were also strong during the quarter, benefiting from higher transient demand. South Florida, up 3% had multiple positive impacts during the quarter such as Super Bowl and Pro Bowl, higher cruise and other leisure demand, and Haiti relief and Miami.
New Orleans, up 3% continues to recover. City wide’s grew from prior year. Mardi Gras was the strongest in years and the market was helped substantially by the Saints winning the Super Bowl.
Our worst performing markets were northern New Jersey, down 12%. That was impacted by lower group and transient demand and decompression from New York. This market began to recover a little later than others, but March was strong for group and transient, especially in the Pharmaceutical industry.
Orlando is down 6%, was also soft, and has been affected by new supply and lower conventions in the market. Myrtle Beach had a large group booking in 2009 that did not repeat in 2010 that caused that market to be down around 10%. However, group bookings for 2010 have now surpassed prior year.
Given the positive movement and trends, and our performance during the first quarter we have taken up our guidance fairly significantly. We forecasted our RevPAR will be flat to positive 3% for the year, which is approximately five points better than we originally expected. We are therefore increasing our EBITDA guidance by approximately $15 million to between $166 million and $177 million, and Andy will provide some additional detail later on.
Now let’s take a look at the balance sheet. Yesterday, we closed a nine property; $212 million secured debt facility with investments, which refinances all of the remaining 2010 maturing debt. This deal was better for us from every perspective than extending with the current lenders and servicers.
We unencumbered two properties. We refinanced the entire outstanding balance, have a lower blended interest rate and lower fees, have more term, and it gives us the flexibility we need to address the second phase of asset sales when they occur. This for all intents and purposes, resolves all of our debt issues.
As evidenced by this deal, the secured debt markets opened up substantially over the course of the last couple of months. This is good not only for us, but should also help close the significant disconnect in the market between lenders and borrowers, thereby solidifying corporate liquidity positions and decreasing the risk of a recession. It has also improved hotel transaction market, which should help expedite the second phase of asset sales.
Given the resolution of our near term maturities, and our revised operating projections, our liquidity position is significantly improved going forward. Additionally, as I pointed out on our last call, we do have a plan in place to de-lever the company significantly going forward, reflecting both anticipate earnings and the second phase of asset sales.
Finally, as everyone is aware, investor interest in REIT has rebounded. As I have always said, we will in a disciplined manner, look to use our equity to take advantage of select opportunities that make sense for our shareholders long term. Those opportunities may take any number of forms and we will discuss any specifics at the appropriate time.
With that, I’ll turn the call over to Andy.
Thanks, Rick and good morning. We are very pleased with our first quarter results. Our RevPAR declined just half a percent compared to our internal expectations of a decline of between 5% and 9%. Clearly, the trends have improved much faster than anticipated.
Hotel EBITDA decline $4 million or only 8% compared to prior year. As we noted during our February earnings call, certain expenses will increase in 2010 that did not occur last year, particularly hotel level salaries and bonus.
Our hotel EBITDA margins declined 177 basis points, which is much better than we expected, especially given the higher than expected occupancy and the mix between occupancy and average rate.
Adjusted FFO was negative $11 million. The decline to prior year was primarily due to higher interest expense of $15 million related to the interest on the senior notes issued last October. However, our $276 million cash balance is $223 million higher than it was a year ago.
Let me provide a little more color on the loan we closed yesterday. We refinanced all of our remaining 2010 debt maturities. While we pursued and had reached agreement to the extend each of the six loans with the existing institutional lender and four special servicers, we also approached over 60 lenders to take out the loans on more favorable terms.
The new loan is superior to extending the existing loans in a number of ways. First, the loan amount of $212 million was slightly more than the existing loan balances. Therefore, no principal pay down was required.
Second, the loan is interest only for the first year with lower amortization thereafter. Third, we were able to release two hotels from the existing collateral pool, and they are now unencumbered. Fourth, the interest rate is 63 basis points lower than the blending existing rate, which corresponds to an annual interest savings of $1.4 million. Fifth, it provides us more flexibility to sell our hotels in the future and finally, it extends our debt maturities.
The nine hotels that secure this loan are listed in our press release. The two hotels that are now unencumbered are the Sheraton Court in Phoenix and the Sheraton Suite Chicago. The loan to value was 71%. We have refinanced $1.2 billion of debt in the past 12 months, which is extraordinary given the state of the capital markets a year ago.
Regarding the status of our discussions on the loans secured by our Embassy Suites in Deerfield, Illinois, and Piscataway, New Jersey, we made discounted pay off offers to each hotel at price levels that make sense for our shareholders and benefited the company from a long term perspective.
Neither offer was accepted by the respective special servicer. As a result, we are now pursuing a transfer of each hotel to its servicer. We recorded a $21 million impairment charge in the first quarter with respect to these hotels. The loan balances on these hotels total $32 million. When the transfer is complete, we will remove the assets and related debt from the balance sheet ad terminate recording of the operations on our financial statements.
Our liquidity position is strong. As I noted, we have $276 million of cash on hand which is sufficient to cover our near term cash needs. We will continue to carry a relatively high amount of cash for the near future.
Guidance; we have increased our expectations for 2010. Our prior guidance assumed a decline of between 1% and 5% to prior year. Our new guidance assumes RevPAR will be flat to up 3%. The improved expectation reflects several factors; first, our actual first quarter results, second, improved economic conditions including employment trends, business activity, consumer confidence and the improvement in the capital markets will lead to further improvement in demand.
Third, current bookings and future bookings; our 2010 group bookings compared to the same time last year, have improved from a 13% decline in December to only down 3% today. Additionally, in the month, for the month bookings are strong, but booking windows are extremely short.
Fundamentals continue to improve. Demand is now growing and supply growth continues to shrink. Supply growth is expected to be below historical levels by the end of 2010. Further, new construction financing is much more difficult to obtain compared to lending standards prior to the recession.
As a result, we expect supply growth to continue to be moderate for the next several years. Additionally, supply growth in our markets is lower than the U.S. average. Hotels under construction in our markets is 1.1% of total room supply compared to 1.6% for the U.S. overall.
To wrap up, fundamentals are improving. We have consistently performed better than our peers and the industry, and expect that to continue. We have refinanced our 2010 debt maturities and have no near term maturities remaining. We have substantial cash on hand.
Thank you, and operator we are now ready to address questions.
(Operator Instructions) Your first question comes from [Andrew Whitman]
I just had a couple of questions mostly focused on the balance sheet. I wanted to start out and just talk about assets going back to lenders. Clearly you’ve decided and clear with these first two here. Just as you look out over the next couple of years, can you think about any other potential that might be value creating as you look out in the next year or two, if you think there’s potential to do more of that.
We don’t see any potential to do any more of that currently.
Just on phase two of the asset sales, can you talk about with where pricing is today whether or not you’re starting to think about testing the waters there today or do you still think that there’s more EBITDA that needs to be shown in the recovery before you’re comfortable to market some of those properties.
I don’t think that we’re – we’re not thinking about taking them to market right this minute, but we do think that there’s a very good chance that we’re going to expedite things significantly. When we had started talking about the second phase of asset sales, we had talked about doing it starting the process in 2012 and the bulk of the asset sales happening in 2013, first half of 2014.
I think that will move fairly dramatically, but there’s no definitive time line for it yet. We’re working on that right now.
Can you just remind us a little bit about the size of the number of hotels or EBITDA room, something to help give us a sense of what you’re thinking of for the second phase?
It would probably be in the neighborhood of 30.
One other question to try to understand your comments on de-leveraging a little bit better. You mentioned that you might use equity as a solution. Do you think equity would be used to buy more EIBTDA in terms of de-leveraging that way or do you think that you’d de-lever maybe through a tender offer of the notes of the preferreds or something like that. As you think about things, which way do you think is more likely for the company to go?
As I said earlier today, and as I’ve always said, we will look at using the equity for opportunities and those opportunities can take any number of forms. We will talk about specifics when it makes sense.
Related to joint venture, it looked like subsequent to the quarter end there was a capital infusion that went into one of the joint ventures. Can you just talk about whether that was a re-fi, a pay down? Can you just give us a little more color on what happened there?
It was Titan’s Corner. We paid the loan off with our joint venture partner.
Is that a consolidated joint venture then?
So that property is now fully unencumbered.
You're next question comes from William Marks – JMP Securities.
William Marks – JMP Securities
Looking at the quarter by brand, the Embassy Suites RevPAR was down more than some others and I don’t necessarily need comment on that. I’m more curious on going forward how you look at your guidance by brand and maybe by location.
I think that we certainly feel good about – the things that we’re looking at right now in making sure that we are maintaining or increasing its market share and flow through. I mean that’s the critical thing right now.
I think that over the, Embassy was up 1.4% in 2009 and so we knew coming into this year that there could be some potential, especially in the first half of the year for numbers to be down a little bit, but what we want to make sure what we’re doing is maintaining share, and we did have a slight increase in share in the first quarter which as is said, given the pretty massive increases in share over the last couple of years, was a pretty strong statement.
You're next question comes from Susan Berlinger – J.P. Morgan.
Susan Berlinger – J.P. Morgan
A couple of questions on the new mortgage loan; are those on assets cross collateralized?
Susan Berlinger – J.P. Morgan
I think you said something about this loan would make it easier to sell assets. Can you state why that is?
It’s floating and we’ve got abilities to pre-pay it after three years and we’ve got some extra carve outs for assets if we want to pursue selling sooner than later.
Susan Berlinger – J.P. Morgan
I just wanted to confirm, right now how many unencumbered properties do you have? My count was two and joint venture, although I think you paid off one subsequent, and then four wholly owned. Is that right?
That would be five wholly owned and two JV. Right. A total of seven.
Susan Berlinger – J.P. Morgan
Is there any way you can tell us which properties, just because I’m missing one or any kind of EBITDA coming from those wholly owned unencumbered properties?
JV’s would be basically Kasey Plaza and Tyson and then the consolidated would be the Westin in Dallas, the Embassy at LA Ex, Doubletree Dana Point, and the two we just unencumbered, so the Sheraton in Phoenix and Chicago.
Susan Berlinger – J.P. Morgan
I guess with your increase in EBITDA guidance, can you help in any way for modeling purposes with regards to margins?
We don’t give margin guidance, but I think you can back into what we’re assuming for the rest of the year.
There are no further questions at this time.
Thanks for joining us this morning and we will talk to you next time.
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