FelCor Lodging Trust's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: FelCor Lodging (FCH)

FelCor Lodging Trust Inc. (NYSE:FCH)

Q1 2014 Earnings Conference Call

May 1, 2014 12:00 PM ET

Executives

Steve Schafer – Vice President Strategic Planning and IR

Richard A. Smith – President and Chief Executive Officer

Michael C. Hughes – Senior Vice President and Chief Financial Officer and Treasurer

Analysts

Patrick Scholes – SunTrust Robinson Humphrey

Anto M. Savarirajan – Goldman Sachs & Co.

Nikhil Bhalla – FBR Capital Markets & Co.

Chris J. Woronka – Deutsche Bank Securities, Inc.

Lukas Hartwich – Green Street Advisors, Inc.

Operator

Good afternoon. My name is Sharon, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the FelCor’s First Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Steve Schafer, you may begin your conference.

Steve Schafer

Thank you and good morning. On behalf of the management team, I want to thank you for joining us for our first quarter earnings conference call. Rick Smith, President and CEO will provide an update on our strategic plan in the current operating environment. Michael Hughes, our Chief Financial Officer will address our balance sheet initiatives, 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. These forward-looking statements are expressions of current expectations and are not guarantees of future performance. Numerous risks and uncertainties and the occurrence of future events may cause actual results to differ materially from those currently expected.

These risks and uncertainties are described in FelCor’s filings with the SEC. 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.

And with that, I will turn the call over to Rick.

Richard A. Smith

Thanks, Steve and good morning, everyone. We had a very strong first quarter from every perspective. We exceeded the high end of our expectations for RevPAR and EBITDA growth, and have increased our full-year operational guidance by $3.5 million at the midpoint.

Our comparable portfolio outperforms the industry once again with 7% RevPAR increase. Our six acquired and recently redeveloped hotels again outperformed our expectations. We made excellent progress on asset sales, and we made good progress on the Knickerbocker redevelopment particularly in the last eight weeks to nine weeks.

Our focus for 14 remains the same. That is, complete the asset sales and use proceeds to prepay debt, over the Knickerbocker and effectively position it in the market, focus on the continued ramp-up of the acquired and recently we developed hotels, continue to aggressively attack ADR Index, primarily through mix management as well as flow-through, and complete the next phase of our Investor Relations program.

Now let's get down to some detail, beginning with our asset sales. It January 1, we had 21 non-strategic hotels remaining to sell. We sold two hotels during the first quarter. We have five hotels under contract to sell, including two with hard deposits, which are expected to close later this month. We will be receiving second-round bids on two additional hotels in the next week.

We recently brought one hotel to market, and have another coming to market later this year. That leaves the 10 hotels and a joint venture with our brand manager partner. We are working diligently to unwind that joint venture and have made significant progress toward that end.

Once the JV is unwound, we will own five of those hotels outright and our JV partner will own the other five. We expect to finalize this deal in the second quarter, and will begin marketing those last five hotels immediately thereafter. Pricing on everything thus far is in line with our expectations, and given the strong transaction environment and the very good progress we have made since our last call, we expect to sell most of the non-strategic hotels this year.

We made significant progress on the mix since the last earnings call as well, and have built good momentum coming out of the winter. Overall, we feel good about the process, both from a development and an operational perspective. We remain on our previously-announced timeline and budget of early call and $240 million respectively. Recent milestones include on floors 5 through 15, mechanical, electrical, and plumbing and framing are virtually complete.

ME&P is also near completion in the public spaces. Sheetrock is being completed through the fourteenth floor and tiling, wall covering and painting is in process on floors 5 through 10. We begun receiving shipments of FF&E and millwork is on its lay. And the HVAC ductwork and framing are underway in the lobby and fourth floors.

From an operational perspective, the sales and marketing staff is complete and are fully engaged. The team is very strong and working closely with leading hotels of the world to augment sales efforts. This includes approximately 200 sales activities per week, including numerous meetings internationally.

In conjunction with the agreement with Charlie Palmer to manage the F&B outlets, we have now hired our F&B Director and chef, and are progressing with the overall F&B plan nicely, and we are finalizing the OS&E selections. Overall, operationally, we are considerably ahead, relative to a typical hotel development, and look forward to a strong opening.

As I mentioned earlier, our six acquired and recently redeveloped hotel, collectively, continue to be on track operationally and hotel EBITDA for the second quarter – I mean for the first quarter exceeded our expectations. The performance of the eight Wyndham hotels continues to improve. March 1, marked the one-year anniversary of the transition. The hotel is grew RevPAR 2.7% during the quarter and 35% in March.

As the disruption subsides from the transition and we complete the renovations at the two remaining hotels, we expect continued strong RevPAR growth. Importantly, the guarantee steps up more than 20% in 2014, so EBITDA at these hotels is expected to be about $43 million, or about $8 million higher than 2013, and will step another 20%-plus in 2015.

Now, let's turn to operations. Our primary operational focus continues to be on mix management, as we continue to shift away from lower-rated segments, such as government, and into higher-rated corporate segments. Corporate transient room nights for the comparable portfolio which makes up the largest concentration of demand for our hotels, increased 8%.

Conversely, room nights for lower-rated segments like government, tour and wholesale, and other discount segments declined 9%. Group room night increased 9%. The good news is that corporate room group also increased 9%, and government rooms, which have been declining over the past couple of years increased 4%. While government business is not a primary focus for us, the increase in business does create additional compression which are still with overall mix management.

Group pace is currently up about 6% to last year, which is an improvement from the pace at the time of our last call. ADR increased 5% accelerating from 4% growth in 2013. Corporate transient rates increased 3%, discount segment rates increased 7%, partially due to exiting lower rate OTA channels.

Group rates increased 3%. Looking forward, we expect very strong increases in corporate transient rates at about 6%, and lastly, F&B revenues and profitability increased more than expected during the first quarter, led by banquet and catering. This is a very good sign moving forward, as group ancillary and social spending are trending up.

In April, we completed the first segment of our 2014 investor communications program with meetings in New York, as well as various other meetings at numerous conferences, et cetera, and have focused on meetings with new investors during the first part of the year.

The second segment, which will be very expensive, will come later this year after the Knickerbocker is open, and the asset sales have progressed. This will also until on Analyst Day at the Knickerbocker. The feedback continues to be very positive as we continue to progress on the asset sale, The Knick and further ramp-up, we will stay out front of investors to update them throughout the process. Now a few comments before I turn it over to Michael.

We remain committed to delivering on our strategic objectives. We're making great progress on the portfolio transformation, which should be mostly complete this year. We are reducing our leverage to further strengthen our balance sheet, we are achieving desired returns on our acquired and recently redeveloped hotels, and we have reinstated the common dividend.

This commitment is paying off. We have assembled a high quality and well diversified portfolio that continues to outperform the industry. We should continue to deliver sustainable growth, as our portfolio is in excellent shape, is well-insulated from new supply, and as a result, it experiencing lower supply growth in the industry.

We will continue to deliver superior stockholder value as we complete the plan and build an even stronger balance sheet. This will provide flexibility throughout the lodging cycle enabling us to seize strategic opportunities while providing a meaningful common dividend.

And with that, I will turn the call over to Michael.

Michael C. Hughes

Thanks, Rick, and good morning. We continue our progress toward completing our balance restructuring. At the end of 2013, we have $63 million of non-cross mortgage loans secured by five hotels, scheduled to mature between June and August of this year, and bearing the weighted average interest rate of 6.6%.

During the quarter, we repaid two of these loans with the combined balance of $28 million, and will repay the remaining three loans during the second quarter. Remaining $234 million of 10% notes matures in October. As Rick said, we are making good progress on the dispositions. We expect to receive approximately $380 million in proceeds from selling the 21 non-strategic hotels and will use those proceeds to repay associated debt and our 2014 maturities. Interest from prospective buyers remains strong, and we expect to sell most of the non-strategic hotels this year.

However, as I mentioned on our previous call, there is a timing gap between the asset sale proceeds and the debt maturity payments. We plan to obtain a freely pre-payable low-cost term loan from some of our relationship lenders to cover any interim gap. If implemented, we expect this loan to be repaid in short order.

Now I will turn to guidance. We forecast 6.5% to 7.5% full-year RevPAR growth for our 49 comparable hotels and 7.45% to 8.45% for our 57 same-store hotels. An increase of 25 basis points for both the low and high-end. As previously mentioned, we expect to sell a majority of our non-strategic hotels this year however for the purpose of EBITDA and FFO guidance, our outlook reflects selling all the remaining 19 hotels.

Both the low-end and high-end of our guidance include selling the five hotels currently under contract, four in the second quarter and one in the third quarter. The low end of our outlook assumes that the remaining 14 hotels are sold in the third quarter, while the high-end assumes that two hotels are sold in the third quarter and remaining hotels are sold during the fourth quarter.

Our full-year outlook continues to assume NOI from our Wyndham hotels equal to the 2014 guarantee amount and includes $1.1 million of EBITDA from the Knickerbocker. We're very pleased that it has exceeded our expedition for first quarter and raise our full-year guidance. Operationally, we've increased the low-end of our EBITDA guidance by $4 million and the high-end by $3 million.

Accelerated asset sales, which are favorable to executing our plan, partially offsets the increased EBITDA from operations at the high-end. As a result, we now forecast full year adjusted FFO per share to be between $0.53 and $0.59 and adjusted EBITDA between $206 and $217 million. While analyst expectations are inline with our full-year guidance, the analyst mean estimate for Q2 is skewed by roughly $0.02 to the high side.

And with that, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Patrick Scholes with SunTrust. Your line is open.

Patrick Scholes – SunTrust Robinson Humphrey

It is Patrick Scholes. Just a couple of questions here. Can you give us what you would expect ballpark proceeds for the remaining asset sales for this year?

Richard A. Smith

Well I mean the total is 380 on everything and given that we in our guidance – I mean I guess you gave to explain that for purposes of guidance. Just we are leaving on the low side that they’ll get from the third quarter of the remaining 2014, and that they get sold in the fourth quarter on the high end. So I’ll just stick with that number for now, Patrick. Is there something more specific you are looking for?

Patrick Scholes – SunTrust Robinson Humphrey

That's fine just something to work with for modeling here. And then just a clarification question. You say have 19 to sell – was to sell this year. But as I look through your press release you missed 18 is non-strategic. What’s the difference between the 19 and 18?

Richard A. Smith

Yes, we had a one asset held for sale, so we are not including it in the metrics.

Patrick Scholes – SunTrust Robinson Humphrey

Okay, how in that one hotel, how many rooms?

Richard A. Smith

That was SouthPark Patrick, it has 208 rooms.

Michael C. Hughes

208 yes.

Patrick Scholes – SunTrust Robinson Humphrey

Okay. Very good that’s it for me come back. Thanks.

Richard A. Smith

Okay. Thanks Patrick.

Operator

Your next question comes from Steven Kent from Goldman Sachs. Your line is open.

Anto M. Savarirajan – Goldman Sachs & Co.

Hi, this is Anto Savarirajan on for Steven Kent. On the unwinding of the JV understand if you can’t give us financial details, but can you tell us which hotels will go with you and what the product contours of the deal with look like.

Richard A. Smith

Not currently, I mean, I can tell that we – the product contours of that deal I think we’ve outlined they would get 5%, we would get 5%, it’s a pretty event split. With regard to quality as well as EBITDA split. And there is some a little – some little tweaks here and there but that’s not really material thing and they take 5%, we take 5% and then we would began to market the 5% that we take on a fairly immediate basis.

Anto M. Savarirajan – Goldman Sachs & Co.

Thank you. My second question among you’re newly acquired and redevelop properties, you noted the progress with the Wyndham portfolio? Can you talk about the trends and others and maybe the alternate options that you are considering notably with these Royalton and Morgans in New York City?

Richard A. Smith

Sure, I can tell you that the – the trending on all but one of those recently acquired redeveloped are moving in very strong positive directions. Boston, San Francisco, the two Renaissance properties and Morgans, we have finally got into the point where reserve is open all the rooms are online and things for that nature and they’ve been improving pretty dramatically they are up 16% in April for example the increased RevPAR index every month this year, since that has began and so its moving in the right direction.

We are still having some issues from a mix and an absolute rate standpoint at Royalton. I think it for the second part of your question we as – as we will with all assets that we have we always look at them for cannot all possibilities, so to speak, so we would be looking at every conceivable option whether it would be keeping, selling and other things kind of embedded within those two primary options. As we move forward we are in the process of doing some analysis now on those, but I cannot really get into that any further at the end of this point.

Anto M. Savarirajan – Goldman Sachs & Co.

Thank you. One last question if I may. Your 2013 10-K shows a few shifts in the hotels you classified as non-core. Can you please elaborate on the – new output that you've got from your wholesale analysis guessing that influence the change in the list. And also if you could talk about the possibility of adding more hotels to your non-core lists?

Richard A. Smith

Well, the thing that made the change last year was kind of Futbol and one of them was a couple of hotels that we were looking at selling under certain circumstances, those circumstances did not come to bare. And therefore they became whole assets again – they were much from a shareholder return standpoint on a wholesale analysis.

If we couldn’t do certain things, and therefore better for shareholders to remain as hope. So we move those back in at the same time we had some things happening for some assets quicker than we had imagine, they would happen and they got to a positive place with regard to what we thought we could do with them in the marketplace that transfer them from the whole to the sell group.

And right now, other than what I've talked about on road show activities with regard to next up assets and things of that nature down the road which we've talked about we don't anticipate changing the core, non-core hotels at this time.

Anto M. Savarirajan – Goldman Sachs & Co.

Thank you.

Richard A. Smith

By the way, I mean one of the two that we brought back in [indiscernible] 29% year-over-year and Minneapolis airport at 19%. So there were a lot of factors that brought those back into kind of the fold hold wise.

Anto M. Savarirajan – Goldman Sachs & Co.

Thank you.

Richard A. Smith

You are welcome.

Operator

Your next question comes from the Nikhil Bhalla from FBR. Your line is open.

Nikhil Bhalla – FBR Capital Markets & Co.

This question is actually for Michael. Michael, just looking at your debt schedule. Could you just walk us through what maybe paid off first year in your debt schedule as it appears in the release? And give us maybe some sense of estimated timing for – some of these things may be paid off?

Michael C. Hughes

Yes, when you look at the non-core mortgages that are mature between June and August you can see in the release that we already paid off two of those so that will be paid off by the end of the second quarter. They will be completely gone we always spend those is to repay those and then you are going to see the 10% notes. Some time before October maturity we will pay those off. And from there on it will be a few underlying mortgages on some of the assets that we are selling and that will depend on timing of those sales.

Nikhil Bhalla – FBR Capital Markets & Co.

Those are the three main pieces right there?

Michael C. Hughes

That's right.

Nikhil Bhalla – FBR Capital Markets & Co.

Got it. Okay. And one question for Rick here. Rick, can you just update us what your expectations are for EBITDA from that Knickerbocker this year and that again next year?

Richard A. Smith

Well right now we've got approximately $1 million dollars break down to EBITDA and that’s based on the timing being what we are currently expecting like I had previously announced early fall. I think we will have a good opening – the tricky part Nikhil with opening a new hotel is when do you feel comfortable taking definitive bookings versus tentative, because you don't want to alienate customers on a go forward basis, so the first couple of months are a little tougher.

We feel like the sales and marketing process – pre-opening has been extremely strong and more active than any kind of typical hotel development or any kind of typical hotel opening. We feel very good moving into next year and I think as we’ve talked about in our investor presentation what we've announced is we expect about $16 million in 2015. We are meeting and getting into more and more detail on that with regard to building them is in a day-by-day stuff with [indiscernible] as we move forward. We will have an opportunity to update that later, but that is our current number.

Nikhil Bhalla – FBR Capital Markets & Co.

Sounds good. Thank you so much.

Richard A. Smith

Thanks Nikhil.

Operator

And your next question comes from Chris Woronka from Deutsche Bank. Your line is open.

Chris J. Woronka – Deutsche Bank Securities, Inc.

Hey guys. I was wondering if you could just talk a little bit about some of the initiatives you've been talking about the Morgans and Royalton in New York and just a status update on that if they are progressing and should we assume that the first quarter RevPAR performance was kind of a function of a tough comp or maybe Super Bowl not being quite as strong as we thought?

Richard A. Smith

Yes. There were number of things in the first quarter for New York. I mean the weather was really bad that cut into business little bit. You had Super Bowl being underwhelming. You have something in the first quarter of 2013 off the tail end of Sandy that created a tough comp for New York at least for us.

We had – but as I said before, Morgans is certainly improving now that everything is back online. And the hotel is doing a good job. We are working very closely with the hotel. Like I said, they were up 16% in April and they were up in the first quarter. We are adding in new sales body kind of on a combined basis for Morgans and Royalton.

In Royalton we are still working through kind of mixed changes and things of that nature. As far as how we are looking at the hotels, we are in the midst of a complete analysis of what our options are with regards to those hotels. We are not ready to talk too much about that publically at this time, but we will certainly what is in the best interest of shareholders moving forward.

Chris J. Woronka – Deutsche Bank Securities, Inc.

Okay and then on your asset sales can you just remind us, are a lot of these being sold with management and franchise contracts to the buyers or are they largely kind of unencumbered to that stuff.

Richard A. Smith

Well all are being sold with franchise opportunities that’s unencumbered with management. So that has – right now the typical buyers in the marketplace is our private equity guys that are teamed up with management companies. So part of their model requires them getting in managing. So everything is being offered pretty much across the board with franchise unencumbered with management.

Chris J. Woronka – Deutsche Bank Securities, Inc.

Okay and then just finally on the Knick, do you have very preliminary kind of idea of mix in terms of international versus domestic or corporate versus non-corporate?

Richard A. Smith

Well we are still working through that and in fact Chris we’ve got a meeting next week, kind of an all day meeting to kind of start talking about where they are coming from a first blush, but the ballpark we are thinking about is around 40% international. And as far as its going to be a four night corporate kind of mix and a three night leisure kind of mix

Chris J. Woronka – Deutsche Bank Securities, Inc.

Okay. Very good thanks.

Richard A. Smith

High-end leisure, I mean and a lot of that would be international.

Operator

(Operator Instructions) Your next question comes from Lukas Hartwich from Green Street Advisors. Your line is open.

Lukas Hartwich – Green Street Advisors, Inc.

Hey guys.

Richard A. Smith

Hi Lukas.

Lukas Hartwich – Green Street Advisors, Inc.

Hey I’m just curious about, do you guys have an estimate of much the Easter calendar shift impacted your quarter?

Richard A. Smith

Not off the top of my head, we can – I mean I think that there was probably more weather than Easter related, Steve can get back to you offline we can take a look at it.

Lukas Hartwich – Green Street Advisors, Inc.

Okay and then can you…

Richard A. Smith

It wasn’t huge; it wasn’t something that we are part of still into dramatically, because it wasn’t far off of our expectations.

Lukas Hartwich – Green Street Advisors, Inc.

Great.

Richard A. Smith

It’s not like the shift coming in.

Lukas Hartwich – Green Street Advisors, Inc.

Right. And then also can you just give us an update on your thought on acquisitions. Are you interested in acquiring hotels today?

Richard A. Smith

We are interested – well I mean, we are not acquiring hotels right now. we need to finish the plan, I mean the idea all along was to from a global planning perspective was to be able to get the leverage down to where we want to, get the maturity profile where we want to, get the cost of borrowing down where we want to and in conjunction with that as we went through the cycle to get into certain markets so that we were alleviating the issues with the overall quality of portfolio and getting that where we wanted. And we’ve accomplished all that with what we did earlier in the market, I mean earlier in the cycle from a San Francisco, [Boston] (ph) New York standpoint.

So there is not a strategic need to acquire at this time, and we are completely focused on selling the remainder of the assets, getting the leverage where it needs to be and then going from there. Now once that is done and once the Knick is opened, once the assets sales are complete and we are looking at next steps with acquisition being part of that analysis.

Yes, but so would taking out the preferred, so would the redevelopment that we have available to us , so would the common share count for example, and we will look at opportunities and for the first time Lukas we will actually be able to be opportunistic versus on [indiscernible] and clean up which we are looking forward to and whatever moves the needle most from a shareholder value standpoint is what we will pursue.

It’s not a deal-for-deal sake or growth-for-growth sake kind of mentality that we have. So if it’s better for us to taking up the preferred and it drags the needle more for shareholders we’ll do that. if its redevelopment, we’ll do that and if we find great opportunities from an acquisition standpoint that greatly moves the needle we’ll do that.

Lukas Hartwich – Green Street Advisors

Great that’s very helpful. Thank you.

Richard A. Smith

Thanks Lukas.

Operator

(Operator Instructions) we have no further questions at this time. I’ll turn the call over to the presenters.

Richard A. Smith

Great. Thank you very much. Thanks all for joining us. And we look forward to speaking to you next quarter. Good bye.

Operator

This concludes today's conference call, you may now disconnect.

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FelCor (FCH): Q1 FFO of $0.03 beats by $0.02. Revenue of $221.35M (+5.9% Y/Y) beats by $7.21M.