Hospitality Properties Trust (HPT) Q1 2019 Earnings Conference Call May 10, 2019 10:00 AM ET
Katie Strohacker - Senior Director of Investor Relations
John Murray - President & Chief Executive Officer
Brian Donley - Chief Financial Officer
Conference Call Participants
Michael Bellisario - Baird
Bryan Maher - B. Riley FBR
Good day and welcome to Hospitality Properties Trust First Quarter 2019 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 Senior Director of Investor Relations, Katie Strohacker. Please go ahead.
Good morning. Joining me on today's call are John Murray, President and Chief Executive Officer; and Brian Donley, Chief Financial Officer.
Today's call includes a presentation by management followed by a question-and-answer session with analyst. Please note that the recording, retransmission, and transcription of today's conference call is prohibited without the prior written consent of HPT.
I would like to point out that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other security laws. These forward-looking statements are based on HPT's present beliefs and expectations as of today May 10 2019.
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 and adjusted EBITDAre. Reconciliations of normalized FFO and adjusted EBITDAre to net income as well as components to calculate AFFO are available in our supplemental package found in the Investor Relations section of the company's website. Actual results may differ materially from those projected in these forward-looking statements.
Additional information concerning factors that could cause those differences is contained in our Form 10-Q to be filed later today with the SEC and in our 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.
And with that, I will turn the call over to you John.
Thank you, Katie and good morning. This morning we reported first quarter normalized FFO of $0.88 per share, a decrease of 6.4% compared to the $0.94 reported in the first quarter of 2018, primarily related to our sale of 20 travel centers and lease amendments with TravelCenters of America completed in January.
As a reminder we agreed to sell 20 travel centers to TA for $308.2 million and amend our leases. As a result of the sale and the amendments, HPT recorded a gain on sale of approximately $160 million. We accelerated the payment of deferred rent starting this year over a four-year period of $70.5 million and we reduced TA's rent to reflect the sale which should increase coverage going forward. Brian will discuss TA's first quarter performance in a moment.
Moving to performance of HPT's hotels, first quarter 2019 comparable RevPAR decreased by 3.2% versus the 2018 quarter, driven by 2.9 percentage point decline in occupancy, partially offset by a 1% increase in rate.
HPT's comparable RevPAR performance lagged industry results this quarter for several reasons most notably renovation disruption. This quarter we had 28 hotels under renovation including 11 full-service hotels compared to 23 hotels last year only three of which were full service.
The first quarter is generally our weakest quarter and it was by design that we scheduled as many renovations into this period as we could to reduce negative impact during our seasonally stronger quarters.
In addition to renovation disruption, we experienced negative weather-related impact primarily due to the loss of FEMA and hurricane recovery demand that occurred in 2018 and the impact of 11 main winter storms in 2019 confirmed disruption from the U.S. government shutdown and headwinds associated with competition from new room supply.
The hotels not impacted by these events comparable RevPAR increased 1.6%. We experienced RevPAR growth from the 16 hotels that completed renovations in the first quarter of 2018. RevPAR for these hotels increased by 9.2%. GOP margin percentage increased by 359 basis points and cash available for minimum returns increased by $1.4 million or 28%.
HPT's asset managers continue to be proactive with our operators to collaborate on various sales, revenue management and marketing strategies to be deployed pre-and post-renovation to reduce the impact that new room supply might have on post-renovation results.
In addition to that our we focused on measuring the RevPAR, GOP, cash flow and coverage improvement associated with hotel renovations, as well as each property's improved market share performance. The pre and post-renovation collaboration coupled with this data is leading to more insightful responses to our changing conditions on the part of our asset managers and operator teams.
Turning to hotel portfolio performance. Our Marriott number one portfolio RevPAR declined 1.3% caused by 2.5 percentage point decline in occupancy, partially offset by a 2.8% increase in rate. Excluding 11 hotels under renovation during the quarter, RevPAR increased 1.5% for this portfolio.
Portfolio segmentation showed large gains in group and corporate negotiated business. However, this was not enough to offset the declines in transient room rates. Four suburban Boston hotels were declined from non-repeat project business and corporate account declines impacting the portfolio's RevPAR of one percentage point.
This portfolios four hotels in Atlanta were helped by the Super Bowl. Coverage at our Marriott number one agreement remains strong at 1.19 times for the trailing 12 months.
RevPAR at our Marietta 234 portfolio declined 1.2% caused by a 2.9 percentage point decline in occupancy, partially offset by a 3% increase in rate. Excluding six hotels under renovation during the quarter, RevPAR increased 1.2% of this portfolio.
Our five San Francisco hotels under this agreement benefited by the reopening of the Moscone Center growing RevPAR 11.2%. This was offset by new room supply pressure which negatively impacted hotels in Dallas, Charleston, and Nashville.
Comparable IHG portfolio RevPAR was down 4.9% this quarter, caused by a 1.2% decrease in rate and a 2.9 percentage point decline in occupancy. Excluding four hotels under renovation during the quarter, RevPAR declined 0.9% for this portfolio. Non-repeat demand associated with last year's hurricanes and all rooms that were out of service in the 2019 first quarter due to the polar vortex were primarily responsible for declines of 10 hotels. Another five hotels were adversely affected by the government shutdown and increased competition due to new room supply. The remaining 82 hotels performed well, reporting RevPAR growth of 2.3%, partially aided by demand from the 2019 Super Bowl.
RevPAR at our comparable Sonesta hotels was down 0.7% this quarter caused by 1.1 percentage point decline in occupancy, partially offset by 1% increase in rate. Excluding three full-service hotels under renovation during the quarter, RevPAR increased 1.5% for this portfolio.
Post-renovation left at certain extended stay hotels was offset by softness related to non-repeat project and FEMA business. RevPAR at our Wyndham portfolio decreased by 9.9% caused by a 4.2% decline in rate and a 3.8 percentage point decline in occupancy.
A full-service Wyndham Hotels experienced double-digit RevPAR declines due to hurricane recovery business in Houston, which did not repeat increased room supply in the Chicago CBD and a reduction in citywide events. Wyndham continued to pay HPT 85% of the returns due under the management agreement approximately $1 million less than the contractual amounts due for the first quarter. We're currently in discussions with Wyndham and are hopeful that we may agree on portfolio restructuring with them in the coming months.
Our Hyatt portfolio experienced RevPAR declines of 3.7%, primarily due to occupancy declines associated with high room supply growth. Group trends were positive in this portfolio due to increased demand associated with citywide in several markets. Our comparable Radisson hotel group portfolio RevPAR was down 12.6% this quarter as of 5.6% rate increase was offset by 12.8 percentage point decline in occupancy. We had four of our eight comparable hotels in this portfolio including our largest in Salt Lake City undergoing renovations during the quarter compared to two hotels last year.
Turning to our investment activity. During the first quarter, we acquired the 335-room Kimpton Hotel Palomar located in Washington D.C. for $141.5 million and added it to our IHG agreement. In May, we acquired the 198-room Crowne Plaza located in Milwaukee, Wisconsin for a purchase price of $30 million and added this hotel to our IHG agreement. This hotel features over 7,000 square feet of flexible new space.
Looking ahead in 2019 renovation disruption will continue. However, there will be only 15 hotels under renovation in the second quarter compared to 22 last year, nine of which are full service versus three last year. In addition, we're expecting to see positive lift this year from the 49 hotels that completed renovations in 2018. This group of hotels increased RevPAR by 8.9% during the first quarter.
HPT's managers continue to project that for 2019 we will experience RevPAR growth through rate and occupancy improvement such that comparable RevPAR will increase between 2% and 3%. GOP margin is expected to be flat given continued pressure on wages and benefits. The combination of active asset management, strong brands, good locations and continued regular capital investment give us confidence that despite current headwinds our operators will meet their projections.
I'll now turn the call over to Brian.
Thanks, John. Starting with operating results at our 323 comparable hotels this quarter RevPAR decreased 3.2%, GOP margin percentage decreased by 172 basis points and cash flow available to pay HPT's minimum returns and rents decreased by 11.3% reflecting the negative impact of renovations supply growth and other non-repeat business versus last year as well as increased operating costs.
3.2% decrease in RevPAR this quarter resulted from a 2.9 percentage point decrease in occupancy, partially offset by a 1% increase in ADR. Our comparable Radisson and Wyndham portfolios had the weakest RevPAR performance with declines of 12.6% and 9.9% respectively versus the prior year quarter. Our Radisson portfolio had four out of eight comparable hotels under renovation during the quarter. Our Wyndham portfolio was heavily impacted by soft market conditions in Chicago and Houston.
Our comparable Sonesta portfolio RevPAR decreased 0.7% versus the prior year quarter as growth at our newly renovated ES Suites was offset by renovation activity at several full-service hotels. GOP margin percentage for our comparable hotels decreased by 172 basis points from the 2018 quarter to 34.5% and gross operating profit decreased approximately $12.9 million. All of our comparable portfolios experience declines in GOP, but four of the portfolios caused the majority of the decrease.
GOP margin at our comparable IHG portfolio decreased 187 basis points to 36.5%, resulting in a $5.6 million decrease in gross operating profit driven by the closure of the Crowne Plaza Ravinia Hotel, non-repeat FEMA business and competition from new supply. It's worth noting that Crowne Plaza Ravinia Hotel reopened during the first quarter in this ramping up post-renovation.
GOP margin out of comparable Radisson portfolio decreased 933 basis points to 28.9%, resulting in a $2 million decrease in gross operating profit primarily driven by renovation activity. Our comparable Sonesta portfolio experienced a 179 basis point decrease in GOP margin to 21.9% resulting in a $1.7 million decrease to GOP driven by renovations at three full-service hotels.
Our Wyndham portfolio experienced a 560 basis point decrease in GOP margin to 9.6% resulting in a $1.6 million decrease to gross operating profit driven primarily by soft market conditions in Chicago and Houston. A lot of the GOP line costs that our comparable hotels reflect the decline in GOP margins resulted in a decrease in cash flow available to bare minimum returns and rents of $13 million or 11.3%.
Cash flow coverage of our minimum returns and rents for our 323 comparable hotels decreased to 0.72 times for the 2019 quarter compared to 0.82 times for the prior year quarter. The first quarter is traditionally one of our weakest quarters, which coupled with our renovation activity resulted in the decline in coverage during the period.
We utilized our available security deposits and guarantees from our operators to cover the majority of shortfalls in hotel cash flows available to pay our minimum returns. Our available security features decreased by $19.4 million during the quarter, leaving an aggregate balance of our security deposits and guarantees at quarter end of $208.4 million. As a reminder, our security features can be replenished by excess cash flows above our minimum returns as measured on a cumulative basis each calendar year.
Turning to the performance of our comparable travel centers. For the quarter, fuel volumes increased by 2.2% over the prior year. Fuel gross margin as adjusted to exclude a benefit related to TA's reward program and a federal biodiesel tax credit included in the prior year period increased by $10.9 million or 21.6%. The increase in adjusted fuel margin was primarily a result of a more favorable fuel purchasing environment in 2019 period.
Non-fuel travel center revenue increased 3.1% versus the prior year due primarily to growth of store and repair shop revenue, which increased 5.4% and 1.4%, respectively. Non-fuel gross margin percentage was flat compared to the prior year at 62%. As a result, our travel centers grew non-fuel gross margins $6.3 million or 2.9% versus the 2018 quarter to $225 million.
Non-fuel sales generated approximately 78% of the total gross margin dollars of our travel centers in quarter. Site-level operating expenses increased $1.9 million or 1.1% from the prior year primarily driven by maintenance and insurance costs. First quarter property-level-adjusted EBITDA of our travel centers increased by approximately $15.3 million or 17.7% compared to the first quarter of 2018 and adjusted rent coverage under our leases was 1.67 times compared to 1.42 times last year.
Turning to HPT's consolidated financial results. Normalized FFO was $144.6 million in the 2019 first quarter compared to $154.9 million in the 2018 quarter, a decrease of $0.06 per share. The decrease was primarily due to $12.3 million reduction to GAAP rental income related to our dispositions and lease amendments with TA and an increase in interest expense partially offset by increases in minimum returns and rents from our acquisition activity and our funding of capital improvements at our properties.
Please note that our transactions with TA were executed in three separate transactions on different dates in January, so the effects of the transactions were prorated in the first quarter. Adjusted EBITDAre was $195.9 million in the 2019 first quarter, a 3.5% decrease from the 2018 quarter. Our adjusted EBITDAre to interest coverage ratio was 3.9 times for the quarter and debt to annualized adjusted EBITDAre was 5.3 times at quarter end.
Turning to our capital improvement fundings and commitments. We funded $44.7 million of hotel improvements in the first quarter. For the rest of 2019, we expect to fund approximately $204 million of hotel improvements and no travel center improvements. The majority of these improvements are expected to be funded from operating cash flow.
Turning to our balance sheet. As of quarter end debt was 40.9% of total gross assets and we had $72 million of cash including $48.2 million of cash escrowed primarily for future improvements to our hotels. As previously announced, we sold 20 travel centers in January for $308.2 million and recorded a gain of $159.5 million in the first quarter. As of today we have $96 million outstanding on our revolving credit facility and no term debt maturities until February 2021. In February we paid a regular quarterly dividend to our common shareholders of $0.53 per share. In April, we announced an increase in our quarterly dividend to $0.54 per share or $2.16 per year.
Operator that concludes our prepared remarks we're ready to open-up the line for questions.
Thank you. Mr. Donley. We will now begin the question-and-answer session. [Operator Instructions] And your first questions will be from Michael Bellisario of Baird. Please go ahead.
Good morning, everyone.
Just first on the Milwaukee acquisition. Why was there no security deposit added like the D.C. transaction from earlier this year? And then how does that affect the economics of the transaction for you?
On the Milwaukee acquisition we negotiated for IHG to share 50% of the cost of the renovation of the hotel. We're estimating approximately $6 million to renovate. They are going to pay $3 million. We're going to pay $3 million. We just decided on this particular transaction that we would rather have them co-invest because the security deposit is at or very close to $100 million. We felt like we have sufficient security, but we wanted them to buy into the hotel as much as we felt we had bought into it.
And what's your estimated cap rate of return expectation for the property?
No. The property was in need in significant need of rooms renovation. So its performance wasn't particularly great. So going in cap rate was in the mid-7s, but we're going to get an 8% return on our investment from IHG. We expect the cash flow will cover that by the time the renovation is completed.
And then you mentioned the discussions with Wyndham on the restructuring. How should we think about maybe potential disruption if any on the performance side related to any potential outcome there? And then just to clarify you're really just restructuring the guarantee in the waterfall right not necessarily the management agreements or the branding of those properties, correct?
Yes I mean I don't want to get into the details because we're in discussions with them and that always goes better privately done on a conference call. But I think, it's fair to say that both sides are considering the possibility of disposing of some of the weaker performing properties and maybe the addition of one or two properties to the portfolio.
And so to be a change in the mix of properties as well as a result of the change in mix, there will be a change in the owner's priority because it will go down for the ones we sell and up for anything we buy. So those will be the main -- the goal will be to arrive at a revised portfolio that has coverage of the owner's priority return, so that we can get a full owner's priority return and Wyndham can get a management fee.
And as far as disruption, I mean they continue to pay the 85%. So as far as modeling I think we're good at that level for now.
Okay. That's fair. And then just lastly same kind of topic on Marriott 5, any update there on the progress, the conversations about the outcomes of that portfolio?
We're still talking. I wouldn't say that there's necessarily been progress, but hopefully by that time the second quarter rolls around, we'll have more to share. There have been term sheets back and fourth. There's still a fair amount of work to be done before anything is in acceptable form to both sides. So yes, there's really nothing to report there. It may result in some similar changes that we may -- there may be a change in credit support. There may be a reduction in -- we may dispose of some weaker-performing properties. I think whatever transpires will be healthy with respect to the longer-term view on coverage and portfolio performance.
Got it. That’s helpful. That’s all for me. Thank you.
[Operator Instructions] Your next questions will be from Bryan Maher of B. Riley FBR. Please go ahead.
Yes, kind of on a housekeeping nature, when you're doing renovations to hotels and the property underperforms and maybe there's a shortfall to the minimum rents that you could go against the security deposits, is that waived during a renovation or is that still stay in place?
That stays in place, Bryan.
And then shifting gears a little bit, John can you talk about your acquisition appetite for 2019? And are you seeing any change in the availability of product and/or pricing given again lateness of this very long cycle and kind of the economic uncertainty that we're seeing unfold here?
Yeah, sure. I think that's a good question. We're always looking at the acquisition market for potential additions to existing portfolios. We did on a couple of properties where we were not successful this quarter. So, potentially we could have had a higher acquisition number that we did. But, we are concerned that -- we’re in the 10th year of the cycle, unemployment is so low and the economy apparently continues to be fairly strong. So it's -- there's a lot of pressure on wages and benefits. And a lot of times in some markets, it's just very hard to feel all your open positions, and so you need to go to agencies in some cases, which is a very expensive way to run a hotel. And so we're nervous about -- or cautious I maybe should say about being late cycle and feeling margin pressures from particularly in wages and benefits, but insurance and real estate taxes are also creeping up.
And so, we're trying to be more conservative and we're trying to be mindful of our leverage levels and mindful of the amount of renovations that we're doing. So, I think there are a couple of hundred million dollars that we'll invest in hotels in 2019. It will be more than a lot of RIETs will invest in acquisitions in a year. So I think the acquisitions we've done so far coupled with our hotel renovations is -- we'll probably will be happy with that for this year. Although I do expect that we'll make additional acquisitions between now and the end of the year.
And just as a follow-up to that. What type of buyers, without naming names specifically, are you losing out to? Who's being more aggressive out there in the marketplace?
I haven't seen an announcement of who won the bids that we lost. So I can't say for sure. But I think that they were seeing some institutional investors, private equity, family offices, high net worth individuals. My sense is that accepting in unusual situations that most of the lodging REITs have sort of taken the same approach as we are. They are being a little more cautious about where they invest and at what price.
Thank you, John.
Ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back to John Murray for any closing remarks.
Thank you for joining us today. We look forward to seeing you at The NYU Hotel Conference or NAREIT in early June. Thank you.
Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.