Q3 2019 Earnings Call

Good day and welcome to the service properties Trust.

Quarter, 2009, <unk> financial results conference call and webcast.

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Oh for today's presentation.

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I'll now turn the conference call merchandise Kristin Brown.

Investor Relations Ms. Brown the floor is yours map.

Good morning, joining me on today's call or John Murray President.

Ryan Dunlap, Chief Financial Officer in our Graves Vice President.

Today's call include the presentation by management, followed by a question and answer session with analysts.

Please note that the recording transmission and transcription of today's conference call is prohibited without the prior written consent that's 15.

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 1995, and other securities laws.

These forward looking statements are based on sbcs present beliefs and expectations as of today November eight 2019.

The company undertakes no obligation to revise or publicly released 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 SBC.

In addition, this call may contain non-GAAP financial measures, including normalized funds from operation or normalized FFO and adjusted EBITDA sorry.

Reconciliations of normalized FFO and adjusted EBITDA Ari to net income as well components to calculate effort, though are available on our supplemental package found on in the Investor Relations section of the company's website.

Actual results may differ materially from those projected any forward looking statement.

Additional information concerning factors that could cause those differences is contained in our Form 10-Q to be filed later today with the FCC and in our supplemental operating and financial data I found on our website at Www Dot FCC <unk> Dot com investors are cautioned not to place undue reliance on any forward looking statement.

I'll turn the call over to John .

Thank you Christina and good morning. This.

Good morning reported third quarter normalized AFFO of 95 cents per share.

Decreased 10.4% compared to the Dollarssix per share reported in the third quarter of 2018, primarily related to our disposition 20 travel centers and the related lease amendments with T.K.. We completed in January lower returns recognizing their hotel portfolio and higher interest expense, partially offset by.

Our acquisition activity.

The most significant events. This quarter was completing a transformative 2.4 billion dollar net lease portfolio acquisition, and that's 70, a read and the name change to service properties Trust.

Yes empty a transaction added 767 that lease service oriented retail properties leased by 279 tenant under 163 brand in 23 industries.

We believe the new name more accurately represents our portfolio composition of hotels service necessity based retail net lease properties.

As previously announced we are targeting $800 million and dispositions to reduce leverage incurred to complete the S&P a transaction.

Going forward, we expect hotels to generally comprised 55% to 60% of our portfolio and triple net lease service retail, including travel centers to comprise 40% to 45%.

God will provide an update on the positive progress we've made so far enough itself in a moment.

Turning to the consolidated results of our hotel portfolio.

Sbcs comparable non renovation hotels exceeded industry performance with a 0.9% increase in Revpar this quarter.

Well tells that were renovated in 2018 recognized healthy double digit revpar growth this quarter and we expect growth from these hotels through the balance of the.

However, renovation disruption continued headwinds from new supply and reduce citywide compression in certain markets offset this tailwind.

In the third quarter, we had 13 comparable hotels under renovation versus 16 hotels under renovation in the third quarter of 2018.

Renovations were evenly divided across the I, It's Jay married 234, Sonesta and Radisson portfolios.

Many of the historically well performing full service hotels under renovation well have materially completed renovations by yearend and are expected to switch from a negative impact to a positive as we move into 2020.

Turning to the performance of our hotel portfolios American number one portfolio Revpar increased by 0.8% due to a 0.6 percentage point increase in occupancy well rates were flat.

Solid post renovation results and strong results in Pennsylvania and Virginia.

Were offset by market specific weaknesses in Torrance, San Jose as well as one renovation auto.

Coverage that marijuana agreement remained solid at 1.16 times for the trailing 12 month.

I'm, sorry, 234 portfolio experienced a revpar decline of 0.8% with the 0.7 percentage point increase in occupancy offset by 1.7% decline in right.

This portfolio had three hotels under renovation and third quarter, where revpar declined in aggregate by 17.5%.

As well as citywide softness in Chicago in Nashville.

Coverage are married 234 agreement remains positive and 1.04 times for the trailing 12 month.

[noise] on previous calls we've told you that we've been in discussions with Marriott regarding the Merrick why and possible outcomes, which include combined Nikolai Hotel. The Marriott 1234 hotel portfolios will Nikolai lease expires on December 30, Onest 2019.

We have made progress in our discussions with Marriott and are working towards the goal of documenting an agreement by year end.

In connection with the discussions with Marriott, we're also considering the possibility of selling approximately 30 hotels.

Revpar at our comparable ATSG portfolio declined 2% costs by 1.9% decline rate coupled with flat occupancy.

Renovation disruption or four hotels, including two full service hotels was closed was the primary driver behind the decline along with supply growth in Chicago, Seattle, and Portland, which negatively impacted three of our kimpton hotels.

Our comparable sonesta portfolio increased revpar by 1.5% driven by occupancy increases of 2.9 percentage points, partially offset by a 2.5% decline and ray.

Revpar gains of 8.8% in the extended stay portfolio mitigated the impact of three full service renovations.

Revpar at our Wyndham hotels was up slightly at 0.3% this quarter, reflecting a 2.2 percentage point increase in occupancy, partially offset by 2.7% decline and ray.

Wyndham continue to pay SBC, 85% of the returns due under the management agreement approximately $1 million less than the contractual amounts due for the third quarter.

As we see Amanda its management agreement with Wyndham in October 2019, so that the term will expire on September Thirtyth 2020, less sort of terminated as hotels are sold every brendan.

Under the amended agreement Wyndham will pay SBC, the cash flow of the hotels after payment of hotel operating costs. When do we will not be entitled to base management fees for the remainder of the agreement term.

In connection with the agreement the Wyndham brand Chicago on the Wyndham Wirebond were rebranded to Royal Sonesta, Sonesta hotels, respectively on November one.

Also in connection with the rebranding of the Chicago Hotel, the timeshare lease with Wyndham destination was amended to terminate on March 31st 2020.

The remaining 21, new branded hotels are being marketed for sale or may potentially be rebrand.

Between the sale of approximately 20, Wyndham and 30 Marriott Hotel, we're confident we will reach our goal of $300 million and proceeds from hotel sales starting the first half of 2020.

Hi portfolio Revpar declined 4.1% caused by 3.3% decline in rate and the 0.7 percentage point decline in occupancy with weakness driven by competition for new supply and erosion in transit demand.

Oh, Radisson Hotel group portfolio Revpar increased 5.8% this quarter versus last year with material post renovation lift and multiple properties modestly offset by renovation disruption at the rate Radisson Seattle.

[noise] for the fourth quarter of 2019, we expect 17 hotels under renovation compared to 38 last year. While we are seeing positive lift this year from a 49 hotels. They completed renovations in 2018 operators are contending with new supply coupled with stagnant or declining demand in many markets as a.

Result rate growth expectations have declined.

Hotels are increasingly taking longer to fill allowing less opportunity to push higher short term rates.

Sbcs managers now project that for the remainder of 2019, we will experience revpar growth from occupancy gains.

Driven by post renovation improvement, but with little change in rate, which results in a reduction to prior forecasts such that full year comparable revpar is likely to be in the minus 1% plus 1% range.

Full year GLP margin is expected to decline.

By 50 to 150 basis points, given flat revenue continued pressure on wages and benefits.

I'll now turn the call of it to Todd to discuss our net lease portfolio progress on asset sales and recent hotel investment activity.

Thanks, John as John mentioned, we closed on the SMTC transaction and late September as of September Thirtyth 2019, SPC on 946, net lease service oriented retail properties, including our travel centers with 17.6 million square feet, requiring annual minimum rent of $419 million.

Which represented 41% of Sbcs total annual minimum returns threats. The portfolio was 98% we used by 280 tenants with a weighted average lease term of 11.3 years operating under 163 brands and 23 distinct industries.

The aggregate coverage of SVC is net lease portfolio as a minimum Brad was 2.27 times as of September Thirtyth 2019.

Brian coverage for our largest tenant Travelcenters of America was 1.92 times for the quarter up from 1.9 times from last year's quarter, driven by increased fuel volume sold fuel margin and non fuel margin.

Coverage was 1.84 times for the trailing 12 months ended September Thirtyth 2019 up from 1.79 times for the prior 12 months.

As we previously announced we plan to sell approximately $500 million of the net lease properties, we acquired in the SMTC transaction.

We are on track to execute sales in excess of 500 million by year end 2019 October we entered an agreement to sell a 126 net lease properties for $438 million.

We expect this transaction to close in November we also sold two additional net lease properties in October for $63.2 million. This included the sale the Las Vegas office property at a 6.4% cap rate or $411 per square foot a record price per square foot for the Las Vegas office market.

We have one additional net leased property that is currently being marketed.

And that lease assets, we selected for sale or generally a cross section of assets across various industries and certain assets that did not strategically fit the portfolio.

Turning to other recent investment activity in October we acquired the 261 room, Chicago Palomar hotel for purchase price of $55 million or $211000 Perky, which we believe is well below replacement cost. This hotel opened in 2010 has 43 suites as over 10000 square feet, a function space and one food.

Advil gel it the hotel was added to our identity management of course.

I will now turn the call over to Brian .

Scott starting with operating results at about 322 comparable hotels this quarter Revpar decreased 0.3% CLP margin percentage decreased by 176 basis points to 39% and gross operating profit decreased by approximately $9.4 million, which was the result of the negative impact of renovations and increased operating.

Costs.

All our comparable portfolio has experienced declines in GLP with exception of Radisson results from our eyes G. Mario 234, and Sonesta portfolio's made up the majority of the decrease.

Labor related costs increased approximately 4% across the portfolio, while repairs and maintenance and additional marketing efforts also contributed to increased expenses this quarter.

Global line GLP costs that are comparable hotels increased by $4.8 million from the prior year, driven primarily by increased real estate tax expenses and tax appeal settlement settlements recorded in the prior year at certain hotels.

Cash flow available to pay our minimum returns in rents for our comparable hotels declined $14.2 billion or 9.4%.

Cash flow coverage of our minimum returns and rents for our thrown at 22 comparable hotels decreased 2.97 times for the 2019 quarter compared to 1.09 times for the prior year quarter.

As a quarter end the balance of our security deposits and guarantees under our hotel operating agreements remained unchanged from the prior quarter at $217 billion.

Turning to Fccs consolidated financial results normalized FFO was $155.6 million in 2019 third quarter compared to $174.7 million into 2018 quarter, a decrease of 11 cents per share.

The decrease was part due primarily to the disposition of 20 travel centers are not least amendments with Tia in January declines and realized returns under our ESG and semester agreements and an increase in interest expense.

This was partially offset by increases a minimum returns and rents from our acquisition activity in our funding of capital improvements at our properties.

Adjusted EBITDA already was $209.5 million into 2019 third quarter, a 7.1% decrease from the 2018 quarter.

Our adjusted EBITDAR you to interest coverage ratio was four times per quarter end and debt the annualized adjusted EBITDAR. He was 6.6 times at quarter end.

As we previously stated our target leverage is to be around six times and we believe we're well on our way to achieving this goal through our disposition strategy.

I'd like to take a minute to discuss the impact of the SMP transaction to our results.

For the third quarter FMT, a portfolio resulted in approximately $5.2 million of EBITDA contribution.

For modeling purposes on a run rate basis, we expect the quarterly EBITDA contribution to the SMTC portfolio to be approximately $42 million before any asset sales.

128, Matt at least asset sales, we have sold or expect to be sold represent approximately $9.8 million a quarterly EBITDA contribution.

Turning to our capital improvement activity, we funded $36 million of hotel improvements in the third quarter.

We expect to find approximately $128 million hotel improvements in the fourth quarter.

The order. These hotel improvements are expected to be funded from operating cash flow.

We don't expect to find any improvements to our net lease portfolio for the remainder of 2019.

Turning to our balance sheet quarter end debt was 51.8% of total gross assets and we had $70.5 million of cash, including $53.5 million for cash EPS growth, primarily for future improvements to our hotels.

As previously announced we sold all the shares we held at the RMR Group Bank on July Onest at a price to the public a $40 per share, resulting in net proceeds of $93.6 million.

To finance the SMTC transaction, we issued $1.7 billion of unsecured senior notes in September 2019, and used our revolving credit facility for the balance with the purchase price.

Upon completion of our senior note offering we terminated 2 billion dollar term loan facility commitment, we arrange for the SMTC transaction and as a result, we recognize the loss on extinguishment of debt of $8.5 million in the two though 2019 third quarter related to the financing cost of this facility.

As of today, we have $700 million outstanding on our $1 billion credit facility and intend to continue to pay down the outstanding balance on our line with proceeds from asset sales.

No term debt maturities until February 2021.

In August we paid a regular quarterly dividend to our common shareholders, a 54 cents per share.

October we declared a regular quarterly dividend to our common shareholders with 54 cents per share or 2016 cents per year to be payable on or about November 15th.

Our dividend as well covered and we had a normalized FFO payout ratio of 56.8% for the third quarter.

Operator that concludes our prepared remarks, we are ready to open up the line for questions.

Thank you Sir.

We will now begin the question answer session.

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Thanks.

And our first question will come from Brian May her of the rally FBR. Please go ahead.

Oh, great. Thank you I'm. Good morning, So can you give us any idea kind of going forward John .

What you're thinking in the way of acquisitions being that it's been pretty active capital recycling year.

Thank you out of the game for awhile.

Selective or are you going to focus on one area over the other.

That's a good question Brian we.

We have during the last.

Quarter are really a couple of quarters has been focused on.

The disposition plans to reduce leverage in connection with the SMTC transaction, but we have we did complete one.

Kempton Hotel acquisition with Fiveg.

This quarter and we are currently looking at both net lease acquisitions and hotel acquisitions at the current time.

We are being selective and.

We had dial things back a bit while we focused on the disposition plan, but we expect to generally.

I have.

Approximately a 50 50 mix of hotel on and that lease property acquisitions.

You know probably.

Yes, a little bit lumpy.

Particularly as we.

As we ramp up our net lease acquisition activity.

But.

Going to focus on master leases were going to focus on.

Diverse.

Tenant base, we're going to focus on coverage.

Monthly financial reporting by the tenants. So there's a lot of things were looking for there.

We have good relationships with.

A number of brands on the hotel side and as well as.

Relationship with Sonesta, So weeks, we expect acquisition activity on the hotel side as well probably.

And the range of a couple of hundred million dollars on both sides.

Over the course and as you.

As you've got your hands dirty with the net lease portfolio and the disposition was there a geography or an asset type that you felt less comfortable with the us that was in the pool of divestitures and going forward is there a segment of that lease that you're now involved in that you.

Seemed like that you might expand upon.

Yeah.

I think generally speaking what we're trying to avoid.

Those areas of retail, where we think is better opportunities for.

Disruption.

From E Commerce and so.

You, probably see us avoid weak retail its apparel base, probably avoid retail its home furnishings type.

Basis.

We're going to probably were weighted a little bit more towards restaurants, and quick service restaurants. Today. So we're not we're not in a rush to grow that side of things dramatically, but we'll probably do some acquisitions there.

Not probably won't grow a movie theater as much.

Okay, and then last for me on this and that's the rent coverage, we noticed kind of it a downtick there can you tell us maybe what's going on there was that an aberration.

Their problem there how should we be thinking about sonesta.

This is Brian I'll take this one.

So that theres, a little bit of noise in the portfolio.

Just to give us some context the full the 12 full service hotels in that portfolio represent approximately 70% of the revenues.

And we had four full service hotels that were under renovation are closed the Clift hotel in San Francisco was closed in the third quarter for a complete renovation hotel MLP. This California, the chase spark plugs in Saint Louis Fort Lauderdale Hotel also had a drag you stripped those four out of coverage was actually up a little bit points.

Many times versus 0.76 times.

The full service hotels, the eight that are remaining outside of those four covers us over 0.9 times.

So again, there was a noisy quarter be extended stay properties.

There's some room renovation ramp up going on but also a little bit of weakness as well, but overall I think the renovation activities. The primary reason.

Okay. Thank you that's all for me.

Thank you Brian .

Again as a reminder, if you like to participate on todays call. Please press Star then one than it had some phone again at a star them one to ask a question and again, we were just pause momentarily to assemble roster.

This is Tom we're showing no further questions. So we'll then conclude today's question answer session.

I would like to.

Turn the conference call back over to Mr., John for any closing remarks. Please go ahead Sir.

Thank you all for joining us today, and we look forward to hopefully see some of you it.

The Navy conference next week in Los Angeles. Thanks.

Thank you Sir also for your time today answer the rest of mass.

Again, the conference call as Alan It at this time you may disconnect. Your lines. Thank you take care of a great everyone.