Q1 2020 Earnings Call

Welcome to service property Trust first quarter 2020 financial results Conference call.

This call is being recorded.

It's time for opening remarks, and introduction I'd like to turn the call over but the director of Investor Relations Kristin Brown. Please go ahead.

Good morning, joining me on todays call or John Murray, President, Brian Donley, Chief Financial Officer, and copper grade President.

Today's call include the presentation by management followed by question in your first question.

Please note that the recording retransmission and transcription of today's conference call. It.

Without the prior right [laughter] B C.

I would like now that today's conference call contains forward looking statement within the meaning of the private Securities Litigation Reform Act at 1995, and other security bought.

These forward looking statements are based on SBC <unk> present beliefs and expectations I have today may 11 2020.

The company undertakes no obligation to survive publicly released results.

Revision to the forward looking statements made in today's conference call.

I agree filings with the security Securities and Exchange Commission or anything.

In addition, this call may contain non-GAAP financial measures, including our lifecycle operation or normalized.

Adjusted EBITDA Ari.

Reconciliation of the normalized FFO and adjusted EBITDA, our economic income.

Welcome to calculate after both are available in our supplemental package thousand 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 different behavior in our form 10-Q be filed later today with the accuracy and in our supplemental operating and financial data on our website at Www Dot SBC <unk> Dot com.

Investors are cautioned not to place undue reliance on any forward looking statement.

With that I'll turn the call over to John.

Thank you Chris.

The call was 19 and related.

The United States outside of dramatically magazine.

No.

It's particularly hard hit I've been hotels restaurants, now the service retail businesses like there hasn't been the Sims.

Well I see some demand midway through March significantly impacted the typically weaker first for.

Most severe facts are expected to be felt in the second quarter.

Yeah first the economy safely reopens, we expect gradual improvement.

Yes, we see has maintained strong balance sheet has well structured grants, which enabled us to be well position as we entered the pandemic there's a lot.

We are taking the necessary steps, both corporate and property love to help navigate the storm as we have previous pricing.

[music], we're taking multiple that's very difficult actions to preserve capital liquidity our liquidity position.

This morning, we announced we amended the credit degree is probably no $1 billion unsecured revolving credit facility and 400 million dollar unsecured Charlie.

Yeah, Matt, which Brian will discuss in further detail includes a waiver of certain financial covenants through March 31 2021.

Continued access to Undrawn.

Credit facility.

Also as we announced in March Sbcs Board of trustees reduce the company's regular quarterly cash distribution.

Common shares to watch out for share, which will preserve up to approximately $262 million what kind of 2020.

Oh planned capital expenditures for the remainder of 2020, well be priority to maintenance capital projects in progress.

Actual obligation.

At our hotels, our asset managers continue to work diligently with our hotel operators to mitigate the impact of depends on how collaboration.

Efforts to reduce operating expenses include but not limited to staffing reductions of furloughs utility consumption reductions personnel reductions eliminations.

Service contract, we've actually got eliminations.

Food and beverage outlet and fitness center closures and the reduction or elimination certain marketing expenditures.

We have also raised temporarily suspend contribution store the reserves on the Cerner property agreements.

[music] droughts and sort of America, which operates which represents about 25% about minimum returns right. That's been designated as an essential services I'm any public authorities, which has allowed <unk> to continue operating as it plays an important role in supporting the nation's flash.

She has also been negatively impacted by the pen.

Particularly by the closure of its full service restaurants.

Because the Cline shale gas.

However, gasoline sales only represent approximately 10% overall fuel cells.

The essential services to the trucking industry, including diesel fuel cells quick service restaurant offerings.

Truck repair services have enabled us to navigate early stages of the spend.

Most of our 10th.

We expect you will continue to remain current on their rent obligations to actually see.

Our retail naturally see my friend discussions, but other than at least retail tends to understand the impact of covert 19 on their businesses.

Valuating tenant rent deferral requests on a case by case basis.

Really I was a good times industry segment corporate financial health rent coverage liquid.

As of last week, we had raised rents parcels totaling $8.6 million, representing one to three months friends, which generally will be advertising trends easily over 12 months beginning September.

Turning to our consolidated hotel results.

First quarter is usually the seasonally weakest water from Charles and for the industry generally.

But the absence of real demand during the last two weeks of watch a devastating impact across lodging sector.

Well the first quarter not comparable hotel started out with resolved flat to slightly up versus last year. The pandemic caused final results to reflect average occupancy has 56.9% down 10.5 percentage points from last year average daily rate of $121.

When 6% from last years for railcar $68, maybe six cents a 19.5% from last year.

With a few exceptions demand was made up of airline growers.

Healthcare workers or extended stay guests, usually always tell it's temporary housing.

Oh, I would tell portfolios were negatively affected.

Occupancy for our comparable hotel portfolios ranged between 51 point, 764.7%, which was down between eight and 15 percentage points versus 2019 for score.

Average daily rates range between 77, Dollarsnine hundred $38.

And 1.66, 0.7% versus last year score.

As a result, rep or injury $41073 down between 18, 24, 24.4% compared to last year.

Subsequent to quarter and hotel performance continues decreased dramatically industry what.

As the impact of travel restrictions will stay home what does continue hotel performance within the top 25 markets has underperformed all other markets citywide events, most gatherings of kind of where people were canceled the people sought out proceeds safety and low lower population density locations.

Hi concentration closures, it's among full service urban hotels, but business levels have been substantially reduced at all times.

During this time, we have drawn security deposits and guarantees from our operators.

Ill see if I had a minimum returns even at the credit supports the please to windfall in our <unk>.

We had closed 90 hotels since the end of March about 6% of I told portfolio.

This is a 14% close rates because of set hotels.

16 of our close hotels, a full service hotels.

This was the best way to reduce losses, we estimate, we're saying $1.9 million per month, keeping these hotels flows rather than open these conditions.

Hi, select service, an extended stay hotels or operating with extremely limited SAP reflect minimal business levels driven by various stayed home restrictions throughout the U.S. So the 28 days I just may 2nd 2020 occupancy for hotels was 23.3%.

Despite overall weak demand a suburban extended stay hotels in select service hotels have so far performed better than our urban full service hotels are extended stay hotels and reported stronger occupancy is there any other type.

Oh hotel and are forecasted to realize continued base occupancy from long term residents medical construction government business.

I would tell what bothers comprised of 56% extended stay hotels, ranging from the appeal to the upper upscale Smith travel chain scales.

Looking ahead, our operating not predicting that the steepest revpar declines of the year will they experienced during the second quarter sterilization third quarter and the started recoveries Faulkner.

We expect a diverse portfolio of suburban expense that and select service hotels married recovered more quickly than our urban full service hotels, let's stay at home waters, a lift as we expect guess may prefer a smaller hotels less densely populated suburban communities to larger be group hotels at least until the south crisis.

It's behind Us.

<unk>.

We were hopeful that the gradual lifting of restrictions good common sense, social distancing hygiene.

Our recovery to take hold in our hotels restaurants theaters fitness centers and other service you tell assets across our portfolio.

The combination of our high quality portfolio of hotels retail assets, the secure structure of our agreements and that liquidity management should enable us to navigate these difficult times pillar recovery takes hold.

With that I'll turn the call, Wisconsin discussion now they split filling in for a detailed as well as our recent investment activity.

Nice job.

As of March 31st to government why do you see all the EUR 13 that we service oriented retail properties.

Great I travel centers with 14.5 million square feet required annual minimum rational brand or $75.5 million.

Which represented 39% recipes total annual minimum contract threats.

<unk> was 90% leased by 187 patents with a weighted average lease term for like why one year operating another 120 brands.

Districts.

Yeah I heard your coverage message is that these portfolios minimum rents was 2.2 rate hikes in trailing 12 month basis as of March 31st that's why.

Our two quite agree to types as of December 31st 2019.

Right coverage for our largest tenant Trauson has of America up was 1.7 times for the trailing 12 months ended March 31st to outweigh.

First of all quite Ninesix cocksure prior period or bioware doctoral margins increased operating costs.

Every day, 25.5%, that's pretty season Democrats and returns to current on all this lease obligations to your desk.

As you see how they're not really ties represent 13.7% best wishes total total minimal RASM returns.

As of April Thirtyth, SBC has quite a 45% of people actually status.

They test result has entered into rather for all agreements with 84 that Ministry of health has the weakest required an aggregate of six secure hard dollars or six point worse at total annual minimum RASK returns.

I don't really is ready for older but wanted to pretty much the Brad it won't be repaid by the times over a 12 month period beginning in September 2020.

SBC after for an aggregate of $8.6 million threats in a rising 4.7 $5 for April $2.4 million for pay the $1.5 million six years.

Notably read recently experienced several of our tax resetting previously requested cracker win as a result of accessing more quickly.

Check protection program.

This is that many of our other small up inside that lease retail operators qualified by executing battery Atlantic rubber.

Turning to leasing activity during the first quarter SBC attributes renewals for an aggregate of 60000 rentable square feet and I know annual minimum rents that were in aggregate produced $7000 less than prior rents for the same space.

The weighted average lease term for these leases were 5.1 years, we've already seen concessions.

Turning to our recent investment activity.

Quarter ended March 31st 2000 twice SBC Salt six net lease properties were actually up 290000 square feet five states.

Aggregate sales price of anyway dollars actually see also acquired at 4.3 net lease properties. During the first quarter approximately 6.7 thousand square feet. Your states, which is required to aggregate a $500000 of annual minimum rent for an aggregate burst suppression $7 million.

As for easier and everybody wants to sell seven net lease properties.

Approximately 821000 square feet six days.

At least as required an aggregate of $5.4 million of annual Democrats.

For aggregate sales pressure, but not quite $4 million, excluding post close.

Actually its expects to sales to take away by the third quarter 2020.

We were also in a process of marketing for sale 20 went up 33, Marriott branded hotels as well as watch your marketing efforts related to our 39, that's the guest suites hotels.

We currently expect transactions related to any of you sort household should wait until later in 2000 22021 as a result of current market conditions trigger Cocos actually pandemic.

2.5% gross operating profit margin per cent is decreased by 10.6% to 24% Engross operating profit decreased by approximately $67 million driven primarily by the sharp occupancy declines during the last two weeks of March.

Although the G.O.P. line Fawcett are comparable hotels were down from the prior year as a result at lower if any reserve contributions partially offset by higher insurance costs.

Cash flow available to pay a minimum returns in rents for our comparable hotels defined $63.5 million or 64.7%.

Cashwell coverage of our minimum returns and rents for 321 profitable hotels decreased the 0.24 times from where the 2021st quarter compared to point 70 times for the prior quarter.

Certainly do I consolidated financial results normalize if oh, it was $123.1 million into 2021st quarter compared to $144.6 million and the prior to the border decrease 13 cents per share.

The decreases due primarily the operating losses at US enough then window motels in 2020 for a score increasing interest expense.

Partially offset by increased returns and rents as a result of our 2019 acquisition activity.

Adjusted He's already was 195 and it all into 2021st quarter.

<unk> coverage ratio is 2.7 times of the first quarter net debt to annualized suggested even during the 7.9 times a quarter rent.

We had previously indicated our target leverage levels to be around six times.

Based on the car environment, we expect our leverage metrics continued to be elevated <unk> hotel portfolio results stabilize.

G.N.A. expensive, the 2021st borders $14 million compared to $12.2 million for the first quarter of 2019.

The increase in genetics meant as a result of higher business management fees paid armario due to increased debt levels, partially offset by a decrease in our equity market capitalism.

As a reminder, I businessman to fees paid on a lesser up total market capitalization our assets under management is currently being paid on total market capitalization.

We believe this calculation is indicative of the alignment of interest Shareables built into our management contract with the <unk>.

30 rock balance sheet as a quarter and debt was 50.4% of total gross assets and we had $100 million with cash including $45 million of cash escrow, primarily for future improvement Star hotels.

We have well <unk> next maturity is 400 million of on secure senior notes do in February 2021.

Next I'd like to discuss or liquidity.

As of March 31st 2020 for the balance of our security deposits and guarantees available to cover shortfalls and cash flow available to pay our minimum returns and rents under certain of our tell operate agreements as the $129.5 million.

Based on car estimates, we project all the security deposits in most of the guarantees could be exhausted in the second quarter of 2020 as a result of current market conditions.

As a reminder, marriages contractually requiring a baby 80% of the minimum return feudalistic avoided defaulted to security deposit guarantees the played it.

I see is required to maintain its security deposit balance at a minimum of $37 million devoted to false.

During April 2020, we advance navigate up $70.7 million is working capital to our certain of our hotel operators to cover projected operating losses.

We are currently projecting an additional $35 million at working capital of answers could be fun to go in the remainder of the year.

Generally under the terms of our hotel agreements working capital advances are reimbursable to us from a share of feature cash flow from the look of the hotel operations in excess of the minimum return is due to loss in certain imagined p. was if any.

As Todd discussed we differ $8.6 million grants to date for certain retail times.

A recent accounting guidance related to rent relief request. These differences are considered payment plans that we did not expect them in fact I revenue recognition. However, they would come or reduce our cash flows.

The day no ran has been forgiven our bayes.

As of today, we have $500 million available under a 1 billion dollar credit facility.

Yeah, I noted we amended the credit agreement governing this facility and up for a million dollar and secure terminal.

The amendment gives us continue to access to and drawn amounts and includes the labor up certain financial commitments covenants through March 2021.

The interest rate, we currently pay them, both a revolver and turn them during the waiver period will increase 50 basis points parameter.

Additionally, would agree to maintain unrestricted liquidity of $125 million.

Distributions on our firemen shows what we've limited to amounts required to maintain read status in one set for common share for Florida.

We currently expect to maintain the common debit in level at one cent per quarter. If you want a few thousand 21, which is the end of the labor period.

The Amendment also includes restrictions on acquisitions encouraged certain bad and cheery purposes.

Capital expenditures will be limited on the amendment to maintenance capital contractual obligations projects in process another committed a mouse.

During the first quarter of 2020, we find it $34.4 million hotel improvements for 1 million dollar them at least improvements.

Currently expect the font approximately $71 million of capital improvements for the remainder of 2020 for projects that fit within the parameters of our credit facility Amendment.

As we look forward and that's that maturities in February of 2021.

Although we currently believe me of Ambled liquidity to carries forward into next year, we pay the $40 million of senior dots maturing in 2021, we're currently assessing all of our options to improve on the quantity position during this extraordinary times.

We're exploring different solutions, including the federal reserve is probably market corporate credit facility and other traditional financing options.

We expect any proceeds we do raise many capital transaction, including any government program would be used to pay amount of those sanding are all their credit facility or outstanding terminal.

Despite the challenges ahead, we believe we managed through this crisis as we've done through a previous downturns.

Operator that concludes I prepared remarks are ready to go down the line for any questions.

<unk> answers questions to ask a question you may <unk> <unk> <unk> <unk>.

They are using a speaker Foley please pick up your hands up before pressing okay.

Till we tie your question you can press Die then too.

I first question today, <unk> will be Riley F.B.I.

Good morning, Guy Yeah, you can you go into a little bit like eat at all on that type of <unk>. Yeah retail tenants that are requesting deferrals N.N. I think you kind of quickly went through a couple of months <unk> do you expect getting millions.

But to what magnitude you think that there's <unk> might increase or yeah.

Hey, Brian side.

So we're typically see the <unk> large portion of them are in the movie theaters.

And the fitness centers, you know that 10 minutes and industries, where the operators just shut down.

At least for the near term. We also are sitting in a lot of casual dining as long as some of the quick service I'd say, that's the majority of where the for all requests are coming.

Yeah, we have differ the majority of it is April a lot of those request came in kind of that last week March before you know a lot of that.

Cares Act headband finalized and where the tenets really understood where they could be getting some government looted from so.

You know for contacts.

I'd say.

Oh, the right to for also be Frances.

In April only 43% of those be branded per may so well collections are consistent with where they were at this time in here for or.

Ah cautiously optimistic that may is going to look a little better in as.

As some of these restrictions are lifted into some of these tennis star to open for business again or over in a more they aspects of their business and somebody's tennis can take advance from the larger can have specific we can take advantage of.

Specifically to mainstream writing program programs that there may not to qualify for before.

Yeah, we're hopeful that that June July August or we do see some improvements.

You know in May we did have a few tenets that requested made at the request vehicles and but for the most part most of the request. If we granted came in came in that last week in March 1st we could vehicle.

Oh are you skills for April ran <unk> as we move through May and as it relates to the <unk> are you requesting that the tenets provide you with financials in order for you to add cyclone their ability to pay back.

Yeah see we the first pass your first the first part of a question.

Yeah. Most of the April Rand collections, you know I think we've accounted for.

Oh, Yeah, we've got we've collected 45%, 42% we have different and then there's another 13%.

Where we're currently negotiating some kind of landing extenuating tennis, where we may end up.

No we won't forgive rent, but we may <unk>, but there is a handful of 10 minutes, where we will likely put them into good into the fall.

Exercise or remedies under the beliefs, we haven't done that yet, but you know our first priority is to try to work with these tennis, but we may end up doing that.

Well.

What was the second <unk>.

I think I I forget if you answered it or not the finances have you been requested the financial to ascertain ability to pay yeah. We are we are requesting that we are requesting the financial who didn't always get those it at the end of March again, they were kind of come again request for coming in very quickly in April that was coming to it [noise].

The first thing we look at it was okay. Just your store opened for business can you get some kind of government really you know what do what do the financial we we did request the financial Jeopardy always get down but we are we are trying to get them. When the cat you know a lot of you use what we're seeing a lot of his restaurants they operate.

<unk> very low margins to carry high debt load. So it's it's we're not we were surprised that those came into we had to that.

<unk>.

You know again, you'd movie theaters, and fitness center and fitness centers that were you know.

The government mandates to have to shut down we were surprised that goes Kevin either we did I mean, we do get a number that we deny it as well and those kind of still end up paying.

Provide them in the lease we are we are doing that.

And lastly, and probably most importantly, when the security deposits for the hotel operators, namely Marriott and Intercon run out probably in the second quarter. I know you guys noted in your prepared comments you know what Marriotts contractually agreed to pay I think you said, 80%.

Minimum rents and intercon to avoid default, but this crisis is unlike what we saw another one in the great recession, and I've always been kind of a amazed that they re up.

On these contracts went when they come up for renewal book, but what do you assign the probability that this time around you know they just throw off their hands. After the security deposits run out and just just let it default I mean, how do you think about that.

Well Brian.

My first along.

Yes.

Yes.

The beauty of our large portfolio.

Transactions is that.

Weve pool.

Mary over 120 properties and with the I actually report properties.

And.

Well branded well located hotel typically perform well under normal circumstances and.

And we do have the ability to.

To the flag and rebranded as other types of hotels. If there is a fault. So I think it's important to these brands not to lose standby new hotel on their systems and so I think this about revisions that we do.

Get paid even after the credit support as is.

For sure.

Okay. Thank you I'll go back into the queue. Thanks.

This concludes our question answer session I would like to hand, the call back over to John Murray for any closing remarks.

We saw thank everybody for joining us on todays call stay well.

Yeah.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.