Q2 2020 Service Properties Trust Earnings Call
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I would now like to turn the conference over to Kristin Brown director of Investor Relations. Please go ahead.
Good morning.
Joining me on today's call our John Murray.
Ryan Dunlap Chief Financial Officer are great Keith.
Today's call include the presentation by management, all my questions first batch expression analysts.
Please note that the recording retransmission and transcription of today's conference call is prohibited without the prior right.
[music] would like to point out that today's conference call contains forward looking statements within the meaning the private Securities Litigation Reform Act 1995, other security bond.
These forward looking statements are based on sbcs present beliefs expectations as of today.
2020, the company undertakes no obligation to revise our publicly released.
Resolve any revision to the forward looking statements made in today's conference call other than to filings with Securities and Exchange Commission.
[music]. In addition, this call may contain non-GAAP financial measures, including normalized funds from operation or normalized.
And adjusted EBIT dollar Ari.
Reconciliation of normalized FFO and adjusted EBITDA Ari to net income and welcome caught us to calculate Abbott, though are available on our supplemental package found in our Investor Relations.
[music] other companies' website actual results may differ materially from those projected any forward looking statement.
Additional information concerning factors that could cause those differences.
And in our form 10-Q to be filed later today with the PC.
And in our supplemental operating and financial data.
Site at Www Dot FCC <unk> dot com.
Investors are cautioned not to place undue reliance upon any forward looking statement.
Please note.
John will provide commentary on ice Jeep evolved during his prepared remarks, but we will not be taking questions related to the ongoing discussion between actually see I, it's cheap and what that color were controlling.
[music], Thank you Christian and good morning.
The Golden 19 pandemic related locked down most of the United States, It's had a dramatically negative impact on the economy and that's it hotels restaurants, and other service retail businesses like theaters and fitness centers, particularly hard.
Although significant uncertainties remain as to the timeframe and trajectory of recovery.
We're confident that the most severe effects are behind us as we have seen the gradual improvement across our portfolio since April when that impacted the pandemic was at its most acute.
We continue to take the necessary steps to preserve capital and solidify our liquidity during these challenging times.
We have raised new debt capital and largely addressed by 2021 debt maturities.
We also amended a $1 billion revolving credit facility to ensure continued access to undrawn amounts and obtained waivers of certain covenants. We knew we would not meet and this operating environment.
Brian will discuss these financing transactions more details in a few moments.
Well the steps we've taken to further reinforce our financial position include reducing our quarterly dividend differing non essential capital spending moving forward with certain about previously planned hotel sales, which Todd will discuss in more.
[music] as we announced in late July we did not receive payment for my age Chief of 8.4 million dollar balance of July minimum returns after applying the remaining $9 million obliged to security deposit well the August minimal returns and rents of $18 million due to us.
As a result, we satisfy edge g., a noticeable can termination of the ice tea agreement in late July.
We have begun discussions with ice GE regarding its management agreement with us to see if there may be a mutually beneficial resolution.
Absent a cure of these default or no settlement was reached we currently plan to drill transition management and branding of these hundred three hotels from ice tea to Sonesta Es.
As a reminder, SBC owns 34% ups enough.
[music] the second quarter of 2020, Mark the historic low for both the industry and I would tell results average occupancy for our comparable hotels in the second quarter was 31.2% down 46 percentage points from last year.
Average daily rate was $83 down 31.5% from last year's quarter, and Revpar was $26 down 72.3% from last year.
Importantly, we have seen continued gradual improvement in most markets each week since the middle in April.
[music], while none of our hotel portfolio spared the immediate dramatic impact of the pandemic, how suburban extended stay hotels and select service hotels outperformed our urban full service hotels, reflecting demand from airline cruise healthcare workers special projects.
Or extended stay guests using a hotels temporary housing.
Oh 183 extended stay hotels reported occupancy is a 45.7% during the quarter compared with occupancy was up 16.4%, 12%, respectively for a 95 blended service and 51 full service hotels.
[noise] results also vary by portfolio has leisure first responder social groups project and government demand outweighed business in group travel.
The results favorite portfolios with competitively priced offerings in the non suburban locations they could accommodate extended stays as needed.
For a comparable hotels are sonesta in Wyndham portfolios performed the best in terms of both nominal revpar and percentage declined from last year's quarter.
Conversely, our Radisson married portfolio saw the grads percentage revpar declines versus last year and the weakest nominal revpar results.
[music] subsequent to quarter and hotel performance continues to improve albeit gradually industry wide with a few plateaus in markets that have experienced moderate buyers resurgence and various degrees of rollbacks in terms of travel restrictions.
[noise] all the time about 329 hotels are now open an overall occupancy has steadily increased to 43.4% for the four weeks ended August 1st.
From a lot of 21% neighbor.
Looking ahead, our operators are seeing continued stabilization in the third quarter and the start of recovery in the fourth quarter.
We expect a diverse portfolio of suburban extended stay in select service hotels will continue to outperform our urban full service hotels throughout 2020.
I stay at home orders are lifted we expect guess will prefer a smaller hotels unless densely populated suburban communities to large urban group hotels at least until this health crisis is behind us.
Also extended stay hotels with full kitchens provide maximum flexibility for guests in markets, what's still restricted restaurant access.
Turning to our net lease retail portfolio Travelcenters of America, which represents about 25.6% of Amanda minimum or returns and rent.
That's continued to operate two out the pandemic due to its designation as an essential services by many public authorities.
Although negatively impacted by the closure, but full service restaurants, and the significant decline in the sale gasoline tea is primary services to the trucking industry, including diesel fuel sales quick service restaurant offerings and truck repair services have shown resiliency and then able to to navigate the pandemic better than most of our.
Tenants.
Yeah. Its current on their rent obligations to us property level coverage at our two locations was 1.91 times this quarter.
My service retail net lease tenants right collections have also trended upward to 80% July from a lower 45% Naples.
Businesses that were temporarily closed due to government mandates or guidelines continue to reopen.
Our service retail asset management team continues to work with our net lease retail tenants to evaluate rent deferral requests on a case by case basis.
Request for deferrals have slowed significantly except for certain tenants in the hardest industries like movie theaters, whose reopening prospects have changed Todd will discuss this in detail what amount.
[noise], we're hopeful that the gradual lifting of restrictions and good common sense, social distancing mask usage and hygiene will allow recovery to take hold and our hotels restaurants theaters fitness centers and other service retail assets across our portfolio.
Although significant uncertainties remain as to the timeframe and trajectory of recovery. We believe we have entered the worst of this crisis and that we are well capitalized with ample liquidity and well positioned with a diverse portfolio of assets.
With that I'll turn the call over to Todd to discuss on at least portfolio for the detailed as well as our recent investment activity.
Thanks, John as of June Thirtyth 2020, we ought to 800 I'm that we service oriented retail properties include air travel centers.
With 13.7 million square feet, requiring annual minimum wraps up $369.4 million, which represented 38% up our total annual minimum returns rats.
Portfolio was 95%, where you just by 180 tenants with a weighted average lease term up 11.1 years.
Operating under a 129 brands and 23 distinct industries.
The aggregate coverage of our net leased portfolios minimum rents was 2.16 times on a trailing 12 month basis as of June Thirtyth 2020.
Right coverage for our largest tenant Travelcenters of America was 1.83 times for the trailing 12 months ended June Thirtyth 2020.
This is 1.97 times for the prior year period due to lower gross margins as a result of a pandemic and lower fuel prices.
Representing 25.6% of our minimum rents returns to use card on all this lease obligations due to ask you see.
For other not least tenants, which represented 12.8% of our total minimum reps returns. We expect coverage metrics will continue to decline for various retail tenants as a full effect of the pandemic is realized they collect a 59.3% of restaurant these tenants trying to second quarter.
Increasing to 75% dropped from 45% in April and 58%, Matt We talked at 80% of July rents for the tenants.
Today, we have entered into rent deferral agreements with 80 that lease retail tenants with leases requiring an aggregate of $59.3 million or 6.2% of total annual minimum rents returns.
Generally these write deferrals are for one to four months of Brad and will be repaid by the tenants over 12 to 24 month period, beginning of September 2000 Teus.
We have deferred an aggregate of $11.3 million Brent today.
[noise] turning to leasing activity agenda second quarter, we entered lease renewals for an aggregate of 507000 rentable square feet.
That weighted by rentable square feet average rents that were 7% higher than prior rents for the same space. The weighted average lease term was 13.7 years and leasing concessions the capital commitments were $7.5 million or $14, an 80 cents per square foot.
We also entered into new leases for an aggregate of 40000 rentable square feet at weighted average rents that were 25.9% below prior rents for the same space.
The weighted average lease term for these leases was six years and leasing concessions a capital commitments <unk> point $2 million or $3, a 93 cents per square foot.
Turning to our recent investment activity during the quarter ended June Thirtyth 2020, we sold for net lease properties with an aggregate of 810000 square feet in four states for an aggregate sales price of $56 million.
We've also entered into agreements to sell seven net lease properties totaling approximately 60000 square feet six days when leases require an aggregate of $332000 of annual minimum rents for an aggregate sales price of $6.9 million. Excluding closing costs. We expect these sales to be completed by the third quarter of 2001.
At the onset of a pad have equity we're targeting to rice bran a million dollars hotel sales.
Well some of these sales will be delayed until later in 2000 or 20 to 2021, we've entered agreements to sell it Marriott branded hotels and one window brands like how does 1178 rose in five states with a net carrying value of $30.3 million for an aggregate sales price of $48.8 billion.
We expect these sales to be completed in the fourth quarter of 2020 and use the proceeds to repay outstanding debt a mouse.
Our annual minimum rent.
Our annual minimum returns due primary out will be reduced by the amount allocated to the Marriott branded hotel sold which are $7.9 million as of June Thirtyth 2020.
But I hotels under contract to sell wherever she doctors in line with greedy pandemic crisis.
Generally the Marriott and wind up branded extended stay hotels that were previously in the market to sell have maintained our values and we continue to receive significant interest from his portfolios from all cash buyers as a result, we believe the timing for disposition of many of these hotels, maybe earlier than our expectations at the time of our Q1 earnings call.
Our management agreement with Wyndham expires on September Thirtyth 2020, and we also expect the transition management and brands are these hotels to some best at that time.
Unless sooner terminated with respect to any hotels that are so I'll now turn the call over to Brian.
Thanks Todd.
Starting with operating results about 306 comparable hotels this quarter Revpar increased 72.3% gross operating profit margin percentage decreased by 40.5% to 1.95 per site and gross operating profit decreased by approximately $182.6 million driven by the shop occupancy declines during the quarter, particularly.
Early in April.
Below the GLP line costs at our comparable hotels were down $24.5 billion from the prior year as a result below or above your reserve contributions, which were assessed threat suspended for certain of our hotel agreements and lower system another fees paid to the brands.
Cash flow bill to pay our minimum returns around for our comparable hotel declined $158.1 million or 121% to a loss of $27.5 billion for the quarter.
Cash flow cover department lumber turns around for Adrianna sex comparable hotel decreased the negative 0.23 times for the 2022nd quarter compared to 1.1 times for the prior quarter.
All of our hotel operators were quick to implement cost savings measures of mid scale back operations.
However, it would also made necessary investments and the operational changes to support employee and guest safety across the hotel portfolio.
We estimate approximately $10 million incremental expenses have been spent year to date to mitigate covert 19.
It's too early to say, what the permanent impacts of operational changes will be a hotel operations.
[noise] turn into our consolidated financial results normalized FFO was $78.2 million in the 2022nd quarter.
We had $168.8 million in the prior year quarter, a decrease of 55 cents per share.
The decrease was due primarily to operating losses at us nothing Wyndham hotels, the unguaranteed portion of our marry up minimum returns.
The suspension of that happened he reserve contributions across the portfolio and an increase in interest expense, partially offset by the impact of the S&P a transaction closed in the third quarter of 2019.
Adjusted EBITDA or he was $152.2 million into 2022nd quarter. Our adjusted EBITDA carried interest coverage ratio was 2.1 times for the second quarter and net debt to annualize just to be diary was 10.2 times at quarter end.
Gionee expense for the 2022nd quarter was $11.3 million compared to $12.2 million for the second quarter 2000, I came as management fees paid RMR decreased based on our equity market capitalization.
Turning to our balance sheet liquidity as the quarter end debt was 51.7% of total gross assets and we had $49.9 billion with cash including $29.7 million of cash escrow, primarily for future improvements to our hotels.
During the second quarter, our hotel operators funded $121.2 billion of the shortfall the hotel cash flows to our minimum returns of rents in the form of security deposit application guarantee payments.
As of June Thirtyth 2020, the balance of our security deposits and guarantees available to cover shortfalls in Cashcall Bill to pay our minimum returns of brands under certain of our hotel agreements was $45 million.
The credit support our hotel agreements have been pressured more quickly a deeply than we've ever seen before.
We exhausted both our security deposit guarantee under our married agreement during the second quarter and in July we apply the remaining $9 million of security deposit under our idea agreement.
Based on current estimates we project our Hyatt guarantee it could be exhausted as soon as the fourth quarter of 2020.
[noise] as John noted IC defaulted on its minimum payment obligations in July.
Absolutely curable agreements defaults or amended agreement Lifesci going forward, we will only received the operating cash flows from RSV branded properties.
Under our married agreement for 122 hotels, we ever see payments or utilize the available security deposit for aggregate, an 80% of the minimum returns due for the six months ended June thirtyth.
Given the security Bobby can guarantee from Meritas completed Mariano is required to fund any shortfall cash flows generated by the hotels and 80% annual minimum returns due to us.
The 80% threshold and settlement of cash amounts are calculated on a monthly basis. After hotel results are finalized each period.
We will receive july's results later in August determine any amounts due from Marriott.
During the 2022nd quarter, we've asked an aggregate of $80.5 million, a working capital of a certain of our hotel operators to cover projected operating losses.
We're currently projecting an additional $20 million and working capital of assets could be funded over the remainder of the here.
Generally under the terms of our hotel agreements working capital advances, our reimbursable doors for our share of future cash flow from applicable hotel operations in excess of the minimum returns due to losses in certain management fees if any.
As Todd discussed, we've deferred $11.3 million of ramp day today for certain retail tenants.
During the second quarter, we recorded reserves for uncollectible revenues of $5 million for certain of our to at least tenants.
Notably $2.5 million or this reserve related to certain AMC theater leases.
800000 related to our retail tenant at a properly property, we sold during the quarter.
In May we amended the credit agreement governing our revolving credit facility and our 400 million dollar term loan.
As a reminder, the amendment gives us continued access to Undrawn amounts include the waiver of certain financial covenants through March 2021 off.
During the second quarter of 2020, we funded $39 million of capital improvements that we currently expect to find approximately $32 million with capital for the remainder of 2020, primarily for maintenance capital and ongoing renovations.
In June 2020, repurchased 350 million of our $400 million senior notes due in February 2021, and the tender offer.
Also in June we issued $800 million, an aggregate principal amount abuse, 7.5% unsecured senior notes due 2025 that are guaranteed by certain unless we see subsidiary has been underwritten public offering.
We use the net proceeds of this offering to repay amounts outstanding on our revolving credit facility, including the amounts drawn from the tender offer.
As of today, we have almost full availability on our $1 billion revolver subject to our 125 million dollar minimum liquidity requirement under our amended credit agreement.
And our net debt maturities the remaining $50 million in 2021 senior notes outstanding due in February.
Operator that concludes our prepared remarks, we're ready to open up the line for questions.
[noise], we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
First question comes from Bryan Maher.
Yes, we are pleased go.
Good morning, everyone. A couple of quick question.
Or maybe not so quick when it comes to the hotel expenses, we are a little bit surprised at how low they work for the quarter.
Can you talk a little bit about what actions were taken there and how the agreement with Marriott Intercon and others might impact how about those expenses work for the quarter.
Good morning, Brian football as well I'll start on the on the income statement for SBC.
The credit support we receive a in the former security deposits in guarantees are presented an income statement as a reduction.
Two operating costs. So so the underlying hotel expenses were higher.
Then what what's in the in the gas consolidation.
In order to show that the right if the correct profit due to test we see during the period we have to.
Show sort of a contra expense amount if you will on the piano. So expenses actually you see that exceeded revenues in the period.
So to make sure we're clear on that.
The hotel portfolio, you know lost I.
I think as a $27 million for on a comparable basis for the quarter. So hopefully that gives you a little clarity on how to expense side works I mean, obviously cost initiatives in reductions across the portfolio were enacted but I just wanted to make sure you're clear on the presentation of the income statement.
Yeah.
Savings wise labor was down 60% or operational level.
And other cost measures right down the line based on the impact of Cowen.
Right, that's what I thought it wasn't meeting to put that but I just wanted to clarify.
John I think you mentioned that the Marriott.
I would tell their performed any particular reason why that might have bad.
No I think.
The Marriott really historically has excelled.
And.
The strength of their rewards program in their.
Corporate negotiated rates and.
Group sales and business transient drivers and.
In the pandemic.
That business has really dried up.
And I.
I think maybe that maybe it's a reflection on how many people have been furloughed.
Well or else, it's a reflection that.
That historically they've had it so good that they're not they're not as well prepared to sell.
The other other types of business.
When when.
Events like this head, but they just didnt really drive the business like a [noise].
Like some of the other portfolios.
Okay, and then kind of moving on to hotel asset sales you know I was pleased to hear.
That those are starting to ramp up again, and I mean, I assume that they've got being done it reasonable pricing I Didnt catch what was said on all regarding that and that's that tells which I think earlier this year.
You had made it is still sounds all but given the instances in which I aged he might not come to integrate the that's the C and there's an H.T. hotels, you branded as mass that would it make sense to hold off selling the others and that's that's because.
At that point, you have a really meaningful brand it's enough that I Becky gain traction on the recovery what are your thoughts there.
I think are you pretty much nailed it Brian we.
We have been evaluating the.
On the Sonesta, yes portfolio.
On the pandemic hit we are right about to launch a marketing effort to sell those assets but.
Uh huh.
As the impact of the pandemic settle then we obviously we saw that the.
Extended stay hotels were performing much better than any other hotel type.
And so we stopped.
The marketing efforts.
We also had been evaluating whether some of those hotels.
Mike.
Might be converted to an alternative use like multifamily and that's something we're still considering.
But in light of.
The edge GE situation.
Yes, you're absolutely right that would significantly increase the amount of extended stay hotels.
Sonesta operates if we if we're not able to work something out with agency.
And.
So so we're not currently moving forward or.
We've changed our plans with respect to the Sonesta es portfolio for now and.
We're going to reevaluate as we move moved through the recovery and and see what transpires.
Hi, Thank you very much good luck with a third quarter.
Thank you.
Next question comes from Dory cost of Wells Fargo.
<unk>.
Thanks, and good morning, guys can you tell us it's all the hotel managers. Other then air can pay their July.
On July returns and what percent of at least a rent payments were received in July.
So from a hotel standpoint, you know ice tea, which we've talked about in all our in our release and up in the script.
Yeah, we utilize the rest of the security deposit for July and did not receive the rest of that payment.
No not works a little bit differently, it's all done in arrears.
To date, we collected more than 80% of the returns. So it each period, we have to Relook at you know, what's what the hotels generated and how much were received today. They figure out you know who was what.
For the hotel portfolio.
Radisson continue to honor their guarantees.
Yes. It has been went I'm.
Just based on cash flows of other properties, which which are currently running losses.
Recent months, so net lease side of it collections of continue to ramp up.
Below 45% in April as.
Gone up to 80% in July.
And th incurred at all their obligations on top of that.
So we feel pretty good about the trend on that at least side of things.
July is early excuse me August early collection results seem to be trending a little bit better than July as well. So we continue to see that is enough good side.
And for asset sales I think you initially said 300 million, but I assume that was also including all of the Sonesta, which you just mentioned makes the sonesta Es suites may stay in the portfolio and then I.
I think previously you had said you are your marketing for sale that 20 Monday.
Right and this release it said that any unsold would go to snap that's I'm just trying to reconcile deep sea original 300 million with what I guess currently on the market are always being planned to be sold.
Yeah.
Since the pandemic had the the sale process has been dicey. So I apologize if it's gotten a little confusing the 300 million did not include the sonesta es portfolio.
So we had it was based on the 20 Wyndham branded hotels in the 33 Marriott branded hotels.
And you know Todd mentioned the.
Transactions, we have currently under agreement.
We're very close on purchase and sale agreements.
Two other.
Groups of assets.
Assets.
The portfolio 15, Hawthorn suites, and the portfolio of 16.
Matt branded hotels, that's 13 courtyards and three residence inns.
Huh.
Per our agreement can remain will remain in the Marriott brands.
No I think probably within the within the coming week will most likely signed the purchase and sale agreements there. So.
Possible that those would close.
[noise] late in the fourth quarter, but you know, but together the pricing.
Uh-huh.
Is.
You know one.
170 ish million dollar inch on those two.
Okay. So the 300 million listed that 33, Marriott and the 21.
Correct.
Okay got you and.
I guess, if isn't Marriott follows the path as I see.
But it should we assume that.
That does hotels couldn't be rebranded that's left is also.
Yeah, I mean, we're hopeful that.
That doesn't come to pass, but but if it if it were to happen.
There isn't any there's no reason why we would treat married to any differently than we're treating ideology.
We will try to protect our agreements.
And our returns.
<unk> <unk>.
No im good thanks.
Thank you.
This concludes our question and answer session I would love to turn the conference back over to John Murphy, Chief Executive Officer for any closing remarks.
Thank you very much for joining us today stay well.
[noise] Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].