Q2 2019 Earnings Call
Good day and welcome to the Hospitality properties Trust second quarter 2019 financial results Conference call.
This call is being recorded.
At this time for opening remarks, and introductions I'd like to turn the call over to senior director of Investor Relations. Katie Strohacker. Please go ahead.
Good morning, joining me on todays call, John Murray, President, Brian Donaldson, Chief Financial Officer, and Todd Hargrave, Vice President today's call includes a presentation by management, followed by a question and answer session with analysts.
Please note that the recording retransmission and transcription of today's conference call is prohibited without the prior written consent of HBP.
I'd like to point out that today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 90, 95, and other securities laws.
These forward looking statements are based on HBP present beliefs and expectations as of today August nine 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 adjusted EBITDA Ari.
Reconciliations of normalized FFO and adjusted EBITDA Ari 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 Dot H.P.T. read dotcom.
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 second quarter normalized FFO of one dollar three per share a decrease of 3.7% compared to the dollar seven per share reported in the second quarter of 2018, primarily related to our disposition.
20 travel centers and the lease amendments with TJ, we completed in January .
The most significant event this quarter was our announcement of the acquisition of a $2.4 billion net lease portfolio of service oriented retail properties from FMT a re.
Todd will provide an update on that transaction shortly.
For each party's hotels second quarter 2019, comparable revpar decreased by 2.1% versus the 2018 quarter, resulting from a 1.2% decline in rate and a 0.7 percentage point decline in occupancy.
HPG is comparable Revpar performance trailed industry results this quarter as did expertise comparable non renovation hotel performance, which declined 2.3%.
Hotels that were renovated in 2018 recognized healthy double digit revpar growth this quarter with multiple success stories in our marriage, one married to 34, Radisson and sonesta portfolios.
We expect lift from these hotels throughout the remainder of the year.
However, renovation disruption and other factors more than offset this tailwind.
In the second quarter, we had 14 hotels under renovation.
Versus 11 comparable renovations in Q2 2018.
Of the 14 comparable renovation hotels this quarter non referral service assets versus three in the same period last year.
Renovations were evenly divided across the HKG marry 234, sonesta and Radisson portfolios.
In addition to renovation disruption the portfolio was negatively impacted by nonrecurring FEMA business that impacted 15 hotels and reduced demand from fewer citywide events in Chicago.
Supply remains an ongoing burden on hotels and hasn't impeded the ability to replace non repeat business and to ramp up post renovation as easily as in past years.
Turning to hotel portfolio performance, Mary one portfolio Revpar declined by 8.6%.
Due to a two percentage point decrease in occupancy, partially offset by a 2.2% increase in rate.
Married number one was materially impacted by non repeat business at seven hotels and two hotels under renovation.
Hotels in this portfolio that had been a revpar performance drove rate through yielding strategies and capitalized on localization demand in markets like Williamsburg, and Scottsdale This quarter.
Coverage at our Marriott one agreement remains strong at 1.18 times for the trailing 12 months.
America 234 portfolio experienced revpar declines of 2.3% due to occupancy declines of 1.8 percentage points and flat rates.
This portfolio had three hotels under renovation in Q2.
Where revpar declined by 6.2%.
Market weakness in Chicago from fewer Citywides.
Resulted in significant revenue declines at the residence Inn downtown Chicago.
Coverage at our Marriott 234 agreement remained solid at 1.06 times for the trailing 12 months.
On previous calls we've told you we have been in discussions with Marriott regarding numeric Hawaiian possible outcomes, which include combining the core hotel with the Marriott, one and 234 hotel portfolios when the choir lease expires.
On December 31 2019.
Other possible outcomes include the sale or rebranding of the quiet period.
In connection with the discussions with Marriott, we're also considering the possibility of selling approximately 30 hotels.
Discussions are ongoing and it's too soon to provide more clarity on how these discussions will finally conclude.
Revpar at our comparable SG portfolio declined 4.6% caused by 3.5% decline in rate and a 0.9 percentage point decline in occupancy.
Our comparable full service non renovation and comparable extended stay portfolios both experienced decreases in revpar of 1.7%.
Renovation disruption was experience at our Intercontinental Toronto Hotel, Elecsys, Seattle, and Crowne Plaza Columbus hotels.
Other negative factors included Nonrepeat femur.
Business in Miami, and Houston, and occupancy declines that hotel Allegro in Chicago due to fewer citywides.
Our comparable sonesta portfolio increased revpar by 2.5% driven by occupancy increases of 1.9 percentage points, partially offset by a 20 basis point decline in rate.
Comparable portfolio Revpar outpaced industry growth by 1.4 percentage points driven by solid trends in performance strong results at the Royal Sonesta, Clift hotel and ramp up associated with 14 recently renovated ETF suite hotels.
Full service hotel renovations at the Sunestas and Silicon Valley, Fort Lauderdale, and Saint Louis negatively impacted Revpar performance by 3.3 percentage points.
Revpar at our Wyndham hotels was down 2.1% this quarter caused by a 3.6% decline in rate, partially offset by 1.1 percentage point increase in occupancy.
Revpar declines were driven by Nonrepeat FEMA business in Houston, and the reduced citywide compression in Chicago.
Wyndham has continued to pay HBT, 85% of the returns due under the management agreement approximately $1 million less than the contractual amounts due for the second quarter.
For several quarters, we have been telling you, we're having discussions with Wyndham regarding possible restructuring of this portfolio and amendment of the management agreement.
Both sides have concluded that we are unable to find a mutually agreeable way forward and instead have begun work to amend the contract to a short term agreement, where both sides work cooperatively to sell or rebrand. The 22 hotels in the next 12 months.
Our Hyatt portfolio Revpar declined 5.7% caused by a 4% decline in rate and a 1.5 percentage point decline in occupancy.
During the quarter supply growth in approximately one third.
Of the Hyatt portfolio markets exceeded industry average supply growth end market demand growth.
Our comparable Radisson hotel groups Revpar was essentially flat this quarter versus last year.
Strong post renovation gains of five hotels were offset by renovation disruption the three hotels during the quarter, including the country and in suites Sunnyvale that was recently repositioned as the Radisson hotel.
The five comparable hotels that were under renovation last year.
Ramping nicely and experienced a revpar lift of 7.9% compared to pre renovation performance in the second quarter two years ago.
Turning to investment activity. In addition to the SNC portfolio announcement in the second quarter, we acquired the 198 room Crowne Plaza located in Milwaukee, Wisconsin.
For a purchase price of $30 million and added this hotel to our H.G. agreement.
The hotel features over 7000 square feet of flexible meeting space.
This hotel benefits from demand generators that include Milwaukee Regional Medical Center, Wisconsin's largest hospital medical campus as well as as well as GE Healthcare's Global headquarters.
Looking ahead in 2019 renovation disruption will continue.
However, there will only be.
15 hotels under renovation in the third quarter compared to 29 last year eight of which are full service versus six last year.
While we are expecting to see positive lift this year from the 49 hotels that completed renovations in 2018.
Operators are contending with continued room supply growth, coupled with stagnant or declining demand growth 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.
Its beauties 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 them.
Minus 1% to plus 1% range full year GLP margin is expected to be down 0.5% to 1.5% given flat revenue and continued pressure on wages and benefits.
Brian will discuss our travelcenter portfolio results in a moment, but first Todd will discuss our transaction with us on Ta.
Thanks, John as John mentioned in June we announced our agreement to acquire a net lease portfolio of service oriented retail properties.
From SMTC, a read for $2.4 billion.
The transaction will add 770 net lease properties to each party's portfolio in 22 different industries spanning 164 brands across the United States.
The acquisition of this portfolio evolves each continue to a hospitality and service retail focus with that lease properties and compliments HBT strategy by providing a reliable income stream and should require minimal capital expenditures.
SMTC shareholder vote on the transaction is scheduled to occur on September 4th.
And assuming a favorable outcome, we will close of the transaction later in September .
Integration efforts are ongoing across the organization and we believe we are well positioned to transition this portfolio, which grew too.
As previously announced we expect to sell approximately $500 million of the properties, we will acquire from SM today.
We have commenced marketing efforts and believe we will be in a position to execute the majority of these sales in the fourth quarter of 2019.
The assets, we are selecting for sale will generally be a cross section of assets across various industries and certain assets that do not strategically fit the portfolio.
We are hopeful that by the time, we announced third quarter earnings we may have selected a buyer.
I will now turn the call over to Brian .
Thanks Todd.
Starting with operating results at our 322 comparable hotels this quarter Revpar decreased 2.1%.
GLP margin percentage decreased by 222 basis points, the cash flow available to page views minimum returns and rents decreased by 8.2%, which was the result of the negative impacts of renovations and increased operating costs.
Our Hyatt.
Comparable equity portfolios had the weakest revpar performance with declines of 5.7% at 4.6% respectively versus the prior year quarter.
Our comparable Sonesta Radisson hotel portfolios had the strongest revpar performances with increases of 2.5% and 0.2% respectively versus the prior year quarter.
GLP margin percentage for our comparable hotels decreased by 222 basis points from the 2018 quarter to 40.6%.
And gross operating profit decreased approximately $16.2 million.
All our comparable portfolio has experienced declines of GLP results from our EISG Mario to 34 Sonesta at high portfolios made up the majority of the decrease.
Revenue losses were associated with renovation activity.
Fewer citywide events in certain markets supply growth Nonrepeat FEMA business in our Miami and Houston area hotels.
Labor related costs increased approximately 3.6% across the portfolio, while additional marketing efforts also contributed to the increased expenses this quarter.
Below the GLP line costs at our comparable hotels declined by $2.4 million from the prior year, driven by lower insurance and real estate tax expenses.
Cash flow available to pay our minimum returns and rents for our comparable hotels declined $13.8 million or 8.2%.
Cash flow coverage of our minimum returns and rents for our 322 comparable hotels decreased to 1.11 times for the 2019 quarter compared to 1.22 times for the prior year quarter.
Our available security features under our hotel operating agreements were replenished by $9 million during the quarter from cash flows in excess of our minimum returns and rents.
In total the balance of our security deposits and guaranteed at quarter end was $217.4 million.
Turning to the performance of our comparable travel centers for the quarter fuel volumes increased by 2.6% over the prior year.
Fuel gross margin increased by $1.9 million or 3.1%.
The increase in fuel gross margin is primarily a result of ta managing gasoline pricing to balance sales volume and profitability.
Non fuel travel center revenue was flat versus the prior year as store and quick serve restaurant revenues increased 3.5% to 3.3% respectively.
This was offset by declines in repair shop in restaurant revenues of 3.1% and 2.1% respectively.
Non fuel gross margin percentage was down 30 basis points compared to the prior year to 60.7%.
As a result, our travelcenters non fuel gross margin declined $1.1 million, a 0.5% versus the 2018 quarter to $237.3 million.
Non fuel sales generated approximately 78% of the total gross margin dollars in our travel centers in the quarter.
Site level operating expenses decreased $879000 or 0.5% from the prior year due to lower maintenance costs.
Second quarter property level, adjusted EBITDAR of our travel centers increased by Approx.
From quarter compared to $176.2 million into 2018 quarter, a decrease of four cents per share.
The decrease was due primarily to primarily to a $13.3 million reduction to GAAP rental income related to the disposition of 20 travel centers in our lease amendments with Tpa in January and declines in additional returns recognized from cash flow in excess of our minimum returns under our EISG and Marriott number one agreements.
This was partially offset by increases in minimum returns and rents from our hotel acquisition activity in our funding of capital improvements at our properties.
Adjusted EBITDA was $219 million in the 2019 second quarter, a 3.5% decrease from the 2018 quarter.
Our adjusted EBITDA to interest coverage ratio was 4.4 times for the quarter and debt to annualized adjusted EBITDA was 4.7 times at quarter end.
Turning to our capital improvement activity, we funded $42.2 million of hotel improvements in the second quarter.
For the rest of 2019, we expect to fund approximately $176.3 million of hotel improvements and no travel center improvements.
The majority of these improvements are expected to be fund from operating cash flow.
Turning to our balance sheet as of quarter end debt was 40.4% of total gross assets and we at $53.5 million of cash, including $37.8 million of cash escrowed, primarily for future improvements to our hotels.
On July Onest, we sold all the shares we held at the RMR group Inc. at a price to the public a $40 per share, resulting in net proceeds of $93.6 million.
This investment generated a total return to us of 283%.
The sale is our first step in executing our plan to manage our overall leverage in connection with the S&P a transaction.
To finance the S&P transaction, we have secured commitments from lenders for an up to $2 billion unsecured term loan facility.
When we use the proceeds from this term loan facility borrowings under our existing credit facility proceeds from asset sales proceeds from the issuance of new unsecured senior notes or other sources to fund this acquisition.
As of today, we have no outstanding balance on our revolving credit facility and no term debt maturities until February 2021.
In May we paid a regular quarterly dividend to our common shareholders of 54 cents per share.
In July we declared a regular quarterly dividend to our common shareholders of 54 cents per share or $2.16 per year to be payable on or about August 15th.
Our dividend is well covered and we had a normalized FFO payout ratio of 52.4% for the second quarter.
Operator that concludes our prepared remarks, we are ready to open up the line for questions.
Yes, yes. Thank you.
We'll now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
Hello, you Speakerphone, please pick up your handset before pressing the keys.
If I understand your question has been addressed and you'd like to have tried. Please press star then too.
At this time, we'll pause momentarily to assemble the roster.
And the first question comes from Bryan Maher with B. Riley FBR.
Yes, good morning.
Couple of questions on the SM Ta portfolio I guess, you noted that you expect to close in the fourth quarter and I thought I heard from your comments that it would be going to just one buyer is that correct.
Well.
We.
We expect to close on the SMTC transaction and the end of September and we hope and expect to close on the sale of the $500 million of assets.
In the fourth quarter.
We have a couple of properties that we identified that are.
Just don't fit the portfolio that were selling individually and then we have a large portfolio.
Todd mentioned on the call and he can give you more detail, but that's being offered as a single portfolio initially could be could be broken up into.
Several sub portfolios Todd you want to.
Sure Brian This is Todd.
So we have in terms of timing, we have engaged a broker or we are in the market. We're talking with potential buyers. We are marketing approximately 125 properties as one portfolio.
But we are also showing it to investors as three different conscious as well ranging from 100 million to $200 million and it's really broken out more by.
Property type.
So Paul one is restaurants.
QSR and casual dining.
Pool, two is automotive dealers carwash as specialty retail and all three is a movie theaters home furnishings day care health and fitness apparel and dollar stores.
We.
I think we did we probably put it at about 25% that it goes to one buyer, we think it's more likely that it gets split up.
But again, we're not likely to split it up between more than more than three buyers.
Okay. So there was the three tranches 125 properties and I think you said at the beginning of the answer some single assets as well. In addition to the 125 is that correct.
Yes, the class a office building in Las Vegas.
And there is a.
Industrial property in.
Just outside South of Boston, Massachusetts.
With those we have.
Different brokers marketing those two properties individually right. We're in the market on the office building and in the broker selection process for.
The industrial building.
Okay, Great. That's helpful and then switching on to wind down.
I know you don't want to get probably too much in the weeds with with what happened there, but what was the big hold up what was that was there. Some big thing in particular that kind of kept you guys from getting a deal and I'm guessing you're not terribly upset by the outcome.
Well.
Wyndham worked really hard on that portfolio and I think.
In some respects it would it would be.
It's a positive for HBT to have.
Diverse group of hotel operators so.
I wish we could have work something out but.
Wyndham took over a portfolio of properties that we took away from.
Another major brand during the or just after the great recession.
And they rebranded those hotels and.
We acquired a couple of other hotels, one in Chicago and one new their office in New Jersey and.
Yes there.
The market softened after that the basis was high so that they had a fairly high hurdle to hit.
The Chicago market weakened dramatically as a result of.
A lot of new supply that came on.
So there are a lot of headwinds that they that they faced as we tried to negotiate an alternative portfolio.
We just.
We couldn't figure out a way to slice and dice thing so that it was going to be a long term.
Positive portfolio going forward without challenges without obvious challenges.
And so.
At the end of the day both sides.
Agreed that we were better off.
I'm trying to find a cooperative way too too.
To bring it to the relationship to a conclusion.
And.
It's possible that that some of the hotels or maybe even.
The majority of the hotels may remain Wyndham branded depending on who the buyers are.
So you know that there's a lot there remains to be seen.
But.
But we are moving forward with.
We have we have.
Several national brokers working on opinions of value for us currently.
And.
We expect to be in the market.
Evaluating.
The potential sales of some of the assets possible rebranding of others.
You know fairly soon.
And so as you look at the portfolio and John you've been doing this a while how many of the 22 do you think you know ultimately or would your goal be to sell versus how many do you think you want to keep and maybe rebrand something else.
Well it's.
I think I would say, it's maybe too early to say I think that.
They'll they'll definitely be interested in a couple of hotels for rebranding.
Chicago and.
Our property in Irvine, California are probably.
Likely to be rebranded.
You know the major brands are in the constant battle for unit growth.
And so.
I think that our existing partners will probably.
Look at these.
Assets to see if there may be some that they that they might want to add to our existing portfolio. So we might have maybe some properties that shift from one portfolio to another.
But I would suspect that.
If I had if I had a guess right now I would say.
Probably somewhere between 15 and 20 of the Hum.
On the properties are sold.
And the Wyndham portfolio and.
Thank you. Thank you.
And once again, please press Star Zero on chart Star then one if you would like to ask your question.
And the next question comes from Michael Bellisario with Baird.
Good morning, everyone.
Good morning.
Good.
On the same Wyndham topic.
Kind of high level.
How youre thinking about balancing the capex needs.
For the few that you might Ki bin rebrand.
Versus just simply selling all of them to reduce your leverage a little bit quicker given that it's stepping up after the spirit transaction.
Yeah.
Well, we have been investing in the in the portfolio. So I think that.
The hotels are.
Okay shape.
So you know I.
I imagine whoever ends up.
With some of the with a couple of those larger full service.
Hotels like Chicago Nirvana, if they do get rebranded the they will be there will be capital associated with those but.
It's still too early to tell.
How big a number that will be but I don't think that won't have a material impact on on HBT.
On its leverage.
So.
You know there is capital it's been.
Six six or seven years since Wyndham rebranded the the Alfonso.
I expect that.
They will be capital that goes into those properties.
Well.
I don't want to I don't want to give anybody have their own Pip I'll, let them figure it out but.
But there will be capital required on all fronts.
Got it then just to clarify on Chicago and around when you say rebrand.
You mean rebrand by you or a potential buyer and the property.
I think the.
What I meant when I said rebrand on those two properties is that we would probably keep them in the portfolio and they might change to one of our other operators.
Got it okay.
It could be a catalyst or somebody else.
Got it okay, that's what I thought and then just.
Lastly on Clyde I know, it's early there but just.
Thinking about if you do sell 30 properties, where would that take your hotel exposure. I know you you mentioned, 50% to 60% was kind of a target in June after the spirit transaction.
Has your view changed at all on what that 50% to 60% range should look like and does this potential 30 hotels sale change that thinking at all.
Well.
I guess, just stepping back where we currently have.
Brokers doing opinions of value for us on both portfolios.
About about.
Little over 30 properties and out of the two married married one of married to 34 portfolios and and the 22 properties in the Wyndham portfolio.
And.
You know, depending on where those valuations come in and where the levels of interest come in from.
From other operators that we do business with.
You know what Thats, how once we have all that.
Data will make decisions on on how much to sell right now we have.
Between the port SMTC a portfolio that.
Todd talked about earlier and the RMR shares that have already been sold.
I think to meet the targets that we had.
Brian will correct me, if I get this wrong, but to meet the targets that we have previously discussed will we only need to sell about $200 million worth of.
Tells them.
I think.
We have.
In excess of that and these two portfolios. So we have we have a fair amount of flexibility.
So we could if we sell more and rebrand less and our leverage will be will come down a little further than than we initially told people.
Okay. That's helpful. Thank you.
Thank you and the next question comes from Dorothy Kesten with Wells Fargo.
Hi, good morning, everyone.
Your your operators Revpar expectations for the year came down considerably quarter over quarter and I was just wondering is it evenly distributed across the agreements or was it concentrated in some and then what what would that imply for rent coverage.
By year end.
I'll take the first part and I'll, let Brian filling the coverage part, but I think it would be fair to say that all of our operators have reduced their expectations.
You know there were all expecting that to see occupancy grow.
Largely because of.
None of renovations, we've had as properties come off renovation so.
They are expected to regain some of the disruption.
So.
But rates are.
You know if there is any growth at all it's expected to be to be modest and so.
And this is a lot of.
Continued wage.
Benefits pressure so.
I think it's it's across the board that were everybody is experiencing some weakness supply is impacting everybody supply growth. So.
Yes, there is no one there is no one culprit.
Evenly.
Spread.
Dorothy as far as far as coverage goes we expect our two Marriott portfolios in a radisson portfolio to be about one time.
But decreased over probably from prior years.
Alright G.
And high portfolios will hover around one times.
And then the other portfolios sonesta and Wyndham will track to similar to prior years. So overall coverage for the whole consolidated hotel portfolio will be under one times, but the major.
Good morning, so that will be around one times greater.
Okay. Thank you.
Thank you.
Thank you.
And as there are no more questions I would like to return the floor John Murray for any closing comments.
Thank you everyone for joining us on today's call.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.