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Hospitality Properties Trust is a real estate investment trust, or REIT, which owns a diverse portfolio of hotels and travel centers located in 45 states, Puerto Rico and Canada. HPT’s properties are operated under long term management or lease agreements. HPT is managed by the operating subsidiary of The RMR Group Inc. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, Massachusetts.
Senior Director, Investor Relations
Bryan: All right. We're going to get started. I'm Bryan Maher, I'm a lodging and REIT analyst at FBR based here in New York. With me this afternoon, we have HPT, Hospitality Properties Trust. John Murray, to my right, is the President and Chief Operating Officer. He's been with the company since 1996. I think I've known him most of those years. To his right is the CFO, Mark Kleifges who's been with the company as a Treasurer and CFO since 2002. I'll let John introduce the company a little bit and then we'll get right into some questions.
John: All right. Thank you very much. For those of you who may not be familiar with us, Hospitality Properties Trust is lodging and REIT. We own 302 hotels, 194 travel centers, geographically diversified across the US, also in San Juan and Toronto, Ontario. Our focus roughly, 85% of our hotel portfolio is comprised of select-service assets, extended stay, and upscale select-service assets like courtyards and high place hotels. The remaining 15% are full-service urban hotels and/or resorts. Our travel center portfolio is also geographically diversified across the United States. We're located in 45 states across the US.
What distinguishes us from our other lodging and REIT peers is really our transaction structure. We have slightly jdifferent approach to the lodging business and that we've tried to strike a different balance where we have more security to our cash flows, most steady cash flows and therefore, more steady predictable dividend. We do that by trying to stick to portfolio transactions with security. Often times, either security deposit or guarantee, in most cases subordinated-based management fees, all in non-renewal options, things like that, in our contracts.
In exchange for the downside protection that we get in the form of that security and the subordinated fees, we typically give our operators slightly the opportunity to earn a higher incentive management fee that they might get otherwise. It's been basically a successful formula for us. As a result of the types of properties that we invest in, the fact that we've spent over the last four years by the billion dollars on renovations and capital improvements to our hotels, our hotel portfolio has, for the last 13 months, had [reap 00:02:57] our growth at exceeded industry averages.
For the last several years, we feel pretty good about the next several years too. As we look out barring a recession or some unexpected geopolitical event; with the economy's continuing to grow; the employment situation is good; the housing market seems good; supply although it's increasing, most of it increases, still concentrated in a select handful of markets, we feel that the future for the rest of this year, next year and really into 2018, looks pretty good. We're happy to be here today to take questions.
Bryan: I think you sold yourself short a little bit. You said 13 months of outperformance. It's been 13 quarters of outperformance. It's quite a long time.
John: I'm modest.
Bryan: Just as a backdrop, we currently have an outperform rating on HPT with a $31 price target and its stock paying about 7.7% dividend. It's trading sub 10 times, this years estimated [inaudible 00:04:07].
There's been a lot of talk about new supply. It has a lot of people concerned. STRs now for gas in 1.7% supply growth for this year, out from 1.1 last year. How are you looking at supply as it impacts your markets which are pretty diverse?
John: The historical long term average supply run rate over the last 25, 30 or more years, has been about 1.9%, right around 2%. The way we're looking at it is supply growth remains a little bit below historical averages. Probably this year, we think it's going to be roughly even maybe still slightly below long term averages. Next year maybe slightly above but we expect as an industry that the balance of supply and demand will cost occupancy to pick up just slightly in 2016.
Basically, we're relatively flat. Next year, we'll be relatively flat. Maybe, a tiny down tick but we believe that as a result of relatively high occupancies, that rate growth will be in the 4% to 5% range for the industry. Most of the prognosticated [smith 00:05:33] travel, PKF, PwC are projecting that RevPAR growth will be in the 4% to 5% range, maybe a little over 5% this year depending on which forecast you look at.
We feel that supply growth right now continues to be concentrated in New York, in Nashville, in Austin, Texas, some in Miami, a little bit Chicago but it's not widespread supply growth. In most and a lot of the suburban markets are in the United States, hotels continue to not have to deal with increase in supply. As a result, we've seen very solid RevPAR gains in our portfolio. I expected that to continue.
Bryan: Thanks. Shifting gears, Marriott and HOT are getting together. Can you tell us, you have a good bid of Marriott hotels, how is that going to impact your portfolio? Are they putting any pressure on you to think about changing brands? How are you thinking about that big transaction?
John: There's a lot of pieces to that. We don't own any Starwood branded properties today. We do have a good relationship with Marriott. We're hopeful that maybe this transaction will lead to some other growth opportunities for us to help grow some of the current Starwood brands. Starwood had some great successes in various ways in the hotel business but they haven't been particularly strong relative to their peers, they haven't particularly strong at growing their select-service assets like a loft in element. We maybe able to help on that front.
We also think, as it relates to our existing Marriott-branded hotels, that the combination of Marriott and Starwood into one organization will hopefully create synergies that will lead to lower cost for us and hopefully that will be more competitive in terms of commissions with the OTAs. Hopefully, they'll be able to strike some better purchasing deals on FF&E and other cost items.
Some people have said, "Are they gonna be unbearable to negotiate with because of their size?" If any of you have ever dealt with Marriott, they're unbearable to negotiate with already so we don't think that that's going to be a big change. They are a very good hotel company.
We think, all in all, that it's going to be a net positive for HPT. There'll be some opportunities for growth and hopefully, there'll be some opportunities for better performance at our existing properties.
Bryan: John, in a couple of cause, you suggested that your [leverage 00:08:36] is a little bit towards the high-end of where you'd like it. How do you think about leverages as we get towards the later and the end of the cycle or maybe Mark, you may want to answer this one? Do you guys feel any pressure to raise equity today?
Mark: We don't let John do numbers. It's true that leverage today at HPT is slightly higher than where we've historically operated the company but it's important to put that into perspective. We've traditionally operated with depth to growth value of real estate in the 35% to 40% range. At the end of the first quarter, we were at 41.3%. While we're slightly above where we've historically operated the company, it's not excessive leverage. We've been investment grade rated since 1998 and we're not going to do anything to jeopardize our investment grade ratings.
I also think, in terms of feeling pressured to raise equity, we don't feel any pressure to raise equity at these prices. If you step back in, John mentioned our contract structures being one of the differentiating factors of HPT, our cash flow is much more secure than the traditional hotel REIT due to the fact that about 80% of our annual minute returns or rents are subject to either a corporate guarantee or a security deposit of some sort.
Our cash flow is much more stable. Our payout ratio today, our FFO payout ratio is around 53%, 54%. We're generating a significant amount of cash flow after payment of our dividends that can fund our ongoing capital needs. We continue to have significant liquidity. We've got a $1 billion revolving credit facility and we have about $750 million available under that facility today. Yes, leverage is slightly higher than where we've traditionally operated the company but we're comfortable with operating it in the near term at that level and do not feel there's any urgency or need to raise equity.
Bryan: Building on that a little bit, [inaudible 00:10:57] on its remaining guarantee balance this past quarter, and you guys mentioned that you believe it will be able to build backup to $4 million by the end of the year, can you elaborate on that and how you think about the security deposits?
Mark: Just to step back a little bit, for our contracts where the payment of our minimum return or rent is supported either by a corporate guarantee or security deposit, the way we've structure our contracts is that when there's cash flow during the good part of the lodging cycle or the economy where there's cash flow being generated by our properties in excess of the minimum rents and returns that are due to us, a portion of that cash flow is used to replenish either the corporate guarantee amount because a number of them are capped or to replenish our security deposit balance that we've previously drawn in.
If you look back in 2015, we replenished security deposit and guarantees by a total of $25 million. During the first quarter of this year, Bryan referenced Wyndham contract where we entered the first quarter with about $4 million left on that corporate guarantee. In the seasonably weaker first quarter, Wyndham drew down on that guarantee to pay us our minimum return for the quarter. We expect there to be excess cash flow for the remaining three quarters of 2016 that will allow us to replenish that guarantee balance in full by the end of the year.
Bryan: Thanks. There's a lot going on in lodging. You have the new soft brands that have hit the market, Autograph, Curio, Tribute, et cetera. How do you think about those brands when you're buying, let's say, a full service hotel in a market that may need something like that. From a competitive standpoint, how are you thinking about those new soft brands?
John: It's a challenge, too. When you look at different markets, there's a ... Generally, I feel like there's enough brands out there without having soft brands. There's enough brand standards without introducing brands that don't seem to have very much in the way of standards. To me, it's a little bit scary and that it gives ... It makes it a little bit easier for Marriott or Hilton or IHG, I guess IGH doesn't really have a good brand like that, but the soft brands can enable your brand partners to put a hotel next year perhaps more easily than when they didn't exist.
I think, for many hotels, that's a good answer in terms of wanting to keep maybe if you have a famous name that's well recognized in the market but you want to take advantage of a more powerful reservation system. That's the reason to go in the direction of a soft brand, but in our portfolio particularly where we're mostly focused on select-service hotels where soft branding so far hasn't been introduced, we prefer to stick to the core brand as opposed to the softer brands.
Bryan: Let's shift gears for a minute to your travel center investments return. It's pretty sizable. Then we'll open it up for some questions. Last year, you guys bought $279 million of assets from TA and you went under contract basically for another five newly developed properties for $118 million. I think you've closed on one or two of those so far. What is your appetite for more travel centers? How do you view the space particularly in light of TA stock has been pretty weak over the past year? Does it keep you up at night? How do you think about that investment?
John: We really like the travel center space. It's a great real estate. It's very difficult today to find 20 plus acres of land that's available for development at interstate highway exit. If you can find the 20 acres, finding a location that will allow you to zone it so you can have a 24-hour or seven-day a week travel center business with truck to trail trucks coming in and out and underground, fuel storage tanks and other [ancilliary 00:15:48] businesses, is very challenging. There's very strong barriers to entry. There's only a few players in the space on the interstate highway system, really three players that sell about 80% of all this that's sold on US interstate highway system. There aren't a lot of price wars so you can sell fuel at decent cents per gallon margin.
We like the demographics associated with rurals that didn't make professional truck drivers be off road for 11 consecutive hours per day. Once they're parked to our truck stops, they're a captive audience for our convenient stores, our sit down restaurant, our fast food quick serve restaurant and for the truck repair business. It's very compelling model for real estate.
To answer your question, we're not looking to, beyond the several remaining properties that are being developed that we've committed to acquire once they're built, we're not looking in the near term to do additional travel center acquisitions beyond that but we do like the travel center business model and we do like the travel center real estate. It's not that we're avoiding additional acquisitions but we're probably more focused on hotel acquisitions at this point.
We also think it benefits HPT that in addition to the convenience stores that TA owns, they have roughly 30 to 35 travel centers that they own directly that generate cash flow. If there are to be a down turn and it gives TA additional sources of cash flow to be able to pay our rent, if they have other properties. We're comfortable with them owning some as well as us.
Bryan: Your rank [inaudible 00:18:03] market is like 1.7 times from TA?
Mark: On a trailing 12-month basis, about 1.7 and probably a normalized coverage under 1.5, 1.6 area on a go forward basis.
Bryan: We'll see maybe ask any questions, if you want to come up to the mic, as being webcast.
Male: [inaudible 00:18:29]
Bryan: The question is are you guys seeing any drag on the TA because of the lack of jobs and truck drivers?
Male: Lack of available drivers.
Bryan: Right. Okay, lack of available drivers.
John: I think that has been a challenge for the industry, the lack of available drivers but we haven't noticed that as a major impact. In terms of head winds to the TA business, I would say that more efficient engines and new trucks where there maybe 10% to 15% more fuel efficient, maybe more or a head wind that issues with adequate number of drivers. We continue to believe that it's a long term successful business model.
Bryan: I might add, we covered TA independent of HPT. If you look at the ATA truck tonage index going back many years, it's odd or near all time high except for a really sharp leap in February. I think that the lack of truck drivers has something to do with increase demand and also, they have to rest for 11 hours a day. They cannot drive 14, 15 hours, and so there's increase demand there as well. Any other questions?
Male: [inaudible 00:20:00]
Bryan: Let me repeat the question so they can hear it. Your question is, John sounds relatively optimistic about the economy and specifically RevPAR and how does that stock up against prior recessions. Should we hump into another one?
John: You're right. We are optimistic.
Male: I think you got it wrong.
Bryan: I'm sorry.
Male: I was asking [inaudible 00:20:42].
Bryan: Like what I said, it was down 16% in the last recession. Give or take, 16.7%. The recession prior to that, it was I think down 7-ish in the '01 period of time. Then, if you go back to 1991, '92, it's only down about 2%. I think what you're seeing is, and what I think freaks people out is -2, -7, -16 is the next recession, -25. As a lodging analyst, I came to space for 20 years, I think when we actually do hit the next recession, barring some geopolitical and RevPAR economic event, it's going to look an awful lot more like the early 1990's than '01, '02 or '07, '08, or '09. Do you have a different take?
Male: I guess the follow question is in a more typical [inaudible 00:21:37].
John: To answer that entirely correctly, you have to go portfolio by portfolio because they're all each a little bit different. Today, we don't have yet one time coverage on a couple of our portfolios with Wyndham and Sonesta. With a couple of our Marriott and our IHG portfolios, we have much greater coverage. I think overall that the impact, if it was 7% RevPAR decline, the impact on our cash flow would be minimal because we have the good amount of coverage. We have security deposits and guarantees. Our operators, typically, they don't get their base management fee unless we get our return. That provides an alignment of interest that when results start to go south, they're generally good about trying to find savings because it impacts them as much as it impacts us.
Male: [inaudible 00:23:08]
John: They work very hard for us. They work very hard for us.
Bryan: We've seen that over a couple of cycles. You have very little fall out in the '01, '02, '03 period. You had to renegotiate a little bit but only in early '11, the last go around and it was very little on the way of give backs. The model, and I've been following this company for close to 15 years, it has worked really, really well.
John: Yeah. The transactions that we had to renegotiate with Marriott and IHG, when we did renegotiate those after the great recession, we got increases security in both cases. We moved some properties to Wyndham and created a new relationship when we got credit support from them as well.
Mark: I think it's important to point out when we renegotiated those contracts, we did not lower our minimum rents or return under the contracts. They stayed where they were pre-downturn.
Bryan: Any other questions out there? Do you guys want to talk a little bit about [ARMAR 00:24:16]? Last year, HPT and the other externally advised REIT positions, roughly half of ARMAR and then distributed shares in December to your shareholders, and now everybody seems to have a pretty invested interest in everybody else performing. ARMAR shares have nearly tripled off of their December prices. How do you think about your relationship with ARMAR kind of what happened over the past year?
John: We've been externally advised since HPT was created, to the extent that investors have taken issue with the external adviser relationship. Their biggest concerns as they expressed them to us was they questioned the alignment of interest between the manager and HPT and possibility that there might be growth for growth sake. They questioned transparency because our manager was a private company. With ARMAR going public, now their reports are all available through the SEC so there's plenty of transparency. HPT acquired its interest in ARMAR primarily through by issuing shares. We own shares now in ARMAR. We think that there's so much greater alignment of interest.
We think, if you'll look at our transaction structure, anybody who has done a lot of any real analysis on the whole growth sake, I assure you that it's a lot easier to have growth sake without trying to negotiate the transaction structure we have. I don't think that many analyst think or investors think that we've follow that path. We think we've made a lot of changes ... We changed the way, the management fees is calculated, also to show greater alignment between the REIT and the manager. All those steps taken together, we think that, to the extent there were concerns by the investors about that relationship that they should largely be mitigated.
Bryan: Mark, you mean to add?
Bryan: Okay. Any other questions? Sure.
Male: Where would you see opportunities for growth in the next 18 months in your space?
John: As we've mentioned earlier, we're committed to buying for more travel centers. One will be this quarter, one probably the fourth quarter, the other is next year. We have some good relationships with the hotel operators that we currently do business with. We recently bought the Hotel Monaco in Portland which is a Kimpton branded hotel. That's part of the IHG brand network. We're looking at some other hotels opportunities with IHG. We've added, in the last six to nine months, we've added 11 extended stay hotels to the Sonesta brand.
We're not currently looking at new transactions with Sonesta but once they got the renovations done on those new 11 which are under renovation currently, and those start to ramp up, we may consider more acquisitions among that line with them. There maybe some growth opportunities, as I mentioned earlier, that come out of the Marriott-Starwood alliance as well.
Male: [inaudible 00:28:23]
John: Soft branded, like Marriott has the Autograph brand. You would see like this hotel company down in Florida called the Kessler Hotels. The Kessler Hotel, a Marriott Autograph collection hotel. Starwood has Tribute as Curio is a Hilton brand. Choice has one.
Bryan: They tie in to the reservation systems of Marriott, pay much less fee than a normal Marriott branded hotel but by being able to access that and access some marketing and it should elevate the RevPAR of the property.
John: The brand standards are a little bit more vague. You have to keep it at 4-star level or keep it at 5-star level, but they don't say you have to have hardwood floors and you have to have 5-fixture bathrooms. There's a little more flexibility.
Bryan: Any other questions? I won't be a pain on a Q&A if I didn't ask you a quick thoughts on Airbnb.
John: Except on very, very heavy business nights like when you have the Superbowl or when the Pope comes to town, I don't think Airbnb is a real issue for the industry. Supply growth is a bigger issue for the industry to be focused on. I don't see Airbnb as ... I think it's a slightly different gas in many cases. I think there's some people who are experimenting with Airbnb. Some of those are guest experimenting with it, some of those a host experimenting with it. I'm not sure at all, the ones who've tried it, either renting out a room in their house or renting a room in somebody's house are necessarily going to repeat that after the first experience.
Bryan: All right. Great. Anything else? All right. Thank you very much, John, Mark. Appreciate it.
Mark: Thank you