Hospitality Properties Trust Executive Insights: IHG Hotels, Sonesta Negotiations
On Monday, Hospitality Properties Trust (NYSE:HPT) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Jeffrey Donnelly – Wells Fargo Securities: What is the rent coverage and RevPAR of the four IHG hotels that are now be pulled out of IHG and put into Sonesta?
Mark L. Kleifges – Treasurer and CFO: The rent coverage is about 0.8 times. I don’t know the RevPAR off the top of my head.
Jeffrey Donnelly – Wells Fargo Securities: Do you guys have a sense of how much you will be investing in the remaining IHG portfolio assuming that they all remain with IHG?
Mark L. Kleifges – Treasurer and CFO: Well, we know that for the hotels that are definitely staying with IHG, we know that we have another $171 million, $172 million this year and there’ll be additional monies in 2013. We’re still following up those estimates.
Jeffrey Donnelly – Wells Fargo Securities: Just from a practical standpoint, how did you guys end up I guess negotiating the arrangements with Sonesta just considering that RMR is sort of on both sides of the transaction? Do you guys have to get a third-party involved or I am just curious from a logistical standpoint?
Mark L. Kleifges – Treasurer and CFO: The valuations and exit rates for hotels are still part of the IHG arrangement that were negotiated with IHG, so those and anyway then shared with our independent trustees will approve the IHG amendments. So we have approval to remove those and rebrand those properties if those values were higher, so it was approved by independent trustees.
Jeffrey Donnelly – Wells Fargo Securities: Just one last question, I don’t know if you guys have it, but I think you said in your release that at the end of the quarter from the Marriott 2, 3, 4 agreement there was $24 million of guarantees or deposits left. Do you have a sense of where that stands today, like maybe in early May or at the end of April?
Mark L. Kleifges – Treasurer and CFO: We are in the process of updating those numbers through – I think Marriott’s on a 13-period system, so we are going to provide in our Q when we file it tomorrow. We will provide and update through the most recent period.
David Loeb – RW Baird: I am not sure you really answered the question that I thought Jeff was asking, and I am just interested in that, so let me ask it a different way. When you are negotiating the management arrangements for a newly rebranded Sonesta Hotel, who negotiates that?
John G. Murray – President and COO: There was a negotiation that took place at the time that we were acquiring Sonesta, and we engaged an outside consultant to a benchmark study of third party management contract terms in the hotel industry. And based on that benchmarking study that was done by an independent firm, our independent trustees signed off on contract terms that were within those parameters, and also on the pooling agreement, so that as we converted hotels from the IHG portfolio to the Sonesta portfolio, if we decided to do that, that the – that the new rebranded hotels would fall under that same – those same contract terms and become pooled together.
David Loeb – RW Baird: So basically any additional contracts that you sign with Sonesta, any hotels that are rebranded, will have those same terms as the initial ones?
John G. Murray – President and COO: Yeah, I think that’s what everybody should expect going forward. Unless there is something particularly different we could go – we could run that by a new scenario by our independent trustees but I think we’ve got a – there was an extensive study done and I think that both sides are comfortable with the terms. They look very similar to most other third-party hotel management contracts that you see among all REITs out there.
David Loeb – RW Baird: Then in supplement, it talks about it actually has a number for annual minimum return, minimum rent for the Sonesta 1, Sonesta 2, which I guess are now two hotels but soon going to more, is that really only relevant in measuring whether HPT has the right to terminate Sonesta?
Mark L. Kleifges – Treasurer and CFO: To terminate as well as for purposes of calculating when the manager would qualify for incentive fees under contract.
David Loeb – RW Baird: So that 1.0 coverage, that’s the threshold for incentive fees to kick in?
Mark L. Kleifges – Treasurer and CFO: Correct. Keep in mind as John mentioned the pooling agreement, so all hotels managed by Sonesta with the exception of the New Orleans leased hotel will be pooled for purposes of calculating whether we received our minimum return.
David Loeb – RW Baird: So as you go forward, I guess this is another thing that maybe Jeff was kind of getting around the edges of, but as you take hotels out of IHG where there is a minimum return requirement and put them into Sonesta where there is not, except for the calculation or be basically where you’re floating relative to the market as any other TRS leased hotel would be, do you expect in near term, or the intermediate term that there will be a decrease in the cash flow coming from that?
Mark L. Kleifges – Treasurer and CFO: For the four hotels that we have announced that we are going to rebrand, there will be a shortfall initially because the minimum return under the IHG contract will be reduced by $9.9 million and as I said those hotels are covering at about 0.8 times on a trailing 12 month basis, so there is a shortfall there. If you look at all of the hotels combined that we’re thinking of converting potentially through the Sonesta brand, they actually – hotel cash flow over on a trailing 12 month basis is greater than the amount of minimum return under the IHG contract will be reduced. So if we convert all of the hotels that we’re considering, there will be no – at least based on historical cash flows, there will be no decline in our cash flow.
David Loeb – RW Baird: In fact an increase in your cash flow, if I heard your numbers right?
Mark L. Kleifges – Treasurer and CFO: It’s based on historical numbers, yes.
John G. Murray – President and COO: We will be renovating all of the properties within six months after conversion, so that’s another reason why there will be a drop-off.
David Loeb – RW Baird: So that makes sense, there will be a drop-off during renovation, but presumably you would expect to have an increased return from those going forward, albeit with a slightly higher risk profile?
John G. Murray – President and COO: Yes
David Loeb – RW Baird: For the hotels that you may decide to retain in Marriot or InterContinental, am I looking at the math right to say that you’ll keep the 8% or 9% minimum return on those, but any additional dollars that you put into renovate those into those systems will also carry that 8% or 9% minimum return?
Mark L. Kleifges – Treasurer and CFO: That’s correct.
David Loeb – RW Baird: That sounds like a good deal. Great, that’s all I had. Thank you.