Good morning and welcome to the Hospitality Properties Trust Second Quarter 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Katie Strohacker, Senior Director of Investor Relations. Please go ahead.

Thank you, Gary, and good morning. On today's call, John Murray, President; and Mark Kleifges, Chief Financial Officer, will make a short presentation, which will be 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 HPT. 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 1995 and other securities laws. These forward-looking statements are based on HPT's present beliefs and expectations as of today, August 9, 2017. 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. A reconciliation of normalized FFO and adjusted EBITDA 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 Web site. 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 once again in our supplemental operating and financial data found on our Web site at www.hptreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. And with that, I'll turn the call over to you John.

Thank you, Katie. Good morning and welcome to our second quarter 2017 earnings call. Earlier this morning we reported second quarter normalized FFO of $173.6 million, an increase of 4.8% compared to the $165.7 million reported in the second quarter of 2016. On a per share basis, normalized FFO of $1.06 per share represents a 2.8% decrease compared to the $1.09 per share in the 2016 quarter due to a higher outstanding share count, a result of our August 2016 common share offering. Second quarter results for HPT's 199 travel centers reflected a $2.2 million or 2.7% increase in fuel margin as increased cents per gallon diesel fuel margins offset slightly weaker diesel gallons sold compared to the 2016 quarter. Non-fuel gross margin increased $4.7 million or 2.1% led by improvements in the stores, quick service restaurants, and repair shops. Property level rent coverage for the quarter was 1.62 times, approximately flat with the 2016 quarter, a strong result considering HPT's rent increased 5.2% compared to the 2016 quarter due to increased investments. Turning to hotel investments. HPT's second quarter 2017 comparable RevPAR declined by 0.3% as various factors including increased supply and market weakness negatively impacted results. Comparable GOP margins declined by 112 basis points versus the 2016 quarter to 43.8%, reflecting lower group business and increased wages and travel agent commissions. Aggregate coverage of annual minimum returns and rents at all of our hotels declined to 1.26 times this quarter, from 1.34 times in 2016. Our primarily upscale and mid-priced hotel portfolio's performance this quarter fell short of industry RevPAR improvement due to room supply growth, market specific factors negatively impacting demand, particularly in Houston and San Francisco, and renovation. A comparable Sonesta portfolio had the strongest revenue growth this quarter with RevPAR increasing by 5.4% and comparable…

Thanks, John. Starting with the performance of our travel centers and improved fuel pricing environment and continued growth in non-fuel revenues in the 2017 second quarter, resulted in an increase in property level operating results from the 2016 quarter. For the quarter, fuel gross margin for our travel centers increased $2.2 million or 2.7% versus the prior year quarter as a result of a 4.7% increase in per gallon fuel margin, offset somewhat by a 1.9% decrease in fuel gallons sold. Non-fuel revenues increased 1.4% versus the prior year due primarily to higher truck repair and convenience store sales. Our travel centers grew non-fuel gross margins 2.1% versus the prior year to $230.1 million, which accounted for approximately 73% of the total gross margin dollars of our travel centers in the quarter. Site level operating expenses increased 1.4% versus the prior year due to an additional $2.8 million in fuel card transaction fees which are the subject of pending litigation between TA and the fuel card provider. Excluding these additional fees, site level operating expenses were approximately flat versus the prior year. As a result of these changes, second quarter property level EBITDA of our travel centers increased by $4.2 million or 3.9% compared to the second quarter of 2016. Annual minimum rent under our travel center leases remains well covered at 1.62 times for the second quarter and 1.52 times for the 12 months ended June 30. Operating results at our comparable hotels were generally soft this quarter with RevPAR down 0.3%, a 112 basis point decrease in GOP margin percentage, and a decline in cash flow available to pay HPT's minimum returns and rents of 3.5%. The 0.3% decline in RevPAR this quarter resulted from ADR growth of 0.8% offset by a 0.9% decline in occupancy. The portfolios…

[Operator Instructions] The first question comes from Ryan Meliker with Canaccord. Please go ahead.

I had two questions for you. The first one is pertaining to the Crowne Plaza acquisitions. You guys have obviously been busy. I am just curious what the take is here with the Ravinia transaction. I think Ashford Trust sold that. They said it was a trailing 5.6 cap rate which obviously seems expensive. I know you guys have the IHG guarantee. I am wondering, is IHG contributing a substantial amount or is underwriting aggressive for IHG to give these guarantees and then support the acquisitions at these prices. And is that what IHG is trying to do going forward with Crowne Plaza, given Marriott and Hilton is launching to a kind of full service conversion brands?

Ryan, the Crowne Plaza Ravinia is right across the driveway from IHG's headquarters. The hotel was most conservatively described as poorly maintained by the prior owner, and substantial amount of capital is going to go into the hotel to renovate it. So if we expect it to continue to generate the kind of cash flow that the prior owner had, then it would be a very aggressive acquisition. But we are expecting to fix the hotel up and make it one of the flagship Crowne Plazas in the U.S., if not around the world. And as a result, and in large part because the business that IHG currently sends to other hotels out of embarrassment over the current condition of that hotel, that will now be able to stay right across the street from where their meetings are. We expect cash flow to increase dramatically. So we don’t think it's an aggressive transaction at all. We think it's a very sensible, good long-term investment.

Got you. So it sounds like, just to put another way, you are building an upside the cash flows post-renovation that we would not have seen in trailing 12 months NOI. Fair?

Yes.

Okay. Great. That’s helpful and that makes some sense. The second question I had, and Mark, this maybe more for you. You know if I recall correctly, you guys have historically targeted a 40% total debt to gross book value of real estate assets. You have a 42% at the end of the quarter. You just talked about $230 million of acquisitions that you are in contract for, plus another roughly $80 million of CapEx coming. How should we think about that leverage level and how high are you willing to take it?

Well, I don’t think even with what we have under contract, we are going to be -- we should be right around that 40% number at the end of the year. When you consider cash we had on hand at quarter end as well as free cash flow we expect to generate from operations during the second half of the year. So we won't be outside of that 35% to 40% range assuming nothing else changes. We will be right up against the 40%. As we have shown in the past, we are willing to operate above 40% for a period of time, if necessary. And that gives us the flexibility to access the capital markets, in particular the equity capital markets when we like where the share price is.

The next question comes from Jeff Donnelly with Wells Fargo. Please go ahead.

Maybe just building off Ryan's question. Some of the full service REITs, you said that pricing in the market was maybe 10% to 15% above what they were able to pay for deals. Can you talk about the tenor of the market for full service versus maybe select service product? Do you find them equally competitive now? Are there tangible differences and maybe the depth of competition you face or financing availability?

Yes. I would say that we feel like there is a little bit -- there has been more competition for transactions over the last six months than what we had seen say last year. I think it was particularly after the election, there was some euphoria that there was going to be some changes that were going to drive an acceleration and economic growth in the United States and that it would be a good time to continue to invest. And so, we thought of a pickup in activity and more bidders at the table, so we felt like that there is still competition. Whether that will continue, I don’t know. What has changed is that I think some of the expectations have been tempered as the expected pickup in economic growth and changes in taxes and the like have not materialized and seem like they probably won't anytime soon. And so, I think that we expect to temper our acquisition pace because of that, but most of the transactions that we completed this past quarter or that we announced were strategic relationship based transactions, and to maintain those types of relationships, you have to be ready to step up when the transactions present themselves, so we will continue to be there for our relationship clients and so we will still do some acquisitions, but we expect to dial it back some given the state of the economy today.

All right. So this wasn’t necessarily a beginning of like a concerted or programmatic effort? I guess it's fair to say.

That’s fair to say, yes.

I guess, where I was going is that if the market is maybe a little bit better than where it was six or 12 months ago. And as Mark explained, I think leverage is manageable, but it's maybe towards the higher end of maybe where you guys typically go. Do you guys give consideration to selling assets into this type of market, maybe on a larger basis, larger scale effort than you have in the past or is that just not something really on the radar screen.

Well, I think we did sell one asset which already puts us at a higher pace than what we have done in the past. We have another one coming up this quarter, another one after that. And we continue to look at our portfolios to try to identify some of the weaker, regularly weaker performing properties that we could prune out and enable our operators and ourselves to show better results. And we will continue to do that. But I don’t think you should expect us to make any sort of wholesale portfolio sales or something like that, if that’s what you mean.

Okay. And just one last one. Just concerning the Morgans and the Clift. I am just curious, how interested are you guys in ultimately exploring terminating that relationship. I don’t know if you can speak to that. And maybe, I was just thinking of, either finding a new manager or finding an opportunity to rebrand that property, perhaps a Sonesta or another brand. I am just kind of curious but what do you kind of think your ultimate interest is there or are you generally kind of pleased with the management. Is just, there is sort of a deal point you are negotiating.

Well, you know we are currently in litigation over the status of the Clift and also in negotiations. So I don’t want to say too much there. But we wouldn’t be litigating for the removal of the tenant if we didn’t feel like there were better alternatives. The property -- it's been the management company's obligation to renovate that hotel. Because of capital constraints and other issues they have not done so and we don’t feel like it's fair to our shareholders to let the Clift -- it's not fair to people in San Francisco to let the Clift remain in the condition that it's in. So we do expect to see change there.

The next question comes from Michael Bellisario with Baird. Please go ahead.

On the Carlson dispositions. Are we thinking about this correctly that coverage is going to down initially given the unchanged rent but cash flows will go down because of the three sold hotels, is that fair?

I think the hotels that we are selling has fairly weak performance. So I don’t expect to see a big change. They will continue to cover -- I believe they will continue to cover their returns and so you won't see a dip in our payments there.

Yes. I agree. The coverage on these three hotels is pretty low. I don’t think removing them from the agreement will have a material impact on coverage at all going forward.

Yes. That was my next question, the 135 coverage trailing is probably not material impact then?

No.

And then just on that same topic. I think we maybe have discussed before when you announced that you were going to acquire another Carlson hotel in November. But any corporate level changes there affecting the way you think about investing in that portfolio or does that impact the negotiation that you had being able to pull these three hotels out.

The change from the hotel that we are looking to acquire that was in Dallas, a few quarters ago, that was a diligence, pricing related termination that had nothing to do with corporate changes at Carlson. And there was some minor impact in the negotiations of this decision to sell a few hotels and for HPT to invest additional funds. Maybe it was slowed down slightly by either the need to get more layers of approval, some of which were outside of the United States but in the end, those parties were onboard just like the local management team.

Fair enough. And then just following up on, I think it was Ryan's question, on the acquisitions on the hotel side. Can you provide either forward or trailing return expectations for all those deals?

We bought the Chase Park Plaza at approximately a 9% cap rate. We are going to be investing in the rooms renovation. When that renovation is done and the properties is ramp up, we expect to have at least an 8% minimum return generated there. The IHG branded properties are all, have an 8% minimum return requirement associated with them. So as I mentioned earlier, trailing cap rates aren't necessarily the best way to look at some of those, particularly Ravinia. On the extended stay portfolio, the cap rate was a little bit north of 10%. Again, we are going to be investing in early generation Residence Inns. We are going to be investing a substantial amount of money to convert them to ES Suites and when that’s completed, we expect to be able to generate an 8% or better return from those hotels as well.

And then all the renovations associated with these deals, is that 2018 spend, not 2017?

Very little on these deals is 2017. It's mostly going to be 2018 or some even into 2019.

[Operator Instructions] The next question comes from Bryan Maher with FBR Capital Markets. Please go ahead.

Most of my questions have already been asked and answered. But just to kind of drill a little bit deeper, John, when you do acquire properties, can you tell us what it is that you are staying with IHG and Sonesta. What they are doing, maybe differently, than some of your other operators, Marriott, Hyatt, Wyndham, which compels you to put them under those flags as opposed to the others.

Well, I guess probably the best way to say it is that we have got good partnerships with, we think with all of our operators. But because of where we are in the cycle, certain operators are focused on franchising or other means of growing their portfolios and aren't necessarily as focused on both branding and management of hotels. And in the case of the Crowne Plaza brands and previously Kimpton branded hotels. IHG came to us and said, we want to keep this hotel in the portfolio and in Ravinia they negotiated the purchase and sale agreement because they wanted to regain control of that property across their driveway. And then they asked us if we would take us on another purchase and sales agreement. So a lot of the activity is mutual conversations that are regularly ongoing or just inbound enquiries as to whether we will assist them with transactions. And so Marriott has indicated that over the near-term, they are not planning on continuing to offer long-term extensions to franchise agreements for older generations Residence Inns. The Sonesta team has been very successful in re-branding some of those older generation Residence Inns and generating decent returns and they identified this portfolio and asked if we would evaluate it together with them and we did so. And that transaction is being worked on for over a year. So it's gotten a lot of focus and analysis before we pull the trigger. I don’t know if that answers your question, hopefully.

That’s good. Thanks. And then kind of shifting gears to TA for a minute. It seems like from their call yesterday, that they are kind of in a holding pattern it seems on new development and acquisitions until a, they figure out what's going on with this litigation, and b, they kind of get their house in order with respect to cost, which they are making good progress on. In light of that, do you anticipate that your travel center investment, not improvements but investments in new properties, will also slow for the next couple of quarters.

Yes. I mean we haven't entered into any new arrangements to buy other than the agreement we entered into couple of years ago now to buy the five newly developed properties. But TA does own a bunch of travel centers and from time to time opportunities arise unexpectedly. So I wouldn’t say we are not going to buy travel centers but we are currently not evaluating any. And so I would say, the answer to your question is, yes, our pace should slow.

This concludes our question-and-answer session. I would like to turn the conference back over to John Murray for any closing remarks.

Thank you for joining us on the call today. Have a nice day.