Matt Boone - B. Riley FBR

Good afternoon and welcome to the Hospitality Properties Trust Third Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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. Katie, please go ahead.

Thank you. Good afternoon everyone. Joining me on today’s call are John Murray, President and Chief Executive Officer; and Mark Kleifges, Chief Financial Officer. In addition we’re joined by Brian Donley, who has been appointed as Chief Financial Officer and Treasurer effective January 1, 2019. 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 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, November 6, 2018. 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 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.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 afternoon. Before we discuss this quarter’s results I want to take a moment to discuss recently announced management changes at HPT; as you may know Mark Kleifges, our Chief Financial Officer has decided to retire at the end of this year; Mark and I’ve worked together on HPT business since it became a publicly traded REIT; he has made numerous beneficial contributions at HPT and RMR and his guidance, professionalism and friendship have been invaluable; we thank him and wish him the best going forward; we’ll all miss him. Effective January 1, 2019, as Katie mentioned Brian Donley will become HPT’s next CFO; Brian has worked closely with Mark and supported him for the last dozen or so years and I am confident he will do a fine job with HPT as CFO. Brian will be with Mark, Katie and I at NAREIT later this week. This morning we reported third quarter normalized FFO of $1.06 per share; a decrease of 29% compared to the $1.07 reported in the third quarter of 2017 due to higher interest expense associated with higher debt levels and reduced additional returns in certain portfolios partially offset by increased minimum return in rents from acquisitions and renovation fundings at our hotels and travel centers. Starting with performance at HPT’s travel centers, total gross margin increased by 12.7 million or 4.1% in the third quarter due to a $6.2 million or 9.9% increase in fuel margin due to higher per gallon fuel margin in the 2018 quarter partially offset by modest fuel declines. And a $6.5 million or 2.6% increase in non-fuel margin. Property level rent coverage for the quarter was 1.68 times down slightly from the prior year due to a one-time credit in the 2017 period; that Mark will discuss…

Thanks John. Starting with performance of our travel center investments for the quarter fuel gross margin increased by $6.2 million or 9.9%, primarily because of $0.0150 or 10.5% increase in per gallon gross margin in 2018 third quarter. This was partially offset by slight decline in fuel sales volume. The increase in per gallon gross margin is primarily a result of more favorable purchasing environment in 2018 period; while the decline in fuel volume over the prior year was due to the continued effects of fuel efficiency gains and increased competition. Non-fuel travel center revenues increased 2.8% versus the prior year due primarily to growth in convenience store and truck service revenues which increased 3.7% and 3.4%, respectively. Non-fuel gross margin percentage decreased 20 basis points from the prior year quarter to 60%. As a result our travel centers grew non-fuel gross margins of $6.5 million or 2.6% versus 2017 quarter to $256.7 million. And non-fuel sales generated approximately 79% of total gross margin dollars of our travel centers in the quarter. Site level operating expenses increased $13.6 million or 7.1% from the prior year; in the 2017 third quarter TA reversed $4.2 million of transaction fees in connection with the favorable settlement of the dispute with a fuel car provider. Excluding the impact of this expense reversal site level operating expenses increased 4.8% versus the prior year due primarily to increased labor costs associated with the increase in non-fuel revenues and higher repair and maintenance expense. Third-quarter property level EBITDA of our travel centers decreased by approximately $900,000 or 70 basis points compared to the third quarter 2017 and annual minimum rent coverage under our leases was 1.68 times compared to 1.73 times last year; adjusting for the impact of $4.2 million reversal of transaction fees in 2017 EBITDA…

Thank you. We’ll now begin our question-and-answer session. [Operator Instructions] The first question today comes from Matt Boone with B. Riley FBR. Please go ahead.

Why would you say you had the bigger impact on RevPAR during the quarter between hurricane activity versus supply pressure and how would you expect that to trend as we head into 2019?

It’s tough to really quantify very accurately the impact of supply growth but supply growth in the upscale segment where most of our hotels, 80 plus percentage of our hotels are -- has been highest this year. Demand growth has been very high in the upscale segment as well, but I think that supply growth probably had at least as much impact as renovations this quarter.

And then sorry if I missed this but for the acquisition that was completed in October can you share what cap rate that was acquired at and how that compares to the broader market, as it stands today from the pricing perspective?

Our cap rate was about 8% cap rate and in place cash available, we think that compares favorably, this is a strong performing recently renovated hotel, the ranch section of Scottsdale, so it’s very well located, again recently renovated. Easily the leader has competitive acceptance, so we think that that’s a very competitive cap rate for a full service hotel in that market.

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 all again for joining us today; we look forward to seeing some or all of you at NAREIT’s REIT World on Thursday in San Francisco. Thank you.

This conference has now concluded; thank you for attending today’s presentation; you may now disconnect.