Good day and welcome to the Hospitality Properties Trust Fourth Quarter 2016 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there'll be an opportunity for analysts to ask questions. [Operator Instructions] Please note that 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. 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 for analysts. Please note that the recording, retransmission and transcription of today's conference call is prohibited without the prior written consent of HPT. I would 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 March 1, 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 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-K 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 John.

Thank you, Katie. Good morning and welcome to our fourth quarter 2016 earnings call. Earlier this morning, we reported fourth quarter normalized FFO of $93.4 million or $0.57 per diluted share, an increase of 5.6% compared to the $0.54 reported in the fourth quarter of 2015. Starting with our travel centers, fourth quarter results for HPT's 198 travel centers reflected reduced diesel fuel volume sold and flat cents per gallon diesel fuel margins versus the comparable 2015 period, resulting in a 4.5% or $3.8 million decrease in fuel margins. TA managed to fuel business well amid rising fuel prices during the quarter, and if you exclude the tax credit in last year's quarter, fourth quarter 2016 fuel margins would have increased relative to the same period last year. Nonfuel gross margin increased $3.8 million led by improvements in the stores, quick service restaurants and repair shops. Property level rent coverage for the quarter was 1.51 times, down from 1.58 times in the 2015 quarter, due to a 5.4% increase in rent to HPT, a result of increased investments. Now turning to our hotel investment, for the year HPT's comparable RevPAR growth of 3.6% exceeded industry average and met operated forecast we discussed last quarter. However, fourth quarter comparable RevPAR growth was only 0.6%. In addition to the seasonality typical of the fourth quarter, certain of our hotel markets were impacted by renovations and accelerating room supply growth. We do citywide events and continued weakness in the energy sector also negatively impacted RevPAR growth. Our operator efforts to push average daily rate and optimize mix coupled with the headwinds I just described caused comparable occupancy to decline this quarter to 70.1%. Despite modest RevPAR growth comparable GOP margins increased 12 basis points versus the 2015 quarter to 38%. Coverage of annual…

Thanks, John. Starting with the performance of our travel center investments, property level operating results for the 2016 fourth quarter improved slightly versus the 2015 quarter. Fuel gross margin decreased $3.8 million or 4.5% versus the prior year quarter. As a result, the 3.7% decline in total gallons sold and the effect of an $8 million biodiesel tax credit that was recognized in the 2015 fourth quarter. TA believes the decline in gallons sold is due primarily to increased fuel efficiency, new competition and some softness in freight volume. Per gallon gross margin was flat year-over-year, but would have been higher not for the prior year tax credit. Our travel centers continue to grow non-fuel revenue and non-fuel gross margin, which increased 0.8% and 1.8% respectively versus the prior year. Non-fuel gross margin totaled $210.9 million in the 2016 fourth quarter and accounted for approximately 72% of the total gross margin of our travel centers during the quarter. Site level operating expenses were well controlled, decreasing 0.5% versus the prior year. As a result of these changes, fourth quarter EBITDA of our travel centers was a $102.6 million or 1% increase compared to the fourth quarter of 2015. Minimum rent under our travel center leases remained well covered at 1.51 times for the seasonably weaker fourth quarter and 1.58 times for the full year. Operating results at our comparable hotels were mixed this quarter with RevPAR up 0.6%, a 12 basis point increase in GOP margin percentage, and a decline in cash flow available to pay HPT’s minimum returns and rents of 4.2%. The 0.6% increase in RevPAR this quarter resulted from ADR growth of 1.9% and a 90 basis point increase in occupancy. The portfolios with the highest RevPAR growth this quarter were our comparable Sonesta Hotels, Marriott 234,…

Thank you. We will now begin our question-and-answer session. [Operator instructions] Our first question comes from Ryan Meliker with Canaccord Genuity. Please go ahead.

I just had a couple of things I wanted to touch on. I think the first thing was you guys obviously have been relatively acquisitive, looks like IHG has been kind of the big winner with you, with the rest of some of these Kimpton properties along with Sonesta. I'm just curious. I know you guys tend to focus on acquisitions where you're able to get your minimum rent, minimum return contracts in place. Is IHG or IHG and Sonesta really the only two companies that are receptive to doing deals like that at this stage or have you seen interest from other parties as well?

We have the dialogue with number of our operators. It's a challenge. Our contract is the most secured contract of the lodging REITs and many of the other types of hotel owners, and so if the hotel manager can find the way to grow their business without being as committed and without having as much alignment of interest with its owners then they may choose to go in that direction. We have good relationship obviously with Sonesta because it's a related party, but also with IHG, we've got a very large portfolio. We work strategically together for many, many years now and we both understand how our operations work and how the contracts work, and they are mutually beneficial. So, those have been easiest ones to grow, but I think over the course of this next year, you will see other transactions taking place with other operators in our portfolio. So, I don’t think you should expect only to see growth with IHG and Sonesta, buy you will continue to see probably more growth there than with others.

And then can you give us any color as part of the Addison burn marks with regards to the Milpitas asset and what happened as to why guys decide to walk away?

I think there may be some confusion there. We walked away from an acquisition in Dallas and Addison.

Sorry, Addison, not Milpitas, sorry.

I don’t want to -- there are confidentiality agreements and the like, it was a result of diligence as probably just the best way to say it. And Milpitas transaction is still going forward.

Yes, right. I've gotten confused, my apologies. And then one other thing I wanted to ask about, with regards to the Morgans litigation over the Clift, is your goal in that litigation to take over control over the asset? Or is your goal something different?

I think because of that there is litigation in place and discussions going on between the parties with best that leave that one alone. Those are [Multiple Speaker].

But assuming in the litigation you filed something in terms of what you're seeking in for damages, right?

No.

No. Okay, fair enough. And then just real quickly lastly. It looks like, if I look at some of the coverage ratios, the Marriott 2, 3, 4 and the Hyatt properties continue to have relatively narrow coverage and now they're post-renovations. So, I'm just wondering, if there is any concern with regards to those coverage levels and limited corporate guarantees for both those, if and when we hit a downturn that you lend up seeing reduce fees from them?

Which were the two portfolios?

I was referring you the Marriott 2, 3, 4 at 1.14 times trailing twelve months coverage and then Hyatt portfolio at 1.16.

I think we feel good about both of those. The security under Marriott, as of yearend, we got the limited guarantee of call it $30.7 million as well as about $16.5 million security deposit, that security deposit increased by about $10 million in 2016, as a result of coverage being to both one times. My expectation is that they will continue to build in 2017, and so, I feel good about where we're now in that contract. With respect to Hyatt, we ended up at year end with about 18.3 under that guarantee, that guarantee grew by about $3.6 million during 2016 as a result of cash flow and excess of one-time coverage I would expected to continue, continue to grow during 2017. So, I feel good about where we stand on that portfolio also.

Okay. That's helpful. And the Sonesta properties, how are those performing that have come out of renovation thus far?

I think if you look at -- as I mentioned in the prepared remarks, if you look at the nine hotels, the nine ES hotels where we completed renovations in the second and third quarters of 2016, RevPAR was up 37% at those properties in the first quarter, and we expect them to continue to ramp up in 2017 where performance came in below. I'd say our expectation was on the 22 hotels that were renovated in 2015 or prior and there that portfolio was really negatively impacted by four properties, the two Houston properties, one is the full service hotel in Houston then we've ES in Houston. Due to that market being where it is, our ES hotel in Burlington had a fire in November and as about half the rooms out of service right now. And then our Hilton Head, Sonesta, the impact of Hurricane Matthew. Those four hotels had RevPAR declines of about 24% during the fourth quarter. So, if you kind of back them out and look at the remaining 18 hotels coverage was up year-over-year, RevPAR growth was pretty decent at 8.2%. So, we feel pretty good about that. Looking forward, I think Hurricane Matthew behind us at Hilton Head. Burlington, those rooms are going to be out of service probably until sometime in the second quarter and then Houston is what it is, but the rest of the portfolio should continue to ramp up in '17.

[Operator Instructions] Our next question comes from Tyler Batory with Janney Capital Markets. Please go ahead.

Just a quick question for you of on the travel center improvements. You said $80 million of those in 2017. I think it was maybe a little bit lower than in years past. Can you maybe just talk about what's going on there and maybe how that might trend in the future?

I think I just characterized that last year was probably higher than normal. I think we've averaged about 80 million if you kind of exclude 2016, and the decline or the reasons 2016 was higher was just that there were a number of projects going on related to reimaging stores and some things around fuel islands that has been completed for the most part and therefore we're backed down to what I'd call a more typical run rate on capital for the TA properties.

Then just as a follow-up on the Wyndham agreements. When you look out towards 2017, do you expect that portfolio to get back to 1-time rent coverage, or do you think it's maybe going to stay below 1-time in 2017?

The portfolio was at 0.9 times in '16. It continues to or was impacted in the fourth quarter. We got full service hotel in Huston that had a significant decline in RevPAR and cash flow. And unfortunately, I don’t see that market bouncing back but the year-over-year comps are getting lot easier there. The other things that’s impacting or impacted that portfolio in the fourth quarter was the Florham Park full service hotel was under renovation and that will be an under renovation through the first quarter of '17. So, I think the first quarter was probably weak, but I would expect coverage to get a lot -- it was like I said, it was at 0.9 times coverage in '16, and I would expected to get closer to one-times coverage, not sure we get there to do. The impact of Florham Park in Huston in '17, but it will be close to then it was in '16.

Our next question comes from Bryan Maher with FBR & Co. Please go ahead.

I wanted to drill down a little bit more on Tyler's question on the TA improvement, the 80 million run rate. Are these all improvements that TA is making that you're basically reimbursing them for? Can you give us some examples there as to what those kind of run rate $80 million projects would be? And my guess is that $80 million would increase their rents by $6 million to $7 million, roughly 8%. Or are those items that are kind of CapEx items that you do kind of regularly because you own the properties that you don't get a bump in rent on?

Our leases with TA are triple net leases. TA is responsible for all capital. We have certain criteria that we've established. We have the -- TA has the right under the lease to ask us to purchase capital improvements they've made to the properties. We don’t have the obligation to purchase those improvements, but we have the right to do so under the lease. The projects vary by year, but we have certain criteria. We're only going to buy longer live assets from them. So, typically, it's an asset with a seven plus year life. And when we do purchase those assets, the minimum rent under our leases goes up by 8.5% of our purchased price.

Can you give me an example of something that they've put to you that you've turned down over the years because if rent's going to go up 8.5%, I can't fathom a situation where you'd be so inclined to turn it down?

I don’t know if there is anything we’ve turned down. I think we've established the criteria of what we're interested and purchasing, and that’s what TA presents to it. We're not going to pay -- we're not going to advise, may decide to put new chairs in our restaurant. We're not going to buy the chairs.

No, I understand that. They would be stupid to do that and pay 8.5% in perpetuity. That being said, any time they put a capital project to you if they're going to guarantee an 8.5% basic rent increase forever and ever Amen, I don't know why you would turn that down. I look at TA's rent going up to HPT quarter in quarter out. You have to start to wonder what's being done and what's being bought because it's an awful lot of money that's being spent there?

Yes, I think the reason that we want to write to turn it down, Brian, is there may be a time where we've a better use for our capital or we have limited access to capital and we don't want to obligation that we have to make those purchases. That's the reason for the flexibility that we built into the lease side. I agree with you that -- as of today, there's no reason we would turn down an opportunity to purchase those improvements.

Just a follow-up question. It was said on yesterday's TA call that roughly 90 competitive travel centers were built last year by Pilot Flying J and Loves. And yet TA with you were only involved in a couple, let's say two or three. Do you have thoughts as it relates to the growth of travel centers in the country relative to kind of a lack of growth of new builds in the TA system? Would you like to see them doing more new builds, or are you kind of indifferent?

I mean I think we're relatively indifferent. TA has a nationwide footprint. I think they've got distribution in the vast majority of the states. And so, if they decide that they have a spot that they want to fill in along the interstate the benefits there, relationships with fleets or other customers, and we can work with them, we're happy to work with them but we don't feel like there's just any shortcoming in their current distribution network and so we're not pushing them to grow their network and we're not out looking for sites for them; we're focused on hotel investments and when TA comes to us with ideas we consider them.

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

I just wanted to follow up on Bryan's question a little bit on capital allocation and kind of the hotel versus travel center tradeoff. Are you seeing any opportunities to acquire more travel centers, or is that really a case-by-case basis in what TA brings to you? Or is it because the hotel acquisitions that you're underwriting, particularly with IHG, have such good returns?

We're committed to buy one more travel center location that's being developed currently and that'll happen in the first probably in the second quarter. We don't as a rule go out looking for travel center acquisitions as so. If TA comes to us with an opportunity, we consider it. Our acquisition focus is on hotels and we look at opportunities that might work for any of our operators. We had a hotel that we ended up terminating; that was going to be with Carlson, we're going to grow that relationship. We've grown with IHG; we've grown with Sonesta. We continue to look at opportunities with those three as well as other operators in our portfolio and outside of our portfolio. So that's our main focus, but it does come down to whether we can get the kind of contracts that we like and the returns that we feel we need.

Can you remind us of -- I may have missed it -- the acquisition yields on Milpitas, the Allegro in Chicago, and the Seattle too?

The transactions with IHG, they are going to pay us an 8% return on our purchase price. The going in cap rate on the Milpitas transaction was a number that would sound high. It was a double digit, going in cap rate based on historic EBITDA, but was a hotel that have been renovated in over 10 years and it needs substantial investment. And $15 million we’re going to invest there as about, equal to about a third, what the purchase price was. So, we're hopeful that we're going to get a return on that 8%, and then gracing over that once the renovations are completed.

Yes. Then just switching gears lastly to Sonesta. What's the path to 1 times coverage, and is the big wild card really just an improvement in Houston?

Clearly an improvement in the energy sector would be very, very helpful because there are two hotels in Huston that would -- we have really been suffering. As Mark mentioned earlier and I mentioned that there was a fire in on our hotel room Burlington, Mass, which has historically been a very strong market. Then half of the rooms in that hotel would be out of service for the first half of the year. So, ones hold back online that will help -- excuse me, improvement in the New Orleans market, the Royal Sonesta New Orleans has always been a critical part to that portfolio. It's very successful, very large property. And it goes under renovation for a substantial part of 2016 and it's been ramping up nicely. Following the completion of the renovation, we're hopeful with that that too will help. And sees the ramp up from renovations with our extended state properties should also help. And if you want to answer that Mark.

No, I think you hit on the strong point. I mean the two Houston hotels are about 9% of the total minimum returns under that agreement. So obviously Houston is important and then as John said, New Orleans is still ramping up -- during 2016, it's still ramping up. Post-renovation that’s the largest minimum return amount in that agreement. So, as that hotel continues to ramp in 2017, we should see improvement in the coverage number that for the Sonesta agreement.

And what percentage is New Orleans?

It's about call it 12%.

At this time, we have no further questions, and I would like to conclude the question-and-answer session. I would now like to turn the conference back to John Murray for any closing remarks.

Thank you everybody for joining us this morning. Have a good day.