Hospitality Properties Trust — Form 10-Q summary
Filing identity: The filing identifies the registrant as Hospitality Properties Trust (HPT), not Service Properties Trust. Reporting period ended September 30, 2018; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
HPT is a REIT that owned 325 hotels and 199 travel centers at quarter-end. Its hotels were managed by third parties or leased to operators; all travel centers were leased to related-party tenant TravelCenters of America LLC (TA). HPT reported managed-hotel operations, hotel and travel-center rent, and FF&E reserve income.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $603.2 | $577.6 | $1,743.7 | $1,636.8 |
| Net income | $117.1 | $85.7 | $294.6 | $183.6 |
| Net income per common share | $0.71 | $0.52 | $1.79 | $1.05 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $403.4 | $442.3 |
| FFO per common share | $1.33 | $1.06 | $3.62 | $2.74 |
| Normalized FFO per common share | $1.06 | $1.07 | $3.08 | $3.03 |
- Q3 revenue rose 4.4%; hotel operating revenue increased 5.2%, while hotel operating expenses increased 6.9%. Nine-month revenue rose 6.5% and hotel operating expenses rose 9.4%.
- Q3 net income increased 36.6%, but included $43.5 million of unrealized gains on equity securities. Nine-month unrealized gains were $89.3 million. These noncash gains arose from marking HPT’s TA and RMR Inc. shares to market under newly adopted accounting guidance.
- Normalized FFO, which excludes unrealized equity gains and certain other items, was nearly flat per share in Q3 and increased to $3.08 from $3.03 for the first nine months. The filing cautions that FFO measures are not cash flow or substitutes for GAAP results.
- Nine-month operating cash flow was $403.4 million, down from $442.3 million. Investing used $277.9 million, versus $726.0 million in 2017; financing used $137.6 million, versus $300.0 million provided in 2017. Cash and restricted cash totaled $85.5 million at September 30.
- At September 30, total assets were $7.25 billion and shareholders’ equity was $2.79 billion. Debt comprised $143 million drawn on a $1.0 billion revolver, a $400 million term loan, and $3.65 billion of senior notes (approximately $4.19 billion principal in total). Cash and cash equivalents were $19.8 million; $857 million remained available on the revolver. HPT reported compliance with debt covenants.
- Interest expense was $49.3 million in Q3 and $145.6 million for nine months, up 5.9% and 7.6%, respectively. The filing estimates a one-percentage-point rate increase would add about $5.4 million in annual floating-rate interest expense at quarter-end borrowings.
Material changes versus comparable periods
- Hotel operating revenue growth reflected acquisitions, improved rates and occupancy at some properties, and conversion of a leased hotel to managed operations. Higher operating costs, acquisitions, and weaker occupancy at some hotels partly offset the gains.
- For all hotels, Q3 ADR rose 1.5% but occupancy fell 2.5 percentage points and RevPAR declined 1.7%. For the first nine months, ADR rose 1.9%, occupancy fell 1.8 points, and RevPAR declined 0.5%. Management said HPT’s comparable-hotel performance generally lagged the U.S. hotel industry, citing renovation disruption, new room supply and weaker business activity in some markets.
- General and administrative expense fell 49.7% for nine months, mainly because 2017 included estimated RMR LLC incentive fees; HPT paid a $74.6 million 2017 incentive fee in January 2018. No 2018 incentive fee was accrued through September, though any annual fee remained contingent on full-year performance.
- Interest expense increased with higher average debt outstanding, partly offset by lower average rates. HPT issued $400 million of 4.375% notes due 2030 in February and amended its credit agreement in May, extending revolver and term-loan maturities to 2022 and 2023 and reducing their interest-rate spreads.
Outlook, risks and unusual items
- Management believed operating cash flows, rents and revolver availability would be sufficient for operating and capital needs, debt service and distributions for the next 12 months. This is subject to tenant and manager performance, financing availability and other risks; no earnings guidance was provided.
- HPT expected hotel renovations and capital improvements of approximately $90.3 million in Q4 2018 and $167.5 million in 2019. These projects may disrupt operations, exceed budget or fail to produce enough operating improvement to support higher contractual minimum returns.
- Two of eight hotel operating agreements, representing 18% of aggregate annual hotel minimum returns and rents, had coverage below 1.0x for the 12 months ended September 30. The Wyndham guarantee was depleted; Wyndham paid 85% of minimum returns, below the contractual minimum. Sonesta returns are not guaranteed or secured, and HPT reported unguaranteed shortfalls under Sonesta and Wyndham agreements.
- HPT said guarantees or security deposits covered about 74% of aggregate annual minimum returns and rents, but these protections can be limited, expire or be depleted. Applying security deposits may create accounting income without providing additional cash.
- TA is HPT’s largest tenant and a related party; HPT also held about 8.6% of TA’s shares. HPT recognized $223.5 million of TA rent for the first nine months, including straight-line adjustments. TA’s ability to pay current and deferred rent is a stated risk. Related-party relationships also include hotel manager Sonesta and business manager RMR LLC.
- Marriott had notified HPT it would not renew the lease on the Kauai resort hotel when it expires December 31, 2019; future operator and cash flows were uncertain. HPT also reported acquiring a 164-suite Scottsdale hotel on October 30, after quarter-end, for $35.9 million.
- Common distributions declared were $0.53 per share for Q3 and $0.53 for Q4 2018. HPT stated that distributions could be reduced or eliminated if cash flows, capital needs or financing conditions deteriorate.
Important facts for investors to verify
- Confirm the registrant identity and any subsequent company-name or corporate changes, given the request metadata’s different company name.
- Separate recurring operating performance from the $89.3 million year-to-date unrealized securities gains; review normalized FFO alongside GAAP earnings and cash flow.
- Track hotel occupancy, RevPAR and rent coverage, especially at Sonesta- and Wyndham-managed properties, and the status of Wyndham payments and guarantees.
- Assess TA’s capacity to meet rent obligations, including deferred amounts, and consider HPT’s concentration and related-party exposure.
- Monitor renovation spending, expected returns, liquidity after distributions, floating-rate exposure and upcoming note maturities; verify progress on the Kauai hotel’s post-2019 operating arrangement.