Business context and reporting period
Hospitality Properties Trust (HPT; the entity named in this 10-Q) is a REIT owning hotels and travel centers. This unaudited filing covers the three months ended March 31, 2016, compared with the same 2015 period. At quarter-end, HPT owned 305 hotels and 194 travel centers.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and operating statistics.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $474.1 | $435.5 | +8.9% |
| Operating income | $93.9 | $77.2 | +21.6% |
| Net income | $52.1 | $41.6 | +25.2% |
| Net income available to common shareholders | $46.9 | $36.4 | +28.8% |
| Basic and diluted EPS | $0.31 | $0.24 | +$0.07 |
| FFO per diluted share | $0.89 | $0.76 | Higher |
| Normalized FFO per diluted share | $0.93 | $0.83 | Higher |
| Cash from operating activities | $38.4 | $96.1 | Lower |
| Cash used in investing activities | $(176.8) | $(84.7) | Higher outflow |
Operating margin increased to approximately 19.8% from 17.7%; net margin increased to approximately 11.0% from 9.5%. Cash from operations fell primarily because HPT paid RMR LLC a $62.3 million 2015 incentive fee in January 2016, alongside higher interest payments and changes in working capital. Investing outflows increased with acquisitions. Financing provided $140.6 million, largely reflecting $750 million of new notes, repayment of $275 million of notes, revolver activity, and distributions.
At March 31, total assets were $6.53 billion and shareholders’ equity was $2.80 billion. Cash and cash equivalents were $15.8 million, with $55.9 million in restricted FF&E reserve cash. Revolver borrowings were $230 million, leaving $770 million available under the $1.0 billion facility. Principal debt was approximately $3.54 billion, including the $400 million term loan and $2.91 billion of public notes and convertible notes. HPT reported covenant compliance. The common distribution paid for Q1 was $0.50 per share; a $0.51 distribution was declared for the next quarter.
Material changes and operating developments
- Hotel operating revenue grew 7.3%, and travel-center rental income rose 20.2%. Revenue increases reflected stronger hotel performance, acquisitions, rent increases, and higher straight-line rent adjustments.
- For 291 comparable hotels, ADR rose 4.0% to $124.79, occupancy increased 0.3 percentage points to 72.2%, and RevPAR rose 4.4% to $90.10. Across all 305 hotels, occupancy declined 0.6 points to 71.3%, while RevPAR increased 2.7% to $88.53.
- HPT acquired two extended-stay hotels in Ohio, a Portland hotel, and a Texas travel center for an aggregate stated purchase price of about $145.7 million, excluding acquisition costs.
- HPT issued $750 million of senior notes: $400 million at 4.25% due 2021 and $350 million at 5.25% due 2026. It used proceeds in part to redeem $275 million of 6.30% notes due 2016.
- Interest expense increased 17.3% to $41.6 million, primarily due to higher average borrowings, partially offset by lower average rates. A $0.07 million loss was recorded on early debt extinguishment.
Outlook, risks, and unusual items
- Management believed operating cash flows, the revolver, and other funding sources would be sufficient for operating and capital expenses, debt service, and distributions over the next 12 months. This is an expectation, not a guarantee; HPT noted that tenants or hotel operators may fail to pay minimum rents or returns.
- HPT expected to fund approximately $68.9 million of hotel renovations and improvements during the remainder of 2016 and projected up to $129.4 million of travel-center improvements for TA. These investments increase contractual returns or rents, but may not produce equivalent operating improvements.
- Three of nine hotel operating agreements, representing 16% of annual minimum returns and rents, had trailing coverage below 1.0x. The Wyndham guarantee was depleted during Q1; certain Marriott security deposits were also substantially drawn down. Sonesta minimum-return shortfalls are not secured by a deposit or guarantee.
- TA is HPT’s largest tenant and leased properties equal to 36% of HPT’s gross real estate carrying value. HPT disclosed $55.3 million due from TA, including accrued and straight-line rent amounts. TA had indicated that one planned travel-center development might not be completed by the purchase deadline.
- Floating-rate debt exposes HPT to LIBOR increases. Management estimated that a 100-basis-point increase would raise annual interest expense by $6.3 million on quarter-end floating debt; the filing also disclosed refinancing and credit-rating risks.
- Other notable considerations include related-party arrangements with RMR LLC, TA, and Sonesta; a $5.3 million estimated 2016 RMR incentive fee included in Q1 expense; and the distinction between accounting rent adjustments and cash collected. HPT said there were no material changes to the risk factors in its 2015 annual report.
Important facts for investors to verify
- Whether hotel and travel-center operators generate enough cash to meet contractual rents and minimum returns, particularly at agreements with sub-1.0x coverage and depleted or limited security.
- Collection and cash-flow implications of TA receivables and straight-line rent, as well as TA’s ability to pay current and deferred rent.
- Actual 2016 renovation and travel-center improvement spending, the resulting increases in contractual returns or rents, and whether property performance supports those increases.
- Debt maturity and refinancing plans, floating-rate exposure, and continued access to revolver capacity and capital markets.
- Whether operating cash flow and liquidity support the common and preferred distributions after capital spending and debt service; FFO and Normalized FFO are non-GAAP measures and do not equal cash available for distributions.
- Hotel operating statistics are reported by managers and tenants and were not independently verified by HPT.