Service Properties Trust (filed as Hospitality Properties Trust) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing is unaudited and reports dollars in thousands unless otherwise stated. The registrant name in the filing is Hospitality Properties Trust.
Business context
The REIT owned 291 hotels and owned or leased 185 travel centers at June 30, 2014. Hotel operations are managed under agreements with third-party operators; the travel centers are leased to related-party tenant TravelCenters of America (TA). The company has no employees and receives management and administrative services from RMR.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $451.9 million | $412.3 million | $846.2 million | $766.8 million |
| Operating income | $89.0 million | $74.3 million | $162.9 million | $137.4 million |
| Net income | $53.9 million | $45.4 million | $91.5 million | $72.9 million |
| Net income available to common shareholders | $48.7 million | $37.3 million | $81.1 million | $56.7 million |
| Basic and diluted earnings per common share | $0.33 | $0.27 | $0.54 | $0.43 |
| Cash from operating activities | — | — | $217.1 million | $171.9 million |
| Cash used in investing activities | — | — | $149.0 million | $311.8 million |
| Cash used in financing activities | — | — | $75.1 million | Cash provided: $320.6 million |
Q2 operating margin was approximately 19.7%, compared with 18.0% a year earlier; six-month operating margin was approximately 19.2%, compared with 17.9%. These are calculated from reported revenue and operating income. Q2 revenue rose 9.6% and operating income 19.9% year over year; six-month revenue rose 10.3% and operating income 18.5%.
- Hotel performance: Comparable hotel RevPAR rose 8.5% in Q2 and 9.2% for the first six months. For the 21 comparable hotels under renovation during all or part of Q2, RevPAR declined 18.5%; the 267 not under renovation increased 11.2%.
- Balance sheet and liquidity: Total assets were $6.0 billion and total liabilities $3.0 billion at June 30. Cash and equivalents were $15.5 million; restricted FF&E cash was $29.2 million. The $750 million revolving facility had $40 million drawn and $710 million available. The company reported $400 million outstanding under its term loan.
- Debt: Public senior notes and convertible notes totaled $2.363 billion principal; total principal debt including revolver and term loan was approximately $2.803 billion. The 2014 $300 million notes were redeemed in February and $350 million of 4.65% notes due 2024 were issued in March. The revolver and term loan maturities were extended to 2018 and 2019, respectively, and pricing was reduced. Management stated it was in compliance with debt covenants.
- Distributions: Common distributions declared were $0.49 per share for Q2; the company declared another $0.49 per share in July, payable in August. Preferred distributions were $5.2 million per quarter.
Changes, outlook, and material matters
- Revenue and operating income improved primarily with hotel rate and occupancy gains, acquisitions, and higher minimum rents. Hotel operating expenses also increased with higher occupancy, acquisitions, and reduced manager-funded shortfall recoveries.
- Six of nine hotel operating agreements had trailing 12-month coverage below 1.0x, ranging from 0.32x to 0.93x. The unguaranteed shortfalls for Marriott No. 1 and Sonesta were $20.0 million for the six-month period. These shortfalls can reduce cash receipts and are not necessarily covered by available guarantees or deposits.
- Management expected most hotel renovation work to be completed by year-end 2014. It expected substantial additional funding for renovations and improvements, including about $55 million for Sonesta hotels and remaining committed amounts under other agreements during the rest of 2014. Renovation costs or resulting hotel returns could differ from expectations.
- Management said operating cash flow should cover operating costs, interest, and declared distributions over the next 12 months, but warned that weaker tenant or manager performance could reduce cash flow and distributions. No specific full-year earnings guidance was provided.
- TA is a major related-party tenant and the company’s largest tenant. Deferred rent of approximately $150 million from TA had not been recognized as income or receivable because collection was uncertain. TA had delayed its 2013 annual filing and had not filed its Q1 2014 Form 10-Q as of the filing date; timing of that filing was uncertain.
- The company sold a Myrtle Beach hotel for net proceeds of $4.3 million and recorded a $0.13 million gain; it acquired a 240-room Fort Lauderdale hotel for $65 million. It received $6.2 million in eminent-domain proceeds for a Virginia travel center, challenged the valuation, and reported a $525,000 annual rent reduction under the TA lease.
- Related-party and governance considerations include RMR’s management role and fees, shared affiliations among trustees and executives, and the company’s interests in TA, Sonesta, and Affiliates Insurance Company. The filing also disclosed that RMR may terminate its management agreements on 120 days’ notice and that termination payments may apply in specified circumstances.
Investor facts to verify
- Confirm subsequent completion of the announced August 2014 redemption of $280 million of 5.125% notes due 2015 and its funding impact.
- Track hotel agreement coverage, unguaranteed shortfalls, and remaining guarantee/security-deposit balances, especially for Marriott, Sonesta, and Wyndham.
- Assess TA’s ability to pay current and deferred rent, its delayed SEC reporting, and the effect of the Virginia taking and rent adjustment.
- Compare planned renovation spending with actual costs, hotel disruption, and the resulting minimum returns and operating performance.
- Monitor liquidity after distributions, capital spending, and debt maturities, including exposure to floating rates and covenant requirements.
- Review related-party arrangements and RMR fees, including incentive fees and potential termination payments.