Service Properties Trust (then Hospitality Properties Trust) — Q2 2010 Form 10-Q
Business context and period. The filing is for the quarter and six months ended June 30, 2010. The registrant reported owning 289 hotels and 185 travel centers, operated under 13 management agreements or leases. Unless noted, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $282.4 | $267.1 | $536.5 | $521.4 |
| Operating income | $81.9 | $73.1 | $160.4 | $144.5 |
| Net income | $23.2 | $51.0 | $64.1 | $112.1 |
| Net income available to common shareholders | $15.7 | $43.6 | $49.1 | $97.2 |
| Basic and diluted earnings per common share | $0.13 | $0.46 | $0.40 | $1.03 |
- Operating margin was approximately 29.0% in Q2 2010 versus 27.4% in Q2 2009; for the six-month periods it was 29.9% versus 27.7%. Net margin was approximately 8.2% versus 19.1% in Q2 and 11.9% versus 21.5% year to date.
- Six-month operating cash flow was $167.5 million, compared with $156.5 million. Investing activities used $20.5 million and financing activities used $273.6 million. Cash declined by $126.6 million to $3.8 million; restricted cash was $41.5 million.
- At June 30, total liabilities were $2,301.9 million. Interest-bearing debt on the balance sheet was approximately $2,053.9 million, including $38.0 million drawn on the revolving facility. The $750 million unsecured facility had $712 million available and matured in October 2010, with an option to extend one year subject to conditions and a fee. Management had not decided whether to extend or replace it.
- Management said operating cash flow was expected to cover operating expenses, interest and distributions for the foreseeable future. It expected to fund up to approximately $86.2 million of additional property improvements in the remainder of 2010, using cash or revolver borrowings. The common distribution was $0.45 per share for the quarter; future distributions were not assured.
Material changes versus the prior period
- Q2 revenue increased 5.7%, while six-month revenue increased 2.9%. Hotel occupancy improved: portfolio occupancy rose to 72.9% from 66.1% in Q2, and year-to-date to 68.6% from 63.0%. Average daily rate declined 5.6% in Q2 and 8.0% year to date; year-to-date RevPAR was nearly flat, up 0.2%.
- Operating income increased 12.0% for Q2 and 11.0% for the six months. Net income fell 54.5% and 42.8%, respectively, reflecting the comparison with prior-year gains on debt extinguishment, the 2010 impairment charge and other financing effects. Common-share earnings also reflected a roughly 30% increase in weighted-average shares, primarily following 2009 share offerings.
- Q2 2010 included a $16.4 million noncash impairment loss on three hotels being marketed for sale and a $6.7 million noncash loss on repurchasing convertible notes. Q2 2009 included a $13.3 million gain on debt extinguishment; the six-month 2009 gain was $39.9 million.
- During Q2, the Trust repurchased $185.7 million face value of 3.8% convertible notes for $185.6 million, leaving $79.1 million face value outstanding. On July 15, 2010, it redeemed $50 million of 9.125% notes at par using revolver borrowings.
Management commentary, risks and unusual items
- Tenant and manager payment shortfalls: Marriott and Crestline paid less than contractual minimums on two hotel agreements during the first half: shortfalls were $8.9 million and $5.6 million. The Trust applied security deposits, which support reported income but do not provide equivalent cash receipts. At August 8, remaining deposits were $17.6 million and $13.5 million. Management expected these deposits to cover anticipated 2010 shortfalls but had not determined further actions.
- TravelCenters of America (TA): TA leased 185 travel centers and represented 39% of investments at cost. TA had deferred $120 million of rent through June 30 and deferred a further $5 million for July under the agreement. The Trust did not recognize deferred principal rent as revenue because collection was uncertain; it recognized $3.3 million of interest income in Q2 under the 1%-per-month provision. TA reported a Q2 net profit of $1.2 million but a six-month net loss of $40.0 million. Management warned that economic conditions, trucking activity and fuel prices could impair TA’s ability to pay deferred amounts.
- Hotel dispositions and renewals: The Trust was pursuing sales of three hotels after recording the impairment; a fourth hotel was also being offered for sale but was not written down. Host had indicated it would not renew the lease covering 18 hotels expiring December 2010, and had disclosed intent not to renew a 53-hotel lease expiring in 2012. The Trust expected to return related security deposits of $17.2 million and potentially $50.5 million, respectively, and anticipated leasing the hotels to its own taxable subsidiaries while retaining Marriott management and brands.
- Capital and financing risk: Management cited volatile credit availability and potentially higher spreads and refinancing costs, and gave no assurance the revolver could be renewed at its current size. The Trust reported compliance with debt covenants at June 30. Most hotel agreement coverage was below 1.0x for the twelve months ended June 30; TA lease coverage was 1.14x and 0.97x, calculated using contractual rent before deferrals.
- Related parties: RMR provides management services to the Trust and TA. RMR-related management expenses were $16.4 million for the first half. The Trust also held a 14.29% interest in Affiliates Insurance, whose board included all Trust trustees; expected annual property insurance premiums through the program were approximately $4.8 million.
Most important facts for investors to verify
- Progress on renewing or replacing the revolver that matured in October 2010, and the cost and availability of refinancing.
- Subsequent collection of TA’s deferred rent, performance and liquidity, and whether any additional rent deferrals or concessions were made.
- Marriott and Crestline payment performance, remaining security deposits and whether deposit applications continue to mask cash collection shortfalls.
- Disposition outcomes and proceeds for the four hotels being marketed, compared with carrying values and the recorded impairment.
- Hotel operating trends, particularly the balance between recovering occupancy and declining room rates, and the ability of operators and guarantors to meet minimum returns.
- Cash available after property improvements, debt service and distributions; the filing’s stated outlook is not a guarantee of future distributions or operating results.