Service Properties Trust annual report, FY2010

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Business context and reporting period

The supplied filing is Hospitality Properties Trust’s (HPT) Form 10-K for the fiscal year ended December 31, 2010, filed February 22, 2011. This differs from the request metadata naming Service Properties Trust; the filing identifies HPT as the registrant. HPT was a hospitality-focused REIT with 289 hotels and 185 travel centers in the United States, Canada and Puerto Rico. Its results include hotel operations and rental income from properties leased to third parties, including TravelCenters of America (TA).

Financial performance and position

  • Revenue: $1.085 billion, up 4.7% from $1.037 billion in 2009. Hotel operating revenue rose 2.9% to $736.4 million; rental income increased 8.0% to $326.8 million.
  • Profit: Operating income increased 13.8% to $330.8 million, a 30.5% operating margin versus 28.0% in 2009. Net income fell 89.0% to $21.4 million; after preferred distributions, common shareholders had a loss of $8.5 million, or $0.07 per share, versus income of $163.5 million, or $1.51 per share, in 2009.
  • Material nonrecurring items: 2010 included a $163.7 million asset impairment loss and a $6.7 million loss on debt extinguishment. By contrast, 2009 included a $51.1 million gain on debt extinguishment. Excluding these items, the reported year-over-year net income comparison is not a like-for-like measure of underlying performance.
  • Hotel operating trends: Portfolio occupancy rose to 69.3% from 64.0%, while average daily rate fell 4.8% to $90.36. RevPAR increased 3.1% to $62.62. Hotel cash flow available to pay minimum returns and rents declined 5.7% year over year.
  • Cash flow: Operating cash flow was $341.4 million, up from $320.1 million. Investing activities used $122.2 million; financing activities used $344.8 million. Cash and cash equivalents declined to $4.9 million from $130.4 million; a further $80.6 million was held as restricted FF&E reserve cash.
  • Debt and liquidity: Debt was $2.11 billion, approximately 41% of book capitalization, versus $2.19 billion a year earlier. The $750 million unsecured revolver had $144 million drawn and $606 million available at year-end, and matured October 24, 2011. HPT reported compliance with debt covenants. The filing highlights $100.8 million of notes maturing in 2012 and a potential holder put of $79.1 million of convertible notes in March 2012.
  • Distributions: Common distributions paid were $1.80 per share in 2010, following suspension after the first quarter of 2009 and resumption in January 2010. The board retained discretion over future distributions.

Material changes versus the prior comparable period

  • Revenue and operating income improved, supported by higher hotel occupancy and contractual rent increases. Hotel room rates remained lower, and hotel operating cash flow available for contractual payments weakened.
  • Net income reversed sharply from 2009, principally reflecting the 2010 impairment charge and the absence of 2009’s debt-extinguishment gain. The 2010 impairment included $157.2 million for 45 hotels among 53 under consideration for sale in connection with negotiations with Marriott and InterContinental; a separate $16.4 million charge related to three hotels marketed for sale, partly offset by a $9.9 million valuation adjustment.
  • Common distributions resumed, increasing financing cash outflows. HPT also repurchased $185.7 million face amount of convertible notes and redeemed $50 million of senior notes during 2010.
  • Common shares outstanding increased to 123.4 million from 108.0 million weighted-average shares in 2009, following a 2009 share issuance.

Outlook, commentary, risks and contingencies

  • Management stated that operating cash flow was expected to cover operating expenses, interest and distributions declared by the board over the next 12 months, but warned that missed tenant or manager payments could reduce cash flow and force lower or suspended common distributions. The filing provides no numerical earnings or revenue guidance.
  • Hotel payment shortfalls: Marriott’s No. 3 and Crestline’s No. 4 contracts paid $16.9 million and $11.6 million less, respectively, than 2010 minimum contractual amounts. HPT applied security deposits, with only about $6.5 million remaining for each contract at February 21, 2011. Security-deposit applications generate accounting income but no cash receipt.
  • InterContinental: Its $125 million guarantee was exhausted in January 2011. A February 1 payment was $8.1 million below contractual minimums; HPT applied the security deposit, which had $28.8 million remaining at February 21. HPT expected the deposit might approximate 2011 shortfalls, based on projections that could prove inaccurate. Negotiations to modify agreements covering 131 hotels remained unresolved.
  • TA lease amendment: On January 31, 2011, after year-end, HPT reduced annual minimum rent for 145 travel centers from $165.1 million to $135.1 million, and for 40 centers from $66.2 million to $54.2 million. The $150 million of deferred rent was extended without interest, with $107.1 million due in December 2022 and $42.9 million in June 2024, subject to acceleration in specified circumstances. TA reported a 2010 net loss of $65.6 million. Its ability to pay amended and deferred rent remains a significant risk.
  • Refinancing and concentration: The revolver’s October 2011 maturity and near-term debt obligations create refinancing risk; management expected renewal costs could rise materially and gave no assurance of renewal at the same size. TA leased all travel centers, representing about 39% of investments; InterContinental and Marriott represented approximately 27% and 26% of investments, respectively.
  • Other disclosed risks include continued weakness in travel and trucking, fuel-price volatility and increased travel-center competition, limited or exhausted guarantees, property-sale proceeds below impaired carrying values, REIT qualification, environmental exposure, and potential conflicts related to external manager RMR. HPT reported no material pending or threatened litigation expected to materially affect it; a proposed settlement concerning the Petro lease remained subject to court approval.

Important facts for investors to verify

  1. Confirm the registrant identity: the provided filing is for Hospitality Properties Trust, not Service Properties Trust.
  2. Review the audited statements and notes for the $163.7 million impairment, its hotel-level assumptions and any subsequent sale outcomes.
  3. Track actual cash rent and return collections from Marriott, Crestline and InterContinental, remaining security deposits, and progress on contract modifications.
  4. Assess TA’s financial condition, ability to meet reduced lease payments, and recovery prospects for the $150 million deferred rent under the amended schedule.
  5. Verify the revolver refinancing, 2012 maturities and convertible-note put funding, including costs, covenant headroom and available liquidity.
  6. Compare declared distributions with recurring cash flow, excluding noncash security-deposit applications and other nonrecurring items.