Business Context and Reporting Period
This Form 8-K Current Report is filed by Hospitality Properties Trust (HPT) for the period ending January 31, 2011. The filing primarily addresses the entry into a material definitive agreement with TravelCenters of America LLC (TA) to amend lease terms and provides updates on negotiations regarding operating agreements with InterContinental Hotels Group plc.
Key Financial Metrics and Material Changes
Amendment Agreement with TravelCenters of America (TA)
On January 31, 2011, HPT entered into an Amendment Agreement with TA, resulting in significant reductions to rental income and changes to deferred rent schedules:
- TA Lease Rent Reduction: Minimum annual rent for 145 travel centers was reduced by approximately $29,983,445.
- Petro Lease Rent Reduction: Minimum annual rent for 40 travel centers was reduced by approximately $12,016,555.
- Elimination of Scheduled Increase: A scheduled $5 million annual rent increase effective February 1, 2011, was eliminated.
- Percentage Rent Waiver: Subject to Delaware Court of Chancery approval, HPT will waive the first $2,500,000 of percentage rent due under the Petro Lease.
- Deferred Rent Restructuring: The due date for $150 million of deferred rent was extended. Interest on this amount ceased accruing as of January 1, 2011. The new payment schedule is:
- $107,085,000 due December 31, 2022.
- $42,915,000 due June 30, 2024.
InterContinental Operating Agreements
HPT manages 131 hotels under four agreements with InterContinental, secured by a $125 million guarantee and a $36.9 million security deposit.
- Guarantee Status: As of December 31, 2010, the remaining availability under the $125 million guarantee was reduced to approximately $6.7 million due to funding of required minimum payments.
- Deposit Restructuring: An agreement dated January 25, 2011, allows the $36.9 million security deposit to apply on a pooled basis to all four operating agreements, including InterContinental No. 2.
- Recasting Negotiations: HPT is negotiating a recasting of the operating agreements. A temporary standstill agreement prevents either party from exercising remedies for payment defaults or breaches during negotiations.
Guidance, Outlook, and Risks
The filing contains significant forward-looking statements and risk disclosures:
- TA Solvency Risk: HPT explicitly states that TA has accumulated large losses since becoming a separate public company in 2007. There is no assurance that TA will be able to pay the reduced and deferred rent amounts.
- Legal Contingency: The waiver of $2.5 million in percentage rent is contingent upon court approval of a settlement in Kahn v. Portnoy, et al. There is no assurance this approval will be obtained.
- InterContinental Negotiation Risk: Significant differences exist between HPT and InterContinental regarding the recasting of operating agreements. There is no assurance that a final agreement will be reached.
- Acceleration Clauses: The deferred rent amounts from TA may be accelerated, and interest may resume accruing if certain events occur, including a change of control of TA.
Investor Verification Checklist
- Verify the status of the Kahn v. Portnoy litigation settlement and the likelihood of Delaware Court of Chancery approval for the $2.5 million rent waiver.
- Review TA's most recent financial statements to assess its ability to service the restructured debt and pay reduced rents given its history of losses.
- Monitor the progress of negotiations with InterContinental to determine if the operating agreements will be successfully recasted or if further defaults may occur.
- Confirm the impact of the rent reductions and deferred interest cessation on HPT's immediate cash flow and future earnings projections.
- Review the "Risk Factors" section of HPT's 2009 Form 10-K and subsequent 10-Q filings for a comprehensive list of risks related to these relationships.