Business Context and Reporting Period
Company: Hospitality Properties Trust (HPT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: HPT is a real estate investment trust (REIT) owning 474 properties, consisting of 289 hotels and 185 travel centers. The properties are operated under 13 management agreements or leases with major operators including Marriott, InterContinental, Hyatt, Carlson, and TravelCenters of America (TA). The company is currently navigating a recessionary environment impacting the U.S. hotel industry.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $521,425 | $657,954 |
| Net Income | $112,103 | $33,925 |
| Net Income Available to Common Shareholders | $97,163 | $18,985 |
| Earnings Per Share (Basic & Diluted) | $1.03 | $0.20 |
| Cash Provided by Operating Activities | $156,531 | $184,189 |
| Cash and Cash Equivalents (End of Period) | $7,414 | $13,492 |
| Total Debt (Revolving + Senior Notes + Convertible) | $2,388,214 | $2,635,502 |
| Revolving Credit Facility Outstanding | $330,000 | $396,000 |
| Available Credit Capacity | $420,000 | $354,000 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 20.8% year-over-year. Hotel operating revenues dropped 22.3% to $362.9 million, and rental income from travel centers fell 26.6% due to rent deferrals by TA.
- Profitability Increase: Despite revenue declines, Net Income increased 230.4% to $112.1 million. This was primarily driven by a $39.9 million gain on the extinguishment of debt and the absence of a $53.2 million asset impairment loss and a $19.6 million straight-line rent reserve recorded in the prior year.
- Debt Reduction: The company repurchased $134.8 million of convertible senior notes and $57.2 million of senior notes during the period, utilizing borrowings from its revolving credit facility.
- Capital Raise: HPT sold 17.5 million common shares in June 2009, raising approximately $192.4 million in net proceeds, which were used to repay revolving credit facility borrowings.
Guidance, Outlook, and Risks
- Distribution Suspension: On April 8, 2009, HPT suspended regular quarterly distributions to common shareholders. Management expects to re-evaluate capital markets and earnings in the fourth quarter of 2009 to determine future distribution amounts and whether they will be paid in cash or shares.
- Tenant Defaults: Marriott International and Barceló Crestline Corporation failed to meet minimum payment obligations under specific contracts (Marriott No. 3 and No. 4). HPT applied security deposits to cover shortfalls of approximately $3.8 million for the six months ended June 30, 2009. Additional shortfalls occurred between June 30 and August 6, 2009.
- TA Rent Deferral: TravelCenters of America (TA) deferred $30 million in rent during the six months ended June 30, 2009. HPT has ceased recognizing straight-line rent for TA leases due to uncertainty regarding collection.
- Market Conditions: Management cites a recessionary economy, reduced business and leisure travel, and volatile capital markets as significant risks. There is no assurance that lenders will fund advances under the credit facility or that future debt/equity offerings will be successful.
Investor Verification Checklist
- Security Deposit Status: Verify the remaining balances of security deposits held for Marriott and Crestline contracts ($33.2 million and $24.2 million respectively as of August 6, 2009) and the likelihood of replenishment.
- TA Solvency: Assess the financial health of TravelCenters of America (TA) and its ability to pay deferred rents, given its reported net losses and the impact of the recession on fuel sales.
- Debt Maturity Profile: Review the schedule of term debt maturities, noting significant obligations in 2010 ($50 million), 2012 ($100.8 million), and 2013 ($287 million), and the company's refinancing strategy.
- Dividend Policy: Monitor the fourth-quarter 2009 announcement regarding the resumption or modification of common share distributions and the potential use of share dividends to maintain REIT status.
- Operating Metrics: Track occupancy rates and RevPAR, which declined significantly (Total Average RevPAR down 21.8% year-over-date), to gauge the severity of the downturn in the hotel portfolio.