Business Context and Reporting Period
Company: Hospitality Properties Trust (HPT)
Filing Type: Form 8-K (Current Report)
Date: December 3, 2007
Primary Purpose: To revise historical financial statements to report the sale of 18 Homestead Studio Suites properties as a discontinued operation and to provide unaudited pro forma financial information reflecting the acquisition of TravelCenters of America (TA) and Petro Stopping Centers.
Key Financial Metrics
Discontinued Operations (Homestead Studio Suites Sale):
- Sale Date: July 26, 2007
- Properties Sold: 18 hotels (17 to unrelated party; 1 to HRPT Properties Trust subsidiary).
- Total Sale Price: Approximately $205 million.
- Net Proceeds: Approximately $189 million (after $15.96 million security deposit refund and closing costs).
- Use of Proceeds: Reduction of amounts outstanding under the revolving credit facility.
- Gain Recognized: Approximately $96 million (recognized in Q3 2007).
The following metrics reflect HPT's operations as if the TA Transactions (acquisition, restructuring, spin-off) and Petro Centers acquisition had occurred on January 1, 2006.
| Metric | Year Ended Dec 31, 2006 (Pro Forma) | Nine Months Ended Sep 30, 2007 (Pro Forma) |
|---|---|---|
| Total Revenues | $1,255,867,000 | $998,526,000 |
| Total Expenses | $1,035,854,000 | $845,798,000 |
| Income from Continuing Operations | $220,013,000 | $152,728,000 |
| Income Available to Common Shareholders | $190,132,000 | $130,319,000 |
| Basic/Diluted EPS | $2.06 | $1.39 |
| Common Shares Outstanding | 92,500,000 | 93,859,000 |
Material Changes and Transactions
Discontinued Operations Reclassification:
In accordance with SFAS 144, revenue, expenses, and gains from the 18 Homestead Studio Suites sold in July 2007 have been reclassified as discontinued operations for all periods presented. This reclassification does not affect reported net income or net income available to common shareholders.
TravelCenters of America (TA) Transactions:
- Acquisition: Completed January 31, 2007.
- Restructuring: Real property interests of 146 travel centers (estimated value $1.7 billion) were retained by HPT subsidiaries, while TA (the operating company) was spun off to shareholders.
- Leaseback: HPT leased the 146 travel centers to TA. Pro forma rental income adjustments reflect minimum rent payments with scheduled increases.
- Capital Contribution: HPT contributed $121.2 million cash to TA to ensure working capital of $200 million.
- Acquisition Date: May 30, 2007.
- Assets: 40 travel centers in 25 states.
- Cost: Approximately $630 million purchase price plus ~$25 million in transaction costs.
- Financing: Initially funded via revolving credit facility; pro forma reflects financing via September 2007 senior notes offering and credit facility borrowings.
- Leaseback: Petro Centers leased to TA for initial annual rent of approximately $62.2 million.
Guidance, Outlook, and Risks
Management Commentary:
Management states that the unaudited pro forma statements are for informational purposes only and are not necessarily indicative of actual results. The pro forma data assumes the TA and Petro transactions were completed as of January 1, 2006.
Financing Outlook:
The acquisition of the Petro Centers was initially funded by borrowings under the revolving credit facility. Management anticipates financing this acquisition on a long-term basis through the issuance of both equity and debt securities. Upon completion of this long-term financing, actual results will differ significantly from the pro forma presentation.
Risks and Contingencies:
- Pro Forma Limitations: The pro forma financial information does not represent results for any future date or period.
- Financing Risk: Reliance on the revolving credit facility for the Petro acquisition until long-term financing is secured.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the reclassification of the $96 million gain and related revenues/expenses from the Homestead Studio Suites sale in historical filings.
- Debt Structure: Confirm the status of the revolving credit facility usage following the Petro acquisition and the terms of the September 2007 senior notes offering ($350 million, 6.7% due 2018).
- Lease Agreements: Review the long-term lease terms between HPT and TA for the 146 TravelCenters and 40 Petro Centers, specifically regarding rent escalations.
- Preferred Distributions: Note the impact of the February 2007 issuance of 7% Series C cumulative redeemable preferred shares on income available to common shareholders.
- Pro Forma Assumptions: Scrutinize the assumptions regarding the elimination of TA operating expenses and the recognition of new interest and depreciation expenses in the pro forma statements.