Business Context and Reporting Period
Company: Hospitality Properties Trust (HPT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: HPT is a Real Estate Investment Trust (REIT) that owns 251 hotels across 37 states. The company does not operate the hotels directly; instead, they are leased to or managed by third-party tenants and operators (including affiliates of Marriott, Host, Barcelo-Crestline, Wyndham, Candlewood, and Homestead). The company earns revenue through minimum rents, percentage rents, and FF&E (Furniture, Fixtures, and Equipment) reserve deposits.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2002 |
Nine Months Ended Sep 30, 2002 |
Nine Months Ended Sep 30, 2001 |
|---|---|---|---|
| Total Revenues | $89,821 | $259,870 | $219,500 |
| Net Income | $34,645 | $103,466 | $94,790 |
| Net Income Available to Common Shareholders | $32,864 | $98,122 | $89,446 |
| Earnings Per Share (Basic & Diluted) | $0.53 | $1.57 | $1.55 |
| Cash Flow from Operating Activities | N/A | $154,767 | $148,031 |
| Cash Available for Distribution (CAD) | $53,513 | $157,149 | $143,080 |
| Cash and Cash Equivalents | $503 | $503 | $24,946 |
| Total Debt (Revolving + Senior Notes) | $556,934 | $556,934 | $464,781 |
Note: Debt figures include $83,000 in revolving credit facility and $473,934 in senior notes (net of discount) as of Sept 30, 2002.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8.0% in the third quarter and 18.4% for the nine-month period compared to 2001. This growth is primarily driven by the acquisition of 23 hotels since the end of the second quarter of 2001 and the consolidation of a Taxable REIT Subsidiary (TRS) which reports hotel operating revenues and expenses rather than rental income.
- FF&E Reserve Income Decline: FF&E reserve income decreased 5.8% in the third quarter and 15.1% for the nine-month period. This decline is attributed to reduced hotel sales volumes due to the recessionary economy and reduced business travel following the September 11, 2001 attacks.
- Operating Expenses: Total expenses increased 7.3% (Q3) and 24.1% (9 months) year-over-year. The increase is largely due to the recognition of hotel operating expenses for properties leased to the TRS and depreciation on newly acquired assets.
- Extraordinary Loss: The company recognized an extraordinary loss of $1,600 in the third quarter related to the write-off of unamortized deferred financing costs upon the early extinguishment of $115,000 in senior notes.
- Liquidity Position: Cash and cash equivalents dropped significantly from $38,962 at year-end 2001 to $503 at September 30, 2002, due to real estate acquisitions ($147,335) and distributions to shareholders ($139,166).
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management notes that the U.S. hotel industry continues to face declines in occupancy, revenues, and profitability due to the war on terrorism and a recessionary economy. Despite these headwinds, all rent payments were current as of September 30, 2002. The company expects to fund future acquisitions and a $32.5 million modernization program for 36 Courtyard by Marriott hotels using existing cash, credit facility borrowings, or new equity/debt offerings.
Risks and Contingencies:
- Tenant Performance: While leases contain security features (guarantees, deposits), there is no assurance that tenants or guarantors will continue to make payments if travel patterns remain depressed for extended periods.
- Coverage Ratios: As of September 30, 2002, only 4 of the 9 hotel pools generated a rent/return coverage ratio of at least 1.0x for the first three quarters of 2002. Pools with coverage below 1.0x rely on tenant guarantees or supplemental payments to meet minimum rent obligations.
- Interest Rate Risk: The company has $83,000 outstanding on a floating-rate revolving credit facility. A 10% increase in interest rates would increase annualized interest expense by approximately $249.
- Accounting Change: Implementation of SFAS No. 145 in 2003 will reclassify gains/losses on debt extinguishment from "extraordinary items" to ordinary income/loss.
Investor Verification Checklist
- Debt Maturity Profile: Verify the company's ability to refinance or repay debt maturing in 2008, 2009, 2010, and 2012, given the current low cash balance ($503).
- Tenant Guarantees: Assess the financial strength of the parent companies guaranteeing the leases for the hotel pools currently operating below 1.0x coverage (specifically Wyndham and Summerfield Suites pools).
- FF&E Reserve Utilization: Monitor the $49,267 in restricted cash held by HPT and the $18,185 held by tenants to ensure funds are available for the planned $32.5 million modernization program.
- TRS Consolidation Impact: Confirm the long-term stability of the Taxable REIT Subsidiary structure and its impact on future tax liabilities and cash flow reporting.
- Market Conditions: Evaluate the trajectory of RevPAR (Revenue Per Available Room) and occupancy rates, which declined 6.3% and 1.5% respectively year-to-date, to gauge future rental income stability.