Business context and reporting period
The filing is Hospitality Properties Trust (HPT), a REIT, for the fiscal year ended December 31, 2017; the supplied filing does not identify the registrant as Service Properties Trust. HPT owned 323 hotels with 49,903 rooms and 199 travel centers. Hotels were managed or leased under agreements with multiple operators; all travel centers were leased to TravelCenters of America LLC (TA).
Key financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $2,171.9 million | $2,047.2 million |
| Operating income | $380.3 million | $386.9 million |
| Net income | $215.1 million | $223.1 million |
| Net income available to common shareholders | $203.8 million; $1.24 per share | $202.4 million; $1.30 per share |
| FFO / Normalized FFO available to common shareholders | $581.1 million / $585.7 million; $3.54 / $3.57 per share | $559.8 million / $561.4 million; $3.59 / $3.60 per share |
| Operating cash flow | $554.2 million | $532.5 million |
| Investing cash flow | $(733.7) million | $(454.4) million |
| Financing cash flow | $192.8 million | $(81.0) million |
| Cash and cash equivalents at year-end | $24.1 million | $10.9 million |
| Debt, net of discounts and issuance costs | $4,001.0 million | $3,163.8 million |
| Common distributions per share | $2.07 | $2.03 |
Hotel operating revenue and expenses are consolidated, so total revenue includes hotel-level operations. Operating margin was approximately 17.5% in 2017 versus 18.9% in 2016. Year-end net debt to gross book value of real estate was 42.3%; $602.0 million was available under the $1.0 billion revolving credit facility. Hotel rent/return coverage averaged 1.06x, while travel-center lease coverage was 1.50x. Four of nine hotel agreements, representing 19% of minimum returns and rents, had coverage below 1.0x.
Across HPT’s 299 continuously owned comparable hotels, 2017 ADR rose 1.0%, occupancy increased 0.1 percentage points to 75.8%, and RevPAR increased 1.1%. Across all 323 hotels, ADR rose 0.9%, occupancy fell 0.4 points to 75.1%, and RevPAR rose 0.3%.
Material changes versus the prior comparable period
- Revenue rose 6.1%, supported by acquisitions, higher minimum rents and returns, and some hotel performance improvement. Operating income fell 1.7%; net income declined 3.6%; common EPS fell 4.6%, partly reflecting higher weighted-average shares.
- FFO increased 3.8%, but FFO per share declined from $3.59 to $3.54. Normalized FFO per share was nearly flat at $3.57 versus $3.60.
- Operating cash flow increased $21.7 million, while investing outflows increased $279.4 million, mainly reflecting higher real estate acquisitions. HPT acquired 20 hotels and one travel center during 2017.
- Debt increased by approximately $837 million, with new senior-note issuance and revolving-credit borrowings used in part to fund acquisitions and redeem or refinance debt. HPT redeemed all Series D preferred shares for $291.4 million; preferred distributions consequently decreased.
- Common distributions increased to $2.07 per share from $2.03. Annual distributions exceeded GAAP net income per share but were below reported FFO and Normalized FFO per share.
- Fourth-quarter revenue was $535.1 million versus $479.3 million in 2016; common net income was $31.5 million versus $58.0 million, and common EPS was $0.19 versus $0.35.
Outlook, risks, contingencies and unusual items
- Management said operating cash flows, rents and returns, and revolver borrowings were expected to meet operating costs, capital needs, debt service and distributions for the next 12 months and foreseeable future. This is subject to operators’ ability and willingness to pay; the filing gives no earnings or FFO guidance.
- HPT expected approximately $231.6 million of capital improvements in 2018 and $105.6 million in 2019. This includes hotel renovations and anticipated purchases of about $51.5 million of TA capital improvements. Renovations can disrupt hotel operations, and improved property performance may not match higher contractual returns.
- TA represented 36% of historical real estate investment and all travel centers were leased to it. TA leases included $150.0 million of deferred rent, payable in part in 2024 and at later lease expirations. TA’s financial condition and capacity to pay rent remain key risks.
- Hotel payment security is not assured: about 74% of annual minimum returns and rents were covered by guarantees or deposits, many limited in amount or duration; the balance was not guaranteed. Deposits are not segregated, and applying them to shortfalls does not generate new cash. Wyndham’s $35.7 million guarantee was depleted; its January and February 2018 payments were 85% of minimum returns and $689 below the contractual amounts. Sonesta-related unfunded shortfalls were $26.8 million in 2017.
- HPT was in a dispute and unlawful-detainer litigation with Morgans and SBE concerning the Clift Hotel. The outcome was uncertain; management anticipated possible lost rent and substantial capital needs. Marriott had notified HPT it did not intend to renew the Kauai hotel lease at its December 2019 expiration.
- The $1.0 billion revolving facility matured July 15, 2018, with a conditional one-year extension option; the $400 million term loan matured April 2019. HPT reported covenant compliance at year-end. Floating-rate debt exposes cash flow to rising interest rates.
- Other material considerations include the externally managed structure and related-party conflicts involving RMR, TA and Sonesta; REIT qualification and tax-law changes; economic, hotel-supply and alternative-lodging risks; trucking, fuel and environmental risks; and planned capital spending. A trustee, Barry Portnoy, died on February 25, 2018, after year-end.
- Unusual items included a $5.4 million tax benefit related to 2017 tax legislation, a $9.3 million gain on hotel sales, and a $9.9 million charge to common shareholders for the excess of the Series D liquidation preference over its carrying value at redemption. HPT also reported a 2017 criminal wire-fraud incident; RMR reimbursed HPT, and HPT reported no resulting loss.
Important facts for investors to verify
- TA’s financial condition, rent-payment capacity and the timing and collectability of the $150 million deferred rent.
- Hotel-level coverage and cash collections, especially the unguaranteed Sonesta shortfalls, depleted Wyndham guarantee and remaining Marriott and InterContinental security support.
- Actual 2018–2019 renovation and travel-center spending, funding sources, and whether resulting operating improvements support increased minimum returns and rents.
- Revolver extension or refinancing, debt maturities, covenant headroom, and sensitivity to higher interest rates.
- Resolution and financial impact of the Clift dispute, the Kauai lease after 2019, and any related operator or capital requirements.
- Reconciliation of GAAP earnings, FFO and cash flows, including incentive management fees and other adjustments; the auditor issued unqualified opinions on the financial statements and internal controls.