Service Properties Trust (then Hospitality Properties Trust) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. The filing reports on Hospitality Properties Trust, the name used by the registrant at the time. Financial statement amounts below are in millions of dollars unless noted.
Business context
The REIT owned 473 properties and leased one hotel: 288 hotels and 185 travel centers, operated under management agreements or leases. Hotel operating revenue reflects managed hotels; rental income includes leased hotels and travel centers. A major comparison factor is that 53 hotels shifted from leased to managed beginning January 1, 2013, changing how their revenue and expenses are reported.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $354.5 | $301.4 | +17.6% |
| Operating income | $63.1 | $77.6 | -18.6% |
| Net income | $27.5 | $42.9 | -36.0% |
| Net income available to common shareholders | $19.4 | $28.8 | -32.6% |
| Basic and diluted earnings per common share | $0.15 | $0.23 | -$0.08 |
| Cash from operating activities | $45.2 | $61.0 | -$15.8 |
| FFO per share | $0.73 | $0.74 | -$0.01 |
| Normalized FFO per share | $0.74 | $0.78 | -$0.04 |
Operating margin was approximately 17.8% versus 25.7% a year earlier; net margin was approximately 7.8% versus 14.3%. These calculations use reported operating income and net income divided by total revenue. The filing does not present these margins as reported measures.
Investing cash outflow was $64.5 million, principally property improvements and FF&E reserve funding; no real estate acquisitions were reported in the quarter. Financing cash inflow was $17.3 million, including net proceeds of approximately $393.5 million from a March common-share offering, largely offset by repayment of revolving-credit borrowings and shareholder distributions. Cash and cash equivalents ended the quarter at $18.0 million; restricted FF&E cash was $37.9 million.
At quarter-end, debt comprised $10 million drawn on a $750 million revolving facility, a $400 million term loan, approximately $1.994 billion of senior notes and $8.5 million of convertible notes. The revolver had $740 million available. The term loan matures in 2017; senior-note principal maturities include $300 million in 2014, $280 million in 2015, $275 million in 2016, $700 million in 2017, $350 million in 2018 and $500 million in 2022. Management said it was in compliance with debt covenants. The common distribution declared for the quarter was $0.47 per share.
Changes and operating trends
- Hotel operating revenue rose 29.6%, largely because 53 hotels moved from leased to managed (+$53.7 million) and because of stronger results at some managed hotels. Hotel operating expenses rose 37.7%, reflecting the same transition and higher occupancy-related costs. The transition materially affects year-over-year comparability.
- Hotel rental income fell 60.4% as those 53 hotels left the leased portfolio; travel-center rent rose 4.3%, mainly from rent increases tied to funded improvements.
- For 285 comparable hotels, ADR increased 3.8% to $103.06, occupancy increased 2.1 percentage points to 66.4%, and RevPAR rose 7.2% to $68.43. Management attributed some underperformance versus industry averages to renovations and rebranding. The filing also reports all-hotel statistics: ADR +3.6%, occupancy +2.0 points and RevPAR +6.8%.
- Normalized FFO decreased 4.0% to $92.6 million. Reported FFO was broadly flat at $91.7 million. Common-share issuance increased weighted-average shares 1.5%.
Outlook, risks and unusual items
- Management expected operating cash flow to cover operating expenses, interest and declared distributions over the next 12 months, but cautioned that tenant or hotel-manager payment shortfalls could reduce cash flow and require a distribution reduction. No specific earnings or FFO guidance was provided.
- Management expected substantial 2013–2014 renovation and rebranding spending, including remaining planned funding of approximately $30.4 million for Marriott No. 234, $77.2 million for InterContinental, $74.3 million for Wyndham, and $167.8 million for Sonesta No. 1. Returns may not improve enough to match higher contractual minimums.
- Hotel coverage was below 1.00x for eight of ten hotel operating agreements over the 12 months ended March 31, 2013; aggregate hotel coverage was 0.80x. Security deposits and guarantees are limited, may be depleted or expire, and applying a deposit does not create new cash flow. Unfunded hotel shortfalls were $18.6 million for the quarter.
- TA was the lessee of 38% of real estate properties at cost and reported a quarterly net loss of $12.1 million. HPT disclosed $150.0 million of deferred TA rent not recognized as income or receivable because collection was uncertain. Travel-center lease coverage was 1.68x for the trailing 12 months.
- The former lease covering 53 Marriott hotels ended in December 2012; from January 2013 HPT leased those hotels to its taxable REIT subsidiary and continued Marriott management without a security deposit or guarantee. Future returns under that arrangement depend on hotel performance.
- After quarter-end, NH Hoteles said it could not obtain bank approvals for the proposed transaction involving a €170 million loan, hotel acquisitions and a New York joint venture; alternatives were uncertain and no transaction was assured. A planned $29.7 million acquisition of the Sonesta Gwinnett Place hotel was subject to closing conditions.
- Other notable items: the 2012 comparison included an $2.9 million preferred-share redemption charge; Q1 2013 included no impairment loss (versus $0.9 million in 2012). The filing identifies related-party relationships involving RMR, TA, Sonesta and AIC as potential sources of conflicts of interest.
Important facts for investors to verify
- How much of revenue growth and expense growth reflects the 53-hotel lease-to-management transition versus underlying hotel performance.
- Whether hotel operating results improve enough to cover minimum returns, and whether available guarantees and security deposits remain adequate.
- TA’s capacity to pay current and deferred rent, given its reported loss, concentration as a tenant and unrecognized deferred rent.
- Actual renovation spending, completion costs and the resulting operating performance and contractual return increases.
- Liquidity and refinancing plans for scheduled debt maturities, including the 2014 notes, and the ability to maintain distributions while funding capital needs.
- Status and final terms, if any, of the proposed Sonesta Gwinnett Place acquisition and any revised NH Hoteles transaction.