Service Properties Trust — 2012 Form 10-K Summary
Filing identity: The supplied filing is for Hospitality Properties Trust (HPT), not Service Properties Trust. It covers the fiscal year ended December 31, 2012; fourth-quarter figures are noted separately below.
Business context and reporting period
HPT was a REIT owning or leasing 289 hotels with 43,404 rooms and 185 travel centers at year-end. Its hotels are operated by third-party managers or taxable REIT subsidiaries; all travel centers are leased to TravelCenters of America LLC (TA). HPT reported hotel and travel-center real estate as its two operating segments.
Financial and operating metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $1,297.0 million | $1,210.3 million |
| Operating income | $278.5 million | $325.8 million |
| Net income | $151.9 million | $190.4 million |
| Net income available to common shareholders | $103.8 million; $0.84 per share | $160.6 million; $1.30 per share |
| FFO / Normalized FFO | $354.9 million / $374.7 million; $2.87 / $3.03 per share | $405.3 million / $407.5 million; $3.28 / $3.30 per share |
| Cash from operating activities | $363.9 million | $355.1 million |
| Cash and cash equivalents at year-end | $20.0 million | $8.3 million |
| Debt, net of discounts | $2,722.4 million | $2,115.7 million |
| Common distributions paid per share | $1.82 | $1.80 |
Operating margin was approximately 21.5% in 2012 versus 26.9% in 2011; net margin was approximately 11.7% versus 15.7%. These are calculated from reported revenue and income. At December 31, 2012, $430 million was available under the $750 million revolving credit facility; restricted FF&E reserve cash was a separate $40.7 million. Debt was 50% of book capitalization. Management stated it believed operating cash flow would cover operating costs, interest and declared distributions for the next 12 months, while warning that missed tenant or manager payments could undermine that expectation.
In fourth-quarter 2012, revenue was $322.3 million, net income was $26.6 million, income available to common shareholders was $18.5 million ($0.15 per share), and the common distribution was $0.47 per share. Fourth-quarter 2011 comparatives were $295.9 million, $38.2 million, $30.7 million ($0.25 per share), and $0.45 per share, respectively.
Material changes versus the prior comparable period
- Annual revenue rose 7.2%, mainly reflecting higher managed-hotel revenue, properties converted from leased to managed, and acquisitions. Hotel operating revenue increased 10.3%, while rental income fell 1.4%.
- Operating income fell 14.5% and net income fell 20.2%; common-shareholder income fell 35.4%. Higher hotel operating expenses, depreciation, preferred distributions and the preferred-share redemption accounting charge contributed. A $10.6 million real-estate sale gain partly offset the decline.
- FFO declined 12.4% and Normalized FFO declined 8.0%. Operating cash flow increased modestly, but investing cash outflow rose to $728.9 million, principally due to hotel acquisitions, property improvements and return of a Host security deposit.
- Debt increased by about $606.6 million. HPT issued $500 million of 5.00% notes due 2022 and entered a $400 million term loan, while repaying or redeeming other debt. It also issued $280.1 million net from Series D preferred shares and redeemed Series B shares and part of its Series C shares.
- Portfolio changes included the acquisition of the Cambridge and New Orleans hotel interests, a Chicago hotel and San Francisco’s Clift Hotel; three hotel sales; and rebranding or management transitions involving Sonesta and Wyndham.
Outlook, risks and unusual items
- Renovation and rebranding activity was expected to remain high through 2013 and into 2014. HPT reported 138 hotels under renovation during some or all of 2012; these hotels’ RevPAR declined 0.3% year over year. The filing describes approximately $390 million of planned refurbishment and rebranding investment over the following two years, with substantial funding expected in 2013.
- Hotel operating coverage was below 1.0x for eight of ten hotel agreements in 2012. HPT received less than contractual minimum returns from Marriott No. 234 and InterContinental: shortfalls were $10.1 million and $29.4 million, respectively. InterContinental shortfalls were covered by a security deposit; Marriott made limited-guaranty payments. Deposits and guarantees are limited, and applying deposits does not provide new cash.
- HPT had $30.6 million of 2012 minimum-return shortfalls not funded by managers, including unguaranteed amounts from Marriott and Sonesta. The Host lease covering 53 hotels expired at year-end; the hotels moved to a TRS-managed arrangement without a security deposit or guarantee.
- TA leases all 185 travel centers and represents approximately 38% of historical investment cost. TA has accumulated losses and may be unable to pay rent, including $150 million of deferred rent due in 2022 and 2024. HPT’s liquidity and distributions are therefore exposed to TA’s operating and financial condition.
- Debt maturities include $300 million in 2014 and $600 million in 2015, the latter including $320 million outstanding on the revolving facility. HPT cited refinancing, interest-rate, covenant and capital-market risks; it reported covenant compliance at year-end. A 100-basis-point increase in rates was estimated to add $7.2 million in annual interest on year-end floating-rate debt.
- Common distributions increased to $1.82 per share in 2012. HPT intended to continue quarterly cash distributions, but their timing and amount remained at the trustees’ discretion and were subject to cash flow, financing restrictions and capital needs.
- A February 2013 letter of intent with NH Hoteles contemplated a €170 million secured loan and hotel acquisitions and a joint venture with approximately $150 million of aggregate acquisition and joint-venture investment. It was preliminary, subject to diligence and other conditions, and not assured to close.
- Unusual items included an $8.5 million impairment charge, including a $7.7 million goodwill write-off, and a $10.6 million gain on hotel sales. Ernst & Young issued unqualified opinions on the financial statements and internal controls; management reported effective disclosure controls and financial reporting controls. No legal proceedings were reported.
Most important facts for investors to verify
- Confirm the issuer: the filing provided is Hospitality Properties Trust, not Service Properties Trust.
- Track Marriott and InterContinental payment shortfalls, remaining guaranty and security-deposit balances, and hotel coverage after renovations and rebranding.
- Assess TA’s ability to meet current rent and deferred-rent obligations, and the implications of its concentration in HPT’s travel-center portfolio.
- Review refinancing plans for 2014–2015 maturities, revolving-credit availability, covenant headroom and sensitivity to higher rates.
- Compare committed renovation spending and distributions with operating cash flow and liquidity; distinguish cash resources from security deposits and restricted reserves.
- Check whether the NH Hoteles proposal advanced beyond its nonbinding letter of intent and whether its investment terms changed.