Service Properties Trust (filed as Hospitality Properties Trust) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; unaudited. Dollar figures below are in millions unless stated otherwise.
Business context and financial performance
The REIT owned 473 properties: 288 hotels and 185 travel centers. Hotels were operated under management agreements or leases; travel centers were leased to TravelCenters of America (TA).
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $318.7 | $281.2 | $914.5 | $817.7 |
| Operating income | $81.6 | $84.5 | $253.4 | $228.6 |
| Net income | $47.5 | $50.2 | $152.2 | $114.3 |
| Net income available to common shareholders | $40.1 | $42.8 | $129.8 | $91.9 |
| Basic and diluted EPS | $0.32 | $0.35 | $1.05 | $0.74 |
| FFO per share / Normalized FFO per share | $0.79 / $0.79 | $0.82 / $0.82 | $2.44 / $2.52 | $2.20 / $2.39 |
Q3 revenue rose 13.3%, but net income fell 5.4% and common EPS declined 8.6%. For the nine months, revenue increased 11.8%, net income rose 33.2%, and EPS increased 41.9%. Hotel operating revenue growth reflected improved occupancy and room rates, as well as the conversion of 37 hotels from leased to managed operations. Q3 operating income was lower amid higher hotel operating costs and lower hotel rental and FF&E reserve income.
For the nine months, operating cash flow was $248.7 million, versus $239.3 million. Investing activities used $18.8 million, versus $62.1 million; financing activities used $228.3 million, versus $302.7 million. Common distributions were $0.45 per share for Q3 and $1.35 per share year to date, unchanged from the comparable 2010 periods.
Debt, liquidity and capital commitments
At September 30, cash and cash equivalents were $6.5 million and restricted FF&E cash was $41.7 million. Balance-sheet debt carrying value was approximately $2.081 billion. The new $750 million unsecured revolving facility matures in September 2015, with a conditional one-year extension option; $115 million was drawn and $635 million remained available. The stated borrowing rate was 1.53%.
Debt principal maturities include $100.8 million in 2012, $287 million in 2013, $300 million in 2014, $280 million in 2015, $275 million in 2016, $300 million in 2017 and $350 million in 2018. Holders may require repurchase of the convertible notes in March 2012. Management reported covenant compliance and expected operating cash flow to cover operating expenses, interest and declared distributions, while warning that weaker tenant or manager payments could impair that capacity.
Material changes, outlook and risks
- Tenant and operator shortfalls: All six hotel operating agreements had coverage below 1.0x for the twelve months ended September 30 (0.46x–0.82x); the two TA travel-center leases had coverage of 1.55x and 1.47x. These third-party operating statistics were not independently verified.
- Marriott: A revised agreement covering 71 hotels retained $98.4 million in annual minimum returns, but hotel cash flows were $18.1 million below minimums for the nine months. The prior $64.7 million security deposit was effectively exhausted; HPT requested $1.6 million under a limited guaranty capped at $40 million.
- InterContinental: A revised agreement covering 130 hotels retained $153.1 million in annual minimum returns and extended the term to 2036. A $64.2 million security deposit at September 30 covered $9.7 million of nine-month shortfalls; its balance was $62.3 million at November 7.
- TA lease amendment: Minimum rents were reduced, and $150 million of previously deferred rent was rescheduled for payment in 2022 and 2024. HPT had not recognized that deferred amount as income or receivable because collection was uncertain. TA was the lessee of properties representing 39% of HPT’s real estate cost.
- Capital plans and dispositions: HPT expected to invest approximately $102 million in renovations under the Marriott agreement and approximately $300 million under the InterContinental agreement; funding generally increases minimum returns. Hotel sales or rebranding plans were uncertain. Twenty-one hotels were classified as held for sale.
- Subsequent event: HPT agreed to a contingent transaction intended to acquire entities owning or leasing two hotels for approximately $150.5 million, expected to be funded with revolver borrowings. The deal was part of a complex merger transaction and involved entities owned by HPT’s Managing Trustees.
- Related-party governance: HPT amended its RMR management agreement, including rules affecting fees on certain acquisitions and a right of first offer for other RMR-managed REITs on certain properties offered for sale. The filing describes significant overlapping relationships among HPT, RMR, TA and affiliated entities.
Management cited economic and lodging-industry weakness, tenant or guarantor defaults, depletion of security deposits and guarantees, refinancing and capital-market access, planned renovation spending, uncertain property sales, REIT qualification, and related-party conflicts among key risks. It cautioned that distributions could be reduced or suspended if cash flows weaken. No specific earnings guidance was provided.
Important facts for investors to verify
- Whether Marriott and InterContinental meet future minimum payment obligations, and how quickly their security deposits or guarantees may be depleted.
- TA’s ability to pay amended current rents and the deferred $150 million; assess its operating performance and HPT’s tenant concentration.
- Funding, timing and expected return on the planned hotel renovations, alongside the uncertain sale or rebranding program.
- The March 2012 convertible-note put, upcoming debt maturities, revolver availability and covenant headroom.
- Completion and financing of the contingent two-hotel acquisition and the terms and governance safeguards of HPT’s RMR-related arrangements.