Business context and reporting period
Filing identity: The supplied filing is Hospitality Properties Trust’s (HPT) Form 10-K for the fiscal year ended December 31, 2016, with quarterly data for Q4 2016. The request metadata names Service Properties Trust; the filing itself identifies Hospitality Properties Trust.
HPT was a REIT owning 306 hotels and 198 travel centers at year-end, across the United States, Canada and Puerto Rico. Its hotels are managed by third parties, primarily through taxable REIT subsidiaries; all travel centers are leased to TravelCenters of America (TA). The company is externally managed by RMR LLC and reports hotel and travel-center segments.
Financial and operating highlights
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $2,047.2 million | $1,921.9 million |
| Operating income | $386.9 million; 18.9% margin | $335.9 million; 17.5% margin |
| Net income | $223.1 million | $166.4 million |
| Net income available to common shareholders | $202.4 million; $1.30 per share | $145.8 million; $0.97 per share |
| FFO available to common shareholders | $559.8 million; $3.59 per share | $464.5 million; $3.08 per share |
| Normalized FFO available to common shareholders | $561.4 million; $3.60 per share | $503.7 million; $3.34 per share |
| Operating cash flow | $532.5 million | $530.9 million |
| Cash used in investing activities | $454.4 million | $653.8 million |
| Debt, net of discounts and issuance costs | $3,163.8 million | $3,274.7 million |
| Cash and cash equivalents | $10.9 million | $13.7 million |
Revenue rose 6.5%; operating income increased 15.2% and common net income increased 38.9%. Results benefited from acquisitions, hotel performance, higher rents and lower general and administrative expense. Interest expense increased 11.7% to $161.9 million, reflecting higher average borrowings and rates. The 2015 comparison included a $36.8 million loss on distribution of RMR Inc. shares and an $11.0 million real-estate sale gain, versus neither item in 2016. FFO and Normalized FFO are non-GAAP measures and are not cash-flow measures.
For Q4 2016, revenue was $479.3 million, net income was $63.2 million, and net income available to common shareholders was $58.0 million, or $0.35 per share. The common distribution was $0.51 per share for the quarter.
Hotel operating performance for all 306 hotels improved in 2016: ADR rose 2.8% to $125.01 and RevPAR rose 2.5% to $94.26, while occupancy declined 0.2 percentage points to 75.4%. The 291 continuously owned comparable hotels achieved 3.6% RevPAR growth. Travel-center lease coverage was 1.57x, down from 1.74x; hotel coverage averaged 1.10x, up from 1.08x. Three hotel agreements, representing 16% of annual minimum returns and rents, had coverage below 1.0x.
Year-end debt included $191 million drawn on a $1.0 billion revolving facility, with $809 million available, and a $400 million term loan. Net debt to gross book value of real estate was 36.3%. The company reported compliance with debt covenants. Common distributions were $2.03 per share in 2016 versus $1.99 in 2015; these exceeded GAAP earnings per share but were below FFO per share. The board retained discretion over future distributions.
Material changes, outlook and risks
- Capital and financing: HPT issued $750 million of senior notes in February 2016 and raised $372.0 million net from a common-share offering in August. It redeemed $575 million of senior notes during 2016. In January 2017, it issued another $600 million of notes and used proceeds in part to repay revolver borrowings and redeem all $290 million liquidation preference of Series D preferred shares in February 2017.
- Investment and capital plans: HPT funded $191.4 million of property improvements in 2016. It expected approximately $143.9 million of 2017 capital improvements and renovation costs, including up to $80.7 million for TA travel-center improvements. It also expected to complete hotel and travel-center acquisitions in 2017; timing and completion were subject to conditions.
- Tenant and operator exposure: TA leases all travel centers, representing 37% of historical investment. TA’s business faces fuel-margin, trucking-demand, competitive, environmental and leverage risks. TA owes $150 million of deferred rent, scheduled in part at lease expirations from 2024 through 2030. Some HPT rent and return protections are limited, may expire or be depleted, and applying security deposits does not generate new cash.
- Hotel risks and disputes: Sonesta agreement coverage was 0.70x, with no guarantee or security deposit; HPT reported $25.5 million of unfunded shortfalls in 2016, principally unguaranteed portions under Sonesta. Marriott notified HPT it would not renew the Kauai hotel lease when it expires in 2019. HPT was litigating with Morgans and SBE over the Clift Hotel in San Francisco, expected possible rent loss and identified substantial potential capital needs. The outcome was uncertain.
- Management and related parties: RMR LLC provides management under annually renewing 20-year terms; termination fees may be substantial. HPT disclosed potential conflicts arising from relationships among RMR, TA, Sonesta and other affiliated entities. These relationships and management arrangements may not be on arm’s-length terms.
- Other exposures: Risks include rising interest rates on floating-rate debt, economic and hotel-supply cycles, property renovation disruption, environmental liabilities, weather and climate effects, and REIT qualification requirements. Management said it expected available operating cash flows and borrowing capacity to meet near-term obligations, but acknowledged tenants’ inability to pay could reduce cash flows and distributions.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts investors should verify
- Confirm the registrant’s identity and whether the requested issuer was intended to be Hospitality Properties Trust, as shown in the filing, rather than Service Properties Trust.
- Review TA’s latest financial condition, lease coverage, deferred-rent repayment capacity and the terms and timing of the $150 million deferred rent.
- Assess hotel-level coverage and the adequacy and remaining duration of guarantees and security deposits, particularly for Sonesta, Marriott and Wyndham arrangements.
- Track the Clift Hotel litigation and operating transition, and the planned 2019 end of the Kauai Marriott lease.
- Reconcile expected 2017 capital spending and acquisitions with cash, revolver availability, debt maturities and the sustainability of distributions; distinguish FFO from GAAP earnings and cash flow.