Business context and reporting period
Entity and period: The supplied filing is Hospitality Properties Trust (HPT), a Maryland REIT, Form 10-K for the fiscal year ended December 31, 2015—not a filing identified as Service Properties Trust. It reports a full fiscal year, with selected fourth-quarter data. Confirm the entity and period before relying on this summary.
At year-end, HPT owned 302 hotels with 45,864 rooms or suites and 193 travel centers across the U.S., Canada and Puerto Rico. Hotels generated operating revenue; all travel centers were leased to TravelCenters of America LLC (TA). HPT relies on third-party managers and tenants and is externally managed by The RMR Group LLC (RMR LLC).
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $1.922 billion | $1.736 billion | +10.7% |
| Operating income | $335.9 million | $339.2 million | -1.0% |
| Net income | $166.4 million | $197.2 million | -15.6% |
| Net income available to common shareholders | $145.8 million; $0.97/share | $176.5 million; $1.18/share | -17.4%; per-share -17.8% |
| NAREIT FFO available to common shareholders | $464.5 million; $3.08/share | $492.3 million; $3.29/share | Lower |
| Normalized FFO available to common shareholders | $503.7 million; $3.34/share | $493.4 million; $3.30/share | Higher |
| Cash from operating activities | $530.9 million | $461.7 million | Higher |
| Cash used in investing activities | $653.8 million | $280.9 million | Higher use |
| Cash and cash equivalents at year-end | $13.7 million | $11.8 million | +$1.8 million |
| Debt, net of discounts | $3.287 billion | $2.839 billion | +$448.9 million |
Revenue growth reflected stronger hotel operations, acquisitions, and higher TA rent. Hotel operating revenue rose 10.8%; rental income rose 9.7%. HPT reported portfolio-wide hotel RevPAR growth of 8.1% for the year, to $91.42, including ADR growth of 6.6% and occupancy improvement of 1.1 percentage points to 75.6%.
Net income was pressured by a $36.8 million noncash loss on the distribution of RMR Inc. shares, higher RMR incentive fees, higher interest expense and other operating changes. The 2015 general and administrative expense increase included $62.3 million of incentive fees under the RMR LLC business management agreement. HPT recorded an $11.0 million gain on sale of five travel centers.
Operating cash flow increased, but investment spending rose substantially, principally for acquisitions, property improvements and the RMR Inc. investment. Financing provided $124.8 million in 2015, compared with $191.5 million of financing cash used in 2014. Cash distributions to common shareholders were $299.963 million; declared cash distributions were $1.99 per share. HPT also made a taxable in-kind RMR Inc. share distribution valued at $0.1974 per common share. FFO and Normalized FFO are non-GAAP measures and are not substitutes for cash flow or net income.
Year-end total assets were $6.408 billion, shareholders’ equity was $2.812 billion and debt was 53.9% of total book capitalization. HPT had $465 million drawn on its $1.0 billion unsecured revolver and $535 million available at December 31, 2015; the revolver was undrawn by February 23, 2016. The $400 million term loan was also outstanding. The company reported compliance with debt covenants at year-end.
Material changes versus the prior comparable period
- Revenue rose, but operating income was approximately flat and common-shareholder net income and NAREIT FFO declined.
- Normalized FFO increased slightly, reflecting exclusions including the RMR share-distribution loss and the timing of incentive-fee recognition in this non-GAAP measure.
- HPT acquired hotels and travel-center interests and funded $188.0 million of property improvements during 2015. Gross real estate properties increased to $8.269 billion from $7.656 billion.
- Debt increased, particularly revolver borrowings used to fund investment activity. The revolver commitment was raised from $750 million to $1.0 billion in December 2015.
- Hotel operating performance improved overall, but renovation disruption was significant at affected hotels: 18 continuously owned hotels under renovation had a 0.6% RevPAR decline, versus 9.7% growth at the 272 comparable hotels not under renovation.
- Common distributions increased to $1.99 per share from $1.95. The fourth-quarter 2015 per-share distribution figure of $0.70 includes the $0.1974 in-kind distribution; it is not a comparable cash-only quarterly amount.
Outlook, commentary, risks and unusual items
- Capital spending: HPT expected to fund approximately $231.4 million of property improvements in 2016, including about $81.4 million at hotels and $150 million at TA-leased travel centers. Rent or minimum returns generally rise when HPT funds qualifying improvements, but operators may not generate enough additional income to cover those increases.
- TA exposure: TA accounted for 37% of historical investment at cost and all travel-center leases. TA had accumulated losses since becoming a separate public company, faced fuel-market and trucking-industry pressures, and owed $150 million of deferred rent payable in stages at lease expirations. TA coverage for the full 2015 year was unavailable; reported combined coverage was 1.92x for the 12 months ended September 30, 2015.
- Hotel payment risk: Three of nine hotel operating agreements had coverage below 1.0x in 2015, ranging from 0.55x to 0.91x. Certain minimum returns were not fully supported by guarantees or deposits. HPT reported $26.1 million of 2015 minimum-return shortfalls not funded by managers, primarily relating to unguaranteed portions under Sonesta and Marriott arrangements. Applying security deposits can create accounting income without new cash receipts.
- Debt, rates and liquidity: A 100-basis-point rise in rates was estimated to increase annual interest expense on year-end floating-rate debt by about $8.7 million, or $0.05 per share versus the stated current-rate case. Debt maturities included $275 million in 2016, $300 million in 2017, and $815 million in 2018, including the revolver maturity. HPT subsequently gave notice in February 2016 to redeem the $275 million 2016 notes and issued $750 million of new senior notes, using net proceeds partly to repay the revolver.
- Acquisitions and commitments: HPT expected to acquire five TA-developed travel centers for development cost estimated at no more than $118 million, subject to completion and approvals by June 30, 2017. A proposed Portland hotel acquisition and other February 2016 acquisitions were also disclosed; the Portland transaction remained subject to closing conditions.
- Related parties and unusual items: In June 2015 HPT acquired RMR Inc. shares and amended and extended its RMR management agreements for rolling 20-year terms. HPT paid a $62.3 million incentive fee for 2015 performance. The filing describes significant relationships among HPT, RMR LLC, TA, Sonesta and AIC, including potential conflicts of interest and substantial fees to terminate certain RMR agreements.
- Other risks: Management cited economic and capital-market uncertainty, hotel and travel-center competition, operator concentration, renovations, fuel-price and trucking trends, environmental liabilities, weather and climate risks, REIT qualification requirements, and dependence on access to debt and equity capital. Management expected operating cash flow and revolving-credit access to cover near-term needs, but cautioned that distributions could be reduced or eliminated.
Most important facts for investors to verify
- Confirm that the intended issuer is Hospitality Properties Trust and that the desired reporting period is fiscal 2015; the request’s company name and “2015 Q4” label do not match the filing title.
- Review the audited financial statements and notes for the $36.8 million RMR share-distribution loss, $62.3 million incentive fee, RMR investment valuation and accounting treatment, and related-party approvals.
- Assess TA’s current financial condition, deferred-rent schedule, lease guarantees, and post-year-end rent coverage; full-year 2015 TA coverage was not available in the filing.
- Check the adequacy and remaining duration of hotel guarantees and security deposits, especially for Sonesta, Marriott, Wyndham, InterContinental, Hyatt and Carlson, and distinguish deposit applications from cash collections.
- Reconcile the 2016 capital plan, debt maturities and post-year-end $750 million note issuance/redemption against actual cash flows, revolver usage and covenant capacity.
- Compare cash distributions with recurring operating cash generation and FFO, and account separately for the taxable in-kind RMR Inc. distribution.
- Verify the reported hotel operating statistics and coverage figures with underlying operator data; HPT stated that it had not independently verified third-party reported operating data.