Hospitality Properties Trust — Form 10-Q, quarter ended March 31, 2015
Issuer identity: The supplied filing names Hospitality Properties Trust (HPT) as the registrant, not Service Properties Trust. The summary below reflects the filing provided.
Business context and reporting period
HPT is a REIT that owned 292 hotels and 184 travel centers at March 31, 2015. Hotel operations are reported as operating revenues and expenses; travel centers are leased to TravelCenters of America (TA), generating rental income. The unaudited results cover the three months ended March 31, 2015, compared with the same 2014 period.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $435.5 million | $394.3 million | +10.5% |
| Hotel operating revenue | $369.6 million | $329.9 million | +12.0% |
| Rental income | $64.8 million | $63.4 million | +2.2% |
| Operating income | $77.2 million | $73.8 million | +4.6% |
| Net income | $41.6 million | $37.6 million | +10.7% |
| Net income available to common shareholders | $36.4 million | $32.4 million | +12.4% |
| Basic and diluted EPS | $0.24 | $0.22 | +9.1% |
| Operating cash flow | $96.1 million | $79.1 million | +$17.0 million |
| Cash and cash equivalents at quarter-end | $15.6 million | $33.8 million | Down $18.3 million year over year |
Operating margin was approximately 17.7% of revenue, versus 18.7% a year earlier. Net income margin was approximately 9.5% in both periods. NAREIT FFO was $115.4 million ($0.77 basic per share) versus $110.7 million ($0.74); Normalized FFO was $126.0 million ($0.84 basic per share) versus $113.1 million ($0.76). These are non-GAAP measures as defined by HPT.
Investing activities used $84.7 million, including $45.5 million for real estate acquisitions and $35.0 million for property improvements. Financing activities used $7.6 million; common and preferred distributions paid totaled $78.6 million. At quarter-end, HPT had $89.0 million drawn on its $750 million revolver, leaving $661 million available, and $400 million outstanding under its term loan. Total debt principal was approximately $2.92 billion, including $2.425 billion of senior notes and $8.5 million of convertible notes. HPT reported compliance with debt covenants.
Material changes versus the prior comparable period
- Comparable hotels reported ADR up 8.3%, occupancy up 1.2 percentage points to 71.8%, and RevPAR up 10.1% to $85.68. Across all hotels, RevPAR rose 10.3% to $86.36.
- Operating income grew more slowly than revenue. Hotel operating expenses increased 11.7%, partly because managers funded fewer minimum-return shortfalls; general and administrative expense rose 85.8% to $21.3 million.
- HPT attributed much of the G&A increase to higher RMR management fees, including an $9.0 million estimated 2015 incentive fee recorded in the quarter. The fee, if ultimately earned, is determined using HPT’s full-year share total return and payable in shares in 2016.
- Operating cash flow increased, while investing cash use rose from $31.2 million to $84.7 million, primarily because of acquisitions. Revolver borrowings were $89 million at quarter-end, compared with $18 million at December 31, 2014.
Outlook, risks, contingencies and unusual items
- Management said it expected operating cash flow to cover operating expenses, interest and distributions declared for the next 12 months, while warning that nonpayment by managers or tenants could reduce cash flow and distributions. No formal earnings guidance was provided.
- HPT expected approximately $51.7 million of hotel renovations and capital improvements for the remainder of 2015 and anticipated reduced renovation activity. Capital spending increases contractual minimum returns under several agreements, but the filing cautions that hotel results may not improve enough to support those higher returns.
- HPT acquired a 300-room Rosemont, Illinois hotel for $35.5 million in March and had agreed to acquire a 364-room Denver hotel for $77.25 million, subject to closing conditions. The Denver acquisition was not completed as of the filing. A Norcross, Georgia hotel with a $4.1 million carrying value was held for sale; completion and proceeds were uncertain.
- Hotel payment protection is uneven. Four of nine hotel operating agreements, representing 19% of annual minimum returns and rents, had trailing 12-month coverage below 1.0x. Certain Marriott and Sonesta hotel returns are not guaranteed or secured by deposits. Aggregate hotel operating shortfalls were $15.5 million for the quarter; $11.5 million was not funded by managers under the agreements.
- Some guarantees and security deposits are limited or depleted. Wyndham made $3.9 million of guarantee payments in the quarter, with only $2.7 million of its guarantee remaining. InterContinental’s available security deposit was $36.5 million. HPT emphasized that applying deposits to shortfalls does not generate additional cash.
- HPT disclosed $40.988 million due from TA at quarter-end, excluding deferred rent. Separately, $107.1 million and $42.9 million of previously deferred TA rent were due in 2022 and 2024, respectively, but had not been recognized as income or receivables because collection was uncertain.
- Floating-rate debt exposure was $489 million. HPT estimated that a 100-basis-point rate increase would raise annual interest expense by approximately $4.9 million at then-current borrowings, or $11.5 million if its revolver were fully drawn and the term loan remained outstanding.
- Related-party arrangements include management agreements with RMR and hotel management relationships with Sonesta. HPT recognized $19.0 million in business and property management fees to RMR. The filing also identifies economic, tenant-credit, capital-market, renovation, REIT-status and related-party conflict risks.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied 10-Q is for Hospitality Properties Trust, although the request names Service Properties Trust.
- Review hotel coverage and the availability, remaining balances and expiry dates of guarantees and security deposits, particularly for Marriott, Sonesta and Wyndham properties.
- Assess TA’s ability to pay current and deferred rent, and distinguish recognized receivables from deferred amounts that HPT had not recognized because collection was uncertain.
- Check the completion, financing and return assumptions for the Denver acquisition, planned renovations and hotel held for sale.
- Reconcile the reported RMR incentive-fee estimate with the eventual full-year determination, and evaluate the effect of distributions and capital spending on liquidity and debt.