Business context and reporting period
The supplied filing is Hospitality Properties Trust’s Form 10-K for the fiscal year ended December 31, 2013, with unaudited fourth-quarter data. This does not match the request metadata naming Service Properties Trust; verify the intended issuer. HPT was a hospitality-focused REIT owning 291 hotels and 184 travel centers and leasing one additional travel center. Hotel operations and travel-center real estate were its two reportable segments.
Financial results and key metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $1.564 billion | $1.297 billion |
| Operating income | $273.6 million | $278.5 million |
| Net income | $133.2 million | $151.9 million |
| Net income available to common shareholders | $101.0 million; $0.73/share | $103.8 million; $0.84/share |
| FFO / Normalized FFO | $408.3 million / $410.4 million; $2.97 / $2.98 per share | $354.9 million / $374.7 million; $2.87 / $3.03 per share |
| Cash from operations | $391.1 million | $363.9 million |
| Cash and cash equivalents at year-end | $22.5 million | $20.0 million |
| Debt, net of discounts | $2.704 billion | $2.722 billion |
Operating margin was approximately 17.5% in 2013 versus 21.5% in 2012; the change in business mix makes this comparison less like-for-like. Hotel operating revenue increased 33.7%, while rental income fell 16.1%. The filing reports 2013 common distributions of $1.89 per share, up from $1.82. Year-end debt was 46.7% of total book capitalization. The $750 million revolving facility was undrawn at year-end; cash plus available revolver capacity was $772.5 million, though the filing cautions that this does not ensure adequate liquidity.
Material changes versus the prior comparable period
- Revenue growth mainly reflected the January 2013 conversion of 53 hotels from leased to managed: hotel operating revenue rose, while hotel minimum rent and FF&E reserve income fell. This change in presentation and operating model limits the usefulness of headline revenue growth as an indicator of comparable performance.
- Comparable hotel performance improved: full-year ADR rose 2.9%, occupancy increased 3.2 percentage points to 71.9%, and RevPAR rose 7.7% to $73.63. For 219 comparable hotels not under renovation, RevPAR rose 9.7%.
- Operating income declined 1.8% and net income declined 12.3%. Common-shareholder earnings per share fell 13.1%, with 11.3% more weighted-average common shares outstanding following 2013 equity offerings.
- Normalized FFO increased 9.5% in total but declined from $3.03 to $2.98 per share. Operating cash flow increased, while investing cash outflow decreased and financing cash flow declined year over year.
- HPT issued $300 million of 4.5% senior notes due 2023 and raised approximately $655 million net through two common-share offerings. It redeemed its Series C preferred shares. The $300 million 7.875% notes due 2014 were subsequently redeemed in February 2014.
Outlook, commentary, risks and unusual items
- Management expected hotel renovations to continue through the first half of 2014 and stated that operating cash flow should cover operating expenses, interest and declared distributions over the next 12 months. It also warned that weaker-than-expected operator or tenant performance could require distribution reductions or suspension.
- Renovation commitments remained substantial: the filing expected approximately $196.6 million of funding under Marriott, InterContinental, Sonesta and Wyndham arrangements over the following two years. Renovation disruption and cost overruns could weigh on hotel results; renovated properties may not generate returns sufficient to cover higher minimum returns.
- Hotel minimum-return coverage was below 1.0x for seven of nine hotel agreements in 2013. Certain hotel managers did not fund $46.3 million of minimum-return shortfalls. Marriott’s No. 234 security deposit was exhausted; its remaining limited guarantee was $30.7 million. InterContinental’s remaining deposit was $27.8 million at year-end and was drawn further after year-end.
- Travel centers were concentrated with TA, which leased all 185 sites. TA’s properties generated reported rent coverage of 1.08x for the 12 months ended September 30, 2013; the filing notes this may not fully measure TA’s ability to pay. TA also owed $150 million of deferred rent, scheduled for payment in 2022 and 2024.
- Debt maturities, refinancing costs, variable-rate exposure, REIT distribution requirements, tenant/operator concentration, finite guarantees and deposits, related-party conflicts involving RMR, TA and Sonesta, and environmental liabilities were material risks. HPT reported compliance with debt covenants at year-end.
- Unusual items included $8.0 million of impairment charges, including a $5.8 million charge related to a Virginia travel center taken by eminent domain and a $2.2 million charge on a hotel held for sale; a $6.9 million deferred tax benefit from TRS restructuring; and preferred-share redemption charges affecting common earnings. The VDOT taking compensation and resulting rent adjustment remained subject to negotiation.
- In January 2014, HPT amended its credit agreements, extending the revolver maturity to 2018 and term-loan maturity to 2019 and reducing stated borrowing spreads. The Orlando hotel acquisition agreement was terminated in February 2014; a Myrtle Beach hotel sale was pending and subject to closing conditions.
Most important facts for investors to verify
- Confirm the intended issuer: the filing is for Hospitality Properties Trust, not the company named in the request metadata.
- Review the complete audited statements and notes for debt terms, covenants, and the effect of the 2013 hotel lease-to-management conversions on comparability.
- Track hotel coverage, guarantee and security-deposit balances, particularly Marriott, InterContinental and Sonesta, and the performance of renovation and rebranding projects.
- Assess TA’s ability to meet current rent and deferred-rent obligations, and verify the status of the eminent-domain compensation and rent reduction.
- Reconcile reported FFO and Normalized FFO with GAAP earnings and cash flows; these non-GAAP measures are not substitutes for operating cash flow.
- Confirm post-year-end borrowing, the 2014 note redemption, the amended credit-facility terms, and the funding plan for committed improvements and distributions.