Business context and reporting period
The supplied filing is Hospitality Properties Trust’s (HPT) unaudited Form 10-Q for the quarter and nine months ended September 30, 2013; it does not identify the registrant as Service Properties Trust. HPT reported 291 hotels and 184 travel centers, operated under 11 management or lease agreements. Amounts below are in U.S. dollars; financial figures are converted to millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $412.3m | $330.1m | $1,179.1m | $974.7m |
| Operating income | $66.3m | $68.5m | $203.7m | $219.8m |
| Net income | $27.6m | $44.7m | $100.4m | $125.3m |
| Net income available to common shareholders | $16.7m | $29.5m | $73.4m | $85.3m |
| Common earnings per share | $0.12 | $0.24 | $0.54 | $0.69 |
| Operating cash flow | Not provided separately | Not provided separately | $265.2m | $264.7m |
Q3 operating margin was approximately 16.1% (20.8% prior year); nine-month operating margin was approximately 17.3% (22.5%). Q3 net margin was approximately 6.7% (13.5%); nine-month net margin was approximately 8.5% (12.9%). These consolidated margins reflect a change in operating structure as well as property performance.
Q3 hotel metrics for comparable properties improved: RevPAR rose 8.1% to $79.48, with ADR up 3.2% and occupancy up 3.4 percentage points to 75.9%. For the nine months, comparable-hotel RevPAR increased 7.6% to $75.10.
HPT’s non-GAAP Normalized FFO was $105.8m, or $0.76 per share, for Q3 versus $91.5m, or $0.74, in 2012; nine-month Normalized FFO was $307.0m, or $2.27 per share, versus $280.9m, or $2.27. The filing cautions that FFO measures are not GAAP cash flow or liquidity measures.
Liquidity, debt and cash flow
- At September 30, 2013, cash and cash equivalents were $17.1m and restricted FF&E reserve cash was $30.3m. The $750m revolving facility had $193m drawn and $557m available; the separate unsecured term loan was $400m.
- Debt was approximately $2.90bn based on reported carrying amounts. Senior notes included a new $300m issue due 2023 at 4.5%; reported maturities include $300m in 2014, $280m in 2015, $275m in 2016 and $700m in 2017. Management reported covenant compliance at quarter-end.
- Nine-month investing cash use was $453.4m, mainly for acquisitions and property improvements; financing provided $185.2m. Cash decreased $2.9m over the period. Cash interest paid was $120.8m.
- A 100-basis-point increase in rates would increase annual interest expense on then-outstanding floating-rate debt by an estimated $5.9m (to $15.4m total, per the filing’s sensitivity table). The table’s stated per-share impact rises from $0.07 to $0.11.
Material changes versus prior period
- Revenue rose 24.9% in Q3 and 21.0% in the nine-month period, while operating income fell 3.2% and 7.3%, respectively, and common earnings per share declined. A major driver of reported revenue growth was the January 2013 conversion of 53 hotels from leased to managed: hotel revenues and expenses both increased, while hotel rental income and FF&E reserve income decreased.
- Common-shareholder net income was also affected by higher interest expense, the absence of the $10.6m real-estate sale gain recorded in Q3 2012, share-count dilution following a March 2013 public offering, and impairment charges. The nine-month net income comparison benefited from a $7.1m deferred tax benefit in 2013.
- HPT raised $393.5m net from issuing 16.1m common shares and $297.1m net from 2023 senior notes. It redeemed all 6.7m Series C preferred shares for $167.5m plus accrued distributions.
- Acquisitions included hotels in Duluth, Georgia, and Florham Park, New Jersey, and the purchase of the fee interest in the New Orleans hotel. The portfolio also acquired travel-center land interests.
Outlook, risks and unusual items
- Management expected operating cash flow to cover operating costs, interest and declared distributions for the next 12 months, but warned that weaker tenant or manager payments could reduce cash flow and force distribution cuts. No formal earnings guidance is provided.
- Renovation and rebranding work was expected to continue through the first half of 2014. HPT expected further 2013–14 capital funding, including approximately $150m for Sonesta hotels, $66.6m for InterContinental hotels and $47.5m for Wyndham hotels, plus other hotel and travel-center projects. Cost and timing are uncertain.
- Eight of nine hotel operating agreements had trailing-12-month coverage below 1.0x, ranging from 0.29x to 0.95x; combined hotel coverage was 0.83x. Travel-center lease coverage was 1.58x. Some guarantees and security deposits are limited or exhausted, and applying deposits does not produce new cash.
- Minimum payments from Sonesta and hotels under the Marriott No. 1 agreement are not supported by guarantees or security deposits. The Marriott No. 234 security deposit was exhausted; a limited guarantee remained available. HPT reported unguaranteed hotel minimum-return shortfalls of $31.9m for the first nine months of 2013.
- Approximately $150.0m of deferred TA rent was not recognized as income because collection was uncertain. TA is a major tenant and related party. A travel center was taken by eminent domain; HPT recorded a $5.8m impairment based on the state transportation department’s proposed $6.3m compensation, with compensation and lease arrangements still under negotiation.
- HPT recorded $8.0m of impairment losses in the first nine months, including the travel-center taking and a hotel being marketed for sale. The filing also highlights concentration, economic, refinancing, interest-rate, REIT-status and related-party risks. RMR manages HPT, while affiliated parties have relationships with TA, Sonesta and AIC.
Important facts for investors to verify
- Confirm the registrant’s identity and relationship, if any, to Service Properties Trust; the supplied filing names Hospitality Properties Trust.
- Track hotel coverage, actual manager/tenant payments and remaining guarantee or security-deposit protection, especially for Sonesta, Marriott and Wyndham agreements.
- Assess liquidity after planned capital improvements, distributions and the 2014–17 debt maturities; available revolver capacity is subject to covenants and conditions.
- Monitor resolution and final compensation for the eminent-domain taking, collectability of deferred TA rent, and the status and terms of planned acquisitions and hotel sale.
- Review the effect of renovations and rebranding on hotel operating results and whether the stated minimum-return increases translate into collected cash.