Hospitality Properties Trust (HPT) — 2011 Form 10-K
Entity and period: The supplied filing is for Hospitality Properties Trust, not a registrant named Service Properties Trust. It covers the fiscal year ended December 31, 2011; quarterly data below identifies Q4 where reported. HPT was a hospitality-focused REIT with 288 hotels and 185 travel centers at year-end.
Financial results and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $1,210.3 million | $1,085.5 million |
| Operating income | $325.8 million | $167.2 million |
| Net income | $190.4 million | $21.4 million |
| Net income available to common shareholders | $160.6 million; $1.30 per share | $(8.5) million; $(0.07) per share |
| Cash from operating activities | $355.1 million | $341.4 million |
| Cash used in investing activities | $94.3 million | $122.2 million |
| Cash used in financing activities | $257.4 million | $344.8 million |
- Revenue rose 11.5%. Hotel operating revenue increased 20.7%, while rental income fell 6.8%, largely because 37 Marriott hotels shifted from leased to managed arrangements. Higher managed-hotel revenue reflected stronger occupancy and room rates.
- Operating margin was approximately 26.9%, versus 15.4% in 2010; this comparison is substantially affected by the much larger 2010 impairment charge. The 2011 filing reports a $16.4 million impairment charge, compared with $163.7 million in 2010.
- FFO was $405.3 million ($3.28 per share) and Normalized FFO was $407.5 million ($3.30 per share), up from $393.2 million and $400.0 million, respectively, in 2010. These are non-GAAP measures and are not cash flow.
- Common distributions were $1.80 per share in both years. Preferred distributions were $29.9 million in 2011. Common distributions declared totaled $222.2 million, exceeding net income available to common shareholders.
- Year-end debt was $2.116 billion, equal to 43% of book capitalization. Cash and cash equivalents were $8.3 million; the $750 million revolving facility had $149 million drawn and $601 million available. HPT reported compliance with debt covenants.
- Debt maturities included $100.8 million of senior notes in 2012, $287 million in 2013, and $300 million in 2014. Holders could require repurchase of $79.1 million of convertible notes in March 2012.
Material changes, outlook and risks
- Hotel operating indicators improved: portfolio occupancy was 71.9% versus 69.3%, ADR was $93.84 versus $90.50, and RevPAR was $67.47 versus $62.72. Management noted industry operating measures remained below pre-recession levels.
- Marriott portfolio payments were $29.8 million below contractual minimums in 2011; HPT used remaining security deposits and received $9.1 million in guaranty payments. The Marriott deposit was exhausted by year-end; its limited guaranty had $30.9 million remaining at year-end and $25.6 million at February 28, 2012.
- InterContinental payments were $18.1 million below minimums in 2011, covered by security deposits. After further shortfalls through February 2012, the remaining deposit was $41.9 million. Applying deposits creates accounting income but no new cash, and reduces funds available to cover future shortfalls.
- TA’s leases were amended in January 2011: minimum rent was reduced and $150 million of deferred rent was extended, without interest, to 2022 and 2024. HPT warned that TA’s history of losses, fuel-price volatility and trucking-market weakness could impair its ability to pay.
- HPT expected approximately $302 million of hotel renovation funding in 2012 under the Marriott and InterContinental agreements, plus approximately $75 million for travel-center improvements. Total disclosed contractual capital-improvement obligations were $358.7 million, mostly due within one year.
- After year-end, HPT issued 11.6 million Series D preferred shares, receiving $280.4 million net proceeds; acquired two Royal Sonesta hotels for $150.5 million; and redeemed all Series B preferred shares. It also agreed to sell one hotel for $35 million, subject to customary conditions. These subsequent events affect financing and portfolio composition.
- Management intended to continue quarterly common distributions of $0.45 per share, but stated distributions remain discretionary and depend on cash flows, financing access, covenants and future capital needs. No earnings or distribution guidance was provided.
- Principal risks include reliance on a small number of operators and tenants, below-minimum hotel cash flows, limited or depleting guarantees and deposits, TA’s credit and operating condition, near-term debt refinancing, renovation spending, interest rates, REIT qualification, environmental liabilities and related-party conflicts involving RMR and affiliates.
- Ernst & Young issued an unqualified audit opinion; management and the auditor concluded internal control over financial reporting was effective. The filing reported no material legal proceedings.
Investor facts to verify
- Whether Marriott and InterContinental shortfalls persist, and how quickly remaining guarantees or security deposits are consumed.
- TA’s ability to meet reduced current rent and ultimately repay deferred rent; review its separate 2011 financial statements when available.
- Funding sources and returns on the large 2012 renovation program, and any resulting changes to contractual minimum returns.
- Execution and terms of the 2012 debt repurchase/refinancing and hotel sale; assess available liquidity after preferred issuance and redemption.
- Whether distributions are supported by recurring cash generation rather than noncash security-deposit applications, and reconcile GAAP earnings with FFO and Normalized FFO.
- Progress on the 21 hotels marketed for sale and potential rebranding or sale of up to 42 InterContinental hotels, including any impairment or proceeds impact.