Service Properties Trust (filing registrant: Hospitality Properties Trust) — Q1 2012 Form 10-Q
Entity note: The supplied filing is for Hospitality Properties Trust (HPT), not Service Properties Trust. Confirm that this is the intended filing. Period ended March 31, 2012; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
HPT was a lodging and travel-center REIT with 475 properties: 290 hotels and 185 travel centers. Hotels were managed or leased under eight agreements; the travel centers were leased to TravelCenters of America (TA). The company reported hotel operating revenues for managed hotels and rental income for leased properties.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $301.4 | $282.0 | +6.9% |
| Operating income | $77.6 | $86.7 | -10.5% |
| Operating margin | 25.7% | 30.7% | -5.0 percentage points |
| Net income | $42.9 | $53.0 | -19.0% |
| Net income available to common shareholders | $28.8 | $45.6 | -36.8% |
| Basic and diluted earnings per common share | $0.23 | $0.37 | -$0.14 |
| FFO per common share | $0.74 | $0.83 | -$0.09 |
| Normalized FFO per common share | $0.78 | $0.83 | -$0.05 |
Revenue growth reflected 19 hotels converted from leased to managed in 2011 and the January 2012 Sonesta hotel acquisition. Higher hotel operating expenses, depreciation, and general and administrative costs more than offset revenue gains. The filing reports average hotel occupancy of 64.1%, down 3.5 percentage points; average daily rate rose 5.9% and RevPAR rose 0.4%.
- Cash flow: Operating cash flow was $61.0, versus $56.5. Investing used $226.2, largely for the hotel acquisition and property improvements. Financing provided $305.1, including term-loan and preferred-share proceeds. Cash ended the quarter at $148.2, compared with $8.3 at year-end 2011.
- Liquidity: HPT had $148.2 cash and $750.0 available under its revolving credit facility at March 31. Restricted FF&E reserve cash was $59.6.
- Debt: At quarter-end, debt included a $400.0 floating-rate term loan, $1,888.3 of senior notes net of discounts, and $8.5 carrying value of convertible notes; there were no revolver borrowings. The term loan and notes imply approximately $2.30 billion of debt before cash. HPT repurchased $70.6 of convertible notes during the quarter and redeemed $100.8 of 6.85% notes on April 11, after quarter-end.
- Distributions: Common distributions were $0.45 per share for the quarter, unchanged from the comparable period. The company also paid preferred distributions; preferred distributions and a $2.9 redemption-related charge reduced income available to common shareholders.
Material changes versus the prior comparable period
- Hotel operating revenue increased 13.9%, while hotel operating expenses rose 15.6%; hotel minimum rent revenue declined 26.1%, principally reflecting the leased-to-managed hotel conversions.
- TA rent increased 3.0%, mainly following HPT-funded property improvements. FF&E reserve income fell 35.4%.
- HPT acquired the entities owning or leasing the Royal Sonesta Boston and New Orleans hotels for a total cost of $153.5, including $150.5 cash consideration and assumed net liabilities.
- HPT issued $280.1 net of costs of Series D preferred shares and redeemed all $86.3 liquidation preference of Series B preferred shares. It also entered a five-year $400.0 unsecured term loan.
- Normalized FFO declined to $96.4 from $102.4. The company recorded $1.1 of acquisition costs and an $0.9 impairment loss after removing 20 Marriott hotels from held-for-sale status.
Outlook, risks and contingencies
- Management stated that operating cash flow was expected to cover operating expenses, interest, and declared distributions for the next 12 months, but warned that weak economic or lodging conditions could impair tenant and manager payments and require lower or suspended common distributions. No specific earnings guidance was provided.
- Planned 2012 property funding was substantial: approximately $171.5 for InterContinental renovations, $42.3 for Marriott No. 234 improvements, and about $62.0 for travel-center improvements, among other amounts. Some plans and commitments remained subject to change.
- Hotel operating shortfalls were significant. InterContinental payments were $16.3 below contractual minimums in the quarter and were covered by security deposits; the remaining deposit was $40.0 as of May 7. Marriott No. 234 hotel cash flows were $9.2 below minimum returns; Marriott paid $6.9 under its guaranty, with $24.0 of guaranty capacity remaining as of May 7. Use of security deposits does not generate new cash.
- Seven of eight hotel operating agreements had trailing 12-month coverage below 1.0x; the Sonesta No. 2 agreement had 3.02x coverage. Sonesta agreements have no guarantees or security deposits, making returns dependent on hotel performance.
- TA leased properties representing 39% of HPT real estate cost. TA reported a $14.2 quarterly net loss, and HPT disclosed $150.0 million of deferred rent due in 2022 and 2024 that it had not recognized because collection was uncertain.
- HPT identified risks from tenant and guarantor performance, security-deposit exhaustion, floating interest rates, refinancing, planned renovations and rebranding, and conflicts involving RMR, TA, Sonesta, and affiliated parties. HPT reported compliance with debt covenants at March 31 and effective disclosure controls.
Important facts for investors to verify
- Confirm the intended issuer: the filing names Hospitality Properties Trust, whereas the request names Service Properties Trust.
- Review hotel-level coverage, payment shortfalls, guaranty limits, and remaining security deposits, especially for Marriott and InterContinental.
- Assess TA’s ability to pay current and deferred rent, given its quarterly loss and concentration in HPT’s property portfolio.
- Track execution, costs, and expected rent or minimum-return effects of the acquisition, renovation, sale, and rebranding plans.
- Reconcile post-quarter debt and liquidity after the April 2012 note redemption, and evaluate the floating-rate exposure and upcoming debt maturities.
- Consider that FFO and Normalized FFO are non-GAAP measures and are not substitutes for operating cash flow or available cash for distributions.