Service Properties Trust (filed as Hospitality Properties Trust) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; financial statements are unaudited. Unless noted otherwise, dollar figures below are in millions.
Business context
At quarter-end, the REIT owned 289 hotels and 185 travel centers, operated under 13 management agreements or leases. TravelCenters of America LLC (TA) leased all 185 travel centers and represented 39% of real estate investments at cost. Results include hotel operating revenues and expenses for managed properties, and rental income for leased properties.
Financial performance, cash flow and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $282.0 | $254.1 |
| Operating income | $86.7 | $78.6 |
| Net income | $53.0 | $40.9 |
| Net income available to common shareholders | $45.6 | $33.4 |
| Basic and diluted earnings per common share | $0.37 | $0.27 |
| Cash provided by operating activities | $56.5 | $59.0 |
| Cash used in investing activities | $5.9 | $9.5 |
| Cash used in financing activities | $39.4 | $63.0 |
- Revenue increased 11.0%; operating income rose 10.3% and net income rose 29.8%. Net income available to common shareholders increased 36.5%. Hotel operating revenue grew 16.7%; rental income was nearly flat.
- Operating margin was approximately 30.7%, versus 30.9% a year earlier. Higher hotel revenue was accompanied by higher hotel operating expenses.
- Operating cash flow declined 4.3%, despite higher net income. Cash and cash equivalents were $16.1 at March 31, versus $4.9 at December 31, 2010; restricted FF&E cash was $59.9.
- Debt carrying values included $171.0 outstanding on the revolving facility, $1,886.7 of senior notes and $77.8 of convertible notes. The $750.0 facility had $579.0 available at quarter-end and matured October 24, 2011. The company said renewal discussions were preliminary and it expected renewal, but gave no assurance.
- Total assets were $5.17 billion and shareholders’ equity was $2.86 billion at quarter-end. The company reported compliance with debt covenants.
- Quarterly distributions included $0.45 per common share and preferred distributions; common distributions paid totaled $55.6. The company said operating cash flow should cover declared distributions and expenses over the next 12 months, while warning that payment defaults could force a reduction or suspension.
Material changes and unusual items
- Hotel operating revenue rose partly because 18 hotels shifted from leased to managed status on January 1, 2011. Across the hotel portfolio, reported occupancy increased to 67.6% from 64.2%, ADR to $93.55 from $91.67, and RevPAR to $63.24 from $58.85.
- TA’s lease amendments effective January 1 reduced minimum annual rent for 145 travel centers from $165.1 to $135.1 million, plus approximately $5.0 million ground rent; rent for 40 centers fell from $66.2 to $54.2 million. Previously deferred TA rent of $150 million was further deferred, without interest, to December 2022 and June 2024. HPT did not recognize that deferred amount as income or a receivable.
- Marriott/Crestline and InterContinental did not pay contractual minimum amounts in full. HPT applied security deposits to cover shortfalls; those applications reduce liabilities and may support reported income, but do not provide cash. InterContinental’s $125 million guarantee was exhausted in January 2011. The remaining deposits were subject to further depletion.
- HPT was negotiating modified hotel agreements with Marriott and InterContinental and was considering selling 53 hotels; neither agreements nor sales were assured. Host had notified HPT it would not renew its lease for 53 hotels at the end of 2012.
- HPT repaid its $3.4 million mortgage in January. It expected to fund about $20 million of Marriott hotel improvements during the remainder of 2011 and said TA might request approximately $35 million for travel-center improvements in Q2.
Outlook and principal risks
Management cited improving hotel occupancy and room rates but emphasized that hotel operating agreements had coverage below 1.0x for the twelve months ended March 31, 2011 (0.22x–0.77x); TA’s two travel-center leases had coverage of 1.38x and 1.26x. Risks include tenant and operator payment shortfalls, exhaustion of guarantees and deposits, TA’s ability to pay amended and deferred rent, unsuccessful contract negotiations, and refinancing the revolving facility in a tight credit market. Management expected renewal of the facility but warned that renewal terms could be more costly or its size could decline. The filing provides no numerical earnings or revenue guidance. Results are seasonal, typically stronger in Q2 and Q3.
Important facts for investors to verify
- Progress and final terms of the revolving credit facility renewal before its October 2011 maturity, including availability, pricing and covenants.
- Subsequent cash receipts and remaining security deposits for the Marriott, Crestline and InterContinental agreements; distinguish cash collected from income recorded through deposit applications.
- TA’s financial capacity to pay reduced current rent and the $150 million deferred rent, as well as any capital-funding requests.
- Outcome of negotiations with Marriott and InterContinental, any decision to sell the identified hotels, and the effect on property values and cash flows.
- Whether operating cash flow supports distributions and planned capital spending amid hotel coverage below 1.0x and continued tenant shortfalls.