Business Context and Reporting Period
Company: Hospitality Properties Trust (HPT)
Filing Type: Form 8-K (Current Report)
Date of Report: November 2, 2011
Event: Entry into a Material Definitive Agreement to acquire two hotel entities from Sonesta Acquisition Corp. (SAC) as part of a broader merger transaction involving Sonesta International Hotels Corporation.
Key Financial Metrics and Transaction Terms
- Aggregate Purchase Price: Approximately $150.5 million (payable in cash).
- Price Adjustment: The purchase price will be reduced by the outstanding principal and accrued interest of a variable rate mortgage loan secured by the Cambridge Hotel (the "Cambridge Loan").
- Existing Debt Assumption/Prepayment: The Cambridge Loan has an outstanding principal balance of approximately $31.2 million. HPT expects to prepay this loan at or shortly after closing.
- Target Assets:
- Royal Sonesta Hotel Boston (Cambridge, MA) - Owned by the seller.
- Royal Sonesta Hotel New Orleans (New Orleans, LA) - Leased by the seller.
- Expected Closing: First quarter of 2012.
Material Changes and Transaction Structure
This filing announces a significant strategic shift involving the acquisition of hotel assets and a related merger. The Purchase Agreement is a component of a transaction where SAC is acquiring all shares of Sonesta International Hotels Corporation for $31.00 per share in cash. Following the merger, SAC will restructure Sonesta to separate real estate assets from management operations. HPT will acquire the entities owning the Cambridge Hotel and leasing the New Orleans Hotel. HPT's obligation to advance the purchase price is contingent upon the satisfaction of conditions to the Merger or a court order compelling specific performance.
Guidance, Outlook, and Management Commentary
Management Agreements
HPT has entered into long-term management agreements with SAC (or an affiliate) for the acquired hotels. Key terms include:
- Minimum Return: HPT is entitled to a fixed minimum return of 8% of invested capital, subject to gross revenue sufficiency.
- Manager Fees:
- Base fee: 3% of gross revenues (5% for limited service hotels).
- Reservation fee: 1.5% of gross room revenues.
- System fee: 1.5% of gross revenues.
- Incentive fee: 20% of operating profit after reimbursements.
- Term: Initial term of 25 years with two successive 15-year renewal options. The New Orleans Hotel agreement terminates upon lease expiration (expected 2024) unless modified.
- Termination Rights: HPT may terminate after three years with a fee, or without a fee if the minimum return falls below 6% of invested capital for three of four consecutive years.
Related Party Transactions
The transaction involves significant related party relationships. The stockholders of SAC are Barry Portnoy and Adam Portnoy, who are HPT's Managing Trustees and owners of HPT's manager, Reit Management & Research LLC (RMR). The purchase price and management agreements were approved by HPT's Independent Trustees, and a valuation consultant was engaged.
Risks and Contingencies
The transaction is subject to numerous risks, including:
- Failure of the Sonesta-SAC merger to close (e.g., due to a higher bid or unmet conditions), which would prevent HPT from acquiring the hotels.
- Claims challenging the transaction due to the complex related-party relationships, potentially resulting in expensive legal defense.
- Uncertainty regarding the future expansion of Sonesta-branded hotels managed by SAC for HPT.
Investor Verification Checklist
- Verify the status of the Sonesta-SAC merger and whether conditions precedent have been satisfied.
- Confirm the final purchase price after the reduction for the Cambridge Loan payoff.
- Review the valuation report provided to the Independent Trustees regarding the $150.5 million price and management fee structure.
- Monitor the "Forward Looking Statements" section for updates on the likelihood of the merger closing in Q1 2012.
- Assess the impact of the 8% minimum return requirement on the projected cash flows of the acquired assets.