Business Context and Reporting Period
Company: Hospitality Properties Trust (HPT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Business Overview: HPT is a real estate investment trust (REIT) owning 475 properties as of September 30, 2008, consisting of 290 hotels and 185 travel centers. Properties are operated under 13 management agreements or leases. The primary tenant for travel centers is TravelCenters of America LLC (TA), a related party.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $312.6 million | $970.5 million |
| Net Income | $40.4 million | $79.1 million |
| Net Income Available to Common Shareholders | $32.9 million | $56.7 million |
| Diluted EPS (Common) | $0.35 | $0.60 |
| Cash and Cash Equivalents | $9.3 million | (Balance Sheet Item) |
| Restricted Cash (FF&E Reserve) | $37.5 million | (Balance Sheet Item) |
| Total Debt (Revolving + Notes + Mortgage) | $2.68 billion | (Balance Sheet Item) |
| Revolving Credit Facility Outstanding | $407.0 million | (Balance Sheet Item) |
| Available Credit Capacity | $343.0 million | (Balance Sheet Item) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 6.5% for the three months ended September 30, 2008, compared to the same period in 2007. Hotel operating revenues fell 2.8% due to the sale of managed hotels and the conversion of the Marriott Kauai Resort from managed to leased status. Rental income from travel centers dropped 28.7% primarily due to rent deferrals by TA.
- Significant Non-Recurring Charges: The nine-month period included a $53.2 million loss on asset impairment related to intangible assets from the TA acquisition and a $19.6 million reserve for straight-line rent receivable due to TA's financial difficulties.
- Net Income Volatility: Net income available to common shareholders decreased 76.9% year-over-year for the quarter. The prior year quarter included a $95.7 million gain on the sale of real estate from discontinued operations, which was absent in the current period.
- Debt Structure: The company redeemed $150 million of 7.0% senior notes in March 2008. Revolving credit facility borrowings increased to $407 million from $158 million at year-end 2007 to fund operations and capital improvements.
Guidance, Outlook, and Risks
- Tenant Risk (TA): TA, the lessee of 40% of HPT's investments, faces liquidity challenges due to rising diesel fuel costs and a slowing economy. HPT entered a rent deferral agreement in August 2008 allowing TA to defer up to $5 million monthly in rent through December 2010. HPT has ceased recognizing straight-line rent for 145 travel centers until payment certainty improves.
- Capital Markets: Management notes that recent capital market conditions are challenging, with illiquid credit markets and wide spreads. There is no assurance that HPT can access debt or equity capital on reasonable terms to refinance maturing debt or fund acquisitions.
- Accounting Changes: Implementation of FSP 14-1 regarding convertible debt is expected to decrease annual earnings per share by approximately $0.08 to $0.10 starting in fiscal year 2009.
- Outlook: Management believes operating cash flow will be sufficient to meet operating expenses, interest, and distributions for the foreseeable future, though they rely on their revolving credit facility to bridge timing differences.
Investor Verification Checklist
- TA Solvency: Verify the financial health of TravelCenters of America (TA) and its ability to resume full rent payments or manage the deferral schedule without default.
- Debt Maturities: Review the schedule of term debt maturities (ranging from 2010 to 2027) and assess refinancing risks given current credit market conditions.
- Impairment Reversal: Monitor the $53.2 million impairment charge on TA intangible assets to determine if further write-downs are necessary if TA's performance deteriorates.
- Dividend Coverage: Confirm that cash flow from operations and the revolving credit facility remain sufficient to support the declared quarterly distributions of $0.77 per common share.
- FF&E Funding: Track the $25.8 million remaining purchase commitment for capital improvements under the TA lease amendment and the impact on cash flow.