SVC

Business Context and Reporting Period

Company: Hospitality Properties Trust (HPT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: HPT is a Real Estate Investment Trust (REIT) owning 289 hotels (42,880 rooms) and 185 travel centers across 44 U.S. states, Canada, and Puerto Rico. The company does not operate properties directly; they are leased to or managed by third parties, primarily TravelCenters of America (TA), Marriott, InterContinental, and others. The portfolio is concentrated in two segments: hotel real estate and travel center real estate.

Key Financial Metrics

Note: 2009 Net Income includes a significant non-cash gain of $51.1 million from the extinguishment of debt.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 17.2% to $1,037.2 million, driven by a 20.4% drop in hotel operating revenues and a 7.8% drop in rental income. This reflects the severe impact of the recession on the hospitality and trucking industries.
• Net Income Increase: Despite lower operating revenues, Net Income increased 55.5% to $193.3 million. This increase was primarily due to a $51.1 million gain on the extinguishment of debt (repurchasing convertible and senior notes at a discount) and the absence of a $53.2 million asset impairment loss recorded in 2008.
• Debt Reduction: Total debt decreased by approximately $445 million to $2.19 billion. The company repurchased $367.4 million of debt face value and issued $300 million in new senior notes to refinance the revolving credit facility.
• Equity Issuance: The company raised approximately $373 million through two common stock offerings in June and August 2009, increasing weighted average shares outstanding by 15%.
• Operating Performance: Hotel RevPAR (Revenue Per Available Room) declined 20.5% year-over-year. Cash flow available to pay minimum returns and rents at hotels declined 42.4%.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management resumed quarterly common share distributions in January 2010 ($0.45 per share) after suspending them in April 2009 due to capital market constraints. The company expects to fund future capital improvements and distributions using existing cash, borrowings under its $750 million revolving credit facility (which matures in October 2010), and potential new equity or debt offerings.

Unusual Items

• Gain on Extinguishment of Debt: A one-time gain of $51.1 million was recognized from repurchasing convertible and senior notes at prices below par value.
• Security Deposit Application: Marriott and Crestline failed to pay full minimum returns/rents under specific contracts. HPT applied security deposits to cover deficiencies of approximately $17.8 million in 2009 and an additional $7.6 million in early 2010. While this records income, it does not generate cash flow.
• TA Rent Deferral: TravelCenters of America (TA) deferred $60 million of rent in 2009 under a deferral agreement. HPT has reserved previously accrued straight-line rent receivables due to uncertainty regarding collectibility.

Risks and Contingencies

• Tenant Solvency: Significant risk exists regarding the ability of major tenants (Marriott, Crestline, TA) to meet minimum rent obligations. Guarantees from InterContinental, Hyatt, and Carlson are limited and may be exhausted.
• Refinancing Risk: The $750 million revolving credit facility matures in October 2010. Renewal is not guaranteed, and interest rates may increase significantly.
• REIT Status: The company must distribute at least 90% of taxable income to maintain REIT status. The suspension of common dividends in 2009 was necessary to preserve liquidity for senior obligations.
• Related Party Transactions: HPT has significant exposure to TA (40% of investments) and its manager, RMR. Conflicts of interest and the financial health of TA are material risks.

Investor Verification Checklist

• Debt Maturities: Verify the status of refinancing for the $750 million revolving credit facility maturing in October 2010 and the $264.8 million convertible notes subject to repurchase in 2012.
• Tenant Defaults: Monitor the remaining balances of security deposits held for Marriott and Crestline and the likelihood of replenishment from future cash flows.
• TA Financial Health: Review TravelCenters of America's (TA) ability to pay deferred rent ($90 million accrued as of Dec 31, 2009) and ongoing minimum rents, given TA's reported net loss of $89.9 million in 2009.
• Distribution Sustainability: Assess whether the resumed common dividend ($1.80 annualized) is sustainable given the 42.4% decline in hotel cash flow available for minimum returns.
• Capital Market Access: Evaluate the company's ability to raise additional equity or debt at reasonable costs to fund capital improvements and meet debt service obligations.