Business Context and Reporting Period
This Form 8-K, filed on September 24, 2007, by Hospitality Properties Trust (HPT), presents unaudited pro forma financial information for the six months ended June 30, 2007. The filing details the financial impact of two major transactions: the January 2007 acquisition of TravelCenters of America, Inc. (TravelCenters) and the subsequent spin-off of the operating business (TA) to shareholders, and the May 2007 acquisition of Petro Stopping Centers Holdings, L.P. (Petro Holdings). The pro forma data assumes these transactions, along with related equity and debt issuances, were completed as of January 1, 2007.
Key Financial Metrics (Pro Forma)
The following metrics reflect the pro forma consolidated results for the six months ended June 30, 2007, incorporating the TravelCenters and Petro acquisitions:
- Total Revenues: $672,196,000 (comprising $474,245,000 in hotel operating revenues and $182,937,000 in rental income).
- Total Expenses: $561,125,000.
- Net Income: $111,071,000.
- Net Income Available to Common Shareholders: $96,132,000.
- Earnings Per Share (Basic and Diluted): $1.02.
- Interest Expense: $80,896,000.
- Depreciation and Amortization: $114,951,000.
Material Changes and Transaction Details
The pro forma adjustments reflect significant structural changes to HPT's business model and capital structure:
- TravelCenters Transaction: HPT acquired TravelCenters and spun off the operating business (TA) to shareholders. HPT retained ownership of 146 travel center properties (valued at approximately $1.7 billion) and leased them to TA. This eliminated TravelCenters' historical operating revenues and expenses from HPT's income statement, replacing them with rental income.
- Petro Acquisition: HPT acquired 40 Petro travel centers for approximately $630 million, funded initially by borrowings under a revolving credit facility. These centers were leased to TA for an initial annual rent of approximately $62,225,000.
- Capital Structure Adjustments: The pro forma includes the effects of HPT's March 2007 issuance of $575 million in 3.8% convertible senior notes and $300 million in 5.625% senior notes, as well as February 2007 preferred share offerings.
Outlook, Risks, and Management Commentary
Management notes that the Petro acquisition was financed with short-term borrowings under the revolving credit facility. The company anticipates refinancing this acquisition on a long-term basis through the issuance of equity and debt securities. Consequently, actual future results of operations will differ significantly from the pro forma statement, which reflects the temporary higher interest costs associated with the revolving credit facility. The pro forma information is provided for informational purposes only and is not indicative of actual historical results or future performance.
Investor Verification Checklist
- Verify the terms of the long-term lease agreements between HPT and TA for the 186 travel centers (146 from TravelCenters and 40 from Petro).
- Confirm the timeline and terms for the planned long-term refinancing of the $655 million revolving credit facility used for the Petro acquisition.
- Review the historical Form 10-Q for the six months ended June 30, 2007, to compare actual historical results against the pro forma adjustments.
- Assess the impact of the $14,939,000 in preferred distributions on cash flow available to common shareholders.
- Monitor the scheduled rent increases in the lease agreements with TA, which affect future rental income projections.