Business Context and Reporting Period
Company: Hospitality Properties Trust (HPT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2003
Business Overview: HPT is a Real Estate Investment Trust (REIT) that owns 274 hotels. The company does not operate hotels directly; instead, properties are leased to or managed by third parties. As of the reporting date, the portfolio consisted of 205 leased hotels and 69 managed hotels (leased to a Taxable REIT Subsidiary). The company is subject to significant industry headwinds, including reduced business travel due to terrorism concerns, the Iraq war, and the SARS outbreak.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2003 |
|---|---|---|
| Total Revenues | $124,863 | $315,216 |
| Net Income | $30,897 | $94,081 |
| Net Income Available to Common Shareholders | $27,202 | $82,996 |
| Earnings Per Share (Basic & Diluted) | $0.43 | $1.33 |
| Cash Provided by Operating Activities | N/A | $158,224 |
| Total Assets | $2,638,551 | N/A |
| Total Liabilities | $1,043,334 | N/A |
| Shareholders' Equity | $1,595,217 | N/A |
| Cash and Cash Equivalents | $4,418 | N/A |
| Revolving Credit Facility Outstanding | $104,000 | N/A |
| Senior Notes Outstanding | $621,136 (net) | N/A |
Material Changes vs. Prior Period
- Revenue Mix Shift: Total revenues increased 39.0% in Q3 and 21.3% for the nine-month period compared to 2002. This increase is driven by a strategic shift from leased to managed hotels. While rental income decreased (down 23.0% in Q3), hotel operating revenues surged 236.9% in Q3 due to the inclusion of managed properties in the consolidated income statement.
- Net Income Decline: Despite higher total revenues, Net Income decreased 10.8% in Q3 and 9.1% for the nine-month period. This was primarily caused by lower income from 27 hotels previously leased to Wyndham (now managed) and 24 hotels leased to Prime (in default), which are now generating cash flows based on actual hotel performance rather than fixed rent.
- Acquisitions: The company acquired 16 Staybridge Suites hotels for $185 million and 7 Candlewood Suites hotels for $65 million in July 2003, funded by cash and revolver borrowings.
- Debt Activity: HPT redeemed $150 million of 8.5% senior notes in February 2003 (incurring a $2.6 million loss on extinguishment) and issued $125 million of 6.75% senior notes in September 2003.
Outlook, Risks, and Contingencies
- Tenant Defaults:
- Wyndham: Declared in default in April 2003 for 27 hotels. HPT terminated the lease, retained security deposits ($33.3M) and FF&E reserves ($7.5M), and is now managing the properties. Income from these hotels is currently lower than the previous fixed rent.
- Prime Hospitality: Declared in default in July 2003 for 24 AmeriSuites hotels. HPT retained deposits ($42.1M) and FF&E reserves ($4.3M). Prime continues to operate the hotels, but payments are limited to current cash flow, which is below the contractual rent.
- Subsequent Events (Post-Sept 30):
- InterContinental Agreement: Entered into a long-term management agreement for the 15 Summerfield Suites (formerly Wyndham) and 16 Staybridge Suites, providing a priority return of $20M/year.
- Candlewood Restructuring: Agreed to terminate the lease for 64 Candlewood Suites, acquire 12 additional hotels for $90M, and enter a new management agreement with InterContinental for 76 hotels. This transaction is expected to close by year-end 2003 or Q1 2004.
- Liquidity: HPT maintains a $350 million revolving credit facility with $246 million available as of September 30, 2003. The company expects operating cash flow to be sufficient for expenses and distributions but may need to access capital markets for future acquisitions and capital improvements.
- Market Risks: The company faces exposure to floating interest rates on its revolver (LIBOR + spread) and significant risk from continued depressed hotel industry conditions (occupancy and ADR declines) which could impact the ability of tenants to meet minimum returns.
Investor Verification Checklist
- Default Resolution: Verify the final settlement terms and expected net gain from the Wyndham and Prime lease defaults, as these amounts are not yet quantified in the financial statements.
- Candlewood Transaction Closing: Confirm the closing of the Candlewood lease termination and acquisition of 12 new hotels, including the $90M purchase price and the new $60M annual priority return structure.
- Capital Expenditures: Monitor funding requirements for the $26.4M Courtyard by Marriott modernization project and the $20M rebranding costs for the former Wyndham properties.
- Debt Covenants: Review compliance with financial covenants in the indenture and credit facility, particularly regarding net worth and distribution restrictions, given the shift in revenue streams.
- Occupancy Trends: Track RevPAR and occupancy rates for the managed portfolio, as these directly impact cash flow for the 69 managed hotels compared to the fixed rent of leased properties.