Business Context and Reporting Period
Company: Hospitality Properties Trust (HPT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2000
Business Overview: HPT is a Real Estate Investment Trust (REIT) that owns and leases hotels to third-party operators. As of June 30, 2000, the company owned or had committed to purchase 224 hotels leased to 11 separate affiliates of publicly owned companies, including Marriott, Host Marriott, Crestline, and Wyndham.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2000 | Six Months Ended June 30, 1999 |
|---|---|---|
| Total Revenues | $125,816 | $112,264 |
| Net Income | $59,839 | $50,506 |
| Net Income Available for Common Shareholders | $56,276 | $48,962 |
| Earnings Per Share (Basic & Diluted) | $1.00 | $1.01 |
| Funds From Operations (FFO) | $107,419 ($1.90/share) | $91,052 ($1.87/share) |
| Cash Provided by Operating Activities | $92,749 | $81,915 |
| Cash and Cash Equivalents (End of Period) | $9,141 | $94,692 |
| Total Debt (Senior Notes + Revolver) | $456,793 | $414,780 |
| Shareholders' Equity | $1,498,336 | $1,519,715 |
Note: All figures in thousands except per share amounts.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 12.1% year-over-year, driven by a 9.1% increase in rental income and a 38.6% increase in FF&E reserve income. This growth is attributed to the full-period impact of 40 hotels acquired in 1999 and the partial-period impact of 12 hotels acquired in the first half of 2000.
- Profitability: Net income rose 18.5% to $59.8 million. However, Net Income Available for Common Shareholders per share declined slightly from $1.01 to $1.00 due to a 16.1% increase in the weighted average number of common shares outstanding, which offset the 14.9% increase in total net income available.
- Expense Trends: Interest expense decreased 9.6% due to lower average borrowings. Conversely, depreciation and amortization increased 14.5% and general and administrative expenses increased 14.6%, primarily due to the expanded portfolio of acquired hotels.
- Liquidity: Cash and cash equivalents decreased significantly from $73.6 million to $9.1 million. This reduction was caused by $131.6 million in real estate acquisitions and $81.5 million in shareholder distributions, partially offset by $42 million in draws on the revolving credit facility.
Guidance, Outlook, and Risks
- Accounting Changes: The company adopted SAB 101 effective January 1, 2000, requiring the deferral of certain percentage rental income until annual thresholds are met. This resulted in the deferral of $2.77 million in percentage rent for the six months ended June 30, 2000.
- Capital Markets Activity: Subsequent to the reporting period (July 2000), the company issued $50 million of 9.125% unsecured Senior Notes due 2010. Proceeds were used to repay the $42 million outstanding on the revolving credit facility, reducing floating rate exposure.
- Acquisitions and Leases: The company purchased 12 hotels for approximately $128.3 million during the period. Additionally, the company consented to the assignment of a lease for 24 hotels from ShoLodge to Prime Hospitality Corp., with a re-branding to AmeriSuites and a lease extension to 2013.
- Distributions: Common share distributions of $0.69 per share were declared for the second quarter, payable in August 2000. Preferred distributions of $0.59375 per share were paid in June 2000.
- Risks: The filing highlights risks related to interest rate fluctuations (though largely mitigated by fixed-rate debt), the ability to complete new investments, tenant operating performance, and the requirement to maintain REIT status by distributing taxable income.
Investor Verification Checklist
- Debt Refinancing: Verify the terms and impact of the $50 million senior note issuance completed in July 2000 to replace the revolving credit facility.
- FF&E Reserve Utilization: Monitor the $34.9 million held in FF&E escrow accounts and the timing of capital expenditures, as these funds are restricted for future renovations.
- Tenant Concentration: Review the financial health of major tenants, specifically Host Marriott Corporation (lessee of 53 properties representing 22% of investments at cost) and Crestline Capital Corporation.
- Percentage Rent Recognition: Track the achievement of annual sales thresholds to determine when the $2.77 million of deferred percentage rent will be recognized as income.
- Liquidity Position: Assess the company's cash flow sufficiency given the low cash balance ($9.1 million) relative to upcoming distribution obligations and potential new acquisitions.