Service Properties Trust (then Hospitality Properties Trust): Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019. The filing registrant was Hospitality Properties Trust (HPT); the filing describes a REIT owning hotels and travel centers that are operated by third-party managers or tenants.
Financial results and liquidity
- Revenue: $524.9 million, down 0.7% from $528.6 million. Hotel operating revenue rose 2.3% to $455.4 million, while rental income fell 16.9% to $68.2 million, primarily reflecting the sale of 20 travel centers to TA.
- Profit: Net income was $225.8 million, or $1.37 per diluted share, compared with $80.2 million, or $0.49, a year earlier. The 2019 result included a $159.5 million real estate sale gain and $21.0 million of unrealized equity-security gains. FFO and Normalized FFO were both $144.6 million, or $0.88 per share, versus $154.9 million, or $0.94, in Q1 2018.
- Cash flow: Operating cash flow was $43.9 million versus $49.7 million. Investing activities provided $102.1 million, mainly due to $308.2 million of travel-center sale proceeds, offset in part by acquisitions and improvements. Financing activities used $123.2 million, including $87.2 million of shareholder distributions. Cash and restricted cash totaled $98.8 million at quarter-end.
- Assets and debt: Total assets were $7.26 billion and total liabilities $4.52 billion. Debt principal comprised $141 million drawn on the revolving facility, a $400 million term loan and $3.65 billion of senior notes. The $1.0 billion revolver had $859 million available at March 31; the company reported covenant compliance.
- Distributions: The company paid $0.53 per share during the quarter and declared $0.54 per share for payment in May.
Material changes and operating performance
- In January, HPT sold 20 travel centers to TA for $308.2 million and recorded a $159.5 million gain. The sale and lease amendments reduced travel-center rental income; TA’s remaining leases covered 179 centers with annual minimum rent of $246.1 million.
- HPT acquired the 335-room Hotel Palomar in Washington, D.C., for approximately $143.7 million including capitalized acquisition costs. After quarter-end, it acquired a 198-room Milwaukee hotel for $30 million.
- For 327 hotels, ADR increased 0.9% to $130.03, occupancy declined 2.8 percentage points to 67.5%, and RevPAR fell 3.1% to $87.77. Management cited renovations and related disruption, new room supply in certain markets, and weaker activity in some areas.
- Hotel operating expenses increased 1.3% to $319.1 million. Interest expense rose 4.7% to $49.8 million, reflecting higher average borrowings and rates.
Outlook, risks and unusual items
- Management said operating cash flows, rents and returns, and revolver borrowings were expected to be sufficient for operating and capital costs, debt service and distributions over the next 12 months and thereafter. This is not a quantified earnings forecast; future distributions are not assured.
- HPT expected approximately $204.2 million of hotel renovations and capital improvements during the final nine months of 2019 and $47.5 million in 2020. Renovations may disrupt operations, cost more than expected, or fail to produce enough improvement in operating results to support higher contractual returns.
- Hotel return coverage was weak: three of eight hotel agreements, representing 21% of annual minimum returns and rents, had trailing coverage below 1.0x. Sonesta’s trailing coverage was 0.64x and Wyndham’s 0.61x. Wyndham’s guarantee was depleted; HPT noted uncertainty about continued payments. Certain minimum returns are unsecured or supported by limited, depletable security deposits and guarantees.
- Marriott had given notice that it would not renew the Kauai hotel lease expiring December 31, 2019; negotiations were ongoing, with rebranding or sale among possible alternatives.
- Floating-rate debt exposes earnings to rate increases: the filing estimates a one-percentage-point increase would add about $5.4 million to annual interest expense at quarter-end debt levels. LIBOR was expected to be phased out in 2021, and the replacement-rate outcome was uncertain.
- The filing reports significant related-party relationships, including management by RMR LLC and relationships with TA and Sonesta. HPT also adopted the new lease standard in January 2019, recording $77.0 million of right-of-use assets and lease liabilities, with no material income-statement or cash-flow effect.
Important facts for investors to verify
- Whether hotel operating trends and coverage improve, particularly at Sonesta, Wyndham, IHG and properties undergoing renovation.
- TA’s ability to meet rent and deferred-rent obligations, and the cash-flow effect of the 20-center sale and lease amendments.
- Progress, costs and expected returns from the planned renovation program and recent acquisitions.
- Distribution sustainability relative to operating cash flow, capital needs and debt service.
- Debt maturities, refinancing access, covenant headroom and exposure to floating rates and the LIBOR transition.
- Developments in the Kauai lease negotiations and the remaining security deposits and guarantees available to cover hotel payment shortfalls.