Business context and reporting period
This is Hospitality Properties Trust’s (HPT) Form 10-K for the fiscal year ended December 31, 2018; the filing does not identify the registrant as Service Properties Trust. HPT was a REIT owning 326 hotels and 199 travel centers at year-end, with hotel operations managed by third parties and all travel centers leased to TravelCenters of America LLC (TA). The business had hotel and travel-center operating segments.
Financial performance and condition
- Revenue: $2.295 billion, up 5.6% from $2.172 billion in 2017. Hotel operating revenue rose 6.4% to $1.961 billion; rental income rose 1.4% to $328.4 million.
- Profit: Net income was $185.7 million, down 13.7%; net income available to common shareholders was $185.7 million, down 8.9%, or $1.13 per share versus $1.24. The filing reports a fourth-quarter net loss of $108.9 million; the supplied quarterly table does not provide a clear full explanation of that quarter’s loss.
- FFO: Nareit FFO available to common shareholders was $588.8 million ($3.59 per share), versus $581.1 million ($3.54) in 2017. Normalized FFO was $605.7 million ($3.69 per share), versus $585.7 million ($3.57). These are non-GAAP measures, not cash flow.
- Cash flow: Operating cash flow was $597.0 million, down from $628.5 million. Investing activities used $427.7 million, versus $795.1 million; financing activities used $190.7 million, versus providing $192.8 million. Common distributions paid totaled $346.8 million, or $2.11 per share, compared with $340.1 million, or $2.07, in 2017.
- Debt and liquidity: Year-end debt was $4.2 billion; debt to gross book value of real estate was 44.2%. Cash and cash equivalents were $26.0 million, restricted cash was $50.0 million, and $823.0 million was available under the $1.0 billion revolving facility. The company reported compliance with debt covenants.
- Assets and equity: Total assets were $7.177 billion and shareholders’ equity was $2.597 billion at year-end, versus $7.150 billion and $2.755 billion, respectively, in 2017.
Material changes versus 2017
- Hotel operating revenue growth reflected acquisitions and improved rates at some properties, but hotel operating expenses increased 8.8%, faster than revenue. General and administrative expense fell 16.4%, primarily because of lower incentive management fees.
- Comparable-hotel ADR rose 1.7%, but occupancy fell 0.9 percentage points to 74.8%; RevPAR rose 0.5%. Across all hotels, occupancy fell 1.8 points to 73.3% and RevPAR declined 0.8% to $95.14.
- Interest expense increased 7.5% to $195.2 million, mainly due to higher average borrowings. HPT issued $400 million of 4.375% senior notes due 2030 and amended its credit agreement, extending facility and term-loan maturities and modestly reducing their interest-rate premiums.
- Adoption of a new equity-security accounting standard moved fair-value changes into earnings. HPT recorded $16.7 million of unrealized losses on its TA and RMR Inc. holdings in 2018.
Outlook, risks and unusual items
- Management expected fewer hotels to be under renovation in 2019 and said available operating cash flows, borrowing capacity and other funding sources should cover operating needs, debt service, capital expenses and distributions over the next 12 months. This is an expectation, not a guarantee.
- HPT expected to fund approximately $290 million of capital improvements in 2019 and $39 million in 2020. Renovation disruption, cost overruns, and returns on funded improvements failing to offset higher contractual returns remain risks.
- In January 2019, HPT sold 20 travel centers to TA for $308.2 million and amended the leases. It expected an approximately $160 million gain in first-quarter 2019. TA’s deferred rent obligation was revised from $150 million to $70.458 million, payable in 16 quarterly installments beginning April 2019; collection depends on TA’s ability to pay.
- Hotel coverage was 0.97x overall, including 0.66x for Sonesta and 0.67x for Wyndham; travel-center coverage was 1.63x. Wyndham’s guarantee was depleted, and it paid 85% of contractual minimum returns in 2018, leaving a $4.1 million shortfall. HPT reported $44.6 million of unfunded minimum-return shortfalls under Sonesta and Wyndham arrangements.
- About 74% of aggregate minimum returns and rents were supported by guarantees or security deposits, but these may be limited or exhausted; deposits are not segregated cash and applying them does not generate new cash. HPT had no guarantee or deposit for its Marriott No. 1 or Sonesta hotel arrangements.
- Marriott said it would not renew the lease for the Kauai resort when it expires December 31, 2019; the future operator and cash flows were unresolved. Other material risks include dependence on TA and a limited number of hotel operators, economic and industry conditions, interest rates and LIBOR transition, REIT qualification, and related-party conflicts involving RMR, TA and Sonesta. The 10-K describes no litigation expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile the fourth-quarter $108.9 million loss to the full-year results, including incentive fees, fair-value changes, taxes and any other quarter-specific items.
- Review TA’s capacity to pay current rent and the amended $70.458 million deferred-rent installments, and assess the impact of the 20-property sale on recurring rent and portfolio exposure.
- Track coverage and cash collections for Sonesta and Wyndham properties, remaining guarantee and deposit balances, and whether hotel renovations improve operating performance.
- Assess funding for the planned $290 million 2019 capital program alongside debt maturities, variable-rate exposure and distributions; the annual common distribution exceeded GAAP net income available to common shareholders.
- Review the Kauai hotel’s post-2019 operating arrangement and the implications of HPT’s external management and related-party relationships.