Business context and reporting period
Unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The filing registrant is Hospitality Properties Trust (HPT), not “Service Properties Trust” as stated in the request metadata. HPT owned 305 hotels and 197 travel centers; hotel operations and travel-center leases are its two reporting segments.
Financial performance and position
Unless otherwise stated, dollar amounts below are in millions.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $550.3 | $507.1 | $1,024.4 | $942.6 |
| Operating income | $99.1 | $108.6 | $193.0 | $185.8 |
| Net income | $56.1 | $83.1 | $108.1 | $124.7 |
| Net income available to common shareholders | $50.9 | $78.0 | $97.8 | $114.4 |
| Basic and diluted earnings per share | $0.34 | $0.52 | $0.65 | $0.76 |
| FFO per share | $0.92 | $0.98 | $1.81 | $1.75 |
| Normalized FFO per share | $1.09 | $0.99 | $2.02 | $1.82 |
- Revenue rose 8.5% in Q2 and 8.7% for the half year. Operating margin was approximately 18.0% in Q2 versus 21.4% a year earlier, and 18.8% for the half year versus 19.7%.
- Hotel operating revenue increased 8.0% in Q2 and 7.7% year to date. For all hotels, Q2 ADR rose 2.8%, occupancy increased 0.7 percentage points to 80.7%, and RevPAR rose 3.7%; six-month RevPAR increased 3.1%.
- Q2 net income fell 32.6%; the prior-year quarter included an $11.0 million real-estate sale gain, while 2016 had higher general and administrative expense, interest expense and taxes. Estimated management incentive fees contributed $25.9 million to Q2 G&A. For the first half, estimated incentive fees were $31.2 million.
- Six-month cash from operations was $231.5 million, down from $252.1 million. Investing used $284.9 million, mainly for acquisitions and property improvements; financing provided $60.1 million. Cash at June 30 was $20.3 million. These cash-flow figures are not a measure of cash available after capital spending and distributions.
- At June 30, total assets were $6.61 billion and shareholders’ equity was $2.79 billion. Debt principal was approximately $3.54 billion: $232 million on the revolver, $400 million on the term loan, and $2.91 billion of public notes and convertible notes. The balance sheet reports debt net of specified issuance costs and discounts.
- Revolver availability was $768 million at June 30; the $1.0 billion facility matures in July 2018, with a conditional one-year extension option. The $400 million term loan matures in April 2019. Management said it was in compliance with debt covenants.
Material changes, outlook and risks
- In February, HPT issued $750 million of notes—$400 million at 4.25% due 2021 and $350 million at 5.25% due 2026—and redeemed $275 million of 6.30% notes due 2016. Interest expense rose 16.4% in Q2 and 16.8% for the first half, principally because of higher average borrowings.
- HPT acquired hotels and travel centers and funded capital improvements. It expected to fund about $68.6 million of hotel renovations and improvements and up to $58 million of TA travel-center improvements in the remainder of 2016. The latter purchases are discretionary and increase contractual rent, but may not improve TA’s ability to pay.
- A proposed $52 million acquisition of a 236-room Milpitas, California hotel was expected to close in Q4 2016, subject to diligence and other conditions; completion was not assured. HPT declared a $0.51-per-share common distribution payable in August 2016; it provided no earnings or FFO forecast.
- Management believed operating cash flows, available borrowing capacity and other funding sources would meet foreseeable needs, including distributions. It warned that this depends on managers and tenants paying rents and minimum returns, access to financing, and property performance; distributions could be reduced or eliminated.
- Concentration and counterparty risks are significant: TA leased 36% of HPT’s gross real-estate carrying value and was also a related party and HPT’s largest tenant. Certain hotel operators had coverage below 1.0x; Sonesta’s six-month coverage was 0.68x and it had no guarantee or security deposit. Security deposits and guarantees are limited, can be depleted, and applying deposits does not generate new cash.
- Other notable risks include renovations failing to lift hotel results, interest-rate and refinancing exposure, seasonality, and potential conflicts involving related parties, including RMR and Sonesta. The filing reported no material change to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the registrant identity: the filing is for Hospitality Properties Trust, despite the Service Properties Trust metadata.
- Assess whether hotel and travel-center operating performance supports minimum rents and returns, especially the portfolios with sub-1.0x coverage and the unguaranteed Sonesta exposure.
- Track TA’s ability to pay current and deferred rent, the substantial deferred-rent balances, and whether funded travel-center improvements produce sufficient operating gains.
- Reconcile GAAP earnings with FFO and Normalized FFO, including the timing and final amount of RMR incentive fees, which were estimated in this quarter and subject to year-end determination.
- Review planned capital spending, liquidity after acquisitions and distributions, debt maturities and floating-rate exposure; the filing estimates a 100-basis-point rate increase would add about $6.3 million to annual interest expense on debt outstanding at June 30.