Service Properties Trust (then Hospitality Properties Trust): 2014 Form 10-K
Entity and period: The supplied filing is for Hospitality Properties Trust (HPT), a Maryland REIT, for the fiscal year ended December 31, 2014; it is not a standalone quarterly filing. The company owned 291 hotels and 184 travel centers across 44 U.S. states, Canada and Puerto Rico. Verify the issuer identity: the request names Service Properties Trust, while the filing uses Hospitality Properties Trust.
Financial results and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $1,736.3 million | $1,563.9 million | +11.0% |
| Operating income | $339.2 million | $273.6 million | +24.0% |
| Net income | $197.2 million | $133.2 million | +48.1% |
| Net income available to common shareholders | $176.5 million | $101.0 million | +74.8% |
| Common diluted EPS | $1.18 | $0.73 | +61.6% |
| NAREIT FFO | $492.3 million; $3.29/share | $408.3 million; $2.97/share | +20.5% total |
| Normalized FFO | $493.4 million; $3.29/share diluted | $410.4 million; $2.98/share diluted | +20.2% total |
| Common distributions declared per share | $1.95 | $1.89 | +3.2% |
Margins: Calculated from reported figures, operating income was about 19.5% of revenue and net income about 11.4%. Hotel operating revenues were $1,474.8 million; rental income was $258.1 million. The filing’s consolidated revenue includes managed-hotel operations and should be interpreted in that context.
Quarter ended December 31, 2014: Revenue was $430.5 million, net income $56.5 million, net income available to common shareholders $51.4 million, and diluted EPS $0.34. The comparable 2013 quarter reported revenue of $384.8 million, net income of $32.8 million, common net income of $27.6 million and diluted EPS of $0.19. Common distributions were $0.49 per share in each fourth quarter.
Cash flow: Cash from operations was $461.7 million, up from $391.1 million. Investing activities used $280.9 million, versus $570.3 million, principally reflecting lower acquisition and renovation spending. Financing activities used $191.5 million, compared with $181.7 million provided in 2013. Cash and cash equivalents were $11.8 million at year-end; restricted FF&E cash was $34.0 million.
Debt and liquidity: Debt, net of discounts, totaled $2,838.6 million, or 48.7% of total book capitalization. The company reported $732.0 million available under its $750 million unsecured revolver at year-end and $400 million outstanding on its term loan. The revolving facility and term loan had stated maturities in 2018 and 2019, respectively. Management reported covenant compliance. No secured mortgage debt was outstanding. The company’s $2.8 billion debt balance and $11.8 million unrestricted cash balance make access to credit and ongoing property cash flows important to liquidity.
Material changes versus the prior year
- Hotel operating revenue rose 12.5%, driven by higher room rates and occupancy, acquisitions and improved hotel demand. Across 288 continuously owned hotels, full-year RevPAR increased 10.2%; ADR rose 6.1% and occupancy increased 2.8 percentage points to 74.9%.
- Travel-center minimum rent increased 2.6%, and percentage rent increased 37.8%. TA leases all 184 travel centers.
- Operating income rose 24.0%; interest expense declined 4.4%, partly due to lower weighted-average borrowing rates. Common-share weighted-average shares increased 8.9%, tempering per-share growth.
- Cash from operations increased, while investing cash use fell as acquisitions and renovation activity declined. Common distributions paid rose to $292.0 million from $256.6 million.
- HPT issued $700 million of senior notes at 4.65% due 2024 and 4.50% due 2025, and redeemed $580 million of higher-coupon notes due 2014 and 2015.
Outlook, risks, contingencies and unusual items
- Management expected hotel renovation activity to be lower in 2015, describing the program as substantially completed by year-end 2014. It expected to fund about $56.4 million of hotel capital improvements in 2015; other planned improvements described in the filing include additional amounts under the company’s agreements.
- Management stated that operating cash flow was expected to cover operating expenses, debt service and distributions for the next 12 months, but cautioned that operator or tenant payment shortfalls could require a distribution reduction or suspension. The Board retains discretion over distributions.
- Hotel minimum-return coverage was below 1.0x for five of nine hotel agreements; aggregate hotel coverage was 0.93x. The filing reports $37.5 million of 2014 minimum-return shortfalls not funded by managers, principally relating to Marriott and Sonesta arrangements. Security deposits and guarantees are limited and may be exhausted; applying deposits does not create additional cash.
- TA represented 35% of historical real estate investment cost and 33% of annual minimum rent. TA had accumulated losses, operates in a competitive, fuel-sensitive business, and owed $150 million of deferred rent, due in 2022 and 2024. Its ability to pay rent is a significant concentration risk.
- Renovation disruption affected results: the 34 continuously owned hotels under renovation had 3.0% RevPAR growth versus 11.4% for the 254 not under renovation. The company cautioned that capital costs may exceed estimates and operating gains may not match higher contractual returns.
- The company and TA were challenging the compensation paid by Virginia for a travel center taken by eminent domain; the final compensation and resulting rent reduction were unresolved. HPT received $6.2 million and annual rent under the applicable lease was reduced by $0.5 million.
- Other notable items included a $0.9 million loss on early extinguishment of debt, a $0.1 million gain on the sale of a hotel, and no asset-impairment charge in 2014 versus $8.0 million in 2013. HPT held one hotel for sale at year-end and had announced a proposed hotel acquisition and a planned travel-center land purchase, both subject to closing conditions.
- Risks include interest-rate increases, refinancing and covenant constraints, economic weakness affecting hotel demand and trucking, environmental and climate-related liabilities, REIT qualification and tax rules, and potential conflicts arising from related-party relationships with RMR, TA, Sonesta and AIC. The filing identifies no legal proceedings and reports effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the issuer and reporting scope: the filing identifies Hospitality Properties Trust, not Service Properties Trust, and reports full-year 2014 results.
- Review TA’s current financial capacity, rent coverage, deferred-rent repayment terms and exposure to fuel-market and trucking trends.
- Assess hotel agreement coverage, unfunded minimum-return shortfalls, and the remaining amounts and expiry dates of operator guarantees and security deposits.
- Reconcile recurring cash available for distributions with the $292.0 million of 2014 common distributions, planned capital spending and debt maturities; FFO and Normalized FFO are non-GAAP measures, not operating cash flow.
- Check subsequent developments in the VDOT eminent-domain dispute, planned acquisitions and land purchase, and the projected 2015 renovation and capital-improvement program.
- Evaluate debt covenant headroom, variable-rate exposure, refinancing costs and the company’s reliance on its revolving credit facility.