Business context and reporting period
The unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014. The registrant named in the filing is Hospitality Properties Trust (HPT); the request metadata identifies Service Properties Trust. HPT reported a portfolio of 291 hotels and 185 travel centers, with hotels operated under management agreements or leases and travel centers leased to TravelCenters of America (TA). Unless noted, dollar amounts below are in millions.
Financial results and key metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $459.6 | $412.3 | $1,305.8 | $1,179.1 |
| Operating income | $83.6 | $66.3 | $246.5 | $203.7 |
| Net income | $49.2 | $27.6 | $140.7 | $100.4 |
| Net income available to common shareholders | $44.0 | $16.7 | $125.2 | $73.4 |
| Common earnings per share, diluted | $0.29 | $0.12 | $0.83 | $0.54 |
| Normalized FFO per diluted share | $0.86 | $0.76 | $2.48 | $2.29 |
Revenue grew 11.5% in Q3 and 10.7% for the nine months. Operating margins were approximately 18.2% and 18.9%, respectively, versus 16.1% and 17.3% in the comparable periods. Net income available to common shareholders rose 163% in Q3 and 70.5% year to date; per-share growth was lower in part because of increased shares outstanding.
- Cash flow: Nine-month operating cash flow was $326.6, versus $265.2 in 2013. Investing used $214.1, compared with $453.4; financing used $115.9, versus $185.2 provided. Cash and cash equivalents were $19.1 at September 30.
- Liquidity: HPT had $15.0 outstanding on its $750.0 revolving facility, leaving $735.0 available at quarter-end; no revolver borrowings remained on November 2, 2014. Restricted FF&E reserve cash was $30.6.
- Debt: Gross principal debt was approximately $2.848 billion, including $400.0 of term-loan borrowings, $15.0 on the revolver, $2.425 billion of senior notes and $8.5 of convertible notes. The balance-sheet carrying amount of these borrowings was approximately $2.835 billion. Total liabilities were $2.989 billion.
- Distributions: Common distributions declared were $0.49 per share for Q3, compared with $0.47 in Q3 2013; nine-month declared distributions were $1.46 per share. Series D preferred distributions were $5.2 for the quarter.
- Portfolio activity and investment: HPT acquired a 240-room Fort Lauderdale hotel for $65.0, sold a Myrtle Beach hotel for $4.3 net proceeds, and funded $159.0 of real estate improvements in the nine-month period.
Material changes versus prior comparable periods
Comparable hotel performance strengthened: for hotels continuously owned since July 2013, Q3 ADR rose 7.2%, occupancy increased 3.2 percentage points to 79.0%, and RevPAR increased 11.8%. For the nine-month comparable portfolio, ADR rose 5.7%, occupancy increased 3.1 points to 76.2%, and RevPAR rose 10.2%. Renovation disruption weighed on some properties: Q3 RevPAR at the 16 comparable hotels under renovation fell 3.8%, and nine-month RevPAR at the 28 comparable hotels under renovation fell 2.5%.
Interest expense declined to $34.3 in Q3 and $104.1 year to date, reflecting lower average borrowing costs and, for Q3, lower average borrowings. In 2014 HPT refinanced maturities by redeeming $300.0 of 7.875% notes due 2014 and $280.0 of 5⅛% notes due 2015, and issuing $350.0 of 4.65% notes due 2024 and $350.0 of 4.50% notes due 2025. The revolving facility and term loan were amended, extending maturities to 2018 and 2019 and reducing pricing. Year-to-date results also benefited from no impairment charge, compared with $8.0 in the prior-year period, and from the absence of the 2013 preferred-share redemption charge; a $6.9 deferred tax benefit in 2013 makes the tax comparison less favorable in 2014.
Outlook, risks, contingencies and unusual items
- Management expected operating cash flow to cover operating expenses, interest and declared distributions over the next 12 months, but cautioned that weaker economic conditions or shortfalls in manager and tenant payments could reduce cash flow and require lower or suspended common distributions. No earnings or FFO guidance was provided.
- Management expected most hotel renovation activity to be completed by year-end 2014. Planned improvement funding remained substantial, including hotel renovation commitments extending into 2015; costs or operating benefits could differ from expectations, and higher contractual minimum returns may not be matched by property cash flow.
- Five of nine hotel operating agreements had trailing-12-month coverage below 1.0x, ranging from 0.27x to 0.95x. HPT reported $25.9 of nine-month minimum-return shortfalls not funded by managers, largely representing unguaranteed portions for Marriott and Sonesta. Security deposits and guarantees are limited; applying deposits does not produce new cash.
- TA is HPT’s largest tenant and a related party. HPT had $39.3 due from TA, excluding deferred rent that has not been recognized because collection is uncertain. Deferred rents of $107.1 and $42.9 are contractually due in 2022 and 2024, respectively. The parties were challenging the valuation of the Virginia eminent-domain taking, with a $0.525 annual rent reduction already effective.
- Related-party and governance risks are notable: RMR manages HPT, HPT has no employees, and RMR, TA, Sonesta and AIC have overlapping relationships with HPT trustees or officers. Estimated RMR incentive fees contributed to higher general and administrative expense.
- Interest-rate risk includes floating-rate borrowings. HPT estimated that a 100-basis-point increase would add about $4.2 of annual interest expense on quarter-end floating debt; if the revolver were fully drawn, the estimated increase was $11.5. The company reported covenant compliance at September 30, 2014.
- Unusual items included $0.855 of year-to-date debt-extinguishment losses, a $0.130 gain on the Myrtle Beach sale, and a $3.4 Q3 unrealized gain on TA shares recorded in other comprehensive income. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the registrant and historical entity name: the filing is for Hospitality Properties Trust, although the request metadata names Service Properties Trust.
- Review hotel-level coverage, particularly Sonesta and Marriott No. 234, and the remaining balances, limits and expiration dates of guarantees and security deposits.
- Assess TA’s ability to meet current rent and the collectability of deferred rent; review the outcome of the eminent-domain valuation dispute.
- Track committed renovation spending, completion timing, disruption to occupancy and RevPAR, and whether the spending lifts property cash flow and contractual returns.
- Reconcile reported earnings, FFO and normalized FFO with cash generation, distributions, share dilution, debt maturities and future financing needs.
- Review related-party agreements and potential conflicts involving RMR, TA, Sonesta and AIC, as well as floating-rate exposure and covenant headroom.