Business Context and Reporting Period
Company: Hospitality Properties Trust (HPT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2009
Business Overview: HPT is a real estate investment trust (REIT) owning 474 properties, consisting of 289 hotels and 185 travel centers. The properties are operated under 13 management agreements or leases with major operators including Marriott, InterContinental, Hyatt, Carlson, and TravelCenters of America (TA). The reporting period reflects the impact of the U.S. recession on the hospitality industry, characterized by declines in occupancy, revenues, and profitability.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $254.3 million | $319.2 million |
| Net Income | $61.1 million | $53.4 million |
| Net Income Available to Common Shareholders | $53.6 million | $45.9 million |
| Earnings Per Share (Basic & Diluted) | $0.57 | $0.49 |
| Cash and Cash Equivalents | $11.8 million | $22.5 million (Dec 31, 2008) |
| Revolving Credit Facility Outstanding | $546.0 million | $396.0 million (Dec 31, 2008) |
| Total Debt (Senior Notes, Convertible Notes, Revolver, Mortgage) | $2.68 billion | $2.64 billion (Dec 31, 2008) |
| Operating Cash Flow | $55.6 million | $56.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 20.3% to $254.3 million. Hotel operating revenues fell 21.0% to $175.7 million due to reduced business and leisure travel. Rental income from travel centers dropped 28.6% primarily due to rent deferrals by TA.
- Net Income Increase: Despite lower operating revenues, Net Income increased 14.4% to $61.1 million. This was driven by a $26.6 million gain on extinguishment of debt from the repurchase of convertible senior notes, offsetting the decline in operating income.
- Debt Reduction: HPT repurchased $121.3 million of 3.8% convertible senior notes for $87.5 million. Additionally, in April and May 2009, the company repurchased $57.2 million of senior notes.
- Operating Expenses: Hotel operating expenses decreased 28.7% to $111.5 million, largely due to lower occupancy and manager initiatives to reduce costs.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Distribution Suspension: On April 8, 2009, HPT announced the suspension of regular quarterly common share distributions for the remainder of 2009 due to capital market conditions. The company expects to re-evaluate conditions in Q4 2009. Preferred share distributions continue.
- Capital Improvements: HPT funded approximately $46.6 million in capital improvements during Q1 2009, exceeding FF&E reserve contributions. Future funding is expected to be sourced from cash balances and the revolving credit facility.
- Market Conditions: Management notes that the U.S. economy remains in recession, leading to further declines in hotel performance. The availability and cost of credit remain challenging.
Risks and Contingencies
- Tenant Defaults: Marriott International and Barcelo Crestline Corporation failed to make full minimum payments under specific management agreements (Marriott No. 3 and No. 4 contracts). HPT applied security deposits to cover deficiencies of approximately $4.2 million in total. While HPT believes security deposits exceed the 2009 shortfall, applying these deposits records income without generating cash flow.
- TA Rent Deferral: TravelCenters of America (TA) deferred $15.0 million in rent during Q1 2009 under a deferral agreement. HPT has ceased recognizing straight-line rent for 145 travel centers due to uncertainty regarding collection.
- Liquidity: HPT relies on its $750 million revolving credit facility (with $204 million available as of March 31, 2009) to fund operations and distributions. There is a risk that lenders may be unable or unwilling to fund advances if market conditions worsen.
Investor Verification Checklist
- Common Dividend Status: Verify the suspension of common dividends for the remainder of 2009 and the potential for future distributions to be paid in stock rather than cash.
- Security Deposit Utilization: Monitor the remaining balance of security deposits held from Marriott and Crestline and the extent to which they are being applied to cover future payment shortfalls.
- TA Financial Health: Review TravelCenters of America's financial stability and ability to resume full rent payments, given the $15 million deferral and economic headwinds.
- Debt Maturities: Assess the company's ability to refinance or repay term debt maturing between 2010 and 2012 in the current restrictive credit environment.
- Cash Flow vs. Net Income: Distinguish between reported Net Income (boosted by non-cash debt extinguishment gains) and actual Operating Cash Flow available for distributions.