Business context and reporting period
Hospitality Properties Trust (the registrant named in this filing; the request metadata uses Service Properties Trust) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. HPT owned 289 hotels and 185 travel centers, operated under hotel management agreements and leases; its travel centers were leased to TravelCenters of America (TA).
Financial results and key metrics
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2010 period.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $313.8 | $282.4 | $595.8 | $536.5 |
| Operating income | $85.1 | $65.5 | $171.8 | $144.1 |
| Net income | $51.6 | $23.2 | $104.7 | $64.1 |
| Net income available to common shareholders | $44.2 | $15.7 | $89.8 | $49.1 |
| Basic and diluted earnings per common share | $0.36 | $0.13 | $0.73 | $0.40 |
| Operating cash flow | — | $166.9 | $167.5 |
- Revenue growth was driven by higher hotel operating revenue: up 17.5% in Q2 and 17.1% for the half year. Hotel operating expenses also rose, by 17.5% and 20.0%, respectively. Calculated operating margin was approximately 27.1% in Q2 versus 23.2%, and 28.8% for the half year versus 26.9%.
- Hotel operating statistics improved year over year: second-quarter occupancy rose 3.3 percentage points to 76.2%, average daily rate rose 3.5% to $93.64, and RevPAR rose 8.2% to $71.35.
- Six-month investing cash outflow was $48.1 million, including $35.9 million for real estate acquisitions and improvements and $5.7 million to purchase additional TA shares. Financing cash outflow was $120.4 million, including $126.0 million of common and preferred distributions. Cash declined to $3.3 million from $4.9 million at year-end 2010.
- At June 30, total assets were $5.15 billion and total liabilities $2.31 billion. Debt consisted of $153 million drawn on the revolver, $1.887 billion of senior notes and $78.1 million of convertible notes; the $3.4 million mortgage was repaid in January.
- The $750 million unsecured revolving facility had $597 million available at June 30, bore interest at 0.74%, and matured October 24, 2011. Management was negotiating a replacement and cautioned that refinancing was not assured and could cost materially more. Convertible note holders could require repurchase in March 2012.
- FFO was $101.8 million for Q2 and $203.7 million for the half year; Normalized FFO was $110.2 million and $212.7 million, respectively. Normalized FFO per share was $0.89 and $1.72. Common distributions declared were $0.45 per share quarterly.
Material changes, outlook, and risks
- Revenue and expenses rose partly because 37 hotels shifted from leased to managed operations during 2011, as well as improved occupancy and room rates. Rental income from hotels declined with the reclassification; travel-center rental income increased following improvements and lease changes.
- TA’s annual minimum rents were reduced under a January amendment. Previously deferred rent of $150 million was postponed, without interest, to December 2022 and June 2024; HPT had not recognized it as income or receivable because collection was uncertain. TA represented 39% of HPT’s real estate investments at cost.
- Marriott’s new agreement pooled 71 hotels and maintained annual minimum returns of $98.4 million, but the portfolio’s security deposit had fallen to $2.4 million by August 8, 2011 after covering shortfalls. Marriott’s 90% limited guaranty is capped at $40 million and expires in 2017. HPT planned about $102 million of refurbishments over two years and was pursuing sales of 21 hotels.
- A July 2011 InterContinental agreement pooled 130 hotels, retaining annual minimum returns and rents of $153.1 million and extending the agreement to 2036. The security deposit, including a $37 million supplement, was $64.9 million on August 8. HPT expected to invest about $300 million in renovations and was considering rebranding or selling up to 42 hotels. These agreements were executed after quarter-end.
- Management expected operating cash flow to cover operating expenses, interest and declared distributions for the next twelve months, but warned that weak economic and industry conditions could impair tenants’ and managers’ ability to pay and could require reducing or suspending common distributions. Security-deposit applications support reported income but do not provide cash and reduce remaining protection.
- Hotel manager/tenant coverage was below 1.0x for all nine hotel agreements over the twelve months ended June 30 (0.35x–0.80x); TA lease coverage was 1.47x and 1.38x. Several security deposits and guarantees were limited or already depleted. HPT reported covenant compliance at quarter-end and effective disclosure controls.
- Q2 included $7.3 million of impairment charges; 2010 included a $6.7 million debt-extinguishment loss. HPT also incurred $0.8 million of acquisition-related costs in 2011. No formal earnings guidance was provided.
Investor verification priorities
- Confirm refinancing of the October 2011 revolver, its final size and pricing, and liquidity for the March 2012 convertible-note put.
- Track actual hotel-manager and tenant payments, particularly Marriott and InterContinental shortfalls, remaining deposits, guarantee limits and cash-versus-noncash income effects.
- Assess TA’s ability to pay reduced current rent and the deferred $150 million, given the long deferral and TA’s operating performance.
- Verify progress, funding and expected returns on planned Marriott and InterContinental renovations, hotel sales and any resulting minimum-rent changes.
- Monitor operating cash flow, capital spending, distributions and hotel coverage; compare distributions with cash generation rather than relying solely on FFO measures.
- Review related-party arrangements involving RMR, TA and Affiliates Insurance Company, and verify the issuer’s legal name when reconciling this filing with the request metadata.