Service Properties Trust (10-Q summary)
Filing identity: The supplied filing is for Hospitality Properties Trust (HPT; Nasdaq: HPT), for the quarter ended June 30, 2019. The filing’s registrant name differs from the company name in the request metadata.
Business context and reporting period
HPT was a REIT owning 328 hotels and 179 travel centers. It did not operate the properties directly: hotels were managed by third parties or leased, and all travel centers were leased to TravelCenters of America (TA). The filing reports the three and six months ended June 30, 2019, compared with 2018. Amounts below are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Total revenue | $610.6 | $612.0 | $1,135.5 | $1,140.6 |
| Net income | $8.8 | $97.3 | $234.6 | $177.5 |
| Net income per diluted share | $0.05 | $0.59 | $1.43 | $1.08 |
| FFO per share | $1.03 | $1.07 | $1.91 | $2.02 |
| Normalized FFO per share | $1.03 | $1.07 | $1.91 | $2.02 |
| Cash from operating activities | Not stated quarterly | Not stated quarterly | $239.9 | $263.4 |
Q2 hotel operating revenue rose 2.3% to $541.7 million, while rental income fell 16.4% to $67.8 million, largely reflecting the January sale of 20 travel centers to TA and related lease changes. Comparable hotel RevPAR declined 2.1% in Q2 and 2.5% in H1; occupancy and ADR also weakened. Management cited renovation-related disruption, new room supply in some markets and lower business activity in certain areas.
Q2 net income fell sharply, primarily reflecting a $60.8 million unrealized loss on equity securities, compared with a $20.9 million gain in Q2 2018. H1 net income increased in part because of a $159.5 million gain on the travel-center sales; H1 unrealized securities losses were $39.8 million versus gains of $45.9 million a year earlier. Normalized FFO, a non-GAAP measure, declined year over year in both periods.
At June 30, 2019, total assets were $7,177.7 million, total liabilities $4,520.3 million and shareholders’ equity $2,657.4 million. Debt comprised $90 million drawn on a $1 billion revolving facility, a $400 million term loan and $3.65 billion of senior notes. Cash and cash equivalents were $15.7 million, with $37.8 million of restricted cash; $910 million remained available on the revolver. As of August 8, the revolver was undrawn. H1 investing cash flow was $0.5 million provided, including $308.2 million in net sale proceeds; financing activities used $263.0 million, including $176.0 million of shareholder distributions.
Material changes, outlook and risks
- In January, HPT sold 20 travel centers to TA for $308.2 million, recognized a $159.5 million gain and reduced annual minimum rent under the TA leases. TA also agreed to repay deferred rent through quarterly installments.
- HPT agreed in June to acquire 770 net-leased service-oriented properties from Spirit MTA REIT (SMTA) for $2.4 billion, plus estimated debt prepayment penalties of about $78 million. The transaction was subject to shareholder approval and other conditions; HPT expected a third-quarter 2019 closing. It arranged a potential $2 billion one-year term loan facility and planned to sell approximately $800 million of assets after closing to reduce leverage. Closing, financing and asset-sale outcomes were not assured.
- Management said operating cash flows and financing sources were expected to cover operating and capital needs, debt service and distributions for the next 12 months. This outlook is conditional: hotel operating results and tenant payments may weaken, and some minimum returns are not fully secured. Six of eight hotel agreements—representing 50% of annual hotel minimum returns and rents—had trailing 12-month coverage below 1.0x; travel-center lease coverage was 1.84x.
- HPT expected about $176.3 million of hotel renovations and capital improvements in H2 2019 and $27.5 million in 2020. These projects may disrupt operations, cost more than expected or fail to improve coverage sufficiently.
- HPT expected to exit its relationship with Wyndham and rebrand or sell its 22 Wyndham-managed hotels. Marriott had notified HPT it would not renew the Kauai hotel lease after December 31, 2019; discussions were ongoing.
- Quarterly distributions were $0.54 per share, or $2.16 annualized. The filing cautioned that distributions could be reduced or suspended. Credit-rating reviews following the proposed SMTA transaction indicated potential downgrades; higher leverage, floating-rate exposure, refinancing access and planned asset sales were material risks. HPT also identified the anticipated LIBOR phaseout as a financing uncertainty.
Most important facts to verify
- Whether the SMTA acquisition closed, on what final terms and with what financing costs, and whether the planned asset sales occurred at expected prices.
- Hotel-level performance and coverage trends, particularly for Sonesta, Wyndham, IHG and the Marriott Kauai property; manager guarantees and security deposits may be limited or depleted.
- Debt levels, credit ratings, refinancing availability and sensitivity to floating rates as the SMTA financing plan progresses.
- Whether renovation spending stayed within estimates and improved hotel results and contractual return coverage.
- Whether distributions remained supported by recurring cash generation: Q2 and H1 Normalized FFO per share were below the respective prior-year periods. FFO is non-GAAP and is not a measure of operating cash flow.