Business Context and Reporting Period
Company: Hospitality Properties Trust (HPT)
Filing Type: Form 8-K (Current Report)
Date of Report: June 14, 2011
Event: Entry into Material Definitive Agreements (Re-alignment of Hotel Management Contracts)
On June 14, 2011, HPT entered into new management agreements and a pooling agreement with subsidiaries of Marriott International, Inc. These "re-alignment agreements" consolidate three existing sets of hotel management contracts (covering 71 hotels) into a single structure. The agreements extend through 2025 with renewal options for two consecutive ten-year terms.
Key Financial Metrics and Contract Terms
- Total Annual Priority Returns/Rents: $98.1 million per year for the 71 re-aligned hotels.
- Security Deposits: Originally totaled $64.7 million; reduced to $10.9 million as of March 31, 2011, due to operating shortfalls. The agreement allows replenishment to $64.7 million using 70% of excess cash flows.
- Guaranty: Marriott provides a guaranty limited to $40 million for 90% of owner's priority returns through 2017.
- Capital Expenditures: HPT plans to fund approximately $102.3 million for general refurbishment of the 71 hotels over the next two years.
- FF&E Reserve: 5-6% of gross revenues will be escrowed for maintenance and refurbishments.
- Unaffected Contracts:
- Contract No. 1 (53 hotels): Annual rent of $65.8 million plus percentage rents (leased to Host Hotels and Resorts).
- Contract No. 5 (1 resort): Annual rent of $9.4 million plus CPI adjustments (leased to Marriott).
Material Changes and Strategic Actions
The re-alignment changes the structure of cash flow distribution for 71 hotels previously managed under three separate contracts (Nos. 2, 3, and 4). Key changes include:
- Pooling of Cash Flows: Excess cash flows from any of the 71 hotels are now available to pay priority returns for the entire group, rather than being siloed by contract.
- Lease Termination: The lease with Barceló Crestline Corporation (Contract No. 4) was terminated. The 19 hotels involved are now owned by HPT, leased to a taxable REIT subsidiary (TRS), and managed by Marriott.
- Asset Sales: HPT and Marriott have identified 21 of the 71 hotels for potential sale. Proceeds from sales will reduce the annual priority return obligation by 9% per annum of the sales proceeds.
- Return Adjustment: Priority payments will increase by 9% per annum on amounts funded for refurbishments.
Outlook, Risks, and Contingencies
Management Commentary and Forward-Looking Statements:
- Refurbishment Costs: There is no assurance that the planned $102.3 million refurbishment can be completed within the estimated budget or two-year timeframe.
- Sale Proceeds: HPT expects sale proceeds from the 21 identified hotels to at least equal the capital investment required for refurbishments, but there is no assurance of sale prices or timing.
- Contract No. 1 Expiration: Host Hotels and Resorts has notified HPT it will not renew the lease for Contract No. 1 (53 hotels) when it expires at year-end 2012. Future payments for these hotels will depend on operating performance or new negotiations.
- Guaranty Limitations: Marriott's $40 million guaranty is capped. If Marriott incurs debt or undergoes reorganization, its ability to honor the guaranty may be jeopardized.
- Operating Performance: The ability to replenish security deposits and pay priority returns depends on Marriott's operational success and general economic conditions.
Investor Verification Checklist
- Verify the current status of the $10.9 million security deposit and the timeline for replenishment to $64.7 million.
- Monitor the progress of the 21 hotels identified for sale and the actual proceeds received versus the $102.3 million capital investment plan.
- Assess the risk associated with the non-renewal of the Host Hotels and Resorts lease (Contract No. 1) at the end of 2012.
- Review Marriott's financial health to evaluate the enforceability of the $40 million guaranty.
- Track the actual costs and completion dates of the planned hotel refurbishments.