SVC

Business Context and Reporting Period

Company: Hospitality Properties Trust (HPT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2003
Business Overview: HPT is a Real Estate Investment Trust (REIT) owning 251 hotel properties leased to or operated by third parties. The company does not operate hotels directly but receives rental income and returns. As of March 31, 2003, the company had 62,575,825 common shares outstanding.

Key Financial Metrics

Note: All figures in thousands except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 8.7% to $89.0 million, driven by increased activities of the Taxable REIT Subsidiary (TRS) and hotel acquisitions. Rental income rose 5.1% to $61.3 million.
• Profit Decline: Net income decreased 2.2% to $32.6 million. Net income available to common shareholders fell 8.4% to $28.9 million.
• Unusual Item: A loss of $2.582 million was recognized on the early extinguishment of debt due to the write-off of unamortized financing costs associated with the redemption of $150 million in senior notes.
• Expense Increases: Total expenses rose 16.1% to $56.4 million, primarily due to increased hotel operating expenses from TRS activities and the aforementioned debt extinguishment loss.
• FF&E Reserve Income: Decreased 10.6% to $4.7 million, attributed to reduced hotel sales levels due to the economic slowdown and business travel declines.

Guidance, Outlook, Risks, and Contingencies

Wyndham Default and Subsequent Events

A material contingency involves 27 hotels leased to subsidiaries of Wyndham International, Inc. On April 1, 2003, Wyndham defaulted on rent payments totaling $3.61 million. HPT declared Wyndham in default on April 2, 2003, and exercised rights to retain security deposits ($33.3 million) and FF&E reserves ($6.9 million).

• Operational Shift: HPT terminated Wyndham's occupancy of 15 Summerfield Suites hotels on April 28, 2003, leasing them to its TRS and hiring third-party managers. Negotiations continue for the remaining 12 Wyndham hotels.
• Financial Impact: Future income from these 27 hotels will fluctuate based on hotel performance rather than fixed rent. Current cash flows from these properties are less than the previously received rents.

Market Risks and Outlook

• Industry Conditions: The hotel industry continues to face declines in occupancy and revenue due to the post-9/11 environment, the war in Iraq, and recessionary pressures. Most operators reported declines in operating performance versus the prior year.
• Liquidity: HPT maintains $28.4 million in cash and a fully available $350 million revolving credit facility. The company declared a $0.72 per share distribution for Q1 2003, payable in May 2003.
• Debt Refinancing: HPT issued $175 million in 6.75% senior notes due 2013 and redeemed $150 million in 8.5% notes due 2009. Total outstanding fixed-rate debt is $500 million.

Investor Verification Checklist

• Wyndham Resolution: Verify the status of negotiations for the 12 remaining Wyndham hotels and the financial performance of the 15 hotels now operated by the TRS.
• Cash Flow Coverage: Review the "Rent/Return Coverage" ratios for the Wyndham leases (0.6x and 0.8x for the 12 months ended March 31, 2003) to assess the risk of future supplemental payments.
• Debt Covenants: Confirm continued compliance with debt covenants, particularly given the shift from fixed rent to variable operating income for the Wyndham portfolio.
• FF&E Reserve Utilization: Monitor the $24.1 million remaining funding requirement for the Courtyard by Marriott modernization program and its impact on future rent increases.
• Dividend Sustainability: Assess whether the shift to variable income from the Wyndham portfolio impacts the ability to maintain the $0.72 quarterly distribution.