Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11527

 

HOSPITALITY PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

617-964-8389

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer, accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act.

 

Large accelerated filer x			Accelerated filer o
Non-accelerated filer o	(Do not check if a smaller reporting company)		Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Number of registrant’s common shares of beneficial interest, $0.01 par value per share, outstanding as of November 6, 2008: 93,982,385

 

 

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HOSPITALITY PROPERTIES TRUST

 

FORM 10-Q

 

September 30, 2008

 

INDEX

 

		Page
PART I	Financial Information (Unaudited)
	Item 1. Financial Statements
	Consolidated Balance Sheet – September 30, 2008 and December 31, 2007	3
	Consolidated Statement of Income – Three and Nine Months Ended September 30, 2008 and 2007	4
	Consolidated Statement of Cash Flows – Nine Months Ended September 30, 2008 and 2007	5
	Notes to Consolidated Financial Statements	7
	Item 2.
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 4.
	Controls and Procedures	29
	Warning Concerning Forward Looking Statements	30
	Statement Concerning Limited Liability	31
PART II	Other Information
	Item 2.
	Unregistered Sales of Equity Securities and Use of Proceeds	32
	Item 5.
	Other	32
	Item 6.
	Exhibits	41
	Signatures	42

 

References in this Form 10-Q to “HPT”, “we”, “us” or “our” include Hospitality Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

 

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PART I            Financial Information

 

Item 1.  Financial Statements

 

HOSPITALITY PROPERTIES TRUST

 

CONSOLIDATED BALANCE SHEET

(Unaudited)

(dollars in thousands, except share data)

 

		September 30,			December 31,
		2008			2007
ASSETS
Real estate properties, at cost:
Land		$	1,392,605		$	1,377,520
Buildings, improvements and equipment		4,973,679			4,818,711
		6,366,284			6,196,231
Accumulated depreciation		(1,004,065		)	(849,470		)
		5,362,219			5,346,761
Cash and cash equivalents		9,301			23,401
Restricted cash (FF&E reserve escrow)		37,485			28,134
Other assets, net		186,570			281,011
		$	5,595,575		$	5,679,307
LIABILITIES AND SHAREHOLDERS’ EQUITY
Revolving credit facility		$	407,000		$	158,000
Senior notes, net of discounts		1,693,487			1,842,756
Convertible senior notes		575,000			575,000
Mortgage payable		3,578			3,635
Security deposits		169,414			169,406
Accounts payable and other liabilities		102,322			134,705
Due to affiliate		11,806			4,617
Dividends payable		4,754			4,754
Total liabilities		2,967,361			2,892,873
Commitments and contingencies
Shareholders’ equity:
Preferred shares of beneficial interest, no par value, 100,000,000 shares authorized:
Series B preferred shares; 8 7/8% cumulative redeemable; 3,450,000 shares issued and outstanding, aggregate liquidation preference $86,250		83,306			83,306
Series C preferred shares; 7% cumulative redeemable; 12,700,000 shares issued and outstanding, aggregate liquidation preference $317,500		306,833			306,833
Common shares of beneficial interest, $0.01 par value; 150,000,000 shares authorized 93,982,385 and 93,892,719 issued and outstanding, respectively		940			939
Additional paid-in capital		3,050,987			3,048,881
Accumulated other comprehensive loss		(40		)	—
Cumulative net income		1,790,140			1,711,079
Cumulative preferred distributions		(116,171		)	(93,761		)
Cumulative common distributions		(2,487,781		)	(2,270,843		)
Total shareholders’ equity		2,628,214			2,786,434
		$	5,595,575		$	5,679,307

 

The accompanying notes are an integral part of these financial statements.

 

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CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

(in thousands, except per share data)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Revenues:
Hotel operating revenues		$	233,393		$	240,179		$	700,399		$	714,424
Rental income		72,824			87,669			250,341			222,819
FF&E reserve income		6,095			5,785			18,620			16,993
Interest income		271			677			1,177			4,483
Total revenues		312,583			334,310			970,537			958,719
Expenses:
Hotel operating expenses		166,896			174,533			500,743			519,242
Interest (including amortization of deferred financing costs of $1,009, $956, $3,056 and $2,608, respectively)		36,529			38,038			110,626			102,488
Depreciation and amortization		60,449			57,647			178,277			160,470
General and administrative		7,881			10,848			28,920			27,801
TA spin off costs		—			—			—			2,711
Reserve for straight line rent receivable		—			—			19,613			—
Loss on asset impairment		—			—			53,225			—
Total expenses		271,755			281,066			891,404			812,712
Income before gain on sale of real estate and income taxes		40,828			53,244			79,133			146,007
Gain on sale of real estate		—			—			1,274			—
Income before income taxes		40,828			53,244			80,407			146,007
Income tax expense		(443		)	(422		)	(1,345		)	(1,644		)
Income from continuing operations		40,385			52,822			79,062			144,363
Discontinued operations:
Income from discontinued operations		—			1,327			—			7,440
Gain on sale of real estate used by discontinued operations		—			95,711			—			95,711
		—			97,038			—			103,151
Net income		40,385			149,860			79,062			247,514
Preferred distributions		(7,470		)	(7,470		)	(22,410		)	(19,299		)
Net income available for common shareholders		$	32,915		$	142,390		$	56,652		$	228,215
Weighted average common shares outstanding		93,954			93,872			93,930			92,845
Basic and diluted earnings per common share:
Income from continuing operations available for common shareholders		$	0.35		$	0.48		$	0.60		$	1.35
Income from discontinued operations available for common shareholders		$	0.00		$	1.03		$	0.00		$	1.11
Net income available for common shareholders		$	0.35		$	1.52		$	0.60		$	2.46

 

The accompanying notes are an integral part of these financial statements.

 

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HOSPITALITY PROPERTIES TRUST

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(in thousands)

 

		Nine Months Ended September 30,
		2008			2007
Cash flows from operating activities:
Net income		$	79,062		$	247,514
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		178,277			162,106
Amortization of deferred financing costs as interest		3,056			2,608
Straight line rental income		(3,780		)	(11,494		)
Reserve for straight line rent receivable		19,613			—
Other non-cash (income) expense, net		(346		)	(2,230		)
FF&E reserve income and deposits		(49,343		)	(44,191		)
Loss on asset impairment		53,225			—
Gain on sale of real estate used by discontinued operations		—			(95,711		)
Gain on sale of real estate		(1,274		)	—
Changes in assets and liabilities:
Decrease (increase) in other assets		2,005			(13,716		)
Decrease in accounts payable and other		(26,594		)	(3,473		)
Increase in due to affiliate		7,173			10,818
Cash provided by operating activities		261,074			252,231
Cash flows from investing activities:
Real estate acquisitions		(119,364		)	(2,584,451		)
FF&E reserve fundings		(29,120		)	(52,228		)
Increase (decrease) in security deposits		8			(15,960		)
Net proceeds from sale of real estate used by discontinued operations		—			205,350
Net proceeds from sale of real estate		13,684			—
Cash used in investing activities		(134,792		)	(2,447,289		)
Cash flows from financing activities:
Issuance of common shares, net		—			343,452
Issuance of preferred shares, net		—			306,833
Issuance of senior notes, net of discount		—			645,842
Issuance of convertible senior notes		—			575,000
Repayment of senior notes		(150,000		)	—
Draws on revolving credit facility		515,000			886,000
Repayments of revolving credit facility		(266,000		)	(749,000		)
Draws on interim credit facility		—			1,400,000
Repayments of interim credit facility		—			(1,400,000		)
Deferred financing costs incurred		(33		)	(17,305		)
Distributions to preferred shareholders		(22,410		)	(16,459		)
Distributions to common shareholders		(216,939		)	(207,863		)
Distribution of TA to common shareholders		—			(121,166		)
Cash (used in) provided by financing activities		(140,382		)	1,645,334
Decrease in cash and cash equivalents		(14,100		)	(549,724		)
Cash and cash equivalents at beginning of period		23,401			553,256
Cash and cash equivalents at end of period		$	9,301		$	3,532

 

The accompanying notes are an integral part of these financial statements.

 

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CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

(Unaudited)

(in thousands)

 

		Nine Months Ended September 30,
		2008			2007
Supplemental cash flow information:
Cash paid for interest		$	129,644		$	107,924
Non-cash investing activities:
Property managers’ deposits in FF&E reserve		$	54,474		$	44,026
Property managers’ purchases with FF&E reserve		(74,243		)	(97,919		)
Non-cash financing activities:
Issuance of common shares		$	2,107		$	1,801
Distribution of TA to common shareholders		—			(216,084		)

 

The accompanying notes are an integral part of these financial statements.

 

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HOSPITALITY PROPERTIES TRUST

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Note 1.  Basis of Presentation

 

The accompanying consolidated financial statements of Hospitality Properties Trust and its subsidiaries have been prepared without audit. Certain information and disclosures required by U.S. generally accepted accounting principles for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2007. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances between Hospitality Properties Trust and its subsidiaries have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.

 

Note 2.  Revenue Recognition

 

We report hotel operating revenues for managed hotels in our consolidated statement of income. Hotel operating revenues, consisting primarily of room, food and beverage sales, are generally recognized when services are provided. Our share of the net operating results of our managed hotels in excess of the minimum returns due to us, or additional returns, are generally determined annually. Additional returns due to us under our management agreements are recognized at year end when all contingencies are met and the income is earned. Deferred additional returns were $5,111 and $16,888 for the three and nine months ended September 30, 2008, respectively, compared with $7,723 and $20,516 for the three and nine months ended September 30, 2007, respectively.

 

We recognize rental income from operating leases on a straight line basis over the life of the lease agreements. Rental income includes $(6) and $3,780 for the three and nine months ended September 30, 2008, respectively, and $4,308 and $11,494 for the three and nine months ended September 30, 2007, respectively, of adjustments necessary to record rent on the straight line basis.  We regularly evaluate whether events or changes in circumstances have occurred that indicate a tenant may be unable to perform under its lease obligations.  Because of the recent financial difficulties of TravelCenters of America LLC, or TA, the tenant under our travel center leases, and our agreement to enter into a rent deferral arrangement with TA (see Note 10), we ceased recording straight line rent revenue under our lease for 145 travel centers in the second quarter of 2008.  In addition, we fully reserved the existing straight line rent receivable related to this lease by a $19,613 charge in the second quarter of 2008.

 

Percentage rent due to us under leases is generally determined annually and is recognized at year end when all contingencies are met and the rent is earned. Deferred percentage rent from continuing operations was $1,283 and $4,385 for the three and nine months ended September 30, 2008, respectively, and $1,651 and $4,748 for the three and nine months ended September 30, 2007, respectively.

 

We own all the FF&E reserve escrows for hotels leased to our taxable REIT subsidiaries, or TRSs, and leased to third parties. We report deposits by our third party tenants into the escrow account as FF&E reserve income. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income.

 

Note 3.  Per Common Share Amounts

 

We compute per common share amounts using the weighted average number of common shares outstanding during the period. We had no dilutive common share equivalents at September 30, 2008 or 2007.

 

Note 4.  Shareholders’ Equity

 

On January 15, 2008, April 15, 2008 and July 15, 2008, we paid a $0.5546875 per share distribution to our Series B preferred shareholders with respect to the periods ended January 14, 2008, April 14, 2008 and July 14, 2008, respectively. On September 2, 2008, we declared a $0.5546875 per share distribution to Series B preferred shareholders

 

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Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

 

of record on September 30, 2008, with respect to the period ended October 14, 2008. We paid this amount on October 15, 2008.

 

On February 15, 2008, May 15, 2008 and August 15, 2008, we paid a $0.4375 per share distribution to our Series C preferred shareholders with respect to the periods ended February 14, 2008, May 14, 2008 and August 14, 2008, respectively. On October 1, 2008, we declared a distribution of $0.4375 per Series C preferred shares to shareholders of record on October 31, 2008, with respect to the period ending November 14, 2008. We expect to pay this amount on or about November 17, 2008.

 

On February 15, 2008, May 15, 2008 and August 15, 2008 we paid a $0.77 per share distribution to our common shareholders for the quarters ended December 31, 2007, March 31, 2008 and June 30, 2008, respectively.  On October 2, 2008, we declared a $0.77 per share distribution to our common shareholders of record on October 15, 2008, for the quarter ended September 30, 2008.  We expect to pay this amount on or about November 17, 2008.

 

Under the terms of our management agreement with Reit Management & Research LLC, or RMR, on April 11, 2008, we issued 53,541 common shares in payment of an incentive fee of $1,713 for services rendered by RMR during 2007.

 

On May 15, 2008, we issued 1,000 common shares, at a price of $32.09 per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day, to each of our trustees as part of their annual compensation (total 5,000 shares).

 

On September 22, 2008, we issued 31,125 common shares pursuant to our Incentive Share Award Plan based upon a per common share price of $20.57, the closing price of our common shares on the NYSE on that day, to our officers and certain key employees of RMR.

 

Note 5.  Indebtedness

 

On March 3, 2008, we redeemed at par plus accrued interest $150,000 of our 7.0% senior notes.

 

We have a $750,000 interest only, unsecured revolving credit facility. Our credit facility matures in October 2010 and may be extended at our option to October 2011 upon payment of an extension fee. The interest rate on drawings under the credit facility is LIBOR plus a spread (4.26% per annum at September 30, 2008). As of September 30, 2008, we had $407,000 outstanding under our revolving credit facility and $343,000 available to be drawn for general business purposes, including acquisitions.

 

Note 6.  Real Estate Properties

 

At September 30, 2008, we owned 475 properties, 290 hotels and 185 travel centers.  All of these properties are operated under 13 management agreements or leases.

 

During the nine months ended September 30, 2008, we funded $29,120 of improvements to certain of our properties, which resulted in a $2,767 increase in our annual minimum returns and rents.

 

Effective January 1, 2008, we entered into a new lease for our Marriott Kauai Resort Beach Club hotel with a subsidiary of Marriott International, Inc., or Marriott.  This hotel was previously part of a 35 hotel portfolio leased to one of our TRSs and managed by Marriott.  The rent payable to us under the lease is $5,522 per annum subject to annual adjustment based upon changes in the Consumer Price Index. The lease agreement expires December 31, 2019, and Marriott has four renewal options of 15 years each.  Marriott guarantees the rent payable to us under the lease.  Pursuant to the lease agreement, we agreed to fund certain planned improvements to the hotel.  The annual minimum rent payable to us under the lease will increase as improvements are funded.

 

On February 5, 2008, we sold our Park Plaza hotel in North Phoenix, Arizona for $8,000 and recognized a gain on sale of $645.

 

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Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

 

On March 17, 2008, we acquired the land and improvements at our Petro travel center located in Sparks, Nevada from a third party for $42,500.  We simultaneously leased them to TA and rent under our lease with TA for 40 travel centers was increased by $3,952 per annum.  We funded this acquisition with cash on hand and borrowings under our revolving credit facility.

 

On May 12, 2008, we entered into an amendment to our lease with TA for 145 travel centers.  The historical lease provided for our purchase from TA of a total of $125,000 of specified capital improvements to the leased travel centers during the first five years of the term, and that these purchases were limited to $25,000 per year.  The amendment provides that TA may accelerate our purchase of the specified capital improvements.  In the event that TA sells us capital improvements before the time contractually required by the original lease terms, our purchase commitment amount is discounted to reflect the accelerated disbursement of funds by us according to a present value formula established in the amended lease.  As of September 30, 2008, our remaining purchase commitment under this lease is $25,821.

 

On June 18, 2008, we sold our AmeriSuites hotel in Pine Knoll Shores, North Carolina for $6,350 and recognized a gain on sale of $629.

 

Note 7. Income Taxes

 

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements.  We are subject to income tax in Canada, Puerto Rico and certain states despite our REIT status.  Further, we lease our managed hotels to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated tax return and are subject to federal, state and foreign income taxes.  Our consolidated income tax provision (or benefit) includes the income tax provision (or benefit) related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our REIT status.  During the three and nine months ended September 30, 2008, we recognized current tax expense of $443 and $1,345, respectively, which includes $88 and $266, respectively, of foreign taxes and $392 and $1,191, respectively, of federal alternative minimum tax and certain state taxes that are payable without regard to our TRS tax loss carry forwards. In addition, during the three and nine months ended September 30, 2008 we recognized a deferred tax benefit of $37 and $112, respectively, related to a tax versus book basis difference at our Puerto Rico hotel.

 

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Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Note 8.  Segment Information

 

		For the Three Months Ended September 30, 2008
		Hotels			Travel Centers			Corporate			Consolidated
Hotel operating revenues		$	233,393		$	—		$	—		$	233,393
Rental income		31,268			41,556			—			72,824
FF&E reserve income		6,095			—			—			6,095
Interest income		—			—			271			271
Total revenues		270,756			41,556			271			312,583
Hotel operating expenses		(166,896		)	—			—			(166,896		)
Operating income		103,860			41,556			271			145,687
Interest expense		—			—			36,529			36,529
Depreciation and amortization expense		39,022			21,427			—			60,449
General and administrative expense		—			—			7,881			7,881
Total expenses		39,022			21,427			44,410			104,859
Income (loss) before income taxes		64,838			20,129			(44,139		)	40,828
Income tax expense		—			—			(443		)	(443		)
Income (loss) from continuing operations		$	64,838		$	20,129		$	(44,582	)	$	40,385

 

		For the Nine Months Ended September 30, 2008
		Hotels			Travel Centers			Corporate			Consolidated
Hotel operating revenues		$	700,399		$	—		$	—		$	700,399
Rental income		93,269			157,072			—			250,341
FF&E reserve income		18,620			—			—			18,620
Interest income		—			—			1,177			1,177
Total revenues		812,288			157,072			1,177			970,537
Hotel operating expenses		(500,743		)	—			—			(500,743		)
Operating income		311,545			157,072			1,177			469,794
Interest expense		—			—			110,626			110,626
Depreciation and amortization expense		116,106			62,171			—			178,277
General and administrative expense		—			—			28,920			28,920
Reserve for straight line rent receivable		—			19,613			—			19,613
Loss on asset impairment		—			53,225			—			53,225
Total expenses		116,106			135,009			139,546			390,661
Income (loss) before gain on sale of real estate and income taxes		195,439			22,063			(138,369		)	79,133
Gain on sale of real estate		1,274			—			—			1,274
Income (loss) before income taxes		196,713			22,063			(138,369		)	80,407
Income tax expense		—			—			(1,345		)	(1,345		)
Income (loss) from continuing operations		$	196,713		$	22,063		$	(139,714	)	$	79,062
Total assets		$	3,197,854		$	2,364,703		$	33,018		$	5,595,575

 

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Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Note 8.  Segment Information (continued)

 

		For the Three Months Ended September 30, 2007
		Hotels			Travel Centers			Corporate			Consolidated
Hotel operating revenues		$	240,179		$	—		$	—		$	240,179
Rental income		29,408			58,261			—			87,669
FF&E reserve income		5,785			—			—			5,785
Interest income		—			—			677			677
Total revenues		275,372			58,261			677			334,310
Hotel operating expenses		(174,533		)	—			—			(174,533		)
Operating income		100,839			58,261			677			159,777
Interest expense		—			—			38,038			38,038
Depreciation and amortization expense		37,148			20,499			—			57,647
General and administrative expense		—			—			10,848			10,848
Total expenses		37,148			20,499			48,886			106,533
Income (loss) before income taxes		63,691			37,762			(48,209		)	53,244
Income tax expense		—			—			(422		)	(422		)
Income (loss) from continuing operations		$	63,691		$	37,762		$	(48,631	)	$	52,822

 

		For the Nine Months Ended September 30, 2007
		Hotels			Travel Centers			Corporate			Consolidated
Hotel operating revenues		$	714,424		$	—		$	—		$	714,424
Rental income		87,893			134,926			—			222,819
FF&E reserve income		16,993			—			—			16,993
Interest income		—			—			4,483