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HPT > SEC Filings for HPT > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for HOSPITALITY PROPERTIES TRUST

Form 10-Q for HOSPITALITY PROPERTIES TRUST


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and with our 2011 Annual Report.

Overview (dollar amounts in thousands, except per share amounts)

Hotel operations. The U.S. hotel industry generally continues to show improvement in average daily rate, or ADR, occupancy and revenue per available room, or RevPAR, over 2011, but these measures are still below levels prior to the recent recession. We believe the increases in ADR, occupancy and RevPAR at certain of our hotels in 2012 have been below hotel industry averages primarily due to the disruption and displacement caused by renovation and rebranding activities. During the three and nine months ended September 30, 2012, we had 27 and 123, respectively, of our hotels under renovation for all or part of the period and we rebranded 35 and 39 hotels, respectively during those periods. We expect our high level of hotel renovation activity to continue through the remainder of 2012 and into 2013.

Our hotel tenants and managers. Many of our hotel operating agreements contain security features, such as guarantees and security deposits, which are intended to protect minimum returns and rents due to us in accordance with our operating agreements regardless of hotel performance. However, the effectiveness of various security features to provide uninterrupted receipt by us of minimum returns and rents is not assured, particularly if the U.S. economy and the lodging industry take an extended period to recover from the severe declines experienced during the recent recession, if economic conditions decline, or if our hotel renovation activities described above do not result in improved operating results at these hotels. Further, certain of the guarantees that have been granted to us are limited in amount and duration and do not provide for payment of the entire amount of the applicable minimum return shortfalls. If our tenants, managers or guarantors do not earn or pay the minimum returns and rents due to us, our cash flows will decline and we may be unable to pay distributions to our shareholders, repay our debt or fund our debt service obligations.

Marriott No. 234 agreement. Additional details of this agreement are set forth in Note 12 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which disclosure is incorporated herein by reference.

During the three and nine months ended September 30, 2012, the payments we received under our Marriott No. 234 agreement, which requires annual minimum returns to us of $100,622, were $2,318 and $6,989 less than the minimum amounts contractually required, respectively. Pursuant to our Marriott No. 234 agreement, Marriott provided us with a limited guarantee for shortfalls up to 90% of our minimum returns. During the three and nine months ended September 30, 2012, Marriott was not required to make any guaranty payments to us because the payments received by us were in excess of the guaranty threshold amount (90% of the minimum returns due to us). During the three months ended September 30, 2012, the amount available under Marriott's guaranty was replenished by the $400 of hotel cash flows in excess of the guaranty threshold amount. Also, during the period from September 30, 2012 to November 6, 2012, the payments we received for these hotels were $1,555 less than the contractual minimum returns due to us. Marriott was not required to make any guaranty payments to us because the minimum return payments received were in excess of the guaranty threshold. The balance of this guaranty was $30,873 as of November 6, 2012.

InterContinental agreement. Additional details of this agreement are set forth in Note 12 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which disclosure is incorporated herein by reference.

During the three and nine months ended September 30, 2012, the payments we received under our agreement with InterContinental covering 91 hotels and requiring minimum returns to us of $131,654 were $2,743 and $17,493 less than the minimum amounts contractually required, respectively. We applied the available security deposit to cover these shortfalls. Also, during the period from September 30, 2012 to November 6, 2012, the minimum return payments we received under our InterContinental agreement were $5,061 less than the minimum amounts due to us. We applied the available security deposit to cover these shortfalls. The remaining balance of the security deposit was $33,266 as of November 6, 2012.


HOSPITALITY PROPERTIES TRUST

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Sonesta agreements. On January 31, 2012, we completed our acquisition of the entities which own the Cambridge Hotel and the New Orleans Hotel for $153,062 ($150,500 cash consideration and $2,562 of assumed net liabilities), excluding acquisition costs. Additional details of this transaction are set forth in Notes 7, 11 and 12 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which disclosure is incorporated herein by reference.

We do not have any security deposits or guarantees for our hotels managed by Sonesta. Sonesta's incentive management fees, but not its other fees, are only earned after we receive our minimum returns, and we may cancel these management agreements if approximately 75% of our minimum returns are not paid for certain periods. Accordingly, the returns we receive from hotels managed by Sonesta will depend exclusively upon the performance of those hotels.

Wyndham agreement. Details of this agreement are set forth in Note 12 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which disclosure is incorporated herein by reference.

Other management agreement and lease matters. As of November 6, 2012, all payments due to us from our managers and tenants under our other operating agreements were current. Additional details of our guarantees from Hyatt and Carlson and our lease agreements with TA are set forth in Notes 11 and 12 to our condensed consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q, which disclosure is incorporated herein by reference. Other information about TA is set forth in Note 10 to our condensed consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q, which disclosure is incorporated herein by reference.

When we reduce the amounts of the security deposits we hold under our operating agreements for payment deficiencies, we record income equal to the amounts by which these deposits are reduced up to the minimum return or minimum rent due to us. However, reducing the security deposits does not result in additional cash flow to us of the deficiency amounts, but reducing amounts of security deposits may reduce the refunds due to the respective lessees or managers who have provided us with these deposits upon expiration of the respective lease or management agreement. Security deposits are non-interest bearing and are not required to be held in escrow. Under all of our hotel contracts that include a security deposit, any amount of the security deposits which are applied to payment deficits may be replenished from future cash flows from the applicable hotel operations pursuant to the terms of the respective contracts. When we receive payments under guarantees under our leases or operating agreements, we receive cash. When we receive guaranty payments under our hotel operating agreements, generally the hotel operator is allowed to recapture payments it makes to us out of some or all of the hotels' future cash flows after our minimum returns are paid.

In November 2010, Host notified us that it will not exercise its renewal option at the end of the current lease term for 53 hotels which we have historically referred to as our Marriott No. 1 agreement. In the absence of any default by Host, upon expiration of the agreement on December 31, 2012, we expect to return the $50,540 security deposit to Host, to lease these hotels to one of our TRSs and to continue the existing hotel brand and management agreements with Marriott with respect to these hotels; this management agreement with Marriott expires in 2024.

Management Agreements and Leases

At September 30, 2012, we owned or leased 287 hotels operated under nine operating agreements; 231 of these hotels are leased by us to our wholly owned TRSs and managed by hotel operating companies, one hotel is leased by one of our TRSs from a third party and managed by a hotel operating company and 55 are leased to third parties. At September 30, 2012, we also owned 185 travel centers that are leased to TA under two agreements. Our Condensed Consolidated Statements of Income and Comprehensive Income include operating revenues and expenses of our managed hotels and rental income from leased hotels and travel centers. Additional information regarding the terms of our management agreements and leases is included in the table on pages 35 and 36 below.


HOSPITALITY PROPERTIES TRUST

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations (dollar amounts in thousands, except per share amounts)



Three Months Ended September 30, 2012 versus 2011



                                            For the Three Months Ended September 30,
                                                                    Increase      % Increase
                                       2012           2011         (Decrease)     (Decrease)
Revenues:
Hotel operating revenues            $   251,722    $   242,995    $      8,727          3.6%
Rental income:
Minimum rents - hotels                   22,198         21,708             490          2.3%
Minimum rents - travel centers           51,717         50,597           1,120          2.2%
Total rental income                      73,915         72,305           1,610          2.2%
FF&E reserve income                       4,431          3,389           1,042         30.7%

Expenses:
Hotel operating expenses                184,566        168,278          16,288          9.7%
Depreciation and amortization -
hotels                                   44,682         36,421           8,261         22.7%
Depreciation and amortization -
travel centers                           21,884         20,685           1,199          5.8%
Total depreciation and
amortization                             66,566         57,106           9,460         16.6%
General and administrative               10,336         11,292            (956 )      (8.5)%
Acquisition related costs                    84            387            (303 )     (78.3)%

Operating income                         68,516         81,626         (13,110 )     (16.1)%

Interest income                             116             11             105        954.5%
Interest expense                        (34,854 )      (33,513 )         1,341          4.0%
Gain on sale of real estate              10,602              -          10,602             -
Equity in earnings of an
investee                                    115             28              87        310.7%
Income before income taxes               44,495         48,152          (3,657 )      (7.6)%
Income tax benefit (expense)                163           (621 )          (784 )    (126.2)%

Net income                               44,658         47,531          (2,873 )      (6.0)%
Excess of liquidation preference
over carrying value of preferred
shares redeemed                          (5,040 )            -          (5,040 )           -
Preferred distributions                 (10,138 )       (7,470 )        (2,668 )       35.7%
Net income available for common
shareholders                             29,480         40,061         (10,581 )     (26.4)%
Weighted average shares
outstanding                             123,577        123,465             112          0.1%
Net income available for common
shareholders per common share       $      0.24    $      0.32    $      (0.08 )     (25.0)%

References to changes in the income and expense categories below relate to the comparison of consolidated results for the three month period ended September 30, 2012 compared with the three month period ended September 30, 2011.

The increase in hotel operating revenues in the third quarter of 2012 compared to the third quarter of 2011 was caused primarily by increased revenue at certain of our managed hotels due to increases in ADR and higher occupancies and our acquisition of the entities that own or lease the Cambridge Hotel and the New Orleans Hotel in January 2012. These increases were partially offset by decreases in revenues at certain of our managed hotels undergoing renovations or rebrandings during the 2012 period which resulted in lower occupancies and the sale of three hotels during the third quarter of 2012. Additional operating statistics of our hotels are included in the table on page 39.


HOSPITALITY PROPERTIES TRUST

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The increase in rental income - hotels is a result of increases in the minimum rents due to us as we funded improvements at certain of our leased hotels since July 1, 2011.

The increase in rental income - travel centers is primarily a result of increases in the minimum rents due to us from TA for improvements we purchased at certain of our travel centers since July 1, 2011. Rental income for the 2012 and 2011 periods includes ($69) and $1,195 of straight line rent, respectively.

FF&E reserve income represents amounts paid by certain of our hotel tenants into restricted accounts owned by us, the purpose of which is to accumulate funds for future capital expenditures. The terms of our hotel leases require these amounts to be calculated as a percentage of total sales at our hotels. The increase in FF&E reserve income is primarily the result of increased levels of sales at our leased hotels during the respective periods of 2012 versus 2011. We do not report the amounts, if any, which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income.

The increase in hotel operating expenses was primarily caused by our hotel acquisitions and increased expenses associated with higher occupancy at certain of our managed hotels, partially offset by operating expense decreases at certain hotels undergoing renovations. Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $20,300 and $6,653, less than the minimum returns due to us in the three months ended September 30, 2012 and 2011, respectively. When the shortfalls are funded by the managers of these hotels under the terms of our operating agreements, we reflect such fundings (including security deposit applications) in our Condensed Consolidated Statements of Income and Comprehensive Income as a reduction of hotel operating expenses. The reduction to operating expenses was $12,791 and $6,653 in the three months ended September 30, 2012 and 2011, respectively. We had $9,840 of shortfalls not funded by managers during the three months ended September 30, 2012 which represents the unguaranteed portion of our minimum returns from Marriott and from Sonesta.

The increase in depreciation and amortization - hotels is primarily due to the depreciation and amortization of assets acquired with funds from our FF&E reserves or directly funded by us since July 1, 2011 and our hotel acquisitions, partially offset by certain of our depreciable assets becoming fully depreciated since July 1, 2011.

The increase in depreciation and amortization - travel centers is primarily due to the depreciation and amortization of improvements made to our travel centers since July 1, 2011.

The decrease in general and administrative costs is primarily due to a decrease in incentive business management fees partially offset by increased equity compensation expense in the respective periods of 2012 versus 2011.

Acquisition related costs represent legal and other costs incurred in connection with our 2012 hotel acquisition activities.

The decrease in operating income is primarily due to the revenue and expense changes discussed above.

The increase in interest income is due to higher average cash balances during the respective periods of 2012 versus 2011.

The increase in interest expense is primarily due to higher average borrowings, partially offset by lower weighted average interest rates in the 2012 period, compared to the 2011 period.

We recorded a $10,602 gain on sale of real estate in the third quarter of 2012 in connection with the sale of our Marriott hotel in St. Louis, MO in July 2012 and the sales of our Staybridge Suites hotels in Auburn Hills, MI and Schaumburg, IL in August 2012.

Equity in earnings of an investee represents our proportionate share of earnings of AIC.


HOSPITALITY PROPERTIES TRUST

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The decrease in income tax expense is primarily the result of an adjustment to reduce accrued state income taxes during the 2012 period due to a decrease in our estimated 2012 state tax liability partially offset by federal taxes related to our TRS that leases the New Orleans Hotel acquired on January 31, 2012.

We reduced net income available for common shareholders for the three months ended September 30, 2012, by $5,040, which represents the amount by which the liquidation preference for our Series C cumulative redeemable preferred shares that were redeemed in September 2012 exceeded our carrying amount for those preferred shares as of the date of redemption.

The increase in preferred distributions is the result of our issuance of 11,600,000 shares of our 7.125% Series D cumulative redeemable preferred shares in January 2012, partially offset by our redemption of 3,450,000 shares of our 8.875% Series B cumulative redeemable preferred shares in February 2012 and our redemption of 6,000,000 shares of our 7.00% Series C cumulative redeemable preferred shares in September 2012.

The decreases in net income, net income available for common shareholders and net income available for common shareholders per common share in the three months ended September 30, 2012, compared to the prior year period, are primarily a result of the changes discussed above.


HOSPITALITY PROPERTIES TRUST

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations (dollar amounts in thousands, except per share amounts)



Nine Months Ended September 30, 2012 versus 2011



                                            For the Nine Months Ended September 30,
                                                                   Increase      % Increase
                                       2012           2011        (Decrease)     (Decrease)

Revenues:
Hotel operating revenues            $   741,775    $  670,867    $     70,908         10.6%
Rental income:
Minimum rents - hotels                   66,237        79,395         (13,158 )     (16.6)%
Minimum rents - travel centers          154,626       150,683           3,943          2.6%
Total rental income                     220,863       230,078          (9,215 )      (4.0)%
FF&E reserve income                      12,033        13,537          (1,504 )     (11.1)%

Expenses:
Hotel operating expenses                527,806       450,845          76,961         17.1%
Depreciation and amortization -
hotels                                  127,244       110,222          17,022         15.4%
Depreciation and amortization -
travel centers                           64,962        60,828           4,134          6.8%
Total depreciation and
amortization                            192,206       171,050          21,156         12.4%
General and administrative               32,333        30,746           1,587          5.2%
Acquisition related costs                 1,648         1,150             498         43.3%
Loss on asset impairment                    889         7,263          (6,374 )     (87.8)%

Operating income                        219,789       253,428         (33,639 )     (13.3)%

Interest income                             233            54             179        331.5%
Interest expense                       (101,660 )    (100,183 )         1,477          1.5%
Gain on sale of real estate              10,602             -          10,602             -
Equity in earnings of an
investee                                    236           111             125        112.6%
Income before income taxes              129,200       153,410         (24,210 )     (15.8)%
Income tax expense                       (3,908 )      (1,188 )         2,720        229.0%

Net income                              125,292       152,222         (26,930 )     (17.7)%
Excess of liquidation preference
over carrying value of preferred
shares redeemed                          (7,984 )           -          (7,984 )           -
Preferred distributions                 (32,048 )     (22,410 )        (9,638 )       43.0%
Net income available for common
shareholders                             85,260       129,812         (44,552 )     (34.3)%
Weighted average shares
outstanding                             123,553       123,453             100          0.1%
Net income available for common
shareholders per common share       $      0.69    $     1.05    $      (0.36 )     (34.3)%

References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine month period ended September 30, 2012 compared with the nine month period ended September 30, 2011.

The increase in hotel operating revenues in the first nine months of 2012 compared to the first nine months of 2011 was caused primarily by increased revenues at certain of our managed hotels due to increases in ADR and higher occupancies, the conversion of 19 hotels from leased to managed properties in June 2011 and our hotel acquisitions as described above. These increases were partially offset by decreases in revenues at certain of our managed hotels undergoing renovations or rebrandings during the 2012 period which resulted in lower occupancies. Additional operating statistics of our hotels are included in the table on page 39.


HOSPITALITY PROPERTIES TRUST

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The decrease in rental income - hotels is a result of the conversion of the 19 hotels from leased to managed in June 2011 as described above, partially offset by increases in the minimum rents due to us as we funded improvements at certain of our leased hotels since January 1, 2011.

The increase in rental income - travel centers is primarily a result of increases in the minimum rents due to us from TA for improvements we purchased at certain of our travel centers since January 1, 2011. Rental income for the 2012 and 2011 periods includes $218 and $3,594 of straight line rent, respectively.

The decrease in FF&E reserve income is primarily the result of the conversion of the 19 hotels from leased to managed in June 2011 as described above, partially offset by increased levels of sales at our leased hotels in the respective periods of 2012 versus 2011.

The increase in hotel operating expenses was primarily caused by the conversion of the 19 hotels from leased to managed in June 2011 as described above, our hotel acquisitions and increased expenses associated with higher occupancy at certain of our managed hotels, partially offset by operating expense decreases at certain hotels undergoing renovations. Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $46,697 and $37,875 less than the minimum returns due to us in the nine months ended September 30, 2012 and 2011, respectively. When the shortfalls are funded by the managers of these hotels under the terms of our operating agreements, we reflect such fundings (including security deposit applications) in our Condensed Consolidated Statements of Income and Comprehensive Income as a reduction to hotel operating expenses. The reduction to operating expenses was $30,483 and $37,875 in the nine months ended September 30, 2012 and 2011, respectively. We had $16,210 of shortfalls not funded by managers during the nine months ended September 30, 2012 which represents the unguaranteed portion of our minimum returns from Marriott and from Sonesta.

The increase in depreciation and amortization - hotels is primarily due to the depreciation and amortization of assets acquired with funds from our FF&E reserves or directly funded by us since January 1, 2011 and our hotel acquisitions, partially offset by certain of our depreciable assets becoming fully depreciated since January 1, 2011.

The increase in depreciation and amortization - travel centers is primarily due to the depreciation and amortization of improvements made to our travel centers since January 1, 2011.

The increase in general and administrative costs is primarily due to increased business management fees, franchise taxes and professional services expense in the respective periods of 2012 versus 2011.

Acquisition related costs represent legal and other costs incurred in connection with our hotel acquisition activities in 2012.

We recorded an $889 loss on asset impairment in the first quarter of 2012 in connection with our decision to remove 20 Marriott branded hotels from held for sale status. We recorded a $7,263 loss on asset impairment in the second quarter of 2011 in connection with our consideration of selling certain InterContinental and Marriott hotels.

The decrease in operating income is primarily due to the revenue and expense changes discussed above.

The increase in interest income is due to higher average cash balances during the respective periods of 2012 versus 2011.

The increase in interest expense is primarily due to higher average borrowings partially offset by lower weighted average interest rates in the 2012 period, compared to the 2011 period.

We recorded a $10,602 gain on sale of real estate in the third quarter of 2012 in connection with the sale of our Marriott hotel in St. Louis, MO in July 2012 and the sale of our Staybridge Suites hotels in Auburn Hills, MI and Schaumburg, IL in August 2012.


HOSPITALITY PROPERTIES TRUST

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Equity in earnings of an investee represents our proportionate share of earnings of AIC.

The increase in income tax expense is primarily the result of an increase in state income taxes as a result of higher taxable income in certain states in the 2012 period compared to the 2011 period and federal taxes related to our TRS that leases the New Orleans Hotel acquired on January 31, 2012.

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