Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
HPT > SEC Filings for HPT > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for HOSPITALITY PROPERTIES TRUST

Form 10-K for HOSPITALITY PROPERTIES TRUST


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K.

Overview (dollar amounts in thousands)

Hotel operations. In 2013, the U.S. hotel industry generally realized improvements in ADR, occupancy and RevPAR when compared to 2012. We believe the average daily rate, or ADR, occupancy and revenue per available room, or RevPAR, at certain of our hotels in 2013 have been negatively impacted by the disruption and displacement caused by our renovation activities. We expect our hotel renovation activities to continue through the first half of 2014.

For the year ended December 31, 2013 compared to the year ended December 31, 2012 for our 285 comparable hotels: ADR increased 2.9% to $102.40; occupancy increased 3.2 percentage points to 71.9%; and RevPAR increased 7.7% to $73.63.

During the year ended December 31, 2013, we had 66 comparable hotels under renovation for all or part of the year. For the year ended December 31, 2013 compared to the year ended December 31, 2012 for our 219 comparable hotels not under renovation: ADR increased 2.3% to $103.08; occupancy increased 5.0 percentage points to 74.1%; and RevPAR increased 9.7% to $76.38.

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 us uninterrupted receipt of minimum returns and rents is not assured, particularly if the profitability of our hotels takes an extended period to recover from the severe declines experienced during the recent recession, if economic conditions generally decline, or if our hotel renovation activities described above do not result in improved operating results at our hotels. Also, certain of the guarantees that we hold are limited in amount and duration and do not provide for payment of the entire amount of the applicable minimum returns. 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. 1 agreement. Our lease with a subsidiary of Host Hotels & Resorts, Inc., or Host, for 53 hotels, which we have historically referred to as our Marriott No. 1 agreement, expired on December 31, 2012. As required upon the expiration of the lease, we paid the $50,540 security deposit we held to Host. Effective January 1, 2013, we leased these hotels to one of our TRSs and continued the previously existing hotel brand and management agreements with Marriott. This management agreement expires in 2024. Because we no longer hold a security deposit for this agreement, the minimum returns we receive under this agreement will be limited to available hotel cash flow after payment of operating expenses.

Marriott No. 234 agreement. Additional details of this agreement are set forth in Note 5 to our consolidated financial statements in Item 15 of this Annual Report on Form 10-K, which disclosure is incorporated herein by reference.

During the year ended December 31, 2013, the payments we received under our Marriott No. 234 agreement, which requires annual minimum returns to us of $105,793, were $9,991 less than the minimum amounts contractually required. Pursuant to our Marriott No. 234 agreement, Marriott has provided us with a limited guarantee for shortfalls up to 90% of our minimum returns through 2019, and Marriott was not required to make any guarantee payments during the year ended December 31, 2013, because the hotels generated cash flows in excess of the guaranty threshold amount (90% of the


Table of Contents

minimum returns due to us). The available balance of this guaranty was $30,672 as of December 31, 2013.

InterContinental agreement. Additional details of this agreement are set forth in Note 5 to our consolidated financial statements in Item 15 of this Annual Report on Form 10-K, which disclosure is incorporated herein by reference.

During the year ended December 31, 2013, we were paid the contractual amounts due for the year under our agreement with InterContinental covering 91 hotels and requiring annual minimum returns to us of $139,498. Our available security deposit was replenished by $1,297 from the net operating results these hotels generated in excess of the minimum returns due to us during the year ended December 31, 2013. The available balance of this security deposit was $27,763 as of December 31, 2013.

Other management agreement and lease matters. As of February 25, 2014, all payments due to us from our managers and tenants under our other operating and lease agreements were current. Additional details of our guarantees from Wyndham, Hyatt and Carlson and our agreements with TA, Sonesta and Morgans are set forth in Note 5 to our consolidated financial statements in Item 15 of this Annual Report on Form 10-K, which disclosure is incorporated herein by reference.

Management Agreements and Leases

At December 31, 2013, we owned 291 hotels operated under nine operating agreements; 288 of these hotels are leased by us to our wholly owned TRSs and managed by hotel operating companies and three are leased to hotel operating companies. At December 31, 2013, our 184 owned travel centers and one travel center we lease through August 31, 2014 are leased to TA under two portfolio agreements. Our 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 and notes thereto on pages 80 through 84.


Table of Contents

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

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

                                              For the Year Ended December 31,
                                                                Increase      % Increase
                                      2013          2012       (Decrease)     (Decrease)
Revenues:
Hotel operating revenues           $ 1,310,969   $  980,732    $   330,237           33.7 %
Rental income:
Minimum rents-hotels                    32,816       88,921        (56,105 )        (63.1 )%
Minimum rents-travel centers           216,948      207,095          9,853            4.8 %


                                       249,764      296,016        (46,252 )        (15.6 )%
Percentage rent-hotels                       -        2,873         (2,873 )            -
Percentage rent-travel centers           2,102        1,465            637           43.5 %


                                         2,102        4,338         (2,236 )        (51.5 )%
Total rental income                    251,866      300,354        (48,488 )        (16.1 )%
FF&E reserve income                      1,020       15,896        (14,876 )        (93.6 )%
Expenses:
Hotel operating expenses               929,581      700,939        228,642           32.6 %
Depreciation and
amortization-hotels                    202,172      173,308         28,864           16.7 %
Depreciation and
amortization-travel centers             97,151       87,523          9,628           11.0 %


Total depreciation and
amortization                           299,323      260,831         38,492           14.8 %
General and administrative              50,087       44,032          6,055           13.8 %
Acquisition related costs                3,273        4,173           (900 )        (21.6 )%
Loss on asset impairment                 8,008        8,547           (539 )         (6.3 )%
Operating income                       273,583      278,460         (4,877 )         (1.8 )%
Interest income                            121          268           (147 )        (54.9 )%
Interest expense                      (145,954 )   (136,111 )        9,843            7.2 %
Gain on sale of real estate                  -       10,602        (10,602 )            -


Income before income taxes and
equity in earnings of an
investee                               127,750      153,219        (25,469 )        (16.6 )%
Income tax benefit (expense)             5,094       (1,612 )       (6,706 )       (416.0 )%
Equity in earnings of an
investee                                   334          316             18            5.7 %


Net income                             133,178      151,923        (18,745 )        (12.3 )%
Net income available for common
shareholders                           100,992      103,794         (2,802 )         (2.7 )%
Weighted average shares
outstanding                            137,553      123,574         13,979           11.3 %
Net income available for common
shareholders per common share      $      0.73   $     0.84    $     (0.11 )        (13.1 )%

References to changes in the income and expense categories below relate to the comparison to consolidated results for the year ended December 31, 2013, compared with the year ended December 31, 2012.

The increase in hotel operating revenues is a result of the conversion of 53 hotels from leased to managed on January 1, 2013 ($240,198), increased revenues at certain of our managed hotels due to increases in ADR and higher occupancies ($72,895) and the effects of our hotel acquisitions since January 1, 2012 ($36,266). These increases were partially offset by the effects of our hotel dispositions since January 1, 2012 ($13,290) and decreased revenues at certain of our managed hotels recently


Table of Contents

rebranded or undergoing renovations during the 2013 period due to decreases in ADR and lower occupancies ($5,832). Additional operating statistics of our hotels are included in the table on page 85.

The decrease in minimum rents-hotels is a result of the conversion of 53 hotels from leased to managed on January 1, 2013 ($67,043), partially offset by the effects of our hotel acquisitions since January 1, 2012 ($9,608) and increases in the minimum rents due to us as we funded improvements at certain of our leased hotels since January 1, 2012 ($1,330).

The increase in minimum rents-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, 2012. Rental income for 2013 and 2012 includes a reduction of ($323) in 2013 and an increase of $149 in 2012 to record rent on a straight line basis.

The decrease in percentage rent-hotels is a result of the conversion of 53 hotels from leased to managed on January 1, 2013.

The increase in percentage rent-travel centers is a result of increased revenues at certain of our travel centers in 2013 versus 2012.

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 decrease in FF&E reserve income is primarily the result of the conversion of 53 hotels from leased to managed on January 1, 2013 ($14,001) and an amendment to our Marriott No. 5 agreement that provided unspent renovations previously advanced by HPT would be used to partially offset 2013 FF&E revenue contributions required under the agreement ($1,339), partially offset by increased levels of sales at certain of our leased hotels ($464). 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 the conversion of 53 hotels from leased to managed on January 1, 2013 ($158,788), increased expenses associated primarily with higher occupancies at certain of our managed hotels ($40,033) and the effect of our acquisitions since January 1, 2012 ($39,561) and the reduction in the amount of minimum return shortfalls funded by our managers ($27,076), partially offset by operating expense decreases at certain properties recently rebranded or undergoing renovations during the 2013 period due to lower occupancies ($23,443) and the effect of our hotel dispositions since January 1, 2012 ($13,373). Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $65,623 and $76,978, less than the minimum returns due to us in 2013 and 2012, respectively. When the managers of these hotels fund the shortfalls under the terms of our operating agreements or their guarantees, we reflect such fundings (including security deposit applications) in our Consolidated Statements of Income and Comprehensive Income as a reduction of hotel operating expenses. The reductions to operating expenses were $19,311 and $46,386 in 2013 and 2012, respectively. We had shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our operating agreements of $46,312 and $30,592 during 2013 and 2012, respectively, which represent the unguaranteed portion of our minimum returns from Marriott and 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, 2012 ($28,211) and the effect of our hotel acquisitions since January 1, 2012 ($10,523), partially offset by certain of our depreciable assets becoming fully depreciated since January 1, 2012 ($9,712) and our dispositions since January 1, 2012 ($158).

The increase in depreciation and amortization-travel centers is due to the depreciation and amortization of improvements made to our travel centers since January 1, 2012.


Table of Contents

The increase in general and administrative costs is primarily due to an increase in business management fees ($3,048), an increase in incentive business management fees due to the increase in our cash available for distribution, as determined under our business management agreement with RMR ($2,656), and an increase in stock compensation expense ($512), partially offset by lower professional services expenses ($161).

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

We recorded an aggregate $8,008 loss on asset impairment in 2013 in connection with an eminent domain taking of our travel center in Roanoke, VA by the VDOT of $5,837 and in connection with our plan to sell one hotel of $2,171. See Notes 4, 8 and 12 to our consolidated financial statements in Item 15 of this Annual Report on Form 10-K for further information relating to these properties. We recorded an aggregate $8,547 loss on asset impairment in 2012 to write off the carrying value of goodwill of $7,658 and in connection with our decision to remove certain of our hotels from held for sale status of $889.

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

The decrease in interest income is due to lower average cash balances during 2013 compared to 2012.

The increase in interest expense is primarily due to higher average borrowings in 2013 compared to 2012, partially offset by a lower weighted average interest rate in 2013.

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

We recorded a $6,868 deferred tax benefit in the 2013 period in connection with the restructuring of certain of our TRSs, the effect of which was partially offset by our recognizing higher income tax expense for 2013 primarily as a result of higher foreign income taxes during the 2013 period.

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

Our net income available for common shareholders was reduced in 2013 by $5,627, which represented the amount by which the liquidation preference for our Series C cumulative redeemable preferred shares that we redeemed in July 2013 exceeded our carrying amount for those preferred shares as of the date of redemption. Our net income available for common shareholders in 2012 was reduced by an aggregate of $7,984, which represented the amount by which the liquidation preference for our Series B cumulative redeemable preferred shares that we redeemed in February 2012 and for our Series C cumulative redeemable preferred shares that were redeemed in September 2012 exceeded our carrying amounts for those preferred shares as of the respective dates of redemption.

The decrease in preferred distributions is the result of our redemption of our Series B cumulative redeemable preferred shares and Series C cumulative redeemable preferred shares described above, partially offset by the issuance of 11,600,000 shares of our 7.125% Series D cumulative redeemable preferred shares in January 2012.

The decreases in net income and net income available for common shareholders in 2013 compared to 2012 are primarily a result of the changes discussed above. On a per share basis, the percentage decrease in net income available for common shareholders is higher due to our issuance of common shares pursuant to public offerings in March 2013 and November 2013.


Table of Contents

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

                                                For the Year Ended December 31,
                                                                 Increase      % Increase
                                        2012         2011       (Decrease)     (Decrease)
Revenues:
Hotel operating revenues             $  980,732   $  889,120    $    91,612          10.3%
Rental income:
Minimum rents-hotels                     88,921      101,198        (12,277 )      (12.1)%
Minimum rents-travel centers            207,095      201,505          5,590           2.8%


                                        296,016      302,703         (6,687 )       (2.2)%
Percentage rent-hotels                    2,873        1,879            994          52.9%
Percentage rent-travel centers            1,465            -          1,465              -


                                          4,338        1,879          2,459         130.9%
Total rental income                     300,354      304,582         (4,228 )       (1.4)%
FF&E reserve income                      15,896       16,631           (735 )       (4.4)%
Expenses:
Hotel operating expenses                700,939      596,616        104,323          17.5%
Depreciation and
amortization-hotels                     173,308      146,567         26,741          18.2%
Depreciation and
amortization-travel centers              87,523       81,775          5,748           7.0%


Total depreciation and
amortization                            260,831      228,342         32,489          14.2%
General and administrative               44,032       40,963          3,069           7.5%
Acquisition related costs                 4,173        2,185          1,988          91.0%
Loss on asset impairment                  8,547       16,384         (7,837 )      (47.8)%
Operating income                        278,460      325,843        (47,383 )      (14.5)%
Interest income                             268           70            198         282.9%
Interest expense                       (136,111 )   (134,110 )        2,001           1.5%
Gain on sale of real estate              10,602            -         10,602              -


Income before income taxes and
equity in income of an investee         153,219      191,803        (38,584 )      (20.1)%
Income tax expense                       (1,612 )     (1,502 )          110           7.3%
Equity in income of an investee             316          139            177         127.3%


Net income                              151,923      190,440        (38,517 )      (20.2)%
Net income available for common
shareholders                            103,794      160,560        (56,766 )      (35.4)%
Weighted average shares
outstanding                             123,574      123,470            104           0.1%
Net income available for common
shareholders per common share        $     0.84   $     1.30    $     (0.46 )      (35.4)%

References to changes in the income and expense categories below relate to the comparison to consolidated results for the year ended December 31, 2012, compared with the year ended December 31, 2011.

The increase in hotel operating revenues in 2012 compared to 2011 was caused primarily by the effects of our hotel acquisitions since January 1, 2011 ($75,937), the conversion of 19 hotels from leased to managed properties on June 14, 2011 ($38,301) and increased revenues at certain of our managed hotels due to increases in ADR and higher occupancies ($5,303). These increases were partially offset by decreases in revenues at certain of our managed hotels undergoing renovations or rebrandings during 2012 which resulted in lower occupancies ($14,861) and the effects of our hotel


Table of Contents

dispositions since January 1, 2011 ($13,068). Additional revenue statistics of our hotels are included in the table on page 85.

The decrease in minimum rents-hotels is a result of the conversion of the 19 hotels from leased to managed on June 14, 2011 ($14,469), 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 ($1,817) and the effects of our hotel acquisitions since January 1, 2011 ($375).

The increase in minimum rents-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 2012 and 2011 includes $149 and $4,789 of straight line rent, respectively.

The increase in percentage rent-hotels is a result of increased sales at certain of our leased hotels in 2012 versus 2011.

The increase in percentage rent-travel centers is a result of the payment of percentage rent to us under one of our leases with TA, which first became payable in 2012.

The decrease in FF&E reserve income is primarily the result of the conversion of the 19 hotels from leased to managed on June 14, 2011 ($1,778), partially offset by increased levels of sales at our leased hotels in 2012 versus 2011 ($1,043).

The increase in hotel operating expenses was primarily caused by the effects of our acquisitions since January 1, 2011 ($70,586), the conversion of the 19 hotels from leased to managed on June 14, 2011 ($38,301), and increased expenses associated with higher occupancy at certain of our managed hotels ($12,547) and the reduction in the amount of minimum return shortfalls funded by our managers ($12,386), partially offset by operating expense decreases at certain hotels undergoing renovations or rebrandings during 2012 due to lower occupancies ($16,429) and the effect of our hotel dispositions since January 1, 2011 ($13,068). Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $76,978 and $60,265 less than the minimum returns due to us in 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 Consolidated Statements of Income and Comprehensive Income as a reduction to hotel operating expenses. The reduction to hotel operating expenses was $46,386 and $58,772 for 2012 and 2011, respectively. We had $30,592 and $1,493 of shortfalls not funded by managers for 2012 and 2011, respectively, which represent 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 ($26,665) and the effect of our hotel acquisitions since January 1, 2011 ($11,371), partially offset by certain of our depreciable assets becoming fully depreciated since January 1, 2011 ($10,183) and the effect of our hotel dispositions since January 1, 2011 ($1,112).

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 ($1,913), franchise taxes ($718), professional services expense ($601) and stock compensation expense ($483) in 2012, partially offset by lower incentive management fees ($646) versus 2011.

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


Table of Contents

We recorded a $7,658 loss on asset impairment in 2012 to write off the carrying value of goodwill. We also recorded an $889 loss on asset impairment in 2012 in connection with our decision to remove certain hotels from held for sale status. We recorded a $16,384 loss on asset impairment in 2011 in connection with our consideration of selling certain 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 2012 compared to 2011.

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

We recorded a $10,602 gain on sale of real estate in 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.

The increase in income tax expense is primarily the result of federal income taxes related to our TRS and the leasehold interest in the Royal Sonesta Hotel New Orleans in New Orleans, LA, or the New Orleans Hotel, that we acquired in January 2012 ($1,500), partially offset by higher deferred taxes recognized ($1,111) and lower foreign income taxes recognized in 2012 compared to 2011 ($279).

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

We reduced net income available for common shareholders in 2012 by an aggregate of $7,984, which represents the amount by which the liquidation preference for our Series B cumulative redeemable preferred shares that were redeemed in February 2012 and 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 in 2012 compared to 2011 is the result of our issuance of 11,600,000 of our 7.125% Series D cumulative redeemable preferred shares in January 2012, partially offset by our redemption . . .

  Add HPT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for HPT - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.