10-Q 1 hpt_093016x10qxdocument.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016
 
OR
 
☐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)
 
Maryland
 
04-3262075
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer Identification No.)
 

Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts
 
02458
(Address of Principal Executive Offices)
 
(Zip Code)
 
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 ☒  No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐
 
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 ☒
 
Accelerated filer ☐
 
 
 
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
 
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒
 
Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of November 9, 2016:   164,269,211
 
 
 
 
 



HOSPITALITY PROPERTIES TRUST
 
FORM 10-Q
 
September 30, 2016
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
References in this Quarterly Report on 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.


2


Part I Financial Information
 
Item 1.  Financial Statements
 
HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except share data) 
 
 
September 30,
 
December 31,
 
 
2016
 
2015
ASSETS
 
 
 
 
 
 
 
 
 
Real estate properties:
 
 
 
 
Land
 
$
1,550,174

 
$
1,529,004

Buildings, improvements and equipment
 
7,047,370

 
6,732,768

Total real estate properties, gross
 
8,597,544

 
8,261,772

Accumulated depreciation
 
(2,436,327
)
 
(2,217,135
)
Total real estate properties, net
 
6,161,217

 
6,044,637

Cash and cash equivalents
 
9,534

 
13,682

Restricted cash (FF&E reserve escrow)
 
60,606

 
51,211

Due from related persons
 
62,949

 
50,987

Other assets, net
 
291,826

 
234,280

Total assets
 
$
6,586,132

 
$
6,394,797

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Unsecured revolving credit facility
 
$
150,000

 
$
465,000

Unsecured term loan, net
 
398,254

 
397,756

Senior unsecured notes, net
 
2,564,476

 
2,403,439

Convertible senior unsecured notes
 
8,478

 
8,478

Security deposits
 
88,524

 
53,579

Accounts payable and other liabilities
 
155,433

 
179,783

Due to related persons
 
64,303

 
69,514

Dividends payable
 
5,166

 
5,166

Total liabilities
 
3,434,634

 
3,582,715

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Preferred shares of beneficial interest, no par value; 100,000,000 shares authorized:
 
 
 
 
Series D preferred shares; 7 1/8% cumulative redeemable; 11,600,000 shares issued and outstanding, aggregate liquidation preference of $290,000
 
280,107

 
280,107

Common shares of beneficial interest, $.01 par value; 200,000,000 shares authorized; 164,269,211 and 151,547,288 shares issued and outstanding, respectively
 
1,643

 
1,515

Additional paid in capital
 
4,539,704

 
4,165,911

Cumulative net income
 
3,041,581

 
2,881,657

Cumulative other comprehensive income (loss)
 
35,904

 
(15,523
)
Cumulative preferred distributions
 
(336,811
)
 
(321,313
)
Cumulative common distributions
 
(4,410,630
)
 
(4,180,272
)
Total shareholders’ equity
 
3,151,498

 
2,812,082

Total liabilities and shareholders’ equity
 
$
6,586,132

 
$
6,394,797

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

3


HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands, except share data)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
Hotel operating revenues
 
$
464,173

 
$
437,171

 
$
1,332,586

 
$
1,243,744

Rental income
 
78,278

 
73,747

 
231,830

 
207,561

FF&E reserve income
 
1,065

 
968

 
3,517

 
3,159

Total revenues
 
543,516

 
511,886

 
1,567,933

 
1,454,464

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Hotel operating expenses
 
322,012

 
308,603

 
923,239

 
870,689

Depreciation and amortization
 
90,139

 
84,261

 
266,192

 
243,812

General and administrative
 
37,739

 
19,831

 
91,127

 
53,820

Acquisition related costs
 
156

 
851

 
885

 
1,986

Total expenses
 
450,046

 
413,546

 
1,281,443

 
1,170,307

 
 
 
 
 
 
 
 
 
Operating income 
 
93,470

 
98,340

 
286,490

 
284,157

 
 
 
 
 
 
 
 
 
Dividend income
 
626

 

 
1,375

 

Interest income
 
89

 
11

 
227

 
32

Interest expense (including amortization of debt issuance costs and debt discounts of $2,122, $1,458, $6,114 and $4,374, respectively)
 
(41,280
)
 
(36,628
)
 
(124,564
)
 
(107,918
)
Loss on early extinguishment of debt
 
(158
)
 

 
(228
)
 

Income before income taxes, equity in earnings (losses) of an investee and gain on sale of real estate
 
52,747

 
61,723

 
163,300

 
176,271

Income tax expense
 
(948
)
 
(514
)
 
(3,483
)
 
(1,445
)
Equity in earnings (losses) of an investee
 
13

 
(24
)
 
107

 
71

Income before gain on sale of real estate
 
51,812

 
61,185

 
159,924

 
174,897

Gain on sale of real estate
 

 

 

 
11,015

Net income
 
51,812

 
61,185

 
159,924

 
185,912

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities
 
14,032

 
(15,458
)
 
51,253

 
(7,832
)
Equity interest in investee’s unrealized gains (losses)
 
80

 
(72
)
 
175

 
(91
)
Other comprehensive income (loss)
 
14,112

 
(15,530
)
 
51,428

 
(7,923
)
 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
65,924

 
$
45,655

 
$
211,352

 
$
177,989

 
 
 
 
 
 
 
 
 
Net income
 
$
51,812

 
$
61,185

 
$
159,924

 
$
185,912

Preferred distributions
 
(5,166
)
 
(5,166
)
 
(15,498
)
 
(15,498
)
Net income available for common shareholders
 
$
46,646

 
$
56,019

 
$
144,426

 
$
170,414

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding (basic)
 
157,217

 
151,359

 
153,357

 
150,476

Weighted average common shares outstanding (diluted)
 
157,263

 
151,386

 
153,390

 
150,863

 
 
 
 
 
 
 
 
 
Net income available for common shareholders per common share:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
0.30

 
$
0.37

 
$
0.94

 
$
1.13

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


4


HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 

Net income
 
$
159,924

 
$
185,912

Adjustments to reconcile net income to cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
266,192

 
243,812

Amortization of debt issuance costs and debt discounts as interest
 
6,114

 
4,374

Straight line rental income
 
(10,377
)
 
(5,807
)
Security deposits received or replenished
 
34,945

 
20,098

FF&E reserve income and deposits
 
(57,890
)
 
(51,840
)
Loss on early extinguishment of debt
 
228

 

Equity in earnings of an investee
 
(107
)
 
(71
)
Gain on sale of real estate
 

 
(11,015
)
Other non-cash (income) expense, net
 
(2,298
)
 
650

Changes in assets and liabilities:
 
 
 
 
Due from related persons
 
(1,909
)
 
(1,629
)
Other assets
 
(8,284
)
 
(7,479
)
Accounts payable and other liabilities
 
(20,823
)
 
(19,838
)
Due to related persons
 
(5,637
)
 
17,739

Net cash provided by operating activities
 
360,078

 
374,906

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Real estate acquisitions and deposits
 
(206,745
)
 
(380,926
)
Real estate improvements
 
(122,239
)
 
(172,627
)
FF&E reserve escrow fundings
 
(2,265
)
 
(6,505
)
Investment in The RMR Group Inc.
 

 
(15,196
)
Net cash used in investing activities
 
(331,249
)
 
(575,254
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 
Proceeds from issuance of common shares, net
 
371,956

 

Proceeds from issuance of senior unsecured notes, net of discounts
 
737,612

 

Repayment of senior unsecured notes
 
(575,000
)
 

Borrowings under unsecured revolving credit facility
 
643,000

 
611,000

Repayments of unsecured revolving credit facility
 
(958,000
)
 
(175,000
)
Payment of debt issuance costs
 
(6,106
)
 
(5
)
Repurchase of common shares
 
(583
)
 
(419
)
Distributions to preferred shareholders
 
(15,498
)
 
(15,497
)
Distributions to common shareholders
 
(230,358
)
 
(224,190
)
Net cash (used in) provided by financing activities
 
(32,977
)
 
195,889

Decrease in cash and cash equivalents 
 
(4,148
)
 
(4,459
)
Cash and cash equivalents at beginning of period
 
13,682

 
11,834

Cash and cash equivalents at end of period
 
$
9,534

 
$
7,375

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 
Cash paid for interest
 
$
137,007

 
$
119,885

Cash paid for income taxes
 
2,464

 
2,289

Non-cash investing activities:
 
 

 
 

Hotel managers’ deposits in FF&E reserve
 
$
55,518

 
$
49,774

Hotel managers’ purchases with FF&E reserve
 
(48,388
)
 
(45,965
)
Investment in The RMR Group Inc. paid in common shares
 

 
43,285

Real estate acquisitions
 

 
(45,042
)
Sales of real estate
 

 
45,042

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

5

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)


Note 1.  Basis of Presentation
The accompanying condensed consolidated financial statements of Hospitality Properties Trust and its subsidiaries, or HPT, we, our or us, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, 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 condensed consolidated 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, 2015, or our 2015 Annual Report. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included in these condensed consolidated financial statements. These condensed consolidated financial statements include the accounts of HPT and our subsidiaries, all of which are 100% owned directly or indirectly by HPT. All intercompany transactions and balances with or among our consolidated 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 years’ condensed consolidated financial statements to conform to the current year’s presentation.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates.  Significant estimates in our condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets, impairment of real estate and the valuation of intangible assets.
We have determined that each of our taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification™.   We have concluded that we must consolidate each of our TRSs because we are the entity with the power to direct the activities that most significantly impact the VIEs’ economic performance and we have the obligation to absorb losses or the right to receive benefits from each VIE that could be significant to the VIE, and are, therefore, the primary beneficiary of each VIE.  The assets of our TRSs were $35,150 and $26,559 as of September 30, 2016 and December 31, 2015, respectively, and consist primarily of amounts due from, and working capital advances to, certain of their hotel managers.  The liabilities of our TRSs were $100,848 and $68,921 as of September 30, 2016 and December 31, 2015, respectively, and consist primarily of security deposits they hold from and amounts payable to certain of their hotel managers.  The assets of our TRSs are available to satisfy our TRSs’ obligations and we have guaranteed certain obligations of our TRSs.
 
Note 2.  New Accounting Pronouncements
On January 1, 2016, we adopted the FASB Accounting Standards Update, or ASU, No. 2015-02, Consolidation. Among other things, this update changed how an entity determines the primary beneficiary of a VIE. The implementation of this update did not have an impact in our condensed consolidated financial statements.
On January 1, 2016, we adopted FASB ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheets as a direct deduction from the associated debt liability, and ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements. The implementation of these updates resulted in the reclassification of certain of our capitalized debt issuance costs as an offset to the associated debt liability in our condensed consolidated balance sheets. The classification of capitalized debt issuance costs related to our unsecured revolving credit facility remains unchanged in accordance with ASU No. 2015-15. As of December 31, 2015, debt issuance costs related to our unsecured term loan and senior unsecured notes of $2,244 and $10,556, respectively, were reclassified from assets to an offset to the associated debt liability in our condensed consolidated balance sheets.
On January 1, 2016, we adopted FASB ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, acquirers must recognize measurement period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The implementation of this update did not have an impact in our condensed consolidated financial statements.

6

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. Under this ASU, these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect how changes in the fair value of available for sale equity investments we hold are presented in our condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU No. 2016-09 is effective for reporting periods beginning after December 15, 2016.  We are currently assessing the potential impact that the adoption of ASU No. 2016-09 will have in our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-15 will have in our condensed consolidated financial statements.
 
Note 3.  Revenue Recognition
We report hotel operating revenues for managed hotels in our condensed consolidated statements of comprehensive income. We generally recognize hotel operating revenues, consisting primarily of room and food and beverage sales, when goods and services are provided.
We report rental income for leased hotels and travel centers in our condensed consolidated statements of comprehensive income. We recognize rental income from operating leases on a straight line basis over the term of the lease agreements except for one lease in which there is uncertainty regarding the collection of scheduled future rent increases.  Rental income includes $2,932 and $10,377 for the three and nine months ended September 30, 2016, respectively, and $3,752 and $5,807 for the three and nine months ended September 30, 2015, respectively, of adjustments necessary to record scheduled rent increases under certain of our leases, the deferred rent obligations payable to us under our leases with TravelCenters of America LLC, or TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks on a straight line basis.  See Note 10 for further information regarding our TA leases.  Due from related persons includes $39,175 and

7

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

$29,122 and other assets, includes $2,165 and $1,841 of straight line rent receivables at September 30, 2016 and December 31, 2015, respectively.
We determine percentage rent due to us under our leases annually and recognize it when all contingencies have been met and the rent is earned. We had deferred estimated percentage rent of $408 and $937 for the three and nine months ended September 30, 2016, respectively.  We had no deferred estimated percentage rent for the three and nine months ended September 30, 2015.  In connection with our June 2015 lease modification with TA, we recorded $2,048 of percentage rent during the nine months ended September 30, 2015 because the amount was no longer contingent. See Note 10 for further information regarding our TA leases.
We own all the FF&E reserve escrows for our hotels. We report deposits by our third party tenants into the escrow accounts 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 4.  Weighted Average Common Shares
The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Weighted average common shares for basic earnings per share
 
157,217

 
151,359

 
153,357

 
150,476

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Contingently issuable common shares
 

 

 

 
360

Unvested share awards
 
46

 
27

 
33

 
27

Weighted average common shares for diluted earnings per share
 
157,263

 
151,386

 
153,390

 
150,863

 
Note 5.  Shareholders’ Equity
Distributions
On each of January 15, 2016, April 15, 2016, July 15, 2016 and October 17, 2016, we paid a $0.4453 per share distribution, or $5,166, to our Series D preferred shareholders.
On February 23, 2016, we paid a regular quarterly distribution to common shareholders of record on January 22, 2016 of $0.50 per share, or $75,774. On May 19, 2016, we paid a regular quarterly distribution to common shareholders of record on April 25, 2016 of $0.51 per share, or $77,289.  On August 17, 2016, we paid a regular quarterly distribution to common shareholders of record on July 22, 2016 of $0.51 per share, or $77,295.  On October 11, 2016, we declared a regular quarterly distribution payable to common shareholders of record on October 21, 2016 of $0.51 per share, or $83,777. We expect to pay this amount on or about November 17, 2016.
Share Issuance and Purchases
On May 25, 2016, we granted 2,500 of our common shares, valued at $25.50 per share, the closing price of our common shares on the New York Stock Exchange on that day, to each of our five Trustees as part of their annual compensation.
On August 19, 2016, we sold 11,000,000 of our common shares at a price of $30.75 per share in a public offering. On August 26, 2016, we sold 1,650,000 of our common shares at a price of $30.75 per share pursuant to an overallotment option granted to the underwriters. Net proceeds from these sales were $371,956 after underwriters' discount and other offering expenses.
On September 15, 2016, pursuant to our 2012 Equity Compensation Plan, we granted an aggregate of 79,100 of our common shares to our officers and to other employees of our manager, The RMR Group LLC, or RMR LLC, valued at $28.57 per share, the closing price of our common shares on The NASDAQ Stock Market LLC, or Nasdaq, on that day.

8

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

On September 26, 2016, we purchased an aggregate of 19,677 of our common shares for $29.64 per common share, the closing price of our common shares on the Nasdaq on that day, from certain of our officers and other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
Cumulative Other Comprehensive Income (Loss)
Cumulative other comprehensive income (loss) represents the unrealized gain (loss) on our available for sale equity investments and our share of the comprehensive income (loss) of Affiliates Insurance Company, or AIC. See Notes 10 and 12 for further information regarding these investments.
 
Note 6.  Indebtedness
Our principal debt obligations at September 30, 2016 were: (1) $150,000 of outstanding borrowings under our $1,000,000 unsecured revolving credit facility; (2) our $400,000 unsecured term loan; (3) an aggregate outstanding principal amount of $2,600,000 of public issuances of unsecured senior notes; and (4) our public issuance of $8,478 outstanding principal amount of convertible senior unsecured notes.
Our $1,000,000 revolving credit facility is available for general business purposes, including acquisitions.  The maturity date of our revolving credit facility is July 15, 2018 and, subject to our payment of an extension fee and meeting other conditions, we have the option to extend the stated maturity date of our revolving credit facility by one year to July 15, 2019. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. We are required to pay interest on borrowings under our revolving credit facility at an annual rate of LIBOR plus a premium, which was 110 basis points as of September 30, 2016. We also pay a facility fee on the total amount of lending commitments, which was 20 basis points per annum at September 30, 2016 under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings.  As of September 30, 2016, the annual interest rate for the amount outstanding under our revolving credit facility was 1.62%. The weighted average annual interest rate for borrowings under our revolving credit facility was 1.60% and 1.55% for the three and nine months ended September 30, 2016, respectively, and 1.30% and 1.28% for the three and nine months ended September 30, 2015, respectively.  As of September 30, 2016 and November 8, 2016, we had $150,000 and $70,000 outstanding under our revolving credit facility, respectively.
Our $400,000 term loan, which matures on April 15, 2019, is prepayable without penalty at any time.  We are required to pay interest on the amounts under our term loan at a rate of LIBOR plus a premium, which was 120 basis points as of September 30, 2016.  The interest rate premium is subject to adjustment based on changes to our credit ratings.  As of September 30, 2016, the annual interest rate for the amount outstanding under our term loan was 1.72%. The weighted average annual interest rate for borrowings under our term loan was 1.69% and 1.65% for the three and nine months ended September 30, 2016, respectively, and 1.39% and 1.38% for the three and nine months ended September 30, 2015, respectively. 
Our credit agreement for our revolving credit facility and term loan also includes a feature under which maximum aggregate borrowings may be increased up to $2,300,000 on a combined basis in certain circumstances.  Our credit agreement for our revolving credit facility and term loan and our notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR LLC ceasing to act as our business manager. Our credit agreement for our revolving credit facility and term loan and our senior notes indentures and their supplements also contain a number of covenants, including covenants that restrict our ability to incur debts or to make distributions under certain circumstances and generally require us to maintain certain financial ratios. We believe we were in compliance with the terms and conditions of our credit agreement for our revolving credit facility and term loan and our senior notes indentures and their supplements at September 30, 2016.
On February 3, 2016, we issued $750,000 aggregate principal amount of senior notes in public offerings, which included $400,000 aggregate principal amount of 4.25% senior notes due 2021 and $350,000 aggregate principal amount 5.25% senior notes due 2026.  Net proceeds from these offerings were $731,506 after original issue discounts and offering expenses.
On March 11, 2016, we redeemed at par all of our outstanding 6.30% senior notes due 2016 for a redemption price equal to the principal amount of $275,000, plus accrued and unpaid interest (an aggregate of $279,139). As a result of the redemption, we recorded a loss on early extinguishment of debt of $70 in the nine months ended September 30, 2016, which represented the unamortized discounts and issuance costs of these notes.

9

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

On September 26, 2016, we redeemed at par all of our outstanding 5.625% senior notes due 2017 for a redemption price equal to the principal amount of $300,000, plus accrued and unpaid interest (an aggregate of $300,516). As a result of the redemption, we recorded a loss on early extinguishment of debt of $158 in the three and nine months ended September 30, 2016, which represented the unamortized discounts and issuance costs of these notes.

Note 7.  Real Estate Properties
At September 30, 2016, we owned 305 hotels and 198 travel centers, which are operated under 14 agreements.
During the nine months ended September 30, 2016, we funded $124,504 for improvements to certain of our properties which, pursuant to the terms of our management and lease agreements with our hotel managers and tenants, resulted in increases in our contractual annual minimum returns and rents of $9,489. See Notes 10 and 11 for further information about our management and lease agreements and our fundings of improvements to certain of our properties.
During the nine months ended September 30, 2016, we acquired three hotels, five travel centers and a land parcel adjacent to a travel center that we own. Our allocation of the purchase price of each of these acquisitions based on the estimated fair value of the acquired assets is presented in the table below.  The allocations of purchase prices are based on preliminary estimates and may change upon completion of third party appraisals.
Acquisition Date
 
Location
 
Purchase Price (1)
 
Land
 
Land Improvements
 
Building and Improvements
 
Furniture, Fixtures and Equipment
2/1/2016
 
Various (2) (3)
 
$
12,000

 
$
1,953

 
$
654

 
$
8,153

 
$
1,240

3/16/2016
 
Portland, OR (2) (4)
 
114,000

 
5,657

 
3

 
100,535

 
7,805

3/31/2016
 
Hillsboro, TX (5)
 
19,683

 
4,834

 
4,196

 
10,653

 

6/22/2016
 
Various (6)
 
23,876

 
3,170

 
9,280

 
11,426

 

6/30/2016
 
Wilmington, IL (7)
 
22,297

 
6,523

 
3,364

 
12,410

 

9/14/2016
 
Holbrook, AZ (8)
 
325

 
325

 

 

 

9/30/2016
 
Caryville, TN (9)
 
16,557

 
2,068

 
6,082

 
8,407

 

 
 
 
 
$
208,738

 
$
24,530

 
$
23,579

 
$
151,584

 
$
9,045

(1)
Excludes acquisition related costs.
(2)
We accounted for these transactions as business combinations.  The pro forma impact of including the results of operations of these acquisitions from the beginning of the year is not material to our condensed consolidated financial statements.
(3)
On February 1, 2016, we acquired two extended stay hotels with 262 suites located in Cleveland and Westlake, OH for an aggregate purchase price of $12,000.  We converted these hotels to the Sonesta ES Suites® brand and entered management agreements for these hotels with Sonesta International Hotels Corporation, or Sonesta.  See Notes 10 and 11 for further information regarding our Sonesta agreements. 
(4)
On March 16, 2016, we acquired the Kimpton Hotel Monaco, a full service lifestyle hotel with 221 rooms located in Portland, OR, for a purchase price of $114,000.  We added this hotel to our agreement with InterContinental Hotels Group, plc, or InterContinental.  See Note 11 for further information regarding our InterContinental agreement.
(5)
On March 31, 2016, we acquired a newly developed travel center located in Hillsboro, TX for $19,683.  We added this TA® branded travel center to our TA No. 4 lease. See Notes 10 and 11 for further information regarding this transaction and our TA leases.  We accounted for this transaction as an asset acquisition. 
(6)
On June 22, 2016, we acquired two travel centers located in Remington and Brazil, IN for an aggregate purchase price of $23,876.  We added these Petro Stopping Centers® branded travel centers to our TA No. 1 and No. 3 leases, respectively. See Notes 10 and 11 for further information regarding these transactions and our TA leases.  We accounted for these transactions as asset acquisitions.

10

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

(7)
On June 30, 2016, we acquired a newly developed travel center located in Wilmington, IL for $22,297.  We added this Petro Stopping Centers® branded travel center to our TA No. 2 lease. See Notes 10 and 11 for further information regarding this transaction and our TA leases.  We accounted for this transaction as an asset acquisition. 
(8)
On September 14, 2016, we acquired land adjacent to a travel center that we own in Holbrook, AZ for $325. We added this property to our TA No. 4 lease. See Notes 10 and 11 for further information regarding this transaction and our TA leases.  We accounted for this transaction as an asset acquisition. We capitalized acquisition related costs of $7 related to this transaction.
(9)
On September 30, 2016, we acquired a newly developed travel center located in Caryville, TN for $16,557. We added this TA® branded travel center to our TA No. 2 lease. See Notes 10 and 11 for further information regarding this transaction and our TA leases.  We accounted for this transaction as an asset acquisition. 

In July 2016, we entered into an agreement to acquire a full service hotel with 236 rooms located in Milpitas, CA for $52,000. We subsequently terminated that agreement and in October 2016 we entered into a new agreement to acquire this hotel for $46,000, excluding acquisition related costs. We currently expect to complete this acquisition during the fourth quarter of 2016. We plan to add this hotel to our management agreement with Sonesta.

In October 2016, we entered into an agreement to acquire a full service hotel with 101 rooms located in Addison, TX for a purchase price of $9,000, excluding acquisition related costs. We currently expect to complete this acquisition in the first quarter of 2017. We plan to add this Radisson branded hotel to our management agreement with Carlson Hotels Worldwide, or Carlson.

In November 2016, we entered into an agreement to acquire a full service hotel with 483 rooms located in Chicago, IL for a purchase price of $86,700, excluding acquisition related costs. We currently expect to complete this acquisition in the first quarter of 2017. We plan to add this Kimpton branded hotel to our management agreement with InterContinental.

See Note 10 for information regarding our commitment to purchase a newly developed travel center from TA.

Our pending acquisitions are subject to conditions; accordingly, we cannot be sure that we will complete these acquisitions or that these acquisitions will not be delayed or the terms of these acquisitions will not change.

Note 8. Income Taxes
We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and, accordingly, 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 qualification for taxation as a REIT.  Also, we lease our managed hotels to our wholly owned TRSs that, unlike most of our other subsidiaries, file separate consolidated federal corporate income tax returns and are subject to federal, state and foreign income taxes.  Our consolidated income tax provision (or benefit) included in our condensed consolidated statements of comprehensive income 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 qualification for taxation as a REIT.
During the three and nine months ended September 30, 2016, we recognized income tax expense of $948 and $3,483, respectively, which includes $415 and $2,018, respectively, of foreign taxes, ($59) and $32, respectively, of federal taxes and $592 and $1,433, respectively, of state taxes.  During the three and nine months ended September 30, 2015, we recognized income tax expense of $514, and $1,445, respectively, which includes $79 and $155, respectively, of foreign taxes and $435 and $1,290, respectively, of state taxes.



11

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)


Note 9.  Segment Information

We operate in two reportable business segments: hotel investments and travel center investments.
 
 
For the Three Months Ended September 30, 2016
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Hotel operating revenues 
 
$
464,173

 
$

 
$

 
$
464,173

Rental income
 
8,412

 
69,866

 

 
78,278

FF&E reserve income 
 
1,065

 

 

 
1,065

Total revenues
 
473,650

 
69,866

 

 
543,516

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Hotel operating expenses 
 
322,012

 

 

 
322,012

Depreciation and amortization 
 
56,397

 
33,742

 

 
90,139

General and administrative 
 

 

 
37,739

 
37,739

Acquisition related costs 
 
156

 

 

 
156

Total expenses 
 
378,565

 
33,742

 
37,739

 
450,046

 
 
 
 
 
 
 
 
 
Operating income (loss) 
 
95,085

 
36,124

 
(37,739
)
 
93,470

 
 
 
 
 
 
 
 
 
Dividend income
 

 

 
626

 
626

Interest income 
 

 

 
89

 
89

Interest expense 
 

 

 
(41,280
)
 
(41,280
)
Loss on early extinguishment of debt
 

 

 
(158
)
 
(158
)
Income (loss) before income taxes and equity in earnings of an investee
 
95,085

 
36,124

 
(78,462
)
 
52,747

Income tax expense
 

 

 
(948
)
 
(948
)
Equity in earnings of an investee 
 

 

 
13

 
13

Net income (loss) 
 
$
95,085

 
$
36,124

 
$
(79,397
)
 
$
51,812

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2016
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Hotel operating revenues 
 
$
1,332,586

 
$

 
$

 
$
1,332,586

Rental income
 
24,880

 
206,950

 

 
231,830

FF&E reserve income 
 
3,517

 

 

 
3,517

Total revenues 
 
1,360,983

 
206,950

 

 
1,567,933

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Hotel operating expenses 
 
923,239

 

 

 
923,239

Depreciation and amortization 
 
167,485

 
98,707

 

 
266,192

General and administrative 
 

 

 
91,127

 
91,127

Acquisition related costs 
 
885

 

 

 
885

Total expenses 
 
1,091,609

 
98,707

 
91,127

 
1,281,443

 
 
 
 
 
 
 
 
 
Operating income (loss) 
 
269,374

 
108,243

 
(91,127
)
 
286,490

 
 
 
 
 
 
 
 
 
Dividend income
 

 

 
1,375

 
1,375

Interest income 
 

 

 
227

 
227

Interest expense 
 

 

 
(124,564
)
 
(124,564
)
Loss on early extinguishment of debt
 

 

 
(228
)
 
(228
)
Income (loss) before income taxes and equity in earnings of an investee
 
269,374

 
108,243

 
(214,317
)
 
163,300

Income tax expense 
 

 

 
(3,483
)
 
(3,483
)
Equity in earnings of an investee 
 

 

 
107

 
107

Net income (loss) 
 
$
269,374

 
$
108,243

 
$
(217,693
)
 
$
159,924

 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Total assets 
 
$
3,965,330

 
$
2,504,865

 
$
115,937

 
$
6,586,132

 

12

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

 
 
For the Three Months Ended September 30, 2015
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Hotel operating revenues 
 
$
437,171

 
$

 
$

 
$
437,171

Rental income
 
8,199

 
65,548

 

 
73,747

FF&E reserve income 
 
968

 

 

 
968

Total revenues 
 
446,338

 
65,548

 

 
511,886

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Hotel operating expenses 
 
308,603

 

 

 
308,603

Depreciation and amortization 
 
54,100

 
30,161

 

 
84,261

General and administrative 
 

 

 
19,831

 
19,831

Acquisition related costs 
 
851

 

 

 
851

Total expenses 
 
363,554

 
30,161

 
19,831

 
413,546

 
 
 
 
 
 
 
 
 
Operating income (loss) 
 
82,784

 
35,387

 
(19,831
)
 
98,340

 
 
 
 
 
 
 
 
 
Interest income 
 

 

 
11

 
11

Interest expense 
 

 

 
(36,628
)
 
(36,628
)
Income (loss) before income taxes and equity in losses of an investee
 
82,784

 
35,387

 
(56,448
)
 
61,723

Income tax expense
 

 

 
(514
)
 
(514
)
Equity in losses of an investee 
 

 

 
(24
)
 
(24
)
Net income (loss) 
 
$
82,784

 
$
35,387

 
$
(56,986
)
 
$
61,185

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2015
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Hotel operating revenues 
 
$
1,243,744

 
$

 
$

 
$
1,243,744

Rental income
 
24,339

 
183,222

 

 
207,561

FF&E reserve income 
 
3,159

 

 

 
3,159

Total revenues 
 
1,271,242

 
183,222

 

 
1,454,464

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Hotel operating expenses 
 
870,689

 

 

 
870,689

Depreciation and amortization 
 
159,421

 
84,391

 

 
243,812

General and administrative 
 

 

 
53,820

 
53,820

Acquisition related costs 
 
1,986

 

 

 
1,986

Total expenses 
 
1,032,096

 
84,391

 
53,820

 
1,170,307

 
 
 
 
 
 
 
 
 
Operating income (loss) 
 
239,146

 
98,831

 
(53,820
)
 
284,157

 
 
 
 
 
 
 
 
 
Interest income 
 

 

 
32

 
32

Interest expense 
 

 

 
(107,918
)
 
(107,918
)
Income (loss) before income taxes, equity in earnings of an investee and gain on sale of real estate
 
239,146

 
98,831

 
(161,706
)
 
176,271

Income tax expense
 

 

 
(1,445
)
 
(1,445
)
Equity in earnings of an investee 
 

 

 
71

 
71

Income (loss) before gain on sale of real estate
 
239,146

 
98,831

 
(163,080
)
 
174,897

Gain on sale of real estate
 

 
11,015

 

 
11,015

Net income (loss) 
 
$
239,146

 
$
109,846

 
$
(163,080
)
 
$
185,912

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Total assets 
 
$
3,892,316

 
$
2,440,393

 
$
62,088

 
$
6,394,797

 

13

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

Note 10. Related Person Transactions
We have relationships and historical and continuing transactions with TA, RMR LLC, Sonesta and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also our Trustees or officers. For further information about these and other such relationships and certain other related person transactions, please refer to our 2015 Annual Report.
TA: TA was our 100% owned subsidiary until we distributed its common shares to our shareholders in 2007. TA is our largest tenant and property operator, leasing 37% of our gross carrying value of real estate properties as of September 30, 2016. We are TA’s largest shareholder; as of September 30, 2016, we owned 3,420,000 of TA’s common shares, representing approximately 8.8% of TA’s outstanding common shares.
Our investment in TA shares, which is included in other assets in our condensed consolidated balance sheets, is recorded at fair value with the related unrealized gain (loss) included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. We recognize the increase or decrease in the fair value of our TA shares each reporting period as unrealized gain (loss) on investment securities, which is a component of other comprehensive income (loss) in our condensed consolidated statements of comprehensive income. See Note 12 for further information regarding our investment in TA.
On June 1, 2015, we entered a transaction agreement with TA. On June 22, 2016, we and TA amended the transaction agreement. We refer to the amended transaction agreement as the Transaction Agreement. Under the Transaction Agreement, among other things, we agreed to purchase from TA four travel centers upon the completion of their development at a purchase price equal to their development costs, including the cost of the land, and two existing travel centers then owned by TA and we agreed to lease back these properties to TA under our TA leases. 
In connection with the Transaction Agreement, as amended:
On March 31, 2016, we purchased one of the development properties from TA for $19,683 and we and TA amended our TA No. 4 agreement to add this property and our annual minimum rent under our TA No. 4 agreement increased by $1,673.
On June 22, 2016, we purchased two existing travel centers then owned by TA for an aggregate of $23,876 and we and TA amended our TA No. 1 agreement and TA No. 3 agreement to add these properties, respectively, and our annual minimum rent under our TA No. 1 agreement and TA No. 3 agreement increased by $1,121 and $908, respectively. We and TA also amended our TA No. 5 agreement to extend its term to 2032.
On June 30, 2016, we purchased one of the development properties from TA for $22,297 and we and TA amended our TA No. 2 agreement to add this property and our annual minimum rent under our TA No. 2 agreement increased by $1,895.
On September 30, 2016, we purchased one of the two remaining development properties from TA for $16,557 and we and TA amended our TA No. 2 agreement to add this property and our annual minimum rent under our TA No. 2 agreement increased by $1,407.
We currently expect to purchase the one remaining development property from TA in the first quarter of 2017 at a purchase price equal to its development cost not to exceed $29,000.
Because of the relationships between us and TA, the terms of the Transaction Agreement, as amended, were negotiated and approved by special committees of our Board of Trustees and the TA board of directors composed of our Independent Trustees and TA’s independent directors who are not also trustees or directors of the other party, which committees were represented by separate counsel.
On September 14, 2016, we purchased a vacant land parcel adjacent to a property in Holbrook, AZ that we own and lease to TA for $325 and we and TA amended our TA No. 4 agreement to add this parcel and our annual minimum rent under our TA No. 4 agreement increased by $28.

14

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

As of September 30, 2016, we leased to TA a total of 198 travel centers. As of September 30, 2016, the number of travel centers leased, the terms, the annual minimum rents and the deferred rent balances under each of our TA leases were as follows:
 
 
Number of Travel Centers
 
Initial Term End (1)
 
Minimum Annual Rent as of September 30, 2016
 
Deferred Rent (2) (3) (4)
TA No. 1 Lease
 
40
 
December 31, 2029
 
$
50,885

 
$
27,421

TA No. 2 Lease
 
40
 
December 31, 2028
 
51,696

 
29,107

TA No. 3 Lease
 
39
 
December 31, 2026
 
52,262

 
29,324

TA No. 4 Lease
 
39
 
December 31, 2030
 
49,629

 
21,233

TA No. 5 Lease
 
40
 
June 30, 2032
 
66,685

 
42,915

 
 
198
 
 
 
$
271,157

 
$
150,000


(1)
TA has two renewal options of 15 years each under each of our TA leases.
(2)
Deferred rent for the TA Nos. 1, 2, 3 and 4 leases is due and payable on the respective initial term end dates noted above.
(3)
Deferred rent for the TA No. 5 lease is due and payable on June 30, 2024.
(4)
Deferred rent is subject to acceleration at our option upon an uncured default by, or a change in control of, TA.
We recognized rental income from TA of $69,866 and $65,548 for the three months ended September 30, 2016 and 2015, respectively, and $206,950 and $183,222 for the nine months ended September 30, 2016 and 2015, respectively. Rental income for the three months ended September 30, 2016 and 2015 includes $2,823 and $3,647, respectively, and the nine months ended September 30, 2016 and 2015 includes $10,053 and $5,452, respectively, of adjustments necessary to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight line basis. Rental income for the nine months ended September 30, 2015 includes $2,048 of percentage rent recorded because the amount was no longer contingent as a result of the modifications to our TA leases in connection with the Transaction Agreement. As of September 30, 2016 and December 31, 2015, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of $62,655 and $40,988, respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets.
We funded $20,255 and $29,734 for the three months ended September 30, 2016 and 2015, respectively, and $75,314 and $70,150 for the nine months ended September 30, 2016 and 2015, respectively, of qualifying capital improvements under our TA leases. As a result, TA’s annual minimum rent payable to us increased by $1,722, and $2,527 for the three months ended September 30, 2016 and 2015, respectively, and $6,402 and $5,963 for the nine months ended September 30, 2016 and 2015, respectively.
We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of $408 and $937 for the three and nine months ended September 30, 2016, respectively, net of any waived percentage rent. We had no deferred percentage rent for the three and nine months ended September 30, 2015. As of June 30, 2016, we had cumulatively waived all of the $2,500 of percentage rent we previously agreed to waive. We waived percentage rent of $271 for the three months ended September 30, 2015 and $372 and $819 for the nine months ended September 30, 2016 and 2015, respectively.
RMR LLC: Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $34,942 and $17,383 for the three months ended September 30, 2016 and 2015, respectively, and $83,547 and $45,832 for the nine months ended September 30, 2016 and 2015, respectively. The business management fees for the three and nine months ended September 30, 2016 include estimated 2016 incentive fees of $25,036 and $56,272, respectively, based on our common share total return as of September 30, 2016. The actual amount of incentive fees payable to RMR LLC for 2016, if any, will be based on our common share total return, as defined, for the three year period ending December 31, 2016, and will be payable in 2017. The net business management fees we recognized for the three and nine months ended September 30, 2015 included $8,561 and $17,383, respectively, of then estimated 2015 incentive fees; in January 2016, we paid RMR LLC an incentive fee of $62,263 for 2015. The net business management fees we recognized for the 2016 and 2015 periods are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

15

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

In accordance with the terms of our business management agreement, we issued 63,119 of our common shares to RMR LLC for the period from January 1, 2015 through May 31, 2015 as payment for a part of the business management fee we recognized for that period. Beginning June 1, 2015, all management fees under our business management agreement are paid in cash.
Pursuant to our property management agreement with RMR LLC, we recognized property management fees of $9 for both of the three months ended September 30, 2016 and 2015 and $34 and $24 for the nine months ended September 30, 2016 and 2015, respectively. These fees are payable to RMR LLC in connection with the management of the office building component of one of our hotels. These amounts are included in hotel operating expenses in our condensed consolidated statements of comprehensive income.
We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. We reimbursed RMR LLC $45 and $38 for property management related expenses related to the office building component of one of our hotels for the three months ended September 30, 2016 and 2015, respectively, and $129 and $104 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in hotel operating expenses in our condensed consolidated statements of comprehensive income.
We have historically awarded share grants to certain RMR LLC employees under our equity compensation plans.  In September 2016 and 2015, we awarded annual share grants of 79,100 and 76,250 of our common shares, respectively, to our officers and to other employees of RMR LLC. In September 2016, we purchased 19,677 of our common shares, at the closing price of our common shares on the Nasdaq on the date of purchase, from our officers and other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services. The amounts recognized as expense for share grants to RMR LLC employees and internal audit costs were $1,019 and $713 for the three months ended September 30, 2016 and 2015, respectively, and $2,125 and $1,838 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.
We lease office space to RMR LLC in the office building component of one of our hotels. Pursuant to our lease agreement with RMR LLC, we recognized rental income from RMR LLC for leased office space of $9 and $26 for the three and nine months ended September 30, 2016 and 2015, respectively.
RMR Inc.:  In connection with our June 2015 acquisition of shares of class A common stock of The RMR Group Inc., or RMR Inc., we recorded a liability for the amount by which the estimated fair value of these shares exceeded the price we paid for these shares. This liability is included in accounts payable and other liabilities in our condensed consolidated balance sheets.  This liability is being amortized on a straight line basis through December 31, 2035 as an allocated reduction to our business management fee expense. We amortized $896 and $2,689 of this liability, respectively, for the three and nine months ended September 30, 2016, and $911 and $1,142 of this liability, respectively, for the three and nine months ended September 30, 2015. These amounts are included in the net business management fee amounts for such periods. As of September 30, 2016, the remaining unamortized amount of this liability was $69,073.
As of September 30, 2016, we owned 2,503,777 shares of class A common stock of RMR Inc. We receive dividends on our RMR Inc. class A common shares as declared and paid by RMR Inc. to all holders of its class A common shares. We received a dividend of $749 on our RMR Inc. class A common shares during the three months ended June 30, 2016, which was for the period from December 14, 2015 through March 31, 2016. We received a dividend of $626 on our RMR Inc. class A common shares during the three months ended September 30, 2016, which was for the period from April 1, 2016 through June 30, 2016.  On October 11, 2016, RMR Inc. declared a regular quarterly dividend of $0.25 per class A common share payable to shareholders of record on October 21, 2016.  RMR Inc. has stated that it expects to pay this dividend on or about November 17, 2016.
Our investment in RMR Inc. class A common shares is included in other assets in our condensed consolidated balance sheets and is recorded at fair value with the related unrealized gain (loss) included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. We recognize the increase or decrease in the fair value of our RMR Inc. class A common shares each reporting period as unrealized gain (loss) on investment securities, which is a component of other comprehensive income (loss) in our condensed consolidated statements of comprehensive income. See Note 12 for further information on our investment in RMR Inc. 

16

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

Sonesta:  Sonesta is owned by our Managing Trustees. As of September 30, 2016, Sonesta managed 33 of our hotels pursuant to management and pooling agreements.
On February 1, 2016, we acquired two extended stay hotels with 262 suites located in Cleveland and Westlake, OH for $12,000, excluding acquisition related costs, and entered into a long term management agreement with Sonesta for each hotel on terms substantially consistent with those of our existing management agreements with Sonesta for extended stay hotels. These management agreements were added to our existing pooling agreement with Sonesta.
Pursuant to our Sonesta agreement, we recognized management, system and reservation fees and the cost to reimburse Sonesta for certain guest loyalty, marketing program and third party reservation transmission fees aggregating $6,712 and $5,742 for the three months ended September 30, 2016 and 2015, respectively, and $19,007 and $16,143 for the nine months ended September 30, 2016 and 2015, respectively. In addition, we recognized procurement and construction supervision fees to Sonesta of $344 and $496 for the three months ended September 30, 2016 and 2015, respectively, and $1,268 and $1,172 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.
On January 4, 2016, we and Sonesta amended our pooling agreement and management agreements. Under the amended pooling agreement, a hotel may be designated as “non-economic” and removed from the pooling agreement and subject to sale and we have an early termination right under each management agreement, in each case if the applicable hotel does not meet certain criteria for the stipulated measurement period. Pursuant to the amendment, these stipulated measurement periods begin on the later of January 1, 2017 and January 1st of the year beginning at least 18 months following the effective date of the applicable management agreement. The amendment to the pooling agreement and management agreements with Sonesta were negotiated and recommended by a Special Committee of our Board of Trustees comprised solely of our Independent Trustees, and were approved by our Independent Trustees and also by our Board of Trustees.
In July 2016, we entered into an agreement to acquire a full service hotel with 236 rooms located in Milpitas, CA for a purchase price of $52,000, excluding acquisition related costs. We subsequently terminated that agreement and in October 2016 we entered into a new agreement to acquire this hotel for $46,000, excluding acquisition related costs. We currently expect to complete this acquisition during the fourth quarter of 2016. This acquisition is subject to closing conditions; accordingly, we cannot be sure that we will acquire this property or that its acquisition will not be delayed or the terms of the acquisition will not change. Upon acquisition of this hotel, we intend to rebrand this hotel as a Sonesta hotel, to enter into a hotel management agreement with Sonesta for this property on terms consistent with our other Sonesta hotel management agreements. See Note 11 for further information regarding our Sonesta agreement.
AIC:  We and six other companies to which RMR LLC provides management services each own AIC in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC. We paid aggregate annual premiums, including taxes and fees, of approximately $3,975 in connection with this insurance program for the policy year ending June 30, 2017, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.
As of September 30, 2016 and December 31, 2015, our investment in AIC had a carrying value of $7,117 and $6,834, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income (loss) of $13 and ($24) related to our investment in AIC for the three months ended September 30, 2016 and 2015, respectively, and $107 and $71 for the nine months ended September 30, 2016 and 2015, respectively. Our other comprehensive income includes our proportionate part of unrealized gains (losses) on securities which are owned by AIC of $80 and ($72) for the three months ended September 30, 2016 and 2015, respectively, and $175 and ($91) for the nine months ended September 30, 2016 and 2015, respectively.
Directors’ and Officers’ Liability Insurance: We, RMR Inc., RMR LLC and certain companies to which RMR LLC provides management services participate in a combined directors’ and officers’ liability insurance policy. In September 2016, we participated in a one year extension of this combined directors’ and officers’ insurance policy through September 2018. Our premium for this policy extension was approximately $141.
See Note 11 for additional information about our agreements with TA and Sonesta.


17

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

Note 11. Hotel Management Agreements and Leases
As of September 30, 2016, 302 of our hotels are leased to our TRSs and managed by independent hotel operating companies and three of our hotels are leased.
Marriott No. 1 agreement. Our management agreement with Marriott International, Inc., or Marriott, for 53 hotels provides that as of September 30, 2016 we are to be paid an annual minimum return of $68,583 to the extent that gross revenues of the hotels, after payment of hotel operating expenses and funding of the FF&E reserve, are sufficient to do so.  We do not have any security deposits or guarantees for our minimum returns from the 53 hotels included in our Marriott No. 1 agreement. Accordingly, the minimum returns we receive from these hotels managed by Marriott are limited to available hotel cash flows after payment of operating expenses and funding of the FF&E reserve. Marriott’s base and incentive management fees are only earned after we receive our minimum returns.  We realized minimum returns of $17,126 and $17,046 during the three months ended September 30, 2016 and 2015, respectively, and minimum returns of $51,361 and $51,080 during the nine months ended September 30, 2016 and 2015, respectively, under this agreement. We also realized additional returns of $4,372 and $10,621 during the three and nine months ended September 30, 2016, respectively, which represents our share of hotel cash flows in excess of the minimum returns due to us for the period.  We realized additional returns of $3,149 under this agreement during the three and nine months ended September 30, 2015.
We funded $2,265 for capital improvements at certain of the hotels included in our Marriott No. 1 agreement during the nine months ended September 30, 2016. We currently expect to fund $750 for capital improvements during the 2016 fourth quarter under this agreement. As we fund these improvements, the annual minimum returns payable to us increase by 10% of the amounts funded.
Marriott No. 234 agreement.  Our management agreement with Marriott for 68 hotels provides that as of September 30, 2016 we are to be paid an annual minimum return of $106,243.  We realized minimum returns of $26,571 and $26,553 during the three months ended September 30, 2016 and 2015, respectively, and minimum returns of $79,682 and $79,586 during the nine months ended September 30, 2016 and 2015, respectively, under this agreement. Pursuant to our Marriott No. 234 agreement, Marriott has provided us with a security deposit to cover minimum return payment shortfalls, if any.  Under this agreement, this security deposit may be replenished and increased up to $64,700 from our share of hotel cash flows in excess of the minimum returns due to us and certain management fees. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. During the nine months ended September 30, 2016, our available security deposit was replenished by $11,198 from our share of hotel cash flows in excess of the minimum returns due to us for the period.  The available balance of this deposit was $17,449 as of September 30, 2016.  Pursuant to our Marriott No. 234 agreement, Marriott has also provided us with a limited guarantee which expires in 2019 for shortfalls up to 90% of our minimum returns, if and after the available security deposit has been depleted. The available balance of the guarantee was $30,672 as of September 30, 2016
We did not make any fundings for capital improvements to our Marriott No. 234 hotels during the nine months ended September 30, 2016. We currently expect to fund $9,000 for capital improvements to certain hotels under our Marriott No. 234 agreement during the 2016 fourth quarter. As we fund these improvements, the annual minimum returns payable to us increase by 9% of the amounts funded. 
Marriott No. 5 agreement. We lease one hotel in Kauai, HI to Marriott. This lease is guaranteed by Marriott and we realized $2,529 of rent for this hotel during each of the three months ended September 30, 2016 and 2015, and $7,587 of rent during each of the nine months ended September 30, 2016 and 2015.  The guarantee provided by Marriott with respect to this leased hotel is unlimited. On August 31, 2016, Marriott notified us that it will not exercise its renewal option at the expiration of the current lease term ending on December 31, 2019. Marriott has four renewal options for 15 years each.
InterContinental agreement. Our management agreement with InterContinental for 94 hotels provides that as of September 30, 2016, we are to be paid annual minimum returns and rents of $160,338.  We realized minimum returns and rents of $40,084 and $37,444 during the three months ended September 30, 2016 and 2015, respectively, and minimum returns and rents of $118,372 and $109,461 during the nine months ended September 30, 2016 and 2015, respectively, under this agreement.  We also realized additional returns under this agreement of $3,563 and $2,607 during the three months ended September 30, 2016 and 2015, respectively, and of $7,467and $5,784 during the nine months ended September 30, 2016 and 2015, respectively, from our share of hotel cash flows in excess of our minimum returns and rents due to us for those periods.

18

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

Pursuant to our InterContinental agreement, InterContinental has provided us with a security deposit to cover minimum payment shortfalls, if any.  Under this agreement, InterContinental is required to maintain a minimum security deposit of $37,000 and this security deposit may be replenished and increased up to $100,000 from a share of future cash flows from the hotels, in excess of our minimum returns and certain management fees.
On March 16, 2016, we amended our management agreement with InterContinental in connection with our acquisition of the Kimpton Hotel Monaco located in Portland, OR. See Note 7 for further information regarding this acquisition. As a result of the amendment, the annual minimum returns due to us increased by an aggregate of 8% of our investment in the hotel ($9,120) and InterContinental provided us $9,000 to supplement the existing security deposit.
During the nine months ended September 30, 2016, the available security deposit was replenished by $23,747 from a share of the hotels’ cash flows in excess of the minimum payments due to us for the period.  The available balance of this security deposit was $70,963 as of September 30, 2016.
We did not make any fundings for capital improvements to our InterContinental hotels during the nine months ended September 30, 2016. We currently expect to fund $17,500 for capital improvements to certain hotels under our InterContinental agreement during the 2016 fourth quarter. As we fund these improvements, the annual minimum returns and rents payable to us increase by 8% of the amounts funded.
Sonesta agreement. Our Sonesta agreement provides that we are to be paid an annual minimum return ($85,964 as of September 30, 2016) equal to 8% of our invested capital, as defined in the agreement, to the extent that gross revenues of the hotels, after payment of hotel operating expenses, including certain management fees to Sonesta, are sufficient to do so.  We do not have a security deposit or guarantee for our hotels managed by Sonesta.  Accordingly, the returns we currently receive from hotels managed by Sonesta are limited to available hotel cash flows after payment of operating expenses. Sonesta’s incentive management fees, but not its other fees, are only earned after we receive our minimum returns and an imputed FF&E escrow. We realized returns of $19,133 and $13,186 during the three months ended September 30, 2016 and 2015, respectively, and returns of $51,279 and $39,985 during the nine months ended September 30, 2016 and 2015, respectively, under this agreement.
Our Sonesta agreement does not require FF&E escrow deposits and we are required to fund capital expenditures made at our Sonesta hotels.  We funded $44,017 for renovations and other capital improvements to hotels included in our Sonesta agreement during the nine months ended September 30, 2016.  We currently expect to fund $23,860 for renovations and other capital improvements during the 2016 fourth quarter under this agreement.  The annual minimum returns due to us under the Sonesta agreement increase by 8% of the amounts funded in excess of threshold amounts, as defined therein. See Note 10 for further information regarding our relationship with Sonesta.
Wyndham agreements. Our management agreement with Wyndham Hotel Group, or Wyndham, for 22 hotels provides that as of September 30, 2016, we are to be paid annual minimum returns of $26,805.  We realized returns of $6,687 and $6,599 during the three months ended September 30, 2016 and 2015, respectively, and returns of $20,009 and $19,706 during the nine months ended September 30, 2016 and 2015, respectively, under this agreement. Pursuant to our Wyndham agreement, Wyndham has provided us with a guarantee, which is limited to $35,656 ($3,416 remaining at September 30, 2016), subject to an annual payment limit of $17,828, and expires on July 28, 2020. During the nine months ended September 30, 2016, Wyndham made $592 of guaranty payments to us.
We also lease 48 vacation units in one of our hotels to Wyndham Vacation Resorts, Inc., a subsidiary of Wyndham, or Wyndham Vacation, which requires annual minimum rents to us of $1,366.  The guarantee provided by Wyndham with respect to the Wyndham Vacation lease for part of one hotel is unlimited.  We realized rents of $341 and $332 during the three months ended September 30, 2016 and 2015, respectively, and rents of $1,024 and $994 during the nine months ended September 30, 2016 and 2015, respectively, under our Wyndham agreements.
Under our Wyndham agreement, the FF&E reserve funding required for all hotels included in the agreement is subject to available cash flows after payment of our minimum return.  The reserve amount is 4% of total hotel sales in 2016 and increases to 5% of total hotel sales in 2017 through the end of the agreement term in 2038.  No FF&E escrow deposits were made during the nine months ended September 30, 2016 due to insufficient available cash flows generated at these hotels.
We funded $2,439 for capital improvements to certain hotels included in our Wyndham agreement during the nine months ended September 30, 2016.  We currently expect to fund $2,000 for capital improvements to certain hotels during the 2016

19

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)

fourth quarter under this agreement.  As we fund these improvements, the annual minimum returns payable to us increase by 8% of the amounts funded.
TA agreements.    Our 198 owned travel centers are leased to and operated by a subsidiary of TA under five agreements. Our TA Nos. 1, 2 and 5 leases for 40 travel centers each expire in 2029, 2028 and 2032, respectively, and have two 15 year renewal options. Our TA Nos. 3 and 4 leases for 39 travel centers each expire in 2026 and 2030, respectively, and each have two 15 year renewal options. TA has guaranteed its subsidiary tenants’ obligations under these leases. Our travel center leases with TA do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components. Under all of our TA leases, TA may request that we fund capital improvements to the leased facilities in return for minimum rent increases. TA is not obligated to request and we are not obligated to fund any such improvements. We funded $75,314 for capital improvements to our travel center properties during the nine months ended September 30, 2016. We currently expect to fund approximately $30,000 for renovations and other capital improvements during the 2016 fourth quarter. As we fund these improvements, the annual minimum rents payable to us increase by 8.5% of the amounts funded. See Note 10 for further information about our TA leases. 
Other management agreement and lease matters. As of November 8, 2016, all payments due to us from our managers and tenants under our other operating agreements were current.  Minimum return and minimum rent payments due to us under some of these other hotel management agreements and leases are supported by guarantees.  The guarantee provided by Hyatt Hotels Corporation, or Hyatt, with respect to the 22 hotels managed by Hyatt is limited to $50,000 ($18,654 remaining at September 30, 2016).  The guarantee provided by Carlson with respect to the 11 hotels managed by Carlson is limited to $40,000 ($29,047 remaining at September 30, 2016).
Guarantees and security deposits generally. When we reduce the amounts of the security deposits we hold for payment deficiencies at our managed and leased hotels, we record income equal to the amounts by which this deposit is reduced up to the minimum return or minimum rent due to us. However, reducing the security deposits does not result in additional cash flows 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. The security deposits are non-interest bearing and are not held in escrow. Under these agreements, any amount of the security deposits which are applied to payment deficits may be replenished from a share of future cash flows from the applicable hotel operations pursuant to the terms of the respective agreements.
Net operating results of our managed hotel portfolios exceeded the minimum returns due to us in both the three months ended September 30, 2016 and 2015.  Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $2,248 and $6,560 less than the minimum returns due to us in the three months ended September 30, 2016 and 2015, respectively, and $12,618 and $17,395 less than the minimum returns due to us for the nine months ended September 30, 2016 and 2015, respectively.  When the managers of these hotels fund these shortfalls under the terms of our operating agreements or their guarantees, we reflect such fundings (including security deposit applications) in our condensed consolidated statements of comprehensive income as a reduction of hotel operating expenses. There was no reduction to hotel operating expenses in the three months ended September 30, 2016 and 2015, and reductions of $592 and $1,295 in the nine months ended September 30, 2016 and 2015, respectively, as a result of such fundings. 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 $2,248 and $6,560, and $12,026 and $16,100 in the three and nine months ended September 30, 2016 and 2015, respectively, which represent the unguaranteed portions of our minimum returns from Sonesta.  
Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $35,123 and $28,969 more than the minimum returns due to us in the three months ended September 30, 2016 and 2015, respectively, and $80,867 and $65,973 more than the minimum returns due to us in the nine months ended September 30, 2016 and 2015, respectively. Certain of our guarantees and our security deposits may be replenished by a share of these excess cash flows from the applicable hotel operations in excess of the minimum returns due to us pursuant to the terms of the respective operating agreements.  When our guarantees and our security deposits are replenished by cash flows from hotel operations, we reflect such replenishments in our condensed consolidated statements of comprehensive income as an increase to hotel operating expenses.  Hotel operating expenses were increased by $15,103 and $11,970 in the three months ended September 30, 2016 and 2015, respectively, and $33,897 and $27,551 in the nine months ended September 30, 2016 and 2015, respectively, as a result of such replenishments.
 
Note 12.  Fair Value of Assets and Liabilities

20


The table below presents certain of our assets carried at fair value at September 30, 2016, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.
 
 
 

 
Fair Value at September 30, 2016 Using
 
 
 
 
Quoted Prices in
 
 
 
 
 
 
 
 
Active Markets for
 
Significant Other
 
Significant
 
 
Carrying Value at
 
Identical Assets
 
Observable Inputs
 
Unobservable Inputs
Description
 
September 30, 2016
 
(Level 1)
 
(Level 2)
 
(Level 3)
Investment in TA (1)
 
$
24,487

 
$
24,487

 
$

 
$

Investment in RMR Inc.(2)
 
$
94,993

 
$
94,993

 
$

 
$


(1)
Our 3,420,000 common shares of TA, which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs).  Our historical cost basis for these shares is $17,407 as of September 30, 2016.  The unrealized gain of $7,080 for these shares as of September 30, 2016 is included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets.
(2)
Our 2,503,777 shares of class A common stock of RMR Inc., which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs).  Our historical cost basis for these shares is $66,374 as of September 30, 2016.  The unrealized gain of $28,619 for these shares as of September 30, 2016 is included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets.
In addition to the investment securities included in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, revolving credit facility, term loan, senior notes and security deposits. At September 30, 2016 and December 31, 2015, the fair values of these additional financial instruments approximated their carrying values in our condensed consolidated balance sheets due to their short term nature or variable interest rates, except as follows:
 
 
September 30, 2016
 
December 31, 2015
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Value (1)
 
Value
 
Value (1)
 
Value
Senior Unsecured Notes, due 2016 at 6.30% (2)
 

 

 
$
274,869

 
$
275,813

Senior Unsecured Notes, due 2017 at 5.625% (3)
 

 

 
299,576

 
311,181

Senior Unsecured Notes, due 2018 at 6.70% 
 
349,246

 
363,426

 
348,821

 
370,438

Senior Unsecured Notes, due 2021 at 4.25% (4)
 
393,697

 
425,874

 

 

Senior Unsecured Notes, due 2022 at 5.00% 
 
492,884

 
544,650

 
491,974

 
515,760

Senior Unsecured Notes, due 2023 at 4.50%
 
298,062

 
311,609

 
297,845

 
295,709

Senior Unsecured Notes, due 2024 at 4.65%
 
346,978

 
361,205

 
346,674

 
346,010

Senior Unsecured Notes, due 2025 at 4.50%
 
344,196

 
356,846

 
343,680

 
338,426

Senior Unsecured Notes, due 2026 at 5.25% (4)
 
339,415

 
372,173

 

 

Convertible Unsecured Senior Notes, due 2027 at 3.8% 
 
8,478

 
8,553

 
8,478

 
8,697

Total financial liabilities 
 
$
2,572,956

 
$
2,744,336

 
$
2,411,917

 
$
2,462,034


(1)
Carrying value includes unamortized discounts and certain issuance costs.
(2)
These senior notes were redeemed at par plus accrued interest in March 2016.
(3)
These senior notes were redeemed at par plus accrued interest in September 2016.
(4)
These senior notes were issued in February 2016.
At September 30, 2016, we estimated the fair values of our senior notes using an average of the bid and ask price of our then outstanding issuances of senior notes (Level 2 inputs).  We estimated the fair value of our convertible senior notes using discounted cash flow analyses and currently prevailing market interest rates (Level 3 inputs) because no market quotes or other observable inputs for these notes were available at September 30, 2016 and December 31, 2015.


21


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 Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2015 Annual Report. We are a REIT organized under Maryland law.

Overview (dollar amounts in thousands, except share amounts)
Management agreements and leases.  At September 30, 2016, we owned 305 hotels operated under nine agreements; 302 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 September 30, 2016, our 198 owned travel centers are leased to TA under five agreements. Our condensed consolidated statements of comprehensive income include operating revenues and expenses of our managed hotels and rental income from our leased hotels and travel centers. 
Many of our 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 agreements regardless of property performance. However, the effectiveness of various security features to provide us uninterrupted receipt of minimum returns and rents is not assured, especially if economic conditions generally decline for a prolonged period. 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 repay our debt, fund our debt service obligations, pay distributions to our shareholders or the amounts of our distributions may decline.
Hotel operations. During the three and nine months ended September 30, 2016, the U.S. hotel industry generally realized increases in average daily rate, or ADR, and revenue per available room, or RevPAR, when compared to the same periods in 2015.  The U.S. hotel industry generally realized stable occupancy during the three and nine months ended September 30, 2016 compared to the 2015 periods. As a result, the growth in RevPAR for the U.S. hotel industry has generally been lower in 2016 compared to 2015. During the three and nine months ended September 30, 2016, our comparable hotels that we owned continuously since January 1, 2015 have produced year over year increases in RevPAR and occupancy in excess of the hotel industry generally that we believe are, in part, a result of recent renovations we made to our hotels.  However, we believe that certain of our hotels acquired since January 1, 2015 were negatively impacted by brand conversions and by the disruption and displacement caused by our renovation activities at those hotels during 2015 and the three and nine months ended September 30, 2016.
For the three months ended September 30, 2016 compared to the same period in 2015 for our 293 comparable hotels that we owned continuously since July 1, 2015: ADR increased 3.3% to $126.58; occupancy increased 0.4 percentage points to 80.4%; and RevPAR increased 3.8% to $101.77.
For the three months ended September 30, 2016 compared to the same period in 2015 for our 305 hotels: ADR increased 3.0% to $126.69; occupancy increased 0.4 percentage points to 80.0%; and RevPAR increased 3.5% to $101.35.
For the nine months ended September 30, 2016 compared to the same period in 2015 for our 291 comparable hotels that we owned continuously since January 1, 2015: ADR increased 3.4% to $125.95; occupancy increased 0.8 percentage points to 78.1%; and RevPAR increased 4.5% to $98.37.
For the nine months ended September 30, 2016 compared to the same period in 2015 for our 305 hotels: ADR increased 3.1% to $125.94; occupancy increased 0.1 percentage points to 77.3%; and RevPAR increased 3.2% to $97.35.
Additional details of our hotel operating agreements and agreements with TA are set forth in Notes 10 and 11 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the table and notes thereto on pages 32 through 34 below.


22


Results of Operations (dollar amounts in thousands, except share amounts)
Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
 
 
For the Three Months Ended September 30,
 
 
 
 
 
 
Increase
 
% Increase
 
 
2016
 
2015
 
(Decrease)
 
(Decrease)
Revenues:
 
 

 
 

 
 
 
 

Hotel operating revenues
 
$
464,173

 
$
437,171

 
$
27,002

 
6.2
 %
Rental income - hotels
 
8,412

 
8,199

 
213

 
2.6
 %
Rental income - travel centers
 
69,866

 
65,548

 
4,318

 
6.6
 %
Total rental income
 
78,278

 
73,747

 
4,531

 
6.1
 %
FF&E reserve income
 
1,065

 
968

 
97

 
10.0
 %
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Hotel operating expenses
 
322,012

 
308,603

 
13,409

 
4.3
 %
Depreciation and amortization - hotels
 
56,397

 
54,100

 
2,297

 
4.2
 %
Depreciation and amortization - travel centers
 
33,742

 
30,161

 
3,581

 
11.9
 %
Total depreciation and amortization
 
90,139

 
84,261

 
5,878

 
7.0
 %
General and administrative
 
37,739

 
19,831

 
17,908

 
90.3
 %
Acquisition related costs
 
156

 
851

 
(695
)
 
(81.7
)%
 
 
 
 
 
 
 
 
 
Operating income
 
93,470

 
98,340

 
(4,870
)
 
(5.0
)%
 
 
 
 
 
 
 
 
 
Dividend income
 
626

 

 
626

 
n/m

Interest income
 
89

 
11

 
78

 
709.1
 %
Interest expense
 
(41,280
)
 
(36,628
)
 
(4,652
)
 
12.7
 %
Loss on early extinguishment of debt
 
(158
)
 

 
(158
)
 
n/m

Income before income taxes and equity earnings (losses) of an investee
 
52,747

 
61,723

 
(8,976
)
 
(14.5
)%
Income tax expense
 
(948
)
 
(514
)
 
(434
)
 
84.4
 %
Equity in earnings (losses) of an investee
 
13

 
(24
)
 
37

 
n/m

Net income
 
51,812

 
61,185

 
(9,373
)
 
(15.3
)%
Preferred distributions
 
(5,166
)
 
(5,166
)
 

 
 %
Net income available for common shareholders
 
$
46,646

 
$
56,019

 
$
(9,373
)
 
(16.7
)%
 
 
 
 
 
 

 
 
Weighted average shares outstanding (basic)
 
157,217

 
151,359

 
5,858

 
3.9
 %
Weighted average shares outstanding (diluted)
 
157,263

 
151,386

 
5,877

 
3.9
 %
 
 
 
 
 
 
 
 
 
Net income available for common shareholders per common share (basic and diluted)