10-Q 1 hpt-20150930x10q.htm 10-Q hpt_Current folio_10-Q

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, 2015

 

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 8, 2015:    151,547,288

 

 

 

 


 

HOSPITALITY PROPERTIES TRUST

 

FORM 10-Q

 

September 30, 2015

 

INDEX

 

 

 

 

 

Page

PART I 

Financial Information (unaudited)

 

 

 

 

 

Item 1. Financial Statements (unaudited)

 

 

Condensed Consolidated Balance Sheets — September 30, 2015 and December 31, 2014

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September  30, 2015 and 2014

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Nine Months Ended September  30, 2015 and 2014

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

 

Item 2.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

 

Item 4.

 

 

Controls and Procedures

44

 

 

 

 

Warning Concerning Forward Looking Statements

45

 

 

 

 

Statement Concerning Limited Liability

50

 

 

 

PART II 

Other Information

 

 

 

 

 

Item 1A.

 

 

Risk Factors

50

 

 

 

 

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

 

Item 6.

 

 

Exhibits

51

 

 

 

 

Signatures

53

 

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 IFinancial Information

 

Item 1.  Financial Statements

 

HOSPITALITY PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

 

December 31,

 

 

 

2015

    

2014

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate properties, at cost:

 

 

 

 

 

 

 

Land

 

$

1,527,504

 

$

1,484,210

 

Buildings, improvements and equipment

 

 

6,671,318

 

 

6,171,983

 

Total real estate properties, gross

 

 

8,198,822

 

 

7,656,193

 

Accumulated depreciation

 

 

(2,153,666)

 

 

(1,982,033)

 

Total real estate properties, net

 

 

6,045,156

 

 

5,674,160

 

Cash and cash equivalents

 

 

7,375

 

 

11,834

 

Restricted cash (FF&E reserve escrow)

 

 

44,296

 

 

33,982

 

Due from related persons

 

 

46,862

 

 

40,253

 

Other assets, net

 

 

350,861

 

 

222,333

 

Total assets

 

$

6,494,550

 

$

5,982,562

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

454,000

 

$

18,000

 

Unsecured term loan

 

 

400,000

 

 

400,000

 

Senior unsecured notes, net of discounts

 

 

2,413,530

 

 

2,412,135

 

Convertible senior unsecured notes

 

 

8,478

 

 

8,478

 

Security deposits

 

 

53,175

 

 

33,069

 

Accounts payable and other liabilities

 

 

160,063

 

 

106,903

 

Due to related persons

 

 

24,306

 

 

8,658

 

Dividends payable

 

 

5,166

 

 

5,166

 

Total liabilities

 

 

3,518,718

 

 

2,992,409

 

 

 

 

 

 

 

 

 

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; 151,547,288 and 149,920,449 shares issued and outstanding, respectively

 

 

1,515

 

 

1,499

 

Additional paid in capital

 

 

4,165,912

 

 

4,118,551

 

Cumulative net income

 

 

2,901,151

 

 

2,715,239

 

Cumulative other comprehensive income

 

 

17,881

 

 

25,804

 

Cumulative preferred distributions

 

 

(316,146)

 

 

(300,649)

 

Cumulative common distributions

 

 

(4,074,588)

 

 

(3,850,398)

 

Total shareholders’ equity

 

 

2,975,832

 

 

2,990,153

 

Total liabilities and shareholders’ equity

 

$

6,494,550

 

$

5,982,562

 

 

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

3


 

HOSPITALITY PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2015

    

2014

    

2015

    

2014

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenues

 

$

437,171

 

$

394,973

 

$

1,243,744

 

$

1,112,157

Rental income

 

 

73,747

 

 

63,837

 

 

207,561

 

 

190,959

FF&E reserve income

 

 

968

 

 

829

 

 

3,159

 

 

2,673

Total revenues

 

 

511,886

 

 

459,639

 

 

1,454,464

 

 

1,305,789

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses

 

 

308,603

 

 

279,560

 

 

870,689

 

 

780,955

Depreciation and amortization

 

 

84,261

 

 

79,649

 

 

243,812

 

 

236,699

General and administrative

 

 

19,831

 

 

16,798

 

 

53,820

 

 

41,429

Acquisition related costs

 

 

851

 

 

14

 

 

1,986

 

 

237

Total expenses

 

 

413,546

 

 

376,021

 

 

1,170,307

 

 

1,059,320

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income 

 

 

98,340

 

 

83,618

 

 

284,157

 

 

246,469

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

11

 

 

13

 

 

32

 

 

63

Interest expense (including amortization of deferred financing costs and debt discounts of $1,458,  $1,361,  $4,374 and $4,034, respectively)

 

 

(36,628)

 

 

(34,304)

 

 

(107,918)

 

 

(104,101)

Loss on early extinguishment of debt

 

 

 -

 

 

(129)

 

 

 -

 

 

(855)

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

 

 

61,723

 

 

49,198

 

 

176,271

 

 

141,576

Income tax expense

 

 

(514)

 

 

(39)

 

 

(1,445)

 

 

(1,110)

Equity in earnings (losses) of an investee

 

 

(24)

 

 

38

 

 

71

 

 

66

Income before gain on sale of real estate

 

 

61,185

 

 

49,197

 

 

174,897

 

 

140,532

Gain on sale of real estate

 

 

 -

 

 

 -

 

 

11,015

 

 

130

Net income

 

 

61,185

 

 

49,197

 

 

185,912

 

 

140,662

Preferred distributions

 

 

(5,166)

 

 

(5,166)

 

 

(15,498)

 

 

(15,498)

Net income available for common shareholders

 

$

56,019

 

$

44,031

 

$

170,414

 

$

125,164

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

61,185

 

$

49,197

 

$

185,912

 

$

140,662

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investment securities

 

 

(15,458)

 

 

3,420

 

 

(7,832)

 

 

479

Equity interest in investee’s unrealized gains (losses)

 

 

(72)

 

 

(33)

 

 

(91)

 

 

9

Other comprehensive income (loss)

 

 

(15,530)

 

 

3,387

 

 

(7,923)

 

 

488

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

45,655

 

$

52,584

 

$

177,989

 

$

141,150

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

 

151,359

 

 

149,665

 

 

150,476

 

 

149,616

Weighted average common shares outstanding (diluted)

 

 

151,386

 

 

150,007

 

 

150,863

 

 

149,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.37

 

$

0.29

 

$

1.13

 

$

0.84

 

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,

 

 

2015

 

2014

 

    

 

 

    

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

185,912

 

$

140,662

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

 

 

 

 

 

 

Depreciation and amortization

 

 

243,812

 

 

236,699

Amortization of deferred financing costs and debt discounts as interest

 

 

4,374

 

 

4,034

Straight line rental income

 

 

(5,807)

 

 

(1,659)

Security deposits replenished

 

 

20,098

 

 

9,382

FF&E reserve income and deposits

 

 

(51,840)

 

 

(41,462)

Loss on extinguishment of debt

 

 

 -

 

 

855

Equity in earnings of an investee

 

 

(71)

 

 

(66)

Gain on sale of real estate

 

 

(11,015)

 

 

(130)

Other non-cash (income) expense, net

 

 

650

 

 

8,463

Changes in assets and liabilities:

 

 

 

 

 

 

Increase in due from related persons

 

 

(1,629)

 

 

(922)

Increase in other assets

 

 

(7,479)

 

 

(2,283)

Decrease in accounts payable and other liabilities

 

 

(19,838)

 

 

(26,047)

Increase (decrease) in due to related persons

 

 

17,739

 

 

(972)

Net cash provided by operating activities

 

 

374,906

 

 

326,554

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

(380,926)

 

 

(60,000)

Real estate improvements

 

 

(172,627)

 

 

(159,027)

FF&E reserve escrow fundings

 

 

(6,505)

 

 

(4,699)

Net proceeds from sale of real estate

 

 

 -

 

 

4,288

Eminent domain proceeds

 

 

 -

 

 

6,178

Investment in Affiliates Insurance Company

 

 

 -

 

 

(825)

Investment in The RMR Group Inc.

 

 

(15,196)

 

 

 -

Net cash used in investing activities

 

 

(575,254)

 

 

(214,085)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of senior unsecured notes, net of discount

 

 

 -

 

 

690,071

Repayment of senior unsecured notes

 

 

 -

 

 

(580,000)

Borrowings under unsecured revolving credit facility

 

 

611,000

 

 

745,000

Repayments of unsecured revolving credit facility

 

 

(175,000)

 

 

(730,000)

Deferred financing costs

 

 

(5)

 

 

(6,881)

Repurchase of common shares

 

 

(419)

 

 

 -

Distributions to preferred shareholders

 

 

(15,497)

 

 

(15,498)

Distributions to common shareholders

 

 

(224,190)

 

 

(218,579)

Net cash provided by (used in) financing activities

 

 

195,889

 

 

(115,887)

Decrease in cash and cash equivalents 

 

 

(4,459)

 

 

(3,418)

Cash and cash equivalents at beginning of period

 

 

11,834

 

 

22,500

Cash and cash equivalents at end of period

 

$

7,375

 

$

19,082

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

119,885

 

$

121,731

Cash paid for income taxes

 

 

2,289

 

 

3,947

Non-cash investing activities:

 

 

 

 

 

 

Hotel managers’ deposits in FF&E reserve

 

$

49,774

 

$

38,328

Hotel managers’ purchases with FF&E reserve

 

 

(45,965)

 

 

(43,278)

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


 

Table of Contents

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

 

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, 2014, or our 2014 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 year’s 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 CodificationTM.   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 $32,875 and $27,023 as of September 30, 2015 and December 31, 2014, respectively, and consist primarily of amounts due from, and working capital advances to, certain of their hotel managers.  The liabilities of our TRSs were $63,696 and $50,528 as of September  30, 2015 and December 31, 2014, 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

 

In February 2015, the FASB issued Accounting Standards Update, or ASU, No. 2015-02, Consolidation.  Among other things, this update changes how an entity determines the primary beneficiary of a VIE.  This ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted.  We are currently in the process of evaluating the impact, if any, this ASU will have on our condensed consolidated financial statements.

 

In April 2015, the FASB issued 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. In August 2015, the FASB clarified the previous ASU and issued ASU No. 2015-15, Presentations and Subsequent Measurement of Debt Issuance Costs Associated With Lines of Credit Arrangements- Amendments to SEC Paragraphs Pursuant to Staff Announcements on June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements. These updates are effective for interim and annual reporting periods beginning after December 15, 2015 and require retrospective application. The implementation of these updates is not expected to cause any material changes to our condensed consolidated financial statements other than the reclassification of certain debt issuance costs from assets to contra liabilities on our condensed consolidated balance sheets.  Debt issuance costs related to line of credit arrangements will remain classified as assets in accordance with ASU No. 2015-15. When these updates are implemented, deferred financing costs of $13,417 and $15,388 as of September 30, 2015 and December 31, 2014, respectively, will be reclassified from assets to the related debt obligations on our condensed consolidated balance sheets. 

 

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Table of Contents

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While this ASU specifically references contracts with customers, it also may apply to certain other transactions such as the sale of real estate or equipment. In July 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017.  We are continuing to evaluate this guidance; however, we do not expect its adoption to have a material impact on our condensed consolidated financial statements.

 

In September 2015, the FASB issued 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 that would have been recorded in previous periods if the accounting had been completed at the acquisition date. This update is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted.  The implementation of this update is not expected to have a material impact on 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 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 $3,752 and $5,807 for the three and nine months ended September 30, 2015, respectively, and $553 and $1,659 for the three and nine months ended September 30, 2014, respectively, of adjustments necessary to record scheduled rent increases under certain of our leases, the deferred rent obligations under our TravelCenters of America LLC, or TA, agreements and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight line basis.  See Note 10 for further information regarding our TA agreements.  Due from related persons includes $25,474 and $20,493 and other assets, net, includes $1,728 and $1,373 of straight line rent receivables at September 30, 2015 and December 31, 2014, respectively.

 

We determine percentage rent due to us under our leases annually and recognize it at year end when all contingencies have been met and the rent is earned. We had no deferred estimated percentage rent for the three and nine months ended September 30, 2015, respectively, and $557 and $2,129 of deferred estimated percentage rent for the three and nine months ended September 30, 2014, respectively.  In connection with our lease modification with TA in June 2015, we recorded $2,048 of percentage rent during the three months ended June 30, 2015.  See Note 10 for further information regarding these agreements.

 

We own all the capital expenditure reserves, or FF&E reserves, for our hotels. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income. We report deposits by our third party hotel tenants into the escrow accounts as FF&E reserve income.

 

Note 4.  Per Common Share Amounts

 

We calculate basic earnings per common share by dividing net income available for common shareholders by the weighted average number of common shares outstanding during the period.  We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method.  Unvested share awards and other potentially dilutive common shares, including contingently issuable common shares under the previous terms of our business management agreement with The RMR Group LLC (formerly known as Reit Management & Research LLC), or RMR LLC, if any, and the related impact on earnings, are considered when calculating diluted earnings per share. The following table provides a

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Table of Contents

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

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,

 

 

2015

  

2014

  

2015

  

2014

 

 

(in thousands)

Weighted average common shares for basic earnings per share

 

151,359

 

149,665

 

150,476

 

149,616

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Contingently issuable common shares

 

 -

 

316

 

360

 

189

Unvested share awards

 

27

 

26

 

27

 

29

Weighted average common shares for diluted earnings per share

 

151,386

 

150,007

 

150,863

 

149,834

   

 

Note 5.  Shareholders’ Equity

 

Common Share Issuances and Repurchases

 

During the nine months ended September 30, 2015, we issued 63,119 of our common shares to RMR LLC as part of the business management fees payable by us under our business management agreement. See Note 10 for further information regarding this agreement.

 

On June 1, 2015, we granted 2,500 of our common shares valued at $30.59 per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day, to each of our five Trustees as part of their annual compensation.

 

On June 5, 2015, we issued 1,490,000 of our common shares in connection with our acquisition of shares of The RMR Group Inc. (formerly known as Reit Management & Research Inc.), or RMR Inc., as further described in Note 10.  RMR Inc. is the parent of RMR LLC, our manager.

 

On September 2, 2015, pursuant to our 2012 Equity Compensation Plan, we granted an aggregate of 76,250 of our common shares to our officers and certain employees of our manager, RMR LLC, valued at $25.66 per share, the closing price of our common shares on the NYSE on that day.

 

On September 24, 2015, we purchased an aggregate of 16,340 of our common shares for $25.62 per share, the closing price of our common shares on the NYSE on that day, from certain of our officers and other employees of RMR LLC in satisfaction of tax withholding and payment obligations associated with the vesting of awards of restricted common shares.

 

On September 28, 2015, we issued 2,500 of our common shares valued at $25.18 per share, the closing price of our common shares on the NYSE on that day, to our new Trustee as part of her annual compensation.

 

Distributions

 

On each of January 15, 2015, April 15, 2015, July 15, 2015 and October 15, 2015, we paid a $0.4453 per share distribution, or $5,166, to our Series D preferred shareholders.

 

On February 24, 2015, we paid a $0.49 per share distribution, or $73,466, to our common shareholders. On May 21, 2015, we paid a $0.50 per share distribution, or $74,981, to our common shareholders.  On August 19, 2015, we paid a $0.50 per share distribution, or $75,743, to our common shareholders.  On October 12, 2015, we declared a $0.50 per share

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

dividend, or $75,774, to our common shareholders of record on October 23, 2015.  We expect to pay this amount on or about November 19, 2015.

 

Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) represents the unrealized gain (loss) on the TA shares we own and our share of the comprehensive income (loss) of Affiliates Insurance Company, or AIC. See Note 10 for further information regarding these investments.

 

Note 6.  Indebtedness

 

Our principal debt obligations at September 30, 2015 were: (1) our $454,000 of outstanding borrowings under our $750,000 unsecured revolving credit facility; (2) our $400,000 unsecured term loan; (3) an aggregate outstanding principal amount of $2,425,000 of public issuances of senior unsecured notes; and (4) an aggregate outstanding principal amount of $8,478 of public issuances of convertible senior unsecured notes. 

 

Our $750,000 unsecured revolving credit facility is available for general business purposes, including acquisitions.  The maturity date of our unsecured revolving credit facility is July 15, 2018 and, subject to the payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date by one year to July 15, 2019. We are required to pay interest on borrowings under our unsecured revolving credit facility at a rate of LIBOR plus a premium, which was 110 basis points at September 30, 2015. We also pay a facility fee on the total amount of lending commitments, which was 20 basis points per annum at September 30, 2015. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of September 30, 2015, the annual interest rate payable on borrowings under our unsecured revolving credit facility was 1.29%. The weighted average annual interest rate for borrowings under our unsecured revolving credit facility was 1.30% and 1.28% for the three and nine months ended September 30, 2015, respectively, and 1.26% and 1.25% for the three and nine months ended September 30, 2014, respectively.  As of September 30, 2015 and November 8, 2015, we had $454,000 and $384,000 outstanding under our unsecured revolving credit facility, respectively.

 

Our $400,000 unsecured term loan, which matures on April 15, 2019, is prepayable without penalty at any time.  We are required to pay interest on the amount outstanding under our unsecured term loan at a rate of LIBOR plus a premium, which was 120 basis points at September 30, 2015.  The interest rate premium is subject to adjustment based on changes to our credit ratings. As of September 30, 2015, the annual interest rate for the amount outstanding under our unsecured term loan was 1.40%. The weighted average annual interest rate for borrowings under our unsecured term loan was 1.39% and 1.38% for the three and nine months ended September 30, 2015, respectively, and 1.35% and 1.36% for the three and nine months ended September 30, 2014, respectively.

 

Our credit agreement for our unsecured revolving credit facility and unsecured term loan also includes a feature under which maximum aggregate borrowings under our unsecured revolving credit facility and unsecured term loan may be increased up to $2,300,000 on a combined basis in certain circumstances. Our credit agreement for our unsecured revolving credit facility and unsecured term loan and our unsecured notes indenture and its 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 unsecured revolving credit facility and unsecured term loan and our senior unsecured notes indenture and its 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 unsecured revolving credit facility and unsecured term loan and our senior unsecured notes indenture and its supplements at September 30, 2015.

 

Note 7.  Real Estate Properties

 

At September 30, 2015, we owned 302 hotels and 193 travel centers which are operated under 14 operating agreements.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

 

During the nine months ended September 30, 2015, we funded $179,132 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 $14,365.  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, 2015, we acquired 11 hotels, a land parcel adjacent to one of our hotels, 14 travel centers and certain assets at 11 travel centers we lease to TA.  Our allocation of the purchase price 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

 

Intangible assets

3/16/2015

 

Rosemont, IL (2) (4)

$

35,500

$

2,375

$

 -

$

31,401

$

1,463

$

261

4/28/2015

 

Ft. Lauderdale, FL (3) (5)

 

750

 

750

 

 -

 

 -

 

 -

 

 -

5/15/2015

 

Denver, CO (2) (6)

 

77,250

 

8,193

 

 -

 

61,185

 

7,872

 

 -

6/1/2015

 

Various (3) (7)

 

227,877

 

26,286

 

67,160

 

134,389

 

42

 

 -

7/23/2015

 

Various (2) (8)

 

85,000

 

13,165

 

 -

 

64,338

 

7,497

 

 -

9/23/2015

 

Various (3) (7)

 

51,506

 

9,165

 

21,266

 

21,075

 

 -

 

 -

 

 

 

$

477,883

$

59,934

$

88,426

$

312,388

$

16,874

$

261

 

 

(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)

We accounted for these transactions as asset acquisitions.

 

(4)

On March 16, 2015, we acquired a 300 room hotel located in Rosemont, IL for $35,500, excluding acquisition related costs.  We added this Holiday Inn and Suites® branded hotel to our management agreement with InterContinental Hotels Group, plc, or InterContinental.  See Note 11 for further information regarding our InterContinental agreement. 

 

(5)

On April 28, 2015, we acquired a land parcel adjacent to one of our hotels in Fort Lauderdale, FL for $750, excluding acquisition related costs. See Note 10 for further information regarding this acquisition.

 

(6)

On May 15, 2015, we acquired a 364 room full service hotel located in Denver, CO for $77,250, excluding acquisition related costs.  We added this Crowne Plaza® branded hotel to our management agreement with InterContinental.  See Note 11 for further information regarding our InterContinental agreement.

 

(7)

On June 1, 2015, we entered agreements with TA to acquire and leaseback 14 travel centers it owned and certain assets it owned at 11 properties we lease to TA for an aggregate purchase price of approximately $279,383.  During June 2015, we acquired 12 of these travel centers and certain assets at 10 properties TA leases from us for an aggregate purchase price of $227,877.  On September 23, 2015, we acquired the remaining two travel centers and certain assets at a property TA leases from us for an aggregate purchase price of $51,506.  Pursuant to these agreements, we also agreed to acquire from, and leaseback to, TA five travel centers it is developing for purchase prices equal to TA’s development costs, which are estimated to be approximately $118,000.  The acquisition of these five travel centers is expected to occur as development of these travel centers is completed before June 30, 2017.  See Note 10 for further information regarding this transaction and our TA agreements. 

 

(8)

On July 23, 2015, we acquired a portfolio of nine extended stay hotels with 1,095 suites located in eight states for $85,000, excluding acquisition related costs.  We converted these hotels to Sonesta ES Suites® branded hotels and added them to our management agreement with Sonesta International Hotels Corporation, or Sonesta.  See Note 10 for further information regarding this transaction and our Sonesta agreement.

 

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

On June 9, 2015, we sold five TA branded travel centers to TA for $45,042.  As a result of this sale, we recorded an $11,015 gain on sale of real estate in the three months ended June 30, 2015.  See Note 10 for further information regarding this transaction and our TA agreements.

 

On October 27, 2015, we entered an agreement to acquire two extended stay hotels with 262 suites located in Cleveland and Westlake, OH for an aggregate purchase price of $12,000.  We plan to convert these hotels to Sonesta ES Suites® and add them to our management agreement with Sonesta.  See Note 10 for further information regarding this transaction and our Sonesta agreement.

 

On October 30, 2015, we acquired the land and certain improvements at a travel center located in Waterloo, NY that we leased from a third party and subleased to TA for $15,000, excluding acquisition related costs. 

 

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 REIT status.  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 included in our condensed consolidated statements of comprehensive income includes the income tax provision related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our REIT status.

 

During the three and nine months ended September 30, 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.  During the three and nine months ended September 30, 2014, we recognized income tax expense (benefit) of $39 and $1,110,  respectively, which includes $16 and $86, respectively, of foreign taxes, $23 and $1,046, respectively, of state taxes and zero and ($22), respectively, of federal taxes.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Note 9.  Segment Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2015

 

 

    

Hotels

    

Travel Centers

    

Corporate

    

Consolidated

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2015

 

 

    

Hotels

    

Travel Centers

    

Corporate

    

Consolidated

 

Total assets 

 

$

3,903,957

 

$

2,425,709

 

$

164,884

 

$

6,494,550

 

 

 

 

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2014

 

 

    

Hotels

    

Travel Centers

    

Corporate

    

Consolidated

 

Hotel operating revenues 

 

$

394,973

 

$

 -

 

$

 -

 

$

394,973

 

Rental income

 

 

8,088

 

 

55,749

 

 

 -

 

 

63,837

 

FF&E reserve income 

 

 

829

 

 

 -

 

 

 -

 

 

829

 

Total revenues 

 

 

403,890

 

 

55,749

 

 

 -

 

 

459,639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses 

 

 

279,560

 

 

 -

 

 

 -

 

 

279,560

 

Depreciation and amortization 

 

 

54,024

 

 

25,625

 

 

 -

 

 

79,649

 

General and administrative 

 

 

 -

 

 

 -

 

 

16,798

 

 

16,798

 

Acquisition related costs 

 

 

14

 

 

 -

 

 

 -

 

 

14

 

Total expenses 

 

 

333,598

 

 

25,625

 

 

16,798

 

 

376,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) 

 

 

70,292

 

 

30,124

 

 

(16,798)

 

 

83,618

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income 

 

 

 -

 

 

 -

 

 

13

 

 

13

 

Interest expense 

 

 

 -

 

 

 -

 

 

(34,304)

 

 

(34,304)

 

Loss on early extinguishment of debt

 

 

 

 

 

 

 

 

(129)

 

 

(129)

 

Income (loss) before income taxes and equity in earnings of an investee

 

 

70,292

 

 

30,124

 

 

(51,218)

 

 

49,198

 

Income tax expense

 

 

 -

 

 

 -

 

 

(39)

 

 

(39)

 

Equity in earnings of an investee 

 

 

 -

 

 

 -

 

 

38

 

 

38

 

Net income (loss) 

 

$

70,292

 

$

30,124

 

$

(51,219)

 

$

49,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2014

 

 

 

Hotels

 

Travel Centers

 

Corporate

 

Consolidated

 

Hotel operating revenues 

 

$

1,112,157

 

$

 -

 

$

 -

 

$

1,112,157

 

Rental income

 

 

24,532

 

 

166,427

 

 

 -

 

 

190,959

 

FF&E reserve income 

 

 

2,673

 

 

 -

 

 

 -

 

 

2,673

 

Total revenues 

 

 

1,139,362

 

 

166,427

 

 

 -

 

 

1,305,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses 

 

 

780,955

 

 

 -

 

 

 -

 

 

780,955

 

Depreciation and amortization 

 

 

160,402

 

 

76,297

 

 

 -

 

 

236,699

 

General and administrative 

 

 

 -

 

 

 -

 

 

41,429

 

 

41,429

 

Acquisition related costs 

 

 

237

 

 

 -

 

 

 -

 

 

237

 

Total expenses 

 

 

941,594

 

 

76,297

 

 

41,429

 

 

1,059,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) 

 

 

197,768

 

 

90,130

 

 

(41,429)

 

 

246,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income 

 

 

 -

 

 

 -

 

 

63

 

 

63

 

Interest expense 

 

 

 -

 

 

 -

 

 

(104,101)

 

 

(104,101)

 

Loss on early extinguishment of debt

 

 

 -

 

 

 -

 

 

(855)

 

 

(855)

 

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

 

 

197,768

 

 

90,130

 

 

(146,322)

 

 

141,576

 

Income tax expense

 

 

 -

 

 

 -

 

 

(1,110)

 

 

(1,110)

 

Equity in earnings of an investee 

 

 

 -

 

 

 -

 

 

66

 

 

66

 

Income (loss) before gain on sale of real estate

 

 

197,768

 

 

90,130

 

 

(147,366)

 

 

140,532

 

Gain on sale of real estate

 

 

130

 

 

 -

 

 

 -

 

 

130

 

Net income (loss) 

 

$

197,898

 

$

90,130

 

$

(147,366)

 

$

140,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014