10-Q 1 hpt-20160630x10q.htm 10-Q hpt_currentfolio_YTD_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 June 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 August 9, 2016:   151,559,788

 

 

 

 


 

HOSPITALITY PROPERTIES TRUST

 

FORM 10-Q

 

June 30, 2016

 

INDEX

 

 

 

 

 

Page

PART I 

Financial Information (unaudited)

 

 

 

 

 

Item 1. Financial Statements (unaudited)

 

 

Condensed Consolidated Balance Sheets — June 30, 2016 and December 31, 2015

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 30, 2016 and 2015

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2016 and 2015

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

 

Item 2.

 

 

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

23

 

 

 

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

40

 

 

 

 

Item 4.

 

 

Controls and Procedures

42

 

 

 

 

Warning Concerning Forward Looking Statements

42

 

 

 

 

Statement Concerning Limited Liability

46

 

 

 

PART II 

Other Information

 

 

 

 

 

Item 1A.

 

 

Risk Factors

46

 

 

 

 

Item 6.

 

 

Exhibits

47

 

 

 

 

Signatures

49

 

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)

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

 

December 31,

 

 

 

2016

    

2015

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate properties:

 

 

 

 

 

 

 

Land

 

$

1,547,774

 

$

1,529,004

 

Buildings, improvements and equipment

 

 

6,993,371

 

 

6,740,423

 

Total real estate properties, gross

 

 

8,541,145

 

 

8,269,427

 

Accumulated depreciation

 

 

(2,361,264)

 

 

(2,218,499)

 

Total real estate properties, net

 

 

6,179,881

 

 

6,050,928

 

Cash and cash equivalents

 

 

20,347

 

 

13,682

 

Restricted cash (FF&E reserve escrow)

 

 

61,419

 

 

51,211

 

Due from related persons

 

 

58,991

 

 

50,987

 

Other assets, net

 

 

288,697

 

 

227,989

 

Total assets

 

$

6,609,335

 

$

6,394,797

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

232,000

 

$

465,000

 

Unsecured term loan, net

 

 

398,088

 

 

397,756

 

Senior unsecured notes, net

 

 

2,862,800

 

 

2,403,439

 

Convertible senior unsecured notes

 

 

8,478

 

 

8,478

 

Security deposits

 

 

77,269

 

 

53,579

 

Accounts payable and other liabilities

 

 

190,304

 

 

179,783

 

Due to related persons

 

 

40,724

 

 

69,514

 

Dividends payable

 

 

5,166

 

 

5,166

 

Total liabilities

 

 

3,814,829

 

 

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; 151,559,788 and 151,547,288 shares issued and outstanding, respectively

 

 

1,516

 

 

1,515

 

Additional paid in capital

 

 

4,166,301

 

 

4,165,911

 

Cumulative net income

 

 

2,989,769

 

 

2,881,657

 

Cumulative other comprehensive income (loss)

 

 

21,793

 

 

(15,523)

 

Cumulative preferred distributions

 

 

(331,645)

 

 

(321,313)

 

Cumulative common distributions

 

 

(4,333,335)

 

 

(4,180,272)

 

Total shareholders’ equity

 

 

2,794,506

 

 

2,812,082

 

Total liabilities and shareholders’ equity

 

$

6,609,335

 

$

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)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

    

2016

    

2015

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenues

 

$

471,910

 

$

436,977

 

$

868,413

 

$

806,573

 

Rental income

 

 

77,293

 

 

69,063

 

 

153,552

 

 

133,814

 

FF&E reserve income

 

 

1,096

 

 

1,026

 

 

2,452

 

 

2,191

 

Total revenues

 

 

550,299

 

 

507,066

 

 

1,024,417

 

 

942,578

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses

 

 

324,922

 

 

304,428

 

 

601,227

 

 

562,086

 

Depreciation and amortization

 

 

88,782

 

 

80,582

 

 

176,053

 

 

159,551

 

General and administrative

 

 

37,365

 

 

12,685

 

 

53,388

 

 

33,989

 

Acquisition related costs

 

 

117

 

 

797

 

 

729

 

 

1,135

 

Total expenses

 

 

451,186

 

 

398,492

 

 

831,397

 

 

756,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income 

 

 

99,113

 

 

108,574

 

 

193,020

 

 

185,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income

 

 

749

 

 

 -

 

 

749

 

 

 -

 

Interest income

 

 

40

 

 

10

 

 

138

 

 

21

 

Interest expense (including amortization of debt issuance costs and debt discounts of $2,127 and $1,458 and $3,993 and $2,916, respectively)

 

 

(41,698)

 

 

(35,836)

 

 

(83,284)

 

 

(71,290)

 

Loss on early extinguishment of debt

 

 

 -

 

 

 -

 

 

(70)

 

 

 -

 

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

 

 

58,204

 

 

72,748

 

 

110,553

 

 

114,548

 

Income tax expense

 

 

(2,160)

 

 

(640)

 

 

(2,535)

 

 

(931)

 

Equity in earnings of an investee

 

 

17

 

 

23

 

 

94

 

 

95

 

Income before gain on sale of real estate

 

 

56,061

 

 

72,131

 

 

108,112

 

 

113,712

 

Gain on sale of real estate

 

 

 -

 

 

11,015

 

 

 -

 

 

11,015

 

Net income

 

 

56,061

 

 

83,146

 

 

108,112

 

 

124,727

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investment securities

 

 

19,676

 

 

(8,858)

 

 

37,221

 

 

7,626

 

Equity interest in investee’s unrealized gains (losses)

 

 

43

 

 

(64)

 

 

95

 

 

(19)

 

Other comprehensive income (loss)

 

 

19,719

 

 

(8,922)

 

 

37,316

 

 

7,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

75,780

 

$

74,224

 

$

145,428

 

$

132,334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

56,061

 

$

83,146

 

$

108,112

 

$

124,727

 

Preferred distributions

 

 

(5,166)

 

 

(5,166)

 

 

(10,332)

 

 

(10,332)

 

Net income available for common shareholders

 

$

50,895

 

$

77,980

 

$

97,780

 

$

114,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

 

151,408

 

 

150,260

 

 

151,405

 

 

150,028

 

Weighted average common shares outstanding (diluted)

 

 

151,442

 

 

150,292

 

 

151,428

 

 

150,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common shareholders per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.34

 

$

0.52

 

$

0.65

 

$

0.76

 

 

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 Six Months Ended June 30,

 

 

 

2016

 

2015

 

 

    

 

 

    

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

108,112

 

$

124,727

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

176,053

 

 

159,551

 

Amortization of debt issuance costs and debt discounts as interest

 

 

3,993

 

 

2,916

 

Straight line rental income

 

 

(7,445)

 

 

(2,056)

 

Security deposits received or replenished

 

 

23,690

 

 

9,064

 

FF&E reserve income and deposits

 

 

(37,491)

 

 

(33,664)

 

Loss on early extinguishment of debt

 

 

70

 

 

 -

 

Equity in earnings of an investee

 

 

(94)

 

 

(95)

 

Gain on sale of real estate

 

 

 -

 

 

(11,015)

 

Other non-cash (income) expense, net

 

 

(1,793)

 

 

1,749

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Due from related persons

 

 

(775)

 

 

(1,411)

 

Other assets

 

 

(11,792)

 

 

(9,539)

 

Accounts payable and other liabilities

 

 

9,923

 

 

2,538

 

Due to related persons

 

 

(30,956)

 

 

9,292

 

Net cash provided by operating activities

 

 

231,495

 

 

252,057

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

(196,856)

 

 

(247,631)

 

Real estate improvements

 

 

(86,929)

 

 

(120,174)

 

FF&E reserve escrow fundings

 

 

(1,156)

 

 

(4,711)

 

Investment in The RMR Group Inc.

 

 

 -

 

 

(15,196)

 

Net cash used in investing activities

 

 

(284,941)

 

 

(387,712)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of senior unsecured notes, net of discounts

 

 

737,612

 

 

 -

 

Repayment of senior unsecured notes

 

 

(275,000)

 

 

 -

 

Borrowings under unsecured revolving credit facility

 

 

410,000

 

 

381,000

 

Repayments of unsecured revolving credit facility

 

 

(643,000)

 

 

(80,000)

 

Debt issuance costs

 

 

(6,106)

 

 

(5)

 

Distributions to preferred shareholders

 

 

(10,332)

 

 

(10,332)

 

Distributions to common shareholders

 

 

(153,063)

 

 

(148,447)

 

Net cash provided by financing activities

 

 

60,111

 

 

142,216

 

Increase in cash and cash equivalents 

 

 

6,665

 

 

6,561

 

Cash and cash equivalents at beginning of period

 

 

13,682

 

 

11,834

 

Cash and cash equivalents at end of period

 

$

20,347

 

$

18,395

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

65,889

 

$

68,196

 

Cash paid for income taxes

 

 

1,988

 

 

2,137

 

Non-cash investing activities:

 

 

 

 

 

 

 

Hotel managers’ deposits in FF&E reserve

 

$

35,145

 

$

31,091

 

Hotel managers’ purchases with FF&E reserve

 

 

(26,093)

 

 

(30,678)

 

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)

(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 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 $38,678 and $26,559 as of June 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 $91,378 and $68,921 as of June 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 on 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

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Table of Contents

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(Unaudited)

 

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 on our condensed consolidated financial statements.

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 on 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 on 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 will become 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 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 $3,693 and $7,445 for the three and six months ended June 30, 2016, respectively, and $1,511 and $2,056 for the three and six months ended June 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,

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Table of Contents

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(Unaudited)

 

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 $36,351 and $29,122 and other assets, includes $2,056 and $1,841 of straight line rent receivables at June 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 $279 and $529 for the three and six months ended June 30, 2016, respectively.  We had no deferred estimated percentage rent for the three and six months ended June 30, 2015.  In connection with our June 2015 lease modification with TA, we recorded $2,048 of percentage rent during the three months ended June 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 June 30,

 

For the Six Months Ended June 30,

 

 

2016

 

2015

 

2016

 

2015

 

 

(in thousands)

Weighted average common shares for basic earnings per share

 

151,408

 

150,260

 

151,405

 

150,028

Effect of dilutive securities:

 

 

 

 

 

 

 

 

  Contingently issuable common shares

 

 -

 

 -

 

 -

 

542

  Unvested share awards

 

34

 

32

 

23

 

24

Weighted average common shares for diluted earnings per share

 

151,442

 

150,292

 

151,428

 

150,594

 

Note 5.  Shareholders’ Equity

Distributions

On each of January 15, 2016, April 15, 2016 and July 15, 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 July 12, 2016, we declared a regular quarterly distribution payable to common shareholders of record on July 22, 2016 of $0.51 per share, or $77,295.  We expect to pay this amount on or about August 18, 2016.

Share Issuance

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.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(Unaudited)

 

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 June 30, 2016 were: (1) our $232,000 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 $2,900,000 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 June 30, 2016. We also pay a facility fee on the total amount of lending commitments, which was 20 basis points per annum at June 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 June 30, 2016, the annual interest rate for the amount outstanding under our revolving credit facility was 1.56%. The weighted average annual interest rate for borrowings under our revolving credit facility was 1.54% for both the three and six months ended June 30, 2016 and 1.28% for both the three and six months ended June 30, 2015.  As of June 30, 2016 and August 8, 2016, we had $232,000 and $167,000 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 June 30, 2016.  The interest rate premium is subject to adjustment based on changes to our credit ratings.  As of June 30, 2016, the annual interest rate for the amount outstanding under our term loan was 1.66%. The weighted average annual interest rate for borrowings under our term loan was 1.64% and 1.63% for the three and six months ended June 30, 2016, respectively, and 1.38% for both the three and six months ended June 30, 2015. 

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 The RMR Group LLC, or 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 June 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 $275,000 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 six months ended June 30, 2016, which represented the unamortized discounts and issuance costs of these notes.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(Unaudited)

 

Note 7.  Real Estate Properties

At June 30, 2016, we owned 305 hotels and 197 travel centers, which are operated under 14 agreements.

During the six months ended June 30, 2016, we funded $88,085 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 $6,805.  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 six months ended June 30, 2016, we acquired three hotels and four travel centers.  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

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

 

 -

 

 

 

$

191,856

$

22,137

$

17,497

$

143,177

$

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, IN 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.

(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. 

On July 29, 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 currently expect to complete this acquisition during the fourth quarter of 2016. This acquisition is subject to completion of diligence and other closing conditions; accordingly, we can provide no assurance 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

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(Unaudited)

 

management agreements and to add that management agreement to our Sonesta agreement. See Notes 10 and 11 for further information regarding our Sonesta agreement.

 

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 six months ended June 30, 2016, we recognized income tax expense of $2,160 and $2,535, respectively, which includes $1,570 and $1,602, respectively, of foreign taxes, $39 and $92, respectively, of federal taxes and $551 and $841, respectively, of state taxes.  During the three and six months ended June 30, 2015, we recognized income tax expense of $640, and $931, respectively, which includes $51 and $75, respectively, of foreign taxes and $589 and $856, respectively, of state taxes.

 

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per 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 June 30, 2016

 

 

    

Hotels

    

Travel Centers

    

Corporate

    

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenues 

 

$

471,910

 

$

 -

 

$

 -

 

$

471,910

 

Rental income

 

 

8,326

 

 

68,967

 

 

 -

 

 

77,293

 

FF&E reserve income 

 

 

1,096

 

 

 -

 

 

 -

 

 

1,096

 

Total revenues

 

 

481,332

 

 

68,967

 

 

 -

 

 

550,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses 

 

 

324,922

 

 

 -

 

 

 -

 

 

324,922

 

Depreciation and amortization 

 

 

56,004

 

 

32,778

 

 

 -

 

 

88,782

 

General and administrative 

 

 

 -

 

 

 -

 

 

37,365

 

 

37,365

 

Acquisition related costs 

 

 

117

 

 

 -

 

 

 -

 

 

117

 

Total expenses 

 

 

381,043

 

 

32,778

 

 

37,365

 

 

451,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) 

 

 

100,289

 

 

36,189

 

 

(37,365)

 

 

99,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income

 

 

 -

 

 

 -

 

 

749

 

 

749

 

Interest income 

 

 

 -

 

 

 -

 

 

40

 

 

40

 

Interest expense 

 

 

 -

 

 

 -

 

 

(41,698)

 

 

(41,698)

 

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

 

 

100,289

 

 

36,189

 

 

(78,274)

 

 

58,204

 

Income tax expense

 

 

 -

 

 

 -

 

 

(2,160)

 

 

(2,160)

 

Equity in earnings of an investee 

 

 

 -

 

 

 -

 

 

17

 

 

17

 

Net income (loss) 

 

$

100,289

 

$

36,189

 

$

(80,417)

 

$

56,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2016

 

 

 

Hotels

 

Travel Centers

 

Corporate

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenues 

 

$

868,413

 

$

 -

 

$

 -

 

$

868,413

 

Rental income

 

 

16,468

 

 

137,084

 

 

 -

 

 

153,552

 

FF&E reserve income 

 

 

2,452

 

 

 -

 

 

 -

 

 

2,452

 

Total revenues 

 

 

887,333

 

 

137,084

 

 

 -

 

 

1,024,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses 

 

 

601,227

 

 

 -

 

 

 -

 

 

601,227

 

Depreciation and amortization 

 

 

111,088

 

 

64,965

 

 

 -

 

 

176,053

 

General and administrative 

 

 

 -

 

 

 -

 

 

53,388

 

 

53,388

 

Acquisition related costs 

 

 

613

 

 

 -

 

 

116

 

 

729

 

Total expenses 

 

 

712,928

 

 

64,965

 

 

53,504

 

 

831,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) 

 

 

174,405

 

 

72,119

 

 

(53,504)

 

 

193,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income

 

 

 -

 

 

 -

 

 

749

 

 

749

 

Interest income 

 

 

 -

 

 

 -

 

 

138

 

 

138

 

Interest expense 

 

 

 -

 

 

 -

 

 

(83,284)

 

 

(83,284)

 

Loss on early extinguishment of debt

 

 

 -

 

 

 -

 

 

(70)

 

 

(70)

 

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

 

 

174,405

 

 

72,119

 

 

(135,971)

 

 

110,553

 

Income tax expense 

 

 

 -

 

 

 -

 

 

(2,535)

 

 

(2,535)

 

Equity in earnings of an investee 

 

 

 -

 

 

 -

 

 

94

 

 

94

 

Net income (loss) 

 

$

174,405

 

$

72,119

 

$

(138,412)

 

$

108,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2016

 

 

    

Hotels

    

Travel Centers

    

Corporate

    

Consolidated

 

Total assets 

 

$

3,999,281

 

$

2,500,414

 

$

109,640

 

$

6,609,335

 

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2015

 

 

    

Hotels

    

Travel Centers

    

Corporate

    

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenues 

 

$

436,977

 

$

 -

 

$

 -

 

$

436,977

 

Rental income

 

 

8,179

 

 

60,884

 

 

 -

 

 

69,063

 

FF&E reserve income 

 

 

1,026

 

 

 -

 

 

 -

 

 

1,026

 

Total revenues 

 

 

446,182

 

 

60,884

 

 

 -

 

 

507,066

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses 

 

 

304,428

 

 

 -

 

 

 -

 

 

304,428

 

Depreciation and amortization 

 

 

52,924

 

 

27,658

 

 

 -

 

 

80,582

 

General and administrative 

 

 

 -

 

 

 -

 

 

12,685

 

 

12,685

 

Acquisition related costs 

 

 

797

 

 

 -

 

 

 -

 

 

797

 

Total expenses 

 

 

358,149

 

 

27,658

 

 

12,685

 

 

398,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) 

 

 

88,033

 

 

33,226

 

 

(12,685)

 

 

108,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income 

 

 

 -

 

 

 -

 

 

10

 

 

10

 

Interest expense 

 

 

 -

 

 

 -

 

 

(35,836)

 

 

(35,836)

 

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

 

 

88,033

 

 

33,226

 

 

(48,511)

 

 

72,748

 

Income tax expense

 

 

 -

 

 

 -

 

 

(640)

 

 

(640)

 

Equity in earnings of an investee 

 

 

 -

 

 

 -

 

 

23

 

 

23

 

Income (loss) before gain on sale of real estate

 

 

88,033

 

 

33,226

 

 

(49,128)

 

 

72,131

 

Gain on sale of real estate

 

 

 -

 

 

11,015

 

 

 -

 

 

11,015

 

Net income (loss) 

 

$

88,033

 

$

44,241

 

$

(49,128)

 

$

83,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2015

 

 

 

Hotels

 

Travel Centers

 

Corporate

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenues 

 

$

806,573

 

$

 -

 

$

 -

 

$

806,573

 

Rental income

 

 

16,140

 

 

117,674

 

 

 -

 

 

133,814

 

FF&E reserve income 

 

 

2,191

 

 

 -

 

 

 -

 

 

2,191

 

Total revenues 

 

 

824,904

 

 

117,674

 

 

 -

 

 

942,578

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses 

 

 

562,086

 

 

 -

 

 

 -

 

 

562,086

 

Depreciation and amortization 

 

 

105,321

 

 

54,230

 

 

 -

 

 

159,551

 

General and administrative 

 

 

 -

 

 

 -

 

 

33,989