HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
294,594
|
|
|
$
|
183,598
|
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
300,308
|
|
|
286,811
|
|
|
Amortization of debt issuance costs and debt discounts and premiums as interest
|
|
7,607
|
|
|
6,541
|
|
|
Straight line rental income
|
|
(9,359
|
)
|
|
(9,208
|
)
|
|
Security deposits received or replenished
|
|
7,687
|
|
|
37,239
|
|
|
Loss on early extinguishment of debt
|
|
160
|
|
|
—
|
|
|
Unrealized gains on equity securities
|
|
(89,348
|
)
|
|
—
|
|
|
Equity in earnings of an investee
|
|
(881
|
)
|
|
(533
|
)
|
|
Gain on sale of real estate
|
|
—
|
|
|
(9,348
|
)
|
|
Other non-cash (income) expense, net
|
|
(2,226
|
)
|
|
(2,523
|
)
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Due from related persons
|
|
(585
|
)
|
|
(992
|
)
|
|
Other assets
|
|
(8,627
|
)
|
|
(14,710
|
)
|
|
Accounts payable and other liabilities
|
|
(21,259
|
)
|
|
(21,979
|
)
|
|
Due to related persons
|
|
(74,667
|
)
|
|
(12,619
|
)
|
|
Net cash provided by operating activities
|
|
403,404
|
|
|
442,277
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Real estate acquisitions and deposits
|
|
(95,208
|
)
|
|
(594,927
|
)
|
|
Real estate improvements
|
|
(111,248
|
)
|
|
(89,955
|
)
|
|
Hotel managers’ purchases with restricted cash
|
|
(89,401
|
)
|
|
(64,574
|
)
|
|
Hotel manager's deposit of insurance proceeds into restricted cash
|
|
18,000
|
|
|
—
|
|
|
Net proceeds from sale of real estate
|
|
—
|
|
|
23,438
|
|
|
Net cash used in investing activities
|
|
(277,857
|
)
|
|
(726,018
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Proceeds from issuance of senior unsecured notes, after discounts and premiums
|
|
389,976
|
|
|
598,246
|
|
|
Redemption of preferred shares
|
|
—
|
|
|
(290,000
|
)
|
|
Repurchase of convertible senior notes
|
|
—
|
|
|
(8,478
|
)
|
|
Borrowings under unsecured revolving credit facility
|
|
395,000
|
|
|
631,000
|
|
|
Repayments of unsecured revolving credit facility
|
|
(650,000
|
)
|
|
(364,000
|
)
|
|
Deferred financing costs
|
|
(12,242
|
)
|
|
(5,018
|
)
|
|
Repurchase of common shares
|
|
(606
|
)
|
|
(533
|
)
|
|
Distributions to preferred shareholders
|
|
—
|
|
|
(6,601
|
)
|
|
Distributions to common shareholders
|
|
(259,678
|
)
|
|
(254,623
|
)
|
|
Net cash provided by (used in) financing activities
|
|
(137,550
|
)
|
|
299,993
|
|
|
Increase (decrease) in cash and cash equivalents and restricted cash
|
|
(12,003
|
)
|
|
16,252
|
|
|
Cash and cash equivalents and restricted cash at beginning of period
|
|
97,496
|
|
|
71,352
|
|
|
Cash and cash equivalents and restricted cash at end of period
|
|
$
|
85,493
|
|
|
$
|
87,604
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash and cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the condensed consolidated statements of cash flows:
|
|
Cash and cash equivalents
|
|
$
|
19,849
|
|
|
$
|
14,489
|
|
|
Restricted cash
|
|
65,644
|
|
|
73,115
|
|
|
Total cash and cash equivalents and restricted cash
|
|
$
|
85,493
|
|
|
$
|
87,604
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
158,056
|
|
|
$
|
149,261
|
|
|
Cash paid for income taxes
|
|
2,804
|
|
|
2,588
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements of Hospitality Properties Trust and its subsidiaries, or HPT, we, our or us, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended
December 31, 2017
, as amended, or our
2017
Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period, have been included. 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 wholly owned taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB,
Accounting Standards Codification
™. We have concluded that we must consolidate each of our TRSs because we are the entity with the power to direct the activities that most significantly impact such VIEs’ 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
$41,224
and
$33,305
as of
September 30, 2018
and
December 31, 2017
, respectively, and consist primarily of amounts due from and working capital advances to certain of our hotel managers. The liabilities of our TRSs were
$148,418
and
$140,897
as of
September 30, 2018
and
December 31, 2017
, respectively, and consist primarily of security deposits they hold and amounts payable to certain of our 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, 2018, we adopted FASB Accounting Standards Update, or ASU, No. 2014-09 (and related clarifying guidance issued by the FASB),
Revenue From Contracts With Customers
, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU No. 2014-09 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 ASU No. 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. The majority of our revenue is from hotels managed under TRS structures. The adoption of this update did not have a material impact on the amount or timing of our revenue recognition for revenues from room, food and beverage, and other hotel level sales of our managed hotels in our condensed consolidated financial statements. A lesser portion of our revenue consists of rental income from leasing arrangements, which are specifically excluded from ASU No. 2014-09. We have adopted ASU No. 2014-09 using the modified retrospective approach.
On January 1, 2018, we adopted FASB 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. The implementation of ASU No. 2016-01 resulted in the reclassification of historical changes in the fair value of our available for sale equity securities of
$78,715
from cumulative other comprehensive income to cumulative net income. We also reclassified
$841
from cumulative other comprehensive income to cumulative net income for our share of cumulative other comprehensive income of our equity method investee. Effective January 1, 2018, changes in the fair value of our equity securities are recorded through earnings in accordance with ASU No. 2016-01.
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
On January 1, 2018, we adopted FASB ASU No. 2016-18,
Restricted Cash
, which requires companies to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The implementation of ASU 2016-18 resulted in an increase of
$55,222
of net cash provided by operating activities and an increase of
$42,563
of net cash used in investing activities for the
nine
months ended
September 30, 2017
. This update also requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheets. Restricted cash consisting of amounts escrowed by our hotel operators pursuant to the terms of our management agreements and leases to fund periodic renovations and improvements at our hotels totaled
$65,644
and
$73,115
as of
September 30, 2018
and
2017
, respectively. See Notes
3
and
8
for further information regarding our FF&E reserves. The adoption of this update did not change our balance sheet presentation.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326)
:
Measurement of Credit Losses on Financial Instruments
, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
, which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. ASU No. 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2018-07 will have in our condensed consolidated financial statements.
Note 3. Revenue Recognition
We report hotel operating revenues for managed hotels in our condensed consolidated statements of comprehensive income. We generally recognize hotel operating revenues, consisting primarily of room and food and beverage sales, when goods and services are provided.
We report rental income for leased hotels and travel centers in our condensed consolidated statements of comprehensive income. We recognize rental income from operating leases on a straight line basis over the term of the lease agreements. Rental income includes
$3,136
and
$9,359
for the
three and nine
months ended
September 30, 2018
, respectively, and
$3,087
and
$9,208
for the
three and nine
months ended
September 30, 2017
, respectively, of adjustments necessary to record scheduled rent increases under certain of our leases, the deferred rent obligations payable to us under our leases with TravelCenters of America LLC, or TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight line basis. See Notes
8
and
10
for further information regarding our TA leases. Due from related persons includes
$63,285
and
$54,219
and other assets, net, includes
$2,985
and
$2,691
of straight line rent receivables at
September 30, 2018
and
December 31, 2017
, 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
$978
and
$2,762
for the
three and nine
months ended
September 30, 2018
, respectively, and
$435
and
$1,384
for the
three and nine
months ended
September 30, 2017
, respectively.
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
We own all the FF&E reserve (as defined in
Note 8
) escrows for our hotels. We report deposits by our third party tenants into the escrow accounts as FF&E reserve income. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income.
Note 4. Weighted Average Common Shares
The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
(in thousands)
|
|
Weighted average common shares for basic earnings per share
|
|
164,232
|
|
|
164,149
|
|
|
164,212
|
|
|
164,131
|
|
|
Effect of dilutive securities: Unvested share awards
|
|
42
|
|
|
39
|
|
|
30
|
|
|
37
|
|
|
Weighted average common shares for diluted earnings per share
|
|
164,274
|
|
|
164,188
|
|
|
164,242
|
|
|
164,168
|
|
Note 5. Shareholders' Equity
Share Awards
On
April 12, 2018
, in accordance with our Trustee compensation arrangements, and in connection with the election of one of our Managing Trustees, we granted
3,000
of our common shares, valued at
$25.07
per common share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day, to the Managing Trustee who was elected as a Managing Trustee that day.
On
June 14, 2018
, in accordance with our Trustee compensation arrangements, we granted
3,000
of our common shares, valued at
$28.44
per common share, the closing price of our common shares on Nasdaq on that day to each of our five Trustees as part of their annual compensation.
On
September 13, 2018
, we granted an aggregate of
97,000
of our common shares, valued at
$28.97
per common share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of The RMR Group LLC, or RMR LLC, under our equity compensation plan.
Share Purchases
On
January 1, 2018
, we purchased an aggregate of
3,394
of our common shares for
$29.85
per common share, the closing price of our common shares on Nasdaq on December 29, 2017, from a former officer of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
On
September 24, 2018
, we purchased an aggregate of
17,808
of our common shares for
$28.35
per common share, the closing price of our common shares on Nasdaq on that day, from our officers and certain other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
Distributions
On
February 22, 2018
, we paid a regular quarterly distribution to our common shareholders of record on
January 29, 2018
of
$0.52
per share, or
$85,460
. On
May 17, 2018
, we paid a regular quarterly distribution to common shareholders of record on
April 30, 2018
of
$0.53
per share, or
$87,105
. On
August 16, 2018
, we paid a regular quarterly distribution to common shareholders of record on
July 30, 2018
of
$0.53
per share, or
$87,113
. On
October 18, 2018
, we declared a regular quarterly distribution to common shareholders of record on
October 29, 2018
of
$0.53
per share, or
$87,154
. We expect to pay this amount on or about
November 15, 2018
.
Cumulative Other Comprehensive Income (Loss)
Cumulative other comprehensive income (loss), as of
September 30, 2018
, represents our share of the comprehensive loss of Affiliates Insurance Company, or AIC. See
Note 10
for further information regarding this investment. The following table
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
presents changes in the amounts we recognized in cumulative other comprehensive income (loss) by component for the
three and nine
months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
Unrealized Gain
|
|
Equity in
|
|
|
|
|
|
(Loss) on Investment
|
|
Unrealized Gain
|
|
|
|
|
|
Securities, net
|
|
(Loss) of Investees
|
|
Total
|
|
Balance at June 30, 2018
|
|
$
|
—
|
|
|
$
|
(281
|
)
|
|
$
|
(281
|
)
|
|
Current period other comprehensive income
|
|
—
|
|
|
173
|
|
|
173
|
|
|
Balance at September 30, 2018
|
|
$
|
—
|
|
|
$
|
(108
|
)
|
|
$
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Unrealized Gain
|
|
Equity in
|
|
|
|
|
|
(Loss) on Investment
|
|
Unrealized Gain
|
|
|
|
|
|
Securities, net
|
|
(Loss) of Investees
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
78,715
|
|
|
$
|
643
|
|
|
$
|
79,358
|
|
|
Amounts reclassified from cumulative other comprehensive income to retained earnings
|
|
(78,715
|
)
|
|
(841
|
)
|
|
(79,556
|
)
|
|
Current period other comprehensive income
|
|
—
|
|
|
90
|
|
|
90
|
|
|
Balance at September 30, 2018
|
|
$
|
—
|
|
|
$
|
(108
|
)
|
|
$
|
(108
|
)
|
Note 6. Indebtedness
Our principal debt obligations at
September 30, 2018
were: (1)
$143,000
of outstanding borrowings under our
$1,000,000
unsecured revolving credit facility; (2) our
$400,000
unsecured term loan; and (3)
$3,650,000
aggregate outstanding principal amount of senior unsecured notes. Our revolving credit facility and our term loan are governed by a credit agreement with a syndicate of institutional lenders.
We have a
$1,000,000
revolving credit facility that is available for general business purposes, including acquisitions. Our revolving credit facility provides that we can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. On
May 10, 2018
, we amended and restated the credit agreement governing our revolving credit facility and our term loan. As a result of the amendment, the interest rate payable on borrowings under our revolving credit facility was reduced from a rate of LIBOR plus a premium of
110
basis points per annum to a rate of LIBOR plus a premium of
100
basis points per annum. The facility fee remained unchanged at
20
basis points per annum on the total amount of lending commitments under this facility. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. Also as a result of the amendment, the stated maturity date of this facility was extended from
July 15, 2018
to
July 15, 2022
, and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to further extend the maturity date of the facility for
two
additional
six
month periods. As a result of this amendment, we recognized a loss on early extinguishment of debt related to the revolving credit facility of
$90
during the three months ended June 30, 2018 to write off unamortized debt issuance costs.
As of
September 30, 2018
, the annual interest rate payable on borrowings under our revolving credit facility was
3.09%
. The weighted average annual interest rate for borrowings under our revolving credit facility was
2.97%
and
3.00%
for the
three and nine
months ended
September 30, 2018
, respectively, and
2.33%
and
2.17%
for the
three and nine
months ended
September 30, 2017
, respectively. As of
September 30, 2018
, we had
$143,000
outstanding and
$857,000
available under our revolving credit facility. As of
November 5, 2018
, we had
$119,000
outstanding and
$881,000
available to borrow under our revolving credit facility.
As a result of the amendment to our credit agreement, the interest rate payable on borrowings under our term loan was reduced from a rate of LIBOR plus a premium of
120
basis points per annum to a rate of LIBOR plus a premium of
110
basis points per annum, subject to adjustment based upon changes to our credit ratings. Also as a result of the amendment, the stated
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
maturity date of the term loan was extended from
April 15, 2019
to
July 15, 2023
. Our term loan is prepayable without penalty at any time. As a result of this amendment, we recognized a loss on early extinguishment of debt related to the term loan of
$70
during the three months ended June 30, 2018 to write off unamortized debt issuance costs.
As of
September 30, 2018
, the annual interest rate for the amount outstanding under our term loan was
3.20%
. The weighted average annual interest rate for borrowings under our term loan was
3.19%
and
3.02%
for the
three and nine
months ended
September 30, 2018
, respectively, and
2.43%
and
2.20%
for the
three and nine
months ended
September 30, 2017
, respectively.
Our credit agreement also includes a feature under which maximum aggregate borrowings may be increased to up to
$2,300,000
on a combined basis in certain circumstances. Our credit agreement and our unsecured senior notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR LLC ceasing to act as our business manager. Our credit agreement and our unsecured 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 and our unsecured senior notes indentures and their supplements at
September 30, 2018
.
On
February 2, 2018
, we issued
$400,000
principal amount of
4.375%
senior notes due
2030
in a public offering. Net proceeds from this offering were
$386,400
after discounts and expenses.
Note 7. Real Estate Properties
At
September 30, 2018
, we owned
325
hotels and
199
travel centers.
During the
nine
months ended
September 30, 2018
, we funded
$118,733
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
$8,608
. See Notes
8
and
10
for further information about our management and lease agreements and our fundings of improvements to certain of our properties.
Acquisitions
During the
nine
months ended
September 30, 2018
, we acquired
two
hotels. We accounted for these transactions as acquisitions of assets. Our allocation of the purchase price of each of these acquisitions based on the estimated fair value of the acquired assets and assumed liabilities is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Date
|
|
Location
|
|
Purchase Price
|
|
Land
|
|
Land Improvements
|
|
Building and Improvements
|
|
Furniture, Fixtures and Equipment
|
|
6/15/2018
|
|
Minneapolis, MN
(1)
|
|
75,572
|
|
|
$
|
2,196
|
|
|
$
|
—
|
|
|
$
|
68,384
|
|
|
$
|
4,992
|
|
|
6/15/2018
|
|
Baton Rouge, LA
(2)
|
|
16,022
|
|
|
2,242
|
|
|
173
|
|
|
12,842
|
|
|
765
|
|
|
|
|
|
|
$
|
91,594
|
|
|
$
|
4,438
|
|
|
$
|
173
|
|
|
$
|
81,226
|
|
|
$
|
5,757
|
|
|
|
|
|
(1)
|
On
June 15, 2018
, we acquired the
360
room Radisson Blu
®
hotel in Minneapolis, MN for a purchase price of
$75,572
, including capitalized acquisition costs of
$572
. We added this hotel to our management agreement with Radisson Hospitality, Inc., or Radisson.
|
|
|
|
|
(2)
|
On
June 15, 2018
, we acquired the
117
suite Staybridge Suites
®
at Louisiana State University in Baton Rouge, LA for a purchase price of
$16,022
including capitalized acquisition costs of
$272
. We added this hotel to our management agreement with InterContinental Hotels Group, plc, or InterContinental.
|
See
Note 8
for further information regarding our Radisson and InterContinental agreements.
On
October 30, 2018
, we acquired a hotel with
164
suites in Scottsdale, AZ for a purchase price of
$35,885
, excluding acquisition related costs. In connection with this acquisition, we converted this hotel to the Sonesta Suites
®
brand and added it
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
to our management agreement with Sonesta International Hotels Corporation, or Sonesta. See Notes
8
and
10
for further information regarding our Sonesta agreement.
Note 8. Management Agreements and Leases
As of
September 30, 2018
, we owned
325
hotels and
199
travel centers, which were included in
13
operating agreements. We do not operate any of our properties.
As of
September 30, 2018
,
323
of our hotels were leased to our TRSs and managed by independent hotel operating companies and
two
hotels were leased to third parties. As of
September 30, 2018
, our hotel properties were managed by or leased to separate subsidiaries of Marriott International, Inc., or Marriott, InterContinental, Sonesta, Wyndham Hotels & Resorts, Inc., or Wyndham, Hyatt Hotels Corporation, or Hyatt, and Radisson under
eight
agreements. These hotel agreements have initial terms expiring between 2019 and 2038. Each of these agreements is for between
one
and
100
of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties included in each agreement, and the renewal terms range between
20
to
60
years. Most of these agreements require the third party manager or tenant to: (1) make payments to us of minimum returns or minimum rents; (2) deposit a percentage of total hotel sales into reserves established for the regular refurbishment of our hotels, or FF&E reserves; and (3) for our managed hotels, make payments to our TRSs of additional returns to the extent of available cash flows after payment of operating expenses, funding of the FF&E reserves, payment of our minimum returns, payment of certain management fees and replenishment of security deposits or guarantees. Some of our managers or tenants or their affiliates have provided deposits or guarantees to secure their obligations to pay us.
Marriott No. 1 agreement
. Our management agreement with Marriott for
53
hotels, or our Marriott No. 1 agreement, provides that, as of
September 30, 2018
, we are to be paid an annual minimum return of
$69,409
to the extent that gross revenues of the hotels, after payment of hotel operating expenses and funding of the FF&E reserve, are sufficient to do so. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. We realized minimum returns of
$17,335
and
$17,247
during the three months ended
September 30, 2018
and
2017
, respectively, and minimum returns of
$51,954
and
$51,657
during the
nine
months ended
September 30, 2018
and
2017
, respectively, under this agreement. We also realized additional returns of
$2,584
and
$5,113
during the
three and nine
months ended
September 30, 2018
and
$3,603
and
$6,807
during the
three and nine
months ended
September 30, 2017
, respectively, which represent our share of hotel cash flows in excess of the minimum returns due to us for these periods. We do not have any security deposits or guarantees for our minimum returns from the
53
hotels included in our Marriott No. 1 agreement. Accordingly, the minimum returns we receive from these hotels managed by Marriott are limited to the hotels' available cash flows after payment of operating expenses and funding of the FF&E reserve.
We funded
$1,769
for capital improvements to certain of the hotels included in our Marriott No. 1 agreement during the
nine
months ended
September 30, 2018
. We currently expect to fund approximately
$8,200
for capital improvements to certain hotels under our Marriott No. 1 agreement during the last
three
months of
2018
. As we fund these improvements, the annual minimum returns payable to us increase by
10%
of the amounts funded.
Marriott No. 234 agreement.
Our management agreement with Marriott for
68
hotels, or our Marriott No. 234 agreement, provides that, as of
September 30, 2018
, we are to be paid an annual minimum return of
$107,110
. We realized minimum returns of
$26,772
and
$26,591
during the three months ended
September 30, 2018
and
2017
, respectively, and
$80,199
and
$79,771
during the
nine
months ended
September 30, 2018
and
2017
, respectively, under this agreement. Pursuant to our Marriott No. 234 agreement, Marriott has provided us with a security deposit to cover minimum return payment shortfalls, if any. Under this agreement, this security deposit may be replenished and increased up to
$64,700
from a share of hotel cash flows in excess of the minimum returns due to us. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. During the
nine
months ended
September 30, 2018
, our available security deposit was replenished by
$7,686
from a share of hotel cash flows in excess of the minimum returns due to us during the period. The available balance of this security deposit was
$33,657
as of
September 30, 2018
. Pursuant to our Marriott No. 234 agreement, Marriott has also provided us with a limited guarantee which expires in 2019 for shortfalls up to
90%
of our minimum returns, if and after the available security deposit has been depleted. The available balance of the guarantee was
$30,672
as of
September 30, 2018
.
We funded
$6,355
for capital improvements to certain of the hotels included in our Marriott No. 234 agreement during the
nine
months ended
September 30, 2018
. We currently expect to fund approximately
$1,200
for capital improvements to certain
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
hotels under our Marriott No. 234 agreement during the last
three
months of
2018
. As we fund these improvements, the annual minimum returns payable to us increase by
9%
of the amounts funded.
Marriott No. 5 agreement
. We lease
one
hotel in Kauai, HI to Marriott which requires that, as of
September 30, 2018
, we are paid annual minimum rents of
$10,321
. This lease is guaranteed by Marriott and we realized
$2,580
and
$2,540
of rent for this hotel during the three months ended
September 30, 2018
and
2017
, respectively, and
$7,740
and
$7,620
during the
nine
months ended
September 30, 2018
and
2017
, respectively. The guarantee provided by Marriott with respect to this leased hotel is unlimited. Marriott has
four
renewal options for
15
years each. On August 31, 2016, Marriott notified us that it will not exercise its renewal option at the expiration of the current lease term ending on December 31, 2019.
InterContinental agreement.
Our management agreement with InterContinental for
100
hotels, or our InterContinental agreement, provides that, as of
September 30, 2018
, we are to be paid annual minimum returns and rents of
$190,521
. We realized minimum returns and rents of
$47,630
and
$46,404
during the three months ended
September 30, 2018
and
2017
, respectively, and
$142,316
and
$131,649
during the
nine
months ended
September 30, 2018
and
2017
, respectively, under this agreement. We also realized additional returns under this agreement of
$6,653
and
$8,264
during the three months ended
September 30, 2018
and
2017
, respectively, and
$8,373
and
$11,836
during the
nine
months ended
September 30, 2018
and
2017
, respectively, from our share of hotel cash flows in excess of the minimum returns and rents due to us for that period.
Pursuant to our InterContinental agreement, InterContinental has provided us with a security deposit to cover minimum payment shortfalls, if any. Under this agreement, InterContinental is required to maintain a minimum security deposit of
$37,000
and this security deposit may be replenished and increased up to
$100,000
from a share of future cash flows from the hotels in excess of our minimum returns and rents. The available balance of the InterContinental security deposit remained at the maximum contractual amount of
$100,000
as of
September 30, 2018
.
We did not fund any capital improvements to our InterContinental hotels during the
nine
months ended
September 30, 2018
. We currently expect to fund approximately
$44,600
during the last
three
months of
2018
and approximately
$56,200
during
2019
for capital improvements to certain hotels under our InterContinental agreement. As we fund these improvements, the annual minimum returns and rents payable to us increase by
8%
of the amounts funded.
Sonesta agreement.
As of
September 30, 2018
, Sonesta managed
11
of our full service hotels and
39
of our limited service hotels pursuant to management agreements for each of the hotels, which we refer to collectively as our Sonesta agreement, and a pooling agreement, which combines those management agreements for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us.
Our Sonesta agreement provides that we are paid a fixed annual minimum return equal to
8%
of our invested capital, as defined therein, which was
$123,180
as of
September 30, 2018
, if gross revenues of the hotels, after payment of hotel operating expenses and management and related fees (other than Sonesta’s incentive fee, if applicable), are sufficient to do so. Our Sonesta agreement further provides that we are paid an additional return based upon operating profits, as defined therein, after payment of Sonesta’s incentive fee, if applicable. We do not have any security deposits or guarantees for our hotels managed by Sonesta. Accordingly, the returns we receive from our hotels managed by Sonesta are limited to the hotels’ available cash flows after payment of operating expenses, including management and related fees. We realized returns of
$21,732
and
$18,741
during the three months ended
September 30, 2018
and
2017
, respectively, and
$61,606
and
$53,808
during the
nine
months ended
September 30, 2018
and
2017
, respectively, under our Sonesta agreement.
Pursuant to our Sonesta agreement, we recognized management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third party reservation transmission fees payable to Sonesta of
$9,437
and
$7,432
for the three months ended
September 30, 2018
and
2017
, respectively, and
$26,245
and
$20,719
for the
nine
months ended
September 30, 2018
and
2017
, respectively. In addition, we recognized procurement and construction supervision fees payable to Sonesta of
$713
and
$479
for the three months ended
September 30, 2018
and
2017
, respectively, and
$1,907
and
$673
for the
nine
months ended
September 30, 2018
and
2017
, respectively, pursuant to our Sonesta agreement. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.
Our Sonesta agreement does not require FF&E escrow deposits, but does require us to fund capital expenditures that we approve at our hotels managed by Sonesta. We funded
$64,032
and
$21,892
for renovations and other capital improvements to certain hotels included in our Sonesta agreement during the
nine
months ended
September 30, 2018
, and
2017
, respectively, which resulted in increases in our contractual annual minimum returns of
$3,948
and
$742
, respectively. We currently expect to
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
fund approximately
$26,900
during the last
three
months of
2018
and approximately
$79,100
during
2019
for renovations and other capital improvements to certain of our hotels managed by Sonesta. The annual minimum returns due to us under the Sonesta agreement increase by
8%
of the capital expenditure amounts we fund in excess of threshold amounts, as defined therein. We owed Sonesta
$6,735
and
$5,685
for capital expenditure and other reimbursements at
September 30, 2018
and
2017
, respectively. Amounts due from Sonesta are included in due from related persons and amounts owed to Sonesta are included in due to related persons in our condensed consolidated balance sheets.
See Notes
7
and
10
for further information regarding our transactions and relationship with Sonesta.
Morgans agreement.
Prior to
May 8, 2018
, we leased The Clift Hotel in San Francisco, CA to Morgans Hotel Group, or Morgans. This lease was scheduled to expire in 2103 and required annual rent to us of
$7,595
. During the period of January 1, 2018 through May 8, 2018, all contractual rent due to us under the Morgans lease was paid to us. On
May 8, 2018
, pursuant to a settlement agreement with Morgans and SBE Entertainment Group, LLC, our Morgans lease was terminated and Morgans surrendered possession of the hotel to us. We rebranded this hotel to the Royal Sonesta
®
brand and added it to our management agreement with Sonesta. The terms of the management agreement are consistent with the terms of our other management agreements with Sonesta for full service hotels.
Wyndham agreements
. Our management agreement with Wyndham for
22
hotels, or our Wyndham agreement, provides that, as of
September 30, 2018
, we are to be paid annual minimum returns of
$27,677
. Pursuant to our Wyndham agreement, Wyndham has provided us with a guarantee, which was limited to
$35,656
, subject to an annual payment limit of
$17,828
, and expires on July 28, 2020. This guarantee was depleted during 2017 and remained depleted as of
September 30, 2018
. This guaranty may be replenished from a share of future cash flows from these hotels in excess of our minimum returns. The Wyndham agreement provides that if the hotel cash flows available after payment of hotel operating expenses are less than the minimum returns due to us and if the guaranty is depleted, to avoid a default Wyndham is required to pay us the greater of the available hotel cash flows after payment of hotel operating expenses and
85%
of the contractual amount due to us. During the
three and nine
months ended
September 30, 2018
, we realized returns of
$5,869
and
$17,588
, respectively, which represents
85%
of the minimum returns due for the period, under this agreement. During the
three and nine
months ended
September 30, 2017
, we realized returns of
$6,847
and
$20,489
, respectively, under this agreement.
Our Wyndham agreement requires FF&E escrow deposits equal to
5%
of total hotel sales for all hotels included in the agreement subject to available cash flows after payment of our minimum return.
No
FF&E escrow deposits were made during the
nine
months ended
September 30, 2018
.
We funded
$1,449
for capital improvements to certain of the hotels included in our Wyndham agreement during the
nine
months ended
September 30, 2018
. We currently expect to fund approximately
$6,600
for capital improvements to certain hotels under our Wyndham agreement during the last
three
months of
2018
. As we fund these improvements, the annual minimum returns payable to us increase by
8%
of the amounts funded.
We also lease
48
vacation units in
one
of our hotels to a subsidiary of Wyndham Destinations, Inc. (NYSE: WYND), or Destinations, which requires that, as of
September 30, 2018
, we are paid annual minimum rents of
$1,449
. The guaranty provided by Destinations with respect to the Destinations lease for part of
one
hotel is unlimited. We recognized the contractual rents of
$454
during the three months ended
September 30, 2018
and
2017
and
$1,361
during the
nine
months ended
September 30, 2018
and
2017
under our Destinations lease agreement. Our lease with Destinations for 48 vacation units is subject to termination in the event of a manager default under our Wyndham agreement. Rental income for the three months ended
September 30, 2018
and
2017
for this lease includes
$91
and
$102
, respectively, and
$273
and
$306
for the
nine
months ended
September 30, 2018
and
2017
, respectively, of adjustments necessary to record rent on a straight line basis.
Hyatt agreement.
Our management agreement with Hyatt for
22
hotels, or our Hyatt agreement, provides that, as of
September 30, 2018
, we are to be paid an annual minimum return of
$22,037
. We realized minimum returns of
$5,509
during each of the three months ended
September 30, 2018
and
2017
and minimum returns of
$16,528
during each of the
nine
months ended
September 30, 2018
and
2017
under this agreement. Pursuant to our Hyatt agreement, Hyatt has provided us with a guarantee, which is limited to
$50,000
. During the
nine
months ended
September 30, 2018
, the available guarantee was replenished by
$2,415
from a share of hotel cash flows in excess of the minimum returns due to us. The available balance of the guarantee was
$23,521
as of
September 30, 2018
.
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Radisson agreement.
Our management agreement with Radisson for
nine
hotels, or our Radisson agreement, provides that, as of
September 30, 2018
, we are to be paid an annual minimum return of
$18,920
. We realized minimum returns of
$4,730
and
$3,230
during the three months ended
September 30, 2018
and
2017
, respectively, and
$11,453
and
$9,690
during the
nine
months ended
September 30, 2018
and
2017
, respectively, under this agreement. In connection with our acquisition of the Radisson Blu
®
hotel described in Note 7, the available balance of the guaranty under our Radisson agreement was increased by
$6,000
and the guaranty cap was increased to
$46,000
. During the
nine
months ended
September 30, 2018
, our available guarantee was replenished by
$4,199
from a share of hotel cash flows in excess of the minimum returns due to us. The available balance of the guarantee was
$43,563
as of
September 30, 2018
.
We did not fund any capital improvement costs at hotels included in our Radisson agreement during the
nine
months ended
September 30, 2018
. We currently expect to fund approximately
$2,800
during the last
three
months of
2018
and approximately
$32,200
during
2019
for capital improvements to certain hotels under our Radisson agreement. Our annual minimum returns, the available balance of the guaranty and the limited guaranty cap under our Radisson agreement will increase by
8%
of any amounts we fund.
TA leases.
As of
September 30, 2018
, we leased to TA a total of
199
travel centers under
five
leases.
We recognized rental income from TA of
$74,797
and
$73,279
for the three months ended
September 30, 2018
and
2017
, respectively, and
$223,458
and
$217,420
for the
nine
months ended
September 30, 2018
and
2017
, respectively. Rental income for the three months ended
September 30, 2018
and
2017
includes
$3,037
and
$2,988
, respectively, and
$9,066
and
$8,907
for the
nine
months ended
September 30, 2018
and
2017
, respectively, of adjustments to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight line basis. As of
September 30, 2018
and
December 31, 2017
, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of
$88,164
and
$78,513
, respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets.
Our TA leases do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components.
Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent equal to
8.5%
of the amounts funded. We funded
$44,653
and
$62,888
for the
nine
months ended
September 30, 2018
and
2017
, respectively, of capital improvements to our TA leases. As a result, TA’s annual minimum rent payable to us increased by
$3,795
and
$5,345
, respectively. We currently expect to fund approximately
$13,600
for renovations and other capital improvements to our travel centers during the last
three
months of
2018
. TA is not obligated to request and we are not obligated to fund any such improvements.
In addition to the rental income that we recognized during the three months ended
September 30, 2018
and
2017
as described above, our TA leases require TA to pay us percentage rent based upon increases in certain sales. We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of
$934
and
$435
for the three months ended
September 30, 2018
and
2017
, respectively, and
$2,630
and
$1,384
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
See
Note 10
for further information regarding our relationship with TA.
Guarantees and security deposits generally.
When we reduce the amounts of the security deposits we hold for payment deficiencies at our managed and leased hotels, we record income equal to the amounts by which this deposit is reduced up to the minimum return or minimum rent due to us. However, reducing the security deposits does not result in additional cash flows to us of the deficiency amounts, but reducing amounts of security deposits may reduce the refunds due to the respective tenants or managers who have provided us with these deposits upon expiration of the respective lease or management agreement. The security deposits are non-interest bearing and are not held in escrow. Under these agreements, any amount of the security deposits which are applied to payment deficits may be replenished from a share of future cash flows from the applicable hotel operations pursuant to the terms of the respective agreements.
Certain of our managed hotel portfolios had net operating results that were, in the aggregate,
$9,216
and
$5,699
less than the minimum returns due to us for the three months ended
September 30, 2018
and
2017
, respectively, and
$31,030
and
$18,971
less than the minimum returns due to us for the
nine
months ended
September 30, 2018
and
2017
, respectively. When
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
managers of these hotels are required to fund the shortfalls under the terms of our management agreements or their guarantees, we reflect such fundings (including security deposit applications) in our condensed consolidated statements of comprehensive income as a reduction of hotel operating expenses. The reduction to hotel operating expenses was
$299
for the three months ended
September 30, 2018
and
$2,377
and
$2,689
for the
nine
months ended
September 30, 2018
and
2017
, respectively. There was
no
reduction to hotel operating expenses for the three months ended
September 30, 2017
. We had shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our management agreements of
$9,818
and
$28,653
for the
three and nine
months ended
September 30, 2018
, respectively, which represent the unguaranteed portions of our minimum returns from our Sonesta and Wyndham agreements. We had shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our management agreements of
$5,699
and
$16,282
for the
three and nine
months ended
September 30, 2017
, which represents the unguaranteed portion of our minimum returns from our Sonesta agreement.
Certain of our managed hotel portfolios had net operating results that were, in the aggregate,
$21,321
and
$31,355
more than the minimum returns due to us for the three months ended
September 30, 2018
and
2017
, respectively, and
$47,901
and
$67,052
more than the minimum returns due to us for the
nine
months ended
September 30, 2018
and
2017
, respectively. Certain of our guarantees and our security deposits may be replenished by a share of future cash flows from the applicable hotel operations in excess of the minimum returns due to us pursuant to the terms of the respective agreements. When our guarantees and our security deposits are replenished by cash flows from hotel operations, we reflect such replenishments in our condensed consolidated statements of comprehensive income as an increase to hotel operating expenses. We had
$5,204
and
$10,099
of guarantee and security deposit replenishments for the three months ended
September 30, 2018
and
2017
, respectively, and
$14,299
and
$26,319
of guarantee and security deposit replenishments for the
nine
months ended
September 30, 2018
and
2017
, respectively.
Note 9. Business and Property Management Agreements with RMR LLC
We have
no
employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have
two
agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to our property level operations of the office building component of one of our hotels.
Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of
$10,430
and
$10,865
for the three months ended
September 30, 2018
and
2017
, respectively, and
$30,048
and
$68,526
for the
nine
months ended
September 30, 2018
and
2017
, respectively. Based on our common share total return, as defined in our business management agreement, as of
September 30, 2018
, no
2018
incentive fees are included in the net business management fees we recognized for the
three and nine
months ended
September 30, 2018
. The actual amount of annual incentive fees for
2018
, if any, will be based on our common share total return, as defined in our business management agreement, for the
three
year period ending
December 31, 2018
, and will be payable in
2019
. The net business management fees we recognized for the
three and nine
months ended
September 30, 2017
included
$873
and
$38,243
, respectively, of then estimated
2017
incentive fees; in January
2018
, we paid RMR LLC an incentive fee of
$74,573
for
2017
. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.
Pursuant to our property management agreement with RMR LLC, we recognized property management fees of
$18
and
$12
for the three months ended
September 30, 2018
and
2017
, respectively, and
$43
and
$33
for the
nine
months ended
September 30, 2018
and
2017
, respectively. These fees are payable in connection with the management of the office building component of one of our hotels. These amounts are included in hotel operating expenses in our condensed consolidated statements of comprehensive income.
We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. We reimbursed RMR LLC
$56
and
$40
for property management related expenses related to the office building component of one of our hotels for the three months ended
September 30, 2018
and
2017
, respectively, and
$167
and
$131
for the
nine
months ended
September 30, 2018
and
2017
, respectively, which amounts are included in hotel operating expenses in our condensed consolidated statements of comprehensive income. In addition, we are responsible for our share of RMR LLC’s costs for providing our internal audit function. The amounts recognized as expense for internal audit costs were
$49
and
$67
for the three months ended
September 30, 2018
and
2017
, respectively, and
$173
and
$202
for the
nine
months ended
September 30, 2018
and
2017
, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income for these periods.
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 10. Related Person Transactions
We have relationships and historical and continuing transactions with TA, Sonesta, RMR LLC, The RMR Group Inc., or RMR Inc., AIC and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and which have trustees, directors and officers who are also our Trustees or officers. Mr. Mark L. Kleifges, our Chief Financial Officer and Treasurer, has announced his retirement from his positions with us effective December 31, 2018.
TA
. TA is our largest tenant and property operator, leasing
34%
of our gross carrying value of real estate properties as of
September 30, 2018
. We lease all of our travel centers to TA under the TA leases. We are also TA’s largest shareholder; as of
September 30, 2018
, we owned
3,420,000
common shares of TA, representing approximately
8.6%
of TA’s outstanding common shares. RMR LLC provides management services to both us and TA, and Adam D. Portnoy, one of our Managing Trustees, also serves as a managing director of TA. As of October 10, 2018, RMR LLC owned approximately
3.8%
of TA's outstanding common shares. See
Note 8
for further information regarding our relationships, agreements and transactions with TA and
Note 13
for further information regarding our investment in TA.
Sonesta.
Sonesta is a private company owned in part by Adam D. Portnoy, one of our Managing Trustees. As of
September 30, 2018
, Sonesta managed
50
of our hotels pursuant to management and pooling agreements. See
Note 8
for further information regarding our relationships, agreements and transactions with Sonesta.
Our Manager, RMR LLC.
We have two agreements with RMR LLC to provide management services to us. See
Note 9
for further information regarding our management agreements with RMR LLC.
We have historically granted share awards to our officers and other RMR LLC employees under our equity compensation plans. In September
2018
and
2017
, we granted annual awards of
97,000
and
85,000
of our common shares, respectively, to our officers and other employees of RMR LLC. In September
2018
and
2017
, we purchased
17,808
and
18,559
of our common shares, respectively, valued at the closing price of our common shares on Nasdaq on the applicable date of purchase in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares to certain of our officers and other employees of RMR LLC. We include the amounts recognized as expense for share awards to our officers and other RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income.
RMR Inc.
RMR LLC is a majority owned subsidiary of RMR Inc. and RMR Inc. is the managing member of RMR LLC. Adam D. Portnoy, one of our Managing Trustees, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., and a managing director, president and chief executive officer of RMR Inc. and an officer of RMR LLC. John G. Murray, our other Managing Trustee and our President and Chief Executive Officer, also serves as an executive officer of RMR LLC. Other officers of RMR LLC also serve as our officers. As of
September 30, 2018
, we owned
2,503,777
shares of class A common stock of RMR Inc. See
Note 13
for further information regarding our investment in RMR Inc.
AIC
. We, ABP Trust, TA and four other companies to which RMR LLC provides management services currently own AIC in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC. We paid aggregate annual premiums, including taxes and fees, of approximately
$5,738
in connection with the renewal of this insurance program for the policy year ending June 30, 2019, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.
As of
September 30, 2018
and
December 31, 2017
, our investment in AIC had a carrying value of
$9,163
and
$8,192
, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income related to our investment in AIC, which is presented as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. Our other comprehensive income includes our proportionate part of unrealized gains and (losses) on securities that are owned by AIC related to our investment in AIC.
For further information about these and certain other such relationships and certain other related person transactions, refer to our
2017
Annual Report.
Note 11. Income Taxes
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
We have elected to be taxed as a real estate investment trust, or REIT, under the United States Internal Revenue Code of 1986, as amended, or the IRC, and, as such, 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. Further, we lease our managed hotels to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated tax return and are subject to federal, state and foreign income taxes. Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our qualification for taxation as a REIT.
During the three and
nine
months ended
September 30, 2018
, we recognized income tax expense of
$707
and
$1,949
, respectively, which includes
$291
and
$631
, respectively, of foreign taxes and
$416
and
$1,318
, respectively, of state taxes. During the three and
nine
months ended
September 30, 2017
, we recognized income tax expense (benefit) of
$619
and
$1,761
, respectively, which includes
$125
and
$486
, respectively, of foreign taxes,
($6)
and
$30
, respectively, of federal taxes and
$500
and
$1,245
, respectively, of state taxes.
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 12. Segment Information
We aggregate our hotels and travel centers into
two
reportable segments, hotel investments and travel center investments, based on their similar operating and economic characteristics.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2018
|
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Hotel operating revenues
|
|
$
|
521,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
521,250
|
|
|
Rental income
|
|
5,893
|
|
|
74,797
|
|
|
—
|
|
|
80,690
|
|
|
FF&E reserve income
|
|
1,213
|
|
|
—
|
|
|
—
|
|
|
1,213
|
|
|
Total revenues
|
|
528,356
|
|
|
74,797
|
|
|
—
|
|
|
603,153
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
366,994
|
|
|
—
|
|
|
—
|
|
|
366,994
|
|
|
Depreciation and amortization
|
|
64,415
|
|
|
36,592
|
|
|
—
|
|
|
101,007
|
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
13,425
|
|
|
13,425
|
|
|
Total expenses
|
|
431,409
|
|
|
36,592
|
|
|
13,425
|
|
|
481,426
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
—
|
|
|
—
|
|
|
626
|
|
|
626
|
|
|
Unrealized gains on equity securities
|
|
—
|
|
|
—
|
|
|
43,453
|
|
|
43,453
|
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
478
|
|
|
478
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(49,308
|
)
|
|
(49,308
|
)
|
|
Income (loss) before income taxes and equity in earnings of an investee
|
|
96,947
|
|
|
38,205
|
|
|
(18,176
|
)
|
|
116,976
|
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(707
|
)
|
|
(707
|
)
|
|
Equity in earnings of an investee
|
|
—
|
|
|
—
|
|
|
830
|
|
|
830
|
|
|
Net income (loss)
|
|
$
|
96,947
|
|
|
$
|
38,205
|
|
|
$
|
(18,053
|
)
|
|
$
|
117,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2018
|
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Hotel operating revenues
|
|
$
|
1,496,125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,496,125
|
|
|
Rental income
|
|
20,243
|
|
|
223,458
|
|
|
—
|
|
|
243,701
|
|
|
FF&E reserve income
|
|
3,911
|
|
|
—
|
|
|
—
|
|
|
3,911
|
|
|
Total revenues
|
|
1,520,279
|
|
|
223,458
|
|
|
—
|
|
|
1,743,737
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
1,056,057
|
|
|
—
|
|
|
—
|
|
|
1,056,057
|
|
|
Depreciation and amortization
|
|
189,814
|
|
|
110,494
|
|
|
—
|
|
|
300,308
|
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
38,280
|
|
|
38,280
|
|
|
Total expenses
|
|
1,245,871
|
|
|
110,494
|
|
|
38,280
|
|
|
1,394,645
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
—
|
|
|
—
|
|
|
1,878
|
|
|
1,878
|
|
|
Unrealized gains on equity securities
|
|
—
|
|
|
—
|
|
|
89,348
|
|
|
89,348
|
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
1,093
|
|
|
1,093
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(145,589
|
)
|
|
(145,589
|
)
|
|
Loss on early extinguishment of debt
|
|
—
|
|
|
—
|
|
|
(160
|
)
|
|
(160
|
)
|
|
Income (loss) before income taxes and equity in earnings of an investee
|
|
274,408
|
|
|
112,964
|
|
|
(91,710
|
)
|
|
295,662
|
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(1,949
|
)
|
|
(1,949
|
)
|
|
Equity in earnings of an investee
|
|
—
|
|
|
—
|
|
|
881
|
|
|
881
|
|
|
Net income (loss)
|
|
$
|
274,408
|
|
|
$
|
112,964
|
|
|
$
|
(92,778
|
)
|
|
$
|
294,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
|
Total assets
|
|
$
|
4,538,553
|
|
|
$
|
2,419,794
|
|
|
$
|
293,206
|
|
|
$
|
7,251,553
|
|
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2017
|
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Hotel operating revenues
|
|
$
|
495,550
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
495,550
|
|
|
Rental income
|
|
7,617
|
|
|
73,279
|
|
|
—
|
|
|
80,896
|
|
|
FF&E reserve income
|
|
1,142
|
|
|
—
|
|
|
—
|
|
|
1,142
|
|
|
Total revenues
|
|
504,309
|
|
|
73,279
|
|
|
—
|
|
|
577,588
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
343,274
|
|
|
—
|
|
|
—
|
|
|
343,274
|
|
|
Depreciation and amortization
|
|
61,996
|
|
|
36,209
|
|
|
—
|
|
|
98,205
|
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
13,404
|
|
|
13,404
|
|
|
Total expenses
|
|
405,270
|
|
|
36,209
|
|
|
13,404
|
|
|
454,883
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate
|
|
9,348
|
|
|
—
|
|
|
—
|
|
|
9,348
|
|
|
Dividend income
|
|
—
|
|
|
—
|
|
|
626
|
|
|
626
|
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
211
|
|
|
211
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(46,574
|
)
|
|
(46,574
|
)
|
|
Income (loss) before income taxes and equity in earnings of an investee
|
|
108,387
|
|
|
37,070
|
|
|
(59,141
|
)
|
|
86,316
|
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(619
|
)
|
|
(619
|
)
|
|
Equity in earnings of an investee
|
|
—
|
|
|
—
|
|
|
31
|
|
|
31
|
|
|
Net income (loss)
|
|
$
|
108,387
|
|
|
$
|
37,070
|
|
|
$
|
(59,729
|
)
|
|
$
|
85,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2017
|
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Hotel operating revenues
|
|
$
|
1,392,995
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,392,995
|
|
|
Rental income
|
|
22,854
|
|
|
217,420
|
|
|
—
|
|
|
240,274
|
|
|
FF&E reserve income
|
|
3,524
|
|
|
—
|
|
|
—
|
|
|
3,524
|
|
|
Total revenues
|
|
1,419,373
|
|
|
217,420
|
|
|
—
|
|
|
1,636,793
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
965,546
|
|
|
—
|
|
|
—
|
|
|
965,546
|
|
|
Depreciation and amortization
|
|
179,503
|
|
|
107,308
|
|
|
—
|
|
|
286,811
|
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
76,097
|
|
|
76,097
|
|
|
Total expenses
|
|
1,145,049
|
|
|
107,308
|
|
|
76,097
|
|
|
1,328,454
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate
|
|
9,348
|
|
|
—
|
|
|
—
|
|
|
9,348
|
|
|
Dividend income
|
|
—
|
|
|
—
|
|
|
1,878
|
|
|
1,878
|
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
590
|
|
|
590
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(135,329
|
)
|
|
(135,329
|
)
|
|
Income (loss) before income taxes and equity in earnings of an investee
|
|
283,672
|
|
|
110,112
|
|
|
(208,958
|
)
|
|
184,826
|
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(1,761
|
)
|
|
(1,761
|
)
|
|
Equity in earnings of an investee
|
|
—
|
|
|
—
|
|
|
533
|
|
|
533
|
|
|
Net income (loss)
|
|
$
|
283,672
|
|
|
$
|
110,112
|
|
|
$
|
(210,186
|
)
|
|
$
|
183,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
|
Total assets
|
|
$
|
4,477,512
|
|
|
$
|
2,476,073
|
|
|
$
|
196,800
|
|
|
$
|
7,150,385
|
|
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 13. Fair Value of Assets and Liabilities
The table below presents certain of our assets carried at fair value at
September 30, 2018
, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at September 30, 2018 Using
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
Significant Other
|
|
Significant
|
|
|
|
Carrying Value at
|
|
Identical Assets
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
Description
|
|
September 30, 2018
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Recurring Fair Value Measurement Assets:
|
|
|
|
|
|
|
|
Investment in TA
(1)
|
|
$
|
19,494
|
|
|
$
|
19,494
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investment in RMR Inc.
(2)
|
|
$
|
232,351
|
|
|
$
|
232,351
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
(1)
|
Our
3,420,000
common shares of TA, which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is
$17,407
as of
September 30, 2018
. During the
three and nine
months ended
September 30, 2018
, we recorded unrealized gains of
$7,524
and
$5,472
, respectively, to adjust the carrying value of our investment in TA shares to their fair value as of
September 30, 2018
.
|
|
|
|
|
(2)
|
Our
2,503,777
shares of class A common stock of RMR Inc., which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is
$66,374
as of
September 30, 2018
. During the
three and nine
months ended
September 30, 2018
, we recorded unrealized gains of
$35,929
and
$83,876
, respectively, to adjust the carrying value of our investment in RMR Inc. shares to their fair value as of
September 30, 2018
.
|
In addition to the investment securities included in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, revolving credit facility, term loan, senior notes and security deposits. At
September 30, 2018
and
December 31, 2017
, the fair values of these additional financial instruments approximated their carrying values in our condensed consolidated balance sheets due to their short term nature or variable interest rates, except as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
Value
(1)
|
|
Value
|
|
Value
(1)
|
|
Value
|
|
Senior Unsecured Notes, due 2021 at 4.25%
|
|
$
|
396,578
|
|
|
$
|
402,810
|
|
|
$
|
395,497
|
|
|
$
|
413,676
|
|
|
Senior Unsecured Notes, due 2022 at 5.00%
|
|
495,307
|
|
|
512,548
|
|
|
494,398
|
|
|
533,908
|
|
|
Senior Unsecured Notes, due 2023 at 4.50%
|
|
499,227
|
|
|
502,033
|
|
|
499,104
|
|
|
523,275
|
|
|
Senior Unsecured Notes, due 2024 at 4.65%
|
|
347,788
|
|
|
348,565
|
|
|
347,484
|
|
|
368,804
|
|
|
Senior Unsecured Notes, due 2025 at 4.50%
|
|
345,571
|
|
|
341,129
|
|
|
345,055
|
|
|
363,589
|
|
|
Senior Unsecured Notes, due 2026 at 5.25%
|
|
341,673
|
|
|
353,250
|
|
|
340,826
|
|
|
377,431
|
|
|
Senior Unsecured Notes, due 2027 at 4.95%
|
|
393,704
|
|
|
392,696
|
|
|
393,137
|
|
|
422,914
|
|
|
Senior Unsecured Notes, due 2028 at 3.95%
|
|
389,322
|
|
|
362,642
|
|
|
388,461
|
|
|
390,930
|
|
|
Senior Unsecured Notes, due 2030 at 4.375%
|
|
387,105
|
|
|
367,644
|
|
|
—
|
|
|
—
|
|
|
Total financial liabilities
|
|
$
|
3,596,275
|
|
|
$
|
3,583,317
|
|
|
$
|
3,203,962
|
|
|
$
|
3,394,527
|
|
|
|
|
|
(1)
|
Carrying value includes unamortized discounts and premiums and issuance costs.
|
At
September 30, 2018
and
December 31, 2017
, we estimated the fair values of our senior notes using an average of the bid and ask price of our then outstanding issuances of senior notes (Level 2 inputs).