Related Party Transactions | 9 Months Ended |
Sep. 30, 2013 |
Related Party Transactions | ' |
Related Party Transactions | ' |
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7. Related Party Transactions |
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Relationship with HPT |
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HPT was our parent company until 2007 and is our principal landlord and our largest shareholder. We were created as a separate public company in 2007 as a result of a spin off from HPT. As of September 30, 2013, HPT owned 2,540,000 of our common shares, representing approximately 8.6% of our outstanding common shares. One of our Managing Directors, Mr. Barry Portnoy, is a managing trustee of HPT. Mr. Barry Portnoy’s son, Mr. Adam Portnoy, is also a managing trustee of HPT, and Mr. Barry Portnoy’s son-in-law is an executive officer of HPT. Our other Managing Director, Mr. Thomas O’Brien, who is also our President and Chief Executive Officer, was a former executive officer of HPT. In addition, one of our Independent Directors, Mr. Arthur Koumantzelis, was a trustee of HPT at the time we were created; Mr. Koumantzelis resigned and ceased to be a trustee of HPT shortly before he joined our Board of Directors in 2007. |
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We have two leases with HPT, the TA Lease and the Petro Lease, pursuant to which we lease 184 locations from HPT. Our TA Lease is for 144 locations that we operate primarily under the TA brand. Our Petro Lease is for 40 locations that we operate under the Petro brand. The TA Lease expires on December 31, 2022. The Petro Lease expires on June 30, 2024, and may be extended by us for up to two additional periods of 15 years each. We have the right to use the “TA”, “TravelCenters of America” and other trademarks, which are owned by HPT, during the term of the TA Lease. We refer to the TA Lease and Petro Lease collectively as the HPT Leases. |
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The HPT Leases are “triple net” leases that require us to pay all costs incurred in the operation of the leased locations, including personnel, utilities, acquiring inventories, providing services to customers, insurance, paying real estate and personal property taxes, environmental related expenses, underground storage tank removal costs and ground lease payments at those locations at which HPT leases the property and subleases it to us. We also are required to generally indemnify HPT for certain environmental matters and for liabilities which arise during the terms of the leases from ownership or operation of the leased locations. In addition, we are obligated to pay HPT at lease expiration an amount equal to an estimate of the cost of removing underground storage tanks on the leased sites. |
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Effective February 2012, the annual rent amount payable under the TA Lease increased by $5,000 pursuant to the final fixed rent increase included in the HPT Leases. Accordingly, under the current terms of the HPT Leases, our rent payments to HPT will not increase except as a result of percentage rent and rent related to sales to HPT of improvements we make to properties we lease from HPT, as further described in the following paragraphs, or in the event HPT leases other properties to us. |
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Effective January 2012, we began to incur percentage rent payable to HPT under the TA Lease, and effective January 2013, we began to incur percentage rent payable to HPT under the Petro Lease. Percentage rent under the HPT Leases is based on the excess of our fuel and nonfuel revenues over such revenues in the applicable base year periods. The percentage rent is paid to HPT quarterly in arrears. HPT has agreed to waive the first $2,500 of percentage rent that may become due under the Petro Lease. The total amount of percentage rent we recognized as expense during the three and nine months ended September 30, 2013 and 2012, was $464 and $1,746 and $222 and $1,277, respectively. The amount of percentage rent that would have been payable under the Petro Lease for the three and nine months ended September 30, 2013, was $90 and $307, respectively; because these amounts were waived, we did not recognize them as an expense in the three and nine months ended September 30, 2013. |
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Under the HPT Leases, we may request that HPT purchase certain approved renovations, improvements and equipment at the leased locations in return for increases in our minimum annual rent according to the following formula: the minimum rent per year will be increased by an amount equal to the amount paid by HPT multiplied by the greater of (i) 8.5% and (ii) a benchmark U.S. Treasury interest rate plus 3.5%. During the nine months ended September 30, 2013, pursuant to the terms of the HPT Leases, we sold to HPT $63,163 of improvements we made to properties leased from HPT, and, as a result, our minimum annual rent payable to HPT increased by approximately $5,369. As of September 30, 2013, our property and equipment balance included $2,448 for similar improvements we have made to HPT owned sites that we intend to request that HPT purchase from us for an increase in future rent; however, HPT is not obligated to purchase these improvements. |
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The following table summarizes the various amounts related to the HPT Leases and leases with other lessors that are reflected in real estate rent expense in our condensed consolidated statements of operations and comprehensive income. |
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| | Three Months Ended | | Nine Months Ended | |
September 30, | September 30, |
| | 2013 | | 2012 | | 2013 | | 2012 | |
Cash payments for rent under the HPT Leases | | $ | 54,637 | | $ | 51,867 | | $ | 161,763 | | $ | 154,973 | |
Change in accrued estimated percentage rent | | (111 | ) | 76 | | 473 | | 76 | |
Adjustments to recognize expense on a straight line basis | | (483 | ) | (1,172 | ) | (1,383 | ) | (2,306 | ) |
Sale/leaseback financing obligation amortization | | (525 | ) | (543 | ) | (1,547 | ) | (1,641 | ) |
Rent payments recognized as interest expense | | (1,757 | ) | (1,816 | ) | (5,242 | ) | (5,436 | ) |
Deferred leasehold improvements allowance amortization | | (1,692 | ) | (1,692 | ) | (5,077 | ) | (5,077 | ) |
Amortization of deferred gain on sale/leaseback transactions | | (77 | ) | (18 | ) | (230 | ) | (52 | ) |
Rent expense related to HPT Leases | | 49,992 | | 46,702 | | 148,757 | | 140,537 | |
Rent paid to others (1) | | 2,430 | | 2,454 | | 7,628 | | 7,302 | |
Adjustments to recognize expense on a straight line basis for other leases | | 2 | | 29 | | 27 | | 191 | |
Total real estate rent expense | | $ | 52,424 | | $ | 49,185 | | $ | 156,412 | | $ | 148,030 | |
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(1) Includes rent paid directly to HPT’s landlords under leases for properties we sublease from HPT as well as rent related to properties we lease from landlords other than HPT. |
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The following table summarizes the various amounts related to the HPT Leases that are included in our balance sheets. |
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| | September 30, | | December 31, | | | | | | | |
| | 2013 | | 2012 | | | | | | | |
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Current HPT Leases liabilities: | | | | | | | | | | | |
Accrued rent | | $ | 18,057 | | $ | 17,092 | | | | | | | |
Current portion of sale/leaseback financing obligation (1) | | 2,220 | | 2,038 | | | | | | | |
Current portion of straight line rent accrual (2) | | 4,413 | | 2,149 | | | | | | | |
Current portion of deferred gain on sale/leaseback transactions (3) | | 306 | | 306 | | | | | | | |
Current portion of deferred tenant improvements allowance (4) | | 6,769 | | 6,769 | | | | | | | |
Total Current HPT Leases liabilities | | $ | 31,765 | | $ | 28,354 | | | | | | | |
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Noncurrent HPT Leases liabilities: | | | | | | | | | | | |
Deferred rent obligation (5) | | $ | 150,000 | | $ | 150,000 | | | | | | | |
Sale/leaseback financing obligation (1) | | 82,650 | | 82,195 | | | | | | | |
Straight line rent accrual (2) | | 51,399 | | 55,233 | | | | | | | |
Deferred gain on sale/leaseback transactions (3) | | 2,562 | | 2,792 | | | | | | | |
Deferred tenant improvements allowance (4) | | 55,838 | | 60,915 | | | | | | | |
Total Noncurrent HPT Lease liabilities | | $ | 342,449 | | $ | 351,135 | | | | | | | |
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(1) Sale/leaseback Financing Obligation. GAAP governing the transactions related to our entering the TA Lease required us to recognize in our consolidated balance sheet the leased assets at thirteen of the locations previously owned by our predecessor that we now lease from HPT because we subleased more than a minor portion of those locations to third parties, and one location did not qualify for operating lease treatment for other reasons. Accordingly, we recorded the leased assets at these locations at an amount equal to HPT’s recorded initial carrying amounts, which were equal to their fair values, and recognized an equal amount of liability that is presented as sale/leaseback financing obligation in our consolidated balance sheet. In addition, sales to HPT of improvements at these locations are accounted for as sale/leaseback financing transactions and these liabilities are increased by the amount of proceeds we receive from HPT. We recognize a portion of the total rent payments to HPT related to these assets as a reduction of the sale/leaseback financing obligation and a portion as interest expense in our consolidated statements of operations and comprehensive income. We determined the allocation of these rent payments to the liability and to interest expense using the effective interest method. The amounts allocated to interest expense were $1,757 and $1,816 for the three months ended September 30, 2013 and 2012, respectively, and $5,242 and $5,436 for the nine months ended September 30, 2013 and 2012, respectively. During 2012, the subleases at four of these locations were terminated, qualifying the related locations for sale leaseback accounting and reducing this liability. In October 2013, the sublease at another one of these locations was terminated and we began to operate that travel center; this liability balance will be reduced by approximately $2,463 in the fourth quarter as a result. |
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(2) Straight Line Rent Accrual. The TA Lease included scheduled rent increases over the first six years of the lease term, as do certain of the leases for properties we sublease from HPT, the rent for which we pay directly to HPT’s landlords. Also, under our leases with HPT, we are obligated to pay to HPT at lease expiration an amount equal to an estimate of the asset retirement obligation we would have if we owned the underlying assets. We recognize the effects of scheduled rent increases and the future payment to HPT for asset retirement obligations in real estate rent expense over the lease terms on a straight line basis, with offsetting entries to this accrual balance. |
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(3) Deferred Gain on Sale/Leaseback Transactions. This gain arose from the termination during 2012 of subleases for four locations we lease from HPT, as further described in note (1) above, and from the sales of certain assets to HPT. Under GAAP, the gain or loss from the sale portion of a sale/leaseback transaction is deferred and amortized into real estate rent expense on a straight line basis over the term of the lease. We expect a gain on sale/leaseback transactions of $434 as a result of the termination in October 2013 of the sublease of a location we lease from HPT, as further described in note (1) above, and that gain will be similarly deferred and amortized. |
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(4) Deferred Tenant Improvements Allowance. HPT committed to fund up to $125,000 of capital projects at the sites we lease under the TA Lease without an increase in rent payable by us, which amount HPT had fully funded by September 30, 2010, net of discounting to reflect our accelerated receipt of those funds. In connection with this commitment, we recognized a liability for the rent deemed to be related to this tenant improvements allowance. This deferred tenant improvements allowance was initially recorded at an amount equal to the leasehold improvements receivable we recognized for the discounted value of the then expected future amounts to be received from HPT, based upon our then expected timing of receipt of those payments. We amortize the deferred tenant improvements allowance on a straight line basis over the term of the TA Lease as a reduction of real estate rent expense. |
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(5) Deferred Rent Obligation. Pursuant to a rent deferral agreement with HPT, through December 31, 2010, we deferred a total of $150,000 of rent payable to HPT. The deferred rent obligation is payable in two installments, $107,085 in December 2022 and $42,915 in June 2024. This obligation does not bear interest, unless certain events of default or other events occur, including a change of control of us. |
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On April 15, 2013, we entered an agreement with Equilon Enterprises LLC doing business as Shell Oil Products US, or Shell, pursuant to which Shell has agreed to construct a network of natural gas fueling lanes at up to 100 of our travel centers located along the U.S. interstate highway system, including locations we lease from HPT. In connection with that agreement, on April 15, 2013, we and HPT amended the HPT Leases to revise the calculation of percentage rent payable by us under the HPT Leases, with the intended effect that the amount of percentage rent be unaffected by the type of fuel sold, whether diesel fuel or natural gas. That amendment also made certain administrative changes. Also on that date, in order to facilitate our agreement with Shell, HPT entered into a subordination, non-disturbance and attornment agreement with Shell, whereby HPT agreed to recognize Shell’s license and other rights with respect to the natural gas fueling lanes at our HPT leased locations on certain conditions and in certain circumstances. |
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On July 1, 2013, HPT purchased land that was previously leased by HPT from a third party and subleased to us under the TA Lease. Effective as of that date, rents due to that third party and our paying of those rents on behalf of HPT under the terms of the TA Lease ceased. Also on that date, we and HPT amended the TA Lease to reflect our direct lease from HPT of that land and certain minor properties adjacent to existing travel centers included in the TA Lease purchased by HPT and to increase annual rent by $537, which was 8.5% of HPT’s investment. |
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One of the travel centers we leased from HPT under the TA Lease, located in Roanoke, VA, was taken in August 2013 by eminent domain proceedings brought by the Virginia Department of Transportation, or VDOT, in connection with certain highway construction. The TA Lease provides that it terminates with respect to a property upon a taking of the property as the result of any eminent domain proceeding. Under the terms of the TA Lease, the annual rent payable by us is reduced by 8.5% of the amount of the proceeds HPT receives from that taking or, at HPT’s option, the fair market value rent of the property. There are ongoing negotiations among VDOT, HPT, and us regarding the amount of compensation to be paid for the taking and regarding a possible short term lease of the property to HPT, for sublease to us. We expect that we will continue to operate this travel center pursuant to a sublease until October 2014. VDOT’s estimate of fair market value for the taking is $6,280. We and HPT have engaged an appraiser to review VDOT’s estimate. Given the preliminary stages of these negotiations, there can be no assurance concerning what additional compensation, if any, would be payable to us or HPT as a result of the taking or what leasing arrangements, if any, will be entered into and the date at which we will cease to operate this travel center. |
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Relationship with RMR |
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Reit Management & Research LLC, or RMR, provides business management and shared services to us pursuant to a business management and shared services agreement, or our business management agreement. RMR also provides building management services to us for our headquarters building pursuant to a property management agreement. Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, including HPT. One of our Managing Directors, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR. Mr. Barry Portnoy’s son, Mr. Adam Portnoy, is an owner of RMR and serves as President, Chief Executive Officer and a director of RMR. Our other Managing Director, Mr. Thomas O’Brien, who is also our President and Chief Executive Officer, is also an Executive Vice President of RMR. Mr. Andrew Rebholz, our Executive Vice President, Chief Financial Officer and Treasurer, and Mr. Mark Young, our Executive Vice President and General Counsel, are Senior Vice Presidents of RMR. HPT’s executive officers are officers of RMR. A majority of our Independent Directors also serve as independent directors or independent trustees of other public companies to which RMR or its affiliates provide management services. Mr. Barry Portnoy serves as a managing director or managing trustee of those companies, including HPT, and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies, including HPT. In addition, officers of RMR serve as officers of those companies. |
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Pursuant to our business management agreement and property management agreement with RMR, we incurred aggregate fees of $2,993 and $2,791 for the three months ended September 30, 2013 and 2012, respectively, and $8,408 and $7,904 for the nine months ended September 30, 2013 and 2012, respectively. These amounts are included in selling, general and administrative expenses in our condensed consolidated financial statements. |
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Relationship with AIC |
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We, RMR, HPT and five other companies to which RMR provides management services each currently own 12.5% of Affiliates Insurance Company, or AIC, an Indiana insurance company. All of our Directors, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC. RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC. As of September 30, 2013, we have invested $5,229 in AIC since its formation in 2008. Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Directors are also directors of AIC. Our investment in AIC had a carrying value of $5,781 and $5,629 as of September 30, 2013 and December 31, 2012, respectively. We recognized income of $64 and $115 for the three months ended September 30, 2013 and 2012, respectively, and $219 and $236 for the nine months ended September 30, 2013 and 2012, respectively, arising from our investment in AIC. We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts. This program was modified and extended in June 2013 for a one year term and we paid a premium, including taxes and fees, of $2,743 in connection with that renewal, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in that program. We periodically consider the possibilities for expanding our insurance relationships with AIC to include other types of insurance and may in the future participate in additional insurance offerings AIC may provide or arrange. We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so. By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business. |
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Relationship with PTP |
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Petro Travel Plaza Holdings LLC, or PTP, is a joint venture between us and Tejon Development Corporation, or Tejon, that owns two travel centers in California. We own a 40% interest in PTP and operate the two locations PTP owns for which we receive management and accounting fees. The carrying value of the investment in PTP as of September 30, 2013 and December 31, 2012, was $17,131 and $15,332, respectively. We recognized management and accounting fee income of $200 for each of the three months ended September 30, 2013 and 2012, and $600 for each of the nine months ended September 30, 2013 and 2012. At September 30, 2013 and December 31, 2012, we had a net payable to PTP of $675 and $575, respectively. We recognized income of $795 and $686 during the three months ended September 30, 2013 and 2012, respectively, and $1,799 and $1,027 during the nine months ended September 30, 2013 and 2012, respectively, related to this investment. In the first nine months of 2012, we received $4,800 of distributions from PTP that represented a return on our investment; accordingly, this distribution is included in cash provided by operating activities in the accompanying statement of cash flows. |
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