Related Party Transactions | 3 Months Ended |
Mar. 31, 2014 |
Related Party Transactions | ' |
Related Party Transactions | ' |
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 March 31, 2014, HPT owned 3,420,000 of our common shares, representing approximately 9.1% 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, Mr. Ethan Bornstein, is an executive officer of HPT. Our other Managing Director, Mr. Thomas O’Brien, who is also our President and Chief Executive Officer, is a former executive officer of HPT. One of our Independent Directors, Mr. Arthur Koumantzelis, was an independent trustee of HPT prior to our spin-off from HPT. |
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We have two leases with HPT, the TA Lease and the Petro Lease, pursuant to which we lease 185 properties from HPT. Our TA Lease is for 145 properties that we operate primarily under the TA brand. Our Petro Lease is for 40 properties 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 properties, including costs related to personnel, utilities, acquiring inventories, providing services to customers, insurance, real estate and personal property taxes, environmental related expenses, underground storage tank removal costs and ground lease payments at those properties at which HPT leases the property from the owner and subleases it to us. We also are required generally to indemnify HPT for certain environmental matters and for liabilities which arise during the terms of the leases from ownership or operation of the leased properties and, at lease expiration, we are required to pay an amount equal to an estimate of the cost of removing underground storage tanks on the leased properties. |
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Effective January 2012 and 2013, we began to incur percentage rent payable to HPT under the TA Lease and the Petro Lease, respectively. In each case, the percentage rent equals 3% of increases in nonfuel gross revenues and 0.3% of increases in gross fuel revenues at the leased properties over base amounts. The increases in percentage rents attributable to fuel revenues are subject to a maximum each year calculated by reference to changes in the consumer price index. Also, HPT has agreed to waive payment of the first $2,500 of percentage rent that may become due under our Petro Lease; HPT waived $152 of percentage rent under our Petro Lease for the three months ended March 31, 2014, pursuant to that waiver, and through the first quarter of 2014 has cumulatively waived $518 of the $2,500 of percentage rent to be waived. The total amount of percentage rent (which is net of the waived amount) that we incurred during the three months ended March 31, 2014 and 2013, was $893 and $689, respectively. |
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Under the HPT Leases, we may request that HPT purchase approved amounts for renovations, improvements and equipment at the leased properties 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% or (ii) a benchmark U.S. Treasury interest rate plus 3.5%. During the three months ended March 31, 2014 and 2013, pursuant to the terms of the HPT Leases, we sold to HPT $6,063 and $22,655, respectively, of improvements we previously made to properties leased from HPT, and, as a result, our minimum annual rent payable to HPT increased by approximately $515 and $1,926, respectively. At March 31, 2014, our property and equipment balance included $2,570 of improvements of the type that we typically request that HPT purchase for an increase in rent in the future; however, HPT is not obligated to purchase these improvements. In June 2014, we sold to HPT $15,860 of improvements for an increase in minimum annual rent payable to HPT of $1,348. |
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The following table details amounts related to the HPT Leases and other leases that are reflected in real estate rent expense in our condensed consolidated statements of operations and comprehensive income (loss). |
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| | Three Months Ended | |
| | March 31, | |
| | 2014 | | 2013 | |
Cash payments to HPT under the HPT Leases | | $ | 55,146 | | $ | 52,850 | |
Change in accrued estimated percentage rent | | 618 | | 666 | |
Adjustments to recognize expense on a straight line basis | | (341 | ) | (241 | ) |
Less sale-leaseback financing obligation amortization | | (589 | ) | (509 | ) |
Less portion of rent payments recognized as interest expense | | (1,470 | ) | (1,741 | ) |
Less deferred tenant improvements allowance amortization | | (1,692 | ) | (1,692 | ) |
Amortization of deferred gain on sale-leaseback transactions | | (96 | ) | (77 | ) |
Rent expense related to HPT Leases | | 51,576 | | 49,256 | |
Rent paid to others (1) | | 2,607 | | 2,607 | |
Adjustments to recognize expense on a straight line basis for other leases | | (57 | ) | 21 | |
Total real estate rent expense | | $ | 54,126 | | $ | 51,884 | |
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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 details amounts related to the HPT Leases that are included in our condensed consolidated balance sheets. |
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| | March 31, | | December 31, | |
| | 2014 | | 2013 | |
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Current HPT Leases liabilities: | | | | | |
Accrued rent | | $ | 18,764 | | $ | 18,041 | |
Current portion of sale-leaseback financing obligation (1) | | 2,405 | | 2,358 | |
Current portion of straight line rent accrual (2) | | 2,438 | | 2,382 | |
Current portion of deferred gain on sale-leaseback transactions (3) | | 385 | | 385 | |
Current portion of deferred tenant improvements allowance (4) | | 6,769 | | 6,769 | |
Total Current HPT Leases liabilities | | $ | 30,761 | | $ | 29,935 | |
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Noncurrent HPT Leases liabilities: | | | | | |
Deferred rent obligation (5) | | $ | 150,000 | | $ | 150,000 | |
Sale-leaseback financing obligation (1) | | 83,393 | | 83,762 | |
Straight line rent accrual (2) | | 52,252 | | 52,901 | |
Deferred gain on sale-leaseback transactions (3) | | 3,021 | | 3,117 | |
Deferred tenant improvements allowance (4) | | 52,454 | | 54,146 | |
Total Noncurrent HPT Leases liabilities | | $ | 341,120 | | $ | 343,926 | |
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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 sheets the leased assets at thirteen of the properties previously owned by our predecessor that we now lease from HPT because we subleased more than a minor portion of those properties to third parties, and one property that did not qualify for operating lease treatment for other reasons. Accordingly, we recorded the leased assets at these properties 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 sheets. In addition, sales to HPT of improvements at these properties 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 (loss). 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 during the three months ended March 31, 2014 and 2013, were $1,470 and $1,741, respectively. |
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During 2012 and 2013, subleases to franchisees of ours at five of these properties were terminated and we began operating these properties directly. The termination of these subleases qualified the properties for sale-leaseback accounting at which times we removed the related assets and liabilities from our consolidated balance sheet. See note (3) below for further discussion regarding the deferred gains of $2,850 we recognized as part of these sublease terminations. |
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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 cost of removing the underground storage tanks we would have if we owned the underlying assets. We recognize the effects of scheduled rent increases and the future payment to HPT for the estimated cost of removing underground storage tanks 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 our 2012 and 2013 terminations of subleases to franchisees for five properties we lease from HPT, which qualified these properties for sale-leaseback accounting and required us to remove the related assets and liabilities from our consolidated balance sheets, 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 our real estate rent expense on a straight line basis over the then remaining term of the lease. |
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(4) Deferred Tenant Improvements Allowance. HPT committed to fund up to $125,000 of capital projects at the properties 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 August 13, 2013, the travel center located in Roanoke, VA that we leased from HPT under the TA Lease was taken by eminent domain proceedings brought by the Virginia Department of Transportation, or VDOT, in connection with planned highway construction. The TA Lease provides that the annual rent payable by us is reduced by 8.5% of the amount of the proceeds HPT receives from the taking or, at HPT’s option, the fair market value rent of the property on the commencement date of the TA Lease. In January 2014, HPT received proceeds from VDOT of $6,178, which is a substantial portion of VDOT’s estimate of the value of the property, and as a result our annual rent under the TA Lease was reduced by $525 effective January 6, 2014. We and HPT have challenged VDOT’s estimate of the property’s value and expect that the ultimate resolution of this matter will take a prolonged period of time. HPT entered a lease agreement with VDOT to lease for $40 per month this property through August 31, 2014, which lease term was recently extended through November 15, 2014. We entered into a sublease for this property with HPT and, we plan to continue operating it as a travel center through November 15, 2014. Under the terms of the TA Lease, we are responsible to pay the rent to VDOT under the lease agreement. |
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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. 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, Mr. Andrew Rebholz, our Executive Vice President, Chief Financial Officer and Treasurer, and Mr. Mark Young, our Executive Vice President and General Counsel, are officers of RMR. RMR provides management services to HPT and HPT’s executive officers are officers of RMR. Two of our Independent Directors also serve as independent directors or independent trustees of other companies to which RMR or its affiliates provide management services. Mr. Barry Portnoy serves as a managing director or managing trustee of a majority of the public companies to which RMR or its affiliates provide management services and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies. 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 $2,854 and $2,483 for the three months ended March 31, 2014 and 2013, respectively. These amounts are included in selling, general and administrative expenses in our condensed consolidated statements of operations and comprehensive income (loss). |
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Relationship with AIC |
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We, RMR and six other companies to which RMR provides management services each owned 12.5% of Affiliates Insurance Company, or AIC, an Indiana insurance company as of March 31, 2014. As noted below, one of those shareholders has since had its AIC equity interests purchased by us and the other AIC shareholders pro rata. A majority of our Directors and most of the trustees and directors of the other AIC shareholders 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 March 31, 2014, we had 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 as a majority of our Directors are also directors of AIC. Our investment in AIC had a carrying value of $5,835 and $5,913 as of March 31, 2014 and December 31, 2013, respectively, which amounts are included in other noncurrent assets on our consolidated balance sheets. We recognized a loss of $97 and income of $76 related to our investment in AIC for the three months ended March 31, 2014 and 2013, respectively. In June 2014, we and the other shareholders of AIC renewed our participation in an insurance program arranged by AIC. In connection with the renewal, we purchased a one-year property insurance policy providing $500,000 of coverage, with respect to which AIC is a reinsurer of certain coverage amounts. We paid AIC a premium, including taxes and fees, of approximately $1,601 in connection with that policy, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in the policy. 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 reducing our insurance expenses and by realizing our pro rata share of any profits of this insurance business. |
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On March 25, 2014, as a result of the removal, without cause, of all of the trustees of CommonWealth REIT, or CWH, CWH underwent a change in control, as defined in the shareholders agreement among us, the other shareholders of AIC, and AIC. As a result of that change in control and in accordance with the terms of the shareholders agreement, on May 9, 2014, we and the other non-CWH shareholders purchased pro rata the AIC shares CWH owned. Pursuant to that purchase, we purchased 2,857 AIC shares from CWH for $825. Following these purchases, we and the six other remaining shareholders each owned approximately 14.3% of AIC. |
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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 and two convenience stores in California. We own a 40% interest in PTP and operate the two travel centers and two convenience stores PTP owns for which we receive management and accounting fees. The carrying value of our investment in PTP as of March 31, 2014 and December 31, 2013, was $18,023 and $17,672, respectively. During each of the three months ended March 31, 2014 and 2013, we recognized management and accounting fee income of $200. At March 31, 2014, and December 31, 2013, we had a net payable to PTP of $2,666 and $1,147, respectively. We recognized income of $351 and $360 during the three months ended March 31, 2014 and 2013, respectively, as our share of PTP’s net income. |
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Summarized financial information of AIC and PTP |
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The following tables set forth the aggregate summarized financial information of AIC and PTP and does not represent the amounts we have included in our consolidated financial statements in connection with our investments in AIC and PTP. |
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| | Three Months Ended March 31, | |
| | 2014 | | 2013 | |
Total revenues | | $ | 26,467 | | $ | 27,599 | |
Total cost of sales (excluding depreciation) | | $ | 20,052 | | $ | 21,915 | |
Operating income (loss) | | $ | (202 | ) | $ | 1,756 | |
Interest expense, net | | $ | (121 | ) | $ | (170 | ) |
Net income | | $ | 96 | | $ | 1,254 | |
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