UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-11527
HOSPITALITY PROPERTIES TRUST
Maryland 04-3262075
(State of Incorporation) (IRS Employer Identification No.)
400 Centre Street, Newton, Massachusetts 02458
617-964-8389
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Shares outstanding
Class at November 1, 2002
- --------------------------------------- -------------------
Common shares of beneficial
interest, $0.01 par value per share 62,547,348
HOSPITALITY PROPERTIES TRUST
FORM 10-Q
September 30, 2002
INDEX
PART I Financial Information (Unaudited) Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - September 30, 2002 and
December 31, 2001.................................................. 3
Consolidated Statement of Income - Three and Nine Months Ended
September 30, 2002 and 2001........................................ 4
Condensed Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 2002 and 2001.................................. 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk........... 20
Item 4.
Controls and Procedures.............................................. 20
Certain Important Factors................................................ 21
PART II Other Information
Item 6.
Exhibits and Reports on Form 8-K..................................... 22
Signatures............................................................... 23
Certifications........................................................... 24
2
PART I Financial Information
Item 1. Financial Statements
HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share amounts)
September 30, December 31,
2002 2001
---------------- ---------------
(unaudited) (audited)
ASSETS
Real estate properties, at cost................................. $ 2,783,021 $ 2,629,153
Accumulated depreciation........................................ (431,578) (363,329)
---------------- ---------------
2,351,443 2,265,824
Cash and cash equivalents....................................... 503 38,962
Restricted cash (FF&E reserve).................................. 49,267 39,913
Other assets, net............................................... 14,050 10,265
---------------- ---------------
$ 2,415,263 $ 2,354,964
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Revolving credit facility....................................... $ 83,000 $ --
Senior notes, net of discount................................... 473,934 464,781
Security and other deposits..................................... 271,129 263,983
Other liabilities............................................... 17,407 21,681
---------------- ---------------
845,470 750,445
---------------- ---------------
Shareholders' equity:
Series A preferred shares, 9.5% cumulative redeemable
at $25/share, no par value; 3,000,000 shares issued and
outstanding............................................... 72,207 72,207
Common shares of beneficial interest, $0.01 par value,
62,547,348 and 62,515,940 issued and outstanding, respectively
625 625
Additional paid-in capital.................................. 1,668,230 1,667,256
Cumulative net income....................................... 677,129 573,663
Cumulative preferred distributions.......................... (24,700) (19,356)
Cumulative common distributions............................. (823,698) (689,876)
---------------- ---------------
Total shareholders' equity................................ 1,569,793 1,604,519
---------------- ---------------
$ 2,415,263 $ 2,354,964
================ ===============
The accompanying notes are an integral part of these financial statements.
3
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts, unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
2002 2001 2002 2001
-------------- --------------- -------------- ---------------
Revenues:
Rental income........................... $ 62,544 $ 58,979 $ 182,973 $ 178,495
Hotel operating revenues................. 21,469 17,861 59,918 20,644
FF&E reserve income..................... 5,773 6,126 16,708 19,680
Interest income......................... 35 222 271 681
-------------- --------------- -------------- ---------------
Total revenues...................... 89,821 83,188 259,870 219,500
-------------- --------------- -------------- ---------------
Expenses:
Hotel operating expenses................ 14,207 12,074 38,605 13,929
Interest (including amortization of
deferred financing costs of $683,
$605, $2,006, and $1,812,
respectively)......................... 10,892 10,542 32,005 31,248
Depreciation and amortization........... 24,258 23,396 72,178 68,025
General and administrative.............. 4,219 3,902 12,016 11,508
-------------- --------------- -------------- ---------------
Total expenses...................... 53,576 49,914 154,804 124,710
-------------- --------------- -------------- ---------------
Net income before extraordinary item....... 36,245 33,274 105,066 94,790
Extraordinary item - loss on early
extinguishment of debt................ (1,600) -- (1,600) --
-------------- --------------- -------------- ---------------
Net income................................. 34,645 33,274 103,466 94,790
Preferred distributions.................... (1,781) (1,781) (5,344) (5,344)
-------------- ---------------
-------------- ---------------
Net income available for common
shareholders............................. $ 32,864 $ 31,493 $ 98,122 $ 89,446
============== =============== ============== ===============
Weighted average common shares outstanding.
62,547 60,344 62,535 57,796
============== =============== ============== ===============
Basic and diluted earnings per common
share:
Net income available for common
shareholders before extraordinary
item................................ $ 0.55 $ 0.52 $ 1.59 $ 1.55
Extraordinary item - loss on early
extinguishment of debt.............. (0.02) -- (0.02) --
-------------- --------------- -------------- ---------------
Net income available for common
shareholders........................ $ 0.53 $ 0.52 $ 1.57 $ 1.55
============== =============== ============== ===============
The accompanying notes are an integral part of these financial statements.
4
HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
Nine Months Ended September 30,
----------------------------------------
2002 2001
------------------ ------------------
Cash flows from operating activities:
Net income............................................................ $ 103,466 $ 94,790
Adjustments to reconcile net income to cash provided by operating
activities:
Extraordinary item - loss on early extinguishment of debt......... 1,600 --
Depreciation and amortization..................................... 72,178 68,025
Amortization of deferred financing costs as interest.............. 2,006 1,812
FF&E reserve income and deposits.................................. (19,816) (20,698)
Deferred percentage rent.......................................... 1,897 3,413
Net change in assets and liabilities.............................. (6,564) 689
------------------ ------------------
Cash provided by operating activities......................... 154,767 148,031
------------------ ------------------
Cash flows from investing activities:
Real estate acquisitions.............................................. (147,335) (188,652)
Increase in security and other deposits............................... 7,146 6,606
------------------ ------------------
Cash used in investing activities............................. (140,189) (182,046)
------------------ ------------------
Cash flows from financing activities:
Proceeds of issuance of common shares, net................................ -- 159,310
Proceeds of issuance of senior notes...................................... 124,106 --
Repayment of senior notes................................................. (115,000) --
Distributions to common shareholders...................................... (133,822) (119,205)
Distributions to preferred shareholders................................... (5,344) (5,344)
Draws on revolving credit facility........................................ 250,000 150,000
Repayment of revolving credit facility.................................... (167,000) (150,000)
Deferred finance costs incurred........................................... (5,977) (401)
------------------ ------------------
Cash (used in) provided by financing activities................ (53,037) 34,360
------------------ ------------------
(Decrease)/increase in cash and cash equivalents.......................... (38,459) 345
Cash and cash equivalents at beginning of period.......................... 38,962 24,601
------------------ ------------------
Cash and cash equivalents at end of period................................ $ 503 $ 24,946
================== ==================
Supplemental cash flow information:
Cash paid for interest............................................. $ 32,116 $ 33,229
Non-cash investing and financing activities:
Property managers' deposits in FF&E reserve........................ 18,935 19,122
Purchases of fixed assets with FF&E reserve........................ (10,462) (10,933)
Real estate acquired in an exchange................................ (28,914) --
Real estate disposed of in an exchange............................. 28,914 --
The accompanying notes are an integral part of these financial statements.
5
HOSPITALITY PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements of Hospitality
Properties Trust and its subsidiaries have been prepared without audit. Certain
information and footnote disclosures required by generally accepted accounting
principles 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 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, 2001. In the opinion of
management, all adjustments, which include only normal recurring adjustments
considered necessary for a fair presentation, have been included. All
intercompany transactions and balances between Hospitality Properties Trust and
its subsidiaries have been eliminated. Our operating results for interim periods
and those of our tenants are not necessarily indicative of the results that may
be expected for the full year.
Note 2. Shareholders' Equity
On August 22, 2002, we paid a $0.72 per share distribution to our common
shareholders for the quarter ended June 30, 2002. On October 1, 2002, we
declared a distribution of $0.72 per share to be paid to common shareholders of
record on October 25, 2002. This distribution will be paid on or about November
21, 2002.
On September 30, 2002, we paid a $0.59375 per share distribution to our
preferred shareholders.
We do not present diluted earnings per share because we have no dilutive
instruments.
Note 3. Indebtedness
On July 8, 2002, we issued $125,000 of 6.85% senior notes, due July 2012. A
portion of the net proceeds of $124,106 were used to repay the then outstanding
balance of our revolving credit facility.
On July 18, 2002, we prepaid our $115,000 of 8.25% senior notes due November
2005. These notes were prepaid at par with cash on hand and borrowing on our
revolving credit facility. In connection with this early repayment, we
recognized an extraordinary loss on early extinguishment of debt of $1,600 in
the 2002 third quarter related to the write-off of unamortized deferred
financing costs.
Our credit facility matures in June 2005 and may be extended at our option to
June 2006 upon our payment of an extension fee. This facility permits borrowing
up to $350,000 and includes a feature under which the maximum draw may expand to
$700,000, in certain circumstances. Drawings under our credit facility are
unsecured. Funds may be drawn, repaid and redrawn until maturity, and no
principal repayment is due until maturity. Interest on borrowings under the
credit facility is payable at a spread above LIBOR.
Note 4. Real Estate Properties
In April 2002, we purchased 21 hotels for $145,000. These 21 hotels and 36
Candlewood Suites hotels we already owned, are leased to a subsidiary of
Candlewood Hotel Company, Inc. through the end of 2018.
During the nine months ended September 30, 2002, we funded improvements at
certain hotels for $2,351, which led to an increase in the annual minimum rent
due to us.
During the first half of 2002, we exchanged three of our hotels with one of our
tenants for three different hotels at no cost to us. No gain or loss was
recognized on these non-monetary exchanges.
6
HOSPITALITY PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
Note 5. New Accounting Pronouncement
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections" (FAS 145). The provisions of this standard
eliminate the requirement that a gain or loss from the extinguishment of debt be
classified as a extraordinary item, unless it can be considered unusual in
nature and infrequent in occurrence. We will be required to implement FAS 145 on
January 1, 2003. Upon implementation, we will reclassify all extraordinary gains
or losses from debt extinguishments in 2002 and prior as ordinary income/loss
from operations.
Note 6. Significant Tenant
At September 30, 2002, HMH HPT Courtyard LLC, a 100% owned special purpose
subsidiary of Host Marriott Corporation ("Host"), is the lessee of 53 Courtyard
by Marriott(R) properties which we own and which represent 19% (20% at December
31, 2001) of our investments, at cost. The results of operations for the
thirty-six weeks ended September 6, 2002 and September 7, 2001, and summarized
balance sheet data of HMH HPT Courtyard LLC as provided by Host are as follows.
HMH HPT Courtyard LLC
(a subsidiary of Host Marriott Corporation)
Thirty-six weeks ended Thirty-six weeks ended
September 6, 2002 September 7, 2001
(unaudited) (unaudited)
--------------------------- --------------------------
Revenues:
Rental income(1)......................... $ 35,000 $ 34,995
Interest income.......................... 208 269
Amortization of deferred gain............ 1,992 1,992
--------------------------- --------------------------
Total revenues........................ 37,200 37,256
--------------------------- --------------------------
Expenses:
Base and percentage rent expense......... 36,320 37,441
Corporate expenses....................... 1,385 1,388
Other expenses........................... 107 117
--------------------------- --------------------------
Total expenses........................ 37,812 38,946
--------------------------- --------------------------
Loss before taxes...................... (612) (1,690)
Provision for income taxes............. -- --
--------------------------- --------------------------
Net loss income........................ $ (612) $ (1,690)
=========================== ==========================
September 6, 2002 December 31, 2001
(unaudited)
--------------------------- --------------------------
Assets................................... $ 67,874 $ 67,224
Liabilities.............................. 37,800 36,538
Equity................................... 30,074 30,686
<FN>
(1) Percentage rental revenue of $2,561 and $7,358 for the thirty-six weeks
ended September 6, 2002 and September 7, 2001, respectively, was
deferred and is included as deferred rent in liabilities on the balance
sheet. Percentage rent will be recognized as income during the year once
specified hotel sales thresholds are achieved.
</FN>
7
HOSPITALITY PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
At September 30, 2002, CCMH Courtyard I LLC, a 100% owned special purpose
subsidiary of Barcelo-Crestline Corporation ("Barcelo-Crestline"), is the
sublessee of the 53 Courtyard by Marriott(R) properties discussed above. The
results of operations for the thirty-six weeks ended September 6, 2002 and
September 7, 2001, and summarized balance sheet data of CCMH Courtyard I LLC, as
provided by Barcelo-Crestline, are as follows.
CCMH Courtyard I LLC
(a subsidiary of Barcelo-Crestline)
Thirty-six weeks ended Thirty-six weeks ended
September 6, 2002 September 7, 2001
(unaudited) (unaudited)
----------------------- -----------------------
Revenues:
Hotels:
Rooms................................... $ 133,620 $ 153,213
Food and beverage....................... 8,739 10,169
Other................................... 3,168 4,865
----------------------- -----------------------
Total hotel revenues............. 145,527 168,247
----------------------- -----------------------
Operating costs and expenses:
Hotels:
Property-level costs and expenses:
Rooms............................... 29,029 32,853
Food and beverage................... 7,198 8,984
Other............................... 51,438 56,483
Other operating costs and expenses:
System management fees.............. 4,366 5,047
Other management fees............... 10,572 16,334
Lease expense....................... 37,885 43,158
----------------------- -----------------------
Total hotel expenses............. 140,488 162,859
----------------------- -----------------------
Operating profit.................... 5,039 5,388
Corporate expenses............................... (253) (213)
Interest expense................................. (181) (181)
Interest income.................................. 1,209 172
----------------------- -----------------------
Income before income taxes....................... 5,814 5,166
Income taxes..................................... (2,268) (2,067)
----------------------- -----------------------
Net income....................................... $ 3,546 $ 3,099
======================= =======================
September 6, 2002 December 31, 2001
(unaudited)
----------------------- -----------------------
Assets........................................... $ 38,885 $ 34,670
Liabilities...................................... 9,232 8,563
Equity........................................... 29,653 26,107
8
HOSPITALITY PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
Operating results for these 53 Courtyard by Marriott(R) properties derived from
data provided by Host and Barcelo-Crestline are detailed below:
Thirty-six weeks Thirty-six weeks
ended ended
September 6, 2002 September 7, 2001
(unaudited) (unaudited)
----------------------- -----------------------
Total hotel sales:
Rooms................................... $ 133,620 $ 153,213
Food and beverage....................... 8,739 10,169
Other................................... 3,168 4,865
----------------------- -----------------------
Total hotel sales....................... 145,527 168,247
----------------------- -----------------------
Expenses:
Rooms................................... 29,029 32,853
Food and beverage....................... 7,198 8,984
Other operating departments............. 1,179 1,034
General and administrative.............. 14,935 16,485
Utilities............................... 5,365 6,344
Repairs, maintenance and accidents...... 5,546 6,410
Marketing and sales..................... 5,397 5,383
Chain services.......................... 3,056 3,533
FF&E escrow deposits.................... 7,276 8,412
Real estate tax......................... 6,166 5,943
Land rent............................... 1,265 1,395
System fees............................. 4,366 5,047
Other costs............................. 1,253 1,544
----------------------- -----------------------
Total departmental expenses............. 92,031 103,367
----------------------- -----------------------
Hotel revenues in excess of property-level costs
and expenses................................... $ 53,496 $ 64,880
======================= =======================
Hotel revenues in excess of property-level costs and expenses, shown above,
represent hotel-level cash flows after costs which are paid in priority to
minimum rent due to us for this lease of $35,553 and $35,477 in the 2002 and
2001 periods, respectively.
9
HOSPITALITY PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
This discussion includes references to cash available for distribution, or CAD.
We compute CAD as net income available for common shareholders plus depreciation
and amortization expense, plus non-cash expenses (including only amortization of
deferred financing costs and administrative expenses to be settled in our common
shares), minus those deposits made into FF&E Escrow accounts which are owned by
us but which are restricted to use for improvements at our properties. In
calculating CAD, we also add percentage rents deferred during interim periods in
accordance with GAAP. Our method of calculating CAD may not be comparable to CAD
which may be reported by other REITs that define this term differently. We
consider CAD to be an appropriate measure of performance for HPT, along with
cash flow from operating activities, investing activities and financing
activities, because it provides investors with an indication of HPT's operating
performance and our ability to incur and service debt, make capital
expenditures, pay distributions and fund other cash needs. Our CAD is an
important factor considered by our Board of Trustees in determining the amount
of our distributions to shareholders. CAD does not represent cash generated by
operating activities in accordance with generally accepted accounting principles
and should not be considered as an alternative to net income or cash flow from
operating activities as measures of financial performance or liquidity.
The following discussion should be read in conjunction with our Annual Report on
Form 10-K.
Current Events
As a result of the terrorist attacks on the United States on September 11, 2001,
concerns regarding the war on terrorism, and the impact of a recessionary
economy, the U.S. hotel industry has experienced significant declines versus the
comparable prior year period in occupancy, revenues and profitability. These
declines primarily arise from reduced business travel and are in addition to
declines which began to affect the hotel industry earlier in 2001 as a result of
slowing business activity in the U.S. economy generally. Most of our hotel
operators have reported declines, including during the third quarter of 2002, in
the operating performance of our hotels versus comparable periods in the prior
year. As of September 30, 2002, all of our rent payments are current. As
described below, our leases and operating agreements contain security features,
such as guarantees, which are intended to protect payment of minimum rents and
returns to us in accordance with our leases and agreements regardless of hotel
performance. However, the effectiveness of various security features to provide
uninterrupted payments to us is not assured, particularly if travel patterns
continue at depressed levels for extended periods. If our tenants, hotel
managers or guarantors default in their payment obligations to us, our revenues
will decline.
Leases and Operating Agreements
Each of our 251 hotels is included in one of nine groups of hotels of between 12
and 57 properties. These groups are each operated under pooled agreements by a
third party as tenant or manager for initial terms expiring between 2010 and
2019. The agreements contain renewal options for all, but not less than all, of
the properties in the same group, and the renewal terms total 20-48 years. Each
agreement requires the lessee or operator to: pay all operating costs associated
with the hotels; deposit a percentage of total hotel sales into reserves
established for the regular refurbishment of our hotels ("FF&E Reserves"); make
payments to us of minimum rents or returns; and make payments to us of
additional returns equal to 5%-10% of increases in total hotel sales over sales
during a specified base year. Each third party has posted a security or
performance deposit with us generally equal to one year's minimum rent or
return.
One of the nine groups discussed above contains 35 hotels, including 18 operated
by affiliates of Marriott International, Inc. ("Marriott") under long-term
management contracts and leased to our 100% owned taxable REIT subsidiary, or
TRS, as allowed by the tax laws applicable to REITs. The remaining 17 hotels in
this group are leased to Marriott. Marriott obligations to pay rents and returns
to us from the operation of all 35 of these hotels are combined for all purposes
under these agreements. Each of the 17 hotels now leased to Marriott are
expected to begin to be leased to our TRS and managed by Marriott from time to
time prior to June 30, 2004.
10
HOSPITALITY PROPERTIES TRUST
On June 15, 2001, we purchased four hotels managed by Marriott and our TRS began
to lease an additional six hotels which we own. On September 7, 2001 and
September 6, 2002, our TRS began to lease six and two hotels, respectively,
which we own.
Our TRS does not operate any hotels. Instead, after our TRS begins to lease each
hotel, Marriott continues to operate the hotel as manager and our TRS begins to
pay rent and FF&E reserves to our other subsidiaries. Because our TRS is
consolidated with us, our consolidated income statement does not show rental
income or FF&E reserve income paid by our TRS to our other subsidiaries;
instead, our consolidated statements show hotel operating revenues and hotel
operating expenses for these hotels. Historically, upon the transfer to us of
hotel leasehold interests, the net of hotel operating revenues and hotel
operating expenses has generally been equal to the rental income and FF&E
reserve income previously attributable to that hotel, a condition we expect will
continue as transfers occur under current market conditions.
Results of Operations (dollar amounts in thousands, except per share amounts)
Three Months Ended September 30, 2002 versus 2001
Total revenues for the 2002 third quarter were $89,821, an 8.0% increase over
revenues of $83,188 for the 2001 third quarter. This increase is partially due
to our TRS's activities and our hotel acquisitions.
Rental income increased to $62,544 for the 2002 third quarter from $58,979 in
the 2001 period as a result of our acquisition of 23 hotels since the end of the
2001 second quarter, which was partially offset by minimum rental income
recognized in the 2001 period for hotels which subsequently began to be leased
to our taxable REIT subsidiary, or TRS.
FF&E reserve income represents amounts paid by our tenants into restricted
accounts owned by us, the purpose of which is to accumulate funds for future
capital expenditures. The terms of our leases require these amounts to be
calculated as a percentage of total sales at our hotels. The FF&E reserve income
for the 2002 third quarter was $5,773, a 5.8% decrease from FF&E reserve income
of $6,126 for the 2001 third quarter. This decrease is due primarily to reduced
levels of hotel sales attributable to the general slowdown of business travel
across the United States described above, offset somewhat by a scheduled
increase in the applicable percentage used to calculate FF&E reserves at some of
our hotels. Part of this decrease is also due to activities related to the eight
hotels which began to be leased by our TRS after the beginning of the 2001 third
quarter; as discussed above, the revenues which are escrowed as FF&E reserves
for hotels leased by our TRS subsidiary are not separately stated in our
consolidated statements of income.
Our TRS's activities have given rise to $21,469 of hotel operating revenues for
the 2002 third quarter, a 20% increase in hotel operating revenues over the 2001
third quarter. Our TRS's activities have also given rise to $14,207 of hotel
operating expenses for the 2002 third quarter, an 18% increase over the 2001
third quarter. The increases in hotel operating revenues and expenses were
caused by activities at the eight hotels which began to be leased by our TRS
subsequent to the beginning of the 2001 third quarter, partially offset by a
4.1% decline in hotel operating revenues and a 5.4% decline in operating
expenses at hotels which were leased to our TRS during both periods. Hotel
operating expenses during the 2002 period are reduced by payments of $859 from
Marriott under the terms of its guarantee to us. These guarantee payments are
$172, or 25%, higher than the amounts required in the comparable 2001 period.
Interest income for the 2002 third quarter was $35, an 84.2% decrease from
interest income of $222 for the 2001 third quarter. This decrease was due to a
lower average cash balance and a lower average interest rate during the 2002
period.
Total expenses for the 2002 third quarter were $53,576, a 7.3% increase over
total expenses of $49,914 for the 2001 third quarter. The increase is due
primarily to our recognition of hotel operating expenses for a larger number of
hotels leased to our TRS in the 2002 period than in the 2001 period, and
increases in other expenses arising from our additional hotel investments during
2001 and 2002.
Interest expense for the 2002 third quarter was $10,892, a 3.3% increase over
interest expense of $10,542 for the 2001 third quarter. The increase was
primarily due to higher average borrowings partially offset by a lower weighted
average interest rate during the 2002 period. Depreciation and amortization
expense for the 2002 third quarter was $24,258, a 3.7% increase over
depreciation and amortization expense of $23,396 for the 2001 third quarter.
This increase was due
11
HOSPITALITY PROPERTIES TRUST
principally to the impact of the depreciation of 23 hotels acquired subsequent
to July 1, 2001, and the impact of the purchase of depreciable assets with funds
from FF&E reserve accounts owned by us during 2001 and 2002. General and
administrative expense for the 2002 third quarter was $4,219, an 8.1% increase
from general and administrative expense of $3,902 in the 2001 third quarter.
This increase is due principally to the impact of additional hotel investments
during 2001 and 2002.
Net income before extraordinary item for the 2002 third quarter was $36,245, an
8.9% increase over net income before extraordinary item of $33,274 for the 2001
third quarter. The increase was primarily due to increased rental income from
new investments partially offset by a decrease in FF&E reserve income and
increases in interest and depreciation expenses. In the third quarter 2002, we
recognized an extraordinary loss of $1,600 to write-off the unamortized deferred
financing costs associated with $115,000 of senior notes we redeemed on July 18,
2002.
Net income available for common shareholders for the 2002 third quarter was
$32,864, or $0.53 per share, a 4.4% increase, or 1.9% on a per share basis, over
net income available for common shareholders of $31,493, or $0.52 per share, for
the 2001 third quarter. This increase resulted from the investment and operating
activity discussed above. The per share amount was also affected by our issuance
of 6,000,000 common shares in August 2001.
Cash Available for Distribution, or CAD, for the third quarters of 2002 and 2001
is derived as follows:
2002 2001
--------------- ---------------
Net income available for common shareholders $ 32,864 $ 31,493
Add: Depreciation and amortization 24,258 23,396
Extraordinary item 1,600 --
Deferred percentage rents 591 430
Non-cash expenses, primarily amortization of
deferred financing costs 1,084 998
Less: FF&E Reserves (1) (6,884) (7,008)
--------------- ---------------
Cash Available for Distribution $ 53,513 $ 49,309
=============== ===============
<FN>
(1)All of our leases require that our tenants make periodic payments into
FF&E reserve escrow accounts for the purpose of funding expected
capital expenditures at our hotels. Our net income includes $5,773 and
$6,126 for the 2002 and 2001 third quarters, respectively, of tenant
deposits into FF&E reserve escrow accounts owned by us, which are
subtracted from net income in determining CAD because these amounts are
not available to us for distributions to shareholders. The FF&E
Reserves amounts shown here also include $1,111 and $882 for the 2002
and 2001 periods, respectively, of our hotel operating revenues, which
we have escrowed for routine capital improvements for the hotels leased
to our TRS and operated by Marriott under a long-term management
agreement. Hotel revenues which are escrowed as FF&E reserves for our
hotels leased by our TRS subsidiary are not separately stated in our
consolidated statements of income. Some of our leases provide that FF&E
Reserve escrow accounts are owned by our tenants during the lease terms
while we have security and remainder interests in the escrow accounts
and in property purchased with funding from those accounts. Deposits
into FF&E reserve accounts owned by our tenants during the 2002 and
2001 periods, totaled $3,935 and $3,552, respectively, and are not
removed here because they are not included in our income.
</FN>
CAD for the 2002 third quarter was $53,513, an 8.5% increase over CAD of $49,309
for the 2001 third quarter. This increase was due primarily to the full quarter
impact of our 2001 acquisition of two hotels subsequent to July 1, 2001, and the
impact of our acquisition of 21 hotels during the 2002 second quarter, offset by
increases in interest and general and administrative expenses, and a decrease in
interest income.
Nine Months Ended September 30, 2002 versus 2001
Total revenues for the first nine months of 2002 were $259,870, an 18.4%
increase over revenues of $219,500 for the first nine months of 2001. This
increase is partially due to our TRS's activities and our hotel acquisitions
discussed above.
12
HOSPITALITY PROPERTIES TRUST
Rental income in the first nine months of 2002 increased to $182,973 from
$178,495 during the 2001 period, or 2.5%. This increase is a result of rents
received for 25 hotels we acquired since January 1, 2001, offset by rental
income for hotels which began to be leased to our TRS during this period as our
TRS rents to us are eliminated in our consolidated statements of income.
The FF&E reserve income for the first nine months of 2002 was $16,708, a 15.1%
decrease from FF&E reserve income of $19,680 for the 2001 period. This decrease
is due primarily to reduced levels of hotel sales attributable to the general
slowdown of business travel described above offset somewhat by a scheduled
increase in the applicable percentage used to calculate FF&E reserves at some of
our hotels. Part of this decrease is also due to activities at the hotels which
began to be leased by our TRS after the beginning of 2001; as discussed above,
the revenues which are escrowed as FF&E reserves for hotels leased to our TRS
subsidiary are not separately stated in our consolidated statements of income.
Our TRS's activities have given rise to $59,918 of hotel operating revenues for
the first nine months of 2002, a 190% increase in hotel operating revenues over
the 2001 period. Our TRS's activities have also given rise to $38,605 of hotel
operating expenses for the first nine months of 2002, a 177% increase over the
2001 period. These increases in hotel operating revenues and expenses were
caused by activities at hotels which began to be leased by our TRS after January
1, 2001, offset partially by the 4.1% decline in hotel operating revenues and
the 5.4% decline in operating expenses for hotels which were leased to our TRS
during both periods. Hotel operating expenses during the 2002 period are reduced
by payments of $3,174 from Marriott under its guarantee to us. These guarantee
payments are $2,487, 362%, higher than the amounts attributable to the
comparable 2001 period.
Interest income for the 2002 period was $271, a 60.2% decrease from interest
income of $681 for the 2001 period. This decrease was due to a lower average
cash balance and a lower average interest rate during the 2002 period.
Total expenses for the first nine months of 2002 were $154,804, a 24.1% increase
over total expenses of $124,710 for the 2001 period. The increase is due
primarily to our recognition of hotel operating expenses for a larger number of
hotels leased to our TRS in the 2002 period than in the 2001 period, and
increases in other expenses arising from our additional hotel investments during
2001 and 2002.
Interest expense for the first nine months of 2002 was $32,005, a 2.4% increase
over interest expense of $31,248 for the first nine months of 2001. The increase
was primarily due to higher average borrowings, partially offset by a lower
weighted average interest rate during the 2002 period. Depreciation and
amortization expense for the first nine months of 2002 was $72,178, a 6.1%
increase over depreciation and amortization expense of $68,025 for the 2001
period. This increase was due principally to the impact of the depreciation of
29 hotels acquired subsequent to January 1, 2001, and the impact of the purchase
of depreciable assets with funds from FF&E reserve accounts owned by us during
2001 and 2002. General and administrative expense for the first nine months of
2002 was $12,016, a 4.4% increase from general and administrative expense of
$11,508 in the 2001 period. This increase is due principally to the impact of
additional hotel investments during 2001 and 2002, offset partially by
previously unanticipated reimbursement of amounts expensed in a prior period
related to a potential acquisition.
Net income before extraordinary item for the first nine months of 2002 was
$105,066, a 10.8% increase over net income before extraordinary item of $94,790
for the 2001 period. The increase was primarily due to increased rental income
from new investments partially offset by decreases in FF&E reserve and interest
income and increases in interest, depreciation and general and administrative
expenses. In the third quarter 2002, we recognized an extraordinary loss of
$1,600 to write-off the unamortized deferred financing costs associated with
$115,000 of senior notes we redeemed on July 18, 2002.
Net income available for common shareholders for the first nine months of 2002
was $98,122, or $1.57 per share, a 9.7% increase, or 1.3% on a per share basis,
over net income available for common shareholders of $89,446, or $1.55 per
share, for the 2001 period. This increase resulted from the investment and
operating activity discussed above. The per share amount was also affected by
our issuance of 6,000,000 common shares in August 2001.
13
HOSPITALITY PROPERTIES TRUST
Cash Available for Distribution, or CAD, for the first nine months of 2002 and
2001 is derived as follows:
2002 2001
--------------- ---------------
Net income available for common shareholders $ 98,122 $ 89,446
Add: Depreciation and amortization 72,178 68,025
Extraordinary item 1,600 --
Deferred percentage rents 1,897 3,413
Non-cash expenses, primarily amortization of
deferred financing costs 3,168 2,894
Less: FF&E Reserves (1) (19,816) (20,698)
--------------- ---------------
Cash Available for Distribution $ 157,149 $143,080
=============== ===============
<FN>
(1)All of our leases require that our tenants make periodic payments into
FF&E reserve escrow accounts for the purpose of funding expected
capital expenditures at our hotels. Our net income includes $16,708 and
$19,680 for the first nine months of 2002 and 2001, respectively, of
tenant deposits into FF&E reserve escrow accounts owned by us, which
are subtracted from net income in determining CAD because these amounts
are not available to us for distributions to shareholders. The FF&E
Reserves amounts shown here also include $3,108 and $1,018 for the 2002
and 2001 periods, respectively, of our hotel operating revenues, which
we have escrowed for routine capital improvements for the hotels leased
by our TRS and operated by Marriott under a long-term management
agreement. Hotel revenues which are escrowed as FF&E reserves for our
hotels leased by our TRS subsidiary are not separately stated in our
consolidated statements of income. Some of our leases provide that FF&E
Reserve escrow accounts are owned by our tenants during the lease terms
while we have security and remainder interests in the escrow accounts
and in property purchased with funding from those accounts. Deposits
into FF&E reserve accounts owned by our tenants during the 2002 and
2001 periods, totaled $11,333 and $11,378, respectively, and are not
removed here because they are not included in our income.
</FN>
CAD for the first nine months of 2002 was $157,149, a 9.8% increase over CAD of
$143,080 for the 2001 period. This increase was due primarily to the full impact
of our acquisition of 29 hotels subsequent to January 1, 2001, offset by
increases in interest and general and administrative expenses, a decrease in
interest income and a decrease in deferred percentage rents.
Liquidity and Capital Resources (dollar amounts in thousands, except per share
amounts)
Our Tenants and Operators
All of our hotels are leased to or operated by third parties; we do not operate
hotels. All costs of operating and maintaining our hotels are paid by these
third parties for their own account or as agent for us. These third parties
derive their funding for hotel operating expenses, reserves for renovations, or
FF&E reserves, and rents and returns due us generally from hotel operating
revenues.
We define coverage as combined total hotel sales minus all expenses which are
not subordinated to minimum payments to us and the required FF&E Reserve
contributions, divided by the aggregate minimum payments to us. More detail
regarding coverage, guarantees and other security features is presented in the
table on pages 17 and 18. Eight of nine of our hotel pools, representing 227
hotels, generated coverage of at least 1.0x during 2001, and 4 hotel pools,
representing 124 hotels generated coverage of at least 1.0x during their first
three fiscal quarters of 2002. If a hotel pool does not generate coverage of at
least 1.0x, our tenant or operator must supplement hotel operating results to
make the minimum payments due us to prevent default under the agreements. In
addition, 153 hotels we own in five pools, 58.2% of our total investments, at
cost, are operated under leases or management agreements which are subject to
full or limited guarantees of the parent companies of our tenants or operators.
These parent company guarantees may provide us with continued payments if
combined total hotel sales less total hotel expenses and required FF&E reserve
payments fail to equal amounts due to us. Our tenants and managers or their
affiliates may also supplement cash flow from our hotels in order to make
payments to us and preserve their rights to continue operating our hotels.
Guarantee or supplemental
14
HOSPITALITY PROPERTIES TRUST
payments to us, if any, made under any of our leases or management agreements,
do not subject us to repayment obligations. As of September 30, 2002, all
payments due us, including those payments due under leases or operating
agreements whose hotels have generated less than 1.0x coverage during 2002, are
current. However, the effectiveness of various security features to provide
uninterrupted payments to us is not assured, particularly if travel patterns
continue at depressed levels for extended periods. If our tenants, hotel
managers or guarantors default in their payment obligations to us, our revenues
will decline.
Our Operating Liquidity and Resources
Our principal source of funds for current expenses and distributions to
shareholders is our operations, primarily rents from leasing and the excess of
hotel operating revenues over hotel operating expenses for hotels leased to our
taxable REIT subsidiary. Minimum rents and minimum returns are received from our
tenants and managers monthly in advance and percentage rents and returns are
received either monthly or quarterly in arrears. This flow of funds has
historically been sufficient for us to pay our operating expenses, including
interest, and distributions. We believe that our operating cash flow will be
sufficient to meet our operating expenses, including interest, and distribution
payments for the foreseeable future.
Our Investment and Financing Liquidity and Resources
Various percentages of total sales at all of our hotels are escrowed as reserves
for future renovations and refurbishment, or FF&E reserves, as discussed above.
As of September 30, 2002, there was approximately $67,452 on deposit in these
escrow accounts, of which $49,267 was held directly by us and reflected on our
balance sheet as restricted cash. The remaining $18,185 is held in accounts
owned by our tenants and is not reflected on our balance sheet. We have security
and remainder interests in these accounts owned by our tenants. During the first
nine months of 2002, $31,149 was deposited into these accounts and $16,566 was
spent from these accounts to renovate and refurbish our hotels.
In order to fund acquisitions and to accommodate occasional cash needs which may
result from timing differences between the receipt of rents and the need to make
distributions or pay operating expenses, we maintain a revolving credit facility
with a group of commercial banks. The credit facility in effect at the beginning
of 2002 expired in March 2002. Our new facility matures in June 2005 and may be
extended at our option to June 2006 upon our payment of an extension fee. The
new facility permits borrowing up to $350,000 and includes a feature under which
the maximum draw may expand to $700,000, in certain circumstances. Drawings
under our credit facility are unsecured. Funds may be drawn, repaid and redrawn
until maturity, and no principal repayment is due until maturity. Interest on
borrowings under the credit facility is payable at a spread above LIBOR.
At September 30, 2002, we had $503 of cash and cash equivalents and $267,000
available on our $350,000 revolving credit facility. We expect to use existing
cash balances, borrowings under our credit facility or other lines of credit and
net proceeds of offerings of equity or debt securities to fund future property
acquisitions.
At September 30, 2002, we had no commitments to purchase additional properties.
However, we expect to make improvements and undertake a modernization program at
36 of our Courtyard by Marriott(R) hotels. These hotels contain 5,228 rooms,
representing 51% of the total Courtyard by Marriott(R) rooms which we own. The
majority of the expected $32.5 million of funding for this project is expected
to take place before the end of the 2003 first quarter. Upon funding, our
minimum annual rent related to these hotels will increase by 10% of the amount
funded.
We have no debt which matures in the next twelve months and no principal or
sinking fund payments in the next twelve months. Our debts other than our credit
facility have maturities as follows: $150,000 in 2008; $150,000 in 2009; $50,000
in 2010; and $125,000 in 2012. None of these debt obligations require principal
or sinking fund payments prior to their maturity date.
To the extent amounts are outstanding on our credit facility and, as the
maturity dates of our credit facility and term debt approach over the longer
term, we will explore alternatives for the repayment of amounts due. Such
alternatives in the short term and long term may include incurring additional
long term debt and issuing new equity securities. In March 2002, our shelf
registration statement was declared effective by the Securities and Exchange
Commission. As of September 30, 2002, we had $2,675,000 available on our shelf
registration. An effective shelf registration allows us to issue public
securities on an expedited basis, but it does not assure that there will be
buyers for securities offered by us. Although there can be no assurance that we
will consummate any debt or equity security offerings or other financings, we
15
HOSPITALITY PROPERTIES TRUST
believe we will have access to various types of financing, including investment
grade debt or equity securities offerings, with which to finance future
acquisitions and to pay our debt and other obligations.
On October 1, 2002, a distribution of $0.72 per common share was declared with
respect to third quarter 2002 results and will be paid to shareholders on or
about November 21, 2002, using cash on hand and borrowings under our revolving
credit facility.
Debt Covenants
Our debt obligations at September 30, 2002, were limited to our revolving credit
facility and our $475,000 of public debt. Each issue of our public debt is
governed by an indenture. The indenture and its supplements and our credit
facility agreement contain a number of financial ratio covenants which generally
restrict our ability to incur debts, including debts secured by mortgages on our
properties, in excess of calculated amounts, require us to maintain a minimum
net worth, as defined, restrict our ability to make distributions under certain
circumstances and require us to maintain other ratios, as defined. At September
30, 2002, we were in compliance with all of our covenants under our indenture
and its supplements and our credit facility.
Neither our indenture and its supplements nor our bank credit facility contain
provisions for acceleration which could be triggered by our debt ratings.
However, under our credit agreement, our senior debt rating is used to determine
the fees and interest rate applied to borrowings.
Our public debt indenture and its supplements contain cross default provisions
to any of our other debts of $20,000 or more. Similarly, a default on our public
indenture or any of its supplements would constitute a default under our credit
agreement.
As of September 30, 2002, we had no commercial paper, derivatives, swaps,
hedges, guarantees, joint ventures or partnerships. As of September 30, 2002, we
had no secured debt obligations. None of our debt documentation requires us to
provide collateral security in the event of a ratings downgrade. We have no "off
balance sheet" arrangements.
Property Leases and Operating Agreements
As of September 30, 2002, we owned 251 hotels which are grouped into nine
combinations and leased to or managed by separate affiliates of: Marriott, Host,
Barcelo-Crestline, Wyndham International, Inc. ("Wyndham"), BRE/Homestead
Village ("Homestead"), Candlewood Hotel Company, Inc. ("Candlewood") and Prime
Hospitality Corp. ("Prime").
The tables on the following pages summarize the key terms of our leases and
other operating agreements as of September 30, 2002:
16
HOSPITALITY PROPERTIES TRUST
- ------------------------------ -------------------- --------------------- -------------------- -------------------- ----------------
Marriott(R)/ Residence Inn by
Courtyard by Residence Inn by Residence Inn by Marriott(R)/ Wyndham(R)/
Hotel Brand Marriott(R) Marriott(R) Marriott(R)/ Courtyard by Wyndham
Courtyard by Marriott(R)/ Garden(R)
Marriott(R)/ TownePlace Suites
TownePlace Suites by Marriott(R)/
by Marriott(R)/ SpringHill Suites
SpringHill Suites by Marriott(R)
by Marriott(R)(1)
- ------------------------------ -------------------- --------------------- -------------------- -------------------- ----------------
Number of Hotels 53 18 35 19 12
Number of Rooms 7,610 2,178 5,382 2,756 2,321
Number of States 24 14 15 14 8
Tenant Subsidiary of Host Subsidiary of Host Subsidiary of Subsidiary of Subsidiary of
Subleased to Subleased to Marriott/Subsidiary Barcelo-Crestline Wyndham
subsidiary of subsidiary of of Hospitality
Barcelo-Crestline Barcelo-Crestline Properties Trust
Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of
Marriott Marriott Marriott Marriott Wyndham
Investment at
September 30, 2002 (000s) (2) $514,139 $179,128 $453,954 $274,222 $182,570
Security Deposit (000s) $50,540 $17,220 $36,204 $28,508 $18,325
End of Initial Term 2012 2010 2019 2015 2014
Renewal Options (3) 3 for 12 1 for 10 years, 2 for 15 2 for 10 4 for 12
years each 2 for 15 years each years each years each years each
Current Annual Minimum
Rent/Return (000s) $51,414 $17,888 $48,288 $28,508 $18,325
Percentage Rent/Return (4) 5.0% 7.5% 7.0% 7.0% 8.0%
Rent/Return Coverage (5) (6):
Year ended 12/31/01 1.7x 1.4x 1.1x 1.0x 1.0x
Twelve months ended 9/30/02 1.5x 1.1x 1.0x 1.0x 0.8x
Nine months ended 9/30/02 1.5x 1.1x 1.0x 0.9x 0.9x
Three months ended 9/30/02 1.5x 1.2x 1.0x 0.8x 0.7x
Other Security Features HPT controlled HPT controlled Limited guarantee Limited guarantees Wyndham parent
lockbox with minimum lockbox with minimum provided by Marriott.provided by minimum net
balance maintenance balance maintenance Barcelo-Crestline worth
requirement; requirement; and Marriott. requirement.
subtenant and subtenant and
subtenant parent subtenant parent
minimum net worth minimum net worth
requirement. requirement.
- ------------------------------ -------------------- --------------------- -------------------- -------------------- ----------------
<FN>
(1) At September 30, 2002, 17 of the 35 hotels in this combination were leased to and operated by subsidiaries of Marriott. The
remaining 18 hotels were operated by subsidiaries of Marriott under a management contract with our TRS subsidiary tenant.
Marriott's obligations under the lease and the management contract are subject to cross default provisions and Marriott has
provided us with a limited guarantee of its lease and management obligations, including the obligation to pay minimum rents and
returns to us.
(2) Excludes expenditures made from FF&E reserves subsequent to our initial purchase.
(3) Renewal options may be exercised by the tenant or manager for all, but not less than all, of the hotels within a pool.
(4) Each lease or management contract provides for payment to us of a percentage of increases in total hotel sales over base year
levels as additional rent or return.
(5) Coverage represents total hotel sales minus all hotel operating expenses which are not subordinated to minimum payments to us
and required FF&E reserve contributions, divided by the aggregate minimum payments to us.
(6) Represents data for the year ended December 28, 2001, and the 52, 36, and 12 weeks ended September 6, 2002, respectively for
the hotel pools managed by Marriott.
</FN>
17
HOSPITALITY PROPERTIES TRUST
- ------------------------------ ------------------- --------------------- -------------------- -------------------- -----------------
Summerfield Total /
Suites by Wyndham(R) Candlewood Homestead Range /
Hotel Brand AmeriSuites(R) Suites(R) Studio Suites(R) Average
- ------------------------------ ------------------- --------------------- -------------------- -------------------- -----------------
Number of Hotels 15 24 57 18 251
Number of Rooms 1,822 2,929 6,887 2,399 34,284
Number of States 8 13 27 5 37
Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of
Wyndham Prime Candlewood Homestead
Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of
Wyndham Prime Candlewood Homestead
Investment at
September 30, 2002 (000s) (1) $240,000 $243,350 $434,750 $145,000 $2,667,113
Security Deposit (000s) $15,000 $25,575 (2) $47,297 $15,960 $254,629
End of Initial Term 2017 2013 2018 2015 2010-2019
(weighted
average by
investment,
13.6 years)
Renewal Options (3) 4 for 12 3 for 15 3 for 15 2 for 15
years each years each years each years each
Current Annual Minimum
Rent/Return (000s) $25,000 $25,575 $45,507 $15,960 $276,465
Percentage Rent/Return (4) 7.5% 8.0% 10.0% 10.0% 5%-10%
Rent/Return Coverage (5) (6):
Year ended 12/31/01 1.1x 0.6x 1.1x 1.1x 0.6x-1.7x
Twelve months ended 9/30/02 0.7x 0.6x 0.9x 1.0x 0.6x-1.5x
Nine months ended 9/30/02 0.7x 0.7x 0.9x 1.1x 0.7x-1.5x
Three months ended 9/30/02 0.7x 0.6x 0.9x 1.0x 0.6x-1.5x
Other Security Features Wyndham parent Limited guarantee Candlewood parent Homestead parent
minimum net worth provided by Prime, guarantee and guarantee and
requirement. secured by $16.5 minimum net worth minimum net worth
million cash requirement. requirement.
deposit.
- ------------------------------ ------------------- --------------------- -------------------- -------------------- -----------------
<FN>
(1) Excludes expenditures made from FF&E Reserves subsequent to our initial purchase.
(2) Excludes other deposits totaling approximately $16.5 million at September 30, 2002, retained by us to secure guarantee
obligations to us.
(3) Renewal options may be exercised by the tenant or manager for all, but not less than all, of the hotels within a pool.
(4) Each lease or management contract provides for payment to us of a percentage of increases in total hotel sales over base year
levels as additional rent or return.
(5) Coverage represents total hotel sales minus all hotel operating expenses which are not subordinated to minimum payments to us
and required FF&E reserve contributions, divided by the aggregate minimum payments to us.
(6) Represents data for the year ended December 28, 2001, and the 52, 36, and 12 weeks ended September 6, 2002, respectively for
the hotel pools managed by Marriott.
</FN>
18
HOSPITALITY PROPERTIES TRUST
The following tables summarize the operating statistics, including occupancy,
average daily rate, or ADR, and revenue per available room, or RevPAR, reported
to us by our third party tenants and managers by brand for the periods indicated
for the 247 hotels we own which were open for at least one full year as of
January 1, 2002:
ADR Third Quarter (1) Year to Date (2)
- --- ----------------------------- -------------------------------
No. of No. of
Brand Hotels Rooms 2002 2001 Change 2002 2001 Change
- ----- ------ ------ ---- ---- ------ ---- ---- ------
Courtyard by Marriott(R) 71 10,280 $93.35 $98.96 -5.7% $95.96 $102.45 -6.3%
Residence Inn by Marriott(R) 36 4,543 $93.43 $102.02 -8.4% $95.37 $103.88 -8.2%
Marriott Hotels Resorts & Suites(R) 3 1,356 $116.20 $124.70 -6.8% $117.23 $122.36 -4.2%
TownePlace Suites by Marriott(R)
and SpringHill Suites by 14 1,595 $65.30 $68.94 -5.3% $62.54 $68.29 -8.4%
Marriott(R)
Wyndham(R)and Wyndham Garden(R) 12 2,321 $79.96 $84.80 -5.7% $83.78 $93.82 -10.7%
Summerfield Suites by Wyndham(R) 15 1,822 $98.49 $118.47 -16.9% $103.41 $124.99 -17.3%
AmeriSuites(R) 21 2,556 $69.73 $71.10 -1.9% $69.78 $74.09 -5.8%
Candlewood Suites(R) 57 6,887 $52.43 $55.28 -5.2% $52.85 $57.63 -8.3%
Homestead Studio Suites(R) 18 2,399 $49.10 $51.05 -3.8% $49.07 $53.78 -8.8%
------- --------- -------- --------- ---------- ---------- ---------- ---------
Total/Average 247 33,759 $78.59 $84.30 -6.8% $79.90 $87.44 -8.6%
OCCUPANCY Third Quarter (1) Year to Date (2)
- --------- ----------------------------- -------------------------------
No. of No. of
Brand of Hotels Rooms 2002 2001 Change 2002 2001 Change
- ----- --------- ------ ---- ---- ------ ---- ---- ------
Courtyard by Marriott(R) 71 10,280 72.8% 75.3% -3.3% 70.0% 74.7% -6.3%
Residence Inn by Marriott(R) 36 4,543 81.8% 81.4% +0.5% 77.8% 80.0% -2.8%
Marriott Hotels Resorts & Suites(R) 3 1,356 81.2% 78.1% +4.0% 78.2% 76.9% +1.7%
TownePlace Suites by Marriott(R)
and SpringHill Suites by 14 1,595 77.7% 75.9% +2.4% 72.3% 71.4% +1.3%
Marriott(R)
Wyndham(R)and Wyndham Garden(R) 12 2,321 71.5% 66.9% +6.9% 71.5% 69.7% +2.6%
Summerfield Suites by Wyndham(R) 15 1,822 84.7% 75.8% +11.7% 79.9% 78.1% +2.3%
AmeriSuites(R) 21 2,556 63.0% 63.8% -1.3% 64.1% 63.7% +0.6%
Candlewood Suites(R) 57 6,887 78.4% 77.5% +1.2% 77.2% 75.5% +2.3%
Homestead Studio Suites(R) 18 2,399 74.1% 75.8% -2.2% 75.9% 77.7% -2.3%
------- --------- -------- --------- ---------- ---------- ---------- ---------
Total/Average 247 33,759 75.6% 75.2% +0.5% 73.6% 74.7% -1.5%
RevPAR Third Quarter (1) Year to Date (2)
- ------ ----------------------------- -------------------------------
No. of No. of
Brand of Hotels Rooms 2002 2001 Change 2002 2001 Change
- ----- --------- ------ ---- ---- ------ ---- ---- ------
Courtyard by Marriott(R) 71 10,280 $67.96 $74.52 -8.8% $67.17 $76.53 -12.2%
Residence Inn by Marriott(R) 36 4,543 $76.43 $83.04 -8.0% $74.20 $83.10 -10.7%
Marriott Hotels Resorts & Suites(R) 3 1,356 $94.35 $97.39 -3.1% $91.67 $94.09 -2.6%
TownePlace Suites by Marriott(R)
and SpringHill Suites by 14 1,595 $50.74 $52.33 -3.0% $45.22 $48.76 -7.3%
Marriott(R)
Wyndham(R)and Wyndham Garden(R) 12 2,321 $57.17 $56.73 +0.8% $59.90 $65.39 -8.4%
Summerfield Suites by Wyndham(R) 15 1,822 $83.42 $89.80 -7.1% $82.62 $97.62 -15.4%
AmeriSuites(R) 21 2,556 $43.93 $45.36 -3.2% $44.73 $47.20 -5.2%
Candlewood Suites(R) 57 6,887 $41.11 $42.84 -4.0% $40.80 $43.51 -6.2%
Homestead Studio Suites(R) 18 2,399 $36.38 $38.70 -6.0% $37.24 $41.79 -10.9%
------- --------- -------- --------- ---------- ---------- ---------- ---------
Total/Average 247 33,759 $59.41 $63.39 -6.3% $58.81 $65.32 -10.0%
<FN>
(1) Includes data for the three months ended September 30th, except for our
Courtyard by Marriott(R), Residence by Marriott(R), Marriott Hotels
Resorts and Suites(R), TownePlace Suites by Marriott(R), and SpringHill
Suites by Marriott(R) branded hotels, which include data for the 12
weeks ended September 6, 2002 and September 7, 2001.
(2) Includes data for the nine months ended September 30th, except for our
Courtyard by Marriott(R), Residence by Marriott(R), Marriott Hotels
Resorts and Suites(R), TownePlace Suites by Marriott(R), and SpringHill
Suites by Marriott(R) branded hotels, which include data for the 36
weeks ended September 6, 2002 and September 7, 2001.
</FN>
19
HOSPITALITY PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar
amounts in thousands)
There have been no material changes in our exposures to market risk or in the
manner in which we manage exposure to market risk since December 31, 2001, other
than an increase in the amount outstanding on our revolving credit facility. The
following table shows the impact a 10% change in interest rates would have on
our interest expense for our floating rate debt:
Interest Debt Annualized Interest Impact of
Circumstance Rate Outstanding Expense Change
- ------------ ---- ----------- ------- ------
Conditions at Sept. 30, 2002 3.2% $83,000 $2,656 --
A 10% increase 3.5% $83,000 $2,905 $249
A 10% decrease 2.9% $83,000 $2,407 ($249)
The foregoing table shows the impact of an immediate change in floating interest
rates. If these changes occurred gradually over time the impact would be spread
over time.
Item 4. Controls and Procedures
a) Within the 90 days prior to the date of this report, management of the
Company carried out an evaluation, under the supervision and with the
participation of our Managing Trustees, President and Chief Operating
Officer and Treasurer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14 and 15d-14. Based upon that
evaluation, our Managing Trustees, President and Chief Operating Officer
and Treasurer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in our periodic SEC filings.
b) There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect those controls since
the Company's evaluation of these controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
20
HOSPITALITY PROPERTIES TRUST
CERTAIN IMPORTANT FACTORS
THIS Quarterly Report on Form 10-Q contains statements which constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 and the securities and exchange act of 1934, as amended. our
forward looking statements are based upon our present beliefs and expectations;
however, they are not guaranteed to occur. for example, several of our tenants
and hotel operators have continued to pay amounts due to us although our hotels
which they operate appear to be producing lesser amounts of operating income
than the payments made to us. any inference that we will continue to receive
rents and returns if these circumstances continue may be unwarranted. if the
operating results at our hotels do not improve, our tenants and operators may be
unable or unwilling to pay amounts due to us. our hotel operating results have
declined in the past year. if our hotel operating results continue to decline or
do not improve, all of the security features which we have in our leases and
management agreements may be insufficient to protect our future income and the
value of our properties may decline. if our tenants or hotel operators stop
paying the amounts due to us, we may be unable to pay our expenses or
distributions to shareholders. investors are cautioned not to place undue
reliance upon forward looking statements.
OUR AMENDED AND RESTATED DECLARATION OF TRUST, DATED AUGUST 21, 1995, A COPY OF
WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS FILED IN THE
OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND,
PROVIDES THAT THE NAME "HOSPITALITY PROPERTIES TRUST" REFERS TO THE TRUSTEES
UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR
PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE
TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY
OBLIGATION OF, OR CLAIM AGAINST, THE TRUST. ALL PERSONS DEALING WITH THE TRUST,
IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE TRUST FOR THE PAYMENT OF ANY
SUM OR THE PERFORMANCE OF ANY OBLIGATION.
21
HOSPITALITY PROPERTIES TRUST
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Distributions
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
(i) On July 1, 2002, we filed a current Report on Form 8-K,
reporting our appointment of Ernst & Young LLP as our
independent auditor (Item 4) and our sale of $125 million
of 6.85% Senior Notes due 2012 (Items 5 and 7).
(ii) On October 1, 2002, we filed a current Report on Form
8-K, reporting the election of officers (Item 5).
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOSPITALITY PROPERTIES TRUST
/s/John G. Murray
----------------------------------------------
John G. Murray
President and Chief Operating Officer
Dated: November 1, 2002
/s/Mark L. Kleifges
----------------------------------------------
Mark L. Kleifges
Treasurer and Chief Financial Officer
Dated: November 1, 2002
23
CERTIFICATIONS
I, Barry M. Portnoy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Hospitality Properties Trust;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 1, 2002 /s/Barry M. Portnoy
------------------- ---------------------------
Barry M. Portnoy
Managing Trustee
24
I, Gerard M. Martin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Hospitality Properties Trust;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 1, 2002 /s/Gerard M. Martin
------------------- ---------------------------
Gerard M. Martin
Managing Trustee
25
I, John G. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Hospitality Properties Trust;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 1, 2002 /s/John G. Murray
------------------- -------------------------------------
John G. Murray
President and Chief Operating Officer
26
I, Mark L. Kleifges, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Hospitality Properties Trust;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 1, 2002 /s/Mark L. Kleifges
------------------- -------------------------------------
Mark L. Kleifges
Treasurer and Chief Financial Officer
27