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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-11527
HOSPITALITY PROPERTIES TRUST
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Shares outstanding
Class at November 8, 1999
- ------------------------------------------- -------------------
Common shares of beneficial 56,449,743
interest, $0.01 par value per share
HOSPITALITY PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
PART I Financial Information (Unaudited) Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998............................................. 3
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 1999 and 1998.................................... 4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1999 and 1998.............................. 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 8
Item 3.
Quantitative and Qualitative Disclosures About Market Risk......... 14
Certain Important Factors.......................................... 16
PART II Other Information
Item 6.
Exhibits and Reports on Form 8-K................................... 16
Signature.......................................................... 17
2
HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
September 30, December 31,
1999 1998
----------- -----------
(unaudited)
ASSETS
Real estate properties ........................................... $ 2,235,402 $ 1,887,735
Accumulated depreciation ......................................... (167,939) (112,924)
----------- -----------
2,067,463 1,774,811
Cash and cash equivalents ........................................ 93,799 24,610
Restricted cash (FF&E Reserves) .................................. 24,300 22,797
Other assets, net ................................................ 13,398 15,420
----------- -----------
$ 2,198,960 $ 1,837,638
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Senior notes, net of discount .................................... $ 414,773 $ 414,753
Revolving debt ................................................... -- --
Security and other deposits ...................................... 243,014 206,018
Other liabilities ................................................ 11,804 43,010
Shareholders' equity:
Series A Preferred shares, 9 1/2% Cumulative Redeemable; no
par value; 100,000,000 shares authorized; 3,000,000 and zero
shares issued and outstanding, respectively; liquidation
preference of $75,000 and zero, respectively ............... 72,227 --
Common shares of beneficial interest, $0.01 par value,
100,000,000 shares authorized, 56,449,743 and 45,595,539
issued and outstanding, respectively ....................... 564 456
Additional paid-in capital ................................... 1,506,415 1,230,849
Cumulative net income ........................................ 284,418 203,507
Preferred dividends .......................................... (3,325) --
Common dividends ............................................. (330,930) (260,955)
----------- -----------
Total shareholders' equity ................................. 1,529,369 1,173,857
----------- -----------
$ 2,198,960 $ 1,837,638
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Rental income .............................. $ 55,198 $ 40,798 $ 157,237 $ 113,702
FF&E reserve income ........................ 5,879 4,223 14,947 11,683
Interest income ............................ 1,266 154 2,423 1,354
--------- --------- --------- ---------
Total revenues ......................... 62,343 45,175 174,607 126,739
--------- --------- --------- ---------
Expenses:
Interest (including amortization of deferred
finance costs of $512, $321, $1,711 and
$2,200, respectively) .................. 8,829 5,783 28,523 15,178
Depreciation and amortization .............. 19,318 14,490 55,015 39,617
General and administrative ................. 3,791 2,790 10,158 7,608
--------- --------- --------- ---------
Total expenses ......................... 31,938 23,063 93,696 62,403
--------- --------- --------- ---------
Income before extraordinary item .............. 30,405 22,112 80,911 64,336
Extraordinary item: loss from early
extinguishment of debt ................. -- (5) -- (6,619)
--------- --------- --------- ---------
Net income .................................... 30,405 22,107 80,911 57,717
Preferred dividends ........................... 1,781 -- 3,325 --
--------- --------- --------- ---------
Net income available for common shareholders .. $ 28,624 $ 22,107 $ 77,586 $ 57,717
========= ========= ========= =========
Weighted average shares outstanding ........... 56,448 42,884 51,257 41,685
========= ========= ========= =========
Basic earnings per common share:
Income before extraordinary item available for
common shareholders .................... $ 0.51 $ 0.52 $ 1.51 $ 1.54
Extraordinary item ............................ -- -- -- (0.16)
--------- --------- --------- ---------
Net income available for common shareholders .. $ 0.51 $ 0.52 $ 1.51 $ 1.38
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
4
HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998
------------- ------------
Cash flows from operating activities:
Net income ...................................................... $ 80,911 $ 57,717
Extraordinary loss from extinguishment of debt .................. -- 6,619
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization ............................... 55,015 39,617
Amortization of deferred finance costs as interest .......... 1,711 2,200
FF&E reserve income ......................................... (14,947) (11,683)
Deferred percentage rent .................................... -- 791
Net change in assets and liabilities ........................ 753 2,111
--------- ---------
Cash provided by operating activities ................... 123,443 97,372
--------- ---------
Cash flows from investing activities:
Real estate acquisitions ........................................ (334,223) (472,380)
Increase in security and other deposits ......................... 36,996 44,588
--------- ---------
Cash used in investing activities ....................... (297,227) (427,792)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred shares, net .................... 72,227 --
Proceeds from issuance of common shares, net ....................... 274,595 127,696
Proceeds from issuance of term debt, net of discount ............... -- 149,730
Repayment of term debt ............................................. -- (125,000)
Repayment of credit facility ....................................... (172,000) (84,000)
Draws on revolving credit facility ................................. 172,000 266,000
Deferred finance costs incurred .................................... -- (5,427)
Dividends paid to preferred shareholders ........................... (3,325) --
Dividends paid to common shareholders .............................. (100,524) (78,886)
--------- ---------
Cash provided by financing activities ................... 242,973 250,113
--------- ---------
Increase (decrease) in cash and equivalents ........................ 69,189 (80,307)
Cash and cash equivalents at beginning of period ................... 24,610 81,728
--------- ---------
Cash and cash equivalents at end of period ......................... $ 93,799 $ 1,421
========= =========
Supplemental cash flow information:
Cash paid for interest ...................................... $ 29,343 $ 12,205
Non-cash investing activities:
Property managers' deposits in owned FF&E reserves .......... 13,218 10,495
Purchases of fixed assets with funds from FF&E reserves ..... (13,444) (6,260)
The accompanying notes are an integral part of these financial statements.
5
HOSPITALITY PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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 thereto contained in our
Annual Report on Form 10-K for the year ended December 31, 1998. 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.
In 1998, the Financial Accounting Standards Board issued Issue No. 98-9,
"Accounting for Contingent Rent in Interim Financial Periods" ("EITF 98-9"). We
had adopted the provisions of EITF 98-9 prospectively as of May 21, 1998 (the
date of the issuance of EITF 98-9) and continued to apply them until EITF 98-9
was rescinded during the fourth quarter 1998. If EITF 98-9 was applicable for
the three and nine months ended September 30, 1999, net income available for
common shareholders would have been $27,760 ($0.49/share) and $74,748
($1.46/share), respectively. If EITF 98-9 was applicable for the entire 1998
periods, for the three and nine months ended September 30, 1998 income before
extraordinary item and net income available for common shareholders would have
been $22,112 ($0.52/share) and $22,107 ($0.52/share) and $62,355 ($1.50/share)
and $55,736 ($1.34/share), respectively. The deferred percentage rent balance as
of September 30, 1999 and 1998 would have been $2,838 and $2,772, respectively.
EITF 98-9 had no impact on our annual results of operations during 1998, the
only year EITF 98-9 was in effect, rather the accounting changes required by
EITF 98-9 deferred recognition of certain percentage rental income from the
second and third quarters to the fourth quarter within a fiscal year.
Note 2. Shareholders' Equity
In August 1999 we paid a $0.69 per share dividend to common shareholders for the
quarter ended June 30, 1999. On October 6, 1999, our Trustees declared a
dividend of $0.69 per common share to be paid to common shareholders of record
as of October 20, 1999, which will be distributed on or about November 18, 1999.
In the second quarter, we issued three million shares of 9 1/2% Series A
Cumulative Redeemable Preferred Shares raising gross proceeds of $75,000, net
proceeds of $72,227. We also issued 10,812,400 common shares of beneficial
interest, raising gross proceeds of $289,907, net proceeds of $274,595. The net
proceeds of these offerings were used to repay all amounts outstanding under our
revolving credit facility, acquire hotels and for general business purposes.
On September 8, 1999, our Trustees declared a dividend on the preferred shares
of $0.59375 per preferred share to be paid to preferred shareholders of record
as of September 15, 1999, which was distributed on September 30, 1999.
We do not present diluted earnings per share because we have no dilutive
instruments.
Note 3. Indebtedness
As of September 30, 1999, we had zero outstanding on our revolving credit
facility. During the first quarter of 1999, we borrowed $172,000 to partially
fund acquisitions. The balance was reduced to zero in May 1999 with proceeds
from the offerings discussed in Note 2.
6
HOSPITALITY PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Note 4. Real Estate Properties
During the nine months ended September 30, 1999, certain of our subsidiaries
purchased three Candlewood Suites(R) hotels, eighteen Homestead Village(R)
hotels, three Residence Inn by Marriott(R) hotels, one Courtyard by Marriott(R)
hotel, six TownePlace Suites by Marriott(R) hotels and six Sumner Suites(R)
hotels for approximately $332,741, all paid for with the proceeds from the
offerings discussed in Note 2 and cash on hand. Subsequent to September 30,
1999, one of our subsidiaries purchased one TownePlace Suites by Marriott(R)
hotel for approximately $7,840, paid for with cash on hand.
Each of these purchased hotels is leased as part of a pool of properties to
affiliates of the sellers.
Note 5. Significant Tenant
At September 30, 1999, 53 Courtyard by Marriott(R) properties which we own were
leased to a special purpose subsidiary of Host Marriott Corporation ("Host") and
managed by a subsidiary of Marriott International, Inc. ("Marriott"). The
results of operations for the thirty-six weeks ended September 10, 1999, and
September 11, 1998, and summarized balance sheet data of the Host subsidiary to
which our Courtyard by Marriott(R) hotels are leased are as follows (000s):
Thirty-six weeks ended Thirty-six weeks ended
September 10, 1999 September 11, 1998
(unaudited) (unaudited)
======================= =====================
Total hotel sales
Rooms ............................ $147,325 $143,528
Food and beverage ................ 10,611 10,490
Other ............................ 5,792 5,207
-------- --------
Total hotel sales ................ 163,728 159,225
-------- --------
Departmental expenses
Rooms ............................ 31,828 29,946
Food and beverage ................ 9,209 9,001
Other operating departments ...... 1,543 1,504
General and administrative ....... 17,080 16,749
Utilities ........................ 5,343 5,526
Repairs, maintenance and accidents 6,017 6,251
Marketing and sales .............. 4,468 4,252
Chain services ................... 3,536 3,142
-------- --------
Total departmental expenses ...... 79,024 76,371
-------- --------
House profit .............................. 84,704 82,854
Subtenant retainage ....................... 42,369 --
-------- --------
Sublease income earned by Tenant .......... 42,335 82,854
Other ..................................... 1,879 --
-------- --------
Total revenue ............................. 44,214 82,854
Investment expenses
Base and percentage rent ............. 37,132 36,802
FF&E contribution .................... -- 7,961
Management fees ...................... -- 19,277
Real estate tax and other ............ 142 7,479
-------- --------
Total investment expenses ........ 37,274 71,519
-------- --------
Income before taxes ....................... 6,940 11,335
Provision for income taxes ................ -- 4,534
-------- --------
Net income ....................... $ 6,940 $ 6,801
======== ========
7
September 10, 1999 December 31, 1998
(unaudited)
------------------ -----------------------
Assets .............. $64,861 $58,884
Liabilities.......... 38,729 39,692
Equity .............. 26,132 19,192
Beginning on January 1, 1999, Host subleased these 53 Courtyard by Marriott(R)
properties to a subsidiary of Crestline Capital Corporation ("Crestline").
However, Host remains our tenant under the leases. Accordingly, beginning
January 1, 1999, Host reports rental income as compared to hotel sales in the
prior year. Also in the 1999 period, FF&E contributions and management fees are
paid by the subtenant, Crestline Capital Corporation ("Crestline"). House profit
of $84,704 in the 1999 period reduced by the FF&E contributions required by our
leases of $8,186, and further reduced by real estate taxes and other costs
totaling $8,212 which are not subordinate to our rent, or $68,306 was available
to pay rent to us during the 36-week 1999 period. This amount was 1.94 times the
base rent ($35,164) and 1.83 times the total rent paid to us for the 36-weeks
ended September 10, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations (dollar amounts in thousands except per share amounts)
Three Months Ended September 30, 1999 versus 1998
Rental income for the 1999 third quarter was $55,198, a 35% increase over rental
income of $40,798 for the 1998 third quarter. This increase was due to the
impact on rent of 51 hotels acquired in 1998 and 37 hotels acquired in the first
half of 1999. Rental income is comprised principally of minimum rent, which was
$54,334 for the 1999 third quarter, a 33% increase over minimum rent of $40,798
for the 1998 third quarter. Minimum rent increased because of the acquisitions
discussed above. Rental income also includes percentage rents which were $864 in
the 1999 third quarter, a 9% increase over percentage rent of $791 (which was
deferred in accordance with EITF 98-9) for the 1998 third quarter. 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
at our properties. The terms of our leases require these amounts to be
calculated as a percentage of total hotel sales at the properties. The FF&E
reserve income for the 1999 third quarter was $5,879, a 39% increase over FF&E
reserve income for the 1998 third quarter of $4,223. This increase is due
principally to the impact of additional hotels owned and the increased level of
total hotel sales experienced at our hotels. Interest income for the 1999 third
quarter was $1,266, a $1,112 increase from interest income of $154 for the 1998
third quarter. This increase was due to a higher average cash balance in the
1999 period.
Interest expense for the 1999 third quarter was $8,829, a 53% increase over
interest expense of $5,783 for the 1998 third quarter. The increase was due to
higher average borrowing and an increase in the weighted average interest rate
during the 1999 period. These increases primarily resulted from two separate
issuances of senior unsecured notes in November ($115 million at 8 1/4%) and
December ($150 million at 8 1/2%) 1998. Depreciation and amortization expense
for the 1999 third quarter was $19,318, a 33% increase over depreciation and
amortization expense of $14,490 for the 1998 third quarter. This increase was
due principally to the full quarter's impact of the depreciation of 51 hotels
acquired in 1998 and 37 hotels acquired in the first half of 1999. General and
administrative expense for the 1999 third quarter was $3,791, a 36% increase
over general and administrative expense of $2,790 in the 1998 third quarter.
This increase is due principally to the impact of additional hotels purchased
throughout 1998 and in the first half of 1999.
Income before extraordinary item for the 1999 third quarter was $30,405, a 38%
increase over income before extraordinary item for the 1998 third quarter of
$22,112. The increase was primarily due to higher rental income partially offset
by increases in depreciation and interest expense. These increases were
primarily the result of the hotel acquisitions and debt issuances discussed
above.
Net income available for common shareholders for the 1999 third quarter was
$28,624, a 29% increase over net income available for common shareholders for
the 1998 period of $22,107 which resulted from the factors discussed above
partially offset by preferred dividends in the 1999 period.
On a per share basis, income before extraordinary item available for common
shareholders was $0.51, a 2% decrease from the 1998 third quarter. The decrease
results from the net effect of the factors discussed above, offset by the 32%
increase in the weighted average shares outstanding that resulted from our
common share issuances during 1998 and in the second quarter of 1999.
8
Funds from operations, or FFO, is defined as net income before extraordinary and
non-recurring items plus depreciation and amortization of real estate assets
plus deposits made into refurbishment escrows which are not included in revenue.
Cash available for distribution, or CAD, is FFO less refurbishment escrows plus
amortization of deferred financing costs and other non-cash charges. For the
three months ended September 30, 1999, FFO was $51,319 or $0.91 per share and
CAD was $42,897 or $0.76 per share. FFO was $40,093 or $0.94 per share and CAD
was $33,780 or $0.79 per share in the 1998 period. Changes in FFO and CAD are
attributable to the effects on revenues and expenses of acquisition and
financing activities in 1998 and 1999 discussed above.
Nine Months Ended September 30, 1999 versus 1998
Rental income for the first nine months of 1999 was $157,237, a 38% increase
over rental income of $113,702 for the first nine months of 1998. This increase
was due to the full impact of 51 hotels acquired in 1998, and the partial impact
of 37 hotels acquired in the first half of 1999. Minimum rent was $154,399 for
the first nine months of 1999, a 38% increase over minimum rent of $111,721 for
the first nine months of 1998. Minimum rent increased because of the
acquisitions discussed above. Percentage rents were $2,838 for the first nine
months of 1999, a 2% increase over percentage rents of $2,772 for the first nine
months of 1998, of which $1,981 had been recognized and $791 of which had been
deferred in accordance with EITF 98-9. The FF&E reserve income for the first
nine months of 1999 was $14,947, a 28% increase over FF&E reserve income for the
first nine months of 1998. This increase is due principally to the impact of
additional hotels owned and the increased level of total hotel sales experienced
at our hotels. Interest income for the first nine months of 1999 was $2,423, a
$1,069 increase from interest income of $1,354 for the first nine months of
1998. This increase was due to a higher average cash balance in the 1999 period
versus the 1998 period.
Interest expense for the first nine months of 1999 was $28,523, an 88% increase
over interest expense of $15,178 for the first nine months of 1998. The increase
was primarily due to higher average borrowing and an increase in the weighted
average interest rate during the 1999 period. These increases primarily resulted
from three separate 1998 issuances of senior unsecured notes in February ($150
million at 7%), November ($115 million at 8 1/4%) and December ($150 million at
8 1/2%) of 1998 for a total of $414,773, net of discount. Depreciation and
amortization expense for the first nine months of 1999 was $55,015, a 39%
increase over depreciation and amortization expense of $39,617 for the first
nine months of 1998. This increase was due principally to the full impact of the
depreciation of 51 hotels acquired in 1998 and the partial impact of 37 hotels
acquired during 1999. General and administrative expense for the first nine
months of 1999 was $10,158, a 34% increase over general and administrative
expense for the first nine months of 1998 of $7,608. This increase is
principally the impact of additional hotels purchased in 1998 and 1999.
Income before extraordinary item for the first nine months of 1999 was $80,911,
a 26% increase over income before extraordinary item for the first nine months
of 1998 of $64,336. The increase was primarily due to higher rental income,
partially offset by increases in depreciation and interest expense. These
increases primarily reflect the impact of hotel acquisitions during 1998 and
1999.
Net income available for common shareholders for the first nine months of 1999
was $77,586, a 34% increase over income available for common shareholders for
the 1998 period of $57,717. The increase was due to the net effect of the
factors discussed above partially offset by preferred dividends in the 1999
period.
On a per share basis, income before extraordinary item available for common
shareholders was $1.51, a 2% decrease from the 1998 income before extraordinary
item available for common shareholders of $1.54. The decrease was due to the
factors discussed above, offset by the 23% increase in the weighted average
shares outstanding that resulted from our common share issuances during 1998 and
in the second quarter of 1999.
For the first nine months of 1999, FFO was $142,411 or $2.78 per share and CAD
was $120,331 or $2.35 per share. FFO was $112,604 or $2.70 per share and CAD was
$96,068 or $2.30 per share in the 1998 period. Growth in FFO and CAD is
primarily related to the effects on revenues and expenses of acquisitions in
1998 and 1999.
Cash flow provided by (used for) operating, investing and financing activities
was $123,443, ($297,227) and $242,973, respectively, for the first nine months
of 1999. Cash flow from operations in 1999 increased 27% from $97,372 in 1998
primarily due to the impact on rental revenue from investments made in 1998 and
1999. Cash used in investing activities decreased in 1999 from 1998 levels
primarily because of investments in 40 hotels during the first nine months of
1998 for $465,190 versus the investment in 37 hotels during the first nine
months of 1999 for $332,741. Cash provided by financing activities decreased
from 1998 levels due to the issuance of 3 million preferred shares producing net
proceeds of $72,227 and 10.8 million common shares producing net proceeds of
$274,595, offset by an increase in
9
preferred and common dividends during the first nine months of 1999 versus the
issuance of 3,942 common shares, net proceeds of $127,696, term debt of $149,730
net of discount and net borrowings of $182,000 under our credit facility in the
first nine months of 1998.
Liquidity and Capital Resources (dollar amounts in thousands except per share
amounts)
Our total assets increased to $2.2 billion as of September 30, 1999 from $1.8
billion as of December 31, 1998. The increase resulted primarily from hotel
acquisitions completed during 1999.
In April 1999 we issued 3 million shares of 9 1/2% Series A Cumulative
Redeemable Preferred Shares raising gross proceeds of $75,000 and net proceeds
of $72,227. The net proceeds were used to repay amounts outstanding under our
revolving credit facility. In May and June 1999 we issued 10,812,400 shares of
beneficial interest, par value $0.01 per share, raising gross proceeds of
$289,907 and net proceeds of $274,595. The net proceeds were used to repay
amounts outstanding under our revolving credit facility, acquire hotels and for
general business purposes.
During the nine months ended September 30, 1999, our subsidiaries purchased
eighteen Homestead Village(R) hotels, three Candlewood Suites(R), three
Residence Inn by Marriott(R) hotels, one Courtyard by Marriott(R) hotel, six
TownePlace Suites by Marriott(R) hotels and six Sumner Suites(R) for
approximately $332,741, all paid for with the proceeds from the offerings
discussed above and cash on hand.
Subsequent to September 30, 1999, one of our subsidiaries purchased one
TownePlace Suites by Marriott(R) hotel for approximately $7,840, paid for by
cash on hand.
We have agreed to acquire two additional hotels from Marriott for an additional
total investment of approximately $22,986. The acquisition of these two hotels
is expected to occur during the remainder of 1999.
All of our leases require the tenants to post a security deposit, generally
equal to one year's rent. The security deposit is payable to each tenant in the
event the tenant elects not to renew its lease. The terms of some of our leases
and the related guarantees require some of our tenants to deposit with us
$32,442 in addition to their security deposits to secure their obligations under
the leases. These guarantee deposits are payable to our tenants upon the
achievement of certain operating performance thresholds at the leased
properties.
At September 30, 1999, we had $93,799 of cash and cash equivalents and zero
outstanding on our $300,000 revolving credit. From time to time, including
currently, we consider entering or pursuing transactions which would provide
equity or debt capital of various forms and on various terms. On January 15,
1998, our shelf registration statement for up to $2 billion of securities,
including debt securities, was declared effective by the Securities and Exchange
Commission. An effective shelf registration statement enables us to issue
specific securities to the public on an expedited basis by filing a prospectus
supplement with the SEC. Currently, we have $1.0 billion available on our shelf
registration statement. We believe that the capital available to us from time to
time will be sufficient to enable the execution of our business plan and the
funding of our existing commitments.
All of our investments are leased to and operated by third parties. All costs of
operating and maintaining our hotels are paid by our tenants. All of our leases
require a percentage, usually 5%, of total hotel sales to be escrowed by the
tenant or operator as a reserve for renovations and refurbishment ("FF&E
Reserve"). Funds escrowed in the FF&E reserve accounts are used for improvements
to, and refurbishment of, our hotels. As of September 30, 1999, we and our
tenants had approximately $37,700 on deposit in these refurbishment escrow
accounts.
To maintain our status as a real estate investment trust ("REIT") under the
Internal Revenue Code , we must meet certain requirements including the
distribution of at least 95% of our taxable income to our shareholders.
Because we are a REIT, we expect not to pay federal income taxes.
Distributions are based principally on cash available for distribution, which is
net income available for common shareholders plus depreciation and amortization
of real estate assets and certain non-cash charges less FF&E reserve income.
Cash available for distribution may not equal cash provided by operating
activities because the cash flow of the Company is affected by other factors not
included in the cash available for distribution calculation.
On September 8, 1999, our Trustees declared a dividend on the preferred shares
of $0.59375 per preferred share to be paid to preferred shareholders of record
as of September 15, 1999, which was distributed on September 30, 1999.
10
Distributions with respect to the second quarter 1999 results of $0.69 per
common share were made in August 1999. Distributions declared with respect to
third quarter 1999 results of $0.69 per common share will be paid to
shareholders on or about November 18, 1999. Distributions to shareholders for a
year in excess of taxable income for that year constitute return of capital.
Funding for current expenses and distributions is provided by our operations,
primarily our leasing of owned properties.
Property Leases
As of September 30, 1999, we own or are committed to purchase 210 hotels which
are grouped into combinations and leased to 11 separate affiliates of publicly
owned hotel companies Marriott, Host Marriott, Crestline, Wyndham International,
Inc., Homestead Village, Inc., Candlewood Hotel Company and ShoLodge, Inc. The
tables on the following pages summarize the key terms of our leases and the most
recent operating results of our tenants.
11
Lease Pool
Courtyard by Residence Inn by Residence Residence Marriott(R)/Residence
Marriott(R) Marriott(R) Inn(R)/Courtyard Inn(R)/Courtyard Inn(R)/Courtyard(R)/
by Marriott(R) by Marriott(R) TownePlace Suite(R)
- --------------------------------------------------------------------------------------------------------------------------
Number of Hotels 53 18 14 9 17
Number of Rooms 7,610 2,178 1,819 1,336 2,663
Number of States 24 14 7 8 7
Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of
Host subleased Host subleased Marriott Marriott Marriott
to subsidiary of to subsidiary of
Crestline Crestline
Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of
Marriott Marriott Marriott Marriott Marriott
Investment at
September 30, 1999
(000s) $507,933 $174,123 $148,812 $129,377 $201,643 (1)
Security Deposits
(000s) $50,540 $17,220 $14,881 $12,938 $21,322 (1)
End of Initial
Lease Term 2012 2010 2014 2012 2013
Renewal Options (2) 3 for 12 years 1 for 10 years, 1 for 12 years, 2 for 10 years 2 for 10 years
each 2 for 15 years 1 for 10 years each each
each
Current Annual
Minimum Rent (000s) $50,793 $17,412 $14,881 $12,938 $21,322
Percentage Rent (3) 5.0% 7.5% 7.0% 7.0% 7.0%
First Nine Months
1999: Occupancy 81.8% 83.9% 83.2% 77.3% 72.0%
ADR $93.86 $101.25 $87.34 $101.44 $83.29
RevPAR $76.78 $84.95 $72.67 $78.41 $59.97
1998: Occupancy 81.6% 85.1% 80.7%
ADR $91.67 $102.97 $84.72 (4) (4)
RevPAR $74.80 $87.63 $68.37
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Amount includes $170.8 million invested as of September 30, 1999, $7.8 million invested subsequent to September 30,
1999 and $23.0 million in commitments expected to be funded later in 1999. The current security deposit of $18,915
will be increased to $21,322 as the outstanding commitments are funded.
(2) Renewal options may be exercised by the tenant for all, but not less than all, of the hotels within a lease pool.
(3) Each lease provides for payment to us as additional rent of a percentage of increases in total hotel sales over
base year levels.
(4) Because a majority of these properties were not open or had operating histories of less than one year as of January
1, 1999, a display of comparative operating results is not meaningful.
</FN>
12
Lease Pool
Wyndham(R) Summerfield Sumner Candlewood Candlewood Homestead
Suites(R) Suites(R) Suites(R) Suites(R) Village(R)
- ---------------------------------------------------------------------------------------------------------------------
Number of Hotels 12 15 20 17 17 18
Number of Rooms 2,321 1,822 2,409 1,839 2,053 2,399
Number of States 8 8 12 14 14 5
Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of
Wyndham Wyndham ShoLodge Candlewood Candlewood Homestead
Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of
Wyndham Wyndham ShoLodge Candlewood Candlewood Homestead
Investment at
September 30, 1999
(000s) $182,570 $240,000 $205,000 $118,500 $142,400 $145,000
Security Deposits
(000s) $18,325 $15,000 $21,280 $12,081 $14,253 $15,960
End of Initial Lease
Term 2012 2015 2011(1) 2011 2011 2015
Renewal Options (2) 4 for 12 4 for 12 5 for 10 3 for 15 3 for 15 2 for 15
years each years each years each years each years each years each
Current Annual
Minimum Rent
(000s) $18,325 $25,000 $21,280 $12,081 $14,253 $15,960
Percentage Rent (3) 8.0% 7.5% 8.0% 10.0% 10.0% 10.0%
First Nine Months
1999: Occupancy 71.3% 82.7% 61.5% (4) 68.3% (5) 69.8% (5) 75.7% (5)
ADR $96.76 $121.59 $79.26 (4) $59.44 (5) $59.65 (5) $51.59 (5)
RevPAR $68.99 $100.80 $48.74 (4) $40.60 (5) $41.64 (5) $39.05 (5)
1998: Occupancy 76.5% 84.4% (5) 59.4% (4) 71.6% (5) 75.5% (5)
ADR $97.64 $119.39 (5) $78.66 (4) $54.85 (5) (6) $44.83 (5)
RevPAR $74.69 $100.77 (5) $46.72 (4) $39.27 (5) $33.85 (5)
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) During the second quarter of 1999 the initial lease term was extended by three years to June 30, 2011.
(2) Renewal options may be exercised by the tenant for all, but not less than all, of the hotels within a lease
pool.
(3) Each lease provides for payment to us as additional rent of a percentage of increases in total hotel sales
over base year levels.
(4) Includes the 15 hotels open throughout the entire 1999 and comparable 1998 periods. Includes information for
periods prior to our acquisition of certain properties.
(5) Includes information for periods prior to our acquisition of certain properties.
(6) Because a majority of these properties were not open or had operating histories of less than one year as of
January 1, 1999, a display of comparative operating results is not meaningful.
</FN>
13
Seasonality
Our hotels have historically experienced seasonal differences typical of the
hotel industry with higher revenues in the second and third quarters of calendar
years compared with the first and fourth quarters. This seasonality is not
expected to cause fluctuations in our rental income because we believe that the
revenues generated by our hotels will be sufficient for the tenants to pay rents
on a regular basis notwithstanding seasonal fluctuations.
Year 2000
Our in-house computer systems are limited to software and hardware developed by
third parties and installed, operated and monitored by our investment advisor.
All of our computer systems, which are limited to information systems, were
installed within the last two years. All of our critical enterprise wide systems
are warrantied in writing to be Year 2000 compliant by the manufacturer and have
been tested by our investment advisor. These systems include the network
hardware, the network operating system, the desktop operating system, business
application software, financial accounting software and communication software.
Other than those operated by our tenants, we have no critical non information
technology systems, and no such systems are provided to us by our investment
advisor. All costs associated with our computer systems are the responsibility
of our investment advisor.
All of our properties are leased on a triple net basis and are not managed by
us. Our business is heavily dependent upon the efforts of third party tenants
and their affiliates which operate all of our hotels. Our leases and other
contractual relationships require these operators to conduct the daily
operations of our hotels and the scope of the operators' responsibilities
includes ensuring preparedness for the Year 2000. Accordingly, our activities
related to Year 2000 issues that might effect the systems used to run hotels,
which include reservations, financial, accounting, personnel, payroll, payables
and other financial, information and operating systems, have been limited to
inquiry and evaluation of our operators' preparedness and contingency plans. All
of our tenants are operated by public companies which have filed reports
containing Year 2000 preparedness information with the SEC. As of September 30,
1999 Marriott, Host, Wyndham, Candlewood, Homestead and ShoLodge, have responded
in writing to our inquiries related to the Year 2000. Based on these responses
and public disclosures which we have reviewed, we believe that these operators
are in the process of studying their systems and the systems of their vendors,
suppliers and service providors to ensure preparedness. Current levels of
preparedness are varied and include partially completed inventory and assessment
of potential risks, testing, implementation of plans for remediation and
reprogramming. While we believe the efforts of our tenants and their contingency
plans described in their responses will be or are adequate to address Year 2000
concerns, there can be no guarantee that all tenant operations and those of
their vendors and payors and the systems of other companies on which we rely
will be Year 2000 compliant on a timely basis and will not have a material
effect on us. Our costs related to the Year 2000 issues are expected to be zero.
If our efforts and the efforts of our vendors, customers and tenants to prepare
for the Year 2000 were ineffective, the operation of our properties could be
subject to significant adverse effects, including, but not limited to, loss of
business and growth opportunities, reduced revenues and increased expenses which
might cause operating losses by our tenants. Continued or severe operating
losses may inhibit our tenants' ability to pay rent, delay the timeliness of
rent payments, or cause one or more of our tenants to ultimately default on
leases. Numerous lease defaults could jeopardize our ability to maintain our
financial results of operations and meet our financial, operating and capital
obligations and timely pay distributions to our shareholders.
We do not currently have a contingency plan in place in the event we, or our
operators, do not successfully remedy Year 2000 compliance issues that are
identified in a timely manner or fail to identify any Year 2000 issues. We will
evaluate the status of our Year 2000 compliance plan in the fourth quarter of
1999 and determine whether a contingency plan is necessary.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to risks associated with market changes in interest rates.
We manage our exposure to this market risk by monitoring available financing
alternatives. Our strategy to manage exposure to changes in interest rates is
unchanged since December 31, 1998. We do not foresee any significant changes in
our exposure other than as described below to fluctuations in interest rates or
in how we manage this exposure in the near future. At September 30, 1999, our
total outstanding debt consisted of three issues of fixed rate, senior unsecured
notes:
14
Interest Rate Total Interest
Principal Balance Per Year Maturity Interest Payments Due Expense Per Year
- ----------------- -------- -------- --------------------- ----------------
$115,000 8 1/4% 2005 Monthly $ 9,488
$150,000 7% 2008 Semi-Annually 10,500
$150,000 8 1/2% 2009 Monthly 12,750
No principal repayments are due under these notes until maturity. Because
interest on all of our outstanding debt at September 30, 1999, is at fixed
rates, changes in interest rates during the term of this debt will not effect
our operating results. If at maturity these notes were refinanced at interest
rates which are 10% higher than shown above, our per annum interest cost would
increase by approximately $3,274. Based on the balances outstanding as of
September 30, 1999, a hypothetical immediate 10% change in interest rates would
change the fair value of our fixed rate debt obligations by approximately
$21,000.
Each of our fixed rate debt arrangements allow us to make repayments earlier
than the stated maturity date. In some cases, we are allowed to make early
repayment at par after a set date and in other cases we are allowed to make
prepayments only at a premium to face value. These prepayment rights may afford
us the opportunity to mitigate the risk of refinancing at maturity at higher
rates by refinancing prior to maturity.
Our line of credit bears interest at floating rates and matures in 2002. As of
September 30, 1999, there was zero outstanding and $300 million was available
for drawing under our revolving credit facility. Our revolving credit facility
is available to finance our commitments and for general business purposes. As of
September 30, 1999, our acquisition commitments totaled approximately $30,826,
excluding closing costs $7,840 of which was funded subsequent to September 30,
1999, with cash on hand. Assuming these commitments were funded with borrowings
under our revolving credit facility, and assuming interest rates increased 10%,
our annualized interest cost would increase by approximately $198. Repayments
under the revolving credit facility may be made at any time without penalty. Our
exposure to fluctuations in interest rates may in the future increase if we
incur debt to fund future acquisitions or otherwise.
15
CERTAIN IMPORTANT FACTORS
This quarterly report on Form 10-Q contains statements which constitute forward
looking statements within the meaning of the Securities Exchange Act of 1934, as
amended. Those statements appear in a number of places in this Form 10-Q and
include statements regarding our intent, belief or expectations, actions by our
Trustees or officers with respect to the declaration or payment of
distributions, the effect of Year 2000 issues, our policies and plans regarding
investments, financings or other matters, our qualification and continued
qualification as a real estate investment trust or trends affecting us or our
hotels' financial condition or results of operations. Readers are cautioned that
forward looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contained in the forward looking statement as a result of various factors.
These factors include, without limitation, changes in financing terms, our
ability or inability to complete acquisitions and financing transactions, Year
2000 issues, results of operations of our hotels, and general changes in
economic conditions not presently expected. The accompanying information
contained in this Form 10-Q including the information under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," identifies other important factors that could cause these
differences.
THE AMENDED AND RESTATED DECLARATION OF TRUST OF THE COMPANY, DATED AUGUST 21,
1995 A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"),
IS DULY 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.
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K
None
16
SIGNATURE
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/Thomas M. O'Brien
Thomas M. O'Brien
Treasurer and Chief Financial Officer
(authorized officer and principal financial officer)
Dated: November 12, 1999
17