HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
|
$
|
234,569
|
|
|
$
|
177,495
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
198,561
|
|
|
199,301
|
|
Amortization of debt issuance costs and debt discounts and premiums as interest
|
|
5,140
|
|
|
5,037
|
|
Straight line rental income
|
|
4,322
|
|
|
(6,223
|
)
|
Security deposits replenished (utilized)
|
|
(9,179
|
)
|
|
4,986
|
|
Loss on early extinguishment of debt
|
|
—
|
|
|
160
|
|
Unrealized (gains) and losses on equity securities, net
|
|
39,811
|
|
|
(45,895
|
)
|
Equity in earnings of an investee
|
|
(534
|
)
|
|
(51
|
)
|
Gain on sale of real estate
|
|
(159,535
|
)
|
|
—
|
|
Other non-cash (income) expense, net
|
|
(207
|
)
|
|
(1,700
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
Due from related persons
|
|
3,389
|
|
|
(243
|
)
|
Other assets
|
|
(21,158
|
)
|
|
(4,689
|
)
|
Accounts payable and other liabilities
|
|
(388
|
)
|
|
10,196
|
|
Due to related persons
|
|
(54,893
|
)
|
|
(74,997
|
)
|
Net cash provided by operating activities
|
|
239,898
|
|
|
263,377
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Real estate acquisitions and deposits
|
|
(175,146
|
)
|
|
(91,221
|
)
|
Real estate improvements
|
|
(37,189
|
)
|
|
(67,069
|
)
|
Hotel managers’ purchases with restricted cash
|
|
(88,150
|
)
|
|
(59,823
|
)
|
Hotel manager's deposit (withdrawal) of insurance proceeds into restricted cash
|
|
(7,184
|
)
|
|
18,000
|
|
Net proceeds from sale of real estate
|
|
308,200
|
|
|
—
|
|
Net cash provided by (used in) investing activities
|
|
531
|
|
|
(200,113
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from issuance of senior unsecured notes, after discounts and premiums
|
|
—
|
|
|
389,976
|
|
Borrowings under unsecured revolving credit facility
|
|
121,000
|
|
|
301,000
|
|
Repayments of unsecured revolving credit facility
|
|
(208,000
|
)
|
|
(577,000
|
)
|
Deferred financing costs
|
|
—
|
|
|
(12,242
|
)
|
Repurchase of common shares
|
|
—
|
|
|
(101
|
)
|
Distributions to common shareholders
|
|
(175,952
|
)
|
|
(172,565
|
)
|
Net cash used in financing activities
|
|
(262,952
|
)
|
|
(70,932
|
)
|
Decrease in cash and cash equivalents and restricted cash
|
|
(22,523
|
)
|
|
(7,668
|
)
|
Cash and cash equivalents and restricted cash at beginning of period
|
|
76,003
|
|
|
97,496
|
|
Cash and cash equivalents and restricted cash at end of period
|
|
$
|
53,480
|
|
|
$
|
89,828
|
|
|
|
|
|
|
Supplemental disclosure of cash and cash equivalents and restricted cash:
|
|
|
|
|
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the condensed consolidated statements of cash flows:
|
Cash and cash equivalents
|
|
$
|
15,688
|
|
|
$
|
16,549
|
|
Restricted cash
|
|
37,792
|
|
|
73,279
|
|
Total cash and cash equivalents and restricted cash
|
|
$
|
53,480
|
|
|
$
|
89,828
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
Cash paid for interest
|
|
$
|
94,296
|
|
|
$
|
76,509
|
|
Cash paid for income taxes
|
|
2,289
|
|
|
2,589
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements of Hospitality Properties Trust and its subsidiaries, or HPT, we, our or us, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended
December 31, 2018
, or our
2018
Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period, have been included. These condensed consolidated financial statements include the accounts of HPT and our subsidiaries, all of which are
100%
owned directly or indirectly by HPT. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets, impairment of real estate and the valuation of intangible assets.
We have determined that each of our wholly owned taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB,
Accounting Standards Codification
™. We have concluded that we must consolidate each of our wholly owned TRSs because we are the entity with the power to direct the activities that most significantly impact such VIEs’ performance and we have the obligation to absorb losses or the right to receive benefits from each VIE that could be significant to the VIE and are, therefore, the primary beneficiary of each VIE. The assets of our TRSs were
$37,053
and
$31,917
as of
June 30, 2019
and
December 31, 2018
, respectively, and consist primarily of amounts due from and working capital advances to certain of our hotel managers. The liabilities of our TRSs were
$137,151
and
$148,459
as of
June 30, 2019
and
December 31, 2018
, respectively, and consist primarily of security deposits they hold and amounts payable to certain of our hotel managers. The assets of our TRSs are available to satisfy our TRSs’ obligations and we have guaranteed certain obligations of our TRSs.
Note 2. New Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update, or ASU, No. 2016-02,
Leases
. Additional guidance and targeted improvements to ASU No. 2016-02 were made through the issuance of supplemental ASUs in July 2018, December 2018 and March 2019, or collectively with ASU No. 2016-02, the Lease Standard. We adopted the Lease Standard on January 1, 2019. The Lease Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The Lease Standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. Upon adoption, we applied the package of practical expedients that allowed us not to reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, (iii) initial direct costs for any expired or existing leases and (iv) the option to initially apply the Lease Standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, although we did not have such an adjustment. Additionally, our leases met the criteria not to separate non-lease components from the related lease component.
As a lessor
. We are required to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. Adoption of the Lease Standard did not have a material impact in our condensed consolidated financial statements for our leases where we are the lessor.
As a lessee
. We are required to record right of use assets and lease liabilities in our condensed consolidated balance sheets for leases with terms greater than 12 months, where we are the lessee. We recorded right of use assets and related lease liabilities of
$77,010
upon implementation of the Lease Standard. Adoption of the Lease Standard did not have a material effect
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
in our condensed consolidated statements of comprehensive income or condensed consolidated statements of cash flows for our leases where we are the lessee.
See Note
8
for further information regarding our leases and the adoption of the Lease Standard.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments
, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements. Lease related receivables are governed by the Lease Standards referred to above and are not subject to ASU No. 2016-13. We currently expect to adopt the standard using the modified retrospective approach.
Note 3. Revenue Recognition
We report hotel operating revenues for managed hotels in our condensed consolidated statements of comprehensive income. We generally recognize hotel operating revenues, consisting primarily of room and food and beverage sales, when goods and services are provided.
We report rental income for leased hotels and travel centers in our condensed consolidated statements of comprehensive income. We recognize rental income from operating leases on a straight line basis over the term of the lease agreements. We reduced rental income by
$3,190
and
$4,322
for the three and
six
months ended
June 30, 2019
, respectively, and increased rental income by
$3,144
and
$6,223
for the three and
six
months ended
June 30, 2018
, respectively, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TravelCenters of America Inc., or TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight line basis. See Notes
8
and
10
for further information regarding our TA leases. Due from related persons includes
$54,461
and
$66,347
and other assets, net, includes
$3,242
and
$3,073
of straight line rent receivables at
June 30, 2019
and
December 31, 2018
, respectively.
We determine percentage rent due to us under our leases annually and recognize it when all contingencies are met and the rent is earned. We had deferred estimated percentage rent of
$958
and
$2,027
for the three and
six
months ended
June 30, 2019
, respectively, and
$950
and
$1,784
for the three and
six
months ended
June 30, 2018
, respectively.
We own all the FF&E reserve escrows for our hotels. We report deposits by our third party tenants into the escrow accounts as FF&E reserve income. We do not report the amounts which are escrowed as reserves established for the regular refurbishment of our hotels, or FF&E reserves, for our managed hotels as FF&E reserve income.
Note 4. Weighted Average Common Shares
The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Weighted average common shares for basic earnings per share
|
|
164,284
|
|
|
164,205
|
|
|
164,281
|
|
|
164,202
|
|
Effect of dilutive securities: Unvested share awards
|
|
42
|
|
|
38
|
|
|
43
|
|
|
24
|
|
Weighted average common shares for diluted earnings per share
|
|
164,326
|
|
|
164,243
|
|
|
164,324
|
|
|
164,226
|
|
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 5. Shareholders' Equity
Share Awards
On
June 13, 2019
, in accordance with our Trustee compensation arrangements, we granted
3,000
of our common shares, valued at
$24.67
per common share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day to each of our five Trustees as part of their annual compensation.
Share Purchases
On
April 5, 2019
, we purchased an aggregate of
1,642
of our common shares for
$26.64
per common share, the closing price of our common shares on Nasdaq on that day, from a former officer of The RMR Group LLC, or RMR LLC, in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
On
July 3, 2019
, we purchased an aggregate of
5,041
of our common shares for
$25.20
per common share, the closing price of our common shares on Nasdaq on that day, from our former officer and a certain former employee of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
Distributions
On
February 21, 2019
, we paid a regular quarterly distribution to our common shareholders of record on
January 28, 2019
of
$0.53
per share, or
$87,154
. On
May 16, 2019
, we paid a regular quarterly distribution to our common shareholders of record on
April 29, 2019
of
$0.54
per share, or
$88,798
. On
July 18, 2019
, we declared a regular quarterly distribution to common shareholders of record on
July 29, 2019
of
$0.54
per share, or
$88,803
. We expect to pay this amount on or about
August 15, 2019
.
Cumulative Other Comprehensive Loss
Cumulative other comprehensive loss, as of
June 30, 2019
, represents our share of the comprehensive loss of Affiliates Insurance Company, or AIC. See
Note 10
for further information regarding this investment.
Note 6. Indebtedness
Our principal debt obligations at
June 30, 2019
were: (1)
$90,000
of outstanding borrowings under our
$1,000,000
unsecured revolving credit facility; (2) our
$400,000
unsecured term loan; and (3)
$3,650,000
aggregate outstanding principal amount of senior unsecured notes. Our revolving credit facility and our term loan are governed by a credit agreement with a syndicate of institutional lenders.
Our
$1,000,000
revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is
July 15, 2022
, and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the maturity date of the facility for
two
additional
six
month periods. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. We are required to pay interest on borrowings under our revolving credit facility at the rate of LIBOR plus a premium, which was
100
basis points per annum as of
June 30, 2019
. We also pay a facility fee, which was
20
basis points per annum at
June 30, 2019
, on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of
June 30, 2019
, the annual interest rate payable on borrowings under our revolving credit facility was
3.37%
. The weighted average annual interest rate for borrowings under our revolving credit facility was
3.40%
for both the three and
six
months ended
June 30, 2019
, and
3.32%
and
3.02%
for the three and
six
months ended
June 30, 2018
, respectively. As of
June 30, 2019
, we had
$90,000
outstanding and
$910,000
available under our revolving credit facility. As of
August 8, 2019
, we had
no
amounts outstanding and
$1,000,000
available to borrow under our revolving credit facility.
Our
$400,000
term loan, which matures on
July 15, 2023
, is prepayable without penalty at any time. We are required to pay interest on the amount outstanding under our term loan at the rate of LIBOR plus a premium, which was
110
basis points per annum as of
June 30, 2019
. The interest rate premium is subject to adjustment based on changes to our credit ratings. As of
June 30, 2019
, the annual interest rate for the amount outstanding under our term loan was
3.54%
. The weighted average annual
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
interest rate for borrowings under our term loan was
3.58%
and
3.59%
for the three and
six
months ended
June 30, 2019
, respectively, and
3.06%
and
2.93%
for the three and
six
months ended
June 30, 2018
, respectively.
Our credit agreement also includes a feature under which maximum aggregate borrowings may be increased to up to
$2,300,000
on a combined basis in certain circumstances. Our credit agreement and our unsecured senior notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR LLC ceasing to act as our business manager. Our credit agreement and our unsecured senior notes indentures and their supplements also contain covenants, including those that restrict our ability to incur debts or to make distributions under certain circumstances and generally require us to maintain certain financial ratios. We believe we were in compliance with the terms and conditions of our credit agreement and our unsecured senior notes indentures and their supplements at
June 30, 2019
.
In connection with our pending acquisition of a net lease portfolio from Spirit MTA REIT, a Maryland real estate investment trust, or REIT, (NYSE: SMTA), or the SMTA Transaction, described in Note
7
, a syndicate of lenders committed to provide us with a one year unsecured term loan facility, under which we may borrow up to
$2,000,000
. Subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the maturity date of this facility for a period of one year.
Note 7. Real Estate Properties
At
June 30, 2019
, we owned
328
hotels and
179
travel centers.
During the
six
months ended
June 30, 2019
, we funded
$87,378
for improvements to certain of our properties which, pursuant to the terms of our management and lease agreements with our managers and tenants, resulted in increases in our contractual annual minimum returns and rents of
$6,608
. See Notes
8
and
10
for further information about our management and lease agreements and our fundings of improvements to certain of our properties.
Acquisitions
During the
six
months ended
June 30, 2019
, we acquired
two
hotels. We accounted for these transactions as acquisitions of assets. Our allocation of the purchase price of each of these acquisitions based on the estimated fair value of the acquired assets is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Date
|
|
Location
|
|
Purchase Price
|
|
Land
|
|
Land Improvements
|
|
Building and Improvements
|
|
Furniture, Fixtures and Equipment
|
2/22/2019
|
|
Washington, D.C.
(1)
|
|
$
|
143,742
|
|
|
$
|
44,972
|
|
|
$
|
151
|
|
|
$
|
93,412
|
|
|
$
|
5,207
|
|
5/7/2019
|
|
Milwaukee, WI
(2)
|
|
30,235
|
|
|
3,442
|
|
|
1,053
|
|
|
25,132
|
|
|
608
|
|
|
|
|
|
$
|
173,977
|
|
|
$
|
48,414
|
|
|
$
|
1,204
|
|
|
$
|
118,544
|
|
|
$
|
5,815
|
|
|
|
(1)
|
On
February 22, 2019
, we acquired the
335
room Hotel Palomar located in Washington, D.C. for a purchase price of
$143,742
, including capitalized acquisition costs of
$2,292
. We added this Kimpton
®
branded hotel to our management agreement with InterContinental Hotels Group, plc, or IHG.
|
|
|
(2)
|
On
May 7, 2019
, we acquired the
198
room Crowne Plaza Milwaukee West hotel in Milwaukee, WI for a purchase price of
$30,235
, including capitalized acquisition costs of
$235
. We added this Crowne Plaza
®
branded hotel to our management agreement with IHG.
|
See Note
8
for further information regarding our management agreement with IHG for
102
hotels, or our IHG agreement.
In
June 2019
, we entered the SMTA Transaction to acquire a net lease portfolio for
$2,400,000
in cash, excluding transaction costs and subject to customary adjustments and prorations. In addition to the
$2,400,000
purchase price, we have agreed to pay the prepayment penalties associated with the redemption of notes issued by certain subsidiaries of SMTA under their asset-backed securitization platform in order to extinguish the existing mortgage debt on the portfolio, which are estimated to be approximately
$78,000
. The portfolio consists of
770
service-oriented retail properties net leased to tenants in
22
different industries and
164
brands that include quick service and casual dining restaurants, movie theaters, health and fitness, automotive parts and services and other service-oriented and necessity-based industries across
43
states. We may use the
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
proceeds from the
$2,000,000
term loan facility described in Note
6
, borrowings under our existing revolving credit facility, proceeds from certain asset sales, the issuance of new unsecured senior notes or other sources to finance the SMTA Transaction. The SMTA Transaction is subject to the approval by SMTA's shareholders, and each party's obligation to consummate the SMTA Transaction is subject to certain other customary conditions. We currently expect the SMTA Transaction to close during the third quarter of 2019.
On
August 1, 2019
, we acquired a land parcel adjacent to our travel center located in Southington, CT for a purchase price of
$60
, excluding acquisition related costs. This land parcel has been added to the TA lease for that travel center.
Dispositions
In
January 2019
, in a series of transactions, we sold
20
travel centers in
15
states to TA for
$308,200
. We recorded a gain of
$159,535
in the first quarter of 2019 as a result of these sales. See Notes
8
and
10
for further information regarding these transactions, our relationship and leases with TA.
Note 8. Management Agreements and Leases
As of
June 30, 2019
, we owned
328
hotels and
179
travel centers, which were included in
13
operating agreements. We do not operate any of our properties.
As of
June 30, 2019
,
326
of our hotels were leased to our TRSs and managed by independent hotel operating companies and
two
hotels were leased to third parties. As of
June 30, 2019
, our hotel properties were managed by or leased to separate subsidiaries of Marriott International, Inc., or Marriott, IHG, Sonesta International Hotels Corporation, or Sonesta, Wyndham Hotels & Resorts, Inc., or Wyndham, Hyatt Hotels Corporation, or Hyatt, and Radisson Hospitality, Inc., or Radisson, under
eight
agreements. These hotel agreements have initial terms expiring between 2019 and 2038. Each of these agreements is for between
one
and
102
of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties included in each agreement, and the renewal terms range between
20
to
60
years. Most of these agreements require the third party manager or tenant to: (1) make payments to us of minimum returns or minimum rents; (2) deposit a percentage of total hotel sales into FF&E reserves; and (3) for our managed hotels, make payments to our TRSs of additional returns to the extent of available cash flows after payment of operating expenses, funding of the FF&E reserves, payment of our minimum returns, payment of certain management fees and replenishment of security deposits or guarantees. Some of our managers or tenants or their affiliates have provided deposits or guarantees to secure their obligations to pay us.
Marriott No. 1 agreement
. Our management agreement with Marriott for
53
hotels, or our Marriott No. 1 agreement, provides that, as of
June 30, 2019
, we are to be paid an annual minimum return of
$71,589
to the extent that gross revenues of the hotels, after payment of hotel operating expenses and funding of the FF&E reserve, are sufficient to do so. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. We realized minimum returns of
$19,847
and
$18,536
during the three months ended
June 30, 2019
and
2018
, respectively, and minimum returns of
$35,559
and
$34,619
during the
six
months ended
June 30, 2019
and
2018
, respectively, under this agreement. We also realized additional returns of
$1,575
during both the three and
six
months ended
June 30, 2019
and
$2,529
during both the three and
six
months ended
June 30, 2018
, which represent our share of hotel cash flows in excess of the minimum returns due to us for these periods. We do not have any security deposits or guarantees for our minimum returns from the
53
hotels included in our Marriott No. 1 agreement. Accordingly, the minimum returns we receive from these hotels managed by Marriott are limited to the hotels' available cash flows after payment of operating expenses and funding of the FF&E reserve.
We funded
$14,527
and
$854
for capital improvements to certain of the hotels included in our Marriott No. 1 agreement during the
six
months ended
June 30, 2019
and
2018
, respectively, which resulted in increases in our contractual annual minimum returns of
$1,453
and
$85
, respectively.
Marriott No. 234 agreement.
Our management agreement with Marriott for
68
hotels, or our Marriott No. 234 agreement, provides that, as of
June 30, 2019
, we are to be paid an annual minimum return of
$109,024
. We realized minimum returns of
$27,057
and
$26,717
during the three months ended
June 30, 2019
and
2018
, respectively, and
$53,949
and
$53,427
during the
six
months ended
June 30, 2019
and
2018
, respectively, under this agreement. Pursuant to our Marriott No. 234 agreement, Marriott has provided us with a security deposit to cover minimum return payment shortfalls, if any. Under this agreement, this security deposit may be replenished and increased up to
$64,700
from a share of hotel cash flows in excess of the minimum returns due to us. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. During the
six
months ended
June 30, 2019
, our available security deposit was replenished by
$2,723
from a share of hotel cash flows
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
in excess of the minimum returns due to us during the period. The available balance of this security deposit was
$35,434
as of
June 30, 2019
. Pursuant to our Marriott No. 234 agreement, Marriott has also provided us with a limited guaranty which expires in 2019 for shortfalls up to
90%
of our minimum returns, if and after the available security deposit has been depleted. The available balance of the guaranty was
$30,672
as of
June 30, 2019
.
We funded
$18,600
and
$3,680
for capital improvements to certain of the hotels included in our Marriott No. 234 agreement during the
six
months ended
June 30, 2019
and
2018
, respectively, which resulted in increases in our contractual annual minimum returns of
$1,674
and
$331
, respectively.
Marriott No. 5 agreement
. We lease
one
hotel in Kauai, HI to Marriott which requires that, as of
June 30, 2019
, we are paid annual minimum rents of
$10,518
. This lease is guaranteed by Marriott and we realized
$2,630
and
$2,580
of rent for this hotel during the three months ended
June 30, 2019
and
2018
, respectively, and
$5,260
and
$5,160
during the
six
months ended
June 30, 2019
and
2018
, respectively. The guaranty provided by Marriott with respect to this leased hotel is unlimited. Marriott has
four
renewal options for
15
years each. On August 31, 2016, Marriott notified us that it will not exercise its renewal option at the expiration of the current lease term ending on December 31, 2019.
IHG agreement.
Our IHG agreement provides that, as of
June 30, 2019
, we are to be paid annual minimum returns and rents of
$207,411
. We realized minimum returns and rents of
$51,617
and
$47,371
during the three months ended
June 30, 2019
and
2018
, respectively, and
$101,201
and
$94,686
during the
six
months ended
June 30, 2019
and
2018
, respectively, under this agreement. We also realized additional returns under this agreement of
$1,720
during both the three and
six
months ended
June 30, 2018
from our share of hotel cash flows in excess of the minimum returns and rents due to us for that period. We did
no
t realize any additional returns during either the three or
six
months ended
June 30, 2019
.
Pursuant to our IHG agreement, IHG has provided us with a security deposit to cover minimum payment shortfalls, if any. Under this agreement, IHG is required to maintain a minimum security deposit of
$37,000
and this security deposit may be replenished and increased up to
$100,000
from a share of future cash flows from the hotels in excess of our minimum returns and rents. During the
six
months ended
June 30, 2019
, we reduced the available security deposit by
$11,897
to cover shortfalls in hotel cash flows available to pay the minimum returns and rents due to us for the period.
The available balance of this security deposit was
$88,103
as of
June 30, 2019
.
We did
no
t fund any capital improvements to our IHG hotels during each of the
six
months ended
June 30, 2019
and
2018
.
Sonesta agreement.
As of
June 30, 2019
, Sonesta managed
12
of our full service hotels and
39
of our limited service hotels pursuant to management agreements for each of the hotels, which we refer to collectively as our Sonesta agreement, and a pooling agreement, which combines those management agreements for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us.
Our Sonesta agreement provides that we are paid a fixed annual minimum return equal to
8%
of our invested capital, as defined therein, if gross revenues of the hotels, after payment of hotel operating expenses and management and related fees (other than Sonesta’s incentive fee, if applicable), are sufficient to do so. Our fixed annual minimum return under our Sonesta agreement was
$129,017
as of
June 30, 2019
. Our Sonesta agreement further provides that we are paid an additional return based upon operating profits, as defined therein, after payment of Sonesta’s incentive fee, if applicable. We realized returns of
$28,005
and
$27,902
during the three months ended
June 30, 2019
and
2018
, respectively, and
$42,165
and
$39,874
during the
six
months ended
June 30, 2019
, and
2018
, respectively, under our Sonesta agreement. We do not have any security deposits or guarantees for our Sonesta hotels. Accordingly, the returns we receive from our Sonesta hotels are limited to the hotels’ available cash flows after payment of operating expenses, including management and related fees.
Pursuant to our Sonesta agreement, we incurred management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third party reservation transmission fees of
$10,180
and
$9,483
for the three months ended
June 30, 2019
and
2018
, respectively, and
$18,703
and
$16,808
for the
six
months ended
June 30, 2019
and
2018
, respectively. In addition, we incurred procurement and construction supervision fees of
$581
and
$789
for the three months ended
June 30, 2019
and
2018
, respectively, and
$986
and
$1,194
for the
six
months ended
June 30, 2019
and
2018
, respectively, pursuant to our Sonesta agreement. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.
Our Sonesta agreement does not require FF&E escrow deposits, but does require us to fund capital expenditures at our Sonesta hotels. We funded
$34,306
and
$36,875
for renovations and other capital improvements to certain hotels included in
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
our Sonesta agreement during the
six
months ended
June 30, 2019
and
2018
, respectively, which resulted in increases in our contractual annual minimum returns of
$1,928
and
$2,218
, respectively. The annual minimum returns due to us under our Sonesta agreement increase by
8%
of the capital expenditure amounts we fund in excess of threshold amounts, as defined therein. We owed Sonesta
$4,374
and
$8,979
for capital expenditure and other reimbursements at
June 30, 2019
and
2018
, respectively. Amounts due from Sonesta are included in due from related persons and amounts owed to Sonesta are included in due to related persons in our condensed consolidated balance sheets.
See Note
10
for further information regarding our relationship, agreements and transactions with Sonesta.
Wyndham agreements
. Our management agreement with Wyndham for
22
hotels, or our Wyndham agreement, provides that, as of
June 30, 2019
, we are to be paid annual minimum returns of
$27,973
. Pursuant to our Wyndham agreement, Wyndham has provided us with a guaranty, which was limited to
$35,656
, subject to an annual payment limit of
$17,828
, and expires on July 28, 2020. This guaranty was depleted during 2017 and remained depleted as of
June 30, 2019
. This guaranty may be replenished from a share of future cash flows from these hotels in excess of our minimum returns. The Wyndham agreement provides that if the hotel cash flows available after payment of hotel operating expenses are less than the minimum returns due to us and if the guaranty is depleted, to avoid a default Wyndham is required to pay us the greater of the available hotel cash flows after payment of hotel operating expenses and
85%
of the contractual amount due to us. If cash flows from our Wyndham managed hotels continue to be less than minimum returns, we cannot be sure as to whether Wyndham will continue to pay at least the greater of available hotel cash flows after payment of hotel operating expenses and
85%
of the minimum returns due to us or if Wyndham will default on its payments. We realized returns of
$5,964
and
$5,862
during the three months ended
June 30, 2019
and
2018
, respectively, and
$11,873
and
$11,719
during the
six
months ended
June 30, 2019
and 2018, respectively, which represents
85%
of the minimum returns due for the period, under this agreement.
Our Wyndham agreement requires FF&E escrow deposits equal to
5%
of total hotel sales for all hotels included in the agreement subject to available cash flows after payment of our minimum return.
No
FF&E escrow deposits were made during the
six
months ended
June 30, 2019
.
We funded
$2,278
and
$660
for capital improvements to certain of the hotels included in our Wyndham agreement during the
six
months ended
June 30, 2019
and
2018
, respectively, which resulted in increases in our contractual annual minimum returns of
$182
and
$53
, respectively.
We currently expect to exit our relationship with Wyndham and to rebrand or sell our
22
hotels currently managed by Wyndham.
We lease
48
vacation units in
one
of our hotels to a subsidiary of Wyndham Destinations, Inc. (NYSE: WYND), or Destinations, which requires that, as of
June 30, 2019
, we are paid annual minimum rents of
$1,493
. The guaranty provided by Destinations with respect to the Destinations lease for part of
one
hotel is unlimited. We recognized the contractual rents of
$454
during both the three months ended
June 30, 2019
and
2018
and
$908
during both the
six
months ended
June 30, 2019
and
2018
under our Destinations lease agreement. Rental income for the three months ended
June 30, 2019
and
2018
for this lease includes
$80
and
$91
, respectively, and
$160
and
$182
for the
six
months ended
June 30, 2019
and
2018
, respectively, of adjustments necessary to record rent on a straight line basis.
Hyatt agreement.
Our management agreement with Hyatt for
22
hotels, or our Hyatt agreement, provides that, as of
June 30, 2019
, we are to be paid an annual minimum return of
$22,037
. We realized minimum returns of
$5,509
during each of the three months ended
June 30, 2019
and
2018
and minimum returns of
$11,019
during each of the
six
months ended
June 30, 2019
and
2018
under this agreement. Pursuant to our Hyatt agreement, Hyatt has provided us with a guaranty, which is limited to
$50,000
. During the
six
months ended
June 30, 2019
, the available guarantee was replenished by
$699
from a share of hotel cash flows in excess of the minimum returns due to us. The available balance of the guaranty was
$22,614
as of
June 30, 2019
.
Radisson agreement.
Our management agreement with Radisson for
nine
hotels, or our Radisson agreement, provides that, as of
June 30, 2019
, we are to be paid an annual minimum return of
$20,292
. We realized minimum returns of
$5,015
and
$3,493
during the three months ended
June 30, 2019
and
2018
, respectively, and
$9,846
and
$6,723
during the
six
months ended
June 30, 2019
and
2018
, respectively, under this agreement. Pursuant to our Radisson agreement, Radisson has provided us with a limited guaranty which, as a result of capital improvement amounts funded by us during the
six
months ended
June 30, 2019
, as described below, was increased
$1,371
to a total of
$47,371
. During the
six
months ended
June 30, 2019
, the hotels under this agreement generated cash flows that were less than the minimum returns due to us for the period, and
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Radisson made
$1,998
of guaranty payments to cover the shortfall. The available balance of the guaranty was
$40,561
as of
June 30, 2019
.
We funded
$17,143
for capital improvements at certain of the hotels included in our Radisson agreement during the
six
months ended
June 30, 2019
, which resulted in increases in our contractual annual minimum returns of
$1,371
. We did
no
t fund any capital improvements to the hotels included in our Radisson agreement during the
six
months ended
June 30, 2018
.
TA leases.
In
January 2019
, we entered agreements with TA, pursuant to which:
|
|
•
|
In
January 2019
, we sold to TA
20
travel center properties, which TA previously leased from us, for a total purchase price of
$308,200
.
|
|
|
•
|
Upon completing these sales, these travel center properties were removed from the TA leases and TA's annual minimum rent payable to us decreased by
$43,148
.
|
|
|
•
|
Commencing on
April 1, 2019
, TA paid us the first of
16
quarterly installments of approximately
$4,400
each (an aggregate of
$70,458
) to fully satisfy and discharge its
$150,000
deferred rent obligation to us that otherwise would have become due in five installments between
2024
and
2030
.
|
|
|
•
|
Commencing with the year ending
December 31, 2020
, TA will be obligated to pay to us an additional amount of percentage rent equal to one-half percent (
0.5%
) of the excess of its annual non-fuel revenues at leased sites over the non-fuel revenues for each respective site for the year ending
December 31, 2019
.
|
|
|
•
|
The term of each TA lease was extended by
three years
.
|
|
|
•
|
Certain of the
179
travel center properties that TA continues to lease from us were reallocated among the TA leases.
|
See Note
7
for further information regarding the effects of certain of our property dispositions on our leases with TA.
As of
June 30, 2019
, we leased to TA a total of
179
travel centers under
five
leases that expire between 2029 and 2035 and require annual minimum returns of
$246,083
.
We recognized rental income from TA of
$62,680
and
$74,468
for the three months ended
June 30, 2019
and
2018
, respectively, and
$125,756
and
$148,661
for the
six
months ended
June 30, 2019
and
2018
, respectively. We reduced rental income by
$3,277
and
$4,491
for the three and
six
months ended
June 30, 2019
, respectively, and increased rental income by
$3,046
and
$6,029
for the three and
six
months ended
June 30, 2018
, respectively, to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight line basis. As of
June 30, 2019
and
December 31, 2018
, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of
$75,939
and
$91,212
, respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets.
Our TA leases do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components.
Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent equal to
8.5%
of the amounts funded. We did
no
t fund any capital improvements to our properties that we leased to TA during the
six
months ended
June 30, 2019
. We funded
$28,836
of capital improvements to our properties that we leased to TA for the
six
months ended
June 30, 2018
. As a result, TA’s annual minimum rent payable to us increased by
$2,451
.
In addition to the rental income that we recognized during the three months ended
June 30, 2019
and
2018
as described above, our TA leases require TA to pay us percentage rent based upon increases in certain sales. We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of
$958
and
$861
for the three months ended
June 30, 2019
and
2018
, respectively, and
$2,027
and
$1,696
for the
six
months ended
June 30, 2019
and
2018
, respectively.
See
Note 10
for further information regarding our relationship with TA.
Additional lease information (as lessor)
. As of
June 30, 2019
, our leases with parties other than our TRSs provide for contractual minimum rents to be paid to us during the remaining current terms as follows:
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
2019
|
$
|
141,816
|
|
2020
|
273,098
|
|
2021
|
272,801
|
|
2022
|
271,222
|
|
2023
|
258,065
|
|
Thereafter
|
2,357,802
|
|
Total
|
$
|
3,574,804
|
|
Additional lease information (as lessee)
. As of January 1, 2019,
14
of our hotels and
one
of our travel centers were subject to ground leases where we are the lessee. In addition, our hotel operators enter various leases on our behalf in the normal course of business at our hotels, or our hotel operating leases. We calculated right of use assets and lease liabilities as the present value of the remaining lease payment obligations for our operating leases, which include the ground leases and hotel operating leases, over the remaining lease term using our estimated incremental borrowing rate. The right of use assets and related lease liabilities are included within other assets, net and accounts payable and other liabilities, respectively, in our condensed consolidated balance sheets.
At
June 30, 2019
, our right of use assets and related lease liabilities totaled
$76,703
and
$77,023
, respectively, which represented our future obligations under our operating lease agreements. Our operating leases require minimum fixed rent payments, percentage rent payments based on a percentage of hotel revenues in excess of certain thresholds, or rent payments equal to the greater of a minimum fixed rent or percentage rent. Rental expense related to our operating leases of
$3,765
and
$6,993
for the three and
six
months ended
June 30, 2019
, respectively, is included in hotel operating expenses within our condensed consolidated statements of comprehensive income. As of
June 30, 2019
, our operating leases provide for contractual minimum rent payments to third parties during the remaining lease terms, as follows:
|
|
|
|
|
2019
|
$
|
3,630
|
|
2020
|
6,896
|
|
2021
|
6,195
|
|
2022
|
5,694
|
|
2023
|
5,548
|
|
Thereafter
|
145,892
|
|
Total lease payments
|
173,855
|
|
Less: imputed interest
|
(96,832
|
)
|
Present value of lease liabilities
(1)
|
$
|
77,023
|
|
|
|
(1)
|
The weighted average discount rate used to calculate the lease liability and the weighted average remaining term for our ground leases (assuming all extension options) and our hotel operating leases are approximately
5.49%
and
32 years
(range of
12
to
68 years
) and
5.58%
and
29 years
(range of
1 month
to
55 years
), respectively.
|
As of
June 30, 2019
,
14
of our travel centers are on land we leased partially or entirely from unrelated third parties. We are not required to record right of use assets and lease liabilities for these properties as we are not the primary obligor under the leases. The average remaining terms of the ground leases on these
14
travel centers was
14 years
(range of
three
to
32 years
) with rents averaging
$443
per year.
Generally, payments of ground lease obligations are made by our managers or tenants. However, if a manager or tenant did not perform obligations under a ground lease or did not renew any ground lease, we might have to perform obligations under the ground lease or renew the ground lease in order to protect our investment in the affected property.
Guarantees and security deposits generally.
When we reduce the amounts of the security deposits we hold for any of our operating agreements for payment deficiencies, it does not result in additional cash flows to us of the deficiency amounts, but reduces the refunds due to the respective tenants or managers who have provided us with these security deposits upon expiration of the applicable operating agreement. The security deposits are non-interest bearing and are not held in escrow.
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Under these agreements, any amount of the security deposits which are applied to payment deficits may be replenished from a share of future cash flows from the applicable hotel operations pursuant to the terms of the applicable agreements.
Certain of our managed hotel portfolios had net operating results that were, in the aggregate,
$4,853
and
$1,434
less than the minimum returns due to us for the three months ended
June 30, 2019
and
2018
, respectively, and
$37,085
and
$22,113
less than the minimum returns due to us for the
six
months ended
June 30, 2019
and
2018
, respectively. When managers of these hotels are required to fund the shortfalls under the terms of our management agreements or their guarantees, we reflect such fundings (including security deposit applications) in our condensed consolidated statements of comprehensive income as a reduction of hotel operating expenses. There was
no
reduction of hotel operating expenses for the three months ended
June 30, 2019
or
2018
and there were reductions of
$16,679
and
$3,278
for the
six
months ended
June 30, 2019
and
2018
, respectively. We had shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our management agreements of
$5,090
and
$2,284
for the three months ended
June 30, 2019
and
2018
, respectively, and
$23,797
and
$18,835
for the
six
months ended
June 30, 2019
and
2018
, respectively, which represent the unguaranteed portions of our minimum returns from our Sonesta and Wyndham agreements.
Certain of our managed hotel portfolios had net operating results that were, in the aggregate,
$21,102
and
$32,512
more than the minimum returns due to us for the three months ended
June 30, 2019
and
2018
, respectively, and
$10,494
and
$26,879
more than the minimum returns due to us for the
six
months ended
June 30, 2019
and
2018
, respectively. Certain of our guarantees and our security deposits may be replenished by a share of future cash flows from the applicable hotel operations in excess of the minimum returns due to us pursuant to the terms of the respective agreements. When our guarantees and security deposits are replenished by cash flows from hotel operations, we reflect such replenishments in our condensed consolidated statements of comprehensive income as an increase to hotel operating expenses. We had
$9,208
and
$16,593
of guaranty and security deposit replenishments for the three months ended
June 30, 2019
and
2018
, respectively, and
$3,422
and
$10,295
of guaranty and security deposit replenishments for the
six
months ended
June 30, 2019
and
2018
, respectively.
Note 9. Business and Property Management Agreements with RMR LLC
We have
no
employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have
two
agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which currently relates to our property level operations of the office building component of one of our hotels.
Pursuant to our business management agreement, we recognized net business management fees of
$9,661
and
$9,894
for the three months ended
June 30, 2019
and
2018
, respectively, and
$19,388
and
$19,618
for the
six
months ended
June 30, 2019
and
2018
, respectively. Based on our common share total return, as defined in our business management agreement, as of
June 30, 2019
, no incentive fees are included in the net business management fees we recognized for the three and
six
months ended
June 30, 2019
. The actual amount of annual incentive fees for
2019
, if any, will be based on our common share total return, as defined in our business management agreement, for the
three
year period ending
December 31, 2019
, and will be payable in
2020
. The net business management fees we recognized for the
three and six
months ended
June 30, 2018
did not include any estimated incentive fees. In January
2019
, we paid RMR LLC an incentive fee of
$53,635
for
2018
. We include business management fee amounts in general and administrative expenses in our condensed consolidated statements of comprehensive income.
Pursuant to our property management agreement with RMR LLC, we recognized property management fees of
$27
and
$12
for the three months ended
June 30, 2019
and
2018
, respectively, and
$38
and
$25
for the
six
months ended
June 30, 2019
and
2018
, respectively. These fees are payable in connection with the management of the office building component of one of our hotels. These amounts are included in hotel operating expenses in our condensed consolidated statements of comprehensive income.
We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC employees assigned to work exclusively or partly at the properties that are subject to the property management agreement, which is currently limited to the office building component of one of our hotels, our share of the wages, benefits and other related costs of RMR LLC's centralized accounting personnel, our share of RMR LLC’s costs for providing our internal audit function, and as otherwise agreed. We reimbursed RMR LLC
$142
and
$99
for these expenses and costs for the three months ended
June 30,
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
2019
and
2018
, respectively, and
$342
and
$234
for the
six
months ended
June 30, 2019
and
2018
, respectively. We included these amounts in hotel operating expenses and selling, general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income.
Note 10. Related Person Transactions
We have relationships and historical and continuing transactions with TA, Sonesta, RMR LLC, The RMR Group Inc., or RMR Inc., AIC and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers.
TA
. TA is our largest tenant and property operator, leasing
31%
of our gross carrying value of real estate properties as of
June 30, 2019
. We lease all of our travel centers to TA under the TA leases. We are also TA’s largest shareholder; as of
June 30, 2019
, we owned
3,420,000
common shares of TA, representing approximately
8.5%
of TA’s outstanding common shares. RMR LLC provides management services to both us and TA, and Adam D. Portnoy, the Chair of our Board of Trustees and one of our Managing Trustees, also serves as a managing director of TA. As of
June 30, 2019
, RMR LLC owned
1,492,691
common shares of TA, representing approximately
3.7%
of TA's outstanding common shares. On August 1, 2019, TA affected a one-for-five reverse stock split. The share amounts as of
June 30, 2019
stated earlier in this paragraph are not adjusted to reflect that reverse stock split. See
Note 8
for further information regarding our relationships, agreements and transactions with TA and
Note 13
for further information regarding our investment in TA.
Sonesta.
Sonesta is a private company owned in part by Adam Portnoy, one of our Managing Trustees. Mr. Portnoy, our other Managing Trustee and our Secretary are directors of Sonesta. As of
June 30, 2019
, Sonesta managed
51
of our hotels pursuant to management and pooling agreements. See
Note 8
for further information regarding our relationships, agreements and transactions with Sonesta.
Our Manager, RMR LLC.
We have
two
agreements with RMR LLC to provide management services to us. See
Note 9
for further information regarding our management agreements with RMR LLC.
RMR Inc.
RMR LLC is a majority owned subsidiary of RMR Inc. and RMR Inc. is the managing member of RMR LLC. Adam Portnoy is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. John G. Murray, our other Managing Trustee and our President and Chief Executive Officer, also serves as an officer and employee of RMR LLC, and each of our other officers is also an officer and employee of RMR LLC, including Ethan S. Bornstein, the brother-in-law of Adam Portnoy.
As of
June 30, 2019
, we owned
2,503,777
shares of class A common stock of RMR Inc. On
July 1, 2019
, we sold all the shares of class A common stock of RMR Inc. we owned in an underwritten public offering at a price to the public of
$40.00
per share pursuant to an underwriting agreement among us, RMR Inc., certain other REITs managed by RMR LLC that also sold their class A common stock of RMR Inc. in the offering, and the underwriters named therein. We received net proceeds of
$93,892
from this sale, after deducting the underwriting discounts and commissions and before other offering expenses. See
Note 13
for further information regarding our investment in RMR Inc.
AIC
. We, ABP Trust, TA and four other companies to which RMR LLC provides management services currently own AIC, an Indiana insurance company, in equal amounts. We and the other AIC shareholders historically participated in a combined property insurance program arranged and reinsured in part by AIC. The policies under that program expired on
June 30, 2019
, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we have instead purchased standalone property insurance coverage with unrelated third party insurance providers.
As of
June 30, 2019
and
December 31, 2018
, our investment in AIC had a carrying value of
$9,310
and
$8,639
, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income of
$130
and
$7
for the three months ended
June 30, 2019
and
2018
, respectively, and
$534
and
$51
for the
six
months ended
June 30, 2019
and
2018
, respectively, related to our investment in AIC, which amounts are presented as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. Our other comprehensive income (loss) includes our proportionate part of unrealized gains (losses) on fixed income securities that are owned by AIC related to our investment in AIC.
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
For further information about these and certain other such relationships and certain other related person transactions, refer to our
2018
Annual Report.
Note 11. Income Taxes
We have elected to be taxed as a REIT under the United States Internal Revenue Code of 1986, as amended, or the IRC, and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We are subject to income tax in Canada, Puerto Rico and certain states despite our qualification for taxation as a REIT. Further, we lease our managed hotels to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated tax return and are subject to federal, state and foreign income taxes. Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our qualification for taxation as a REIT.
During the three months ended
June 30, 2019
, we recognized an income tax benefit of
$260
, which includes
$97
related to foreign taxes and
$163
related to state taxes. During the
six
months ended
June 30, 2019
, we recognized income tax expense of
$799
, which includes
$218
of foreign taxes and
$581
of state taxes. During the three and
six
months ended
June 30, 2018
, we recognized income tax expense of
$771
and
$1,242
, respectively, which includes
$211
and
$340
, respectively, of foreign taxes and
$560
and
$902
, respectively, of state taxes.
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 12. Segment Information
We aggregate our hotels and travel centers into
two
reportable segments, hotel investments and travel center investments, based on their similar operating and economic characteristics.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2019
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
|
Hotel operating revenues
|
|
$
|
541,668
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
541,668
|
|
Rental income
|
|
5,084
|
|
|
62,680
|
|
|
—
|
|
|
67,764
|
|
FF&E reserve income
|
|
1,130
|
|
|
—
|
|
|
—
|
|
|
1,130
|
|
Total revenues
|
|
547,882
|
|
|
62,680
|
|
|
—
|
|
|
610,562
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
381,703
|
|
|
—
|
|
|
—
|
|
|
381,703
|
|
Depreciation and amortization
|
|
67,021
|
|
|
32,175
|
|
|
—
|
|
|
99,196
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
12,207
|
|
|
12,207
|
|
Total expenses
|
|
448,724
|
|
|
32,175
|
|
|
12,207
|
|
|
493,106
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
—
|
|
|
—
|
|
|
876
|
|
|
876
|
|
Unrealized losses on equity securities
|
|
—
|
|
|
—
|
|
|
(60,788
|
)
|
|
(60,788
|
)
|
Interest income
|
|
216
|
|
|
—
|
|
|
233
|
|
|
449
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(49,601
|
)
|
|
(49,601
|
)
|
Income (loss) before income taxes and equity in earnings of an investee
|
|
99,374
|
|
|
30,505
|
|
|
(121,487
|
)
|
|
8,392
|
|
Income tax benefit
|
|
—
|
|
|
—
|
|
|
260
|
|
|
260
|
|
Equity in earnings of an investee
|
|
—
|
|
|
—
|
|
|
130
|
|
|
130
|
|
Net income (loss)
|
|
$
|
99,374
|
|
|
$
|
30,505
|
|
|
$
|
(121,097
|
)
|
|
$
|
8,782
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2019
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
|
Hotel operating revenues
|
|
$
|
997,053
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
997,053
|
|
Rental income
|
|
10,159
|
|
|
125,756
|
|
|
—
|
|
|
135,915
|
|
FF&E reserve income
|
|
2,502
|
|
|
—
|
|
|
—
|
|
|
2,502
|
|
Total revenues
|
|
1,009,714
|
|
|
125,756
|
|
|
—
|
|
|
1,135,470
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
700,828
|
|
|
—
|
|
|
—
|
|
|
700,828
|
|
Depreciation and amortization
|
|
133,604
|
|
|
64,957
|
|
|
—
|
|
|
198,561
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
24,442
|
|
|
24,442
|
|
Total expenses
|
|
834,432
|
|
|
64,957
|
|
|
24,442
|
|
|
923,831
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate
|
|
—
|
|
|
159,535
|
|
|
—
|
|
|
159,535
|
|
Dividend income
|
|
—
|
|
|
—
|
|
|
1,752
|
|
|
1,752
|
|
Unrealized losses on equity securities
|
|
—
|
|
|
—
|
|
|
(39,811
|
)
|
|
(39,811
|
)
|
Interest income
|
|
427
|
|
|
—
|
|
|
659
|
|
|
1,086
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(99,367
|
)
|
|
(99,367
|
)
|
Income (loss) before income taxes and equity in earnings of an investee
|
|
175,709
|
|
|
220,334
|
|
|
(161,209
|
)
|
|
234,834
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(799
|
)
|
|
(799
|
)
|
Equity in earnings of an investee
|
|
—
|
|
|
—
|
|
|
534
|
|
|
534
|
|
Net income (loss)
|
|
$
|
175,709
|
|
|
$
|
220,334
|
|
|
$
|
(161,474
|
)
|
|
$
|
234,569
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
Total assets
|
|
$
|
4,806,796
|
|
|
$
|
2,192,789
|
|
|
$
|
178,161
|
|
|
$
|
7,177,746
|
|
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
|
Hotel operating revenues
|
|
$
|
529,599
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
529,599
|
|
Rental income
|
|
6,550
|
|
|
74,468
|
|
|
—
|
|
|
81,018
|
|
FF&E reserve income
|
|
1,334
|
|
|
—
|
|
|
—
|
|
|
1,334
|
|
Total revenues
|
|
537,483
|
|
|
74,468
|
|
|
—
|
|
|
611,951
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
374,081
|
|
|
—
|
|
|
—
|
|
|
374,081
|
|
Depreciation and amortization
|
|
62,953
|
|
|
36,731
|
|
|
—
|
|
|
99,684
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
13,121
|
|
|
13,121
|
|
Total expenses
|
|
437,034
|
|
|
36,731
|
|
|
13,121
|
|
|
486,886
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
—
|
|
|
—
|
|
|
626
|
|
|
626
|
|
Unrealized gains and losses on equity securities, net
|
|
—
|
|
|
—
|
|
|
20,940
|
|
|
20,940
|
|
Interest income
|
|
210
|
|
|
—
|
|
|
113
|
|
|
323
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(48,741
|
)
|
|
(48,741
|
)
|
Loss on early extinguishment of debt
|
|
—
|
|
|
—
|
|
|
(160
|
)
|
|
(160
|
)
|
Income (loss) before income taxes and equity in earnings of an investee
|
|
100,659
|
|
|
37,737
|
|
|
(40,343
|
)
|
|
98,053
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(771
|
)
|
|
(771
|
)
|
Equity in earnings of an investee
|
|
—
|
|
|
—
|
|
|
7
|
|
|
7
|
|
Net income (loss)
|
|
$
|
100,659
|
|
|
$
|
37,737
|
|
|
$
|
(41,107
|
)
|
|
$
|
97,289
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2018
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
|
Hotel operating revenues
|
|
$
|
974,875
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
974,875
|
|
Rental income
|
|
14,350
|
|
|
148,661
|
|
|
—
|
|
|
163,011
|
|
FF&E reserve income
|
|
2,698
|
|
|
—
|
|
|
—
|
|
|
2,698
|
|
Total revenues
|
|
991,923
|
|
|
148,661
|
|
|
—
|
|
|
1,140,584
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
689,063
|
|
|
—
|
|
|
—
|
|
|
689,063
|
|
Depreciation and amortization
|
|
125,399
|
|
|
73,902
|
|
|
—
|
|
|
199,301
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
24,855
|
|
|
24,855
|
|
Total expenses
|
|
814,462
|
|
|
73,902
|
|
|
24,855
|
|
|
913,219
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
—
|
|
|
—
|
|
|
1,252
|
|
|
1,252
|
|
Unrealized gains and losses on equity securities, net
|
|
—
|
|
|
—
|
|
|
45,895
|
|
|
45,895
|
|
Interest income
|
|
403
|
|
|
—
|
|
|
212
|
|
|
615
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(96,281
|
)
|
|
(96,281
|
)
|
Loss on early extinguishment of debt
|
|
—
|
|
|
—
|
|
|
(160
|
)
|
|
(160
|
)
|
Income (loss) before income taxes and equity in earnings of an investee
|
|
177,864
|
|
|
74,759
|
|
|
(73,937
|
)
|
|
178,686
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(1,242
|
)
|
|
(1,242
|
)
|
Equity in earnings of an investee
|
|
—
|
|
|
—
|
|
|
51
|
|
|
51
|
|
Net income (loss)
|
|
$
|
177,864
|
|
|
$
|
74,759
|
|
|
$
|
(75,128
|
)
|
|
$
|
177,495
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
Hotels
|
|
Travel Centers
|
|
Corporate
|
|
Consolidated
|
Total assets
|
|
$
|
4,586,709
|
|
|
$
|
2,398,118
|
|
|
$
|
192,252
|
|
|
$
|
7,177,079
|
|
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 13. Fair Value of Assets and Liabilities
The table below presents certain of our assets and liabilities carried at fair value at
June 30, 2019
, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset or liability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at Reporting Date Using
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
Significant Other
|
|
Significant
|
|
|
Carrying Value at
|
|
Identical Assets
|
|
Observable Inputs
|
|
Unobservable Inputs
|
Description
|
|
June 30, 2019
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Recurring Fair Value Measurement Assets:
|
|
|
|
|
|
|
Investment in TA
(1)
|
|
$
|
12,380
|
|
|
$
|
12,380
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment in RMR Inc.
(2)
|
|
$
|
117,627
|
|
|
$
|
117,627
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-recurring Fair Value Measurement Liabilities:
|
|
|
|
|
|
|
Other Liability
(2)
|
|
$
|
(17,476
|
)
|
|
$
|
—
|
|
|
$
|
(17,476
|
)
|
|
$
|
—
|
|
|
|
(1)
|
Our
3,420,000
common shares of TA, which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is
$17,407
as of
June 30, 2019
. During the three and
six
months ended
June 30, 2019
, we recorded unrealized losses of
$1,676
and
$479
, respectively, and during the three and
six
months ended
June 30, 2018
, we recorded unrealized losses of
$342
and
$2,052
, respectively, to adjust the carrying value of our investment in TA shares to its fair value.
|
|
|
(2)
|
Our
2,503,777
shares of class A common stock of RMR Inc. are included in other assets, net and had a fair value at
June 30, 2019
of
$117,627
, based on quoted market prices (Level 1 inputs as defined by the fair value hierarchy under GAAP). On June 26, 2019, we entered into a transaction to sell all of our shares of RMR Inc. class A common stock in an underwritten public offering at a price of
$40.00
per share. We completed that sale on July 1, 2019 in accordance with the terms of the underwriting agreement. See Note
10
for additional information regarding this sale. We have elected to account for the agreement to sell our shares of RMR Inc. class A common stock using the fair value option, based upon the difference between the contractual offering price (Level 2 inputs as defined in the fair value hierarchy under GAAP) and the fair value of the underlying assets at
June 30, 2019
. Our historical cost basis for these shares is
$66,374
as of
June 30, 2019
. During the three and
six
months ended
June 30, 2019
, we recorded unrealized losses of
$35,053
and
$15,273
, respectively, to adjust our investment in RMR Inc. shares to its fair value. In addition, during the three and
six
months ended
June 30, 2019
, we recorded a loss of
$17,476
and estimated expenses of
$6,583
related to the agreement to sell our shares of RMR Inc. class A common stock, both of which are included in accounts payable and other liabilities in our condensed consolidated balance sheets and in unrealized gains and (losses) on equity securities, net in our condensed consolidated statements of comprehensive income.
|
In addition to the investment securities included in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, revolving credit facility, term loan, senior notes and security deposits. At
June 30, 2019
and
December 31, 2018
, the fair values of these additional financial instruments approximated their carrying values in our condensed consolidated balance sheets due to their short term nature or floating interest rates, except as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Value
(1)
|
|
Value
|
|
Value
(1)
|
|
Value
|
Senior Unsecured Notes, due 2021 at 4.25%
|
|
$
|
397,659
|
|
|
$
|
404,246
|
|
|
$
|
396,938
|
|
|
$
|
404,582
|
|
Senior Unsecured Notes, due 2022 at 5.00%
|
|
496,215
|
|
|
524,240
|
|
|
495,609
|
|
|
510,658
|
|
Senior Unsecured Notes, due 2023 at 4.50%
|
|
499,350
|
|
|
517,670
|
|
|
499,268
|
|
|
503,295
|
|
Senior Unsecured Notes, due 2024 at 4.65%
|
|
348,092
|
|
|
360,607
|
|
|
347,890
|
|
|
349,741
|
|
Senior Unsecured Notes, due 2025 at 4.50%
|
|
346,087
|
|
|
350,137
|
|
|
345,743
|
|
|
341,114
|
|
Senior Unsecured Notes, due 2026 at 5.25%
|
|
342,519
|
|
|
358,549
|
|
|
341,955
|
|
|
354,060
|
|
Senior Unsecured Notes, due 2027 at 4.95%
|
|
394,271
|
|
|
403,314
|
|
|
393,893
|
|
|
391,660
|
|
Senior Unsecured Notes, due 2028 at 3.95%
|
|
390,184
|
|
|
376,436
|
|
|
389,610
|
|
|
361,232
|
|
Senior Unsecured Notes, due 2030 at 4.375%
|
|
387,956
|
|
|
382,804
|
|
|
387,389
|
|
|
367,110
|
|
Total financial liabilities
|
|
$
|
3,602,333
|
|
|
$
|
3,678,003
|
|
|
$
|
3,598,295
|
|
|
$
|
3,583,452
|
|
HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
|
|
(1)
|
Carrying value includes unamortized discounts and premiums and issuance costs.
|
At
June 30, 2019
and
December 31, 2018
, we estimated the fair values of our senior notes using an average of the bid and ask price of our then outstanding issuances of senior notes (Level 2 inputs).