Hospitality Properties Trust (HPT) Q4 2018 Earnings Conference Call February 27, 2019 10:00 AM ET Company Participants Katie Strohacker - Senior Director of Investor Relations John Murray - President and Chief Executive Officer Brian Donley - Treasurer and Chief Financial Officer Conference Call Participants Michael Bellisario - Baird Bryan Maher - B. Riley FBR Operator Good morning, and welcome to the Hospitality Properties Trust Fourth Quarter 2018 Financial Results Conference Call. [Operator Instructions ...

PART I [Item 1. Business](index=9&type=section&id=Item%201.%20Business) HPT is a Maryland REIT investing in hotels and travel centers, owning 326 hotels and 199 travel centers as of December 31, 2018 - HPT is a REIT formed in 1995, owning **326 hotels** (50,543 rooms) and **199 travel centers** as of December 31, 2018, located in **45 states, Canada, and Puerto Rico**[25](index=25&type=chunk) - The company's internal growth strategy focuses on asset management to improve hotel operating income and travel center sales, supported by capital investments for long-term value[26](index=26&type=chunk) - External growth is driven by acquisition, disposition, and financing policies set by the Board of Trustees, aiming to increase cash flows and per-share distributions[27](index=27&type=chunk)[40](index=40&type=chunk) Hotel Portfolio by Brand (as of December 31, 2018) | Brand | Manager | Number of Properties | Number of Rooms or Suites | Investment ($ thousands) | | :--------------------------------- | :-------- | :------------------- | :------------------------ | :----------------------- | | Courtyard by Marriott® | Marriott | 71 | 10,264 | 994,555 | | Royal Sonesta Hotels® | Sonesta | 6 | 2,332 | 703,124 | | Sonesta ES Suites® | Sonesta | 39 | 4,730 | 642,050 | | Crowne Plaza® | IHG | 10 | 3,941 | 587,488 | | Candlewood Suites® | IHG | 61 | 7,553 | 586,546 | | Residence Inn by Marriott® | Marriott | 35 | 4,488 | 545,029 | | Sonesta Hotels & Resorts® | Sonesta | 6 | 1,800 | 350,635 | | Staybridge Suites® | IHG | 20 | 2,481 | 347,592 | | Hyatt Place® | Hyatt | 22 | 2,724 | 301,942 | | Wyndham Hotels and Resorts® & Grand | Wyndham | 6 | 1,823 | 294,557 | | Kimpton® Hotels & Restaurants | IHG | 3 | 825 | 282,586 | | InterContinental Hotels and Resorts® | IHG | 3 | 800 | 218,469 | | Radisson® Hotels & Resorts and Radisson Blu | Radisson | 5 | 1,329 | 196,703 | | Marriott Hotels and Resorts® | Marriott | 2 | 748 | 131,303 | | TownePlace Suites by Marriott® | Marriott | 12 | 1,321 | 112,979 | | Hawthorn Suites® | Wyndham | 16 | 1,756 | 102,125 | | Country Inns & Suites® by Radisson | Radisson | 4 | 610 | 73,402 | | Holiday Inn® | IHG | 3 | 754 | 73,331 | | SpringHill Suites by Marriott® | Marriott | 2 | 264 | 24,914 | | **Total Hotels** | | **326** | **50,543** | **6,569,330** | - As of December 31, 2018, HPT owned **199 travel centers**, all leased to TravelCenters of America LLC (TA), operating under **TA® (149 properties)** and **Petro® (50 properties)** brand names[33](index=33&type=chunk) - Most management agreements and leases include security features like cash security deposits or guarantees from parent companies, covering **73.9% of total minimum returns and rents** as of December 31, 2018[41](index=41&type=chunk) - HPT has no employees; RMR LLC provides day-to-day operations, investment, and administrative services. Key personnel, including Managing Trustees and officers, also hold positions at RMR LLC[66](index=66&type=chunk)[67](index=67&type=chunk) - HPT has elected to be taxed as a REIT, generally avoiding federal income tax on distributed net income, but must comply with complex qualification tests regarding income, assets, and distributions[90](index=90&type=chunk)[91](index=91&type=chunk)[93](index=93&type=chunk) [Item 1A. Risk Factors](index=40&type=section&id=Item%201A.%20Risk%20Factors) HPT faces risks from economic conditions, competition, debt, dependence on RMR LLC, and maintaining REIT status - Adverse general economic conditions in the U.S. are likely to negatively impact HPT's hotel and travel center segments, which are highly sensitive to economic cycles and discretionary spending[197](index=197&type=chunk)[198](index=198&type=chunk)[199](index=199&type=chunk) - Certain returns and rents are guaranteed by parent companies or secured by cash deposits, but these may be limited in amount and duration, and some guarantees (e.g., Wyndham's) have been depleted, leading to potential payment shortfalls[201](index=201&type=chunk)[202](index=202&type=chunk)[203](index=203&type=chunk)[204](index=204&type=chunk)[205](index=205&type=chunk)[206](index=206&type=chunk) - HPT's consolidated indebtedness was **$4.2 billion** as of December 31, 2018, with a total debt to gross book value of real estate ratio of **44.2%**[215](index=215&type=chunk)[216](index=216&type=chunk) - HPT is highly dependent on RMR LLC for management services, and the existing management structure and related-party transactions (with RMR LLC, TA, Sonesta, AIC) create potential conflicts of interest and may not be on arm's-length terms[252](index=252&type=chunk)[254](index=254&type=chunk)[257](index=257&type=chunk)[259](index=259&type=chunk)[263](index=263&type=chunk)[265](index=265&type=chunk) - Failure to maintain REIT qualification or changes in tax laws could result in significant adverse consequences, including federal and state income taxes, reduced ability to raise capital, and a decline in common share market price[283](index=283&type=chunk)[284](index=284&type=chunk)[285](index=285&type=chunk)[286](index=286&type=chunk)[295](index=295&type=chunk) [Item 1B. Unresolved Staff Comments](index=50&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) No unresolved staff comments were reported - No unresolved staff comments were reported[306](index=306&type=chunk) [Item 2. Properties](index=51&type=section&id=Item%202.%20Properties) HPT owned 326 hotels and 199 travel centers with a total undepreciated value of $9.75 billion as of December 31, 2018 Summary of All Properties (as of December 31, 2018) | Category | Number of Properties | Undepreciated Carrying Value ($ thousands) | Depreciated Carrying Value ($ thousands) | | :----------------- | :------------------- | :----------------------------------------- | :--------------------------------------- | | Hotels | 326 | 6,442,183 | 4,488,764 | | Travel Centers | 179 | 3,080,790 | 2,060,825 | | Held For Sale (Travel Centers) | 20 | 228,435 | 144,008 | | **Grand Total** | **525** | **9,751,408** | **6,693,597** | - As of December 31, 2018, **14 hotels** and **15 travel centers** were on land leased partially or entirely from unrelated third parties, with average remaining ground lease terms of approximately **38 years for hotels** and **11 years for travel centers**[311](index=311&type=chunk)[312](index=312&type=chunk) Depreciated Carrying Value of Properties Subject to Ground Leases (as of December 31, 2018) | Property Type | Depreciated Carrying Value ($ thousands) | | :--------------- | :--------------------------------------- | | 14 hotels | 196,555 | | 15 travel centers | 86,800 | | **Total** | **283,355** | [Item 3. Legal Proceedings](index=52&type=section&id=Item%203.%20Legal%20Proceedings) HPT is not currently involved in any litigation expected to have a material adverse effect on its business - HPT is not currently a party to any litigation expected to have a material adverse effect on its business[316](index=316&type=chunk) [Item 4. Mine Safety Disclosures](index=53&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Hospitality Properties Trust - Mine Safety Disclosures are not applicable to HPT[317](index=317&type=chunk) PART II [Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=53&type=section&id=Item%205.%20Market%20for%20the%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) HPT common shares are traded on Nasdaq under the symbol HPT, with 483 shareholders of record as of February 11, 2019 - HPT common shares are traded on Nasdaq (**symbol: HPT**)[319](index=319&type=chunk) - As of February 11, 2019, there were **483 shareholders of record** for HPT common shares[320](index=320&type=chunk) [Item 6. Selected Financial Data](index=54&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes HPT's financial data from 2014-2018, showing total revenues grew to $2.29 billion in 2018 Selected Financial Data (2014-2018) | Metric (in thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | | :------------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | **Income Statement Data:** | | | | | | | Total revenues | $2,294,536 | $2,171,935 | $2,047,211 | $1,921,904 | $1,736,322 | | Total expenses | $1,900,294 | $1,791,608 | $1,660,352 | $1,585,969 | $1,397,152 | | Net income | $185,734 | $215,143 | $223,110 | $166,418 | $197,185 | | Net income available for common shareholders | $185,734 | $203,815 | $202,446 | $145,754 | $176,521 | | **Per Common Share Data:** | | | | | | | Net income available for common shareholders | $1.13 | $1.24 | $1.30 | $0.97 | $1.18 | | Distributions paid per common share | $2.11 | $2.07 | $2.03 | $1.99 | $1.95 | | **Balance Sheet Data (as of Dec 31):** | | | | | | | Real estate properties, gross | $9,522,973 | $9,427,659 | $8,723,389 | $8,261,772 | $7,656,193 | | Total assets | $7,177,079 | $7,150,385 | $6,634,228 | $6,394,797 | $5,967,127 | | Debt, net | $4,172,587 | $4,001,048 | $3,163,807 | $3,274,673 | $2,823,178 | | Shareholders' equity | $2,597,431 | $2,755,422 | $3,129,389 | $2,812,082 | $2,990,153 | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=55&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes HPT's financial performance, liquidity, and capital resources, detailing key financial changes and accounting policies [Overview](index=55&type=section&id=Overview) HPT, a REIT, owned 326 hotels and 199 travel centers as of December 31, 2018, managed by various operators, and sold 20 travel centers in January 2019 - As of December 31, 2018, HPT owned **326 hotels** and **199 travel centers**, managed or leased by operators like Marriott, IHG, Sonesta, Wyndham, Hyatt, Radisson, and TA[327](index=327&type=chunk)[540](index=540&type=chunk) - Many operating agreements include security features (guarantees, security deposits) to protect minimum returns/rents, but their effectiveness is not assured, especially during prolonged economic downturns[328](index=328&type=chunk) Hotel Operating Performance (Year Ended December 31, 2018 vs 2017) | Metric (303 comparable hotels) | 2018 | 2017 | Change | | :----------------------------- | :-------- | :-------- | :----- | | ADR | $128.64 | $126.50 | +1.7% | | Occupancy | 74.8% | 75.7% | -0.9 pts | | RevPAR | $96.22 | $95.75 | +0.5% | | Metric (All 326 hotels) | 2018 | 2017 | Change | | :----------------------------- | :-------- | :-------- | :----- | | ADR | $129.80 | $127.66 | +1.7% | | Occupancy | 73.3% | 75.1% | -1.8 pts | | RevPAR | $95.14 | $95.87 | -0.8% | - In January 2019, HPT sold **20 travel centers** to TA and amended existing leases, expecting a gain of approximately **$160 million** in Q1 2019[33](index=33&type=chunk)[594](index=594&type=chunk) [Results of Operations (Year Ended December 31, 2018 Compared to Year Ended December 31, 2017)](index=56&type=section&id=Results%20of%20Operations%20(dollar%20amounts%20in%20thousands%2C%20except%20share%20amounts)) Net income available for common shareholders decreased by 8.9% in 2018 due to higher expenses and unrealized losses, despite revenue growth Key Financial Changes (2018 vs 2017) | Metric (in thousands) | 2018 | 2017 | Increase (Decrease) | % Change | | :-------------------- | :---------- | :---------- | :------------------ | :----------- | | Hotel operating revenues | $1,960,958 | $1,843,501 | $117,457 | 6.4% | | Rental income - hotels | $26,137 | $30,491 | $(4,354) | (14.3)% | | Rental income - travel centers | $302,309 | $293,273 | $9,036 | 3.1% | | Total revenues | $2,294,536 | $2,171,935 | $122,601 | 5.6% | | Hotel operating expenses | $1,392,355 | $1,279,547 | $112,808 | 8.8% | | Total depreciation and amortization | $403,077 | $386,659 | $16,418 | 4.2% | | General and administrative | $104,862 | $125,402 | $(20,540) | (16.4)% | | Unrealized losses on equity securities | $(16,737) | $0 | $(16,737) | n/m | | Interest expense | $(195,213) | $(181,579) | $(13,634) | 7.5% | | Net income available for common shareholders | $185,734 | $203,815 | $(18,081) | (8.9)% | | Net income available for common shareholders per common share | $1.13 | $1.24 | $(0.11) | (8.9)% | - Hotel operating revenues increased by **$117.5 million (6.4%)** due to acquisitions (**$84.5 million**), increased ADR and occupancies at certain managed hotels (**$56.3 million**), and one hotel conversion from leased to managed (**$23.1 million**), partially offset by decreased revenues from lower occupancies and renovations[334](index=334&type=chunk) - Travel center rental income increased by **$9.0 million (3.1%)** due to minimum rent increases from capital improvements (**$6.6 million**), higher percentage rent earned (**$1.4 million**), and acquisitions (**$0.8 million**)[337](index=337&type=chunk) - General and administrative costs decreased by **$20.5 million (16.4%)** primarily due to lower incentive fees in 2018[342](index=342&type=chunk) - Unrealized losses on equity securities of **$16.7 million** were recorded in 2018 due to new GAAP standards requiring fair value adjustments for investments in RMR Inc. and TA common shares[344](index=344&type=chunk) [Results of Operations (Year Ended December 31, 2017 Compared to Year Ended December 31, 2016)](index=59&type=section&id=Year%20Ended%20December%2031%2C%202017%20Compared%20to%20Year%20Ended%20December%2031%2C%202016) Net income available for common shareholders increased by 0.7% in 2017, primarily due to reduced preferred distributions, despite higher expenses Key Financial Changes (2017 vs 2016) | Metric (in thousands) | 2017 | 2016 | Increase (Decrease) | % Change | | :-------------------- | :---------- | :---------- | :------------------ | :----------- | | Hotel operating revenues | $1,843,501 | $1,733,103 | $110,398 | 6.4% | | Rental income - hotels | $30,491 | $30,425 | $66 | 0.2% | | Rental income - travel centers | $293,273 | $279,175 | $14,098 | 5.0% | | Total revenues | $2,171,935 | $2,047,211 | $124,724 | 6.1% | | Hotel operating expenses | $1,279,547 | $1,202,538 | $77,009 | 6.4% | | Total depreciation and amortization | $386,659 | $357,342 | $29,317 | 8.2% | | General and administrative | $125,402 | $99,105 | $26,297 | 26.5% | | Interest expense | $(181,579) | $(161,913) | $(19,666) | 12.1% | | Preferred distributions | $(1,435) | $(20,664) | $19,229 | (93.1)% | | Net income available for common shareholders | $203,815 | $202,446 | $1,369 | 0.7% | | Net income available for common shareholders per common share | $1.24 | $1.30 | $(0.06) | (4.6)% | - Hotel operating revenues increased by **$110.4 million (6.4%)** due to acquisitions (**$101.0 million**) and increased ADR/occupancies at managed hotels (**$48.4 million**), partially offset by lower occupancies from renovations and dispositions[352](index=352&type=chunk) - Travel center rental income increased by **$14.1 million (5.0%)** due to minimum rent increases from capital improvements (**$9.5 million**), acquisitions (**$5.0 million**), and higher percentage rent earned (**$0.8 million**)[356](index=356&type=chunk) - General and administrative costs increased by **$26.3 million (26.5%)** primarily due to higher incentive fees in 2017[361](index=361&type=chunk) - The decrease in preferred distributions by **$19.2 million (93.1%)** was a significant factor, resulting from the redemption of all outstanding **7.125% Series D cumulative redeemable preferred shares** in February 2017[365](index=365&type=chunk) [Liquidity and Capital Resources](index=62&type=section&id=Liquidity%20and%20Capital%20Resources) HPT's liquidity relies on minimum returns/rents and its revolving credit facility, with significant capital expenditures planned for property improvements - Principal sources of funds are minimum returns from managed hotels, minimum rents from leased hotels and travel centers, and borrowings under the revolving credit facility[375](index=375&type=chunk) Cash Flow Changes (2018 vs 2017) | Cash Flow Category | 2018 ($ thousands) | 2017 ($ thousands) | Change ($ thousands) | | :----------------- | :----------------- | :----------------- | :------------------- | | Operating activities | 596,953 | 628,495 | (31,542) | | Investing activities | (427,742) | (795,108) | 367,366 | | Financing activities | (190,704) | 192,757 | (383,461) | - HPT expects to fund approximately **$260 million in 2019** and **$39 million in 2020** for renovations and capital improvements at hotels, and **$30 million in 2019** for travel center capital improvements, which will increase contractual minimum returns/rents[13](index=13&type=chunk)[380](index=380&type=chunk)[381](index=381&type=chunk)[382](index=382&type=chunk)[385](index=385&type=chunk) - In February 2018, HPT issued **$400 million of 4.375% senior notes due 2030**, with net proceeds of **$386.4 million** used to repay revolving credit facility borrowings and for general business purposes[383](index=383&type=chunk) - HPT acquired **three hotels** in 2018 for a total of **$126.7 million** and sold **20 travel centers** to TA in January 2019 for **$308.2 million**, using proceeds for debt repayment and hotel acquisitions[385](index=385&type=chunk)[386](index=386&type=chunk)[387](index=387&type=chunk)[388](index=388&type=chunk) - The **$1.0 billion revolving credit facility** was amended in May 2018, extending its maturity to **July 15, 2022**, and reducing the interest rate premium. As of December 31, 2018, **$177 million was outstanding**, with **$823 million available**[389](index=389&type=chunk) [Off Balance Sheet Arrangements](index=66&type=section&id=Off%20Balance%20Sheet%20Arrangements) As of December 31, 2018, HPT had no off-balance sheet arrangements expected to materially affect its financial condition - As of December 31, 2018, HPT had no off-balance sheet arrangements expected to have a material effect on its financial condition or results of operations[396](index=396&type=chunk) [Debt Covenants](index=66&type=section&id=Debt%20Covenants) HPT's debt obligations are subject to covenants restricting debt and requiring financial ratio maintenance, with compliance reported as of December 31, 2018 - HPT's debt obligations include covenants restricting debt incurrence, requiring financial ratio maintenance, and potentially limiting distributions[398](index=398&type=chunk) - Cross-default provisions exist across public debt indentures and the credit agreement, which could accelerate payments if defaults occur[400](index=400&type=chunk) - As of December 31, 2018, HPT believed it was in compliance with all covenants under its indentures and credit agreement[398](index=398&type=chunk) [Related Person Transactions](index=67&type=section&id=Related%20Person%20Transactions) HPT has extensive related-party transactions with RMR LLC, RMR Inc., TA, Sonesta, and AIC, creating potential conflicts of interest - HPT has relationships and transactions with RMR LLC, RMR Inc., TA, Sonesta, and AIC, involving common trustees, officers, and ownership interests[401](index=401&type=chunk) - Adam D. Portnoy, a Managing Trustee, is the controlling shareholder of RMR Inc. and holds executive positions at RMR Inc. and RMR LLC, which manages HPT and other related entities[401](index=401&type=chunk) - HPT is TA's largest shareholder (**8.5% ownership**) and landlord, and Sonesta, one of HPT's hotel managers, is majority-owned by Adam Portnoy[401](index=401&type=chunk) - HPT, along with other RMR LLC-managed companies, owns **14.3% of Affiliates Insurance Company (AIC)** and participates in a combined property insurance program[401](index=401&type=chunk) [Critical Accounting Policies](index=67&type=section&id=Critical%20Accounting%20Policies) HPT's critical accounting policies involve significant judgments for real estate, depreciation, impairments, leases, and income taxes, with recent GAAP adoptions - Critical accounting policies include purchase price allocation for real estate, depreciation and amortization, assessment of asset impairments, classification of leases, and income taxes[403](index=403&type=chunk)[406](index=406&type=chunk)[407](index=407&type=chunk)[408](index=408&type=chunk)[412](index=412&type=chunk)[414](index=414&type=chunk) - HPT consolidates its wholly-owned TRSs, which are deemed Variable Interest Entities (VIEs), as HPT is the primary beneficiary[405](index=405&type=chunk) - Effective **January 1, 2018**, HPT adopted new GAAP standards for financial instruments (**ASU No. 2016-01**), requiring changes in fair value of equity securities to be recorded through earnings, and for restricted cash (**ASU No. 2016-18**), impacting cash flow statement presentation[563](index=563&type=chunk)[564](index=564&type=chunk) - HPT is assessing the impact of **ASU No. 2016-13 (Credit Losses)** and will adopt new lease accounting standards (**ASU No. 2016-02, 2018-10, 2018-11, 2018-20**) effective **January 1, 2019**, which will require recording right-of-use assets and lease liabilities for ground leases[566](index=566&type=chunk)[568](index=568&type=chunk)[569](index=569&type=chunk) [Management Agreements, Leases and Operating Statistics](index=69&type=section&id=Management%20Agreements%2C%20Leases%20and%20Operating%20Statistics%20(dollar%20amounts%20in%20thousands)) This section details HPT's 13 operating agreements for hotels and travel centers, including minimum returns, security features, and coverage ratios - As of December 31, 2018, HPT had **13 operating agreements** covering **326 hotels** and **199 travel centers**, with **324 hotels** leased to TRSs and managed by third parties, and all travel centers leased to TA[597](index=597&type=chunk)[598](index=598&type=chunk) Rent/Return Coverage by Operating Agreement (Year Ended December 31, 2018) | Operating Agreement | Number of Properties | Annual Minimum Return/Rent ($ thousands) | Coverage (2018) | | :------------------ | :------------------- | :--------------------------------------- | :-------------- | | Marriott (No. 1) | 53 | 70,137 | 1.20x | | Marriott (No. 234) | 68 | 107,350 | 1.09x | | Marriott (No. 5) | 1 | 10,321 | 1.05x | | IHG | 100 | 193,695 | 1.06x | | Sonesta | 51 | 127,089 | 0.66x | | Wyndham | 22 | 29,283 | 0.67x | | Hyatt | 22 | 22,037 | 1.04x | | Radisson | 9 | 18,920 | 1.11x | | TA (all leases) | 199 | 289,231 | 1.63x | - Two hotel operating agreements (Sonesta and Wyndham), representing **18% of total annual minimum returns and rents**, generated coverage of **less than 1.0x** in 2018, indicating reliance on guarantees or security deposits[370](index=370&type=chunk) - Wyndham's **$35.7 million limited guarantee** was depleted in 2017 and remained depleted in 2018, leading to payments of **85% of minimum returns due**, resulting in a **$4.1 million shortfall** for 2018[202](index=202&type=chunk)[373](index=373&type=chunk)[619](index=619&type=chunk) - Marriott notified HPT that it will not renew the lease for the Kauai Marriott (Marriott No. 5 agreement) expiring **December 31, 2019**, prompting negotiations for future operation[374](index=374&type=chunk)[604](index=604&type=chunk) - TA leases generated a combined coverage of **1.63x** for the year ended December 31, 2018. In January 2019, HPT sold **20 travel centers** to TA and amended leases, including a repayment schedule for TA's **$150 million deferred rent obligation**[371](index=371&type=chunk)[625](index=625&type=chunk)[626](index=626&type=chunk) [Impact of Inflation](index=74&type=section&id=Impact%20of%20Inflation) Inflation could increase asset values but negatively affect HPT if expenses outpace revenues, though no material adverse impact is expected soon - Inflation could increase asset values but may adversely impact HPT if operating expenses rise faster than revenues, potentially exhausting security features[447](index=447&type=chunk)[448](index=448&type=chunk) - HPT does not expect a material adverse impact from inflation on financial results for the next **12 months** or the foreseeable future[450](index=450&type=chunk) - Interest rate hedge arrangements may be used in the future to mitigate the adverse impact of increased debt capital costs due to inflation[449](index=449&type=chunk) [Seasonality](index=75&type=section&id=Seasonality) HPT's properties experience seasonal variations, but security features are expected to mitigate material fluctuations in income and cash flows - Hotels and travel centers experience seasonal differences, with higher revenues in **Q2 and Q3**[451](index=451&type=chunk) - Seasonality is not expected to cause material fluctuations in income or cash flows due to equal monthly payments and available guarantees/security deposits[451](index=451&type=chunk) - For agreements without security, income and cash flows will reflect the seasonality of the hotel industry[451](index=451&type=chunk) [Impact of Climate Change](index=75&type=section&id=Impact%20of%20Climate%20Change) Climate change concerns may increase property costs, but HPT mitigates risks through energy-efficient initiatives and insurance coverage - Climate change regulations may increase energy and other costs at properties, but the direct impact on HPT's operations is not expected to be material as costs are generally passed through[452](index=452&type=chunk) - HPT and its tenants/managers implement initiatives for recycling, reduced water/energy use, and use energy-efficient products during renovations[453](index=453&type=chunk) - Severe weather events pose risks, but HPT mitigates these through adequate insurance coverage to protect against material damages and losses[455](index=455&type=chunk) [Non-GAAP Measures](index=75&type=section&id=Non-GAAP%20Measures) HPT uses FFO and Normalized FFO as supplemental performance measures, adjusting for specific items to provide comparative insights - HPT uses **FFO available for common shareholders** (Nareit defined) and **Normalized FFO available for common shareholders** (HPT's adjusted FFO) as supplemental operating performance measures[457](index=457&type=chunk) - Normalized FFO excludes business management incentive fees (except in Q4), acquisition-related costs, loss on early extinguishment of debt, excess of liquidation preference over carrying value of preferred shares redeemed, unrealized losses on equity securities, and certain deferred tax benefits[457](index=457&type=chunk) FFO and Normalized FFO (2016-2018) | Metric (in thousands, except per share amounts) | 2018 | 2017 | 2016 | | :---------------------------------------------- | :---------- | :---------- | :---------- | | Net income available for common shareholders | $185,734 | $203,815 | $202,446 | | FFO available for common shareholders | $588,811 | $581,126 | $559,788 | | Normalized FFO available for common shareholders | $605,708 | $585,734 | $561,383 | | FFO available for common shareholders per share | $3.59 | $3.54 | $3.59 | | Normalized FFO available for common shareholders per share | $3.69 | $3.57 | $3.60 | | Distributions declared per share | $2.11 | $2.07 | $2.03 | [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=78&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) HPT is exposed to interest rate risk, managing it through fixed-rate debt and monitoring floating-rate debt vulnerable to LIBOR changes - HPT is exposed to interest rate risk and manages it by monitoring financing alternatives[463](index=463&type=chunk) Fixed Rate Debt (as of December 31, 2018) | Principal Balance ($ thousands) | Annual Interest Rate | Maturity | | :------------------------------ | :------------------- | :------- | | 400,000 | 4.250% | 2021 | | 500,000 | 5.000% | 2022 | | 500,000 | 4.500% | 2023 | | 350,000 | 4.650% | 2024 | | 350,000 | 4.500% | 2025 | | 350,000 | 5.250% | 2026 | | 400,000 | 4.950% | 2027 | | 400,000 | 3.950% | 2028 | | 400,000 | 4.375% | 2030 | | **Total: 3,650,000** | | | - A hypothetical **one percentage point increase** in interest rates would increase annual interest cost on fixed-rate debt by approximately **$36.5 million** and decrease its fair value by approximately **$178.8 million**[464](index=464&type=chunk) - Floating-rate debt, totaling **$577 million** as of December 31, 2018 (revolving credit facility and term loan), is vulnerable to changes in LIBOR, with a **one percentage point increase** raising annual interest expense by **$5.77 million**[466](index=466&type=chunk)[467](index=467&type=chunk) - LIBOR is expected to be phased out in **2021**, and the replacement interest rate index may result in increased interest payments for HPT[471](index=471&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=79&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) Financial statements and supplementary data are included in Item 15 of this Annual Report on Form 10-K - Financial statements and supplementary data are located in **Item 15**[472](index=472&type=chunk) [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=79&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There have been no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure were reported[473](index=473&type=chunk) [Item 9A. Controls and Procedures](index=80&type=section&id=Item%209A.%20Controls%20and%20Procedures) HPT's management evaluated and deemed its disclosure controls and internal control over financial reporting effective as of December 31, 2018 - HPT's disclosure controls and procedures were evaluated and deemed **effective** as of **December 31, 2018**[474](index=474&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended **December 31, 2018**[475](index=475&type=chunk) - Management assessed and concluded that internal control over financial reporting was **effective** as of **December 31, 2018**, based on the COSO framework[477](index=477&type=chunk) [Item 9B. Other Information](index=80&type=section&id=Item%209B.%20Other%20Information) No other information is reported under this item - No other information was reported under this item[479](index=479&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=80&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) HPT maintains a Code of Conduct, with further information incorporated by reference from its definitive Proxy Statement - HPT maintains a **Code of Conduct** for its officers, Trustees, RMR Inc., RMR LLC, and certain employees, available on its website[481](index=481&type=chunk) - Additional information is incorporated by reference from the definitive Proxy Statement[482](index=482&type=chunk) [Item 11. Executive Compensation](index=80&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation information is incorporated by reference from HPT's definitive Proxy Statement - Executive compensation information is incorporated by reference from the definitive Proxy Statement[483](index=483&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=80&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) HPT grants common shares under its 2012 Equity Compensation Plan, with 2,412,017 shares available for future issuance as of December 31, 2018 Equity Compensation Plan Information (as of December 31, 2018) | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | :--------------------------------------------- | :-------------------------------------------------------------------------------- | :------------------------------------------------------------------------------ | :------------------------------------------------------------------------------------------------------------------------------------------------ | | Equity compensation plans approved by security holders—2012 Plan | None. | None. | 2,412,017 | | Equity compensation plans not approved by security holders | None. | None. | None. | | **Total** | **None.** | **None.** | **2,412,017** | - HPT granted **115,000 common shares** in 2018 under the Share Award Plan to officers and RMR LLC employees, with an estimated future compensation expense of **$3.67 million** over approximately **23 months**[574](index=574&type=chunk) - In 2018, HPT repurchased **21,202 common shares** for tax withholding obligations related to vesting awards[576](index=576&type=chunk) - All **11.6 million outstanding 7.125% Series D cumulative redeemable preferred shares** were redeemed in **February 2017** for **$291.4 million**, resulting in a **$9.89 million reduction** in net income available for common shareholders[579](index=579&type=chunk)[580](index=580&type=chunk) - Cash distributions to common shareholders were **$2.11 per share** (**$346.8 million total**) in 2018, characterized as **100% ordinary income**[581](index=581&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=81&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on related transactions and director independence is incorporated by reference from HPT's definitive Proxy Statement - Information on related transactions and director independence is incorporated by reference from the definitive Proxy Statement[488](index=488&type=chunk) [Item 14. Principal Accountant Fees and Services](index=81&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information on principal accountant fees and services is incorporated by reference from HPT's definitive Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the definitive Proxy Statement[489](index=489&type=chunk) PART IV [Item 15. Exhibits and Financial Statement Schedules](index=82&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section indexes financial statements and exhibits, highlighting TA as a significant tenant leasing 32.4% of HPT's properties - This section includes an index to financial statements, supplementary data, and a list of exhibits[492](index=492&type=chunk) - TravelCenters of America (TA) is a significant tenant, leasing **32.4% of HPT's real estate properties (at cost)** as of December 31, 2018[493](index=493&type=chunk) - The financial statements include consolidated balance sheets, statements of comprehensive income, shareholders' equity, and cash flows for the period ended **December 31, 2018**[492](index=492&type=chunk) - Schedule III details Real Estate and Accumulated Depreciation as of **December 31, 2018**, showing total cost of properties and changes over time[492](index=492&type=chunk)[706](index=706&type=chunk)[709](index=709&type=chunk)[711](index=711&type=chunk) [Item 16. Form 10-K Summary](index=88&type=section&id=Item%2016.%20Form%2010-K%20Summary) No Form 10-K Summary is included in this report - No Form 10-K Summary is included in this report[507](index=507&type=chunk)

Hospitality Properties Trust Fourth Quarter 2018 Supplemental Operating and Financial Data Marriott Courtyard Phoenix Camelback Phoenix, AZ Operator: Marriott International, Inc. Guest Rooms: 155 All amounts in this report are unaudited. TABLE OF CONTENTS TABLE OF CONTENTS PAGE CORPORATE INFORMATION 6 Company Profile 7,8 Investor Information 9 Research Coverage 10 FINANCIALS Key Financial Data 12 Consolidated Balance Sheets 13 Consolidated Statements of Income 14 Notes to Consolidated Statements of Income 1 ...