Service Properties Trust(SVC) - 2019 Q1 - Quarterly Report

PART I Financial Information (unaudited) This section presents the unaudited financial statements and related disclosures for the company's first quarter Item 1. Financial Statements (unaudited) This section provides the unaudited condensed consolidated financial statements, including balance sheets, income, equity, and cash flow statements, with explanatory notes Condensed Consolidated Balance Sheets This section presents the company's financial position at specific dates, detailing assets, liabilities, and shareholders' equity Condensed Consolidated Balance Sheets (March 31, 2019 vs. December 31, 2018) | Category | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | ASSETS | | | | Total real estate properties, net | $6,653,425 | $6,549,589 | | Cash and cash equivalents | $23,675 | $25,966 | | Restricted cash | $75,129 | $50,037 | | Due from related persons | $79,710 | $91,212 | | Other assets, net | $423,865 | $460,275 | | Total assets | $7,255,804 | $7,177,079 | | LIABILITIES | | | | Unsecured revolving credit facility | $141,000 | $177,000 | | Unsecured term loan, net | $397,442 | $397,292 | | Senior unsecured notes, net | $3,600,314 | $3,598,295 | | Security deposits | $116,448 | $132,816 | | Accounts payable and other liabilities | $250,925 | $211,332 | | Due to related persons | $13,109 | $62,913 | | Total liabilities | $4,519,238 | $4,579,648 | | SHAREHOLDERS' EQUITY | | | | Total shareholders' equity | $2,736,566 | $2,597,431 | | Total liabilities and shareholders' equity | $7,255,804 | $7,177,079 | - Total assets increased by $78,725 thousand from December 31, 2018, to March 31, 2019, primarily driven by an increase in net real estate properties[8] - Total liabilities decreased by $60,410 thousand, mainly due to a reduction in the unsecured revolving credit facility and amounts due to related persons[8] - Total shareholders' equity increased by $139,135 thousand, reflecting net income and additional paid-in capital[9] Condensed Consolidated Statements of Comprehensive Income This section details the company's financial performance over a period, including revenues, expenses, and net income Condensed Consolidated Statements of Comprehensive Income (Three Months Ended March 31, 2019 vs. 2018) | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | Change (YoY) | | :------------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Hotel operating revenues | $455,385 | $445,276 | +$10,109 | | Rental income | $68,151 | $81,993 | -$13,842 | | Total revenues | $524,908 | $528,633 | -$3,725 | | Hotel operating expenses | $319,125 | $314,982 | +$4,143 | | Depreciation and amortization | $99,365 | $99,617 | -$252 | | General and administrative | $12,235 | $11,734 | +$501 | | Total expenses | $430,725 | $426,333 | +$4,392 | | Gain on sale of real estate | $159,535 | — | +$159,535 | | Interest expense | ($49,766) | ($47,540) | -$2,226 | | Net income | $225,787 | $80,206 | +$145,581 | | Comprehensive income | $225,853 | $80,113 | +$145,740 | | Net income per common share (basic and diluted) | $1.37 | $0.49 | +$0.88 | - Net income significantly increased by 181.5% year-over-year, primarily driven by a $159,535 thousand gain on the sale of real estate in Q1 2019[11][142] - Total revenues saw a slight decrease of 0.7% due to lower rental income from travel centers, partially offset by increased hotel operating revenues[11][128] Condensed Consolidated Statements of Shareholders' Equity This section outlines changes in the company's equity, reflecting net income, distributions, and other comprehensive income Condensed Consolidated Statements of Shareholders' Equity (Three Months Ended March 31, 2019 vs. 2018) | Category | Balance at Dec 31, 2018 (in thousands) | Net Income (in thousands) | Equity Interest in Investee's Unrealized Gains (in thousands) | Common Share Grants (in thousands) | Distributions (in thousands) | Balance at Mar 31, 2019 (in thousands) | | :----------------------------------- | :----------------------------------- | :------------------------ | :--------------------------------------------------- | :----------------------- | :----------------------- | :----------------------------------- | | Common Shares | $1,644 | — | — | — | — | $1,644 | | Additional Paid in Capital | $4,545,481 | — | — | $436 | — | $4,545,917 | | Cumulative Net Income Available for Common Shareholders | $3,231,895 | $225,787 | — | — | — | $3,457,682 | | Cumulative Common Distributions | ($5,181,323) | — | — | — | ($87,154) | ($5,268,477) | | Cumulative Other Comprehensive Loss | ($266) | — | $66 | — | — | ($200) | | Total Shareholders' Equity | $2,597,431 | $225,787 | $66 | $436 | ($87,154) | $2,736,566 | - Total shareholders' equity increased by $139,135 thousand from December 31, 2018, to March 31, 2019, primarily due to net income of $225,787 thousand, partially offset by common distributions of $87,154 thousand[13] Condensed Consolidated Statements of Cash Flows This section reports the cash generated and used by the company across operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31, 2019 vs. 2018) | Cash Flow Activity | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Net cash provided by operating activities | $43,865 | $49,685 | -$5,820 | | Net cash provided by (used in) investing activities | $102,090 | ($59,709) | +$161,799 | | Net cash used in financing activities | ($123,154) | ($11,107) | -$112,047 | | Increase (decrease) in cash and cash equivalents and restricted cash | $22,801 | ($21,131) | +$43,932 | | Cash and cash equivalents and restricted cash at end of period | $98,804 | $76,365 | +$22,439 | - Cash flows from operating activities decreased by $5,820 thousand, primarily due to lower minimum rents from travel centers and higher interest payments, partially offset by decreased incentive business management fees[16][151] - Investing activities shifted from a net use of $59,709 thousand in 2018 to a net provision of $102,090 thousand in 2019, largely due to proceeds from the sale of 20 travel centers ($308,200 thousand) and decreased capital improvement fundings, partially offset by increased real estate acquisitions[16][151] - Cash used in financing activities increased significantly by $112,047 thousand, mainly due to the issuance of notes in 2018 not recurring in 2019, partially offset by lower net repayments under the revolving credit facility[16][151] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed financial statements - The company adopted the new Lease Standard (ASU No. 2016-02) on January 1, 2019, recording $77,010 thousand in right-of-use assets and related lease liabilities as a lessee, with no material impact on comprehensive income or cash flows[23][25] - Revenue recognition for managed hotels is based on goods and services provided, while rental income from operating leases (hotels and travel centers) is recognized on a straight-line basis over the lease term[29][30] - The company acquired one hotel (Hotel Palomar in Washington, D.C.) for $143,742 thousand in February 2019 and sold 20 travel centers to TA for $308,200 thousand in January 2019, recording a gain of $159,535 thousand[47][49] - As of March 31, 2019, the company owned 327 hotels and 179 travel centers, managed or leased under 13 operating agreements with various operators like Marriott, IHG, Sonesta, Wyndham, Hyatt, Radisson, and TA[50][51] - The company has significant related party transactions with TA (largest tenant and shareholder), Sonesta (hotel manager, partly owned by a Managing Trustee), RMR LLC (business and property manager), RMR Inc. (parent of RMR LLC, company is a shareholder), and AIC (insurance company, jointly owned)[97][98][99][100][101][102] - The company's investments in TA common shares and RMR Inc. class A common stock are reported at fair value, with unrealized gains of $1,197 thousand and $19,780 thousand, respectively, recorded for the three months ended March 31, 2019[116][117] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results, covering revenues, expenses, liquidity, debt, and key operating statistics, including non-GAAP measures Overview This section provides a high-level summary of the company's property portfolio and key hotel operating performance metrics - As of March 31, 2019, the company owned 327 hotels (325 managed by hotel operating companies via TRSs, 2 leased to third parties) and 179 travel centers leased to TA[122] - Many operating agreements include security features like guarantees and security deposits to protect minimum returns/rents, but their effectiveness is not assured, especially during prolonged economic downturns[123] Hotel Operating Statistics (323 Comparable Hotels, Q1 2019 vs. Q1 2018) | Metric | Q1 2019 | Q1 2018 | Change (YoY) | | :------- | :------ | :------ | :----------- | | ADR ($) | $129.11 | N/A | +1.0% | | Occupancy (%) | 67.4% | N/A | -2.9 percentage points | | RevPAR ($) | $87.02 | N/A | -3.2% | - Comparable hotels experienced a decline in occupancy and RevPAR, attributed to renovation disruptions, increased competition from new hotel supply, and decreased business activity in certain markets[124] Results of Operations This section analyzes the company's financial performance, detailing changes in revenues, expenses, and net income Key Financial Results (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (YoY) | % Change (YoY) | | :------------------------------------------ | :------------------ | :------------------ | :----------- | :------------- | | Hotel operating revenues | $455,385 | $445,276 | $10,109 | 2.3% | | Rental income - hotels | $5,076 | $7,800 | ($2,724) | (34.9)% | | Rental income - travel centers | $63,075 | $74,193 | ($11,118) | (15.0)% | | Total revenues | $524,908 | $528,633 | ($3,725) | (0.7)% | | Hotel operating expenses | $319,125 | $314,982 | $4,143 | 1.3% | | Depreciation and amortization - hotels | $66,583 | $62,446 | $4,137 | 6.6% | | Depreciation and amortization - travel centers | $32,782 | $37,171 | ($4,389) | (11.8)% | | General and administrative | $12,235 | $11,734 | $501 | 4.3% | | Gain on sale of real estate | $159,535 | — | $159,535 | n/m | | Interest expense | ($49,766) | ($47,540) | ($2,226) | 4.7% | | Net income | $225,787 | $80,206 | $145,581 | 181.5% | | Net income per common share (basic and diluted) | $1.37 | $0.49 | $0.88 | 179.6% | - Net income increased significantly by 181.5% year-over-year, primarily due to a $159,535 thousand gain on the sale of 20 travel centers in Q1 2019[128][138][142] - Total revenues decreased slightly by 0.7%, as a 2.3% increase in hotel operating revenues was offset by a 16.9% decrease in total rental income, mainly from travel centers due to dispositions and lease amendments[128][129][131] - Hotel operating expenses increased by 1.3%, influenced by hotel acquisitions and conversions, but partially offset by a significant increase in guaranty and security deposit utilization ($11,614 thousand) to cover shortfalls[128][135] Liquidity and Capital Resources This section discusses the company's ability to meet financial obligations and fund operations, including cash flow and debt - The company's primary liquidity sources are minimum returns/rents from managed/leased properties and borrowings under its revolving credit facility, which are expected to be sufficient for operating expenses, debt service, and distributions[149] Cash Flow Changes (Three Months Ended March 31, 2019 vs. 2018) | Cash Flow Activity | 2019 (in thousands) | 2018 (in thousands) | Change (YoY) | | :--------------------------------- | :------------------ | :------------------ | :----------- | | Operating activities | $43,865 | $49,685 | ($5,820) | | Investing activities | $102,090 | ($59,709) | $161,799 | | Financing activities | ($123,154) | ($11,107) | ($112,047) | - The shift in investing cash flows to a net positive was primarily due to $308,200 thousand from the sale of 20 travel centers, partially offset by increased real estate acquisitions ($148,011 thousand) and hotel improvements[16][151][157][159] - The company funded $44,693 thousand for capital improvements to hotels in Q1 2019, which generally increases contractual annual minimum returns, and expects to fund an additional $204.2 million in the remaining nine months of 2019 and $47.5 million in 2020[154][155][223] - As of March 31, 2019, the company had $141,000 thousand outstanding and $859,000 thousand available under its $1,000,000 thousand revolving credit facility, with a maturity date of July 15, 2022[161] Off Balance Sheet Arrangements This section confirms the absence of material off-balance sheet arrangements impacting financial position - As of March 31, 2019, the company had no off-balance sheet arrangements that are reasonably likely to have a material effect on its financial condition, results of operations, or liquidity[168] Debt Covenants This section outlines financial restrictions and requirements imposed by debt agreements and compliance status - The company's debt obligations, including its revolving credit facility, term loan, and senior notes, are subject to covenants that restrict debt incurrence and distributions, and require maintaining specific financial ratios[169] - As of March 31, 2019, the company believes it was in compliance with all debt covenants[169] - Debt agreements contain cross-default provisions for other indebtedness exceeding certain thresholds ($20,000 thousand or $50,000 thousand for public debt, $25,000 thousand recourse or $75,000 thousand non-recourse for credit agreement)[171] Management Agreements, Leases and Operating Statistics This section details the operational structure of properties, including management, lease agreements, and key performance metrics - As of March 31, 2019, the company's 327 hotels and 179 travel centers were operated under various management and lease agreements with Marriott, IHG, Sonesta, Wyndham, Hyatt, Radisson, and TA[173] - For the twelve months ended March 31, 2019, three of eight hotel operating agreements (21% of total annual minimum returns/rents) had coverage ratios below 1.0x (ranging from 0.61x to 0.97x)[144] - The 179 travel centers leased to TA generated a combined coverage of 1.83x for the twelve months ended March 31, 2019[145] Hotel Operating Statistics (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 | 2018 | Change | | :-------------------- | :----- | :----- | :------- | | All Hotels Total / Average ADR ($) | $130.03 | $128.90 | 0.9% | | All Hotels Total / Average Occupancy (%) | 67.5% | 70.3% | -2.8 pts | | All Hotels Total / Average RevPAR ($) | $87.77 | $90.62 | -3.1% | - Wyndham's guarantee for its managed hotels was depleted as of March 31, 2019, requiring Wyndham to pay the greater of available cash flows or 85% of minimum returns to avoid default[147][184] - Marriott notified the company that it will not renew the lease for the Kauai Marriott, expiring December 31, 2019, leading to ongoing negotiations for alternatives[148][187] Related Person Transactions This section describes the company's significant business relationships and transactions with its related parties - The company has extensive relationships with RMR LLC (business and property manager), RMR Inc. (parent of RMR LLC), TA (largest tenant and shareholder), Sonesta (hotel manager, partly owned by a Managing Trustee), and AIC (insurance company, jointly owned)[197][199] - These relationships involve shared management, ownership interests, and operational agreements, which are detailed in the notes to financial statements and other SEC filings[197][199] Non-GAAP Measures (FFO and Normalized FFO) This section presents and reconciles non-GAAP financial measures, FFO and Normalized FFO, for operating performance insights - The company presents Funds From Operations (FFO) and Normalized FFO as non-GAAP measures to supplement GAAP net income, believing they provide useful information for comparing operating performance among REITs[200][201] FFO and Normalized FFO (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | | Net income | $225,787 | $80,206 | | Add (Less): Depreciation and amortization expense | $99,365 | $99,617 | | Gain on sale of real estate | ($159,535) | — | | Unrealized gains and losses on equity securities, net | ($20,977) | ($24,955) | | FFO and Normalized FFO | $144,640 | $154,868 | | Basic and diluted FFO and Normalized FFO per common share | $0.88 | $0.94 | - FFO and Normalized FFO decreased by $10,228 thousand (6.6%) year-over-year, primarily due to the exclusion of the gain on sale of real estate and unrealized gains on equity securities, which significantly boosted net income[204] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's market risk exposures, mainly interest rate fluctuations, and its management strategies, including the impact on fixed and floating-rate debt and LIBOR phase-out Fixed Rate Debt This section analyzes fixed-rate debt, outstanding amounts, interest expenses, and sensitivity to market interest rates - As of March 31, 2019, the company had $3,650,000 thousand in fixed-rate senior notes across nine issues, with annual interest expenses totaling $168,000 thousand[206] - A hypothetical one percentage point increase in interest rates would increase annual interest costs by approximately $36,500 thousand if these notes were refinanced[206] - Changes in market interest rates affect the fair value of fixed-rate debt; a one percentage point change would alter fair value by approximately $173,546 thousand[207] Floating Rate Debt This section examines floating-rate debt, its exposure to interest rate fluctuations, and impact on interest expenses - As of March 31, 2019, floating-rate debt included $141,000 thousand outstanding under a $1,000,000 thousand revolving credit facility and a $400,000 thousand term loan, totaling $541,000 thousand[209][210] - Interest on floating-rate debt is based on LIBOR plus a premium, making the company vulnerable to changes in U.S. dollar-based short-term interest rates[209] Impact of 1% Interest Rate Increase on Floating Rate Debt (March 31, 2019) | Scenario | Outstanding Debt (in thousands) | Annual Interest Expense (in thousands) | Annual Per Share Impact ($/share) | | :------------------------------------------------ | :------------------------------ | :----------------------------------- | :-------------------------------- | | Current (as of March 31, 2019) | $541,000 | $19,151 | $0.12 | | One percentage point increase | $541,000 | $24,561 | $0.15 | | Fully drawn on revolving credit facility (total $1,400,000) | $1,400,000 | $48,440 | $0.29 | | Fully drawn + one percentage point increase | $1,400,000 | $62,440 | $0.38 | LIBOR Phase Out This section addresses the anticipated discontinuation of LIBOR and its potential implications for debt agreements - LIBOR is expected to be phased out in 2021, which may require revisions to the interest rate determination under the company's credit facility and term loan[214] - The company expects the new interest rate standard to approximate existing LIBOR calculations but cannot be certain of the exact impact or the replacement standard[214] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls, absence of material changes to internal controls, and provides warnings about forward-looking statements and limited liability Disclosure Controls and Internal Control Over Financial Reporting This section assesses the effectiveness of the company's controls for financial reporting and disclosure - Management, under the supervision of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[216] - There have been no material changes to the company's internal control over financial reporting during the quarter ended March 31, 2019[217] Warning Concerning Forward-Looking Statements This section cautions readers about forward-looking statements and outlines risks that could cause actual results to differ - The report contains forward-looking statements regarding business aspects such as managers'/tenants' payment abilities, acquisitions, distributions, debt/equity capital, property improvements, and related party benefits[219][220] - Actual results may differ materially due to known and unknown risks, including economic conditions, competition, compliance with laws, REIT qualification, acts of terrorism, and conflicts of interest with related parties[220][223] - Specific risks highlighted include potential inability of managers/tenants to pay, limitations of security deposits/guarantees, costs and disruptions from hotel renovations, and the impact of declining economic activity on hotel and travel center performance[223][224][225] Statement Concerning Limited Liability This section clarifies that trustees, officers, shareholders, employees, and agents are not personally liable for company obligations - The company's Declaration of Trust stipulates that no trustee, officer, shareholder, employee, or agent shall be held personally liable for any obligation or claim against Hospitality Properties Trust; all persons dealing with the Trust must look solely to its assets[231] PART II Other Information This section provides additional disclosures not covered in the financial information, including risk factors and exhibits Item 1A. Risk Factors This section confirms no material changes to the risk factors previously disclosed in the company's 2018 Annual Report - No material changes to risk factors have occurred since the 2018 Annual Report[233] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, indentures, and certifications - The exhibits include the Amended and Restated Declaration of Trust, Amended and Restated Bylaws, various Supplemental Indentures for Senior Notes, and Rule 13a-14(a) and Section 1350 Certifications[234] - XBRL formatted financial statements (Balance Sheets, Comprehensive Income, Shareholders' Equity, Cash Flows, and related notes) are also filed as Exhibit 101.1[236] Signatures This section contains the required signatures of the company's President, CEO, CFO, and Treasurer, certifying the report's filing - The report is signed by John G. Murray, President and Chief Executive Officer, and Brian E. Donley, Chief Financial Officer and Treasurer, on May 10, 2019[239]