UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-11527 HOSPITALITY PROPERTIES TRUST Maryland 04-3262075 (State of Incorporation) (IRS Employer Identification No.) 400 Centre Street, Newton, Massachusetts 02458 617-964-8389 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Shares outstanding Class at November 8, 2001 - ---------------------------------------- ------------------- Common shares of beneficial interest, $0.01 par value per share 62,515,940
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST FORM 10-Q September 30, 2001 INDEX Page <S> <C> <C> PART I Financial Information (Unaudited) Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 2001 and December 31, 2000.................................................. 3 Consolidated Statements of Income - Three and Nine Months Ended September 30, 2001 and 2000........................................ 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000.................................. 5 Notes to Condensed Consolidated Financial Statements................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 18 Certain Important Factors............................................ 19 PART II Other Information Item 6. Exhibits and Reports on Form 8-K..................................... 20 Signature................................................................ 21 </TABLE> 2
Item 1. Financial Statements <TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) September 30, December 31, 2001 2000 -------------- -------------- (unaudited) <S> <C> <C> ASSETS Real estate properties, at cost $ 2,628,838 $ 2,429,421 Accumulated depreciation (339,959) (271,934) ----------- ----------- 2,288,879 2,157,487 Cash and cash equivalents 24,946 24,601 Restricted cash (FF&E reserve) 37,239 27,306 Other assets, net 8,693 11,515 ----------- ----------- $ 2,359,757 $ 2,220,909 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Senior notes, net of discount $ 464,773 $ 464,748 Revolving credit facility -- -- Security and other deposits 263,983 257,377 Other liabilities 17,480 15,844 Shareholders' equity: Series A preferred shares; 9 1/2% cumulative redeemable at $25/share, no par value; 3,000,000 shares issued and outstanding 72,207 72,207 Common shares of beneficial interest; $0.01 par value, 62,515,940 and 56,472,512 issued and outstanding, respectively 625 565 Additional paid-in capital 1,667,256 1,506,976 Cumulative net income 536,497 441,707 Cumulative preferred distributions (17,575) (12,231) Cumulative common distributions (645,489) (526,284) ----------- ----------- Total shareholders' equity 1,613,521 1,482,940 ----------- ----------- $ 2,359,757 $ 2,220,909 =========== =========== </TABLE> The accompanying notes are an integral part of thesefinancial statements. 3
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts, unaudited) Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- --------------------------------- 2001 2000 2001 2000 --------------- -------------- -------------- --------------- <S> <C> <C> <C> <C> Revenues: Rental income $ 58,979 $ 58,658 $178,495 $169,968 Hotel operating revenues 17,861 -- 20,644 -- FF&E reserve income 6,126 6,724 19,680 19,290 Interest income 222 442 681 2,382 -------- -------- -------- -------- Total revenues 83,188 65,824 219,500 191,640 -------- -------- -------- -------- Expenses: Hotel operating expenses 12,074 -- 13,929 -- Interest (including amortization of deferred financing costs of $605, $521, $1,812, and $1,545, respectively) 10,542 9,891 31,248 27,700 Depreciation and amortization 23,396 21,639 68,025 62,508 General and administrative 3,902 3,854 11,508 11,153 -------- -------- -------- -------- Total expenses 49,914 35,384 124,710 101,361 -------- -------- -------- -------- Net income 33,274 30,440 94,790 90,279 Preferred distributions 1,781 1,781 5,344 5,344 -------- -------- -------- -------- Net income available for common shareholders $ 31,493 $ 28,659 $ 89,446 $ 84,935 ======== ======== ======== ======== Weighted average common shares outstanding 60,344 56,469 57,796 56,464 ======== ======== ======== ======== Basic and diluted earnings per common share: Net income $ 0.55 $ 0.54 $ 1.64 $ 1.60 ======== ======== ======== ======== Net income available for common shareholders $ 0.52 $ 0.51 $ 1.55 $ 1.50 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements. 4
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Nine Months Ended September 30, ------------------------------------- 2001 2000 ---------------- --------------- <S> <C> <C> Cash flows from operating activities: Net income $ 94,790 $ 90,279 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 68,025 62,508 Amortization of deferred financing costs as interest 1,812 1,545 FF&E reserve income and deposits (20,698) (19,290) Deferred percentage rent 3,413 4,186 Net change in assets and liabilities 689 (478) --------- --------- Cash provided by operating activities 148,031 138,750 --------- --------- Cash flows from investing activities: Real estate acquisitions (188,652) (131,813) Increase in security and other deposits 6,606 16,410 --------- --------- Cash used in investing activities (182,046) (115,403) --------- --------- Cash flows from financing activities: Proceeds of issuance of common shares, net 159,310 -- Distributions to common shareholders (119,205) (116,873) Distributions to preferred shareholders (5,344) (5,344) Draws on revolving credit facility 150,000 42,000 Repayments of revolving credit facility (150,000) (42,000) Debt issuance, net of discount -- 49,938 Other (401) (375) --------- --------- Cash provided by (used in) financing activities 34,360 (72,654) --------- --------- Increase (decrease) in cash and cash equivalents 345 (49,307) Cash and cash equivalents at beginning of period 24,601 73,554 --------- --------- Cash and cash equivalents at end of period $ 24,946 $ 24,247 ========= ========= Supplemental cash flow information: Cash paid for interest $ 33,229 $ 27,826 Non-cash investing and financing activities: Property managers' deposits in FF&E reserve 19,122 17,060 Purchases of fixed assets with FF&E reserve (10,933) (19,478) </TABLE> The accompanying notes are an integral part of these financial statements. 5
HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements of Hospitality Properties Trust and its subsidiaries have been prepared without audit. Certain information and footnote disclosures required by generally accepted accounting principles for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2000. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances between Hospitality Properties Trust and its subsidiaries have been eliminated. Our operating results for interim periods and those of our tenants are not necessarily indicative of the results that may be expected for the full year. Minimum rental income, interest income and FF&E reserve income are recognized when earned under the related lease arrangements. The Securities and Exchange Commission Staff Accounting Bulletin No. 101 ("SAB 101") generally requires us to recognize percentage rental income received for the first, second and third quarters in the fourth quarter. Percentage rent deferred for the three months ended September 30, 2001 and 2000, was $430 and $1,416, respectively, and for the nine months ended September 30, 2001 and 2000, was $3,413 and $4,186, respectively. As described in Note 4, beginning June 15, 2001, some hotels which we own are leased to a subsidiary of ours and managed under a long-term management arrangement with Marriott International, Inc. ("Marriott"). The hotel operating revenues, consisting primarily of room sales and sales of food, beverages and telephone services are recognized for these hotels when earned. Note 2. Shareholders' Equity In August 2001 we paid a $0.71 per share distribution to common shareholders for the quarter ended June 30, 2001. On October 3, 2001, our Trustees declared a distribution of $0.71 per share to be paid to common shareholders of record on October 25, 2001. This amount will be distributed on or about November 21, 2001. On September 28, 2001, we paid a $0.59375 per share distribution to preferred shareholders. We do not present diluted earnings per share because we have no dilutive instruments. In August 2001, we sold 6,000,000 common shares, in a public offering raising gross proceeds of $168,301 ($28.05 per share), and net proceeds after expenses of $159,310. Note 3. Indebtedness During the quarter ended September 30, 2001, we paid all outstanding amounts on our revolving credit facility primarily with the proceeds of the equity sale described in Note 2. As of September 30, 2001, we had zero outstanding and $300,000 available on our revolving credit facility for acquisitions and for general business purposes. 6
HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) Note 4. Real Estate Properties During the nine months ended September 30, 2001, we purchased eight hotels and funded improvements at certain hotels for $188,652 using cash on hand, proceeds from our equity offering and borrowings under our revolving credit facility. Prior to August 10, 2001, we owned 34 hotels leased to Candlewood Hotel Company ("Candlewood") under two separate leases which each extended to 2011. On August 10, 2001, we purchased two additional hotels from Candlewood for $28,850, and entered a single combined lease for all 36 properties which we own and lease to Candlewood. The terms of the new lease are substantially similar to the old leases, except that the term has been extended five years to 2016. On June 15, 2001, we purchased four hotels from Marriott for $101,500. These four hotels, together with 31 hotels we previously purchased will be leased to our 100% owned taxable REIT subsidiary ("TRS"). Marriott will continue to manage all 35 of these hotels under an arrangement which continues to 2019. From time to time over the next three years hotels will cease to be leased to a subsidiary of Marriott and will begin to be leased to our TRS. The Marriott lease for ten of the 35 hotels ceased on June 15, 2001, and for six additional hotels on September 7, 2001. Until the new arrangement is effective for all 35 hotels, all of Marriott's obligations to us under its leases and the new management arrangement are subject to cross default and cross collateralization of existing security features. As hotels become subject to the new management arrangement, we begin to report the hotel operating revenues and hotel operating expenses in our consolidated statement of income, and the rental income which we previously received from Marriott will decline. The substitute rent which we receive from our subsidiary tenant will not be reported on our consolidated financial statements, but the yield on our investment in the managed hotels will be the net of hotel operating revenues less hotel operating expenses. 7
HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) Note 5. Significant Tenant At September 30, 2001, HMH HPT Courtyard LLC, a 100% owned special purpose subsidiary of Host Marriott Corporation ("Host") is the lessee of 53 Courtyard by Marriott(R) properties which we own and which represent 20% of our investments, at cost. The following results of operations for the thirty-six weeks ended September 7, 2001, and September 8, 2000, and summarized balance sheet data of HMH HPT Courtyard LLC are provided by the lessee's management. <TABLE> <CAPTION> HMH HPT Courtyard LLC (a subsidiary of Host Marriott Corporation) Thirty-Six Weeks Ended Thirty-Six Weeks Ended September 7, 2001 September 8, 2000 (unaudited) (unaudited) ---------------------- ----------------------- <S> <C> <C> Revenues: Rental income1 .............................. $ 34,995 $ 35,068 Interest income ............................. 269 417 Amortization of deferred gain ............... 1,992 1,992 Other income ................................ -- 31 -------- -------- Total revenues ........................... 37,256 37,508 -------- -------- Expenses: Base and percentage rent expense ............ 37,441 38,486 Corporate expenses .......................... 1,388 927 Other expenses .............................. 117 64 -------- -------- Total expenses ........................... 38,946 39,477 -------- -------- Income (loss) before taxes ............... (1,690) (1,969) Provision for income taxes ............... -- -- -------- -------- Net (loss) income ........................ $ (1,690) $ (1,969) ======== ======== September 7, 2001 (unaudited) December 31, 2000 ----------------- ------------------- Assets..................................... $ 68,734 $ 68,120 Liabilities................................ 42,444 40,140 Equity..................................... 26,290 27,980 <FN> 1 Percentage rental revenue of $7,358 and $8,387 for the thirty-six weeks ended September 7, 2001, and September 8, 2000, respectively, was deferred in accordance with SAB 101 and is included as deferred rent in liabilities on the balance sheet. Percentage rent will be recognized as income during the year once specified hotel sales thresholds are achieved. </FN> </TABLE> 8
HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) At September 30, 2001, CCMH Courtyard I LLC, a 100% owned special purpose subsidiary of Crestline Capital Corporation ("Crestline") is the sublessee of the 53 Courtyard by Marriott(R) properties discussed above. The following results of operations for the thirty-six weeks ended September 7, 2001, and September 8, 2000, and summarized balance sheet data of CCMH Courtyard I LLC are provided by the sublessee's management. <TABLE> <CAPTION> CCMH Courtyard I LLC (a subsidiary of Crestline Capital Corporation) Thirty-Six Weeks Ended Thirty-Six Weeks Ended September 7, 2001 September 8, 2000 (unaudited) (unaudited) ---------------------- ----------------------- <S> <C> <C> Revenues: Hotels: Rooms .................................... $ 153,213 $ 154,732 Food and beverage ........................ 10,169 10,672 Other .................................... 4,865 5,756 --------- --------- Total hotel revenues .............. 168,247 171,160 --------- --------- Operating costs and expenses: Hotels: Property-level costs and expenses: Rooms ................................ 32,853 33,781 Food and beverage .................... 8,984 9,585 Other ................................ 56,483 55,772 Other operating costs and expenses: System management fees ............... 5,047 5,135 Other management fees ................ 16,334 16,966 Lease expense ........................ 43,158 44,411 --------- --------- Total hotel expenses .............. 162,859 165,650 --------- --------- Operating profit .................................. 5,388 5,510 Corporate expenses ................................ (213) (217) Interest expense .................................. (181) (196) Interest income ................................... 172 120 --------- --------- Income before income taxes ........................ 5,166 5,217 Income taxes ...................................... (2,067) (2,139) --------- --------- Net income ........................................ $ 3,099 $ 3,078 ========= ========= September 7, 2001 (unaudited) December 31, 2000 ----------------- ----------------- Assets........................................... $ 37,748 $ 31,299 Liabilities...................................... 10,394 9,111 Equity........................................... 27,354 22,188 </TABLE> 9
HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) Operating results for these 53 Courtyard by Marriott(R) properties derived from data provided by management of HMH HPT Courtyard LLC (our tenant) and CCMH Courtyard I LLC (Host's subtenant) are detailed below and present revenues in excess of those expenses which are not subordinate to our rent: <TABLE> <CAPTION> Thirty-Six Weeks Ended Thirty-Six Weeks Ended September 7, 2001 September 8, 2000 (unaudited) (unaudited) ---------------------- ----------------------- <S> <C> <C> Total hotel sales: Rooms ......................................... $153,213 $154,732 Food and beverage ............................. 10,169 10,672 Other ......................................... 4,865 5,756 -------- -------- Total hotel sales ........................... 168,247 171,160 -------- -------- Expenses: Rooms ......................................... 32,853 33,781 Food and beverage ............................. 8,984 9,585 Other operating departments ................... 1,034 1,233 General and administrative .................... 16,485 17,186 Utilities ..................................... 6,344 5,513 Repairs, maintenance and accidents ............ 6,410 6,297 Marketing and sales ........................... 5,383 5,123 Chain services ................................ 3,533 3,800 FF&E escrow deposits .......................... 8,412 8,558 Real estate tax ............................... 5,943 5,563 Land rent ..................................... 1,395 1,465 System fees ................................... 5,047 5,135 Other costs ................................... 1,544 1,034 -------- -------- Total departmental expenses ................. 103,367 104,273 -------- -------- Hotel revenues in excess of property-level costs and expenses ....................................... $ 64,880 $ 66,887 ======== ======== </TABLE> Hotel revenues in excess of property-level costs and expenses, shown above, represent hotel-level cash flows after costs which are paid in priority to minimum rent due to us for this lease of $35,477 and $35,248 in the 2001 and 2000 periods, respectively. 10
HOSPITALITY PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations (dollar amounts in thousands, except per share amounts) This discussion includes references to Cash Available for Distribution ("CAD"). We compute CAD as net income available for common shareholders plus depreciation and amortization expense, plus non-cash expenses (including only amortization of deferred financing costs and administrative expenses to be settled in our common shares), minus those deposits made into FF&E Escrow accounts which are owned by us but which are restricted to use for improvements at our properties. In calculating CAD, we also add percentage rents deferred pursuant to SAB 101 described in Note 1 to our financial statements. Our method of calculation of CAD may not be comparable to CAD which may be reported by other REITs that define this term differently. We consider CAD to be an appropriate measure of performance for an equity REIT, along with cash flow from operating activities, investing activities and financing activities, because it provides investors with an indication of an equity REIT's operating performance and its ability to incur and service debt, make capital expenditures, pay distributions and fund other cash needs. Our CAD is an important factor considered by our Board of Trustees in determining the amount of our distributions to shareholders. CAD does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income or cash flow from operating activities as measures of financial performance or liquidity. Three Months Ended September 30, 2001 versus 2000 Total revenues for the 2001 third quarter were $83,188, a 26% increase over revenues for the 2000 third quarter. This increase is primarily due to our acquisition of eight hotels since the end of the second quarter 2000 and our new management arrangement with Marriott, discussed in Note 4 to the financial statements, which requires our recognition of total hotel sales as hotel operating revenue. FF&E reserve income represents amounts paid by our tenants into restricted accounts owned by us, the purpose of which is to accumulate funds for future capital expenditures. The terms of our leases require these amounts to be calculated as a percentage of total hotel sales at our properties. The FF&E reserve income for the 2001 third quarter was $6,126, an 8.9% decrease over FF&E reserve income of $6,724 for the 2000 third quarter. This decrease is due to the commencement of our new management arrangement with Marriott discussed in Note 4 to the financial statements, which requires us to fund the reserves from our hotel operating revenues and reduced levels of hotel sales offset somewhat by the impact of acquisitions discussed above. Interest income for the 2001 third quarter was $222, a 49.8% decrease from interest income of $442 for the 2000 third quarter. This decrease was due to a lower average cash balance and a lower average interest rate in the 2001 period. Interest expense for the 2001 third quarter was $10,542, a 6.6% increase over interest expense of $9,891 for the 2000 third quarter. The increase was primarily due to average borrowings which were higher during the 2001 period, offset somewhat by lower weighted average interest rates. Depreciation and amortization expense for the 2001 third quarter was $23,396, an 8.1% increase over depreciation and amortization expense of $21,639 for the 2000 third quarter. This increase was due principally to the full quarter's impact of the depreciation of six hotels acquired subsequent to second quarter 2000 plus two hotels purchased during the 2001 third quarter and the partial impact of the purchase of depreciable assets with funds from FF&E reserve restricted cash accounts owned by us during 2000 and 2001. General and administrative expense for the 2001 third quarter was $3,902, a 1.2% increase over general and administrative expense of $3,854 in the 2000 third quarter. This increase is due principally to the impact of additional hotels purchased in 2000 and 2001. As described above in Note 4 to our financial statements, we began leasing 10 hotels to one of our 100% owned subsidiaries on June 15, 2001, and an additional six hotels on September 7, 2001. During the 2001 third quarter, operating expenses realized from the hotels under this agreement were $12,074. There were no comparable hotel operating expenses in the year 2000 period. Net income for the 2001 third quarter was $33,274, a 9.3% increase over net income of $30,440 for the 2000 third quarter. The increase was primarily due to higher rental income, and hotel operating revenues in excess of hotel 11
HOSPITALITY PROPERTIES TRUST operating expenses, offset somewhat by a decrease in interest income and increases in interest, depreciation and general and administrative expenses. Net income available for common shareholders for the 2001 third quarter was $31,493, or $0.52 per share, a 9.9% increase, or 2.0% on a per share basis, over net income available for common shareholders of $28,659, or $0.51 per share, for the 2000 third quarter. This change resulted from the investment and operating activity discussed above. The per share increase was also diluted somewhat by the sale of 6,000,000 of our common shares completed in August 2001. Cash Available for Distribution, or CAD, for the third quarters of 2001 and 2000 is derived as follows: <TABLE> <CAPTION> 2001 2000 ------------ ------------ <S> <C> <C> Net income available for common shareholders $ 31,493 $ 28,659 Add: Depreciation and amortization 23,396 21,639 Deferred percentage rents 430 1,416 Non-cash expenses, primarily amortization of deferred financing costs as interest 998 859 Less: FF&E reserves (1) 7,008 6,724 -------- -------- Cash Available for Distribution $ 49,309 $ 45,849 ======== ======== <FN> (1) All of our leases require that our tenants make periodic payments into FF&E reserve escrow accounts for the purpose of funding expected capital expenditures at our hotels. Our net income includes $7,008 and $6,724 for the 2001 and 2000 third quarters, respectively, of deposits into FF&E reserve escrow accounts owned by us, which are removed here because these amounts are not available to us for distributions to shareholders. For the 2001 period, the amount shown here includes $882 of hotel operating revenues which we have escrowed for routine capital improvements for the 16 hotels discussed in Note 4 to our financial statements. Some of our leases provide that FF&E Reserve escrow accounts are owned by our tenants during the lease terms while we have security and remainder interests in the escrow accounts and in property purchased with funding from those accounts. Deposits into FF&E reserve accounts owned by our tenants during the 2001 and 2000 periods, totaled $3,552 and $3,958, respectively, and are not removed here because they are not included in our income. </FN> </TABLE> CAD for the 2001 third quarter was $49,309, a 7.5% increase over CAD of $45,849 for the 2000 third quarter. This increase was due primarily to the impact our acquisition of eight hotels subsequent to the 2000 second quarter offset somewhat by the decrease in interest income discussed above, a decrease in percentage rents received in cash, and by the increases in interest and general and administrative expenses discussed above. Nine Months Ended September 30, 2001 versus 2000 Total revenues for the first nine months of 2001 were $219,500, a 14.5% increase over revenues of $191,640 for the 2000 period. This increase was due primarily to the full period's impact of 12 hotels purchased during 2000 and the partial impact of hotels purchased in 2001, and the new management agreement with Marriott as discussed in Note 4 to the financial statements. FF&E reserve income for the first nine months of 2001 was $19,680, a 2.0% increase over FF&E reserve income of $19,290 for the 2000 period. This increase is due to the impact of the acquisitions discussed above and was offset by the combination of the commencement of our new management arrangement with Marriott discussed in Note 4 to the financial statements, which requires us to fund the reserves from our hotel operating revenues and reduced levels of hotel sales in the 2001 period. Interest income for the first nine months of 2001 was $681, a 71.4% decrease from interest income of $2,382 for the 2000 period. This decrease was due to a lower average cash balance and a lower average interest rate in the 2001 period. Interest expense for the first nine months of 2001 was $31,248, a 12.8% increase over interest expense of $27,700 for the first nine months of 2000. The increase was due to higher average borrowings during the 2001 period resulting primarily from the issuance of $50,000 in senior, fixed rate notes in July 2000, offset somewhat by lower interest rates on our revolving credit facility. Depreciation and amortization expense for the first nine months of 2001 was $68,025, 12
HOSPITALITY PROPERTIES TRUST an 8.8% increase over depreciation and amortization expense of $62,508 for the first nine months of 2000. This increase was due principally to the full period's impact of the depreciation of 12 hotels acquired during 2000 and the partial impact of eight hotels acquired during 2001 in addition to the purchase of depreciable assets with funds from FF&E reserve restricted cash accounts owned by us during 2000 and 2001. General and administrative expense for the first nine months of 2001 was $11,508, a 3.2% increase over general and administrative expense of $11,153 for the first nine months of 2000. This increase is due principally to the impact of additional hotels purchased in 2000 and 2001. As discussed above we began leasing 16 hotels to a 100% owned subsidiary of our in June and September, 2001. During the nine month period ended September 30, 2001, we incurred hotel operating expenses of $13,929. There were no hotels managed for our account in 2000, and, accordingly, there are no comparable results. Net income for the first nine months of 2001 was $94,790, a 5.0% increase over net income of $90,279 for the first nine months of 2000. The increase was primarily due to higher rental income, and hotel operating revenues in excess of hotel operating expenses, the effects of which were offset by increases in depreciation, interest and general and administrative expenses as well as reduced interest income. These changes were primarily the result of additional hotels purchased during 2001 and 2000. Net income available for common shareholders for the first nine months of 2001 was $89,446, a 5.3% increase over net income available for common shareholders of $84,935 for the 2000 period. This increase resulted from the factors discussed above. On a per share basis, net income available for common shareholders was $1.55, which is an increase of 2.7% from the 2000 period of $1.50. Cash Available for Distribution, or CAD, for the first nine months of 2001 and 2000 is derived as follows: <TABLE> <CAPTION> 2001 2000 ------------- ------------- <S> <C> <C> Net income available for common shareholders $ 89,446 $ 84,935 Add: Depreciation and amortization 68,025 62,508 Deferred percentage rents 3,413 4,186 Non-cash expenses, primarily amortization of deferred financing costs as interest 2,894 2,567 Less: FF&E reserves (1) 20,698 19,290 --------- --------- Cash Available for Distribution $ 143,080 $ 134,906 ========= ========= <FN> (1) All of our leases require that our tenants make periodic payments into FF&E reserve escrow accounts for the purpose of funding expected capital expenditures at our hotels. Our net income includes $20,698 and $19,290 for the first nine months of 2001 and 2000, respectively, of deposits into FF&E reserve escrow accounts owned by us, which are removed here because these amounts are not available to us for distributions to shareholders. For the 2001 period, the amount shown here includes $1,018 of hotel operating revenues which we have escrowed for routine capital improvements for the hotels discussed in Note 4 to our financial statements. Some of our leases provide that FF&E Reserve escrow accounts are owned by our tenants during the lease terms while we have security and remainder interests in the escrow accounts and in property purchased with funding from those accounts. Deposits into FF&E reserve accounts owned by our tenants during the 2001 and 2000 periods totaled $11,378 and $11,462, respectively, and are not removed here because they are not included in our income. </FN> </TABLE> CAD for the first nine months of 2001 was $143,080, a 6.1% increase over CAD of $134,906 for the 2000 period. This increase was due primarily to the impact of our acquisition of 20 hotels in 2000 and 2001, offset somewhat by the decreases in interest income discussed above and percentage rents received in cash and the increases in interest and general and administrative expense discussed above. 13
HOSPITALITY PROPERTIES TRUST Liquidity and Capital Resources (dollar amounts in thousands, except per share amounts) Our total assets increased to $2,359,757 as of September 30, 2001, from $2,220,909 as of December 31, 2000. The increase resulted primarily from additional investments in hotels of $188,652 offset by depreciation expense. At September 30, 2001, we had $24,946 of cash and cash equivalents and zero outstanding on our $300,000 revolving credit facility. In August 2001, we sold 6,000,000 common shares, raising gross proceeds of $168,301 ($28.05 per share). Net proceeds (after underwriting costs and other offering expenses) of approximately $159,310 were used to repay all outstanding amounts under our revolving credit facility and for general business purposes. On August 10, 2001, we purchased two hotels for $28,850. This investment was funded with cash on hand. From time to time, including currently, we consider entering or pursuing transactions which would provide equity or debt capital of various forms and on various terms. On January 15, 1998, our shelf registration statement for up to $2,000,000 of securities, including debt securities, was declared effective by the Securities and Exchange Commission. An effective shelf registration statement enables us to issue specific securities to the public on an expedited basis by filing a prospectus supplement with the Securities and Exchange Commission. We currently have $793,577 available under our shelf registration statement. We believe that the capital available to us from time to time will be sufficient to enable the execution of our business plans. All of our hotels are leased to or operated by third parties. All costs of operating and maintaining our hotels are paid by these third parties for their own account or as agent for us. Five to six percent of total sales at all of our hotels are escrowed as a reserve for future renovations and refurbishment ("FF&E Reserve"). As of September 30, 2001, there was approximately $52,160 on deposit in these refurbishment escrow accounts. During the nine months ended September 30, 2001, $32,245 was deposited into these accounts and $23,787 was spent to renovate and refurbish our properties. Certain of these accounts are held and owned by tenants and not reflected on our balance sheet. To maintain our status as a real estate investment trust ("REIT") under the Internal Revenue Code, we must meet certain requirements including the distribution of a substantial portion of our taxable income to our shareholders. As a REIT, we do not expect to pay federal income taxes on the majority of our income. In 1999 federal legislation known as the REIT Modernization Act ("RMA") was enacted and became effective on January 1, 2001. The RMA, among other things, allows a REIT to lease hotels to a so-called "taxable REIT subsidiary" if the hotel is managed by an independent third party. As described in Note 4 to our financial statements, we entered our first transaction using a taxable REIT subsidiary on June 15, 2001. The income realized by our taxable REIT subsidiary in excess of the rent paid to us by our subsidiary will be subject to income tax at customary corporate rates. As and if the financial performance of the hotels operated for the account of our taxable REIT subsidiary improves, these taxes may become material, but the anticipated taxes are not material to our consolidated financial results at this time. A distribution of $0.59375 per preferred share for the third quarter 2001 was paid in September 2001. Common share distributions of $0.71 per common share declared with respect to the second quarter 2001 results were paid in August 2001. Common share distributions of $0.71 per common share declared with respect to third quarter 2001 results will be paid to shareholders in November 2001. Funding for hotel operating expenses is provided by hotel operating revenues. Funding for other current expenses and for distributions is provided by our operations, primarily rents derived from leasing and the excess of hotel operating revenues over hotel operating expenses of our hotels. Events of September 11 Since the terrorist attacks on the United States on September 11, 2001, the U.S. hotel industry has experienced significant declines versus the 2000 period in occupancy, revenues and profitability. These declines primarily arise from reduced travel. Most of our hotel operators have reported declines of this nature at our hotels. Our leases and operating agreements contain features such as security deposits and guarantees intended to require payment of our minimum returns to us. The operation of various security features to provide uninterrupted payments to us is not assured, particularly if travel patterns continue at depressed levels for extended periods. If our tenants, hotel managers or guarantors default in their obligations to us, our revenues will decline. 14
HOSPITALITY PROPERTIES TRUST Seasonality Our hotels have historically experienced seasonal variations typical of the hotel industry with higher revenues in the second and third quarters of calendar years compared with the first and fourth quarters. This seasonality is not expected to cause fluctuations in our rental income because we believe that the revenues generated by our hotels will be sufficient for the tenants to pay our rents on a regular basis notwithstanding seasonal variations. Seasonality may effect our hotel operating revenues but, we do not expect seasonal variations to have a material impact upon our financial results of operations. Certain Considerations The discussion and analysis of our financial condition and results of operations requires us to make estimates and assumptions and contains statements of our beliefs, intentions or expectations concerning projections, plans, future events and performance. Some of these statements are forward looking statements within the meaning of the Private Securities Reform Litigation Act of 1995. The estimates, assumptions and statements, such as those relating to our ability to expand our portfolio, performance of our assets and the hotel industry in general, the ability of our operators to pay rent, remain competitive, maintain or improve hotel operating revenues or results, our ability to make distributions, our level of taxation related to the activities of our taxable REIT subsidiary, our tax status as a REIT and our ability to appropriately balance the use of debt and equity and to access capital markets, depend upon various factors over which we and our lessees have or may have limited or no control. Those factors include, without limitation, the status of the economy, capital market conditions (including prevailing interest rates), compliance with the changes to regulations within the hospitality industry, competition, changes in guest preferences, brand recognition, changes to federal, state and local laws and other factors. We cannot predict the impact of these factors. However, these factors could cause our actual results for subsequent periods to be different from those stated, estimated or assumed in this discussion and analysis of our financial condition and results of operations. We believe that our estimates and assumptions are reasonable at this time. Properties As of September 30, 2001, we owned 230 hotels which are grouped into ten combinations and leased to or managed by separate affiliates of publicly owned companies: Marriott, Host, Crestline, Wyndham International, Inc. ("Wyndham"), Security Capital Group, Inc. ("Security Capital"), Candlewood and Prime Hospitality Corp. ("Prime"). The tables on the following pages summarize the key terms of our leases and other operating agreements at September 30, 2001, and operating statistics of our tenants' operations of our hotels for the first nine months of 2001 and 2000: 15
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST Hotel Brand Courtyard by Residence Inn Residence Inn by Marriott(R)/Residence Wyndham(R) Marriott(R) by Marriott(R) Marriott(R)/Courtyard Inn by Marriott(R)/ by Marriott(R)/ Courtyard by TownePlace Suites Marriott(R)/ by Marriott(R)/ TownePlace Suites SpringHill Suites by Marriott(R)/ by Marriott(R) SpringHill Suites by Marriott(R)(1) - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Number of Hotels 53 18 19 35 12 Number of Rooms 7,610 2,178 2,756 5,382 2,321 Number of States 24 14 14 15 8 Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Host subleased Host subleased Crestline Marriott / Wyndham to subsidiary of to subsidiary Subsidiary of Crestline of Crestline Hospitality Properties Trust Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Marriott Marriott Marriott Marriott Wyndham Investment at September 30, 2001 (000s) (2) $512,956 $176,882 $274,221 $453,955 $182,570 Deposits (000s) (3) $50,540 $17,220 $28,509 $36,203 $18,325 End of Initial Term 2012 2010 2015 2019 2014 Renewal Options (4) 3 for 12 years 1 for 10 years, 2 for 10 years 2 for 15 years 4 for 12 each 2 for 15 years each each years each each Current Annual Minimum Rent / Return (000s) $51,296 $17,688 $28,509 $48,287 $18,325 Percentage Rent / Return (5) 5.0% 7.5% 7.0% 7.0% 8.0% Year to date September: 2001: Occupancy 76.8% 79.8% 75.8% (6) 76.4% (7) 69.7% ADR $104.03 $106.12 $106.69 (6) $96.20 (7) $93.82 RevPAR $79.90 $84.68 $80.87 (6) $73.49 (7) $65.39 2000: Occupancy 81.3% 85.0% 78.0% (6) 80.0% (7) 73.8% ADR $99.25 $104.21 $101.53 (6) $ 93.63 (7) $92.27 RevPAR $80.69 $88.58 $79.19 (6) $ 74.90 (7) $68.10 - --------------------------------------------------------------------------------------------------------------------------- <FN> (1) At September 30, 2001, 19 of the 35 hotels in this combination are leased to and operated by subsidiaries of Marriott. The remaining 16 hotels are operated by subsidiaries of Marriott under a management contract with our wholly-owned subsidiary tenant. Marriott's obligations under the lease and the management contracts are subject to cross-default provisions and Marriott has provided us with a limited guarantee of its lease and management obligations, including the obligation to pay minimum returns to us. (2) Excludes expenditures made from FF&E Reserves subsequent to our initial purchase. (3) Excludes other deposits totaling approximately $26.6 million retained by us to secure various guarantee obligations to us. (4) Renewal options may be exercised by the tenant / manager for all, but not less than all, of the hotels within a lease pool. (5) Each lease and operating agreement provides for payment to us of a percentage of increases in total hotel sales over base year levels. (6) Includes the 13 hotels in this lease pool which were open for at least one year prior to January 1, 2001. (7) Includes the 32 hotels in this lease pool which were open for at least one year prior to January 1, 2001. </FN> </TABLE> 16
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST Hotel Brand Summerfield AmeriSuites(R) Candlewood Homestead Total / Suites by Suites(R) Studio Suites(R) Range / Wyndham(R) Average - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Number of Hotels 15 24 36 18 230 Number of Rooms 1,822 2,929 4,294 2,399 31,691 Number of States 8 13 23 5 37 Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Prime Candlewood Security Capital Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Prime Candlewood Security Capital Investment at September 30, 2001 (000s) (1) $240,000 $243,350 $289,750 $145,000 $2,518,684 Deposits (000s) (2) $15,000 $25,575 $30,086 $15,960 $237,418 End of Initial Term 2017 2013 2016 2015 2010-2019 (average 14 years) Renewal Options (3) 4 for 12 3 for 15 3 for 15 2 for 15 20 - 48 years years each years each years each years each Current Annual Minimum Rent / Return (000s) $25,000 $25,575 $29,507 $15,960 $260,147 Percentage Rent / Return (4) 7.5% 8.0% 10.0% 10.0% 5% - 10% Year to date September: 2001: Occupancy 78.1% 62.8% 75.1% (5) 77.7% 74.8% (6) ADR $124.99 $73.88 $57.53 (5) $53.78 $90.32 (6) RevPAR $97.62 $46.40 $43.21 (5) $41.79 $67.55 (6) 2000: Occupancy 84.0% 61.8% 79.3% (5) 81.1% 78.3% (6) ADR $127.13 $77.53 $56.31 (5) $50.27 $88.15 (6) RevPAR $106.79 $47.91 $44.65 (5) $40.77 $69.02 (6) - ------------------------------------------------------------------------------------------------------------------------ <FN> (1) Excludes expenditures made from FF&E Reserves subsequent to our initial purchase. (2) Excludes other deposits totaling approximately $26.6 million retained by us to secure various guarantee obligations to us. (3) Renewal options may be exercised by the tenant for all, but not less than all, of the hotels within a lease pool. (4) Each lease provides for payment to us as additional rent of a percentage of increases in total hotel sales over base year levels. (5) Includes the 35 hotels in this lease pool which were open for at least one year prior to January 1, 2001. (6) Includes the 220 hotels which were open for at least one year prior to January 1, 2001. </FN> </TABLE> 17
HOSPITALITY PROPERTIES TRUST Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands) We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates is unchanged since December 31, 2000. Other than as described below we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future. At September 30, 2001, our outstanding debt included four issues of fixed rate, senior unsecured notes as follows: <TABLE> <CAPTION> Interest Rate Total Interest Principal Balance Per Year Maturity Interest Payments Due Expense Per Year - ----------------- -------- -------- --------------------- ---------------- <S> <C> <C> <C> <C> $ 115,000 8.25% 2005 Monthly $ 9,488 150,000 7.00% 2008 Semi-Annually 10,500 150,000 8.50% 2009 Monthly 12,750 50,000 9.125% 2010 Semi-Annually 4,563 - --------- -------- $ 465,000 $ 37,301 ========= ======== </TABLE> No principal repayments are due under these notes until maturity. Because these notes bear interest at fixed rates, changes in market interest rates during the term of this debt will not effect our operating results. If at maturity these notes are refinanced at interest rates which are 10% higher than shown above, our per annum interest cost would increase by approximately $3,730. Changes in the interest rate also affect the fair value of our debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balances outstanding as of September 30, 2001, a hypothetical immediate 10% change in interest rates would change the fair value of our fixed rate debt obligations by approximately $17,396. Each of our fixed rate debt arrangements allows us to make repayments earlier than the stated maturity date. Our $115,000 8.25% notes due 2005 are callable by us at par any time after November 15, 2001. Our $150,000 8.5% notes due 2009 are callable by us at par any time after December 15, 2002. In other cases we are allowed to make prepayments only at a premium to face value. These prepayment rights may afford us the opportunity to mitigate the risk of refinancing at maturity at higher rates by refinancing prior to maturity. Our line of credit bears interest at floating rates and matures in 2002. As of September 30, 2001, we had zero outstanding and the full amount of $300,000 available for drawing under our revolving credit facility. Our revolving credit facility is available to purchase hotels and for general business purposes. Our exposure to fluctuations in interest rates may in the future increase if we incur debt to fund acquisitions or otherwise. A change in interest rates would not affect the value of our floating rate debt obligations but would affect the interest which we must pay on this debt. The interest rate market which has an impact upon us is the U.S. dollar interest rate for corporate obligations, including floating rate LIBOR based obligations and fixed rate obligations. 18
HOSPITALITY PROPERTIES TRUST CERTAIN IMPORTANT FACTORS THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD- LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THOSE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS FORM 10-Q AND INCLUDE STATEMENTS REGARDING OUR INTENT, BELIEF OR EXPECTATION, OR THE INTENT, BELIEF OR EXPECTATION OF OUR TRUSTEES OR OUR OFFICERS WITH RESPECT TO THE DECLARATION, TIMING OR PAYMENT OF DISTRIBUTIONS OR OBLIGATIONS, OUR POLICIES AND PLANS REGARDING OUR TAXATION AND REIT QUALIFICATION, INTEREST RATE RISK MANAGEMENT, HOTEL INVESTMENTS, CAPITAL FINANCE, SEASONALITY, THE IMPACT ON US AND OUR TENANTS REGARDING THE CURRENT DEPRESSED LEVEL OF TRAVEL AND ITS IMPACT ON OUR REVENUES, AND OTHER MATTERS. READERS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. SUCH FACTORS INCLUDE WITHOUT LIMITATION HOTEL ROOM DEMAND, CHANGES IN FINANCING TERMS, OUR ABILITY OR INABILITY TO COMPLETE ACQUISITIONS AND FINANCING TRANSACTIONS, OUR, OUR HOTELS' OR OUR TENANTS, MANAGER'S OR GUARANTORS' RESULTS OF OPERATIONS AND GENERAL CHANGES IN ECONOMIC CONDITIONS. THE INFORMATION CONTAINED IN THIS FORM 10-Q, AND INFORMATION IN OUR ANNUAL REPORT ON FORM 10-K INCLUDING THE INFORMATION UNDER THE HEADINGS "BUSINESS AND PROPERTIES" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES BETWEEN FORWARD-LOOKING STATEMENTS AND ACTUAL FUTURE RESULTS. OUR AMENDED AND RESTATED DECLARATION OF TRUST, DATED AUGUST 21, 1995, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HOSPITALITY PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE TRUST. ALL PERSONS DEALING WITH THE TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. 19
HOSPITALITY PROPERTIES TRUST PART II Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Distributions (b) Reports on Form 8-K On August 1, 2001, the Company filed a current Report on Form 8-K reporting under items 5 and 7 information and exhibits pertaining to the offering of 5,750,000 common shares of beneficial interest at a public offering price of $28.05 per share and related underwriters' overallotment option to purchase additional shares. 20
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOSPITALITY PROPERTIES TRUST /s/ Thomas M. O'Brien Thomas M. O'Brien Treasurer and Chief Financial Officer (authorized officer and principal financial officer) Dated: November 8, 2001 21