UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 1-11527 HOSPITALITY PROPERTIES TRUST (Exact Name of Registrant as Specified in Its Charter) Maryland 04-3262075 (State of Incorporation) (IRS Employer Identification No.) 400 Centre Street, Newton, Massachusetts 02458 (Address of principal executive offices) (Zip code) 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 August 8, 2002 - -------------------------------------- ----------------- Common shares of beneficial interest, $0.01 par value per share 62,547,348
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST FORM 10-Q June 30, 2002 INDEX <S> <C> PART I Financial Information (Unaudited) Page Item 1. Financial Statements Condensed Consolidated Balance Sheet - June 30, 2002 and December 31, 2001.................................................. 3 Consolidated Statement of Income - Three and Six Months Ended June 30, 2002 and 2001............................................. 4 Condensed Consolidated Statement of Cash Flows - Six Months Ended June 30, 2002 and 2001....................................... 5 Notes to Condensed Consolidated Financial Statements................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 20 Certain Important Factors............................................ 21 PART II Other Information Item 2. Changes in Securities and Use of Proceeds............................ 22 Item 4. Submission of Matters to a Vote of Security Holders.................. 22 Item 6. Exhibits and Reports on Form 8-K..................................... 22 Signatures............................................................... 23 </TABLE> 2
PART I Financial Information Item 1. Financial Statements <TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except share and per share amounts) June 30, December 31, 2002 2001 ---------------- --------------- (unaudited) (audited) <S> <C> <C> ASSETS Real estate properties, at cost................................. $ 2,778,761 $ 2,629,153 Accumulated depreciation........................................ (407,320) (363,329) ---------------- --------------- 2,371,441 2,265,824 Cash and cash equivalents....................................... 487 38,962 Restricted cash (FF&E reserve).................................. 45,873 39,913 Other assets, net............................................... 16,075 10,265 ---------------- --------------- $ 2,433,876 $ 2,354,964 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Senior notes, net of discount................................... $ 464,798 $ 464,781 Revolving credit facility....................................... 98,000 -- Security and other deposits..................................... 271,129 263,983 Other liabilities............................................... 17,986 21,681 ---------------- --------------- 851,913 750,445 ---------------- --------------- Shareholders' equity: Series A preferred shares, 9.5% 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, 62,547,348 and 62,515,940 issued and outstanding, respectively.............................................. 625 625 Additional paid-in capital.................................. 1,668,230 1,667,256 Cumulative net income....................................... 642,484 573,663 Cumulative preferred distributions.......................... (22,919) (19,356) Cumulative common distributions............................. (778,664) (689,876) ---------------- --------------- Total shareholders' equity................................ 1,581,963 1,604,519 ---------------- --------------- $ 2,433,876 $ 2,354,964 ================ =============== </TABLE> The accompanying notes are an integral part of these financial statements. 3
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts, unaudited) Three Months Ended June 30, Six Months Ended June 30, --------------------------------- ------------------------------------ 2002 2001 2002 2001 --------------- -------------- --------------- ----------------- <S> <C> <C> <C> <C> Revenues: Rental income........................ $ 62,082 $ 60,114 $ 120,429 $ 119,516 Hotel operating revenues............. 20,310 2,783 38,449 2,783 FF&E reserve income.................. 5,669 7,145 10,935 13,554 Interest income...................... 54 97 236 459 --------------- -------------- --------------- ----------------- Total revenues................... 88,115 70,139 170,049 136,312 --------------- -------------- --------------- ----------------- Expenses: Hotel operating expenses............. 13,229 1,855 24,398 1,855 Interest (including amortization of deferred financing costs of $718, $604, $1,323, and $1,207, respectively)...................... 11,066 10,520 21,113 20,706 Depreciation and amortization........ 24,186 22,491 47,920 44,629 General and administrative........... 4,144 3,845 7,797 7,606 --------------- -------------- --------------- ----------------- Total expenses................... 52,625 38,711 101,228 74,796 --------------- -------------- --------------- ----------------- Net income.............................. 35,490 31,428 68,821 61,516 Preferred distributions................. 1,781 1,781 3,563 3,563 --------------- -------------- --------------- ----------------- Net income available for common shareholders.......................... $ 33,709 $ 29,647 $ 65,258 $ 57,953 =============== ============== =============== ================= Weighted average common shares outstanding........................... 62,538 56,507 62,529 56,501 =============== ============== =============== ================= Basic and diluted earnings per common share: Net income available for common shareholders..................... $ 0.54 $ 0.52 $ 1.04 $ 1.03 =============== ============== =============== ================= </TABLE> The accompanying notes are an integral part of these financial statements. 4
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands, unaudited) Six Months Ended June 30, ---------------------------------------- 2002 2001 ------------------ ------------------ <S> <C> <C> Cash flows from operating activities: Net income............................................................ $ 68,821 $ 61,516 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization..................................... 47,920 44,629 Amortization of deferred financing costs as interest.............. 1,323 1,207 FF&E reserve income and deposits.................................. (12,932) (13,690) Deferred percentage rent.......................................... 1,306 2,983 Net change in assets and liabilities.............................. (5,357) 2,899 ------------------ ------------------ Cash provided by operating activities......................... 101,081 99,544 ------------------ ------------------ Cash flows from investing activities: Real estate acquisitions.............................................. (146,565) (158,925) Increase in security and other deposits............................... 7,146 5,956 ------------------ ------------------ Cash used in investing activities............................. (139,419) (152,969) ------------------ ------------------ Cash flows from financing activities: Distributions to common shareholders................................... (88,788) (79,085) Distributions to preferred shareholders................................ (3,563) (3,563) Draws on revolving credit facility..................................... 133,000 150,000 Repayment of revolving credit facility................................. (35,000) (38,000) Finance costs.......................................................... (5,786) (401) ------------------ ------------------ Cash (used in) provided by financing activities................ (137) 28,951 ------------------ ------------------ Decrease in cash and cash equivalents..................................... (38,475) (24,474) Cash and cash equivalents at beginning of period.......................... 38,962 24,601 ------------------ ------------------ Cash and cash equivalents at end of period................................ $ 487 $ 127 ================== ================== Supplemental cash flow information: Cash paid for interest............................................. $ 19,635 $ 19,294 Non-cash investing and financing activities: Property managers' deposits in FF&E reserve........................ 11,727 12,621 Purchases of fixed assets with FF&E reserve........................ (6,972) (7,413) Real estate acquired in an exchange................................ (28,914) -- Real estate disposed of in an exchange............................. 28,914 -- </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, 2001. 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. We generally recognize percentage rental income received for the first, second and third quarters in the fourth quarter when sales thresholds have been met or exceeded. Percentage rent deferred for the three and six months ended June 30, 2002, was $641 and $1,306, respectively, and for the three and six months ended June 30, 2001, was $1,288 and $2,983, respectively. Some of our hotels are leased to a taxable REIT 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 On May 23, 2002, we paid a $0.71 per share distribution to our common shareholders for the quarter ended March 31, 2002. On July 1, 2002, we declared a distribution of $0.72 per share to be paid to common shareholders of record on July 24, 2002. This distribution will be paid on or about August 22, 2002. On June 28, 2002, we paid a $0.59375 per share distribution to our preferred shareholders. On May 7, 2002, our three independent trustees each were awarded 300 common shares as part of their annual compensation. These shares vest immediately. On June 28, 2002, 8,850 common shares were granted to our officers and employees of our advisor, REIT Management & Research LLC. One-third of these shares vest immediately, and one-third vests on each of the first and second anniversaries of the award. We do not present diluted earnings per share because we have no dilutive instruments. Note 3. Indebtedness Our credit facility matures in June 2005 and may be extended at our option to June 2006 upon our payment of an extension fee. This facility permits borrowing up to $350,000 and includes a feature under which the maximum draw could expand to $700,000, in certain circumstances. Drawings under our credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. Interest on borrowings under the credit facility is payable at a spread above LIBOR. On July 8, 2002, we issued $125,000 of 6.85% senior notes, due July 2012. A portion of the net proceeds of $124,106 were used to repay the then outstanding balance of our revolving credit facility. On July 18, 2002, we prepaid our $115,000 of 8.25% senior notes due November 2005. These notes were prepaid at par with cash on hand and borrowing on our revolving credit facility. In connection with this early repayment, we expect to recognize an extraordinary loss on early extinguishment of debt of $1,600 in the 2002 third quarter related to the write-off of unamortized deferred financing costs. 6
HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) Note 4. Real Estate Properties In April 2002, we purchased 21 hotels for $145,000. These 21 hotels, combined with 36 Candlewood Suites hotels we previously owned, are leased to a subsidiary of Candlewood Hotel Company, Inc. through the end of 2018. During the six months ended June 30, 2002, we funded improvements at certain hotels for $1,560, which led to an increase in the annual minimum rent due to us. In March, April and June 2002, we exercised options to exchange three hotels with one of our tenants. We acquired a hotel in each of Mt. Laurel, NJ, Chantilly, VA, and Utica, MI, in exchange for a hotel in each of Albuquerque, NM, Alpharetta, GA and Las Colinas, TX. These exchange options were exercised at no cost to us. No gain or loss was recognized on these non-monetary exchanges. Note 5. Significant Tenant At June 30, 2002, 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 19% (20% at December 31, 2001) of our investments, at cost. The following results of operations for the twenty-four weeks ended June 14, 2002 and June 15, 2001, and summarized balance sheet data of HMH HPT Courtyard LLC as provided by Host are included here in compliance with applicable accounting and disclosure regulations of the Securities and Exchange Commission. <TABLE> <CAPTION> HMH HPT Courtyard LLC (a subsidiary of Host Marriott Corporation) Twenty-four weeks ended Twenty-four weeks ended June 14, 2002 June 15, 2001 (unaudited) (unaudited) --------------------------- -------------------------- <S> <C> <C> Revenues: Rental income(1).......................... $ 23,204 $ 23,222 Interest income........................... 137 164 Amortization of deferred gain............. 1,328 1,328 --------------------------- -------------------------- Total revenues......................... 24,669 24,714 --------------------------- -------------------------- Expenses: Base and percentage rent expense.......... 24,129 24,986 Corporate expenses........................ 923 926 Other expenses............................ 67 68 --------------------------- -------------------------- Total expenses......................... 25,119 25,980 --------------------------- -------------------------- Income (loss) before taxes.............. (450) (1,266) Provision for income taxes.............. -- -- --------------------------- -------------------------- Net (loss) income....................... $ (450) $ (1,266) =========================== ========================== <CAPTION> June 14, 2002 December 31, 2001 (unaudited) (audited) --------------------------- -------------------------- <S> <C> <C> Assets.................................... $ 67,926 $ 67,224 Liabilities............................... 37,690 36,538 Equity.................................... 30,236 30,686 <FN> (1) Percentage rental revenue of $1,518 and $5,068 for the twenty-four weeks ended June 14, 2002 and June 15, 2001, 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> 7
HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) At June 30, 2002, CCMH Courtyard I LLC, a 100% owned special purpose subsidiary of Barcelo-Crestline Corporation ("Barcelo-Crestline"), is the sublessee of the 53 Courtyard by Marriott(R) properties discussed above. The following results of operations for the twenty-four weeks ended June 14, 2002 and June 15, 2001, and summarized balance sheet data of CCMH Courtyard I LLC, as provided by Barcelo-Crestline, are included here in compliance with applicable accounting and disclosure regulations of the Securities and Exchange Commission. <TABLE> <CAPTION> CCMH Courtyard I LLC (a subsidiary of Barcelo-Crestline) Twenty-four weeks Twenty-four weeks ended ended June 14, 2002 June 15, 2001 (unaudited) (unaudited) ----------------------- ----------------------- <S> <C> <C> Revenues: Hotels: Rooms................................... $ 87,997 $ 102,905 Food and beverage....................... 5,840 6,942 Other................................... 2,190 3,175 ----------------------- ----------------------- Total hotel revenues............. 96,027 113,022 ----------------------- ----------------------- Operating costs and expenses: Hotels: Property-level costs and expenses: Rooms............................... 19,182 22,154 Food and beverage................... 4,698 6,131 Other............................... 33,996 38,343 Other operating costs and expenses: Management fees..................... 10,383 14,682 Lease expense....................... 24,389 28,252 ----------------------- ----------------------- Total hotel expenses............. 92,648 109,562 ----------------------- ----------------------- Operating profit.................... 3,379 3,460 Corporate expenses............................... (167) (148) Interest expense................................. (121) (120) Interest income.................................. 778 146 ----------------------- ----------------------- Income before income taxes....................... 3,869 3,338 Income taxes..................................... (1,509) (1,335) ----------------------- ----------------------- Net income....................................... $ 2,360 $ 2,003 ======================= ======================= <CAPTION> June 14, 2002 December 31, 2001 (unaudited) (audited) ----------------------- ----------------------- <S> <C> <C> Assets........................................... $ 37,281 $ 34,670 Liabilities...................................... 8,814 8,563 Equity........................................... 28,467 26,107 </TABLE> 8
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 Host and Barcelo-Crestline are detailed below: <TABLE> <CAPTION> Twenty-four weeks Twenty-four weeks ended ended June 14, 2002 June 15, 2001 (unaudited) (unaudited) ----------------------- ----------------------- <S> <C> <C> Total hotel sales: Rooms................................... $ 87,997 $ 102,905 Food and beverage....................... 5,840 6,942 Other................................... 2,190 3,175 ----------------------- ----------------------- Total hotel sales....................... 96,027 113,022 ----------------------- ----------------------- Expenses: Rooms................................... 19,182 22,154 Food and beverage....................... 4,698 6,131 Other operating departments............. 765 704 General and administrative.............. 9,937 11,290 Utilities............................... 3,612 4,375 Repairs, maintenance and accidents...... 3,583 4,336 Marketing and sales..................... 3,498 3,611 Chain services.......................... 2,017 2,374 FF&E escrow deposits.................... 4,801 5,651 Real estate tax......................... 4,208 4,240 Land rent............................... 878 979 System fees............................. 2,881 3,391 Other costs............................. 697 783 ----------------------- ----------------------- Total departmental expenses............. 60,757 70,019 ----------------------- ----------------------- Hotel revenues in excess of property-level costs and expenses................................... $ 35,270 $ 43,003 ======================= ======================= </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 $23,694 and $23,643 in the 2002 and 2001 periods, respectively. 9
HOSPITALITY PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview This discussion includes references to cash available for distribution, or 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 as described in Note 1 to our financial statements. Our method of calculating 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 a 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 generally accepted accounting principles and should not be considered as an alternative to net income or cash flow from operating activities as measures of financial performance or liquidity. The following discussion should be read in conjunction with our Annual Report on Form 10-K. Events of September 11, 2001 Since the terrorist attacks on the United States on September 11, 2001, the U.S. hotel industry has experienced significant declines versus the comparable prior year period in occupancy, revenues and profitability. These declines primarily arise from reduced business travel. These declines are in addition to declines which began to affect the hotel industry earlier in 2001 as a result of slowing business activity in the U.S. economy generally. Most of our hotel operators have reported declines, including during the second quarter of 2002, in the operating performance of our hotels versus comparable periods in the prior year. As of June 30, 2002, all of our rent payments are current and none of our tenants or managers have indicated a need for relief under our agreements as a result of these circumstances. As described below, our leases and operating agreements contain security features, such as guarantees, which are intended to protect payment of minimum rents and returns to us in accordance with our leases and agreements regardless of hotel performance. However, the effectiveness 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 payment obligations to us, our revenues will decline. Leases and Operating Agreements All of our 251 hotels are leased to or operated by third parties. Each of our hotels is included in one of nine groups of hotels of between 12 and 57 properties. These groups are each operated under a single or pooled agreement by a third party as tenant or manager for an initial term expiring between 2010 and 2019. The agreements contain renewal options for all, but not less than all, of the related properties, and the renewal terms total 20-48 years. Each agreement requires the third-party lessee or operator to: pay all operating costs associated with the hotels; deposit a percentage of total hotel sales into reserves established for the regular refurbishment of our hotels ("FF&E Reserves"); make payments to us of minimum rents or returns; and make payments to us of additional returns equal to 5%-10% of increases in total hotel sales over sales during a specified base year. Each third party has posted a security or performance deposit with us generally equal to one year's minimum rent or return. Of our 251 hotels, 235 are leased to third parties and 16 are operated by affiliates of Marriott under a long-term management contract which began in 2001. These 16 hotels are leased to a 100% owned taxable REIT subsidiary of ours as allowed by the tax laws applicable to REITs. Of the 16 hotels now operated under this management contract, 12 were previously leased by us to Marriott. Prior to the commencement of this management contract we recognized rental income for these 12 hotels. Subsequent to the commencement of this management contract, hotel operating revenues and expenses from these hotels are reflected in our consolidated financial statements. These 16 hotels are pooled with 19 other hotels which will continue to be leased to Marriott until Marriott elects to operate them under the new management agreement. The operations of all 35 of these hotels are combined for all purposes under our agreement with Marriott to pay combined rents and returns to us. The 19 hotels now leased to Marriott are expected to transfer 10
HOSPITALITY PROPERTIES TRUST into this arrangement from time to time over the next two years, but not later than June 30, 2004. As hotels are transferred into this new arrangement, we will cease to recognize rental income and begin to recognize hotel operating revenues and expenses related to these hotels. We do not expect that this change will have any impact on our net income or cash available for distribution. Results of Operations (dollar amounts in thousands, except per share amounts) Three Months Ended June 30, 2002 versus 2001 Total revenues for the 2002 second quarter were $88,115, a 25.6% increase over revenues of $70,139 for the 2001 second quarter. This increase is primarily due to our management arrangement with Marriott discussed above, which requires our recognition of total hotel sales for 16 of our hotels during the 2002 period as hotel operating revenue. Additionally, rental income increased to $62,082 for the 2002 second quarter from $60,114 in the 2001 period, a result of our acquisition of 23 hotels since the end of the 2001 first quarter, which was partially offset by minimum rental income recognized in the 2001 period for hotels which subsequently began to be leased to our taxable REIT subsidiary. 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 2002 second quarter was $5,669, a 20.7% decrease from FF&E reserve income of $7,145 for the 2001 second quarter. This decrease is due primarily to the commencement of our management arrangement with Marriott which requires us to fund the reserves from our hotel operating revenues and reduced levels of hotel sales. Interest income for the 2002 second quarter was $54, a 44.3% decrease from interest income of $97 for the 2001 second quarter. This decrease was due to a lower average cash balance and a lower average interest rate during the 2002 period. Total expenses for the 2002 second quarter were $52,625, a 35.9% increase over total expenses of $38,711 for the 2001 second quarter. The increase is due primarily to our recognition of hotel operating expenses, as discussed above, as well as general increases in our operating expenses related to our additional investments in hotel properties over the last twelve months. 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. Operating expenses realized from the hotels under this agreement were $13,229 during the 2002 second quarter and $1,855 during the partial 2001 period. Interest expense for the 2002 second quarter was $11,066, a 5.2% increase over interest expense of $10,520 for the 2001 second quarter. The increase was primarily due to higher average borrowings offset to some extent by a lower weighted average interest rate during the 2002 period. Depreciation and amortization expense for the 2002 second quarter was $24,186, a 7.5% increase over depreciation and amortization expense of $22,491 for the 2001 second quarter. This increase was due principally to the impact of the depreciation of 27 hotels acquired subsequent to April 1, 2001, and the impact of the purchase of depreciable assets with funds from FF&E reserve restricted cash accounts owned by us during 2001 and 2002. General and administrative expense for the 2002 second quarter was $4,144, a 7.8% increase from general and administrative expense of $3,845 in the 2001 second quarter. This increase is due principally to the impact of additional hotel investments during 2001 and 2002. Net income for the 2002 second quarter was $35,490, a 12.9% increase over net income of $31,428 for the 2001 second quarter. The increase was primarily due to increased rental income from new investments and increased net revenues over expenses from hotels operated under our management arrangement with Marriott partially offset by a decrease in FF&E reserve income and increases in interest and depreciation expenses. Net income available for common shareholders for the 2002 second quarter was $33,709, or $0.54 per share, a 13.7% increase, or 3.8% on a per share basis, over net income available for common shareholders of $29,647, or $0.52 per share, for the 2001 second quarter. This increase resulted from the investment and operating activity discussed above. The per share amount was affected by our issuance of 6,000,000 common shares in August 2001. 11
HOSPITALITY PROPERTIES TRUST Cash Available for Distribution, or CAD, for the second quarters of 2002 and 2001 is derived as follows: <TABLE> <CAPTION> 2002 2001 --------------- --------------- <S> <C> <C> Net income available for common shareholders $ 33,709 $ 29,647 Add: Depreciation and amortization 24,186 22,491 Deferred percentage rents 641 1,288 Non-cash expenses, primarily amortization of deferred financing costs as interest 1,099 949 Less: FF&E Reserves (1) 6,723 7,281 --------------- --------------- Cash Available for Distribution $ 52,912 $ 47,094 =============== =============== <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 $5,669 and $7,145 for the 2002 and 2001 second quarters, respectively, of tenant deposits into FF&E reserve escrow accounts owned by us, which are subtracted from net income in determining CAD because these amounts are not available to us for distributions to shareholders. The FF&E Reserves amounts shown here also include $1,054 and $136 for the 2002 and 2001 periods, respectively, of our hotel operating revenues, which we have escrowed for routine capital improvements for the hotels operated by Marriott under a long-term management agreement. 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 2002 and 2001 periods, totaled $3,959 and $3,967, respectively, and are not removed here because they are not included in our income. </FN> </TABLE> CAD for the 2002 second quarter was $52,912, a 12.4% increase over CAD of $47,094 for the 2001 second quarter. This increase was due primarily to the full quarter impact of our 2001 acquisition of six hotels subsequent to April 1, 2001, the impact of our acquisition of 21 hotels during the 2002 second quarter offset by increases in interest and general and administrative expenses, a decrease in interest income as discussed above and a decrease in deferred percentage rents. Six Months Ended June 30, 2002 versus 2001 Total revenues for the first six months of 2002 were $170,049, a 24.7% increase over revenues of $136,312 for the first six months of 2001. This increase is primarily due to our management arrangement with Marriott discussed above, which requires our recognition of total hotel sales for 16 of our hotels during the 2002 period as hotel operating revenue. Additionally, rental income in the first six months of 2002 increased to $120,429 from $119,516 during the 2001 first half, as a result of our acquisition of 25 hotels since January 1, 2001, the majority of which was offset by rental income recognized in the 2001 period for hotels which subsequently began to be leased to our taxable REIT subsidiary. 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 first half of 2002 was $10,935, a 19.3% decrease from FF&E reserve income of $13,554 for the 2001 period. This decrease is due primarily to the commencement of our management arrangement with Marriott which requires us to fund the reserves from our hotel operating revenues and reduced levels of hotel sales. Interest income for the 2002 period was $236, a 48.6% decrease from interest income of $459 for the 2001 period. This decrease was due to a lower average cash balance and a lower average interest rate during the 2002 period. Total expenses for the first six months of 2002 were $101,228, a 35.3% increase over total expenses of $74,796 for the 2001 period. The increase is due primarily to our recognition of hotel operating expenses, as discussed above, as well as increases in operating expenses related to our additional investments in hotel properties in 2001 and 2002. 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. Operating expenses realized from the hotels under this agreement were $24,398 during the first six months of 2002 and $1,855 during the partial 2001 period. 12
HOSPITALITY PROPERTIES TRUST Interest expense for the first half of 2002 was $21,113, a 2.0% increase over interest expense of $20,706 for the 2001 first half. The increase was primarily due to higher average borrowings offset to some extent by a lower weighted average interest rate during the 2002 period. Depreciation and amortization expense for the first six months of 2002 was $47,920, a 7.4% increase over depreciation and amortization expense of $44,629 for the 2001 period. This increase was due principally to the impact of the depreciation of 29 hotels acquired subsequent to January 1, 2001, and the impact of the purchase of depreciable assets with funds from FF&E reserve restricted cash accounts owned by us during 2001 and 2002. General and administrative expense for the 2002 first half was $7,797, a 2.5% increase from general and administrative expense of $7,606 in the 2001 first half. This increase is due principally to the impact of additional hotel investments during 2001 and 2002, offset to some extent by previously unanticipated reimbursement of amounts expensed in a prior period related to a potential acquisition during the first half of 2002. Net income for the first half of 2002 was $68,821, an 11.9% increase over net income of $61,516 for the 2001 period. The increase was primarily due to increased rental income from new investments and net revenues over expenses from hotels operated under our management arrangement with Marriott, partially offset by decreases in FF&E reserve and interest income and increases in interest, depreciation and general and administrative expenses. Net income available for common shareholders for the 2002 first half was $65,258, or $1.04 per share, a 12.6% increase, or 1.0% on a per share basis, over net income available for common shareholders of $57,953, or $1.03 per share, for the 2001 first half. This increase resulted from the investment and operating activity discussed above. The per share amount was affected by our issuance of 6,000,000 common shares in August 2001. Cash Available for Distribution, or CAD, for the first six months of 2002 and 2001 is derived as follows: <TABLE> <CAPTION> 2002 2001 --------------- --------------- <S> <C> <C> Net income available for common shareholders $ 65,258 $ 57,953 Add: Depreciation and amortization 47,920 44,629 Deferred percentage rents 1,306 2,983 Non-cash expenses, primarily amortization of deferred financing costs as interest 2,084 1,896 Less: FF&E Reserves (1) 12,932 13,690 --------------- --------------- Cash Available for Distribution $103,636 $ 93,771 =============== =============== <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 $10,935 and $13,554 for the first half of 2002 and 2001, respectively, of tenant deposits into FF&E reserve escrow accounts owned by us, which are subtracted from net income in determining CAD because these amounts are not available to us for distributions to shareholders. The FF&E Reserves amounts shown here also include $1,997 and $136 for the 2002 and 2001 periods, respectively of our hotel operating revenues, which we have escrowed for routine capital improvements for the hotels operated by Marriott under a long-term management agreement. 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 2002 and 2001 periods, totaled $7,398 and $7,826, respectively, and are not removed here because they are not included in our income. </FN> </TABLE> CAD for the 2002 first half was $103,636, a 10.5% increase over CAD of $93,771 for the 2001 period. This increase was due primarily to the full impact of our acquisition of eight hotels during 2001, the partial impact of our acquisition of 21 hotels during the 2002 second quarter offset by increases in interest and general and administrative expenses, a decrease in interest income as discussed above and a decrease in deferred percentage rents. 13
HOSPITALITY PROPERTIES TRUST Liquidity and Capital Resources (dollar amounts in thousands, except per share amounts) Our Tenants and Operators All of our hotels are leased to or operated by third parties; we do not operate hotels. All costs of operating and maintaining our hotels are paid by these third parties for their own account or as agent for us. These third parties derive their funding for hotel operating expenses, reserves for renovations, or FF&E reserves, and rents and returns due us generally from hotel operating revenues. As of June 30, 2002, obligations to us by our tenants and managers of 58.2% of our total investments, at cost, are guaranteed by the parent companies of our tenants and managers. These parent company guarantees may provide us with continued payments if combined total hotel sales less total hotel expenses and required FF&E reserve payments are not in excess of amounts due to us. Our tenants and managers or their affiliates may also supplement cash flow from our hotels in order to make payments to us and preserve their rights to continue operating our hotels. We define coverage as combined total hotel sales minus all expenses which are not subordinated to minimum payments to us and the required FF&E Reserve contributions, divided by the aggregate minimum payments to us. Coverage for our hotels is presented in the table on pages 17 and 18. Eight of nine of our hotel pools, representing 227 hotels, generated coverage of at least 1.0x during 2001, and five hotel pools, representing 120 hotels generated coverage of at least 1.0x during their first two fiscal quarters of 2002. If a hotel pool does not generate coverage of at least 1.0x, our tenant or operator must supplement hotel operating results to make the minimum payments due us to prevent default under the agreements. In addition, 153 hotels we own in five pools are operated under leases or management agreements which are guaranteed by the parent companies of our tenant or operator. More detail regarding coverage, guarantees and other security features is presented in the table on pages 17 and 18. As of June 30, 2002, all payments due us, including those payments due under leases or operating agreements whose hotels have generated less than 1.0x coverage during 2002, are current and none of our tenants or managers have indicated a need for relief of their obligations. Guarantee or supplemental payments to us, if any, made under any of our leases or management agreements, do not subject us to repayment obligations. We lease 16 hotels to our taxable REIT subsidiary, which are operated by Marriott in combination with an additional 19 hotels which are leased to a subsidiary of Marriott. For any of these 35 hotels, funding for hotel operating expenses, rents and returns to us, may be provided by a combination of hotel operating revenues from all other hotels in the combination, payments from Marriott International under its guarantee obligation, or voluntary payments by affiliates of Marriott. During the first half of 2002, the 16 hotels leased to our taxable REIT subsidiary did not generate hotel operating revenues in excess of hotel operating expenses including expenses allocated by Marriott and allocated minimum returns to us by approximately $2,315. This amount is reflected as a reduction to hotel operating expenses for the 2002 first half. Our Operating Liquidity and Resources Our principal sources of funding for current expenses and for distributions to shareholders is provided by our operations, primarily rents derived from leasing and the excess of hotel operating revenues over hotel operating expenses of our hotels leased to our taxable REIT subsidiary and operated by Marriott. Minimum rents and minimum returns are received from our tenants and managers monthly in advance and percentage rents or returns are received either monthly or quarterly in arrears. This flow of funds has historically been sufficient for us to pay our operating expenses, interest and distributions. We believe that our operating cash flow will be sufficient to meet our operating expenses, interest and distribution payments for the foreseeable future. Various percentages of total sales at all of our hotels are escrowed as reserves for future renovations and refurbishment, or FF&E reserves, as discussed above. As of June 30, 2002, there was approximately $62,458 on deposit in these escrow accounts of which $45,873 was held directly by us and reflected on our balance sheet as restricted cash. The remaining $16,585 is held in accounts owned by our tenants and is not reflected on our balance sheet. During the first six months of 2002, $20,330 was deposited into these accounts and $11,740 was spent to renovate and refurbish our properties. 14
HOSPITALITY PROPERTIES TRUST Our Investment and Financing Liquidity and Resources In order to fund acquisitions and to accommodate occasional cash needs which may result from timing differences between the receipt of rents and the need to make distributions or pay operating expenses, we maintain a revolving credit facility with a group of commercial banks. The credit facility in effect at the beginning of 2002 expired in March 2002. Our new facility matures in June 2005 and may be extended at our option to June 2006 upon our payment of an extension fee. The new facility permits borrowing up to $350,000 and includes a feature under which the maximum draw could expand to $700,000, in certain circumstances. Drawings under our credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. Interest on borrowings under the credit facility are payable at a spread above LIBOR. At June 30, 2002, we had $487 of cash and cash equivalents and $98,000 outstanding on our revolving credit facility. We expect to use existing cash balances, borrowings under our credit facility or other lines of credit and net proceeds of offerings of equity or debt securities to fund future hotel acquisitions. On July 8, 2002, we issued $125,000 of 6.85% senior notes due July 2012. A portion of the net proceeds of $124,106 from this offering was used to repay the then outstanding balance of our revolving credit facility. On July 18, 2002, we redeemed at par $115,000 of 8.25% senior notes, due November 2005, using cash on hand and borrowings under our revolving credit facility. As of August 8, 2002, we have $62,000 outstanding on our revolving credit facility and $288,000 available to fund our investment and financing activities. We have no debt which matures in the next twelve months and no principal or sinking-fund payments in the next twelve months. After giving effect to the issuance and redemption of senior notes in July 2002, our debts (besides those incurred under our credit facility) had maturities as follows: $150,000 in 2008; $150,000 in 2009; $50,000 in 2010; and $125,000 in 2012. None of these debt obligations require principal or sinking-fund payments prior to their maturity date. To the extent we borrow on our credit facility and, as the maturity dates of our credit facility and term debt approach over the longer term, we will explore alternatives for the repayment of amounts due. Such alternatives in the short-term and long-term may include incurring additional long-term debt and issuing new equity securities. On March 8, 2002, we filed a shelf registration statement for issuance of securities having an aggregate initial value of $2,800,000; the Securities and Exchange Commission, or SEC, declared this registration effective on March 20, 2002. As of August 8, 2002, we had $2,675,000 available on our shelf registration. An effective shelf registration allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for any such securities offered by us. Although there can be no assurance that we will consummate any debt or equity security offerings or other financings, we believe we will have access to various types of financing, including investment grade debt or equity securities offerings, with which to finance future acquisitions and to pay our debt and other obligations. Our total assets as of June 30, 2002, were $2,433,923, an increase of 3.4% from $2,354,964 as of December 31, 2001. The increase resulted primarily the acquisition of 21 hotels in 2002, offset to some extent by depreciation expense accrued, lower cash balances and distributions paid to shareholders during the six months ended June 30, 2002. A common share distribution of $0.71 per common share declared with respect to the first quarter 2002 results was paid in May 2002. A distribution of $0.59375 per preferred share for second quarter 2002 was paid in June 2002. A common share distribution of $0.72 per common share declared with respect to second quarter 2002 results will be paid to shareholders in August 2002. Debt Covenants Our debt obligations at June 30, 2002, were limited to our revolving credit facility and our $465,000 of public debt. Each issue of our public debt is governed by an indenture. The indenture and its supplements and our credit facility agreement contain a number of financial ratio covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to maintain a minimum net worth, as defined, restrict our ability to make distributions under certain circumstances and require us to maintain other ratios, as defined. At June 30, 2002, we were in compliance with all of our covenants under our indenture and its supplements and our credit facility. 15
HOSPITALITY PROPERTIES TRUST Neither our indenture and its supplements nor our bank credit facility contain provisions for acceleration which could be triggered by our debt ratings. However, under our credit agreement, our senior debt rating is used to determine the fees and interest rate applied to borrowings. Our public debt indenture and its supplements contain cross default provisions to any of our other debts of $20,000 or more. Similarly, a default on our public indenture or any of its supplements would constitute a default under our credit agreement. As of June 30, 2002, we had no commercial paper, derivatives, swaps, hedges, guarantees, joint ventures or partnerships. As of June 30, 2002, we had no secured debt obligations. None of our debt documentation requires us to provide collateral security in the event of a ratings downgrade. We have no "off balance sheet" arrangements. 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 or cash contributed by our tenants, managers or guarantors 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. Property Leases and Operating Agreements As of June 30, 2002, we owned 251 hotels which are grouped into nine combinations and leased to or managed by separate affiliates of: Marriott, Host, Barcelo-Crestline, Wyndham International, Inc. ("Wyndham"), BRE/Homestead Village ("BRE/Homestead"), Candlewood Hotel Company, Inc. ("Candlewood") and Prime Hospitality Corp. ("Prime"). The tables on the following pages summarize the key terms of our leases and other operating agreements as of June 30, 2002: 16
HOSPITALITY PROPERTIES TRUST <TABLE> <CAPTION> - ------------------------------ -------------------- --------------------- -------------------- -------------------- ---------------- Marriott(R)/ Residence Inn by Courtyard by Residence Inn by Residence Inn by Marriott(R)/ Wyndham(R)/ Hotel Brand Marriott(R) Marriott(R) Marriott(R)/ Courtyard by Wyndham Courtyard by Marriott(R)/ Garden(R) Marriott(R)/ TownePlace Suites TownePlace Suites by Marriott(R)/ by Marriott(R)/ SpringHill Suites SpringHill Suites by Marriott(R) by Marriott(R)(1) - ------------------------------ -------------------- --------------------- -------------------- -------------------- ---------------- <S> <C> <C> <C> <C> <C> Number of Hotels 53 18 35 19 12 Number of Rooms 7,610 2,178 5,382 2,756 2,321 Number of States 24 14 15 14 8 Tenant Subsidiary of Host Subsidiary of Host Subsidiary of Subsidiary of Subsidiary of Subleased to Subleased to Marriott/Subsidiary Barcelo-Crestline Wyndham Subsidiary of Subsidiary of of Hospitality Barcelo-Crestline Barcelo-Crestline Properties Trust Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Marriott Marriott Marriott Marriott Wyndham Investment at June 30, 2002 (000s) (2) $513,904 $178,565 $453,954 $274,222 $182,570 Security Deposit (000s) (3) $50,540 $17,220 $36,204 $28,508 $18,325 End of Initial Term 2012 2010 2019 2015 2014 Renewal Options (4) 3 for 12 1 for 10 years, 2 for 15 2 for 10 4 for 12 years each 2 for 15 years each years each years each years each Current Annual Minimum Rent/Return (000s) $51,390 $17,832 $48,288 $28,508 $18,325 Percentage Rent/Return (5) 5.0% 7.5% 7.0% 7.0% 8.0% Rent/Return Coverage (6) (7): Year ended 12/31/01 1.7x 1.4x 1.1x 1.0x 1.0x Twelve months ended 6/30/02 1.5x 1.2x 1.0x 0.9x 0.8x Six months ended 6/30/02 1.5x 1.1x 0.9x 1.0x 1.0x Three months ended 6/30/02 1.6x 1.2x 1.0x 1.0x 0.8x Other Security Features HPT controlled HPT controlled Limited guarantee Limited guarantees Wyndham parent lockbox with minimum lockbox with minimum provided by provided by minimum net balance maintenance balance maintenance Marriott. Barcelo-Crestline worth requirement; requirement; and Marriott. requirement. subtenant and subtenant and subtenant parent subtenant parent minimum net worth minimum net worth requirement. requirement. - ------------------------------ -------------------- --------------------- -------------------- -------------------- ---------------- <FN> (1) At June 30, 2002, 19 of the 35 hotels in this combination were leased to and operated by subsidiaries of Marriott. The remaining 16 hotels were operated by subsidiaries of Marriott under a management contract with our wholly-owned subsidiary tenant. Marriott's obligations under the lease and the management contract 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 rents and returns to us. (2) Excludes expenditures made from FF&E reserves subsequent to our initial purchase. (3) Excludes other deposits totaling approximately $16.5 million at June 30, 2002, retained by us to secure various guarantee obligations to us. (4) Renewal options may be exercised by the tenant or manager for all, but not less than all, of the hotels within a pool. (5) Each lease or management contract provides for payment to us of a percentage of increases in total hotel sales over base year levels as additional rent or return. (6) Coverage represents total hotel sales minus all hotel operating expenses which are not subordinated to minimum payments to us and required FF&E reserve contributions, divided by the aggregate minimum payments to us. (7) Represents data for the year ended December 28, 2001, and the 52, 24, and 12 weeks ended June 14, 2002, respectively for the hotel pools managed by Marriott. </FN> </TABLE> 17
HOSPITALITY PROPERTIES TRUST <TABLE> <CAPTION> - ------------------------------ ------------------- --------------------- -------------------- -------------------- ----------------- Summerfield Total / Suites by Candlewood Homestead Range / Hotel Brand Wyndham(R) AmeriSuites(R) Suites(R) Studio Suites(R) Average - ------------------------------ ------------------- --------------------- -------------------- -------------------- ----------------- <S> <C> <C> <C> <C> <C> Number of Hotels 15 24 57 18 251 Number of Rooms 1,822 2,929 6,887 2,399 34,284 Number of States 8 13 27 5 37 Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Prime Candlewood BRE/Homestead Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Prime Candlewood BRE/Homestead Investment at June 30, 2002 (000s) (1) $240,000 $243,350 $434,750 $145,000 $2,666,315 Security Deposit (000s) (2) $15,000 $25,575 $47,297 $15,960 $254,629 End of Initial Term 2017 2013 2018 2015 2010-2019 (weighted average by investment, 13.6 years) Renewal Options (3) 4 for 12 3 for 15 3 for 15 2 for 15 years each years each years each years each Current Annual Minimum Rent/Return (000s) $25,000 $25,575 $45,507 $15,960 $276,385 Percentage Rent/Return (4) 7.5% 8.0% 10.0% 10.0% 5%-10% Rent/Return Coverage (5): Year ended 12/31/01 1.1x 0.6x 1.1x 1.1x 0.6x-1.7x Twelve months ended 6/30/02 0.8x 0.5x 0.9x 1.0x 0.5x-1.5x Six months ended 6/30/02 0.7x 0.6x 0.9x 1.1x 0.6x-1.5x Three months ended 6/30/02 0.8x 0.7x 1.0x 1.1x 0.7x-1.6x Other Security Features Wyndham parent Prime guarantee, Candlewood parent BRE/Homestead minimum net worth secured by $16.5 guarantee and parent guarantee requirement. million cash minimum net worth and minimum net deposit. requirement. worth requirement. - ------------------------------ ------------------- --------------------- -------------------- -------------------- ----------------- <FN> (1) Excludes expenditures made from FF&E Reserves subsequent to our initial purchase. (2) Excludes other deposits totaling approximately $16.5 million at June 30, 2002, retained by us to secure various guarantee obligations to us. (3) Renewal options may be exercised by the tenant or manager for all, but not less than all, of the hotels within a pool. (4) Each lease or management contract provides for payment to us of a percentage of increases in total hotel sales over base year levels as additional rent or return. (5) Coverage represents total hotel sales minus all hotel operating expenses which are not subordinated to minimum payments to us and required FF&E reserve contributions, divided by the aggregate minimum payments to us. </FN> </TABLE> 18
HOSPITALITY PROPERTIES TRUST The following tables summarize the operating statistics, including occupancy, average daily rate, or ADR, and revenue per available room, or RevPAR, reported to us by our third party tenants and managers by brand for the periods indicated for the 247 hotels we own which were open for at least one full year as of January 1, 2002: <TABLE> <CAPTION> OCCUPANCY Second Quarter (1) Year to Date (2) - --------- ------------------------------- ------------------------------- No. of No. of Brand Hotels Rooms 2002 2001 Change 2002 2001 Change - ----- ------ ----- ---- ---- ------ ---- ---- ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Courtyard by Marriott(R) 71 10,280 72.4% 75.7% -4.4% 68.5% 74.5% -8.1% Residence Inn by Marriott(R) 36 4,543 79.0% 80.5% -1.9% 75.8% 79.3% -4.4% Marriott Hotels Resorts & Suites(R) 3 1,356 80.4% 79.3% +1.4% 76.8% 76.5% +0.4% TownePlace Suites by Marriott(R) and SpringHill Suites by Marriott(R) 14 1,595 72.1% 73.0% -1.2% 69.6% 69.1% +0.7% Wyndham(R)and Wyndham Garden(R) 12 2,321 73.1% 71.4% +2.4% 71.5% 71.1% +0.6% Summerfield Suites by Wyndham(R) 15 1,822 81.5% 80.3% +1.5% 77.5% 79.2% -2.1% AmeriSuites(R) 21 2,556 66.6% 67.5% -1.3% 64.6% 63.6% +1.6% Candlewood Suites(R) 57 6,887 79.7% 75.9% +5.0% 76.5% 74.5% +2.7% Homestead Studio Suites(R) 18 2,399 80.0% 79.5% +0.6% 76.9% 78.7% -2.3% -------- --------- ------------------------------- ------------------------------- Total/Average 247 33,759 75.8% 76.0% -0.3% 72.6% 74.4% -2.4% <CAPTION> ADR Second Quarter (1) Year to Date (2) - --- ------------------------------- ------------------------------- No. of No. of Brand Hotels Rooms 2002 2001 Change 2002 2001 Change - ----- ------ ----- ---- ---- ------ ---- ---- ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Courtyard by Marriott(R) 71 10,280 $96.65 $104.49 -7.5% $97.35 $104.21 -6.6% Residence Inn by Marriott(R) 36 4,543 $96.06 $105.41 -8.9% $96.42 $104.84 -8.0% Marriott Hotels Resorts & Suites(R) 3 1,356 $117.58 $120.84 -2.7% $117.77 $122.36 -3.8% TownePlace Suites by Marriott(R) and SpringHill Suites by Marriott(R) 14 1,595 $62.12 $68.71 -9.6% $61.01 $67.94 -10.2% Wyndham(R)and Wyndham Garden(R) 12 2,321 $79.60 $91.60 -13.1% $85.73 $98.12 -12.6% Summerfield Suites by Wyndham(R) 15 1,822 $105.12 $124.99 -15.9% $106.14 $128.16 -17.2% AmeriSuites(R) 21 2,556 $69.49 $73.28 -5.2% $69.81 $75.62 -7.7% Candlewood Suites(R) 57 6,887 $52.32 $58.56 -10.7% $53.06 $58.87 -9.9% Homestead Studio Suites(R) 18 2,399 $47.91 $53.64 -10.7% $49.05 $55.10 -11.0% -------- --------- ------------------------------- ------------------------------- Total/Average 247 33,759 $79.70 $88.21 -9.6% $80.60 $89.13 -9.6% <CAPTION> RevPAR Second Quarter (1) Year to Date (2) - ------ ------------------------------- ------------------------------- No. of No. of Brand Hotels Rooms 2002 2001 Change 2002 2001 Change - ----- ------ ----- ---- ---- ------ ---- ---- ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Courtyard by Marriott(R) 71 10,280 $69.97 $79.10 -11.5% $66.68 $77.64 -14.1% Residence Inn by Marriott(R) 36 4,543 $75.89 $84.86 -10.6% $73.09 $83.14 -12.1% Marriott Hotels Resorts & Suites(R) 3 1,356 $94.53 $95.83 -1.4% $90.45 $93.61 -3.4% TownePlace Suites by Marriott(R) and SpringHill Suites by Marriott(R) 14 1,595 $44.79 $50.16 -10.7% $42.46 $46.95 -9.6% Wyndham(R)and Wyndham Garden(R) 12 2,321 $58.19 $65.40 -11.0% $61.30 $69.76 -12.1% Summerfield Suites by Wyndham(R) 15 1,822 $85.67 $100.37 -14.6% $82.26 $101.50 -19.0% AmeriSuites(R) 21 2,556 $46.28 $49.46 -6.4% $45.10 $48.09 -6.2% Candlewood Suites(R) 57 6,887 $41.70 $44.45 -6.2% $40.59 $43.86 -7.5% Homestead Studio Suites(R) 18 2,399 $38.33 $42.64 -10.1% $37.72 $43.36 -13.0% -------- --------- ------------------------------- ------------------------------- Total/Average 247 33,759 $60.41 $67.04 -9.9% $58.52 $66.31 -11.7% <FN> (1) Includes data for the three months ended June 30, 2002, except for our Courtyard by Marriott(R), Residence by Marriott(R), Marriott Hotels Resorts and Suites(R), TownePlace Suites by Marriott(R), and SpringHill Suites by Marriott(R) brands, which include data for the 12 weeks ended June 14, 2002 and June 15, 2001. (2) Includes data for the six months ended June 30, 2002, except for our Courtyard by Marriott(R), Residence by Marriott(R), Marriott Hotels Resorts and Suites(R), TownePlace Suites by Marriott(R), and SpringHill Suites by Marriott(R) brands, which include data for the 24 weeks ended June 14, 2002 and June 15, 2001. </FN> </TABLE> 19
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, 2001. Other than as described below we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we plan to manage this exposure in the near future. In July 2002 we issued $125,000 of 6.85% senior notes due 2012 and prepaid $115,000 of 8.25% senior notes due 2005. Including the impact of these two transactions, at August 8, 2002, 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> $150,000 7.00% 2008 Semi-Annually $10,500 150,000 8.50% 2009 Monthly 12,750 50,000 9.125% 2010 Semi-Annually 4,563 125,000 6.85% 2012 Semi-Annually 8,563 -------- ------- $475,000 $36,376 ======== ======= </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 affect 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 $3,638. Changes in interest rates 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. A hypothetical immediate 10% change in interest rates would change the fair value of our fixed rate debt obligations in the table above by $12,611. Each of our fixed rate debt arrangements allows us to make repayments earlier than the stated maturity date. Our $150,000 of 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 that is generally designed to preserve a stated yield to the note holder. 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 2005. As of June 30, 2002, we had $98,000 outstanding and $252,000 available for drawing under our revolving credit facility. Our revolving credit facility is available for acquisitions and general business purposes. Repayments under our revolving credit facility may be made at any time without penalty. Our exposure to fluctuations in interest rates may in the future increase if we incur debt to fund future acquisitions or otherwise. 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 following table shows the impact a 10% change in interest rates would have on our interest expense for our floating rate debt currently outstanding: <TABLE> <CAPTION> Interest Debt Annualized Interest Impact of Circumstance Rate Outstanding Expense Change - ------------ ---- ----------- ------- ------ <S> <C> <C> <C> <C> Conditions at June 30, 2002 3.2% $98,000 $3,136 -- A 10% increase 3.5% $98,000 $3,430 $294 A 10% decrease 2.9% $98,000 $2,842 ($294) </TABLE> The foregoing table shows the impact of an immediate change in floating interest rates. If these changes occurred gradually over time the impact would be spread over time. 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. We are unable to predict the direction or amount of interest rate changes during the next year. Also, we may incur additional debt at floating or fixed rates in the future, which would increase our exposure to market changes in interest rates. 20
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 AND THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED. THOSE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS FORM 10-Q AND INCLUDE STATEMENTS REGARDING OUR INTENT, BELIEF OR EXPECTATION, OR THE INTENT, BELIEF OR EXPECTATION OF OUR TRUSTEES OR OUR OFFICERS WITH RESPECT TO THE DECLARATION, TIMING OR PAYMENT OF DISTRIBUTIONS, INTEREST RATE RISK MANAGEMENT, EXISTING AND FUTURE INVESTMENTS, THE EFFECTIVENESS OF SECURITY PROVISIONS IN OUR LEASES AND MANAGEMENT CONTRACTS, AVAILABILITY OF CAPITAL TO FINANCE INVESTMENTS, THE IMPACT OF SEASONALITY, THE IMPACT OF REDUCED TRAVEL ON US AND OUR TENANTS 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, TERRORIST ACTS, CHANGES IN FINANCING TERMS, OUR ABILITY OR INABILITY TO COMPLETE ACQUISITIONS AND FINANCING TRANSACTIONS AND GENERAL CHANGES IN ECONOMIC CONDITIONS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS. 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. 21
HOSPITALITY PROPERTIES TRUST PART II Other Information Item 2. Changes in Securities On June 28, 2002, we granted 8,850 common shares pursuant to our Incentive Share Award Plan to our officers and employees of our advisor, REIT Management & Research LLC valued at $36.50 per common share, the closing price of the common shares on the New York Stock Exchange on June 28, 2002. The grants were made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. Item 4. Submission of Matters to a Vote of Security Holders At our regular annual meeting of shareholders held on May 7, 2002, John L. Harrington and Barry M. Portnoy were re-elected as trustees (57,300,334 and 57,271,414 shares voted in favor of, and 404,101 and 433,021 shares withheld from voting for the re-election of Messrs. Harrington and Portnoy, respectively). The current terms of Messrs. Harrington and Portnoy expire in 2005. William J. Sheehan, Gerard M. Martin and Arthur G. Koumantzelis continue to serve as trustees with current terms expiring in 2003, 2003 and 2004, respectively. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4.1 Supplemental Indenture No. 6, dated as of July 8, 2002, by and between the Company and State Street Bank and Trust Company, relating to the Company's 6.85% Senior Notes due 2012, including form thereof. 10.1 Second Amended and Restated Lease Agreement dated as of April 12, 2002, by and between HPT CW Properties Trust and Candlewood Leasing No. 1, Inc. 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Distributions 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On July 1, 2002, we filed a current Report on Form 8-K, reporting our appointment of Ernst & Young LLP as our independent auditor (Item 4) and our sale of $125 million of 6.85% Senior Notes due 2012 (Items 5 and 7). 22
SIGNATURES 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/John G. Murray John G. Murray President and Chief Operating Officer Dated: August 9, 2002 /s/Thomas M. O'Brien Thomas M. O'Brien Treasurer and Chief Financial Officer Dated: August 9, 2002 23