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 March 31, 1999 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 May 6, 1999 - ------------------------------------------- --------------------- Common shares of beneficial 45,628,443 Interest, $.01 par value per share
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST FORM 10-Q MARCH 31, 1999 INDEX <S> <C> <C> PART I Financial Information (Unaudited) Page Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 31, 1999 and December 31, 1998........................................................ 3 Consolidated Statements of Income - Three Months Ended March 31, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998........................................................ 5 Notes to Condensed Consolidated Financial Statements......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 12 Certain Important Factors.................................................... 14 PART II Other Information Item 2. Changes in Securities........................................................ 14 Item 6. Exhibits and Reports on Form 8-K............................................. 14 Signature.................................................................... 16 </TABLE> 2
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) March 31, December 31, 1999 1998 ----------- ----------- (unaudited) <S> <C> <C> ASSETS Real estate properties ........................................ $ 2,113,258 $ 1,887,735 Accumulated depreciation ...................................... (130,195) (112,924) ----------- ----------- 1,983,063 1,774,811 Cash and cash equivalents ..................................... 6,536 24,610 Restricted cash (FF&E Reserve) ................................ 24,407 22,797 Other assets, net ............................................. 14,668 15,420 ----------- ----------- $ 2,028,674 $ 1,837,638 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Senior notes, net of discount ................................. $ 414,759 $ 414,753 Revolving debt ................................................ 172,000 -- Security and other deposits ................................... 231,114 206,018 Other liabilities ............................................. 13,209 43,010 Shareholders' equity: Common shares of beneficial interest, $.01 par value, 100,000,000 shares authorized, 45,628,443 and 45,595,539 issued and outstanding, respectively .................... 456 456 Additional paid-in capital ................................ 1,231,688 1,230,849 Cumulative net income ..................................... 226,403 203,507 Dividends ................................................. (260,955) (260,955) ----------- ----------- Total shareholders' equity .............................. 1,197,592 1,173,857 ----------- ----------- $ 2,028,674 $ 1,837,638 =========== =========== The accompanying notes are an integral part of these financial statements. </TABLE> 3
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited) For the Three For the Three Months Ended Months Ended March 31, March 31, 1999 1998 -------------- ------------- <S> <C> <C> Revenues: Rental income ............................................... $ 49,042 $ 32,474 FF&E reserve income ......................................... 4,114 3,818 Interest income ............................................. 117 1,078 -------- -------- Total revenues .......................................... 53,273 37,370 -------- -------- Expenses: Interest (including amortization of deferred finance costs of $554 and $1,585, respectively) .......................... 9,935 4,239 Depreciation and amortization ............................... 17,271 11,364 General and administrative .................................. 3,171 2,213 -------- -------- Total expenses .......................................... 30,377 17,816 -------- -------- Income before extraordinary item ............................... 22,896 19,554 Extraordinary loss from extinguishment of debt ................. -- (6,316) -------- -------- Net income ..................................................... $ 22,896 $ 13,238 ======== ======== Weighted average shares outstanding ............................ 45,614 39,779 ======== ======== Basic earnings (loss) per common share: Income before extraordinary item ............................... $ 0.50 $ 0.49 Extraordinary item ............................................. -- (0.16) -------- -------- Net income ..................................................... $ 0.50 $ 0.33 ======== ======== The accompanying notes are an integral part of these financial statements. </TABLE> 4
<TABLE> <CAPTION> HOSPITALITY PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) For the Three For the Three Months Ended Months Ended March 31, March 31, 1999 1998 ------------- ------------ <S> <C> <C> Cash flows from operating activities: Net income .................................................................. $ 22,896 $ 13,238 Extraordinary loss from extinguishment of debt .............................. -- 6,316 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization ........................................... 17,271 11,364 Amortization of deferred finance costs as interest ...................... 554 1,585 FF&E reserve income ..................................................... (4,114) (3,818) Net change in assets and liabilities .................................... 1,791 4,903 --------- --------- Cash provided by operating activities ............................... 38,398 33,588 --------- --------- Cash flows from investing activities: Real estate acquisitions .................................................... (223,019) (312,519) Increase in security and other deposits ..................................... 25,096 21,646 --------- --------- Cash used in investing activities ................................... (197,923) (290,873) --------- --------- Cash flows from financing activities: Proceeds from issuance of common shares, net ................................... -- 70,958 Proceeds from issuance of term debt, net of discount ........................... -- 149,730 Repayment of credit facility ................................................... -- (125,000) Draws on revolving credit facility ............................................. 172,000 125,000 Deferred finance costs incurred ................................................ -- (4,723) Dividends paid ................................................................. (30,549) (24,493) --------- --------- Cash provided by financing activities ............................... 141,451 191,472 --------- --------- Decrease in cash and equivalents ............................................... (18,074) (65,813) Cash and cash equivalents at beginning of period ............................... 24,610 81,728 --------- --------- Cash and cash equivalents at end of period ..................................... $ 6,536 $ 15,915 ========= ========= Supplemental cash flow information: Cash paid for interest .................................................. $ 11,680 $ 2,050 Non-cash investing activities: Property managers' deposits in owned FF&E reserves ...................... 3,845 2,939 Purchases of fixed assets with FF&E reserves proceeds ................... (2,504) (774) The accompanying notes are an integral part of these financial statements. </TABLE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements of Hospitality Properties Trust, or the Company, 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 thereto contained in our Annual Report on Form 10-K for the year ended December 31, 1998. 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. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. In 1998, the Financial Accounting Standards Board issued Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods" ("EITF 98-9"). We had adopted the provisions of EITF 98-9 prospectively as of May 21, 1998 (the date of the issuance of EITF 98-9) and continued to apply them until EITF 98-9 was rescinded during the fourth quarter 1998. If EITF 98-9 was applicable for the three months ended March 31, 1999, net income would have been $21,957 ($.48/share). For the three months ended March 31, 1998 net income before extraordinary items and net income would have been $18,575 ($.47/share) and $12,259 ($0.31/share), respectively. The deferred percentage rent balance as of March 31, 1999 and 1998 would have been $939 and $979, respectively. EITF 98-9 had no impact on our annual results of operations, rather the accounting changes required by EITF 98-9 would have, in general, deferred recognition of certain percentage rental income from the first, second and third quarters to the fourth quarter within a fiscal year. Note 2. Shareholders' Equity In January 1999, we paid a $0.67 per share dividend to shareholders for the quarter ended December 31, 1998. On April 5, 1999, the Trustees declared a dividend of $0.68 per share to be paid to shareholders of record as of April 20, 1999, which will be distributed on or about May 20, 1999. On April 12, 1999, we issued 3 million shares of 9 1/2% Series A Cumulative Redeemable Preferred Shares raising net proceeds of approximately $72,400. The net proceeds were used to repay amounts outstanding under our revolving credit facility. On May 5, 1999 we issued 10,000,000 common shares of beneficial interest, raising net proceeds of $253,925. The net proceeds were used to repay all amounts outstanding under our revolving credit facility and for general business purposes. We do not present diluted earnings per share because we have no dilutive instruments. Note 3. Indebtedness As of March 31, 1999 we had $172,000 outstanding on our revolving credit facility all of which was drawn during the 1999 first quarter. Proceeds from the draws were used to fund the acquisitions discussed in Note 4. The balance was reduced to zero in May 1999 with proceeds from the offerings discussed in Note 2. Note 4. Real Estate Properties During the three months ended March 31, 1999, certain of our subsidiaries purchased eighteen Homestead Village(R) hotels, three Candlewood Suites(R) hotels, five TownePlace Suites by Marriott(R) hotels and one Residence Inn by Marriott(R) hotel for approximately $221,300, paid for by draws under our revolving credit facility and cash on hand. Subsequent to March 31, 1999, one of our subsidiaries purchased one Courtyard by Marriott(R) hotel for approximately $10,200, paid for by cash on hand. 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Each of these hotels purchased in 1999 was leased to an unaffiliated party as part of a pool of properties also leased to affiliates of the seller. Note 5. Significant Tenant At March 31, 1999, 53 Courtyard by Marriott(R) properties owned by one of our subsidiaries were leased to a special purpose subsidiary of Host Marriott Corporation ("Host") and managed by a subsidiary of Marriott International, Inc. (Marriott). The results of operations for the twelve weeks ended March 26, 1999 and March 27, 1998 and summarized balance sheet data of the Host Marriott subsidiary to which our Courtyard by Marriott(R) hotels are leased are as follows: <TABLE> <CAPTION> Twelve weeks ended Twelve weeks ended March 26, 1999 March 27, 1998 (unaudited) (unaudited) ------------------ ------------------ <S> <C> <C> Total hotel sales Rooms ............................ $ 46,717 $ 45,772 Food and beverage ................ 3,462 3,464 Other ............................ 1,852 1,789 -------- -------- Total hotel sales ................ 52,031 51,025 -------- -------- Departmental expenses Rooms ............................ 10,142 9,562 Food and beverage ................ 3,022 2,958 Other operating departments ...... 477 467 General and administrative ....... 5,633 5,340 Utilities ........................ 1,887 1,991 Repairs, maintenance and accidents 1,967 1,956 Marketing and sales .............. 1,411 453 Chain services ................... 1,041 1,883 -------- -------- Total departmental expenses ...... 25,580 24,610 -------- -------- House profit .............................. 26,451 26,415 Subtenant retainage ....................... (12,732) -- -------- -------- Sublease income earned by Tenant .......... 13,719 26,415 Other ..................................... 722 -- -------- -------- Total revenue ............................. 14,441 26,415 Investment expenses Base and percentage rent ............. 12,357 12,176 FF&E contribution .................... -- 2,551 Management fees ...................... -- 6,264 Real estate tax ...................... -- 1,860 Other ................................ 105 639 -------- -------- Total investment expenses ........ 12,462 23,490 -------- -------- Income before taxes ....................... 1,979 2,925 Provision for income taxes ................ -- (1,170) -------- -------- Net income ....................... $ 1,979 $ 1,755 ======== ======== <CAPTION> March 26, 1999 December 31, 1998 (unaudited) -------------- ----------------- <S> <C> <C> Assets $ 60,570 $58,884 Liabilities 39,399 39,692 Equity 21,171 19,192 </TABLE> Beginning on January 1, 1999, Host subleased the 53 Courtyard by Marriott(R) properties to a subsidiary of Crestline Capital Corporation. However, Host remains the primary obligor under the leases. Accordingly, beginning January 1, 1999, Host Marriott reports rental income as compared to hotel sales in the prior year. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Results of Operations (dollar amounts in thousands except share and per share amounts) Quarter Ended March 31, 1999 versus 1998 Rental income for the 1999 first quarter was $49,042, a 51% increase over rental income of $32,474 for the 1998 first quarter. This increase was due to the full impact of 51 hotels acquired in 1998 and the partial impact of 27 hotels acquired during the first quarter of 1999. Rental income is comprised principally of base rent, which was $48,102 for the 1999 first quarter, a 53% increase over base rent of $31, 495 for the 1998 first quarter. Base rents increased because of the acquisitions discussed above. Rental income also includes percentage rents which were $939 in the 1999 first quarter, substantially unchanged from percentage rent of $979 for the 1998 first quarter. 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 necessary capital expenditures at our owned properties. The terms of our leases require these amounts to be calculated as a percentage of total hotel sales at these properties. The FF&E reserve income for the 1999 first quarter was $4,114, an 8% increase over FF&E reserve income for the 1998 first quarter. This increase is due principally to the impact of additional hotels owned and the increased level of total hotel sales experienced at our hotels. Interest income for the 1999 first quarter was $117, a $961 decrease from interest income of $1,078 for the 1998 first quarter. This decrease was due to a lower average cash balance in the 1999 period versus the 1998 period. Interest expense for the 1999 first quarter was $9,935, a 134% increase over interest expense of $4,239 for the 1998 first quarter. The increase was due to higher average borrowing during the 1999 period. Borrowings increased primarily as a result of three separate issuances of senior unsecured notes in February, November and December of 1998 for a total of $415,000. Depreciation and amortization expense for the 1999 first quarter was $17,271, a 52% increase over depreciation and amortization expense of $11,364 for the 1998 first quarter. This increase was due principally to the full quarter's impact of the depreciation of 51 hotels acquired in 1998 and the partial impact of 27 hotels acquired during the first quarter of 1999. General and administrative expense for the 1999 first quarter was $3,171, a 43% increase over general and administrative expense in the 1998 first quarter. This increase is due principally to the impact of additional hotels purchased in 1998 and in the first quarter of 1999. Income before extraordinary item for the 1999 first quarter was $22,896, a 17% increase over income before extraordinary item for the 1998 first quarter. The increase was primarily due to higher rental income partially offset by increases in depreciation and interest expense. These increases were due primarily to the impact of hotel acquisitions during 1998 and in the first quarter 1999. On a per share basis, income before extraordinary item was $0.50, a 2% increase over the 1998 first quarter. The increase was due to the effect of acquisitions discussed above, partially offset by the increase in the weighted average shares outstanding that resulted from our common share issuances during 1998. Funds from operations, or FFO, is defined as net income before extraordinary and non-recurring items plus depreciation and amortization of real estate assets plus those deposits made into refurbishment escrows which are not included in revenue. Cash available for distribution, or CAD, is FFO less refurbishment escrows plus amortization of deferred financing costs and other non-cash charges. For the quarter ended March 31, 1999, FFO was $43,238 ($.95 per share) and CAD was $36,909 ($.81 per share). FFO and CAD were $33,717 ($.85 per share) and $28,957 ($.73 per share), respectively, in the 1998 period. Growth in FFO and CAD is primarily related to the effects on revenues and expenses of acquisitions in 1998 and 1999. Cash flow provided by (used for) operating, investing and financing activities was $38,398, ($197,923) and $141,451, respectively, for the quarter ended March 31, 1999. Cash flow from operations in 1999 increased 14% from $33,588 in 1998 primarily due to the impact on rental revenue from investments made in 1998 and 1999. Cash used in investing activities and provided by financing activities decreased in 1999 from 1998 levels primarily because of investments in and related financing of 25 hotels during the first quarter 1998 for $312,519 versus the investment in and related financing of 27 hotels during the first quarter 1999 for $223,019. Our total assets increased to $2.0 billion as of March 31, 1999 from $1.8 billion as of December 31, 1998. The increase resulted primarily from hotel acquisitions completed in the first quarter of 1999. 8
Liquidity and Capital Resources (dollar amounts in thousands except per share amounts) During the three months ended March 31, 1999, certain of our subsidiaries acquired 18 Homestead Village(R) hotels, three Candlewood Suites(R) hotels, five TownePlace Suites by Marriott(R) hotels, and one Residence Inn by Marriott(R) hotel for $223,019. Cash used to make these acquisitions plus closing costs was funded with proceeds from draws under our revolving credit facility and cash on hand. Subsequent to March 31, 1999, one of our subsidiaries purchased one Courtyard by Marriott(R) hotel for approximately $10,205. Cash used to make this purchase plus closing costs was funded primarily with cash on hand. We have agreed to acquire an additional six hotels from Marriott International for an additional total investment of approximately $64,744. The acquisition of these six hotels is expected to occur during the remainder of 1999. At March 31, 1999, we had $6,532 of cash and cash equivalents and $172,000 outstanding on our revolving credit facility, with the ability to draw up to an additional $128,000. 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 billion of securities, including debt securities, was declared effective by the Securities and Exchange Commission, or the SEC. 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 SEC. After giving effect to our $75 million preferred share issuance in April 1999, we have $1.3 billion available on 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 and the funding of our existing commitments. On April 12, 1999, we issued three million shares of 9 1/2% Series A Cumulative Redeemable Preferred Shares raising gross proceeds of $75,000 (net proceeds of $72,400). The net proceeds were used to repay amounts outstanding under our revolving credit facility. All our investments are leased to and operated by third parties. All costs of operating and maintaining the hotel properties are borne by our tenants and operators. All of our leases require a percentage (usually 5%) of total hotel sales to be escrowed by the tenant or operator as a reserve for renovations and refurbishment ("FF&E Reserve"). We use funds escrowed in the FF&E reserve accounts for capitalized improvements and replacements to, and refurbishment of, our hotels. Capital expenditures for routine maintenance, replacement and refurbishment of our properties are required to be paid for from funds in cash FF&E Reserves. As of March 31, 1999, we and our several tenants had approximately $31,312 on deposit in these refurbishment escrow accounts. To maintain our status as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, we must meet certain requirements including the distribution of at least 95% of its taxable income to its shareholders. As a REIT, we expect not to be subject to federal income taxes. Dividends are based principally on cash available for distribution which is net income plus depreciation and amortization of real estate assets and certain non-cash charges less FF&E reserve income. Cash available for distribution may not equal cash provided by operating activities because the cash flow of the Company is affected by other factors not included in the cash available for distribution calculation. Dividends with respect to the fourth quarter 1998 results of $0.67 per share were distributed in January 1999. Dividends declared with respect to first quarter 1999 results of $0.68 per share will be paid to shareholders on or about May 20, 1999. Dividends for a year in excess of taxable income for that year constitute return of capital. Funding for current expenses and distributions is provided for by our operations, which are primarily comprised of leasing activity related to owned properties. Property Leases As of March 31, 1999 we own or are committed to purchase 204 hotels which are grouped into eleven combinations and leased to separate affiliates of publicly owned hotel companies including Marriott, Host Marriott Corporation ("Host"), Crestline Capital Corporation ("Crestline"), Patriot American Hospitality Corp. and Wyndham International, Inc. (collectively "Wyndham"), Homestead Village ("Homestead"), Candlewood Hotel Company ("Candlewood") and ShoLodge, Inc. ("ShoLodge"). The tables on the following pages summarize the key terms of our leases and the operating results of our tenants. 9
<TABLE> <CAPTION> =================================================================================================================================== Lease Pool Courtyard by Residence Inn by Residence Residence Marriott(R)/Residence Marriott(R) Marriott(R) Inn(R)/Courtyard by Inn(R)/Courtyard by Inn(R)/Courtyard(R)/ Marriott(R) Marriott(R) TownePlace Suite(R) - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Number of Hotels 53 18 14 9 17 Number of Rooms 7,610 2,178 1,819 1,336 2,665 Number of States 24 14 7 8 7 Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Host subleased Host subleased Marriott Marriott Marriott to subsidiary of to subsidiary of Crestline Crestline Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Marriott Marriott Marriott Marriott Marriott Investment at March 31, 1999 (000's) $506,464 $172,905 $148,812 $129,377 $201,643 (1) Security Deposits (000's) $50,540 $17,220 $14,881 $12,938 $21,322 End of Initial Lease Term 2012 2010 2014 2012 2013 Renewal Options (2) 3 for 12 years 1 for 10 years, 1 for 12 years, 2 for 10 years 2 for 10 years each 2 for 15 years 1 for 10 years each each each Current Annual Minimum Rent (000's) $50,646 $17,290 $14,881 $12,938 $21,322 Percentage Rent (3) 5.0% 7.5% 7.0% 7.0% 7.0% First quarter 1999: Occupancy 79.1% 81.2% 80.5% 74.4% (4) 70.6% (5) ADR $92.42 $100.77 $85.51 $105.68 (4) $82.18 (5) RevPAR $73.10 $ 81.83 $68.84 $78.63 (4) $58.02 (5) 1998: Occupancy 78.0% 82.7% 77.3% ADR $91.83 $103.32 $82.15 (6) (6) RevPAR $71.63 $ 85.45 $63.50 =================================================================================================================================== <FN> (1) Amount includes $126.7 million invested as of March 31, 1999, $10.2 million invested since March 31, 1999 and $64.7 million in commitments expected to be funded later in 1999. (2) Renewal options may be exercised by the tenant for all, but not less than all, of the hotels within a lease pool. (3) Each lease provides for payment of a percentage of increases in total hotel sales over base year levels to us as additional rent. (4) Data includes two hotels that were open for less than one full year as of March 31, 1999 and four which opened in the first quarter of 1998. (5) Data includes ten hotels open as of March 31, 1999, including three opened in 1999 and three opened in the fourth quarter of 1998. (6) Because a majority of these properties have operating histories of less than one year as of the beginning of the period presented, a display of comparative operating results is not meaningful. </FN> </TABLE> 10
<TABLE> <CAPTION> ===================================================================================================================== Lease Pool Wyndham(R) Summerfield Sumner Candlewood Candlewood Homestead Suites(R) Suites(R) Suites(R) Suites(R) Village(R) - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Number of Hotels 12 15 14 17 17 18 Number of Rooms 2,321 1,822 1,641 1,839 2,053 2,399 Number of States 8 8 8 13 13 5 Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Patriot Patriot ShoLodge Candlewood Candlewood Homestead Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Wyndham ShoLodge Candlewood Candlewood Homestead Investment at March 31, 1999 (000's) $182,570 $240,000 $140,000 $118,500 $142,400 $145,000 Security Deposits (000's) $18,325 $15,000 $14,000 $12,081 $14,253 $15,960 End of Initial Lease Term 2012 2015 2008 2011 2011 2015 Renewal Options (1) 4 for 12 4 for 12 5 for 10 3 for 15 3 for 15 2 for 15 years each years each years each years each years each years each Current Annual Minimum Rent (000's) $18,325 $25,000 $14,000 $12,081 $14,253 $15,960 Percentage Rent (2) 8.0% 7.5% 8.0% 10.0% 10.0% 10.0% First quarter 1999: Occupancy (3) 69.7% 78.3% 60.5% 63.7% (4) 62.1% (5) 70.9% (6) ADR (3) $104.87 $122.31 $79.68 $58.62 (4) $60.48 (5) $52.97 (6) RevPAR (3) $73.09 $95.77 $48.21 $37.44 (4) $37.56 (5) $37.56 (6) 1998: Occupancy (3) 76.3% 79.5% 62.0% 62.8% 76.1% (7) ADR (3) $104.81 $123.54 $78.49 $54.17 (5) $42.80 (7) RevPAR (3) $79.97 $98.21 $48.66 $34.02 $32.57 (7) ===================================================================================================================== <FN> (1) Renewal options may be exercised by the tenant for all, but not less than all, of the hotels within a lease pool. (2) Each lease provides for payment of a percentage of increases in total hotel sales over base year levels to us as additional rent. (3) Includes information for periods prior to the acquisition of certain properties by us. (4) Data includes two hotels that were open for less than one full year as of March 31, 1999. (5) Data includes 13 hotels that were open for less than one full year as of March 31, 1999. Because these properties have operating histories of less than one year as of the beginning of the period presented, a display of comparative operating results is not meaningful. (6) Data includes four hotels that were open for less than one full year as of March 31, 1999. (7) Data includes 14 hotels, including 12 hotels that were open for less than one full year as of March 31, 1998. </FN> </TABLE> 11
Seasonality Our hotels have historically experienced seasonal differences 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 lessees to pay rents on a regular basis notwithstanding seasonal fluctuations. Year 2000 Our in-house computer systems environment is limited to software and hardware developed by third parties and installed, operated and monitored by our investment advisor. All of our computer systems (which are limited to financial reporting and accounting systems) were installed within the last two years and we believe such systems are Year 2000 compliant. All costs associated with our computer systems are borne by our investment advisor. Our business is heavily dependent upon the efforts of our third party tenants and their affiliates which operate all of our hotels. Our leases and other contractual relationships require these operators to conduct the daily operations of our hotels and the scope of the operators' responsibilities includes ensuring preparedness for the year 2000. As such, our activities related to year 2000 issues that might effect the systems used by our operators (which include reservations, financial, accounting, personnel, payroll, payables and other systems) have been limited to inquiry and evaluation of our operators' preparedness and contingency plans. Each tenant and operator as of March 31, 1999 (including Marriott, Host, Wyndham, Candlewood, Homestead and ShoLodge) has responded to our inquiries related to the year 2000. Based on operator responses to these inquiries, we believe that these operators are in the process of studying their systems and the systems of their vendors, suppliers and service providors to ensure preparedness. Current levels of preparedness are varied and include partially completed inventory and assessment of potential risks, testing, implementation of plans for remediation and reprogramming. While we believe the efforts of our tenants and their contingency plans described in their responses will be or are adequate to address year 2000 concerns, there can be no guarantee that the systems of other companies on which we rely will be year 2000 compliant on a timely basis and will not have a material effect on us. Our costs related to the year 2000 issues are expected to be zero. If the efforts of our vendors and tenants to prepare for the year 2000 were ineffective, our properties could be subject to significant adverse effects, including, but not limited to, loss of business and growth opportunities, reduced revenues and increased expenses which might cause operating losses by its tenants at their operating properties. Continued or severe operating losses may cause one or more of our tenants to ultimately default on their leases. Numerous lease defaults could jeopardize our ability to maintain our financial results of operations and meet our financial operating and capital obligations. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to risks associated with interest rate changes. We manage our exposure to this market risk through our monitoring of available financing alternatives. Our strategy to manage exposure to changes in interest rates is unchanged from December 31, 1998. Furthermore, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage such exposure in the near future. At March 31, 1999, our total outstanding debt consisted of three issues of fixed rate, senior unsecured notes: Principal Balance Coupon Maturity Interest Payments Due - ----------------- ------ -------- --------------------- $115 million 8 1/4% 2005 Monthly $150 million 7% 2008 Semi-Annually $150 million 8 1/2% 2009 Monthly No principal repayments are due under these notes until maturity. Hypothetically, if at maturity these notes were refinanced at interest rates which are 1/2 percentage point higher than shown above, our per annum interest cost would increase by approximately $2 million. Based on the balances outstanding as of March 31, 1999, a hypothetical immediate 1/2 percentage point change in interest rates would change the fair value of our fixed rate debt obligations by approximately $13 million. Each of our fixed rate debt arrangements allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and in other cases we are allowed to make 12
prepayments only at a premium to face value. In any event, these prepayment rights may afford us the opportunity to mitigate the risk of refinancing at maturity at higher rates by refinancing at lower rates prior to maturity. Our line of credit bears interest at floating rates and has a maturity in 2002. As March 31, 1999, there was $172,000 outstanding and $128,000 was available for drawing under our revolving credit facility. Our revolving credit facility is available to finance our acquisition commitments. As of March 31, 1999, our acquisition commitments totaled approximately $67,000 (excluding closing costs), net of security deposits. Assuming these commitments were funded with borrowings under our revolving credit facility, and assuming interest rates increased 1/2 percentage point, our annualized interest cost would increase by approximately $335. Repayments under the revolving credit facility may be made at any time without penalty. 13
CERTAIN IMPORTANT FACTORS Our quarterly report on Form 10-Q contains statements which constitute forward looking statements within the meaning of the Securities 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 expectations, our Trustees or officers with respect to the declaration or payment of distributions, the effect of Year 2000 issues, our policies and plans regarding investments, financings or other matters, our qualification and continued qualification as a real estate investment trust or trends affecting us or our hotels' financial condition or results of operations. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contained in the forward looking statement as a result of various factors. Such factors include without limitation changes in financing terms, our ability or inability to complete acquisitions and financing transactions, results of operations of our hotels and general changes in economic conditions not presently contemplated. The accompanying information contained in this Form 10-Q including the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operation," identifies other important factors that could cause such differences. THE AMENDED AND RESTATED DECLARATION OF TRUST OF THE COMPANY, DATED AUGUST 21, 1995 A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY 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. PART II Other Information Item 2. Changes in Securities In February 1999 we issued 32,904 common shares to REIT Management & Research, Inc. in payment of an incentive fee of $846,340 for services rendered during 1998 based upon a per common share price of $25.7220. These restricted securities were issued pursuant to the exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule. (b) Reports on Form 8-K (i) Current Report on Form 8-K, dated February 11, 1999, reporting (a) management's discussion and analysis of results of operations and financial condition and (b) consolidated financial statements and related schedule of Hospitality Properties Trust for the years ended December 31, 1998, 1997 and 1996 (Items 5 and 7). (ii) Current Report on Form 8-K, dated March 23, 1999, (a) reporting unaudited consolidated pro forma financial statements and other data and (b) filing as exhibits certain material contracts, a computation of pro forma ratio of earnings to fixed charges, a computation of pro forma ratio of earnings to combined fixed charges and preferred dividends and accountants' consents (Item 7). 14
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: May 10, 1999 15