Service Properties Trust - Annual Report: 2007 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-115272
Hospitality Properties Trust
(Exact Name of Registrant as Specified in Its Charter)
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Maryland |
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04-3262075 |
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(State of Organization) |
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(IRS Employer Identification No.) |
400 Centre Street, Newton, Massachusetts 02458
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code 617-964-8389
Securities registered pursuant to Section 12(b) of the Act:
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Title Of Each Class |
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Name Of Each Exchange On Which Registered |
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Common Shares of Beneficial Interest |
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New York Stock Exchange |
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Series B Cumulative Redeemable Preferred Shares of Beneficial Interest |
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New York Stock Exchange |
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Series C Cumulative Redeemable Preferred Shares of Beneficial Interest |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting shares of the registrant held by non-affiliates was $3.9 billion based on the $41.49 closing price per common share on the New York Stock Exchange on June 30, 2007. For purposes of this calculation, an aggregate of 334,756 common shares of beneficial interest $0.01 par value, held by the trustees and officers of the registrant have been included in the number of shares held by affiliates.
Number of the registrant’s Common Shares outstanding as of February 27, 2008: 93,892,719
References in this Annual Report on Form 10-K to the “Company,” “HPT,” “we,” “us” or “our” include Hospitality Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is to be incorporated herein by reference from our definitive Proxy Statement for the annual meeting of shareholders scheduled for May 15, 2008, or our definitive Proxy Statement.
WARNING CONCERNING FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL SECURITIES LAWS. THESE FORWARD LOOKING STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS FORM 10-K AND INCLUDE BUT ARE NOT LIMITED TO STATEMENTS REGARDING OUR INTENT, BELIEF OR EXPECTATION, OR THE INTENT, BELIEF OR EXPECTATION OF OUR TRUSTEES AND OFFICERS WITH RESPECT TO:
• OUR MANAGERS’ OR TENANTS’ ABILITY TO PAY RETURNS OR RENT TO US;
• OUR ABILITY TO PURCHASE ADDITIONAL PROPERTIES;
• OUR INTENT TO REFURBISH CERTAIN OF OUR PROPERTIES;
• OUR ABILITY TO PAY INTEREST AND DEBT PRINCIPAL AND MAKE DISTRIBUTIONS;
• OUR POLICIES AND PLANS REGARDING INVESTMENTS AND FINANCINGS;
• OUR TAX STATUS AS A REAL ESTATE INVESTMENT TRUST;
• OUR ABILITY TO APPROPRIATELY BALANCE THE USE OF DEBT AND EQUITY AND TO RAISE CAPITAL;
• LITIGATION AFFECTING US AS DESCRIBED HEREIN; AND
• OTHER MATTERS.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION:
• THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS (INCLUDING THE RECENT CHANGES IN THE CAPITAL MARKETS) ON US AND OUR MANAGERS AND TENANTS;
• COMPLIANCE WITH AND CHANGES TO LAWS AND REGULATIONS AFFECTING THE REAL ESTATE, HOTEL, TRANSPORTATION AND TRAVEL CENTER INDUSTRIES;
• DISCOVERY AND JUDICIAL DECISIONS DURING LITIGATION; AND
• COMPETITION WITHIN THE REAL ESTATE, HOTEL AND TRAVEL CENTER INDUSTRIES GENERALLY AND AMONG REITS.
FOR EXAMPLE:
• IF THE AVAILABILITY OF DEBT CAPITAL MARKET REMAINS RESTRICTED OR BECOMES MORE RESTRICTED, WE MAY BE UNABLE TO REFINANCE OR REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE OR ON TERMS WHICH ARE AS FAVORABLE AS WE NOW HAVE.
• HOTEL ROOM DEMAND IS USUALLY A REFLECTION OF THE GENERAL ECONOMIC ACTIVITY IN THE COUNTRY; AND IF HOTEL ROOM DEMAND BECOMES DEPRESSED BECAUSE OF A GENERAL SLOWING OF THE ECONOMY, THE OPERATING RESULTS OF OUR HOTELS MAY DECLINE, THE FINANCIAL RESULTS OF OUR MANAGERS AND TENANTS MAY DECLINE AND OUR OPERATORS AND TENANTS MAY BE UNABLE TO PAY OUR RETURNS OR RENTS.
• A SLOWING OF THE ECONOMY GENERALLY MAY RESULT IN LESS DEMAND FOR SERVICES AT OUR TRAVEL CENTERS; IF TRUCKING ACTIVITY DECLINES, OUR TRAVEL CENTER TENANTS MAY BECOME UNABLE TO PAY OUR RENTS;
• THE LITIGATION DESCRIBED HEREIN MAY HAVE RESULTS DIFFERENT THAN WE NOW ANTICIPATE; AND
• WE MAY BE UNABLE TO IDENTIFY PROPERTIES THAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, AQCUISITION FINANCING TERMS, MANAGEMENT AGREEMENTS OR LEASE TERMS FOR NEW PROPERTIES.
THESE UNEXPECTED RESULTS COULD OCCUR FOR MANY DIFFERENT REASONS, SOME OF WHICH, SUCH AS NATURAL DISASTERS OR CHANGES IN OUR MANAGERS’ OR TENANTS’ REVENUES OR COSTS, OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY, ARE BEYOND OUR CONTROL.
OTHER RISKS MAY ADVERSELY IMPACT US, AS DESCRIBED MORE FULLY UNDER “ITEM 1A. RISK FACTORS.”
FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR.
YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.
EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR RELEASE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
STATEMENT CONCERNING LIMITED LIABILITY
OUR AMENDED AND RESTATED DECLARATION OF TRUST, DATED AUGUST 21, 1995, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME “HOSPITALITY PROPERTIES TRUST” REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST AS SO AMENDED AND SUPPLEMENTED, COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HOSPITALITY PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HOSPITALITY PROPERTIES TRUST. ALL PERSONS DEALING WITH HOSPITALITY PROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HOSPITALITY PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
HOSPITALITY PROPERTIES TRUST
2007 FORM 10-K ANNUAL REPORT
Table of Contents
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Incorporated by reference from our Proxy Statement for the annual meeting of shareholders scheduled to be held on May 15, 2008, to be filed pursuant to Regulation 14A. |
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The Company. We are a real estate investment trust, or REIT, formed in 1995 under the laws of the State of Maryland. As of December 31, 2007, we owned 292 hotels with 43,223 rooms or suites, and 185 travel centers. Our properties are located in 44 states in the United States, Canada and Puerto Rico. Our principal place of business is 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 964-8389.
Our principal external growth strategy is to expand our investments in high quality real estate used in hospitality industries and enter leases and management agreements with experienced operators which generate returns to us that exceed our operating and capital costs. Our principal internal growth strategy is to participate through percentage returns and rents in increases in total sales at our properties, and, under some of our hotel management agreements, increases in the operating income of our properties.
Our investment, financing and disposition policies and business strategies are established by our board of trustees and may be changed by our board of trustees at any time without shareholder approval.
HOTEL PROPERTIES
As of December 31, 2007, our hotels are operated as Courtyard by Marriott®, Candlewood Suites®, Staybridge Suites®, Residence Inn by Marriott®, Crowne Plaza Hotels & Resorts®, Hyatt PlaceTM, AmeriSuites®, InterContinental Hotels & Resorts®, Marriott Hotels and Resorts®, Radisson® Hotels & Resorts, TownePlace Suites by Marriott®, Country Inns & Suites by Carlson®, Holiday Inn Hotels & Resorts®, SpringHill Suites by Marriott®, or Park Plaza® Hotels & Resorts.
Courtyard by Marriott® hotels are designed to attract both business and leisure travelers. A typical Courtyard by Marriott® hotel has 80-150 guest rooms. Most Courtyard by Marriott® hotels are situated on well landscaped grounds and typically are built with a courtyard containing a patio, pool and socializing area that may be enclosed depending upon location. These hotels generally have lounges, meeting rooms, an exercise room, a guest laundry and a restaurant. The guest rooms are similar in size and furnishings to guest rooms in full service Marriott® hotels. In addition, many of the same amenities as would be available in full service Marriott® hotels are available in Courtyard by Marriott® hotels, except that restaurants may be open only for breakfast or serve limited menus, room service may not be available and meeting and function rooms are limited in size and number. According to Marriott International, Inc., or Marriott, as of December 2007, 767 Courtyard by Marriott® hotels were open and operating in the United States and internationally. We believe that the Courtyard by Marriott® brand is a leading brand in the upscale, limited service segment of the United States hotel industry. We have invested a total of $845 million in 71 Courtyard by Marriott® hotels with a total of 10,280 rooms.
Candlewood Suites® hotels are mid-priced extended stay hotels which offer studio and one-bedroom suites designed for business and leisure travelers expecting to stay five or more nights. Each Candlewood Suites® suite contains a fully equipped kitchen, a combination living and work area and a sleeping area. The kitchen typically includes a full size microwave, full size refrigerator, stove, dishwasher and coffee maker. The living area generally contains a convertible sofa or recliner, 32 inch television, combination videocassette and DVD player and compact disc player. The work area includes a large desk and executive chair, free high speed internet access, two phone lines, voice mail and a speaker phone. Most Candlewood Suites® suites contain a king size bed. Other amenities generally offered at each Candlewood Suites® hotel include a fitness center, free guest laundry facilities and a Candlewood Cupboard® area where guests can purchase light meals, snacks and other refreshments 24 hours a day. According to InterContinental Hotels Group plc, or InterContintental, the owner of the Candlewood Suites® brand, there were 158 Candlewood Suites® hotels open and operating in the United States as of December 31, 2007. We have invested $589 million in 76 Candlewood Suites® hotels with a total of 9,220 suites.
Staybridge Suites® hotels generally offer residential style studio, one-bedroom and two bedroom suites for business, governmental and family travelers. Each suite typically offers a fully equipped kitchen and a work area with an oversized desk, two phone lines, an ergonomically designed chair and high speed internet access. Other amenities
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usually include free breakfast buffet, evening receptions 3 days per week, an on site convenience store, fitness center and a 24 hour business center. According to InterContinental, the owner of the Staybridge Suites® brand, there were 122 Staybridge Suites® hotels open and operating in the United States and internationally as of December 2007. We have invested a total of $476 million in 35 Staybridge Suites® hotels with a total of 4,338 suites.
Residence Inn by Marriott® hotels are designed to attract business, governmental and family travelers who stay several consecutive nights. Residence Inn by Marriott® hotels generally have between 80 and 130 studio, one bedroom and two bedroom suites. Most Residence Inn by Marriott® hotels are designed as residential style buildings with landscaped walkways, courtyards and recreational areas. Residence Inn by Marriott® hotels do not have restaurants. All offer complimentary continental breakfast and a complimentary evening hospitality hour. In addition, each suite contains a fully equipped kitchen and many have fireplaces. Most Residence Inn by Marriott® hotels also have swimming pools, exercise rooms, sports courts and guest laundries. According to Marriott, as of December 2007, 546 Residence Inn by Marriott® hotels were open and operating in the United States, Mexico and Canada. We believe that the Residence Inn by Marriott® brand is a leading brand in the extended stay segment of the United States hotel industry. We have invested a total of $438 million in 37 Residence Inn by Marriott® hotels with a total of 4,695 suites.
Crowne Plaza Hotels & Resorts® is InterContinental’s upscale brand targeted at the business guest seeking upscale accommodations at a reasonable price. Crowne Plaza Hotels & Resorts® have a particular focus on meeting accommodations and related services. Our Crowne Plaza Hotels & Resorts® contain between 295 and 613 rooms. With its wide variety of premium services and amenities, including fully-appointed guest rooms with ample work space, full complement of business services, dining choices, quality fitness facilities and comprehensive meeting capabilities, Crowne Plaza Hotels & Resorts® attempt to exceed guest expectations by providing “the right room, the right technology and the right service”. According to InterContinental, there were 299 Crowne Plaza Hotels & Resorts® open and operating worldwide as of December 2007. We have invested a total of $368 million in 12 Crowne Plaza Hotels & Resorts® with a total of 4,406 rooms.
Hyatt PlaceTM and AmeriSuites® hotels are all suite hotels designed to compete in the all suite segment of the lodging industry. After it acquired the AmeriSuites® brand in 2005, Global Hyatt Corporation, or Hyatt, announced a plan for all qualifying AmeriSuites® hotels to be rebranded to the more upscale Hyatt PlaceTM brand and renovated to incorporate the new interior and exterior design of the Hyatt PlaceTM brand. The renovation of our AmeriSuites® hotels began during 2006. As of December 31, 2007, we have completed renovations and rebranded 21 of our former AmeriSuites®hotels. Most renovated Hyatt PlaceTM hotel rooms include upgraded bedding, a wet bar, granite counters, a sectional sofa and a media center with a 42 inch high definition plasma television. We are scheduled to complete renovation of one additional property in 2008. The remaining two AmeriSuites® hotels will not be rebranded and as of December 31, 2007, are being held for sale. According to Hyatt, there were seven AmeriSuites® hotels and 120 Hyatt PlaceTM hotels open and operating in the United States as of December 2007. We have invested $310 million in 24 Hyatt PlaceTM and AmeriSuites® hotels with a total of 2,895 suites.
InterContinental Hotels & Resorts® hotels blend consistent global standards with the distinctive cultural features associated with their separate locations in an effort to deliver favorable guest experiences. Our InterContinental Hotels & Resorts® contain between 189 and 485 rooms. InterContinental Hotels & Resorts® offer high levels of service for business and leisure guests seeking a luxury hotel experience. Amenities include a wide range of personal and business services in addition to restaurants, cocktail lounges, pools, saunas and health/fitness centers. According to InterContinental, there were 149 InterContinental Hotels & Resorts® hotels open worldwide as of December 2007. We have invested a total of $300 million in five InterContinental Hotels & Resorts® with a total of 1,479 rooms.
Marriott Hotels and Resorts® are renowned for the consistent quality of their physical appearances and the well trained staff. Our Marriott Hotels and Resorts® contain between 356 and 601 rooms. Our Marriott Hotels and Resorts® have between 20,000 to 29,000 square feet of meeting and banquet space. Amenities include a wide range of personal and business services in addition to a choice of restaurants, cocktail lounges, concierge floors, pools, saunas, and health/fitness centers. According to Marriott, there were 469 Marriott Hotels and Resorts® open worldwide as of December 2007. We have invested $117 million in 3 Marriott Hotels and Resorts® with a total of 1,356 guest rooms.
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Radisson® Hotels & Resorts is a leading full service hotel brand. Our Radisson® Hotels & Resorts hotels contain between 159 and 381 rooms. Amenities and services often include Sleep Number® beds, large desks, free high speed internet access, room service and a pre-arrival online check in system. The meeting facilities at our Radisson® Hotels & Resorts generally can accommodate groups of between 10 and 600 people in a flexible meeting room design with audiovisual equipment. Most of our Radisson® Hotels & Resorts hotels also have a lobby lounge, a swimming pool, exercise facilities and one or more restaurants. According to Carlson Hotels Worldwide, or Carlson, the owner of the Radisson® Hotels & Resorts brand, there were 398 Radisson® Hotels & Resorts open and operating worldwide as of December 2007. We have invested a total of $116 million in five Radisson® Hotels & Resorts with a total of 975 rooms.
TownePlace Suites by Marriott® are extended stay hotels offering studio, one bedroom and two bedroom suites for business and family travelers. TownePlace Suites by Marriott® compete in the mid-priced extended stay segment of the lodging industry. Each suite usually offers a fully equipped kitchen, a bedroom and separate living and work areas. Other amenities offered typically include voice mail, free high speed internet access, on site business services, guest laundry facilities and a fitness center. According to Marriott, there were 141 TownePlace Suites by Marriott® open worldwide as of December 2007. We have invested $104 million in 12 TownePlace Suites by Marriott® with a total of 1,331 suites.
Country Inns & Suites by Carlson® is a mid-market priced lodging chain. Our Country Inns & Suites by Carlson® hotels contain between 84 and 180 rooms. Amenities and services at these hotels generally include large desks, free breakfast, weekday morning paper and high speed internet access. The meeting facilities at our Country Inns & Suites by Carlson® hotels generally can accommodate groups of between 10 and 200 people in a flexible meeting room design with audiovisual equipment. Most of our Country Inns & Suites by Carlson® hotels also feature a lobby with a fireplace, swimming pool, exercise facilities, fax and copy service and a restaurant and lounge. According to Carlson there were 436 Country Inns & Suites by Carlson® open and operating worldwide as of December 2007. We have invested a total of $75 million in five Country Inns & Suites by Carlson® with a total of 753 rooms.
Holiday Inn Hotels & Resorts® attempt to offer all the services and amenities of a full service hotel in a contemporary style at a reasonable price. Our three Holiday Inn Hotels® and our two Holiday Inn Select® hotels contain between 190 and 264 rooms. Amenities and services generally available at these hotels include a large work desk, phone with voicemail, free high speed internet access, a business center with internet access, copy and fax service, in room coffee or tea service, a refrigerator and designer bath amenities. The meeting facilities at our Holiday Inn Hotels® generally can accommodate groups of between 18 and 280 people in a flexible meeting room design with audiovisual equipment and catering options. These hotels typically also offer a swimming pool, exercise facilities, guest self-service laundry, a lobby lounge and restaurant. According to InterContinental, the owner of the Holiday Inn Hotels & Resorts® brand, there were 1,381 Holiday Inn Hotels® open and operating worldwide as of December 2007. We have invested a total of $36 million in 3 Holiday Inn Hotels® with a total of 697 rooms.
SpringHill Suites by Marriott® are all suites hotels designed to attract value conscious business and family travelers. Guest suites can be up to 25% larger than standard hotel rooms. Each suite usually has separate sleeping, living and work areas, a mini-refrigerator, a microwave and coffee service. Other amenities offered include a pull out sofa bed, complimentary breakfast buffet, weekday newspaper, two phone lines, free high speed internet access and voice mail, other on site business services, guest laundry facilities and a fitness center. According to Marriott, there were 177 SpringHill Suites by Marriott® open as of December 2007. We have invested $21 million in two SpringHill Suites by Marriott® with a total of 264 suites.
Park Plaza® Hotels & Resorts is in the mid priced segment of the full service hotel category. Our Park Plaza® Hotels & Resorts contain between 166 and 209 rooms. Amenities and services generally available at these hotels include large desks, free high speed internet access, room service and a restaurant. The meeting facilities at our Park Plaza® Hotels & Resorts generally can accommodate groups of between 10 and 400 people in a flexible meeting room design with audiovisual equipment. Our Park Plaza® Hotels & Resorts hotels also usually have a lobby lounge, a swimming pool and exercise facilities. According to Carlson, the owner of the Park Plaza® Hotels & Resorts brand, there were 41 Park Plaza® Hotels & Resorts open and operating as of December 2007. At December 31, 2007, we had invested a total of $21 million in two Park Plaza® Hotels & Resorts with a total of 534 rooms. In February 2008, we sold one of our Park Plaza® hotels for net proceeds of approximately $7.6 million.
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TRAVEL CENTER PROPERTIES
As of December 31, 2007 we owned 185 travel centers; 145 of our travel centers are operated under the TravelCenters of America® or TA® brand names and 40 are operated under the Petro Stopping Centers® brand name.
Substantially all our travel centers are full service sites located on or near an interstate highway and offer fuel and non-fuel products and services 24 hours per day, 365 days per year. The typical travel center generally contains: over 20 acres of land with parking for 170 tractor trailers and 100 cars; a full service restaurant and one to three quick service restaurants, or QSRs, which are operated under nationally recognized brands; a truck repair facility and parts store; multiple diesel and gasoline fueling points; a travel and convenience store; and, a game room, lounge, private showers and other amenities for professional truck drivers and motorists. In addition, some of our travel centers include a hotel.
The physical layout of our travel centers vary from property to property. Many of our Travel Centers of America® and TA® properties have one building with separate service areas, while many of our Petro Stopping Centers® branded properties have several separate buildings.
PRINCIPAL MANAGEMENT AGREEMENT OR LEASE FEATURES
As of December 31, 2007, each of our 292 hotels are included in one of 10 combinations of hotels; 201 hotels are leased to our taxable REIT subsidiaries, or TRSs, and managed by independent hotel operating companies, and 91 hotels are leased to third parties. Our 185 travel centers are leased under two agreements. The principal features of the management agreements and leases for our 477 properties are as follows:
• Minimum Returns or Minimum Rent. All of our agreements require our managers or tenants to pay to us fixed minimum returns or minimum rent.
• Additional Returns or Rent. Most of our agreements require percentage returns or rent based on increases in gross property revenues over threshold amounts. In addition, certain of our hotel management agreements provide for additional returns to us based on increases in hotel operating income.
• Long Terms. Our management agreements and leases are generally entered for initial terms of 15 years or more. None of our management agreements and leases for our properties expire before December 2010. The weighted average term remaining for our agreements (weighted by our investment) is 16.0 years as of December 31, 2007.
• Pooled Agreements. Each of our properties is part of a combination of properties. The manager’s or tenant’s obligations to us with respect to each property in a combination are subject to cross default with the obligations with respect to all the other properties in the same combination. The smallest combination includes 10 hotels in which we have invested $231 million; the largest combination includes 145 travel centers in which we have invested $1.7 billion.
• Geographic Diversification. Each combination of properties is geographically diversified. In addition, our properties are located in the vicinity of major demand generators such as large suburban office parks, airports, medical or educational facilities or major tourist attractions for hotels and interstate highways for travel centers.
• All or None Renewals. All manager or tenant renewal options for each combination of our properties may only be exercised on an all or none basis and not for separate properties.
• Property Maintenance. Generally our hotel agreements require the deposit of 5% to 6% of gross hotel revenues into escrows to fund periodic renovations. For recently built or renovated hotels, this requirement may be deferred for the first few years of the agreement. Our travel center leases require the tenants to maintain the leased travel centers at their expense, including structural and non-structural components.
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• Security Features. Each management agreement or lease includes various terms intended to secure the payments to us, including some or all of the following: cash security deposits which we receive but do not escrow; subordination of management fees payable to the operator to some or all of our return or rent; and full or limited guarantees from the manager’s or tenant’s parent company. As of December 31, 2007, eight of our 12 combination agreements, including 352 properties, have minimum return or minimum rent payable to us which are subject to full or limited guarantees. These properties represent 75% of our total investments, at cost, at December 31, 2007.
On January 31, 2007, we distributed all the common shares of our formerly wholly owned subsidiary TravelCenters of America LLC, or TA, to our common shareholders. Today, TA is a separate company listed on the American Stock Exchange under the symbol “TA”. As of December 31, 2007, TA leases all of our travel center properties and is responsible for 39% of our annual minimum returns and rent. As of the date of this report, TA has not filed its Annual Report on Form 10-K for the year ended December 31, 2007. Therefore, summary audited financial information regarding TA is not now available. We expect to furnish such information by an amendment to this Annual Report on Form 10-K when it becomes available to us.
INVESTMENT AND OPERATING POLICIES
We provide capital to owners and operators in hospitality related industries who wish to divest their properties while remaining in the hospitality business. Many other public hospitality REITs seek to control the operations of properties in which they invest and generally design their management agreements or leases to capture substantially all net operating income from their hotels’ businesses. Our agreements with our operators and tenants are designed with the expectation that, over their terms, net operating income from our properties will exceed minimum amounts due to us. We believe that this difference in operating philosophy may afford us a competitive advantage over other hospitality REITs in finding high quality investment opportunities on attractive terms and increase the dependability of our cash flows used to pay distributions.
Our investment objectives include increasing cash flow from operations from dependable and diverse sources in order to increase per share distributions. To achieve these objectives, we seek to: maintain a strong capital base of shareholders’ equity; invest in high quality properties operated by experienced operating companies; use moderate debt leverage to fund additional investments which increase cash flow from operations because of positive spreads between our cost of investment capital and investment yields; structure investments which generate a minimum return and provide an opportunity to participate in operating growth at our properties; when market conditions permit, refinance debt with additional equity or long term debt; and, pursue diversification so that our cash flow from operations comes from diverse properties and operators.
In order to benefit from potential property appreciation, we prefer to own properties rather than make mortgage investments. We may invest in real estate joint ventures if we conclude that we may benefit from the participation of co-ventures or that the opportunity to participate in the investment is contingent on the use of a joint venture structure. We may invest in participating, convertible or other types of mortgages if we conclude that we may benefit from the cash flow or appreciation in the value of the mortgaged property. Convertible mortgages are similar to equity participation because they permit lenders to either participate in increasing revenues from the property or convert some or all of that mortgage into equity ownership interests. At December 31, 2007, we owned no convertible mortgages or joint venture interests.
We may not achieve some or all of our investment objectives.
Because we are a REIT, generally, we may not operate our properties. We or our tenants have entered into arrangements for operation of our properties. As described elsewhere in this Annual Report on Form 10-K, tax law changes known as the REIT Modernization Act, or the RMA, were enacted and became effective January 1, 2001. The RMA, among other things, allows a REIT to lease hotels to a TRS if the hotel is managed by a third party. As of December 31, 2007, 201 of our hotels are leased to our TRSs and managed by third parties. Any income realized by a TRS in excess of the rent paid to us by the subsidiary is subject to income tax at customary corporate rates. As, and if, the financial performance of the hotels operated for the account of our TRSs improves, these taxes may become material.
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ACQUISITION POLICIES
We intend to pursue growth through the acquisition of additional properties. Generally, we prefer to purchase multiple properties in one transaction because we believe a single management or lease agreement, cross default covenants and all or none renewal rights for multiple properties in diverse locations enhance the credit characteristics and the security of our investments. In implementing our acquisition strategy, we consider a range of factors relating to proposed property purchases including:
· Historical and projected cash flows;
· The competitive market environment and the current or potential market position of each property;
· The availability of a qualified operator or lessee;
· The financial strength of the proposed operator or lessee;
· The amount and type of financial support available from the proposed operator or lessee;
· The property’s design, physical condition and age;
· The estimated replacement cost and proposed acquisition price of the property;
· The reputation of the particular management organization, if any, with which the property is or may become affiliated;
· The level of services and amenities offered at the property;
· The proposed management agreement or lease terms; and
· The brand under which the property operates or is expected to operate.
In determining the competitive position of a property, we examine the proximity and convenience of the property to its expected customer base, the number and characteristics of competitive properties within the property’s market area and the existence of barriers to entry within that market, including site availability and zoning restrictions. While we have historically focused on the acquisition of upscale limited service, extended stay and full service hotel properties and, more recently, full service travel centers, we consider acquisitions in all segments of the hospitality industry. An important part of our acquisition strategy is to identify and select, or create, qualified, experienced and financially stable operators.
Whenever we purchase an individual property or a small number of properties we attempt to arrange for these properties to be added to agreements covering, and operated in combination with, properties we already own.
We have no policies which specifically limit the percentage of our assets which may be invested in any individual property, in any one type of property, in properties operated by or leased to any one entity or in properties operated by or leased to an affiliated group of entities.
We have in the past considered and may in the future consider the possibility of entering into mergers or strategic combinations with other companies. A principal goal of any such transaction may be to further diversify our revenue sources and increase our cash flow from operations.
DISPOSITION POLICIES
In the past we have occasionally sold a property or exchanged properties which we own for different properties. In December 2007, our board of trustees authorized us to pursue the disposition of three hotels with a net carrying value of approximately $15.8 million at December 31, 2007. In February 2008, one hotel was sold for net proceeds of approximately $7.6 million. Although we may do so, we have no current intention to dispose of any of our other presently owned properties. We currently make decisions to dispose of properties based on factors including but not limited to the following:
· Potential opportunities to increase revenues and property values by reinvesting sale proceeds;
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· The proposed sale price;
· The strategic fit of the property with the rest of our portfolio;
· Our operator’s or tenant’s desire to cease operation of the property; and
· The existence of alternative sources, uses or needs for capital.
FINANCING POLICIES
Although there are no limitations in our organizational documents on the amount of indebtedness we may incur, our $750 million unsecured revolving credit facility and our senior note indenture and its supplements contain financial covenants which, among other things, restrict our ability to incur indebtedness and require us to maintain certain financial ratios and a minimum net worth. We currently intend to pursue our growth strategies while maintaining debt that is less than 50% of our total capitalization. We may from time to time re-evaluate and modify our financing policies in light of then current economic conditions, relative availability and costs of debt and equity capital, market values of properties, growth and acquisition opportunities and other factors; and we may increase or decrease our ratio of debt to total capitalization accordingly.
Our board of trustees may determine to obtain a replacement for our current credit facility or to seek additional capital through equity offerings, interim or long term debt financings, or retention of cash flows in excess of distributions to shareholders or a combination of these methods. Only one of our properties is encumbered by a mortgage. To the extent that our board of trustees decides to obtain additional debt financing, we may do so on an unsecured basis or a secured basis. We may seek to obtain other lines of credit or to issue securities senior to our common and/or preferred shares, including preferred shares of beneficial interest and debt securities, either of which may be convertible into common shares or be accompanied by warrants to purchase common shares, or to engage in transactions which may involve a sale or other conveyance of hotels to subsidiaries or to unaffiliated entities. We may finance acquisitions through an exchange of properties or through the issuance of additional common shares or other securities. The proceeds from any of our financings may be used to pay distributions, to provide working capital, to refinance existing indebtedness or to finance acquisitions and expansions of existing or new properties.
Manager. Our day to day operations are conducted by Reit Management & Research LLC, or RMR. RMR originates and presents investment opportunities to our board of trustees and provides property management and administrative services to us. RMR is a Delaware limited liability company that is beneficially owned by Barry M. Portnoy and his son, Adam D. Portnoy, our managing trustees. RMR has a principal place of business at 400 Centre Street, Newton, Massachusetts 02458; and its telephone number is (617) 332-3990. RMR also acts as the manager to HRPT Properties Trust, or HRP, and to Senior Housing Properties Trust, or SNH, and has other business interersts. The directors of RMR: are David J. Hegarty, Gerard M. Martin, formerly one of our managing trustees, Adam D. Portnoy and Barry M. Portnoy. The executive officers of RMR are Adam D. Portnoy, President and Chief Executive Officer; David J. Hegarty, Executive Vice President and Secretary; John G. Murray, Executive Vice President; Evrett W. Benton, Senior Vice President; Ethan S. Bornstein, Senior Vice President; Jennifer B. Clark, Senior Vice President and General Counsel; Richard A. Doyle Jr., Senior Vice President; John R. Hoadley, Senior Vice President; Mark L. Kleifges, Senior Vice President; David M. Lepore, Senior Vice President; Bruce J. Mackey Jr., Senior Vice President; John A. Mannix, Senior Vice President; Thomas M. O’Brien, Senior Vice President; John C. Popeo, Senior Vice President, Treasurer and Chief Financial Officer and Andrew J. Rebholz, Senior Vice President. Messrs. Murray, Kleifges and Bornstein are also our officers. Other officers of RMR also serve as officers of other companies to which RMR provides management or other services.
Employees. We have no employees. Services which would otherwise be provided by employees are provided by RMR and by our managing trustees and officers. As of February 26, 2008, RMR had approximately 500 full time employees.
Competition. The hotel industry is highly competitive. Generally our hotels are located in areas that include other hotels. Increases in the number of hotels in a particular area could have a material adverse effect on the occupancy and daily room rates at our hotels located in that area. Agreements with the operators of our hotels sometimes restrict the right of each operator and its affiliates for periods of time to own, build, operate, franchise or manage other hotels of the same brand within various specified areas around our hotels. Under these agreements neither the operators nor their affiliates are usually restricted from operating other brands of hotels in the market areas
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of any of our hotels, and after such period of time, the operators and their affiliates may also compete with our hotels by opening, managing or franchising additional hotels under the same brand name in direct competition with our hotels.
The travel center and truck stop industry is fragmented and highly competitive. Fuel and non-fuel products and services can be obtained by long haul truck drivers from a variety of sources, including regional full service travel centers and pumper only truck stop chains, independently owned and operated truck stops and some large gas stations. In addition, some trucking companies operate their own terminals to provide fuel and services to their own trucking fleets.
We expect to compete for property acquisition and financing opportunities with entities which may have substantially greater financial resources than us, including, without limitation, other REITs, operating companies in the hospitality industry, banks, insurance companies, pension plans and public and private partnerships. These entities may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of property operators and the extent of leverage used in their capital structure. Such competition may reduce the number of suitable property acquisition or financing opportunities available to us or increase the bargaining power of property owners seeking to sell or finance their properties.
Environmental Matters. Under various laws, owners of real estate may be required to investigate and clean up hazardous substances present at their properties, and may be held liable for property damage or personal injuries that result from such hazardous substances. These laws also expose us to the possibility that we may become liable to reimburse the government for damages and costs it incurs in connection with the hazardous substances. Our travel centers include fueling areas, truck repair and maintenance facilities and tanks for the storage of petroleum products and other hazardous substances, all of which create a potential for environmental damages. We reviewed environmental surveys and other studies of the properties we own prior to their purchase. Based upon those reviews we do not believe that any of our properties are subject to environmental contamination that is likely to result in material adverse consequences to us. Under the terms of our management agreements and leases, our tenants and operators have agreed to indemnify us from all environmental liabilities arising during the term of the agreements. However, no assurances can be given that environmental conditions for which we would be liable are not present at our properties or that costs we incur to remediate contamination will not have a material adverse effect on our business or financial condition. Moreover, our tenants and operators may not have sufficient resources to pay environmental liabilities.
Internet Website. Our internet website address is www.hptreit.com. Copies of our governance guidelines, code of business conduct and ethics and the charters of our audit, compensation and nominating and governance committees may be obtained free of charge by writing to our Secretary, Hospitality Properties Trust, 400 Centre Street, Newton, MA 02458 or at our website. We make available, free of charge, on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after these forms are filed with, or furnished to, the Securities and Exchange Commission. Any shareholder or other interested party who desires to communicate with our non-management trustees, individually or as a group, may do so by filling out a report on our website. Our board of trustees also provides a process for security holders to send communications to the entire board. Information about the process for sending communications to our board can be found on our website. Our website address is included several times in this Annual Report on Form 10-K as a textual reference only and the information in the website is not incorporated by reference into this Annual Report on Form 10-K.
Segment Information. As of December 31, 2007, we have two operating segments, hotel real estate investments and travel center real estate investments.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of federal income tax considerations is based on existing law, and is limited to investors who own our shares as investment assets rather than as inventory or as property used in a trade or business. The summary
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does not discuss the particular tax consequences that might be relevant to you if you are subject to special rules under federal income tax law, for example if you are:
· a bank, life insurance company, regulated investment company, or other financial institution;
· a broker or dealer in securities or foreign currency;
· a person who has a functional currency other than the U.S. dollar;
· a person who acquires our shares in connection with employment or other performance of services;
· a person subject to alternative minimum tax;
· a person who owns our shares as part of a straddle, hedging transaction, constructive sale transaction, constructive ownership transaction, or conversion transaction; or
· except as specifically described in the following summary, a tax-exempt entity or a foreign person.
The Internal Revenue Code of 1986, as amended, or the IRC sections that govern federal income tax qualification and treatment of a REIT and its shareholders are complex. This presentation is a summary of applicable IRC provisions, related rules and regulations and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Future legislative, judicial, or administrative actions or decisions could also affect the accuracy of statements made in this summary. We have not received a ruling from the Internal Revenue Service, or the IRS, with respect to any matter described in this summary, and we cannot assure you that the IRS, or a court will agree with the statements made in this summary. The IRS or a court could, for example, take a different position, which could result in significant tax liabilities for applicable parties, from that described in this summary with respect to our acquisitions, operations, restructurings or any other matters described in this summary. In addition, this summary is not exhaustive of all possible tax consequences, and does not discuss any estate, gift, state, local, or foreign tax consequences. For all these reasons, we urge you and any prospective acquiror of our shares to consult with a tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares. Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations that are in effect as of the date of this Annual Report on Form 10-K. If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs.
Your federal income tax consequences may differ depending on whether or not you are a “U.S. shareholder.” For purposes of this summary, a “U.S. shareholder” for federal income tax purposes is:
· a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws;
· an entity treated as a corporation for federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
· an estate the income of which is subject to federal income taxation regardless of its source; or
· a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or electing trusts in existence on August 20, 1996, to the extent provided in Treasury regulations;
whose status as a U.S. shareholder is not overridden by an applicable tax treaty. Conversely, a “non-U.S. shareholder” is a beneficial owner of our shares who is not a U.S. shareholder. If a partnership (including any entity treated as a partnership for federal income tax purposes) is a beneficial owner of our shares, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A beneficial owner that is a partnership and partners in such a partnership should consult their tax advisors about the federal income tax consequences of the acquisition, ownership and disposition of our shares.
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Taxation as a REIT
We have elected to be taxed as a REIT under Sections 856 through 860 of the IRC, commencing with our taxable year ending December 31, 1995. Our REIT election, assuming continuing compliance with the then applicable qualification tests, continues in effect for subsequent taxable years. Although no assurance can be given, we believe that we are organized, have operated, and will continue to operate in a manner that qualifies us to be taxed under the IRC as a REIT.
As a REIT, we generally are not subject to federal income tax on our net income distributed as dividends to our shareholders. Distributions to our shareholders generally are included in their income as dividends to the extent of our current or accumulated earnings and profits. Our dividends are not generally entitled to the favorable 15% rate on qualified dividend income, but a portion of our dividends may be treated as capital gain dividends, all as explained below. No portion of any of our dividends is eligible for the dividends received deduction for corporate shareholders. Distributions in excess of current or accumulated earnings and profits generally are treated for federal income tax purposes as return of capital to the extent of a recipient shareholder’s basis in our shares, and will reduce this basis. Our current or accumulated earnings and profits are generally allocated first to distributions made on our preferred shares, and thereafter to distributions made on our common shares. For all these purposes, our distributions include both cash distributions and any in kind distributions of property that we might make, for example, our January 2007 spin off of TA to our common shareholders as described below.
If a shareholder actually or constructively owns none or a small percentage of our common shares, and such shareholder surrenders its preferred shares to us to be repurchased for cash only, then the repurchase of the preferred shares is likely to qualify for sale or exchange treatment because the repurchase would not be “essentially equivalent to a dividend” as defined by the IRC. More specifically, a cash repurchase of preferred shares will be treated under Section 302 of the IRC as a distribution, and hence taxable as a dividend to the extent of our allocable current or accumulated earnings and profits, as discussed above, unless the repurchase satisfies one of the tests set forth in Section 302(b) of the IRC and is therefore treated as a sale or exchange of the repurchased shares. The repurchase will be treated as a sale or exchange if it (1) is “substantially disproportionate” with respect to the surrendering shareholder’s ownership in us, (2) results in a “complete termination” of the surrendering shareholder’s common and preferred share interest in us, or (3) is “not essentially equivalent to a dividend” with respect to the surrendering shareholder, all within the meaning of Section 302(b) of the IRC. In determining whether any of these tests have been met, a shareholder must generally take into account our common and preferred shares considered to be owned by such shareholder by reason of constructive ownership rules set forth in the IRC, as well as our common and preferred shares actually owned by such shareholder. In addition, if a repurchase is treated as a distribution under the preceding tests, then a shareholder’s tax basis in the repurchased preferred shares will be transferred to the shareholder’s remaining shares of our common or preferred shares, if any, and if such shareholder owns no other shares of our common or preferred shares, such basis may be transferred to a related person or may be lost entirely. Because the determination as to whether a shareholder will satisfy any of the tests of Section 302(b) of the IRC depends upon the facts and circumstances at the time that the preferred shares are repurchased, we encourage you to consult your own tax advisor to determine your particular tax treatment.
Our counsel, Sullivan & Worcester LLP, has opined that we have been organized and have qualified as a REIT under the IRC for our 1995 through 2007 taxable years, and that our current investments and plan of operation enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC. Our continued qualification and taxation as a REIT will depend upon our compliance with various qualification tests imposed under the IRC and summarized below. While we believe that we will satisfy these tests, our counsel has not reviewed and will not review compliance with these tests on a continuing basis. If we fail to qualify as a REIT, we will be subject to federal income taxation as if we were a C corporation and our shareholders will be taxed like shareholders of C corporations. In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders may be reduced or eliminated.
If we qualify as a REIT and meet the tests described below, we generally will not pay federal income tax on amounts we distribute to our shareholders. However, even if we qualify as a REIT, we may be subject to federal tax in the following circumstances:
· We will be taxed at regular corporate rates on any undistributed “real estate investment trust taxable income,” including our undistributed net capital gains.
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· If our alternative minimum taxable income exceeds our taxable income, we may be subject to the corporate alternative minimum tax on our items of tax preference.
· If we have net income from the disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business or from other nonqualifying income from foreclosure property, we will be subject to tax on this income at the highest regular corporate rate, currently 35%.
· If we have net income from prohibited transactions, including dispositions of inventory or property held primarily for sale to customers in the ordinary course of business other than foreclosure property, we will be subject to tax on this income at a 100% rate.
· If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, but nonetheless maintain our qualification as a REIT, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability.
· If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year, and any undistributed taxable income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed.
· If we acquire an asset from a corporation in a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of a present or former C corporation, and if we subsequently recognize gain on the disposition of this asset during the ten year period beginning on the date on which the asset ceased to be owned by the C corporation, then we will pay tax at the highest regular corporate tax rate, which is currently 35%, on the lesser of the excess of the fair market value of the asset over the C corporation’s basis in the asset on the date the asset ceased to be owned by the C corporation, or the gain we recognize in the disposition.
· If we acquire a corporation, to preserve our status as a REIT we must generally distribute all of the C corporation earnings and profits inherited in that acquisition, if any, not later than the end of the taxable year of the acquisition. However, if we fail to do so, relief provisions would allow us to maintain our status as a REIT provided we distribute any subsequently discovered C corporation earnings and profits and pay an interest charge in respect of the period of delayed distribution. As discussed below, we have acquired C corporations in connection with our acquisition of real estate. Our investigations of these C corporations indicated that they did not have undistributed earnings and profits that we inherited but failed to timely distribute. However, upon review or audit, the IRS may disagree.
· As summarized below, REITs are permitted within limits to own stock and securities of a TRS. A TRS is separately taxed on its net income as a C corporation, and is subject to limitations on the deductibility of interest expense paid to its REIT parent. In addition, its REIT parent is subject to a 100% tax on the difference between amounts charged and redetermined rents and deductions, including excess interest.
· If and to the extent we invest in properties in foreign jurisdictions, our income from those properties will generally be subject to tax in those jurisdictions. In 2005, we acquired hotels in Canada and Puerto Rico. Our profits from properties outside of the United States will generally be subject to tax in the local jurisdictions. Through structuring and available tax exemptions, we have minimized the Canadian and Puerto Rican income taxes we must pay, but there can be no assurance that these existing structures and exemptions will be available to us in the future to minimize taxes. If we continue to operate as we do, then we will distribute our taxable income to our shareholders each year and we will generally not pay federal income tax. As a result, we cannot recover the cost of foreign income taxes imposed on our foreign investments by claiming foreign tax credits against our federal income tax liability. Also, we cannot pass through to our shareholders any foreign tax credits.
If we fail to qualify or elect not to qualify as a REIT, we will be subject to federal income tax in the same manner as a C corporation. Distributions to our shareholders if we do not qualify as a REIT will not be deductible by us
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nor will distributions be required under the IRC. In that event, distributions to our shareholders will generally be taxable as ordinary dividends potentially eligible for the 15% income tax rate discussed below in “Taxation of U.S. Shareholders” and, subject to limitations in the IRC, will be eligible for the dividends received deduction for corporate shareholders. Also, we will generally be disqualified from qualification as a REIT for the four taxable years following disqualification. If we do not qualify as a REIT for even one year, this could result in reduction or elimination of distributions to our shareholders, or in our incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level taxes. The IRC provides certain relief provisions under which we might avoid automatically ceasing to be a REIT for failure to meet certain REIT requirements, all as discussed in more detail below.
In the January 31, 2007 spin off of TA, our common shareholders received a distribution from us in an amount equal to the fair market value of the TA common shares at the time of the spin off. A recipient of TA common shares in the spin off obtained a tax basis in those shares equal to their fair market value at the time of the spin off, and the recipient’s holding period in those TA common shares commenced on the day after the spin off. Sullivan & Worcester LLP is unable to render an opinion on the fair market value of the TA common shares because of the factual nature of value determinations. However, we believe that our shareholders may, for federal income tax purposes, value the TA common shares at the time of the spin off as $32.34 per TA common share.
REIT Qualification Requirements
General Requirements. Section 856(a) of the IRC defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;
(3) that would be taxable, but for Sections 856 through 859 of the IRC, as a C corporation;
(4) that is not a financial institution or an insurance company subject to special provisions of the IRC;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) that is not “closely held” as defined under the personal holding company stock ownership test, as described below; and
(7) that meets other tests regarding income, assets and distributions, all as described below.
Section 856(b) of the IRC provides that conditions (1) through (4) must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a pro rata part of a taxable year of less than 12 months. Section 856(h)(2) of the IRC provides that neither condition (5) nor (6) need be met for our first taxable year as a REIT. We believe that we have met conditions (1) through (7) during each of the requisite periods ending on or before our most recently completed taxable year, and that we can continue to meet these conditions in future taxable years. There can, however, be no assurance in this regard.
By reason of condition (6), we will fail to qualify as a REIT for a taxable year if at any time during the last half of a year more than 50% in value of our outstanding shares is owned directly or indirectly by five or fewer individuals. To help comply with condition (6), our declaration of trust restricts transfers of our shares. In addition, if we comply with applicable Treasury regulations to ascertain the ownership of our shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as having met condition (6). However, our failure to comply with these regulations for ascertaining ownership may result in a penalty of $25,000, or $50,000 for intentional violations. Accordingly, we intend to comply with these regulations, and to request annually from record holders of significant percentages of our shares information regarding the ownership of our shares. Under our declaration of trust, our shareholders are required to respond to these requests for information.
For purposes of condition (6), REIT shares held by a pension trust are treated as held directly by the pension trust’s beneficiaries in proportion to their actuarial interests in the pension trust. Consequently, five or fewer pension trusts
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could own more than 50% of the interests in an entity without jeopardizing that entity’s federal income tax qualification as a REIT. However, as discussed below, if a REIT is a “pension-held REIT,” each pension trust owning more than 10% of the REIT’s shares by value generally may be taxed on a portion of the dividends it receives from the REIT.
The IRC provides that we will not automatically fail to be a REIT if we do not meet conditions (1) through (6), provided we can establish reasonable cause for any such failure. Each such excused failure will result in the imposition of a $50,000 penalty instead of REIT disqualification. It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision. This relief provision applies to any failure of the applicable conditions, even if the failure first occurred in a prior taxable year, as long as each of the requirements of the relief provision is satisfied after October 22, 2004.
Our Wholly-Owned Subsidiaries and Our Investments through Partnerships. Except in respect of TRSs as discussed below, Section 856(i) of the IRC provides that any corporation, 100% of whose stock is held by a REIT, is a qualified REIT subsidiary and shall not be treated as a separate corporation. The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as the REIT’s. We believe that each of our direct and indirect wholly-owned subsidiaries, other than the TRSs discussed below, will either be a qualified REIT subsidiary within the meaning of Section 856(i) of the IRC, or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under regulations issued under Section 7701 of the IRC. Thus, except for the TRSs discussed below, in applying all the federal income tax REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our direct and indirect wholly-owned subsidiaries are treated as ours.
We have invested and may invest in real estate through one or more limited or general partnerships or limited liability companies that are treated as partnerships for federal income tax purposes. In the case of a REIT that is a partner in a partnership, regulations under the IRC provide that, for purposes of the REIT qualification requirements regarding income and assets discussed below, the REIT is deemed to own its proportionate share of the assets of the partnership corresponding to the REIT’s proportionate capital interest in the partnership and is deemed to be entitled to the income of the partnership attributable to this proportionate share. In addition, for these purposes, the character of the assets and gross income of the partnership generally retain the same character in the hands of the REIT. Accordingly, our proportionate share of the assets, liabilities, and items of income of each partnership in which we are a partner is treated as ours for purposes of the income tests and asset tests discussed below. In contrast, for purposes of the distribution requirement discussed below, we must take into account as a partner our share of the partnership’s income as determined under the general federal income tax rules governing partners and partnerships under Sections 701 through 777 of the IRC.
Taxable REIT Subsidiaries. We are permitted to own any or all of the securities of a TRS as defined in Section 856(l) of the IRC, provided that no more than 20% of our assets, at the close of each quarter, is comprised of our investments in the stock or securities of our TRSs. Among other requirements, a TRS must:
(1) be a non-REIT corporation for federal income tax purposes in which we directly or indirectly own shares;
(2) join with us in making a TRS election;
(3) not directly or indirectly operate or manage a lodging facility or a health care facility; and
(4) not directly or indirectly provide to any person, under a franchise, license, or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, except that in limited circumstances a subfranchise, sublicense or similar right can be granted to an independent contractor to operate or manage a lodging facility.
In addition, a corporation other than a REIT in which a TRS directly or indirectly owns more than 35% of the voting power or value will automatically be treated as a TRS. Subject to the discussion below, we believe that we and each of our TRSs have complied with, and will continue to comply with, the requirements for TRS status during all times each subsidiary’s TRS election remains in effect, and we believe that the same will be true for any TRS that we later form or acquire.
Our ownership of stock and securities in TRSs is exempt from the 10% and 5% REIT asset tests discussed below. Also, as discussed below, TRSs can perform services for our tenants without disqualifying the rents we receive from
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those tenants under the 75% or 95% gross income tests discussed below. Moreover, because TRSs are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit are not generally imputed to us for purposes of the REIT qualification requirements described in this summary. Therefore, TRSs can generally undertake third-party management and development activities and activities not related to real estate. Finally, while a REIT is generally limited in its ability to earn qualifying rental income from a TRS, a REIT can earn qualifying rental income from the lease of a qualified lodging facility to TRS if an eligible independent contractor operates the facility, as discussed more fully below.
Restrictions are imposed on TRSs to ensure that they will be subject to an appropriate level of federal income taxation. For example, a TRS may not deduct interest paid in any year to an affiliated REIT to the extent that the interest payments exceed, generally, 50% of the TRSs’ adjusted taxable income for that year. However, the TRS may carry forward the disallowed interest expense to a succeeding year, and deduct the interest in that later year subject to that year’s 50% adjusted taxable income limitation. In addition, if a TRS pays interest, rent, or other amounts to its affiliated REIT in an amount that exceeds what an unrelated third party would have paid in an arm’s length transaction, then the REIT generally will be subject to an excise tax equal to 100% of the excessive portion of the payment. Finally, if in comparison to an arm’s length transaction, a tenant has overpaid rent to the REIT in exchange for underpaying the TRS for services rendered, then the REIT may be subject to an excise tax equal to 100% of the overpayment. There can be no assurance that arrangements involving our TRSs will not result in the imposition of one or more of these deduction limitations or excise taxes, but we do not believe that we are or will be subject to these impositions.
Income Tests. There are two gross income requirements for qualification as a REIT under the IRC:
· At least 75% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from investments relating to real property, including “rents from real property” as defined under Section 856 of the IRC, mortgages on real property, or shares in other REITs. When we receive new capital in exchange for our shares or in a public offering of five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% gross income test.
· At least 95% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from a combination of items of real property income that satisfy the 75% gross income test described above, dividends, interest, gains from the sale or disposition of stock, securities, or real property or, for financial instruments entered into during our 2004 or earlier taxable years, certain payments under interest rate swap or cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. But for financial instruments entered into during our 2005 or later taxable years, the 95% gross income test has been modified as follows: except as may be provided in Treasury regulations, gross income for these purposes no longer includes income from a “hedging transaction” as defined under clauses (ii) and (iii) of Section 1221(b)(2)(A) of the IRC, but only to the extent that (A) the transaction hedges indebtedness we incur to acquire or carry real estate assets, and (B) the hedging transaction was “clearly identified,” meaning that the transaction must be identified as a hedging transaction before the end of the day on which it is entered and the risks being hedged must be identified generally within 35 days after the date the transaction is entered.
For purposes of the 75% and 95% gross income tests outlined above, income derived from a “shared appreciation provision” in a mortgage loan is generally treated as gain recognized on the sale of the property to which it relates. Although we will use our best efforts to ensure that the income generated by our investments will be of a type that satisfies both the 75% and 95% gross income tests, there can be no assurance in this regard.
In order to qualify as “rents from real property” under Section 856 of the IRC, several requirements must be met:
· The amount of rent received generally must not be based on the income or profits of any person, but may be based on receipts or sales.
· Rents do not qualify if the REIT owns 10% or more by vote or value of the tenant, whether directly or after application of attribution rules. While we intend not to lease property to any party if rents from that property would not qualify as rents from real property, application of the 10% ownership rule is dependent upon complex
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attribution rules and circumstances that may be beyond our control. For example, an unaffiliated third party’s ownership directly or by attribution of 10% or more by value of our shares, as well as 10% or more by vote or value of the stock of one of our tenants, would result in that tenant’s rents not qualifying as rents from real property. Our declaration of trust disallows transfers or purported acquisitions, directly or by attribution, of our shares to the extent necessary to maintain our REIT status under the IRC. Nevertheless, there can be no assurance that these provisions in our declaration of trust will be effective to prevent our REIT status from being jeopardized under the 10% affiliated tenant rule. Furthermore, there can be no assurance that we will be able to monitor and enforce these restrictions, nor will our shareholders necessarily be aware of ownership of shares attributed to them under the IRC’s attribution rules.
· There is a limited exception to the above prohibition on earning “rents from real property” from a 10% affiliated tenant, if the tenant is a TRS. If at least 90% of the leased space of a property is leased to tenants other than TRSs and 10% affiliated tenants, and if the TRS’s rent for space at that property is substantially comparable to the rents paid by nonaffiliated tenants for comparable space at the property, then otherwise qualifying rents paid by the taxable REIT subsidiary to the REIT will not be disqualified on account of the rule prohibiting 10% affiliated tenants.
· There is a second exception to the above prohibition on earning “rents from real property” from a 10% affiliated tenant. For this second exception to apply, a real property interest in a “qualified lodging facility” must be leased by the REIT to its TRS, and the facility must be operated on behalf of the TRS by a person who is an “eligible independent contractor,” all as described in Section 856(d)(8)-(9) of the IRC. As described below, we believe our leases with our TRSs have satisfied and will continue to satisfy these requirements.
· In order for rents to qualify, we generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom we derive no income or, for our 2001 taxable year and thereafter, through one of our TRSs. There is an exception to this rule permitting a REIT to perform customary tenant services of the sort that a tax-exempt organization could perform without being considered in receipt of “unrelated business taxable income” as defined in Section 512(b)(3) of the IRC. In addition, a de minimis amount of noncustomary services will not disqualify income as “rents from real property” so long as the value of the impermissible services does not exceed 1% of the gross income from the property.
· If rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as “rents from real property” if this 15% threshold is exceeded, the rent attributable to personal property will not so qualify. For our taxable years through December 31, 2000, the portion of rental income treated as attributable to personal property was determined according to the ratio of the tax basis of the personal property to the total tax basis of the real and personal property that is rented. For our 2001 taxable year and thereafter, the ratio is determined by reference to fair market values rather than tax bases.
We believe that all or substantially all our rents have qualified and will qualify as rents from real property for purposes of Section 856 of the IRC, subject to the considerations in the following paragraph.
We have received opinions from our counsel Sullivan & Worcester LLP that (i) our underground storage tanks should constitute real estate assets, rather than personal property, for purposes of the various REIT qualification tests described in this summary, and (ii) with respect to each of our leases with TA, although the matter is not free from doubt, for purposes of applying the 15% incidental personal property test above, regarding rent attributable to incidental personal property leased in connection with real property, the test will be applied in the aggregate to all the travel center sites leased under each such lease on a lease by lease basis, rather than on a site by site basis. If the IRS or a court determines that one or both of these opinions is incorrect, then a portion of the rental income we receive from TA could be nonqualifying income for purposes of the 75% and 95% gross income tests, possibly jeopardizing our compliance with the 95% gross income test. Under those circumstances, however, we expect we would qualify for the gross income tests’ relief provision described below, and thereby preserve our qualification as a REIT. If the relief provision below were to apply to us, we would be subject to tax at a 100% rate on the amount by which we failed the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable
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year; however, in a typical taxable year, we have little or no nonqualifying income from other sources and thus would expect to owe little tax in such circumstances.
In order to qualify as mortgage interest on real property for purposes of the 75% test, interest must derive from a mortgage loan secured by real property with a fair market value, at the time the loan is made, at least equal to the amount of the loan. If the amount of the loan exceeds the fair market value of the real property, the interest will be treated as interest on a mortgage loan in a ratio equal to the ratio of the fair market value of the real property to the total amount of the mortgage loan.
Amounts payable to us under agreements relating to the Canadian hotels we acquired in 2005 may be determined by reference to revenue and expenditure items denominated in Canadian dollars. Currency translation or exchange gains or losses might not count favorably toward the 75% and 95% gross income tests summarized above, and thus, in sufficient amounts, currency gains could threaten our compliance with the REIT income tests. However, because any amounts paid to us, as opposed to our TRS, under these Canadian hotel agreements will be denominated in U.S. dollars and determined by reference to more than just exchange rates, we do not expect to have material amounts of currency gains in respect of our Canadian investments.
Our January 31, 2007 spin off of TA was treated for federal income tax purposes as though we disposed of each of the individual assets of TA and its principal subsidiaries in a taxable transaction in which individual asset gains, but not losses, were recognized. The amount realized on each asset in this taxable disposition was equal to the fair market value of that asset at the time of the spin off, and our tax basis in the asset was the carryover tax basis inherited from TravelCenters. For these purposes, the assets and liabilities of any TRSs are ignored, and instead the stock in the TRS is treated like any other individual asset being distributed. Even though some of the gains we recognized on the distributed assets were not qualifying gross income under the 75% and 95% gross income tests of Section 856(c) of the IRC, we do not believe the recognized gains from the distribution materially affected our ability to comply with these tests. Although our counsel Sullivan & Worcester LLP is unable to opine on factual matters such as the fair market value of the distributed assets at the time of the spin off, Sullivan & Worcester LLP has opined that it is more likely than not that we have been reasonable in our approach to valuations and gain computations (including valuation methodology) in connection with the spin off of TA and thus that, even if our computations should be successfully challenged so as to result in our failing the 95% gross income test, we would more likely than not qualify for the gross income tests’ relief provision described below and thereby preserve our qualification as a REIT. If the relief provision below were to apply to us, we would be subject to tax at a 100% rate on the amount by which we failed the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year; but we would expect to owe little tax in such circumstances.
Other than sales of foreclosure property, any gain we realize on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business will be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. This prohibited transaction income also may adversely affect our ability to satisfy the 75% and 95% gross income tests for federal income tax qualification as a REIT. We cannot provide assurances as to whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax. However, we believe that dispositions of assets that we have made or that we might make in the future will not be subject to the 100% penalty tax, because we intend to:
· own our assets for investment with a view to long-term income production and capital appreciation;
· engage in the business of developing, owning and operating our existing properties and acquiring, developing, owning and operating new properties; and
· make occasional dispositions of our assets consistent with our long-term investment objectives.
If we fail to satisfy one or both of the 75% or the 95% gross income tests in any taxable year, we may nevertheless qualify as a REIT for that year if we satisfy the following requirements after October 22, 2004:
· our failure to meet the test is due to reasonable cause and not due to willful neglect, and
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· after we identify the failure, we file a schedule describing each item of our gross income included in the 75% or 95% gross income tests for that taxable year.
It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision for the 75% and 95% gross income tests. Even if this relief provision does apply, a 100% tax is imposed upon the greater of the amount by which we failed the 75% test or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability. This relief provision applies to any failure of the applicable income tests, even if the failure first occurred in a prior taxable year, as long as each of the requirements of the relief provision is satisfied after October 22, 2004.
Under prior law, if we failed to satisfy one or both of the 75% or 95% gross income tests, we nevertheless would have qualified as a REIT for that year if: our failure to meet the test was due to reasonable cause and not due to willful neglect; we reported the nature and amount of each item of our income included in the 75% or 95% gross income tests for that taxable year on a schedule attached to our tax return; and any incorrect information on the schedule was not due to fraud with intent to evade tax. For our 2004 and prior taxable years, we attached a schedule of gross income to our federal income tax returns, but it is impossible to state whether in all circumstances we would be entitled to the benefit of this prior relief provision for the 75% and 95% gross income tests. Even if this relief provision did apply, a 100% tax is imposed upon the greater of the amount by which we failed the 75% test or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability.
Asset Tests. At the close of each quarter of each taxable year, we must also satisfy the following asset percentage tests in order to qualify as a REIT for federal income tax purposes:
· At least 75% of our total assets must consist of real estate assets, cash and cash items, shares in other REITs, government securities, and temporary investments of new capital (that is, stock or debt instruments purchased with proceeds of a stock offering or a public offering of our debt with a term of at least five years, but only for the one-year period commencing with our receipt of the offering proceeds).
· Not more than 25% of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test.
· Of the investments included in the preceding 25% asset class, the value of any one non-REIT issuer’s securities that we own may not exceed 5% of the value of our total assets, and we may not own more than 10% of any one non-REIT issuer’s outstanding voting securities. For our 2001 taxable year and thereafter, we may not own more than 10% of the vote or value of any one non-REIT issuer’s outstanding securities, unless that issuer is our TRS or the securities are “straight debt” securities or otherwise excepted as discussed below.
· For our 2001 taxable year and thereafter, our stock and securities in a TRS are exempted from the preceding 10% and 5% asset tests. However, no more than 20% of our total assets may be represented by stock or securities of TRSs.
When a failure to satisfy the above asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter.
In addition, if we fail the 5% value test or the 10% vote or value tests at the close of any quarter and do not cure such failure within 30 days after the close of that quarter, that failure will nevertheless be excused if (a) the failure is de minimis and (b) within 6 months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy the 5% value and 10% vote and value asset tests. For purposes of this relief provision, the failure will be “de minimis” if the value of the assets causing the failure does not exceed the lesser of (a) 1% of the total value of our assets at the end of the relevant quarter or (b) $10,000,000. If our failure is not de minimis, or if any of the other REIT asset tests have been violated, we may nevertheless qualify as a REIT if (a) we provide the IRS with a description of each asset causing the failure, (b) the failure was due to reasonable cause and not willful neglect, (c) we pay a tax equal to the greater of (i) $50,000 or (ii) the highest rate of corporate tax imposed (currently 35%) on the net income generated by the assets causing the failure during the period of the failure, and (d) within 6 months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy all of the REIT asset tests. These relief provisions apply to any failure of the applicable asset tests, even if the failure first
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occurred in a prior taxable year, as long as each of the requirements of the relief provision is satisfied after October 22, 2004.
The IRC also provides, for our 2001 taxable year and thereafter, an excepted securities safe harbor to the 10% value test that includes among other items (a) “straight debt” securities, (b) certain rental agreements in which payment is to be made in subsequent years, (c) any obligation to pay rents from real property, (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of or payments from a nongovernmental entity, and (e) any security issued by another REIT.
We intend to maintain records of the value of our assets to document our compliance with the above asset tests, and to take actions as may be required to cure any failure to satisfy the tests within 30 days after the close of any quarter.
Our Relationship with TA. On January 31, 2007, we spun off all the then outstanding TA common shares. Under the transaction agreement that governed the spin off, TA will generally be responsible for the tax filings and liabilities, including federal income tax filings and liabilities, of TravelCenters and its subsidiaries for the periods ending on or before the distribution date. Because TA and its principal subsidiaries were entities which were not regarded as separate from us for tax purposes prior to the spin off, TA and these subsidiaries immediately after the spin off were (and expected thereafter to remain) tenants in whom we have at all times during each taxable year an actual and constructive ownership interest of less than 10% by vote and by value. Moreover, our lease with TA, TA’s limited liability company operating agreement, and the transaction agreement governing the spin off collectively contain restrictions upon the ownership of TA common shares and require TA to refrain from taking any actions that may result in any affiliation with us that would jeopardize our qualification as a REIT under the IRC. Accordingly, subject to the personal property considerations discussed above and commencing with the January 31, 2007 spin off, we expect that the rental income we receive from TA and its subsidiaries will be “rents from real property” under Section 856(d) of the IRC, and therefore qualifying income under the 75% and 95% gross income tests described above.
Our Relationship with Our Taxable REIT Subsidiaries. We currently own hotels that we purchased to be leased to our TRSs or which are being leased to our TRSs as a result of modifications to a prior lease that were agreed to among us, the former tenant and the manager. We may from time to time in the future lease additional hotels that we acquire in this manner.
In connection with lease defaults, we terminated occupancy of some of our hotels by defaulting tenants and immediately leased these hotels to our TRSs and entered into new third party management agreements for these hotels. We may in the future employ similar arrangements if we again face lease or occupancy terminations.
In transactions involving our TRSs, our intent is that the rents paid to us by the TRS qualify as “rents from real property” under the REIT gross income tests summarized above. In order for this to be the case, the manager engaged by the applicable TRS must be an “eligible independent contractor” within the meaning of Section 856(d)(9)(A) of the IRC, and the hotels leased to the TRS must be “qualified lodging facilities” within the meaning of Section 856(d)(9)(D) of the IRC. Qualified lodging facilities are defined as hotels, motels, or other establishments where more than half of the dwelling units are used on a transient basis, provided that legally authorized wagering or gambling activities are not conducted at or in connection with such facilities. Also included in the definition are the qualified lodging facility’s customary amenities and facilities.
For these purposes, a contractor qualifies as an “eligible independent contractor” if it is less than 35% affiliated with the REIT and, at the time the contractor enters into the agreement with the TRS to operate the qualified lodging facility, that contractor or any person related to that contractor is actively engaged in the trade or business of operating qualified lodging facilities for persons unrelated to the TRS or its affiliated REIT. For these purposes, an otherwise eligible independent contractor is not disqualified from that status on account of the TRS bearing the expenses of the operation of the qualified lodging facility, the TRS receiving the revenues from the operation of the qualified lodging facility, net of expenses for that operation and fees payable to the eligible independent contractor, or the REIT receiving income from the eligible independent contractor pursuant to a preexisting or otherwise grandfathered lease of another property.
In one case involving a former manager whose hotel management activities for parties unrelated to us were not as extensive as those of our current managers, we received an opinion from our counsel Sullivan & Worcester LLP that the particular manager should qualify as an “eligible independent contractor” within the meaning of
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Section 856(d)(9)(A) of the IRC, and that, although the matter is not free from doubt, it is reasonable for us to rely on such opinion for purposes of the relief provisions under the REIT gross income tests summarized above. Although there can be no assurance in this regard, we expect that the rental income we receive from our TRSs will qualify as “rents from real property” under the REIT gross income tests. We also took steps to qualify for the 75% and 95% gross income tests’ relief provision, including for example attaching an applicable schedule of gross income to our federal income tax returns as previously required by Section 856(c)(6) of the IRC. Thus, even if the IRS or a court ultimately determines that one or more of our managers failed to operate “qualified lodging facilities” for others sufficient to qualify as an eligible independent contractor, and that this failure thereby implicated our compliance with the REIT gross income tests, we expect we would qualify for the gross income tests’ relief provision and thereby preserve our qualification as a REIT.
As explained above, we will be subject to a 100% tax if the IRS successfully asserts that the rents paid by our TRS to us exceed an arm’s length rental rate. Although there is no clear precedent to distinguish for federal income tax purposes among leases, management contracts, partnerships, financings, and other contractual arrangements, we believe that our leases and our TRSs’ management agreements will be respected for purposes of the requirements of the IRC discussed above. Accordingly, we expect that the rental income from our current and future TRSs will qualify as “rents from real property,” and that the 100% tax on excessive rents from a TRS will not apply.
Annual Distribution Requirements. In order to qualify for taxation as a REIT under the IRC, we are required to make annual distributions other than capital gain dividends to our shareholders in an amount at least equal to the excess of:
(A) the sum of 90% of our “real estate investment trust taxable income,” as defined in Section 857 of the IRC, computed by excluding any net capital gain and before taking into account any dividends paid deduction for which we are eligible, and 90% of our net income after tax, if any, from property received in foreclosure, over
(B) the sum of our qualifying noncash income, e.g., imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges.
The distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the earlier taxable year and if paid on or before the first regular distribution payment after that declaration. If a dividend is declared in October, November, or December to shareholders of record during one of those months, and is paid during the following January, then for federal income tax purposes the dividend will be treated as having been both paid and received on December 31 of the prior taxable year. A distribution which is not pro rata within a class of our beneficial interests entitled to a distribution, or which is not consistent with the rights to distributions among our classes of beneficial interests, is a preferential distribution that is not taken into consideration for purposes of the distribution requirements, and accordingly the payment of a preferential distribution could affect our ability to meet the distribution requirements. Taking into account our distribution policies, including the dividend reinvestment plan we have adopted, we expect that we will not make any preferential distributions. The distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax discussed below. To the extent that we do not distribute all of our net capital gain and all of our real estate investment trust taxable income, as adjusted, we will be subject to tax on undistributed amounts.
In addition, we will be subject to a 4% nondeductible excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the “grossed up required distribution” for the preceding calendar year over the amount treated as distributed for that preceding calendar year. For this purpose, the term “grossed up required distribution” for any calendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed under the provision. We will be treated as having sufficient earnings and profits to treat as a dividend any distribution by us up to the amount required to be distributed in order to avoid imposition of the 4% excise tax.
If we do not have enough cash or other liquid assets to meet the 90% distribution requirements, we may find it necessary and desirable to arrange for new debt or equity financing to provide funds for required distributions in order to maintain our REIT status. We can provide no assurance that financing would be available for these purposes on favorable terms.
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We may be able to rectify a failure to pay sufficient dividends for any year by paying “deficiency dividends” to shareholders in a later year. These deficiency dividends may be included in our deduction for dividends paid for the earlier year, but an interest charge would be imposed upon us for the delay in distribution. Although we may be able to avoid being taxed on amounts distributed as deficiency dividends, we will remain liable for the 4% excise tax discussed above.
In addition to the other distribution requirements above, to preserve our status as a REIT we are required to timely distribute C corporation earnings and profits that we inherit from acquired corporations.
Acquisition of C Corporations
In 2005 we purchased a hotel in Puerto Rico. In order to acquire the Puerto Rican hotel, we acquired all of the outstanding stock of a C corporation that owned that hotel as its primary asset. Upon our acquisition, the acquired C corporation became our qualified REIT subsidiary under Section 856(i) of the IRC. Thus, after the acquisition, all assets, liabilities and items of income, deduction and credit of the acquired corporation are treated as ours for purposes of the various REIT qualification tests described above. In our acquisitions of the stock of C corporations, we are generally treated as the successor to the acquired corporation’s federal income tax attributes, such as its adjusted tax bases in its assets and its C corporation earnings and profits. However, because we made an election under Section 338(g) of the IRC in respect of this acquired Puerto Rican corporation, we did not succeed to its earnings and profits, nor do we have any built-in gain in this former C corporation’s assets.
On January 31, 2007, we acquired all of the outstanding stock of TravelCenters, a C corporation. At the time of that acquisition, this C corporation directly or indirectly owned all of the outstanding equity interests in various corporate and noncorporate subsidiaries. Upon our acquisition, the acquired entities generally became either our qualified REIT subsidiaries under Section 856(i) of the IRC or disregarded entities under Treasury regulations issued under Section 7701 of the IRC. Thus, after the acquisition, all assets, liabilities and items of income, deduction and credit of these acquired entities have been treated as ours for purposes of the various REIT qualification tests described above. In addition, we generally were treated as the successor to these acquired subsidiaries’ federal income tax attributes, such as these entities’ adjusted tax bases in their assets and their depreciation schedules; we were also treated as the successor to these acquired corporate subsidiaries’ earnings and profits for federal income tax purposes, if any.
Upon completing the acquisition, we effected a restructuring of the travel center business so as to divide it between us and TA, and we then spun off TA on January 31, 2007.
Earnings and Profits. A REIT may not have any undistributed C corporation earnings and profits at the end of any taxable year. Upon the closing of the January 31, 2007 transaction, we succeeded to the undistributed earnings and profits, if any, of the acquired corporate entities. Thus, we needed to distribute any such earnings and profits no later than December 31, 2007. If we failed to do so, we would not qualify to be taxed as a REIT for 2007 and a number of years thereafter, unless we are able to rely on the relief provision described below.
Although Sullivan & Worcester LLP is unable to render an opinion on factual determinations such as the amount of undistributed earnings and profits, we retained accountants to compute the amount of undistributed earnings and profits that we inherited in the January 31, 2007 transaction. Based on our calculations, we believe that we did not inherit any undistributed earnings and profits in this transaction. However, there can be no assurance that the IRS would not, upon examination, propose adjustments to our calculation of the undistributed earnings and profits that we inherited, including adjustments that might be deemed necessary by the IRS as a result of its examination of the companies we acquired. If it is subsequently determined that we had undistributed earnings and profits as of December 31, 2007, we may be eligible for a relief provision similar to the “deficiency dividends” procedure described above. To utilize this relief provision, we would have to pay an interest charge for the delay in distributing the undistributed earnings and profits; in addition, we would be required to distribute to our shareholders, in addition to our other REIT distribution requirements, the amount of the undistributed earnings and profits less the interest charge paid.
Built-in-Gains from C Corporations. As described above, notwithstanding our qualification and taxation as a REIT, we may still be subject to corporate taxation in particular circumstances. Specifically, if we acquire an asset from a corporation in a transaction in which our adjusted tax basis in the asset is determined by reference to the
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adjusted tax basis of that asset in the hands of a present or former C corporation, and if we subsequently recognize gain on the disposition of that asset during the ten year period beginning on the date on which the asset ceased to be owned by the C corporation, then we will generally pay tax at the highest regular corporate tax rate, currently 35%, on the lesser of (1) the excess, if any, of the asset’s fair market value over its adjusted tax basis, each determined as of the time the asset ceased to be owned by the C corporation, or (2) our gain recognized in the disposition. In the case of assets acquired in the January 31, 2007 acquisition, any gain subject to this tax may generally be reduced by certain net operating loss carryforwards that we inherited. Other than the assets we distributed in the spin off of TA as described above, we have no present plan or intent to dispose of any other assets acquired in the January 31, 2007 acquisition. We believe that we recognized only modest taxable gains from the spin off of TA, and we also expect that net operating loss carryforwards will be available to us so as to reduce or eliminate any tax that we may owe in respect of any such recognized gains.
To the extent of our gains in a taxable year that are subject to the built in gains tax described above, net of any taxes paid on such gains with respect to that taxable year, our taxable dividends paid to you in the following year will be eligible for treatment as qualified dividends that are taxed to our noncorporate shareholders at the maximum capital gain rate of 15% while that rate is in effect.
Acquisition of Partnership
In 2007, we acquired all of the limited partnership interests and the general partnership interest of a partnership as well as certain of the partnership’s noncorporate subsidiary entities. Pursuant to Treasury regulations issued under Section 7701 of the IRC, each of these acquired entities was either a partnership or disregarded entity for federal income tax purposes, and thus upon our acquisition these entities became disregarded entities of ours. Accordingly, after this 2007 acquisition, all assets, liabilities and items of income, deduction and credit of these acquired entities have been treated as ours for purposes of the various REIT qualification tests described above. Our initial tax basis in the acquired assets is our cost for acquiring them, and we believe that we did not succeed to any C corporation earnings and profits in this acquisition.
Depreciation and Federal Income Tax Treatment of Leases
Our initial tax bases in our assets will generally be our acquisition cost. We will generally depreciate our real property on a straight-line basis over 40 years and our personal property over the applicable shorter periods. These depreciation schedules may vary for properties that we acquire through tax-free or carryover basis acquisitions.
We are entitled to depreciation deductions from our facilities only if we are treated for federal income tax purposes as the owner of the facilities. This means that the leases of the facilities must be classified for federal income tax purposes as true leases, rather than as sales or financing arrangements, and we believe this to be the case. In the case of sale-leaseback arrangements, the IRS could assert that we realized prepaid rental income in the year of purchase to the extent that the value of a leased property, at the time of purchase, exceeded the purchase price for that property. While we believe that the value of leased property at the time of purchase did not exceed purchase prices, because of the lack of clear precedent we cannot provide assurances as to whether the IRS might successfully assert the existence of prepaid rental income in any of our sale-leaseback transactions.
Taxation of U.S. Shareholders
The maximum individual federal income tax rate for long-term capital gains is generally 15% (for taxable years that begin on or before December 31, 2010) and for most corporate dividends is generally also 15% (for taxable years that begin on or before December 31, 2010). However, because we are not generally subject to federal income tax on the portion of our REIT taxable income or capital gains distributed to our shareholders, dividends on our shares generally are not eligible for such 15% tax rate on dividends. As a result, our ordinary dividends continue to be taxed at the higher federal income tax rates applicable to ordinary income. However, the 15% federal income tax rate for long-term capital gains and dividends generally applies to:
(1) your long-term capital gains, if any, recognized on the disposition of our shares;
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(2) our distributions designated as long-term capital gain dividends (except to the extent attributable to real estate depreciation recapture, in which case the distributions are subject to a 25% federal income tax rate);
(3) our dividends attributable to dividends, if any, received by us from non-REIT corporations such as TRSs; and
(4) our dividends to the extent attributable to income upon which we have paid federal corporate income tax.
As long as we qualify as a REIT for federal income tax purposes, a distribution to our U.S. shareholders that we do not designate as a capital gain dividend will be treated as an ordinary income dividend to the extent of our current or accumulated earnings and profits. Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year. However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the IRC.
In addition, we may elect to retain net capital gain income and treat it as constructively distributed. In that case:
(1) we will be taxed at regular corporate capital gains tax rates on retained amounts;
(2) each U.S. shareholder will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated a capital gain dividend;
(3) each U.S. shareholder will receive a credit for its designated proportionate share of the tax that we pay;
(4) each U.S. shareholder will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over its proportionate share of this tax that we pay; and
(5) both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes.
If we elect to retain our net capital gains in this fashion, we will notify our U.S. shareholders of the relevant tax information within 60 days after the close of the affected taxable year.
As discussed above, for noncorporate U.S. shareholders, long-term capital gains are generally taxed at maximum rates of 15% or 25%, depending upon the type of property disposed of and the previously claimed depreciation with respect to this property. If for any taxable year we designate capital gain dividends for U.S. shareholders, then the portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares. We will similarly designate the portion of any capital gain dividend that is to be taxed to noncorporate U.S. shareholders at the maximum rates of 15% or 25% so that the designations will be proportionate among all classes of our shares.
Distributions in excess of current or accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the shareholder’s adjusted tax basis in the shareholder’s shares, but will reduce the shareholder’s basis in those shares. To the extent that these excess distributions exceed the adjusted basis of a U.S. shareholder’s shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. shareholders at a maximum rate of 15%. No U.S. shareholder may include on his federal income tax return any of our net operating losses or any of our capital losses.
Dividends that we declare in October, November or December of a taxable year to U.S. shareholders of record on a date in those months will be deemed to have been received by shareholders on December 31 of that taxable year, provided we actually pay these dividends during the following January. Also, items that are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its shareholders under Treasury regulations
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which are to be prescribed. It is possible that these Treasury regulations will require tax preference items to be allocated to our shareholders with respect to any accelerated depreciation or other tax preference items that we claim.
A U.S. shareholder will generally recognize gain or loss equal to the difference between the amount realized and the shareholder’s adjusted basis in our shares that are sold or exchanged. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the shareholder’s holding period in the shares exceeds one year. In addition, any loss upon a sale or exchange of our shares held for six months or less will generally be treated as a long-term capital loss to the extent of our long-term capital gain dividends during the holding period.
Effective for federal tax returns with due dates after October 22, 2004, the IRC imposes a penalty for the failure to properly disclose a “reportable transaction.” A reportable transaction currently includes, among other things, a sale or exchange of our shares resulting in a tax loss in excess of (i) $10 million in any single year or $20 million in any combination of years in the case of our shares held by a C corporation or by a partnership with only C corporation partners or (ii) $2 million in any single year or $4 million in any combination of years in the case of our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals. A taxpayer discloses a reportable transaction by filing IRS Form 8886 with its federal income tax return and, in the first year of filing, a copy of Form 8886 must be sent to the IRS’s Office of Tax Shelter Analysis. The penalty for failing to disclose a reportable transaction is generally $10,000 in the case of a natural person and $50,000 in any other case.
Noncorporate U.S. shareholders who borrow funds to finance their acquisition of our shares could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred. Under Section 163(d) of the IRC, interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment is generally deductible only to the extent of the investor’s net investment income. A U.S. shareholder’s net investment income will include ordinary income dividend distributions received from us and, if an appropriate election is made by the shareholder, capital gain dividend distributions received from us; however, distributions treated as a nontaxable return of the shareholder’s basis will not enter into the computation of net investment income.
Taxation of Tax-Exempt Shareholders
In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a REIT to a tax-exempt employees’ pension trust did not constitute “unrelated business taxable income,” even though the REIT may have financed some of its activities with acquisition indebtedness. Although revenue rulings are interpretive in nature and subject to revocation or modification by the IRS, based upon the analysis and conclusion of Revenue Ruling 66-106, our distributions made to shareholders that are tax-exempt pension plans, individual retirement accounts, or other qualifying tax-exempt entities should not constitute unrelated business taxable income, provided that the shareholder has not financed its acquisition of our shares with “acquisition indebtedness” within the meaning of the IRC, and provided further that, consistent with our present intent, we do not hold a residual interest in a real estate mortgage investment conduit.
Tax-exempt pension trusts, including so-called 401(k) plans but excluding individual retirement accounts or government pension plans, that own more than 10% by value of a “pension-held REIT” at any time during a taxable year may be required to treat a percentage of all dividends received from the pension-held REIT during the year as unrelated business taxable income. This percentage is equal to the ratio of:
(1) the pension-held REIT’s gross income derived from the conduct of unrelated trades or businesses, determined as if the pension-held REIT were a tax-exempt pension fund, less direct expenses related to that income, to
(2) the pension-held REIT’s gross income from all sources, less direct expenses related to that income,
except that this percentage shall be deemed to be zero unless it would otherwise equal or exceed 5%. A REIT is a pension-held REIT if:
· the REIT is “predominantly held” by tax-exempt pension trusts; and
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· the REIT would fail to satisfy the “closely held” ownership requirement discussed above if the stock or beneficial interests in the REIT held by tax-exempt pension trusts were viewed as held by tax-exempt pension trusts rather than by their respective beneficiaries.
A REIT is predominantly held by tax-exempt pension trusts if at least one tax-exempt pension trust owns more than 25% by value of the REIT’s stock or beneficial interests, or if one or more tax-exempt pension trusts, each owning more than 10% by value of the REIT’s stock or beneficial interests, own in the aggregate more than 50% by value of the REIT’s stock or beneficial interests. Because of the share ownership concentration restrictions in our declaration of trust, we believe that we are not and will not be a pension-held REIT. However, because our shares are publicly traded, we cannot completely control whether or not we are or will become a pension-held REIT.
Social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the IRC, respectively, are subject to different unrelated business taxable income rules, which generally will require them to characterize distributions from a REIT as unrelated business taxable income. In addition, these prospective investors should consult their own tax advisors concerning any “set aside” or reserve requirements applicable to them.
Taxation of Non-U.S. Shareholders
The rules governing the United States federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of these rules. If you are a non-U.S. shareholder, we urge you to consult with your own tax advisor to determine the impact of United States federal, state, local, and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your investment in our shares.
In general, a non-U.S. shareholder will be subject to regular United States federal income tax in the same manner as a U.S. shareholder with respect to its investment in our shares if that investment is effectively connected with the non-U.S. shareholder’s conduct of a trade or business in the United States. In addition, a corporate non-U.S. shareholder that receives income that is or is deemed effectively connected with a trade or business in the United States may also be subject to the 30% branch profits tax under Section 884 of the IRC, which is payable in addition to regular United States federal corporate income tax. The balance of this discussion of the United States federal income taxation of non-U.S. shareholders addresses only those non-U.S. shareholders whose investment in our shares is not effectively connected with the conduct of a trade or business in the United States.
A distribution by us to a non-U.S. shareholder that is not attributable to gain from the sale or exchange of a United States real property interest and that is not designated as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of current or accumulated earnings and profits. A distribution of this type will generally be subject to United States federal income tax and withholding at the rate of 30%, or at a lower rate if the non-U.S. shareholder has in the manner prescribed by the IRS demonstrated its entitlement to benefits under a tax treaty. In the case of any in kind distributions of property, we or other applicable withholding agents will collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the non-U.S. shareholder would otherwise receive, and the non-U.S. shareholder may bear brokerage or other costs for this withholding procedure. Because we cannot determine our current and accumulated earnings and profits until the end of the taxable year, withholding at the rate of 30% or applicable lower treaty rate will generally be imposed on the gross amount of any distribution to a non-U.S. shareholder that we make and do not designate a capital gain dividend. Notwithstanding this withholding on distributions in excess of our current and accumulated earnings and profits, these distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholder’s adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the non-U.S. shareholder’s adjusted basis in our shares, the distributions will give rise to tax liability if the non-U.S. shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below. A non-U.S. shareholder may seek a refund from the IRS of amounts withheld on distributions to him in excess of our current and accumulated earnings and profits.
From time to time, some of our distributions may be attributable to the sale or exchange of United States real property interests. However, capital gain dividends that are received by a non-U.S. shareholder, including dividends attributable to our sales of United States real property interests, and that are deductible by us in respect of our 2005 taxable year and thereafter will be subject to the taxation and withholding regime applicable to ordinary income dividends and the branch
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profits tax will not apply, provided that (1) the capital gain dividends are received with respect to a class of shares that is “regularly traded” on a domestic “established securities market” such as the New York Stock Exchange, or the NYSE, both as defined by applicable Treasury regulations, and (2) the non-U.S. shareholder does not own more than 5% of that class of shares at any time during the one-year period ending on the date of distribution of the capital gain dividends. If both of these provisions are satisfied, qualifying non-U.S. shareholders will not be subject to withholding on capital gain dividends as though those amounts were effectively connected with a United States trade or business, and qualifying non-U.S. shareholders will not be required to file United States federal income tax returns or pay branch profits tax in respect of these capital gain dividends. Instead, these dividends will be subject to United States federal income tax and withholding as ordinary dividends, currently at a 30% tax rate unless reduced by applicable treaty, as discussed below. We believe that our shares have been and will remain “regularly traded” on an “established securities market” within the definition of each term provided in applicable Treasury regulations; however, we can provide no assurance that our shares will continue to be “regularly traded” on an “established securities market” in future taxable years.
Except as discussed above, for any year in which we qualify as a REIT, distributions that are attributable to gain from the sale or exchange of a United States real property interest are taxed to a non-U.S. shareholder as if these distributions were gains effectively connected with a trade or business in the United States conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder that does not qualify for the provision above or that received dividends for taxable years before 2005 will be taxed on these amounts at the normal capital gain rates applicable to a U.S. shareholder, subject to any applicable alternative minimum tax and to a special alternative minimum tax in the case of nonresident alien individuals; such a non-U.S. shareholder will be required to file a United States federal income tax return reporting these amounts, even if applicable withholding is imposed as described below; and such a non-U.S. shareholder that is also a corporation may owe the 30% branch profits tax under Section 884 of the IRC in respect of these amounts. We will be required to withhold from distributions to such non-U.S. shareholders, and remit to the IRS, 35% of the maximum amount of any distribution that could be designated as a capital gain dividend. In addition, for purposes of this withholding rule, if we designate prior distributions as capital gain dividends, then subsequent distributions up to the amount of the designated prior distributions will be treated as capital gain dividends. The amount of any tax withheld is creditable against the non-U.S. shareholder’s United States federal income tax liability, and the non-U.S. shareholder may file for a refund from the IRS of any amount of withheld tax in excess of that tax liability.
Effective generally from and after 2006, a special “wash sale” rule applies to a non-U.S. shareholder who owns any class of our shares if (1) the shareholder owns more than 5% of that class of shares at any time during the one-year period ending on the date of the distribution described below, or (2) that class of our shares is not, within the meaning of applicable Treasury Regulations, “regularly traded” on a domestic “established securities market” such as the NYSE. Although there can be no assurance in this regard, we believe that our common shares and each class of our preferred shares has been and will remain “regularly traded” on a domestic “established securities market” within the meaning of applicable Treasury regulations, all as discussed above. We thus anticipate this wash sale rule to apply, if at all, only to a non-U.S. shareholder that owns more than 5% of either our common shares or any class of our preferred shares. Such a non-U.S. shareholder will be treated as having made a “wash sale” of our shares if it (1) disposes of an interest in our shares during the 30 days preceding the ex-dividend date of a distribution by us that, but for such disposition, would have been treated by the non-U.S. shareholder in whole or in part as gain from the sale or exchange of a United States real property interest, and then (2) acquires or enters into a contract to acquire a substantially identical interest in our shares, either actually or constructively through a related party, during the 61-day period beginning 30 days prior to the ex-dividend date. In the event of such a wash sale, the non-U.S. shareholder will have gain from the sale or exchange of a United States real property interest in an amount equal to the portion of the distribution that, but for the wash sale, would have been a gain from the sale or exchange of a United States real property interest. As discussed above, a non-U.S. shareholder’s gain from the sale or exchange of a United States real property interest can trigger increased United States taxes, such as the branch profits tax applicable to non-U.S. corporations, and increased United States tax filing requirements.
If for any taxable year we designate capital gain dividends for our shareholders, then the portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares.
Tax treaties may reduce the withholding obligations on our distributions. Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from United States corporations may not apply to ordinary income dividends from a REIT or may apply only if the REIT meets certain additional conditions. You must generally use an
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applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits. If the amount of tax withheld by us with respect to a distribution to a non-U.S. shareholder exceeds the shareholder’s United States federal income tax liability with respect to the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS. The 35% withholding tax rate discussed above on some capital gain dividends corresponds to the maximum income tax rate applicable to corporate non-U.S. shareholders but is higher than the 15% and 25% maximum rates on capital gains generally applicable to noncorporate non-U.S. shareholders. Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty. In the case of any in kind distributions of property, we or other applicable withholding agents will have to collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the non-U.S. shareholder would otherwise receive, and the non-U.S. shareholder may bear brokerage or other costs for this withholding procedure.
If our shares are not “United States real property interests” within the meaning of Section 897 of the IRC, then a non-U.S. shareholder’s gain on sale of these shares generally will not be subject to United States federal income taxation, except that a nonresident alien individual who was in the United States for 183 days or more during the taxable year may be subject to a 30% tax on this gain. Our shares will not constitute a United States real property interest if we are a “domestically controlled REIT.” A domestically controlled REIT is a REIT in which at all times during the preceding five-year period less than 50% in value of its shares is held directly or indirectly by foreign persons. We believe that we have been and will remain a domestically controlled REIT and thus a non-U.S. shareholder’s gain on sale of our shares will not be subject to United States federal income taxation. However, because our shares are publicly traded, we can provide no assurance that we will be a domestically controlled REIT. If we are not a domestically controlled REIT, a non-U.S. shareholder’s gain on sale of our shares will not be subject to United States federal income taxation as a sale of a United States real property interest, if that class of shares is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market like the NYSE, and the non-U.S. shareholder has at all times during the preceding five years owned 5% or less by value of that class of shares. In this regard, because the preferred shares of others may be redeemed, a non-U.S. shareholder’s percentage interest in a class of our preferred shares may increase even if it acquires no additional preferred shares in that class. If the gain on the sale of our shares were subject to United States federal income taxation, the non-U.S. shareholder will generally be subject to the same treatment as a U.S. shareholder with respect to its gain, will be required to file a United States federal income tax return reporting that gain, and a corporate non-U.S. shareholder might owe branch profits tax under Section 884 of the IRC. A purchaser of our shares from a non-U.S. shareholder will not be required to withhold on the purchase price if the purchased shares are regularly traded on an established securities market or if we are a domestically controlled REIT. Otherwise, a purchaser of our shares from a non-U.S. shareholder may be required to withhold 10% of the purchase price paid to the non-U.S. shareholder and to remit the withheld amount to the IRS.
Backup Withholding and Information Reporting
Information reporting and backup withholding may apply to distributions or proceeds paid to our shareholders under the circumstances discussed below. The backup withholding rate is currently 28% and is scheduled to increase to 31% after 2010. Amounts withheld under backup withholding are generally not an additional tax and may be refunded by the IRS or credited against the REIT shareholder’s federal income tax liability. In the case of any in kind distributions of property by us to a shareholder, we or other applicable withholding agents will have to collect any applicable backup withholding by reducing to cash for remittance to the IRS a sufficient portion of the property that our shareholder would otherwise receive, and the shareholder may bear brokerage or other costs for this withholding procedure.
A U.S. shareholder will be subject to backup withholding when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the U.S. shareholder properly executes, or has previously properly executed, under penalties of perjury an IRS Form W-9 or substantially similar form that:
· provides the U.S. shareholder’s correct taxpayer identification number; and
· certifies that the U.S. shareholder is exempt from backup withholding because it is a corporation or comes within another exempt category, it has not been notified by the IRS that it is subject to backup withholding, or it has been notified by the IRS that it is no longer subject to backup withholding.
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If the U.S. shareholder has not and does not provide its correct taxpayer identification number on the IRS Form W-9 or substantially similar form, it may be subject to penalties imposed by the IRS, and the REIT or other withholding agent may have to withhold a portion of any distributions paid to it. Unless the U.S. shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it is a corporation or comes within another exempt category, distributions on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS.
Distributions on our shares to a non-U.S. shareholder during each calendar year and the amount of tax withheld, if any, will generally be reported to the non-U.S. shareholder and to the IRS. This information reporting requirement applies regardless of whether the non-U.S. shareholder is subject to withholding on distributions on our shares or whether the withholding was reduced or eliminated by an applicable tax treaty. Also, distributions paid to a non-U.S. shareholder on our shares may be subject to backup withholding, unless the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form in the manner described above. Similarly, information reporting and backup withholding will not apply to proceeds a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares, if the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form. Even without having executed an IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding will not apply to proceeds that a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares if the non-U.S. shareholder receives those proceeds through a broker’s foreign office.
Other Tax Consequences
Our tax treatment and that of our shareholders may be modified by legislative, judicial, or administrative actions at any time, which actions may be retroactive in effect. The rules dealing with federal income taxation are constantly under review by the Congress, the IRS and the Treasury Department, and statutory changes, new regulations, revisions to existing regulations, and revised interpretations of established concepts are issued frequently. Likewise, the rules regarding taxes other than federal income taxes may also be modified. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions or the direct or indirect effect on us and our shareholders. Revisions to tax laws and interpretations of these laws could adversely affect the tax or other consequences of an investment in our shares. We and our shareholders may also be subject to taxation by state, local or other jurisdictions, including those in which we or our shareholders transact business or reside. These tax consequences may not be comparable to the federal income tax consequences discussed above.
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ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
General Fiduciary Obligations
Fiduciaries of a pension, profit-sharing or other employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended, or ERISA, must consider whether:
· their investment in our shares satisfies the diversification requirements of ERISA;
· the investment is prudent in light of possible limitations on the marketability of our shares;
· they have authority to acquire our shares under the applicable governing instrument and Title I of ERISA; and
· the investment is otherwise consistent with their fiduciary responsibilities.
Trustees and other fiduciaries of an ERISA plan may incur personal liability for any loss suffered by the plan on account of a violation of their fiduciary responsibilities. In addition, these fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the plan on account of a violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified retirement plan not subject to Title I of ERISA, referred to as “non-ERISA plans,” should consider that a plan may only make investments that are authorized by the appropriate governing instrument.
Fiduciaries considering an investment in our securities should consult their own legal advisors if they have any concern as to whether the investment is consistent with the foregoing criteria or is otherwise appropriate. The sale of our securities to a plan is in no respect a representation by us or any underwriter of the securities that the investment meets all relevant legal requirements with respect to investments by plans generally or any particular plan, or that the investment is appropriate for plans generally or any particular plan.
Prohibited Transactions
Fiduciaries of ERISA plans and persons making the investment decision for an IRA or other non-ERISA plan should consider the application of the prohibited transaction provisions of ERISA and the IRC in making their investment decision. Sales and other transactions between an ERISA or non-ERISA plan, and persons related to it, are prohibited transactions. The particular facts concerning the sponsorship, operations and other investments of an ERISA plan or non-ERISA plan may cause a wide range of other persons to be treated as disqualified persons or parties in interest with respect to it. A prohibited transaction, in addition to imposing potential personal liability upon fiduciaries of ERISA plans, may also result in the imposition of an excise tax under the IRC or a penalty under ERISA upon the disqualified person or party in interest with respect to the plan. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA or Roth IRA is maintained or his beneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the prohibited transaction, but no excise tax will be imposed. Fiduciaries considering an investment in our securities should consult their own legal advisors as to whether the ownership of our securities involves a prohibited transaction.
“Plan Assets” Considerations
The Department of Labor, which has administrative responsibility over ERISA plans as well as non-ERISA plans, has issued a regulation defining “plan assets.” The regulation generally provides that when an ERISA or non-ERISA plan acquires a security that is an equity interest in an entity and that security is neither a “publicly offered security” nor a security issued by an investment company registered under the Investment Company Act of 1940, as amended, the ERISA plan’s or non-ERISA plan’s assets include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant.
Debt instruments that we issue with any “substantial equity feature” will be treated as an equity interest. However, an example in the applicable regulations concludes that a convertible debt instrument issued by a corporation, apparently on conventional terms, would not be treated as an equity interest because the conversion feature was deemed “incidental” to
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the issuer’s obligation to pay principal and interest. Based on the foregoing, our counsel Sullivan & Worcester LLP has opined that, while the matter is not free from doubt, our 3.80% Convertible Senior Notes due 2027 will not be treated as equity interests under ERISA’s plan assets rules.
Each class of our shares (that is, our common shares and any class of preferred shares that we have issued or may issue) must be analyzed separately to ascertain whether it is a publicly offered security. The regulation defines a publicly offered security as a security that is “widely held,” “freely transferable” and either part of a class of securities registered under the Exchange Act, or sold under an effective registration statement under the Securities Act of 1933, as amended, provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred. Each class of our outstanding shares has been registered under the Exchange Act.
The regulation provides that a security is “widely held” only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. However, a security will not fail to be “widely held” because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer’s control. Our common shares and our preferred shares have been widely held and we expect our common shares and our preferred shares to continue to be widely held. We expect the same to be true of any additional class of preferred stock that we may issue, but we can give no assurance in that regard.
The regulation provides that whether a security is “freely transferable” is a factual question to be determined on the basis of all relevant facts and circumstances. The regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that these securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include:
· any restriction on or prohibition against any transfer or assignment which would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order;
· any requirement that advance notice of a transfer or assignment be given to the issuer and any requirement that either the transferor or transferee, or both, execute documentation setting forth representations as to compliance with any restrictions on transfer which are among those enumerated in the regulation as not affecting free transferability, including those described in the preceding clause of this sentence;
· any administrative procedure which establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and
· any limitation or restriction on transfer or assignment that is not imposed by the issuer or a person acting on behalf of the issuer.
We believe that the restrictions imposed under our declaration of trust on the transfer of shares do not result in the failure of our shares to be “freely transferable.” Furthermore, we believe that there exist no other facts or circumstances limiting the transferability of our shares which are not included among those enumerated as not affecting their free transferability under the regulation, and we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer which would not be among the enumerated permissible limitations or restrictions.
Assuming that each class of our shares will be “widely held” and that no other facts and circumstances exist which restrict transferability of these shares, we have received an opinion of our counsel, Sullivan & Worcester LLP, that our shares will not fail to be “freely transferable” for purposes of the regulation due to the restrictions on transfer of the shares under our declaration of trust and that under the regulation each class of our currently outstanding shares is publicly offered and our assets will not be deemed to be “plan assets” of any ERISA plan or non-ERISA plan that invests in our shares.
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Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our debt or equity securities could decline. Investors and prospective investors should consider the following risks and the information contained under the heading “Warning Concerning Forward-Looking Statements” before deciding whether to invest in our securities.
Financial difficulties at TA could adversely effect us.
We lease all of our travel center properties, which constitute approximately 39% of our investments, to TA. TA’s total revenues for the eight months ended September 30, 2007 were $4.0 billion and its net loss from operations was $42.1 million. TA’s fuel sales generate low margins; in the eight months ended September 30, 2007, TA generated a gross profit from fuel sales of $113 million on sales of $3.3 billion. In addition, during the past few years the price of fuel has materially increased and fuel supplies have been occasionally disrupted and made more expensive by natural disasters, wars and acts of terrorism; these fuel price increases and volatility have increased TA’s working capital requirements. Recently, the slowing of the U.S. economy appears to have had an adverse impact upon the U.S. trucking industry from which TA draws customers. Price increases and volatility in fuel prices and continued weakness in the U.S. trucking industry may result in future losses at TA, including losses in excess of those previously experienced, which could jeopardize TA’s ability to pay rent to us.
In the past, events beyond our control, including an economic slowdown, the wars in Iraq and Afghanistan and on terrorism, reduced the financial results experienced in the hotel industry generally and the financial performance of our hotels. If these or similar events occur again or continue for substantial periods, our operating and financial results may be harmed by declines in average daily room rates or occupancy at our hotels.
The terrorist attacks of September 11, 2001 had a dramatic adverse effect on business and leisure travel and on our hotels’ occupancy and average daily rate, or ADR. Future terrorist activities could have a similarly harmful effect on both the hotel industry and us. As a result of terrorism concerns, the wars in Iraq and Afghanistan and the impact of a recessionary economy, the U.S. hotel industry generally and our hotels specifically experienced significant declines in occupancy, revenues and profitability in 2001, 2002 and 2003. While the performance of our hotels has improved, the uncertainty associated with future acts of terrorism and the current economic slowdown in the U.S. may adversely impact business and leisure travel patterns and, accordingly, our business.
We are dependant on a limited number of operators for our properties and we have a high concentration of our properties with a limited number of operators and their brands.
TA leases all of our travel center properties, which constitute approximately 39% of our investments. In addition, two of our hotel operators, InterContinental and Marriott, operate approximately 46% and 40%, respectively, of our hotel investments. If we were to have a dispute with any of these operators, or if any of these operators were to fail to provide quality services and amenities or to maintain quality brands, our income from these properties may be adversely affected. Further if we were required to replace any of our operators, this could result in significant disruptions at the affected properties and declines in our profitability and cash flows.
Some of our returns and rents are guaranteed by parent entities or affiliates of our tenants or operators, but these guarantees may be limited or the guarantors may be unable to honor their commitments. Other security features in our management agreements and leases may not be sufficient to cover all obligations due to us.
Each management agreement or lease that we have entered into includes various terms intended to secure the payments due to us, including some or all of the following: security deposits which we received but do not escrow, subordination of management fees payable to the operator to some or all of our return or rent and full or limited guarantees from the manager’s or tenant’s parent company. However, the effectiveness of these various security features to provide uninterrupted payments to us is not assured, particularly if the profitability of our properties is at a depressed level for an extended period. Also, these security features may not be sufficient to cover all obligations due to us. We may not receive payments under certain of our guarantees because the guaranty amount is exhausted, because the guarantor’s financial condition deteriorates and it is unable to meet its obligations or for some other reason. Under the terms of some of our guarantees, the guarantors may be released if cash flows from the affected properties exceed certain threshold amounts, and such releases would be effective even if cash flows subsequently decline.
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We are not permitted to operate our properties and we are dependent on the managers and tenants of our properties.
Because federal income tax laws restrict REITs and their subsidiaries from operating hotels or travel centers, we do not manage our hotels or our travel centers. Instead, we or our subsidiaries that qualify as TRSs under applicable REIT laws, either retain third party managers to manage our properties pursuant to management agreements or lease our properties to operating companies. Our income from our properties may be adversely affected if our managers or tenants fail to provide quality services and amenities to customers or if they fail to maintain a quality brand. While we monitor our managers’ and tenants’ performances, we have limited recourse under our management agreements and leases if we believe that the managers or tenants are not performing adequately. Failure by our managers or tenants to fully perform the duties agreed to in our management agreements and leases could adversely affect our results of operations. In addition, our managers or tenants manage, and in some cases own or have invested in, properties that compete with our properties, which may result in conflicts of interest. As a result, our managers or tenants have in the past made and may in the future make decisions regarding competing properties that are not or would not be in our best interests.
We may be unable to access the capital necessary to repay debts or grow.
To retain our status as a REIT, we are required to distribute 90% of our taxable income to shareholders and we generally cannot retain sufficient income from operations to repay debts, to invest in our properties or fund our acquisitions. Accordingly, our business and growth strategy depend, in part, upon our ability to raise additional capital at reasonable costs to repay our debt maturities and to fund new investments. We believe we will be able to raise additional debt and equity capital at reasonable costs and to refinance our debts at or prior to their maturities, including our $150 million of senior notes due March 1, 2008, to maintain our properties and to invest at yields which exceed our cost of capital. However, the U.S. capital markets are currently experiencing severe liquidity constraints and our ability to raise reasonably priced capital is not guaranteed; we may be unable to raise reasonably priced capital because of reasons related to our business or for reasons beyond our control, such as the current restrictive market conditions in the debt capital market. Our business and growth strategy is not assured and may fail.
Acquisitions that we make may not be successful.
Our business strategy contemplates additional acquisitions. We cannot assure our investors that we will be able to consummate further acquisitions or that acquisitions we make will prove to be successful. We might encounter unanticipated difficulties and expenditures relating to any acquired properties. Newly acquired properties might require significant management attention that would otherwise be devoted to our ongoing business. Also, acquisitions of properties may not yield the returns we expect and, if financed using debt or new equity issuances may result in shareholder dilution.
We face competition for the acquisition of properties.
We compete with pension funds, private equity investors, other REITs, owner operators and other businesses which are engaged in the acquisition of hospitality properties. Some of our competitors have greater financial resources and more experienced personnel than we have. These competitors may affect the supply/demand dynamics and, accordingly, increase the price we must pay for properties we seek to acquire. Furthermore, owners of hospitality properties who offer them for sale may find our competitors to be more attractive buyers because they may have greater financial resources, may be willing to pay more, or may have a more compatible operating philosophy.
31
We have recently learned of litigation against us.
We have recently learned that a purported shareholder of TA has commenced a derivative action against TA’s directors which also seeks damages against us. This litigation alleges that our lease to TA of travel centers we acquired when we purchased Petro Stopping Centers Holdings L.P., or Petro, is unfair to TA. Although we are only beginning to assess our defenses to this litigation, we believe this allegation is not true and we expect to vigorously defend this litigation. Nonetheless, we understand that rulings made in litigation can sometimes produce unexpected results and litigation can be expensive to conduct. Accordingly, we can not predict the final impact of this litigation on us at this time.
The loss of our tax status as a REIT or tax authority challenges could have significant adverse consequences to us and reduce the market price of our securities.
As a REIT, we generally do not pay federal and state income taxes. However, our continued qualification as a REIT is dependent upon our compliance with complex provisions of the Internal Revenue Code, for which only limited judicial or administrative interpretations are available. We believe we have operated, and are operating, as a REIT in compliance with the Internal Revenue Code. However, we cannot be certain that, upon review or audit, the IRS will agree with this conclusion. If we cease to be a REIT, we would violate a covenant in our bank credit facilities, our ability to raise capital could be adversely affected, we may be subject to material amounts of federal and state income taxes and the value of our shares would likely decline.
There is no assurance that we will make distributions in the future.
We intend to continue to pay quarterly distributions to our shareholders consistent with our historical practice. However, our ability to pay distributions may be adversely affected if any of the risks described herein occur. Our payment of distributions is subject to compliance with restrictions contained in our revolving credit facility and our debt indenture. All our distributions are made at the discretion of our board of trustees and our future distributions will depend upon our earnings, our cash flows, our anticipated cash flows, our financial condition, maintenance of our REIT tax status and such other factors as our board of trustees may deem relevant from time to time. There are no assurances of our ability to pay distributions in the future. In addition, our distributions in the past have included, and may in the future include, a return of capital.
We may be unable to provide the funding required for the refurbishment of our properties.
Some of our management agreements and lease arrangements require us to invest money for refurbishments and capital improvements to our properties. We may have to invest more than expected in order to achieve and maintain the competitive position and future financial performance of our properties. We may not have the necessary funds to invest, and such expenditures, if made, may not be sufficient to maintain the successful financial performance of our properties. Our management agreements and lease arrangements require us to maintain the properties in a certain required condition. If we fail to maintain these required standards, then the manager or tenant may terminate the management or lease agreement and hold us liable for damages we may have caused.
Our business dealings with our managing trustees and affiliated entities may create conflicts of interest.
We have no employees. Personnel and other services which we require are provided to us under contracts by our manager, RMR. RMR is beneficially owned by our managing trustees, Barry Portnoy and Adam Portnoy. Barry Portnoy is Chairman, and Adam Portnoy is President, Chief Executive Officer and a director of RMR. In addition, John Murray, our President, Chief Operating Officer and Secretary, Mark Kleifges, our Treasurer and Chief Financial Officer, and Ethan Bornstein, our Senior Vice President, are executive officers of RMR. We pay RMR a fee based in part upon the historical cost of our investments plus incentive fees based upon increases in our cash flow, as defined. Any incentive fees are payable through our issuance of restricted common shares . Our total fees paid to RMR in 2007 were $31.8 million. Although we do not believe it has done so, our fee arrangement with RMR could encourage RMR to advocate acquisitions and discourage sales by us. RMR also acts as the manager for two other publicly owned REITs: HRPT Properties Trust, or HRPT, which primarily owns office buildings; and, Senior Housing Properties Trust, or SNH, which primarily owns healthcare properties. RMR also provides management services to one of our tenants, TA, and other public and private companies. These multiple responsibilities to public companies and other businesses could create competition among these companies for the time and efforts of RMR and Messrs. Barry Portnoy and Adam Portnoy. A termination of our contract with RMR is a default under our revolving credit facility unless approved by a majority of our lenders. We believe that the quality and depth of management available to us by contracting with RMR could not be duplicated by our being a self-managed company or by our contracting with unrelated third parties, without considerable cost increases. We believe our contractual arrangement with our managing trustees and RMR are commercially reasonable. All of our contractual arrangements with RMR have been approved by our independent trustees.
32
Ownership limitations and anti-takeover provisions in our declaration of trust, bylaws and rights agreement and under Maryland law may prevent our shareholders from receiving a takeover premium.
Our declaration of trust prohibits any shareholder, other than RMR and their affiliates, from owning more than 9.8% of our outstanding shares. This provision of the declaration of trust may help us comply with REIT tax requirements. However, this provision will also inhibit a change of control. Our declaration of trust and bylaws contain other provisions that may increase the difficulty of acquiring control of us by means of a tender offer, open market purchases, a proxy fight or otherwise, if the acquisition is not approved by our board of trustees. These other anti-takeover provisions include the following:
· a staggered board of trustees with three separate classes;
· the two-thirds majority shareholder vote required for removal of trustees;
· the ability of our board of trustees to increase, without shareholder approval, the amount of shares (including common shares) that we are authorized to issue under our declaration of trust and bylaws, and to issue additional shares on terms that it determines;
· advance notice procedures with respect to nominations of trustees and shareholder proposals; and
· the fact that only the board of trustees may call shareholder meetings and that shareholders are not entitled to act without a meeting.
We have a rights agreement whereby, in the event a person or group of persons acquires or attempts to acquire 10% or more of our outstanding common shares, our shareholders, other than such person or group, will be entitled to purchase additional shares or other securities or property at a discount. In addition, certain provisions of Maryland law may have an anti-takeover effect. For all of these reasons, our shareholders may be unable to realize a change of control premium for shares they own.
Some of our management agreements and leases limit our ability to sell or finance some of our properties.
Under the terms of some of our hotel management agreements and leases, we generally may not sell, lease or otherwise transfer the properties unless the transferee is not a competitor of the manager and the transferee assumes the related management agreements and meets other specified conditions. Our ability to finance or sell our properties, depending upon the structure of such transactions, may require the manager’s consent or the tenant’s consent under our management agreements and leases. If, in these circumstances, the manager or the tenant does not consent, we may be prevented from taking actions which might be beneficial to our shareholders.
33
Real estate ownership creates risks and liabilities.
Our business is subject to risks associated with real estate acquisitions and ownership, including:
· increased supply of similar properties in our markets;
· catastrophic property and casualty losses, such as losses due to wars, terrorist attacks or natural disasters, some of which may be uninsured;
· defaults and bankruptcies by our managers or tenants;
· the illiquid nature of real estate markets which impairs our ability to purchase or sell our assets rapidly to respond to changing economic conditions;
· management agreements or leases which are not renewed at expiration and may be replaced with management agreements with less favorable terms or relet at lower rents; and
· costs that may be incurred relating to maintenance and repair, and the need to make capital expenditures to maintain our properties’ values or due to contractual obligations or changes in governmental regulations, including the Americans with Disabilities Act.
Compliance with environmental laws may be costly.
Acquisition and ownership of real estate is subject to risks associated with environmental hazards. We may be liable for environmental hazards at our properties, including those created by prior owners or occupants, existing tenants, abutters or other persons. The travel centers we own and that TA leases from us include fueling areas, truck repair and maintenance facilities and tanks for the storage of petroleum products and other hazardous substances, all of which create the potential for environmental damages. As a result, TA is expected to regularly incur environmental clean up costs. In the leases that we entered with TA, TA agreed to indemnify us from all environmental liabilities arising at any travel center property during the term of the lease. Despite this indemnity, various federal and state laws impose environmental liabilities upon property owners, such as us, for any environmental damages arising on properties they own or occupy, and we cannot be assured that we will not be held liable for environmental clean up at our properties, including environmental damages at sites we own and lease to TA. As an owner or previous owner of properties which contain environmental hazards, we also may be liable to pay damages to governmental agencies or third parties for costs and damages they incur arising from environmental hazards at the properties. Moreover, the costs and damages which may arise from environmental hazards are often difficult to project and TA may not have sufficient resources to pay its environmental liabilities.
We have substantial debt obligations and may incur additional debt.
At December 31, 2007, we had $2.6 billion in debt outstanding, which was 48% of our total book capitalization. Our note indenture and revolving credit facility permit us and our subsidiaries to incur additional debt, including secured debt. If we default in paying any of our debts or honoring our debt covenants, these debts may be accelerated and we could be forced to liquidate our assets for less than the values we would receive in a more orderly process.
If we issue secured debt or subsidiary debt, such debt will have priority claims on certain of our assets which are senior to our existing debts.
We conduct substantially all of our business through, and substantially all of our properties are owned by, subsidiaries. Consequently, our ability to pay debt service on our outstanding notes and any notes we issue in the future will be dependent upon the cash flow of our subsidiaries and payments by those subsidiaries to us as dividends or otherwise. Our subsidiaries are separate legal entities and have their own liabilities. Payments due on our outstanding notes, and any notes we may issue, are, or will be, effectively subordinated to liabilities of our subsidiaries, including guaranty liabilities. Substantially all of our subsidiaries have guaranteed our revolving credit facility; none of our subsidiaries guaranty our outstanding notes. In addition, at December 31, 2007, one of our subsidiaries has $3.6 million of secured
34
debt. Our outstanding notes are, and any notes we may issue will be, also effectively subordinated to our secured debt with regard to our assets pledged to secure those debts.
Our notes may permit redemption before maturity, and our noteholders may be unable to reinvest proceeds at the same or a higher rate.
The terms of our notes may permit us to redeem all or a portion of our outstanding notes after a certain amount of time, or up to a certain percentage of the notes prior to certain dates. Generally, the redemption price will equal the principal amount being redeemed, plus accrued interest to the redemption date, plus any applicable premium. If a redemption occurs, our noteholders may be unable to reinvest the money they receive in the redemption at a rate that is equal to or higher than the rate of return on the applicable notes.
There may be no public market for notes we may issue and one may not develop.
Generally, any notes we may issue will be a new issue for which no trading market currently exists. We may not list our notes on any securities exchange or seek approval for price quotations to be made available through any automated quotation system. There is no assurance that an active trading market for any of our notes will exist in the future. Even if a market does develop, the liquidity of the trading market for any of our notes and the market price quoted for any such notes may be adversely affected by changes in the overall market for fixed income securities, by changes in our financial performance or prospects, or by changes in the prospects for REITs or for the hospitality industries generally.
We may not have the cash necessary to pay the principal return and any net amount upon the conversion of our convertible notes or to repurchase the convertible notes on specified dates or following certain change in control transactions.
We have $575 million of convertible notes outstanding at this time. Upon a conversion of notes in accordance with their terms, we will be required to pay the principal return of these notes in cash. Furthermore, there may be circumstances that prevent the issuance of our common shares for all or any portion of any net amount deliverable upon the conversion of notes, thereby requiring us to satisfy our net amount obligation in cash. Holders of notes also have the right to require us to repurchase the notes for cash on March 20, 2012, March 15, 2017 and March 15, 2022 or upon the occurrence of certain change in control transactions prior to March 20, 2012. Some of our future debt agreements or securities may contain similar provisions. We may not have sufficient funds to pay the principal return and any such net cash amount or make the required repurchase of notes, as the case may be, in cash at the applicable time; and, in such circumstances, we may not be able to arrange the necessary financing on favorable terms. In addition, our ability to pay the principal return and any such net cash amount or make the required repurchase, as the case may be, may be limited by law or the terms of other debt agreements or securities. Moreover, our failure to pay the principal return and any such net cash amount or make the required repurchase, as the case may be, would constitute an event of default under the indenture governing the notes which, in turn, would constitute an event of default under other debt agreements or securities, thereby resulting in their acceleration and required prepayment and further restricting our ability to make such payments and repurchases.
An increase in interest rates would increase our interest costs on variable rate debt and could adversely impact our ability to refinance existing debt or sell assets. Also, interest rate changes often affect the value of dividend paying securities.
Our revolving credit facility requires interest at variable rates and matures in October 2010. At December 31, 2007, we had an outstanding balance of $158 million and $592 million available for drawing under our revolving credit facility. As we use this facility, if market interest rates increase, so will our interest costs, which could adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our shareholders. Further, rising interest rates may raise our cost to refinance existing debt when it matures. In addition, an increase in interest rates could decrease the amount buyers may be willing to pay for our properties, thereby limiting our ability to sell properties, to raise capital or realize gains.
35
We pay regular dividends to our common and preferred shareholders. When interest rates available to investors rise, the trading market price of dividend paying securities often decline. If interest rates rise, the value of your ownership of our securities may decline.
Item 1B. Unresolved Staff Comments
None.
36
At December 31, 2007, we owned 292 hotels and 185 travel centers. The following table summarizes certain information about our properties as of December 31, 2007.
|
Location of |
|
Number |
|
Undepreciated |
|
Depreciated |
|
Number |
|
Undepreciated |
|
Depreciated |
|
Total |
|
Total |
|
Total |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Alabama |
|
4 |
|
$ |
33,994 |
|
$ |
25,237 |
|
4 |
|
$ |
50,807 |
|
$ |
49,378 |
|
8 |
|
$ |
84,801 |
|
$ |
74,615 |
|
||||||
|
Arizona |
|
14 |
|
153,831 |
|
117,075 |
|
6 |
|
121,480 |
|
118,364 |
|
20 |
|
275,311 |
|
235,439 |
|
||||||||||||
|
Arkansas |
|
— |
|
— |
|
— |
|
4 |
|
81,058 |
|
75,854 |
|
4 |
|
81,058 |
|
75,854 |
|
||||||||||||
|
California |
|
34 |
|
591,070 |
|
486,814 |
|
9 |
|
137,723 |
|
135,753 |
|
43 |
|
728,793 |
|
622,567 |
|
||||||||||||
|
Colorado |
|
4 |
|
38,692 |
|
30,989 |
|
3 |
|
25,220 |
|
24,328 |
|
7 |
|
63,912 |
|
55,317 |
|
||||||||||||
|
Connecticut |
|
1 |
|
7,788 |
|
6,565 |
|
3 |
|
24,670 |
|
23,523 |
|
4 |
|
32,458 |
|
30,088 |
|
||||||||||||
|
Delaware |
|
1 |
|
15,456 |
|
11,263 |
|
— |
|
— |
|
— |
|
1 |
|
15,456 |
|
11,263 |
|
||||||||||||
|
Florida |
|
12 |
|
163,957 |
|
130,290 |
|
7 |
|
103,977 |
|
102,027 |
|
19 |
|
267,934 |
|
232,317 |
|
||||||||||||
|
Georgia |
|
20 |
|
261,091 |
|
213,010 |
|
9 |
|
92,560 |
|
89,230 |
|
29 |
|
353,651 |
|
302,240 |
|
||||||||||||
|
Hawaii |
|
1 |
|
59,673 |
|
47,050 |
|
— |
|
— |
|
— |
|
1 |
|
59,673 |
|
47,050 |
|
||||||||||||
|
Idaho |
|
— |
|
— |
|
— |
|
1 |
|
13,862 |
|
13,557 |
|
1 |
|
13,862 |
|
13,557 |
|
||||||||||||
|
Illinois |
|
14 |
|
162,406 |
|
127,335 |
|
7 |
|
48,241 |
|
46,935 |
|
21 |
|
210,647 |
|
174,270 |
|
||||||||||||
|
Indiana |
|
3 |
|
35,910 |
|
29,154 |
|
7 |
|
48,585 |
|
45,098 |
|
10 |
|
84,495 |
|
74,252 |
|
||||||||||||
|
Iowa |
|
2 |
|
16,014 |
|
11,565 |
|
1 |
|
7,252 |
|
7,061 |
|
3 |
|
23,266 |
|
18,626 |
|
||||||||||||
|
Kansas |
|
4 |
|
28,438 |
|
22,948 |
|
— |
|
— |
|
— |
|
4 |
|
28,438 |
|
22,948 |
|
||||||||||||
|
Kentucky |
|
1 |
|
5,096 |
|
3,906 |
|
3 |
|
37,827 |
|
36,775 |
|
4 |
|
42,923 |
|
40,681 |
|
||||||||||||
|
Louisiana |
|
1 |
|
28,209 |
|
22,358 |
|
6 |
|
92,123 |
|
89,928 |
|
7 |
|
120,332 |
|
112,286 |
|
||||||||||||
|
Maryland |
|
7 |
|
153,384 |
|
131,989 |
|
3 |
|
41,332 |
|
40,509 |
|
10 |
|
194,716 |
|
172,498 |
|
||||||||||||
|
Massachusetts |
|
13 |
|
159,544 |
|
125,370 |
|
— |
|
— |
|
— |
|
13 |
|
159,544 |
|
125,370 |
|
||||||||||||
|
Michigan |
|
12 |
|
110,808 |
|
91,310 |
|
4 |
|
24,239 |
|
23,625 |
|
16 |
|
135,047 |
|
114,935 |
|
||||||||||||
|
Minnesota |
|
4 |
|
37,315 |
|
29,330 |
|
1 |
|
3,377 |
|
3,314 |
|
5 |
|
40,692 |
|
32,644 |
|
||||||||||||
|
Mississippi |
|
— |
|
— |
|
— |
|
1 |
|
20,665 |
|
19,932 |
|
1 |
|
20,665 |
|
19,932 |
|
||||||||||||
|
Missouri |
|
6 |
|
90,569 |
|
61,721 |
|
5 |
|
45,542 |
|
44,127 |
|
11 |
|
136,111 |
|
105,848 |
|
||||||||||||
|
Nebraska |
|
1 |
|
6,495 |
|
4,795 |
|
3 |
|
33,780 |
|
32,703 |
|
4 |
|
40,275 |
|
37,498 |
|
||||||||||||
|
Nevada |
|
3 |
|
45,612 |
|
36,411 |
|
5 |
|
86,914 |
|
85,646 |
|
8 |
|
132,526 |
|
122,057 |
|
||||||||||||
|
New Hampshire |
|
— |
|
— |
|
— |
|
1 |
|
3,968 |
|
3,491 |
|
1 |
|
3,968 |
|
3,491 |
|
||||||||||||
|
New Jersey |
|
12 |
|
184,687 |
|
149,394 |
|
4 |
|
92,515 |
|
90,379 |
|
16 |
|
277,202 |
|
239,773 |
|
||||||||||||
|
New Mexico |
|
2 |
|
21,977 |
|
16,229 |
|
6 |
|
78,270 |
|
75,352 |
|
8 |
|
100,247 |
|
91,581 |
|
||||||||||||
|
New York |
|
5 |
|
96,822 |
|
79,677 |
|
6 |
|
19,115 |
|
16,979 |
|
11 |
|
115,937 |
|
96,656 |
|
||||||||||||
|
North Carolina |
|
13 |
|
119,672 |
|
94,031 |
|
3 |
|
30,538 |
|
29,758 |
|
16 |
|
150,210 |
|
123,789 |
|
||||||||||||
|
Ohio |
|
5 |
|
42,770 |
|
33,486 |
|
14 |
|
140,140 |
|
136,318 |
|
19 |
|
182,910 |
|
169,804 |
|
||||||||||||
|
Oklahoma |
|
2 |
|
16,994 |
|
13,050 |
|
4 |
|
31,324 |
|
29,733 |
|
6 |
|
48,318 |
|
42,783 |
|
||||||||||||
|
Oregon |
|
— |
|
— |
|
— |
|
3 |
|
35,105 |
|
34,356 |
|
3 |
|
35,105 |
|
34,356 |
|
||||||||||||
|
Pennsylvania |
|
10 |
|
156,832 |
|
126,609 |
|
9 |
|
103,321 |
|
100,593 |
|
19 |
|
260,153 |
|
227,202 |
|
||||||||||||
|
Rhode Island |
|
1 |
|
12,417 |
|
8,637 |
|
— |
|
— |
|
— |
|
1 |
|
12,417 |
|
8,637 |
|
||||||||||||
|
South Carolina |
|
4 |
|
55,702 |
|
47,272 |
|
2 |
|
22,528 |
|
21,764 |
|
6 |
|
78,230 |
|
69,036 |
|
||||||||||||
|
Tennessee |
|
9 |
|
131,321 |
|
99,001 |
|
8 |
|
73,460 |
|
71,876 |
|
17 |
|
204,781 |
|
170,877 |
|
||||||||||||
|
Texas |
|
35 |
|
424,622 |
|
349,802 |
|
17 |
|
313,165 |
|
303,789 |
|
52 |
|
737,787 |
|
653,591 |
|
||||||||||||
|
Utah |
|
3 |
|
62,242 |
|
46,736 |
|
2 |
|
15,318 |
|
14,726 |
|
5 |
|
77,560 |
|
61,462 |
|
||||||||||||
|
Virginia |
|
15 |
|
165,060 |
|
125,652 |
|
4 |
|
46,442 |
|
45,174 |
|
19 |
|
211,502 |
|
170,826 |
|
||||||||||||
|
Washington |
|
6 |
|
83,649 |
|
63,358 |
|
2 |
|
3,476 |
|
3,202 |
|
8 |
|
87,125 |
|
66,560 |
|
||||||||||||
|
West Virginia |
|
1 |
|
8,578 |
|
6,916 |
|
2 |
|
6,815 |
|
6,591 |
|
3 |
|
15,393 |
|
13,507 |
|
||||||||||||
|
Wisconsin |
|
1 |
|
10,305 |
|
7,409 |
|
2 |
|
11,541 |
|
11,154 |
|
3 |
|
21,846 |
|
18,563 |
|
||||||||||||
|
Wyoming |
|
— |
|
— |
|
— |
|
4 |
|
55,146 |
|
53,306 |
|
4 |
|
55,146 |
|
53,306 |
|
||||||||||||
|
|
|
286 |
|
3,799,002 |
|
3,033,744 |
|
185 |
|
2,223,421 |
|
2,156,208 |
|
471 |
|
6,022,423 |
|
5,189,952 |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Ontario, Canada |
|
2 |
|
39,117 |
|
34,532 |
|
— |
|
— |
|
— |
|
2 |
|
39,117 |
|
34,532 |
|
||||||||||||
|
Puerto Rico |
|
1 |
|
134,691 |
|
122,277 |
|
— |
|
— |
|
— |
|
1 |
|
134,691 |
|
122,277 |
|
||||||||||||
|
|
|
3 |
|
173,808 |
|
156,809 |
|
— |
|
— |
|
— |
|
3 |
|
173,808 |
|
156,809 |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Arizona |
|
1 |
|
9,338 |
|
6,951 |
|
— |
|
— |
|
— |
|
1 |
|
9,338 |
|
6,951 |
|
||||||||||||
|
Florida |
|
1 |
|
4,437 |
|
3,431 |
|
— |
|
— |
|
— |
|
1 |
|
4,437 |
|
3,431 |
|
||||||||||||
|
N. Carolina |
|
1 |
|
8,208 |
|
6,716 |
|
— |
|
— |
|
— |
|
1 |
|
8,208 |
|
6,716 |
|
||||||||||||
|
Total |
|
292 |
|
$ |
3,994,793 |
|
$ |
3,207,651 |
|
185 |
|
$ |
2,223,421 |
|
$ |
2,156,208 |
|
477 |
|
$ |
6,218,214 |
|
$ |
5,363,859 |
|
||||||
37
At December 31, 2007, 14 of our hotels were on leased land. The average remaining term of the ground leases (including renewal options) is in excess of 50 years; the ground lessors are unrelated to us. Ground rent payable under nine of the ground leases is generally calculated as a percentage of hotel revenues. Twelve of the 14 ground leases require minimum annual rents ranging from approximately $102,406 to $556,400 per year; future rents under two ground leases have been pre-paid. Generally payments of ground lease obligations are made by our hotel managers or tenants. However, if a manager or tenant did not perform obligations under a ground lease or elected not to renew any ground lease, we might have to perform obligations under the ground lease or renew the ground lease in order to protect our investment in the affected property. Any pledge of our interests in a ground lease may require the consent of the applicable ground lessor and its lenders.
At December 31, 2007, 26 of our travel centers were on land leased partially or in its entirety. The average remaining term of the ground leases (including renewal options) is 20 years, and the ground lessors are unrelated to us. Ground rent payable under the ground leases is generally a fixed amount, averaging $375,397. Payments of these travel centers ground lease obligations are made by our tenants. However, if our tenants did not perform obligations under a ground lease or elected not to renew any ground lease, we might have to perform obligations under the ground lease or renew the ground lease in order to protect our investment in the affected property. Any pledge of our interests in a ground lease may require the consent of the applicable ground lessor and its lenders.
38
We are aware of a complaint filed in the Delaware Court of Chancery on February 1, 2008 which purports to be a derivative action against TA’s directors, us and RMR. This complaint appears to allege that our lease of Petro travel centers to TA is unfair to TA. We are only beginning to assess our defenses to this litigation. However, we believe the underlying premises of this litigation about the Petro lease are not true, and we expect to vigorously defend this litigation. At this time, we do not believe this litigation is likely to have a material adverse impact upon us.
In the ordinary course of business we are involved in litigation incidental to our business; however we are not aware of any material pending or threatened legal proceeding affecting us or any of our properties for which we might become liable or the outcome of which we expect to have a material impact on us.
Item 4. Submission of Matters to a Vote of Security Holders
None.
39
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common shares are traded on the New York Stock Exchange, or the NYSE (symbol: HPT). The following table sets forth for the periods indicated the high and low sale prices for our common shares as reported in the NYSE Composite Transactions reports:
|
2006 |
|
High |
|
Low |
|
||
|
First Quarter |
|
$ |
46.47 |
|
$ |
39.32 |
|
|
Second Quarter |
|
44.10 |
|
40.08 |
|
||
|
Third Quarter |
|
48.00 |
|
42.50 |
|
||
|
Fourth Quarter |
|
51.46 |
|
46.65 |
|
||
|
2007 |
|
High |
|
Low |
|
||
|
First Quarter |
|
$ |
49.00 |
|
$ |
37.52 |
|
|
Second Quarter |
|
47.88 |
|
40.75 |
|
||
|
Third Quarter |
|
44.30 |
|
36.00 |
|
||
|
Fourth Quarter |
|
43.18 |
|
32.02 |
|
||
The closing price of our common shares on the NYSE on February 27, 2008, was $36.09 per share.
As of February 27, 2008, there were 946 shareholders of record, and we estimate that as of such date there were in excess of 78,600 beneficial owners of our common shares.
Information about cash distributions paid to common shareholders is summarized in the table below. Common share distributions are generally paid in the quarter following the quarter to which they relate.
|
|
|
Distributions |
|
||||
|
|
|
Per Common Share |
|
||||
|
|
|
2006 |
|
2007 |
|
||
|
First Quarter |
|
$ |
0.73 |
|
$ |
0.76 |
|
|
Second Quarter |
|
0.74 |
|
0.76 |
|
||
|
Third Quarter |
|
0.74 |
|
0.77 |
|
||
|
Fourth Quarter |
|
0.74 |
|
0.77 |
|
||
|
Total |
|
$ |
2.95 |
|
$ |
3.06 |
|
All common share distributions shown in the table above have been paid. We currently intend to continue to declare and pay common share distributions on a quarterly basis. However, distributions are made at the discretion of our board of trustees and depend on our earnings, cash available for distribution, financial condition, capital market conditions, growth prospects and other factors which our board of trustees deems relevant.
In addition to the cash distributions paid to common shareholders in 2007, we distributed all of the shares of our former subsidiary, TA, to our common shareholders on January 31, 2007. One share of TA was distributed to our common shareholders with respect to every 10 of our shares owned; and this resulted in a taxable valuation of this in kind distribution of $3.234 for each of our shares.
We issued unregistered shares during the fourth quarter as follows: on December 12, 2007, we made share grants pursuant to our incentive share award plans to certain employees of our manager, RMR, totaling 2,450 common shares of beneficial interest, par value $0.01 per share, valued at $35.50 per share, the closing price of our common shares on the NYSE on that day. All of these grants were made pursuant to an exemption from registration contained in section 4(2) of the Securities Act.
40
Item 6. Selected Financial Data
The following table sets forth selected financial data for the periods and dates indicated. Comparative results are affected by property acquisitions and dispositions during the periods shown. This data should be read in conjunction with, and is qualified in its entirety by reference to, management’s discussion and analysis of financial condition and results of operations and the consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K.
|
|
|
Year Ended December 31, |
|
|||||||||||||
|
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||
|
|
|
(In thousands, except per share data) |
|
|||||||||||||
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Hotel operating revenues |
|
$ |
941,455 |
|
$ |
879,324 |
|
$ |
682,541 |
|
$ |
498,122 |
|
$ |
209,299 |
|
|
Rental income |
|
316,819 |
|
120,649 |
|
114,332 |
|
112,325 |
|
201,197 |
|
|||||
|
FF&E reserve income |
|
22,286 |
|
20,299 |
|
19,767 |
|
18,147 |
|
18,000 |
|
|||||
|
Interest income |
|
4,919 |
|
2,674 |
|
1,373 |
|
627 |
|
733 |
|
|||||
|
Gain on lease terminations |
|
— |
|
— |
|
— |
|
— |
|
107,516 |
|
|||||
|
Total revenues |
|
1,285,479 |
|
1,022,946 |
|
818,013 |
|
629,221 |
|
536,745 |
|
|||||
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Hotel operating expenses |
|
657,000 |
|
618,334 |
|
476,858 |
|
333,818 |
|
145,863 |
|
|||||
|
Interest |
|
140,517 |
|
81,451 |
|
65,263 |
|
50,393 |
|
44,536 |
|
|||||
|
Depreciation and amortization |
|
216,688 |
|
141,198 |
|
127,242 |
|
110,333 |
|
100,257 |
|
|||||
|
General and administrative |
|
37,223 |
|
25,090 |
|
22,514 |
|
18,659 |
|
16,075 |
|
|||||
|
Loss on early extinguishment of debt |
|
— |
|
— |
|
— |
|
— |
|
2,582 |
|
|||||
|
Loss on asset impairment |
|
1,332 |
|
— |
|
7,300 |
|
— |
|
— |
|
|||||
|
TA spin off costs |
|
2,711 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Total expenses |
|
1,055,471 |
|
866,073 |
|
699,177 |
|
513,203 |
|
309,313 |
|
|||||
|
Income before income taxes |
|
230,008 |
|
156,873 |
|
118,836 |
|
116,018 |
|
227,432 |
|
|||||
|
Income tax expense |
|
(2,191 |
) |
(372 |
) |
(57 |
) |
— |
|
— |
|
|||||
|
Income before gain on sale of real estate and discontinued operations |
|
227,817 |
|
156,501 |
|
118,779 |
|
116,018 |
|
227,432 |
|
|||||
|
Gain on sale of real estate |
|
— |
|
— |
|
— |
|
203 |
|
— |
|
|||||
|
Income from continuing operations |
|
227,817 |
|
156,501 |
|
118,779 |
|
116,221 |
|
227,432 |
|
|||||
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income from discontinued operations |
|
7,440 |
|
12,538 |
|
11,124 |
|
10,870 |
|
10,781 |
|
|||||
|
Gain on sale of real estate used by discontinued operations |
|
95,711 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Net income |
|
330,968 |
|
169,039 |
|
129,903 |
|
127,091 |
|
238,213 |
|
|||||
|
Preferred distributions |
|
26,769 |
|
7,656 |
|
7,656 |
|
9,674 |
|
14,780 |
|
|||||
|
Excess of liquidation preference over carrying value of preferred shares |
|
— |
|
— |
|
— |
|
2,793 |
|
— |
|
|||||
|
Net income available for common shareholders |
|
$ |
304,199 |
|
$ |
161,383 |
|
$ |
122,247 |
|
$ |
114,624 |
|
$ |
223,433 |
|
|
Common distributions declared |
|
$ |
287,272 |
|
$ |
225,927 |
|
$ |
205,162 |
|
$ |
193,523 |
|
$ |
180,242 |
|
|
Weighted average common shares outstanding |
|
93,109 |
|
73,279 |
|
69,866 |
|
66,503 |
|
62,576 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Per Common Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income from continuing operations available for common shareholders |
|
$ |
2.16 |
|
$ |
2.03 |
|
$ |
1.59 |
|
$ |
1.56 |
|
$ |
3.40 |
|
|
Income from discontinued operations available for common shareholders |
|
$ |
1.11 |
|
$ |
0.17 |
|
$ |
0.16 |
|
$ |
0.16 |
|
$ |
0.17 |
|
|
Net income available for common shareholders |
|
$ |
3.27 |
|
$ |
2.20 |
|
$ |
1.75 |
|
$ |
1.72 |
|
$ |
3.57 |
|
|
Distributions per common share |
|
$ |
3.06 |
|
$ |
2.95 |
|
$ |
2.90 |
|
$ |
2.88 |
|
$ |
2.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance Sheet Data (as of December 31): |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Real estate properties, at cost |
|
$ |
6,196,231 |
|
$ |
4,018,781 |
|
$ |
3,606,404 |
|
$ |
3,161,259 |
|
$ |
3,160,675 |
|
|
Real estate properties, net |
|
5,346,761 |
|
3,316,268 |
|
2,997,605 |
|
2,608,019 |
|
2,668,982 |
|
|||||
|
Total assets |
|
5,679,307 |
|
3,957,463 |
|
3,114,607 |
|
2,689,425 |
|
2,761,601 |
|
|||||
|
Debt, net of discount |
|
2,579,391 |
|
1,199,830 |
|
960,372 |
|
697,505 |
|
826,126 |
|
|||||
|
Shareholders’ equity |
|
2,786,434 |
|
2,447,540 |
|
1,855,455 |
|
1,685,873 |
|
1,645,528 |
|
|||||
41
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in thousands, except per share amounts)
Overview
The following information should be read in conjunction with our consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K.
2007 Developments
On January 31, 2007, we completed our acquisition of TravelCenters of America, Inc., or TravelCenters, pursuant to the Agreement and Plan of Merger dated as of September 15, 2006, as amended, among TravelCenters, us, one of our former subsidiaries and the stockholders of TravelCenters. Upon completion of the acquisition, we restructured the business of TravelCenters and distributed all of the common shares of our former subsidiary, or TA, to our shareholders in a spin off transaction. The acquisition of TravelCenters, the restructuring of the TravelCenters business and the spin off transaction are collectively referred to herein as the TA Transaction.
As a part of the restructuring of TravelCenters which occurred in connection with the TA Transaction, on January 31, 2007:
|
· |
|
TravelCenters became a subsidiary of our subsidiary, TA; |
|
|
|
|
|
· |
|
certain real property interests of 146 travel centers that were operated by TravelCenters and certain other assets used in connection with the travel center business with an estimated total value of $1,697,221 were transferred to subsidiaries of ours that were not owned by TA; |
|
|
|
|
|
· |
|
TA became the owner of all of the working capital of TravelCenters, including current assets (primarily consisting of cash, receivables and inventory) and current liabilities (primarily consisting of trade payables and accrued liabilities); |
|
|
|
|
|
· |
|
we contributed cash of $121,166 to TA so that the sum of its current assets, net of current liabilities, was $200,000; |
|
|
|
|
|
· |
|
TA became the owner of one travel center in Ontario, Canada, the operator of two travel centers leased from owners other than us, the manager of one travel center for an owner other than us, the franchisor of 13 travel centers owned and operated by third parties and the owner of certain other assets historically owned and used by TravelCenters; |
|
|
|
|
|
· |
|
we entered into a lease of the 146 travel centers we acquired (one travel center was subsequently disposed of) and certain related assets to TA; and |
|
|
|
|
|
· |
|
TA commenced operating the travel center business formerly conducted by TravelCenters. |
After this restructuring, on January 31, 2007, we distributed all of the shares of TA to our common shareholders of record on January 26, 2007. The book value of this distribution was $337,250. Shareholders were entitled to receive one TA common share for every ten of our common shares owned on the record date. Fractional shares were issued as necessary. TA’s common shares are listed on the American Stock Exchange under the symbol “TA”. We expensed $2,711 of costs in connection with the spin off transaction.
Our lease with TA is a “triple net” lease, which requires TA to pay all costs incurred in the operation of the leased travel centers, including personnel, utilities, inventories, services to customers, insurance, real estate and personal property taxes and ground lease payments, if any. The annual minimum rent due to us under this agreement is scheduled to increase to $158,962 in 2008, $162,625 in 2009, $166,638 in 2010, $171,613 in 2011 and $176,620 in 2012. The annual straight line rent currently reported by us under Generally Accepted Accounting Principle, or GAAP, is $171,389. Starting in 2012, the lease requires TA to pay us certain percentages of increases in gross revenues at the leased travel centers. We have agreed to provide up to $125,000 of funding during the first five years of the lease for certain specified improvements to the leased travel centers. This funding may be drawn by TA from us in subsequent years until December 2015. There will not be any adjustment in our minimum rent as we fund these amounts. All improvements funded by us will be owned by us. As of December 31, 2007, we have funded $25,000 under this agreement. TA is required to maintain, at its expense, the leased travel centers in good order and repair,
42
including structural and non-structural components, but may request that we fund amounts in addition to the $125,000, in return for minimum annual rent increases equal to a percentage of the amount we fund. Our lease agreement with TA expires on December 31, 2022.
On May 30, 2007, we acquired Petro for approximately $630,000 plus certain costs. Petro owns 40 travel centers located in 25 states. In connection with our acquisition of Petro, we acquired certain Petro properties which secure debt that was previously issued by Petro Stopping Centers, L.P., or Petro Centers, a former subsidiary of Petro acquired by TA on May 30, 2007. Upon closing of our acquisition of Petro, the Petro Centers debt assumed by TA was covenant defeased and funds were escrowed by TA at closing and used to redeem the Petro Centers debt on February 15, 2008. We agreed to pay certain costs associated with our acquisition of Petro, including those relating to the defeasance and prepayment of the Petro Centers debt, and customary closing costs, which totaled approximately $25,000. We funded the purchase price and costs by borrowing under our revolving credit facility. Simultaneous with our acquisition of Petro, we leased the 40 travel centers which Petro owned to TA for an initial minimum rent of $62,225 per year. Starting in 2013, the lease requires TA to pay us additional rent calculated as certain percentages of increases in gross revenues at the leased travel centers. This lease agreement with TA expires on June 30, 2024, and TA has two renewal options of 15 years each exercisable for all, but not less than all, of these 40 leased travel centers.
On July 26, 2007, we sold 18 Homestead Studio Suites hotels for $205,350 and recognized a gain on sale of $95,711. Seventeen of these hotels were sold to an unrelated party. One hotel was purchased by a subsidiary of HRPT, a publicly traded real estate investment trust that is our former parent company, and which is managed by RMR, which is also our manager. We used the net proceeds from these sales, totaling $189,309 after the refund of a $15,960 security deposit and payment of closing costs, to reduce amounts outstanding under our revolving credit facility.
Management Agreements and Leases
At December 31, 2007, each of our 292 hotels is included in one of ten combinations of hotels of which 201 are leased to one of our wholly owned taxable REIT subsidiaries, or TRSs, and managed by an independent hotel operating company and 91 are leased to third parties. Our 185 travel centers are leased to TA under two agreements. Our consolidated statement of income includes operating revenues and expenses of our managed hotels and rental income from our leased hotels and travel centers. Additional information regarding the terms of our management agreements and leases is included in the table on pages 56 and 57.
43
Results of Operations (dollar amounts in thousands, except per share amounts)
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
|
|
|
For the year ended December 31, |
|
|||||||||
|
|
|
2007 |
|
2006 |
|
Increase |
|
% Increase |
|
|||
|
|
|
(amounts in dollars, except number of shares) |
|
|
|
|||||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|||
|
Hotel operating revenues |
|
$ |
941,455 |
|
$ |
879,324 |
|
$ |
62,131 |
|
7.1 |
% |
|
Rental income: |
|
|
|
|
|
|
|
|
|
|||
|
Minimum rents - hotels |
|
117,193 |
|
115,461 |
|
1,732 |
|
1.5 |
% |
|||
|
Minimum rents - travel centers |
|
193,571 |
|
— |
|
193,571 |
|
— |
|
|||
|
|
|
310,764 |
|
115,461 |
|
195,303 |
|
169.2 |
% |
|||
|
Percentage rent - hotels |
|
6,055 |
|
5,188 |
|
867 |
|
16.7 |
% |
|||
|
Total rental income |
|
316,819 |
|
120,649 |
|
196,170 |
|
162.6 |
% |
|||
|
FF&E reserve income - hotels |
|
22,286 |
|
20,299 |
|
1,987 |
|
9.8 |
% |
|||
|
Interest income |
|
4,919 |
|
2,674 |
|
2,245 |
|
84.0 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Expenses: |
|
|
|
|
|
|
|
|
|
|||
|
Hotel operating expenses |
|
657,000 |
|
618,334 |
|
38,666 |
|
6.3 |
% |
|||
|
Interest expense |
|
140,517 |
|
81,451 |
|
59,066 |
|
72.5 |
% |
|||
|
Depreciation and amortization - hotels |
|
147,401 |
|
141,198 |
|
6,203 |
|
4.4 |
% |
|||
|
Depreciation and amortization - travel centers |
|
69,287 |
|
— |
|
69,287 |
|
— |
|
|||
|
Total depreciation and amortization |
|
216,688 |
|
141,198 |
|
75,490 |
|
53.5 |
% |
|||
|
General and administrative |
|
37,223 |
|
25,090 |
|
12,133 |
|
48.4 |
% |
|||
|
TA spin off costs |
|
2,711 |
|
— |
|
2,711 |
|
— |
|
|||
|
Loss on asset impairment |
|
1,332 |
|
— |
|
1,332 |
|
— |
|
|||
|
Income tax expense |
|
2,191 |
|
372 |
|
1,819 |
|
489.0 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Income from continuing operations |
|
227,817 |
|
156,501 |
|
71,316 |
|
45.6 |
% |
|||
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|||
|
Income from discontinued operations |
|
7,440 |
|
12,538 |
|
(5,098 |
) |
(40.7 |
)% |
|||
|
Gain on sale of real estate from discontinued operations |
|
95,711 |
|
— |
|
95,711 |
|
— |
|
|||
|
Net income |
|
330,968 |
|
169,039 |
|
161,929 |
|
95.8 |
% |
|||
|
Net income available for common shareholders |
|
304,199 |
|
161,383 |
|
142,816 |
|
88.5 |
% |
|||
|
Weighted average shares outstanding |
|
93,109 |
|
73,279 |
|
19,380 |
|
27.1 |
% |
|||
|
Income from continuing operations available for common shareholders per common share |
|
$ |
2.16 |
|
$ |
2.03 |
|
$ |
0.13 |
|
6.4 |
% |
|
Income from discontinued operations available for common shareholders per common share |
|
$ |
1.11 |
|
$ |
0.17 |
|
$ |
0.94 |
|
552.9 |
% |
|
Net income available for common shareholders per common share |
|
$ |
3.27 |
|
$ |
2.20 |
|
$ |
1.07 |
|
48.6 |
% |
The increase in hotel operating revenues in 2007 versus 2006 was caused by the increase in revenues at our managed hotels and our acquisition of four managed hotels in April 2006. Revenues increased at most of our managed hotels from 2006 due to higher average daily room rates, or ADR, partially offset by slightly lower occupancy rates. Additional operating statistics of our hotels are included in the table on page 58.
44
The increase in hotel operating expenses from 2006 was caused primarily by the general increase in the cost of labor, real estate taxes and insurance in 2007 and increased management fees due to the growth in hotel revenues in 2007 described above.
Our share of the operating results of our managed hotels in excess of the minimum returns due to us, or additional returns, under our hotel management agreements is recognized as income at year end when all contingencies are met and the income is earned. We recognized additional returns of $24,181 and $20,029 in the fourth quarter 2007 and 2006, respectively. The increase in additional returns from 2006 is due to the improved operating performance of our managed hotels in 2007 described above.
As a result of renovations which required hotel rooms to be taken out of service in 2007 and 2006, certain of our managed hotels had net operating results that were $9,780 and $3,542 less than the minimum returns due to us in 2007 and 2006, respectively. These amounts are reflected in our consolidated statement of income as a net reduction to hotel operating expenses in these years because the minimum returns were funded by our managers.
The increase in rental income - hotels is a result of our funding of improvements at certain of our leased hotels in 2006 and 2007 that caused in increases in the annual minimum rents due to us.
The increase in rental income - travel centers is a result of our acquisition of 146 travel centers and commencement of our lease with TA on January 31, 2007 and our acquisition of an additional 40 travel centers and commencement of our second lease with TA on May 30, 2007. Rental income - travel centers includes $15,813 of adjustments necessary to record rent on the straight line basis for the twelve months ended December 31, 2007.
The increase in percentage rent - hotels is the result of increased sales at our leased hotels.
FF&E reserve income - hotels represents amounts paid by our third party hotel tenants into restricted accounts owned by us, the purpose of which is to accumulate funds for future capital expenditures. The terms of our hotel leases require these amounts to be calculated as a percentage of total sales at our hotels. The increase in FF&E reserve income - hotels is primarily due to increased levels of hotel sales in 2007 versus 2006 at our leased hotels. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels and for leased hotels where the FF&E reserve is owned by our tenants as FF&E reserve income.
The increase in interest income is due to higher average cash balances and higher average interest rates during 2007.
The increase in interest expense is primarily due to higher average borrowings as a result of our 2006 and 2007 acquisitions, which was partially offset by a lower weighted average interest rate during 2007 than in 2006.
The increase in depreciation and amortization - hotels is due principally to the depreciation and amortization of assets acquired in our 2006 acquisitions and the purchase of depreciable assets with funds from FF&E reserve accounts owned by us in 2006 and 2007. The increase was offset somewhat by the sale of our Homestead Studio Suites hotels in July 2007.
The increase in depreciation and amortization - travel centers is due to the depreciation and amortization of assets acquired in our 2007 travel center acquisitions described above.
The increase to general and administrative expense is due principally to the impact of additional property investments during 2006 and 2007.
We recorded a $1,332 loss on asset impairment in the 2007 fourth quarter to reduce the carrying value of a hotel held for sale to its estimated net realizable value less costs to sell.
The increase in income tax expense is primarily due to increased Canadian income taxes at one of our TRSs and higher state income taxes as a result of a change in tax laws in the state of Texas.
45
The decrease in income from discontinued operations is the result of the sale of our 18 Homestead Studio Suites hotels in July 2007.
The gain on sale of real estate from discontinued operations in 2007 reflects the sale of our 18 Homestead Studio Suites hotels in July 2007 for $205,350.
The increases in income from continuing operations available for common shareholders, income from discontinued operations available for common shareholders, net income available for common shareholders and the corresponding per common share amounts are primarily due to the investment and operating activity discussed above. On a per share basis, the percentage increases in income from continuing operations available for common shareholders, income from discontinued operations available for common shareholders and net income available for common shareholders was lower due to our issuance of common shares in July and December 2006 and February 2007.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
|
|
|
For the year ended December 31, |
|
|||||||||
|
|
|
2006 |
|
2005 |
|
Increase |
|
% Increase |
|
|||
|
|
|
(amounts in dollars, except number of shares) |
|
|
|
|||||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|||
|
Hotel operating revenues |
|
$ |
879,324 |
|
$ |
682,541 |
|
$ |
196,783 |
|
28.8 |
% |
|
Rental income: |
|
|
|
|
|
|
|
|
|
|||
|
Minimum rent - hotels |
|
115,461 |
|
110,869 |
|
4,592 |
|
4.1 |
% |
|||
|
Percentage rent - hotels |
|
5,188 |
|
3,463 |
|
1,725 |
|
49.8 |
% |
|||
|
Total rental income |
|
120,649 |
|
114,332 |
|
6,317 |
|
5.5 |
% |
|||
|
FF&E reserve income - hotels |
|
20,299 |
|
19,767 |
|
532 |
|
2.7 |
% |
|||
|
Interest income |
|
2,674 |
|
1,373 |
|
1,301 |
|
94.8 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Expenses: |
|
|
|
|
|
|
|
|
|
|||
|
Hotel operating expenses |
|
618,334 |
|
476,858 |
|
141,476 |
|
29.7 |
% |
|||
|
Interest expense |
|
81,451 |
|
65,263 |
|
16,188 |
|
24.8 |
% |
|||
|
Depreciation and amortization - hotels |
|
141,198 |
|
127,242 |
|
13,956 |
|
11.0 |
% |
|||
|
General and administrative |
|
25,090 |
|
22,514 |
|
2,576 |
|
11.4 |
% |
|||
|
Loss on asset impairment |
|
— |
|
7,300 |
|
(7,300 |
) |
(100.0 |
)% |
|||
|
Income tax expense |
|
372 |
|
57 |
|
315 |
|
552.6 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Income from continuing operations |
|
156,501 |
|
118,779 |
|
37,722 |
|
31.8 |
% |
|||
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|||
|
Income from discontinued operations |
|
12,538 |
|
11,124 |
|
1,414 |
|
12.7 |
% |
|||
|
Net income |
|
169,039 |
|
129,903 |
|
39,136 |
|
30.1 |
% |
|||
|
Net income available for common shareholders |
|
161,383 |
|
122,247 |
|
39,136 |
|
32.0 |
% |
|||
|
Weighted average shares outstanding |
|
73,279 |
|
69,866 |
|
3,413 |
|
4.9 |
% |
|||
|
Income from continuing operations available for common shareholders per common share |
|
$ |
2.03 |
|
$ |
1.59 |
|
$ |
0.44 |
|
27.7 |
% |
|
Income from discontinued operations available for common shareholders per common share |
|
$ |
0.17 |
|
$ |
0.16 |
|
$ |
0.01 |
|
6.3 |
% |
|
Net income available for common shareholders per common share |
|
$ |
2.20 |
|
$ |
1.75 |
|
$ |
0.45 |
|
25.7 |
% |
The increase in hotel operating revenues from 2005 was caused by the increase in the number of managed hotels in 2006 due to our January and April 2006 hotel acquisitions and the general increase in hotel revenues at most
46
of our managed hotels due to improvements in the lodging market that resulted in ADR increases at most of our managed hotels. The increased revenues resulting from the higher ADR was partially offset by lower revenues at certain of our managed hotels in 2006 which were under renovations in 2006 which required hotel rooms to be taken out of service. Additional operating statistics of our hotels is included in the table on page 58.
The increase in hotel operating expenses was caused by the increase in the number of managed hotels in 2006 due to our January and April 2006 hotel acquisitions and the general increase in the cost of labor and utilities in 2006.
We recognized additional returns from our managed hotels of $20,029 and $13,568 in the fourth quarter of 2006 and 2005, respectively. The increase in additional returns from 2005 is due to the improved operating performance of our managed hotels in 2006 described above.
As a result of the renovations described above, certain of our managed hotels had net operating results that were $3,542 and $2,491 less than the minimum returns due to us in 2006 and 2005, respectively. These amounts are reflected in our consolidated statement of income as a net reduction to hotel operating expenses in these years because the minimum returns were funded by our managers.
The increase in minimum rental income- hotels is primarily a result of the increased minimum rents resulting from our funding of improvements at certain of our leased hotels in 2006 and our acquisition of a hotel in January 2006.
The increase in percentage rent - hotels is the result of increased sales at our leased hotels.
The increase in FF&E reserve income- hotels is primarily due to increased sales in 2006 versus 2005 at our leased hotels.
The increase in interest income is due to higher average cash balances and higher average interest rates during 2006.
The increase in interest expense is primarily due to higher average borrowings as a result of our hotel acquisitions, which was partially offset by a lower weighted average interest rate during 2006 than in 2005.
The increase in depreciation and amortization- hotels is due principally to the depreciation of 12 hotels acquired during 2006 and the impact of the purchases in 2006 and 2005 of depreciable assets with funds from FF&E reserve accounts owned by us. This increase was offset to some extent by the sale of a hotel in September 2005 and certain assets becoming fully depreciated in 2006 and 2005.
The increase to general and administrative expense is due principally to the impact of additional hotel investments during 2006.
In 2005, we recorded a $7,300 loss on asset impairment to reduce the carrying value of a hotel held for sale to its estimated net realizable value less costs to sell.
The increase to income tax expense is primarily due to higher state income taxes as a result of our hotel acquisitions and increased Canadian income taxes at our TRS which owns hotels in Canada.
The increase in income from discontinued operations is the result of increased percentage rent at our 18 Homestead Studio Suites® hotels due to higher sales in 2006.
The increases in income from continuing operations available for common shareholders, income from discontinued operations available for common shareholders, net income available for common shareholders and the corresponding per common share amounts are primarily due to the investment and operating activity discussed above. On a per share basis, the percentage increase in income from continuing operations available for common shareholders, income from discontinued operations available for common shareholders and net income available for common shareholders was lower due to our issuance of common shares in July and December 2006 and in June 2005.
47
Liquidity and Capital Resources
Our Managers and Tenants
All 477 of our properties are operated under management agreements or leases with third party operating companies. All costs of operating and maintaining our properties are paid by the third party hotel managers as agents for us or by tenants for their own account. These managers and tenants derive their funding for property operating expenses, FF&E reserves, and returns and rents due to us generally from property operating revenues and, to the extent that these managers and tenants fund our minimum returns and minimum rents, from their separate resources.
We define coverage for each of our combination management agreements or leases as total property sales minus all property level expenses that are not subordinated to the minimum returns and minimum rents due to us and the required FF&E reserve contributions, divided by the aggregate minimum payments due to us. More detail regarding coverage, guarantees and other security features of our operating agreements is presented in the table on pages 56 and 57. Assuming our twelve operating agreements as of December 31, 2007, had been in place during the twelve months ended December 31, 2007 (September 30, 2007, for the TA operating agreements), eleven combinations, representing 453 properties, generated coverage of at least 1.0x using historical operating results. The remaining combination, representing 24 hotels, generated coverage of 0.54x in 2007; twenty of the hotels in this combination were undergoing significant renovations that had a negative impact on the operating results of this combination during 2006 and 2007. We expect to complete renovations at these hotels in the first half of 2008.
Three hundred fifty two (352) of our properties, representing 75% of our total investments at cost as of December 31, 2007, in eight combinations are operated under management agreements or leases which are subject to full or limited guarantees. These guarantees may provide us with continued payments if the total sales less total expenses and required FF&E reserve payments fail to equal or exceed guaranteed amounts due to us. Our managers and tenants or their affiliates may also supplement cash flow from our properties in order to make payments to us and preserve their rights to continue operating our properties. Guarantee or supplemental payments to us, if any, made under any of our management agreements or leases, do not subject us to repayment obligations but, under some of our agreements, these guarantee or supplemental payments may be recovered by the manager or tenant from the future cash flows from our properties after our future minimum returns and minimum rents are paid.
As of February 26, 2008, all payments due, including those payments due under the combination management agreement whose hotels generated less than 1.0x coverage during 2007, are current. However, the effectiveness of our various security features to provide uninterrupted payments to us is not assured. If any of our property operators, tenants or guarantors default in their payment obligations to us, our revenues and cash flows will decline.
Our Operating Liquidity and Capital Resources
Our principal source of funds for current expenses and distributions to shareholders are minimum returns from our managed hotels and minimum rents from our leased hotels and travel centers. We receive minimum returns and minimum rents from our managers and tenants monthly. We receive additional returns, percentage returns and rents and our share of the operating profits of our managed hotels after payment of all management fees and other deductions either monthly or quarterly. This flow of funds has historically been sufficient for us to pay our operating expenses, interest and distributions to shareholders. We believe that our operating cash flow will be sufficient to meet our operating expenses, interest and distribution payments for the foreseeable future.
We maintain our status as a real estate investment trust, or REIT under the Internal Revenue Code of 1986, as amended, or IRC, by meeting certain requirements. As a REIT, we do not expect to pay federal income taxes on the majority of our income. In 1999, federal legislation known as the REIT Modernization Act, or the RMA, was enacted and became effective on January 1, 2001. The RMA, among other things, allows a REIT to lease hotels to TRSs if the hotels are managed by an independent third party. The income realized by our TRSs in excess of the rent they pay to us is subject to income tax at corporate tax rates. Also, the income we receive from our hotels in Canada, Puerto Rico and certain states is subject to taxes in those jurisdictions.
48
Our Investment and Financing Liquidity and Capital Resources
Various percentages of total sales at most of our hotels are escrowed as FF&E reserves to fund future capital improvements at our hotels. During 2007, our managers and tenants contributed $57,476 to these accounts. As of December 31, 2007, there was approximately $28,134 on deposit in these escrow accounts, which was held directly by us and is included on our balance sheet as restricted cash.
Our hotel operating agreements generally provide that, if necessary, we will provide our managers and tenants funding for capital improvements to our hotels in excess of amounts available in escrowed FF&E reserves. To the extent we make such additional FF&E reserve fundings, our annual minimum returns or minimum rent generally increase by a percentage of the amount we fund. During 2007, we funded $64,241 for capital improvements to our hotels in addition to FF&E reserve fundings from hotel operations.
During 2007, $122,138 was spent from the FF&E reserve escrow accounts to renovate and refurbish our hotels.
FF&E escrow deposits are not required under our travel centers leases with TA. However, TA is required to maintain the leased travel centers at its expense, including structural and non-structural components. Under our TA lease for 145 travel centers, we have agreed to fund up to $25,000 per year for certain specified capital improvements to the leased properties during the first five years of the lease term or thereafter on a cumulative basis. All of the capital improvements funded under this agreement will be owned by us. As of December 31, 2007, we have funded $25,000 under this agreement and we expect to fund $25,000 in 2008, using funds from our existing cash balances or borrowings under our revolving credit facility. Under both leases, TA may request that we fund additional amounts for capital improvements to the leased facilities in return for annual minimum rent increases. In 2007, we funded $1,438 of such additional amounts under these agreements.
During 2007, we funded $8,020 for improvements to our Marriott International branded hotels using cash on hand and borrowings under our revolving credit facility. We expect to fund approximately $90,000 for improvements to our four Marriott branded hotel portfolios throughout 2008 with funds from our existing cash balances or borrowings under our revolving credit facility. Our minimum annual rent for these hotels is increased by approximately 10% of the amounts we fund, which amounts are in addition to recurring FF&E reserve funding from hotel operations.
Pursuant to an April 2005 agreement we entered with a subsidiary of Hyatt for management of 24 AmeriSuites® hotels, we agreed to provide funding to Hyatt for rebranding of these hotels to the Hyatt PlaceTM brand and for other improvements. To the extent our fundings exceed $8,000, the minimum return payable by Hyatt to us increases as these funds are advanced by approximately 10% of the funded amounts per year. As of December 31, 2007, $71,500 has been funded. During 2007, we funded $42,000 of this amount and we expect to fund approximately $4,000 in 2008, using funds from our existing cash balances or borrowings under our revolving credit facility.
Pursuant to an April 2005 agreement we entered with a subsidiary of Carlson, for management of 12 PrimeSM hotels, we agreed to provide funding to Carlson for rebranding these hotels to Carlson brands and for other improvements at these hotels. To the extent our payments exceed $12,000, the minimum return payable by Carlson to us increases as these funds are advanced by approximately 10% of the funded amounts per year. As of December 31, 2007, $26,408 has been funded. During 2007, we funded $553 of this amount and we expect to fund $400 in 2008, using funds from our existing cash balances or borrowings under our revolving credit facility.
Pursuant to a December 2004 agreement we entered to purchase 13 hotels from InterContinental, we agreed to pay $25,000 during the three years following closing to fund improvements to the hotels. We paid $10,000 of this amount in 2005 and paid the remaining $15,000 in December 2007.
Pursuant to a January 2006 agreement we entered with InterContinental for the management of the Harbor Court Complex in Baltimore, Maryland, we agreed to fund $2,300 for rebranding and other improvements during the two years following closing. We paid $1,000 of this amount in 2006 and funded the remaining $1,300 in December 2007.
49
Pursuant to January and April 2006 agreements we entered with InterContinental for the management of ten hotels, we agreed to fund $24,228 for capital improvements to these hotels during the three years following closing. We funded $9,691 in January 2007, $9,691 in January 2008 and expect to fund $4,846 in January 2009, using funds from our existing cash balances or borrowings under our revolving credit facility.
On January 16, 2007, April 16, 2007, July 16, 2007 and October 15, 2007, we paid a $0.5546875 per share distribution to our Series B preferred shareholders with respect to the periods ended January 14, 2007, April 14, 2007, July 14, 2007 and October 14, 2007, respectively. On December 3, 2007, we declared a $0.5546875 per share distribution to Series B preferred shareholders of record on December 31, 2007 with respect to the period ended January 14, 2008. We paid this distribution on January 15, 2008, using existing cash balances and borrowings under our revolving credit facility.
On May 15, 2007, we paid a $0.40833 per share distribution to our Series C preferred shareholders with respect to the period ended May 14, 2007. On August 15, 2007 and November 15, 2007, we paid a $0.4375 per share distribution to our Series C preferred shareholders with respect to the periods ended August 14, 2007 and November 14, 2007, respectively. These distributions were funded using cash on hand and borrowings under our revolving credit facility. On January 3, 2008, we declared a distribution of $0.4375 per Series C preferred shareholders with respect to the period ending February 14, 2008. We paid this distribution on February 15, 2008, using existing cash balances and borrowings under our revolving credit facility.
On February 15, 2007, May 17, 2007, August 16, 2007 and November 15, 2007, we paid a $0.74, $0.76, $0.76 and $0.77 per share distribution to our common shareholders, for the quarters ended December 31, 2006, March 31, 2007, June 30, 2007 and September 30, 2007, respectively. On January 3, 2008, we declared a $0.77 per share distribution to our common shareholders of record on January 14, 2008. We paid this distribution on February 15, 2008, using existing cash balances and borrowings under our revolving credit facility.
On January 22, 2007, we entered into a new $2,000,000 interim loan agreement, or the Acquisition Facility, with a group of institutional lenders that became effective concurrently with our acquisition of TravelCenters. We funded the acquisition of TravelCenters and the capitalization of TA with a $1,400,000 borrowing under the Acquisition Facility and with our existing cash balances. We subsequently repaid all borrowings under the Acquisition Facility during the first quarter of 2007 with net proceeds from certain of the financing transactions described below.
In January 2007, we sold 1,800,000 of our common shares at a price of $47.51 per share pursuant to an over allotment option granted to the underwriters of our December 2006 common share offering. Net proceeds from this sale of $81,775 (after underwriting and other offering expenses) were used to partially fund our acquisition of TravelCenters.
In February 2007, we sold 5,750,000 of our common shares at a price of $47.67 per share in a public offering. Net proceeds from this sale of $261,677 (after underwriting and other offering expenses) were used to reduce borrowings under our Acquisition Facility.
Also in February 2007, we sold 12,700,000 Series C cumulative redeemable preferred shares at a price of $25.00 per share in a public offering. Net proceeds from this sale of $306,833 (after underwriting and other offering expenses) were used to reduce borrowings under our Acquisition Facility.
In March 2007, we sold $575,000 of 3.8% convertible senior notes due 2027 to initial purchasers for resale to qualified institutional buyers pursuant to the exemption from registration provided by Rule 144A under the Securities Act of 1933, as amended, or the Securities Act. Net proceeds from this sale of $562,525 (after placement and other offering expenses) were used to repay amounts outstanding under the Acquisition Facility and for general business purposes. Resales of these notes and any underlying common shares were registered on behalf of certain selling security holders on April 5, 2007.
In March 2007, we sold $300,000 of 5.625% senior notes due 2017 to initial purchasers for resale to qualified institutional buyers pursuant to the exemption from registration provided by Rule 144A under the Securities Act. We used net proceeds from this sale of $296,468 (after placement and other offering expenses) to reduce borrowings under
50
our Acquisition Facility. In June 2007, we issued $300,000 of 5.625% senior notes due 2017 that were registered with the Securities and Exchange Commission in exchange for all of our privately placed 5.625% senior notes due 2017.
In May 2007, we purchased Petro for approximately $655,000, including acquisition costs, using borrowings under our revolving credit facility.
In July 2007, we sold 18 Homestead Studio Suites hotels for $205,350. We used the net proceeds of approximately $189,309 to reduce amounts outstanding under our revolving credit facility.
On September 24, 2007, we sold $350,000 of 6.7% unsecured senior notes due 2018. We used net proceeds from this offering of $344,226 (after placement and other offering expenses) to reduce borrowings under our revolving credit facility.
In order to fund capital improvements to our properties and acquisitions and to meet cash needs that may result from timing differences between our receipt of returns and rents and our desire or need to make distributions or pay operating expenses, we maintain a revolving credit facility with a group of institutional lenders. The maturity date of our revolving credit facility is October 24, 2010 and we have the option to extend the facility for one additional year upon payment of an extension fee. The annual interest rate payable for drawn amounts under the facility is LIBOR plus a premium (5.41% per annum at December 31, 2007). We may borrow up to $750,000 under the revolving credit facility and it includes a feature under which the maximum amount available for borrowing may be expanded to $1,500,000 in certain circumstances. Borrowings under our revolving credit facility are unsecured. We may draw, repay and redraw funds until maturity, and no principal repayment is due until maturity. As of December 31, 2007, we had a balance of $158,000 outstanding under our revolving credit facility.
At December 31, 2007, we had $23,401 of cash and cash equivalents and $592,000 available from our revolving credit facility. We expect to use existing cash balances, borrowings under our revolving credit facility and net proceeds of offerings of equity or debt securities to fund future property acquisitions and other general business purposes.
Our term debt maturities (other than our revolving credit facility) are as follows: $150,000 in 2008; $50,000 in 2010; $125,000 in 2012; $300,000 in 2013; $300,000 in 2015; $275,000 in 2016; $300,000 in 2017; $350,000 in 2018; and $575,000 in 2027. We expect to fund the redemption of our $150,000 of 7% senior notes due March 1, 2008, with existing cash balances and borrowings under our revolving credit facility. Our 3.8% convertible senior notes are convertible if certain conditions are met (including certain changes in control) into cash equal to the principal amount of the notes and, to the extent the market price of our common shares exceeds the initial exchange price of $50.50 per share, subject to adjustment, either cash or our common shares at our option with a value based on such excess amount. Holders of our convertible senior notes may require us to repurchase all or a portion of the notes on March 20, 2012, March 15, 2017 and March 15, 2022, or upon the occurrence of certain change in control events.
As of December 31, 2007, we had one mortgage note we assumed in connection with our acquisition of one hotel with a current principal balance of $3,635. This mortgage note requires monthly payments of principal and interest of $32 and is expected to have a principal balance of $3,326 at maturity in 2011. None of our other debt obligations require principal or sinking fund payments prior to their maturity date. In connection with our acquisition of Petro, we acquired certain Petro properties which secure debt that was previously issued by Petro Centers. Upon closing of our acquisition of Petro, the Petro Centers debt assumed by TA was covenant defeased and funds were escrowed at closing by TA and used to redeem this debt on February 15, 2008.
When amounts are outstanding under our revolving credit facility and as the maturity or repurchase dates of our revolving credit facility and term debts 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 debt and issuing new equity securities. We have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but does not assure that there will be buyers for such securities. Although there can be no assurance that we will complete 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, with which to finance future acquisitions and capital expenditures and to pay our debt and other obligations.
51
As of December 31, 2007, our contractual obligations were as follows:
|
|
|
Payment due by period |
|
|||||||||||||
|
|
|
Total |
|
Less than |
|
1-3 years |
|
3-5 years |
|
More than |
|
|||||
|
Long-Term Debt Obligations |
|
$ |
2,586,635 |
|
$ |
150,077 |
|
$ |
208,182 |
|
$ |
128,376 |
|
$ |
2,100,000 |
|
|
Ground Lease Obligations (1) |
|
175,818 |
|
13,846 |
|
26,721 |
|
24,038 |
|
111,213 |
|
|||||
|
Capital improvements (2) |
|
208,937 |
|
129,091 |
|
54,846 |
|
25,000 |
|
— |
|
|||||
|
Projected interest expense (3) |
|
1,296,964 |
|
143,542 |
|
274,937 |
|
247,547 |
|
630,938 |
|
|||||
|
Total |
|
$ |
4,268,354 |
|
$ |
436,556 |
|
$ |
564,686 |
|
$ |
424,961 |
|
$ |
2,842,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
(1) 14 of our hotels and 26 of our travel centers are on land leased partially or in its entirety. In each case the ground lessors are unrelated to us. Generally, payments of ground lease obligations are made by our managers or tenants. However, if a manager or tenant fails to perform obligations under a ground lease or elects not to renew any ground lease, we might have to perform obligations under the ground lease or renew the ground lease in order to protect our investment in the affected hotel or travel center.
(2) Represents amounts we expect to fund for capital improvements to our properties in addition to recurring FF&E reserve funding from hotel operations.
(3) Projected interest expense is attributable to only the long term debt obligations listed above at existing rates and is not intended to project future interest costs which may result from debt prepayments, new debt issuances or changes in interest rates.
As of December 31, 2007, we had no off-balance sheet arrangements, commercial paper, derivatives, swaps, hedges, guarantees, joint ventures or partnerships. As of December 31, 2007, our secured debt obligations were limited to one mortgage note of $3,635 secured by a single property. None of our debt documentation requires us to provide collateral security in the event of a ratings downgrade.
Debt Covenants
Our debt obligations at December 31, 2007, consist of our revolving credit facility, our $2,425,000 of unsecured term debt and convertible notes and our $3,635 mortgage note. Our unsecured term debt and convertible notes are governed by an indenture. This indenture and related supplements and our revolving 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, restrict our ability to make distributions under certain circumstances and require us to maintain various financial ratios. As of December 31, 2007, we were in compliance with all of our covenants under our indenture and its supplements and our revolving credit facility agreement.
Neither our indenture and its supplements, nor our revolving credit facility contain provisions for acceleration which could be triggered by our debt ratings. However, under our revolving credit facility 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 other debts of $20,000 or more. Similarly, a default on our public debt indenture would be a default on our credit facility.
Related Person Transactions
As more fully described above, on January 31, 2007, we acquired TravelCenters and, in connection with the acquisition, restructured the business of TravelCenters so as to place its operating business in our subsidiary, TA, distributed all of the common shares of TA, to our shareholders in a spin off transaction, and leased 146 travel centers to TA for an average minimum rent of $170.7 million per year during the lease term. In order to effect the reorganization and spin off, we entered into a transaction agreement effective as of January 29, 2007, with TA and RMR. That agreement provided for certain of the steps in the restructuring of the TravelCenters business and the spin off. In addition, under this agreement TA entered into a management and shared services agreement with RMR, TA granted to us a right of first refusal to purchase, lease, mortgage or otherwise finance any interest it owns or acquires in a travel center before it is purchased, sold, leased, mortgaged or otherwise financed with another party, and TA agreed to indemnify us for liabilities relating to its business and operations for periods before and after the spin off and for liabilities relating to the ownership and operation of the leased travel centers which arise during the term of our lease with TA. On May 30, 2007, we purchased Petro and simultaneously leased the 40 travel centers owned by Petro to a subsidiary of TA for an initial minimum rent of $62.2 million per year. Starting in 2013, the lease requires TA to pay us additional rent calculated as certain percentages of increases in gross revenues at the leased travel centers. As a result of the transaction in January 2007 and the Petro lease in May 2007, we have on-going business dealings with TA, including funding improvements to the leased properties and adding or removing
52
properties from the leases. RMR provides management services to us and to TA. Barry M. Portnoy, one of our managing trustees, is an owner and director of RMR and a managing director of TA. Adam D. Portnoy, our other managing trustee, is an owner, a director and president of RMR. Thomas M. O’Brien is a senior vice president of RMR and a managing director and president of TA. Because of the potential for conflicts of interests between the responsibilities of Messrs. Barry Portnoy, Adam Portnoy and Thomas O’Brien to us, RMR and TA, all transactions between us and TA are approved by our trustees who are independent of TA and RMR, and by TA’s directors who are independent of us and RMR, respectively.
RMR presents investment and divestment opportunities to us and provides management and administrative services to us under an agreement. RMR is compensated at an annual rate equal to 0.7% of our average real estate investments, as defined, up to the first $250,000 and 0.5% thereafter, plus an incentive fee based upon increases in cash available for distribution per share, as defined. The incentive fee payable to RMR is paid in our common shares. On January 6, 2006, we entered into a management agreement with RMR to operate the office building component of one of our properties. Fees paid to RMR under this management agreement are based on a formula, generally 3% of gross collected rents as a property management fee and 5% of gross construction costs as a construction management fee. Aggregate fees earned by RMR from us during 2007 were $31,799, which includes an incentive fee of $1,862 which we plan to pay later in 2008 through the issuance of 53,541 of our common shares. RMR also provides the internal audit function for us and for other publicly traded companies to which it provides management or other services. Our audit committee appoints our director of internal audit and our compensation committee approves his salary and the other internal audit costs we pay. Our pro rata share of RMR’s costs in providing that function was $169 in 2007. All transactions between us and RMR are approved by our compensation committee. Both our audit and compensation committees are solely composed of independent trustees.
Critical Accounting Policies
Our critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations. Our five most critical accounting policies are as follows:
Classification of Leases. Certain of our properties are leased on a triple net basis, pursuant to non-cancelable, fixed term, operating leases. Each time we enter a new lease or materially modify an existing lease we evaluate its classification as either a capital lease or operating lease. The classification of a lease as capital or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue. These evaluations require us to make estimates of, among other things, the remaining useful life and market value of a leased property, appropriate present value discount rates and future cash flows. Incorrect assumptions or estimates may result in misclassification of our leases.
Allocation of Purchase Price and Recognition of Depreciation and Amortization Expense. The acquisition cost of each property investment is allocated to various property components such as land, buildings and equipment, and each component generally has a different useful life. For real estate acquired, we allocate the purchase price among building, land, furniture, fixtures and equipment, and, if applicable, the value of in-place leases, the fair market value of above or below market leases and customer relationships. Acquisition cost allocations and the determination of the useful lives are based on our estimates or studies from independent experts. We compute related depreciation expense using the straight line method over estimated useful lives of up to 40 years for buildings and improvements, and up to 12 years for personal property. The value of intangible assets is amortized over the shorter of its estimated useful life, or the term of the respective lease or the affected contract. The allocated cost of land is not depreciated. Inappropriate allocation of acquisition costs or incorrect estimates of useful lives could result in depreciation and amortization expenses which do not appropriately reflect the allocation of our capital expenditures over future periods required by accounting principles generally accepted in the United States.
Impairment of Long Lived Assets. We periodically evaluate our real estate investments and intangible assets for impairment indicators. These indicators may include weak or declining operating profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life or market or industry
53
changes that could permanently reduce the value of our investments. If indicators of impairment are present, we evaluate the carrying value of the related investment by comparing it to the expected future undiscounted cash flows to be generated from that investment. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value. Estimated fair value is determined through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. If we misjudge or estimate incorrectly or if future operating profitability, market or industry factors differ from our expectations we may record an impairment charge which is inappropriate, fail to record a charge when we should have done so or the amount of such charges may be inaccurate.
Variable Interest Entities. Under Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities”, if an entity is determined to be a variable interest entity, it must be consolidated by the primary beneficiary. The primary beneficiary is the enterprise that absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both. Generally, expected losses and expected residual returns are the expected negative and positive variability, respectively, in the fair value of the variable interest entities’ net assets. When our TRS enters a new operating agreement or materially modifies an existing operating agreement with a third party hotel manager we are required to assess if our TRS is or continues to be the primary beneficiary. This assessment requires us to make estimates of the future cash flows of our TRS. Incorrect assumptions or estimates of, among other things, occupancy, average daily room rate and operating expenses of our hotels may result in an inaccurate determination of the primary beneficiary.
Income Taxes. We account for income taxes in accordance with SFAS 109 “Accounting for Income Taxes.” Under this method deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are established to reduce deferred tax assets to the amounts that are expected to be realized when necessary. We have elected to be taxed as a REIT under the IRC and are generally not subject to federal and state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We are subject to income tax in Canada, Puerto Rico and in certain states despite our REIT status. Further, we lease our managed hotels to our wholly owned TRS that, unlike most of our subsidiaries is generally subject to federal, state and foreign income tax. Our consolidated income tax provision (or benefit) includes the income tax provision (or benefit) related to the operations of the TRS and state and foreign income taxes incurred by us despite our tax status as a REIT. In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, or FIN 48. FIN 48 prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN 48, we can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that has a greater than 50% likelihood of being realized upon settlement. As required, we adopted FIN 48 effective January 1, 2007 and have concluded that the effect is not material to our consolidated financial statements. Accordingly, we did not record a cumulative effect adjustment related to the adoption of FIN 48. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expense.
These policies involve significant judgments based upon our experience, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual values, the ability of our tenants and operators to perform their obligations to us, and the current and likely future operating and competitive environments in which our properties operate. In the future we may need to revise our assessments to incorporate information which is not now known, and such revisions could increase or decrease our depreciation expense related to properties we own, result in the classification of our leases as other than operating leases or decrease the carrying values of our assets.
54
Property Management Agreements, Leases and Operating Statistics
As of December 31, 2007, we owned 292 hotels and 185 travel centers which are grouped into twelve combinations. Our ten hotel combinations are managed by or leased to subsidiaries of hotel operating companies including InterContinental, Marriott, Host Hotels & Resorts Inc., or Host, Barcelo Crestline Corporation, or Barcelo Crestline, Hyatt and Carlson. Our 185 travel centers are leased to and operated by subsidiaries of TA under two agreements.
The tables on the following pages summarize the key terms of our leases and management agreements as of December 31, 2007, and include statistics reported to us or derived from information reported to us by our managers and tenants. These statistics include coverage of our minimum returns or minimum rents and occupancy, average daily rate, or ADR, revenue per day per available room, or RevPAR, for our hotel properties. We consider these statistics, and the management agreement or lease security features also presented in the tables on the following pages, to be important measures of our managers’ and tenants’ success in operating our properties and their ability to continue to pay us. However, none of this third party reported information is a direct measure of our financial performance and none of it has been independently verified by us.
55
|
Property Brand: |
|
Courtyard by |
|
Residence Inn by |
|
Marriott®/ |
|
Residence Inn by |
|
Staybridge |
|
Candlewood |
|
|
Agreement Reference Name: |
|
Marriott (no. 1) |
|
Marriott (no. 2) |
|
Marriott (no. 3) |
|
Marriott (no. 4) |
|
InterContinental |
|
InterContinental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Properties: |
|
53 |
|
18 |
|
35 |
|
19 |
|
31 |
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Rooms / Suites: |
|
7,610 |
|
2,178 |
|
5,382 |
|
2,756 |
|
3,844 |
|
9,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of States: |
|
24 |
|
14 |
|
15 |
|
14 |
|
16 |
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant: |
|
Subsidiary of Host Subleased to Subsidiary of Barcelo Crestline. |
|
Subsidiary of Host Subleased to Subsidiary of Barcelo Crestline. |
|
Our TRS. |
|
Subsidiary of Barcelo Crestline. |
|
Our TRS. |
|
Our TRS. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manager: |
|
Subsidiary of Marriott. |
|
Subsidiary of Marriott. |
|
Subsidiaries of Marriott. |
|
Subsidiaries of Marriott. |
|
Subsidiary of InterContinental. |
|
Subsidiary of InterContinental. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment (000s) (1): |
|
$585,229 |
|
$193,059 |
|
$472,410 |
|
$274,222 |
|
$436,708 |
|
$589,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Deposit (000s): |
|
$50,540 |
|
$17,220 |
|
$36,204 |
|
$28,508 |
|
$36,872 (7) |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Current Term: |
|
2012 |
|
2010 |
|
2019 |
|
2015 |
|
2031 |
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal Options (2): |
|
3 for 12 years |
|
1 for 10 years, |
|
2 for 15 years |
|
2 for 10 years |
|
2 for 12.5 years |
|
2 for 15 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Minimum Return / |
|
$58,379 |
|
$19,287 |
|
$49,034 |
|
$28,508 |
|
$37,882 |
|
$50,000 |
|
|
Minimum Rent (000s) (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Return: |
|
— |
|
— |
|
$1,173 (6) |
|
— |
|
— |
|
$10,000 (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Return / Rent (4): |
|
5.0% of revenues above 1994/95 revenues. |
|
7.5% of revenues above 1996 revenues. |
|
7.0% of revenues above 2000/01 revenues. |
|
7.0% of revenues above 1999/2000 revenues. |
|
7.5% of revenues above 2004/06 revenues. |
|
7.5% of revenues above 2006 revenues. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return / Rent Coverage (5): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended 12/31/07: |
|
1.63x |
|
1.33x |
|
1.24x |
|
1.22x |
|
1.09x |
|
1.43x |
|
|
Year ended 12/31/06: |
|
1.49x |
|
1.34x |
|
1.11x |
|
1.21x |
|
1.07x |
|
1.35x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Security Features: |
|
HPT controlled |
|
HPT controlled |
|
— |
|
Tenant minimum |
|
Limited guarantee |
|
Limited guarantee |
|
|
|
|
lockbox with minimum balance maintenance requirement; subtenant and subtenant parent minimum net worth requirement. |
|
lockbox with minimum balance maintenance requirement; subtenant and subtenant parent minimum net worth requirement. |
|
|
|
net worth |
|
provided by InterContinental. |
|
provided by InterContinental. |
|
|
|
|
(1) |
|
Amounts exclude expenditures made from FF&E reserves funded from hotel operations, but includes amounts funded by us separately from hotel operations. |
|
|
|
(2) |
|
Renewal options may be exercised by the tenant or manager (when the property is leased to our TRS) for all, but not less than all, of the properties within each combination of properties. |
|
|
|
(3) |
|
Each management agreement or lease provides for payment to us of an annual minimum return or minimum rent, respectively. Management fees are generally subordinated to these minimum payment amounts and certain minimum payments are subject to full or limited guarantees. |
|
|
|
(4) |
|
Certain of our management agreements and leases provide for payment to us of a percentage of increases in total sales over base year levels. Percentage returns under our management agreements are payable to us only to the extent of available cash flow, as defined in the agreements. The payment of percentage rent under our leases is not subject to available cash flow |
|
|
|
(5) |
|
We define coverage as total property sales minus all property level expenses which are not subordinated to minimum payments to us and the required FF&E reserve contributions (which data is provided to us by our operators or tenants), divided by the minimum returns or minimum rent payments due to us. |
|
|
|
(6) |
|
These agreements provide for annual additional return payment to us in the amount listed to the extent of available cash flow after payment of operating costs, funding of the FF&E reserve and payment of our minimum return and percentage return. |
|
|
|
(7) |
|
A single $36,872 deposit secures InterContinental’s obligations under the InterContinental No. 1, No. 3 and No. 4 portfolios. |
56
|
Property Brand: |
|
InterContinental®/ |
|
Crowne Plaza®/ |
|
Hyatt Place™ |
|
Radisson® Hotels & |
|
TravelCenters of |
|
Petro Stopping |
|
Total/ |
|
|
Agreement Reference Name: |
|
InterContinental |
|
InterContinental |
|
Hyatt |
|
Carlson |
|
TA (1) |
|
TA (2) |
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Properties: |
|
14 |
|
10 |
|
24 |
|
12 |
|
145 |
|
40 |
|
477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Rooms / Suites: |
|
4,139 |
|
2,937 |
|
2,895 |
|
2,262 |
|
— (9) |
|
— |
|
43,223 (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of States: |
|
7 plus Ontario and Puerto Rico |
|
5 |
|
14 |
|
7 |
|
39 |
|
25 |
|
44 plus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant: |
|
Our TRS and a subsidiary of InterContinental. |
|
Our TRS. |
|
Our TRS. |
|
Our TRS. |
|
Subsidiary of |
|
Subsidiary of TA. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manager: |
|
Subsidiaries of InterContinental. |
|
Subsidiaries of InterContinental. |
|
Subsidiary of |
|
Subsidiary of |
|
TA. |
|
TA. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment (000s) (1): |
|
$512,300 |
|
$230,649 |
|
$309,850 |
|
$211,309 |
|
$1,747,962 |
|
$654,288 |
|
$6,217,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Deposit (000s): |
|
$36,872 (6) |
|
$36,872 (6) |
|
— |
|
— |
|
— |
|
— |
|
$169,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Current Term: |
|
2029 |
|
2030 |
|
2030 |
|
2030 |
|
2022 |
|
2024 |
|
2010-2031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal Options (2): |
|
2 for 15 Years each. |
|
2 for 15 years each. |
|
2 for 15 years each. |
|
2 for 15 years each. |
|
N/A |
|
2 for 15 years each |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Minimum Return / Minimum Rent (000s) (3): |
|
$42,873 |
|
$20,306 |
|
$23,050 |
|
$11,890 |
|
$155,713 (10) |
|
$62,225 |
|
$559,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Return: |
|
$3,458 (7) |
|
$1,750 (7) |
|
50% of cash flow in excess of minimum return. (8) |
|
50% of cash flow in excess of minimum return. (8) |
|
— |
|
— |
|
$16,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Return / Rent (4): |
|
7.5% of revenues |
|
7.5% of revenues |
|
— |
|
— |
|
3% of non-fuel revenues and .3% of fuel revenues above 2011 revenues. |
|
3% of non-fuel revenues and .3% of fuel revenues above 2012 revenues. |
|
|
|
|
Return / Rent Coverage (5): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended 12/31/07: |
|
1.33x |
|
1.39x |
|
0.54x |
|
1.63x |
|
1.39x (11) |
|
1.14x (11) |
|
0.54x – 1.63x |
|
|
Year ended 12/31/06 |
|
1.37x |
|
1.51x |
|
0.80x |
|
1.36x |
|
1.47x |
|
1.3x |
|
0.80x – 1.51x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Security Features: |
|
Limited guarantee provided by InterContinental. |
|
Limited guarantee provided by InterContinental. |
|
Limited guarantee provided by Hyatt. |
|
Limited guarantee provided by Carlson. |
|
TA parent guarantee. |
|
TA parent guarantee. |
|
|
|
|
|
|
(1) |
|
Amounts exclude expenditures made from FF&E reserves funded from hotel operations, but includes amounts funded by us separately from hotel operations. |
|
|
|
(2) |
|
Renewal options may be exercised by the tenant or manager (when the property is leased to our TRS) for all, but not less than all, of the hotels within each combination of properties. |
|
|
|
(3) |
|
Each management agreement or lease provides for payment to us of an annual minimum return or minimum rent, respectively. Hotel management fees are generally subordinated to these minimum payment amounts and certain minimum payments are subject to full or limited guarantees. |
|
|
|
(4) |
|
Certain of our management agreements and leases provides for payment to us of a percentage of increases in total sales over base year levels. Percentage returns under our management agreements are payable to us only to the extent of available cash flow, as defined in the agreements. The payment of percentage rent under our leases is not subject to available cash flow. |
|
|
|
(5) |
|
We define coverage as total property sales minus all property level expenses which are not subordinated to minimum payments to us and the required FF&E reserve contributions (which data is provided to us by our operators or tenants), divided by the minimum return or minimum rent payments due to us. For some combinations, amounts have been calculated using data for periods prior to our ownership of certain properties and prior to commencement of operating agreements. |
|
|
|
(6) |
|
A single $36,872 deposit secures InterContinental’s obligations under the InterContinental No. 1, No. 3 and No. 4 portfolios. |
|
|
|
(7) |
|
These agreements provide for annual additional return payment to us of the amounts stated to the extent of available cash flow after payment of operating costs, funding of the FF&E reserve, payment of our minimum return and payment of certain management fees. |
|
|
|
(8) |
|
These agreements provide for payment to us of 50% of available cash flow after payment of operating costs, funding the FF&E reserve, payment of our minimum return and reimbursement to the managers of working capital and guaranty advances, if any. |
|
|
|
(9) |
|
18 of the TA properties include a hotel. The rooms associated with these hotels have been excluded from total hotel rooms. |
|
|
|
(10) |
|
The amount of minimum rent payable to us by TA is scheduled to increase to $158,962, $162,625, $166,638, $171,613 and $176,620 in 2008, 2009, 2010, 2011 and 2012, respectively. The annual straight line rent for GAAP purposes is $171,389. |
|
|
|
(11) |
|
Represents data for the 12 months ended September 30, 2007. Data for the period ended December 31, 2007 is not currently available from our tenant, TA. |
57
The following tables summarize the operating statistics, including occupancy, ADR and RevPAR, reported to us by our hotel operators by management agreement or lease for the periods indicated:
|
|
|
No. of |
|
No. of |
|
|
|
|
|
|
|
||
|
Management Agreement/Lease |
|
Hotels |
|
Rooms/Suites |
|
2007(1) |
|
2006(1) |
|
Change |
|
||
|
ADR |
|
|
|
|
|
|
|
|
|
|
|
||
|
InterContinental (no. 1)(2) |
|
31 |
|
3,844 |
|
$ |
110.47 |
|
$ |
104.38 |
|
5.8 |
% |
|
InterContinental (no. 2) |
|
76 |
|
9,220 |
|
69.81 |
|
66.50 |
|
5.0 |
% |
||
|
InterContinental (no. 3)(3) (4) |
|
14 |
|
4,139 |
|
141.79 |
|
134.49 |
|
5.4 |
% |
||
|
InterContinental (no.4)(3) |
|
10 |
|
2,937 |
|
109.64 |
|
101.22 |
|
8.3 |
% |
||
|
Marriott (no. 1) |
|
53 |
|
7,610 |
|
123.67 |
|
117.76 |
|
5.0 |
% |
||
|
Marriott (no. 2) |
|
18 |
|
2,178 |
|
119.69 |
|
112.81 |
|
6.1 |
% |
||
|
Marriott (no. 3) |
|
35 |
|
5,382 |
|
116.65 |
|
110.34 |
|
5.7 |
% |
||
|
Marriott (no. 4) |
|
19 |
|
2,756 |
|
116.47 |
|
114.74 |
|
1.5 |
% |
||
|
Hyatt |
|
24 |
|
2,895 |
|
95.45 |
|
82.02 |
|
16.4 |
% |
||
|
Carlson |
|
12 |
|
2,262 |
|
99.58 |
|
92.73 |
|
7.4 |
% |
||
|
Total/Average |
|
292 |
|
43,223 |
|
$ |
107.18 |
|
$ |
101.04 |
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Occupancy |
|
|
|
|
|
|
|
|
|
|
|
||
|
InterContinental (no. 1)(2) |
|
31 |
|
3,844 |
|
75.9 |
% |
76.0 |
% |
-0.1 |
pts |
||
|
InterContinental (no. 2) |
|
76 |
|
9,220 |
|
74.5 |
% |
75.7 |
% |
-1.2 |
pts |
||
|
InterContinental (no. 3)(3) (4) |
|
14 |
|
4,139 |
|
76.8 |
% |
75.1 |
% |
1.7 |
pts |
||
|
InterContinental (no.4)(3) |
|
10 |
|
2,937 |
|
68.6 |
% |
71.8 |
% |
-3.2 |
pts |
||
|
Marriott (no. 1) |
|
53 |
|
7,610 |
|
69.2 |
% |
69.3 |
% |
-0.1 |
pts |
||
|
Marriott (no. 2) |
|
18 |
|
2,178 |
|
76.5 |
% |
79.9 |
% |
-3.4 |
pts |
||
|
Marriott (no. 3) |
|
35 |
|
5,382 |
|
75.7 |
% |
75.4 |
% |
0.3 |
pts |
||
|
Marriott (no. 4) |
|
19 |
|
2,756 |
|
73.0 |
% |
73.2 |
% |
-0.2 |
pts |
||
|
Hyatt |
|
24 |
|
2,895 |
|
58.8 |
% |
61.1 |
% |
-2.3 |
pts |
||
|
Carlson |
|
12 |
|
2,262 |
|
67.0 |
% |
63.6 |
% |
3.4 |
pts |
||
|
Total/Average |
|
292 |
|
43,223 |
|
72.2 |
% |
72.6 |
% |
-0.4 |
pts |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
RevPAR |
|
|
|
|
|
|
|
|
|
|
|
||
|
InterContinental (no. 1)(2) |
|
31 |
|
3,844 |
|
$ |
83.85 |
|
$ |
79.33 |
|
5.7 |
% |
|
InterContinental (no. 2) |
|
76 |
|
9,220 |
|
52.01 |
|
50.34 |
|
3.3 |
% |
||
|
InterContinental (no. 3)(3) (4) |
|
14 |
|
4,139 |
|
108.89 |
|
101.00 |
|
7.8 |
% |
||
|
InterContinental (no.4)(3) |
|
10 |
|
2,937 |
|
75.21 |
|
72.68 |
|
3.5 |
% |
||
|
Marriott (no. 1) |
|
53 |
|
7,610 |
|
85.58 |
|
81.61 |
|
4.9 |
% |
||
|
Marriott (no. 2) |
|
18 |
|
2,178 |
|
91.56 |
|
90.14 |
|
1.6 |
% |
||
|
Marriott (no. 3) |
|
35 |
|
5,382 |
|
88.30 |
|
83.20 |
|
6.1 |
% |
||
|
Marriott (no. 4) |
|
19 |
|
2,756 |
|
85.02 |
|
83.99 |
|
1.2 |
% |
||
|
Hyatt |
|
24 |
|
2,895 |
|
56.12 |
|
50.11 |
|
12.0 |
% |
||
|
Carlson |
|
12 |
|
2,262 |
|
66.72 |
|
58.98 |
|
13.1 |
% |
||
|
Total/Average |
|
292 |
|
43,223 |
|
$ |
77.38 |
|
$ |
73.36 |
|
5.5 |
% |
(1) Includes data for the calendar year indicated, except for our Marriott branded hotels, which include data for comparable fiscal periods.
(2) Excludes operating statistics of one hotel which was closed from May 2005 through May 2006 due to fire damage and a newly developed hotel acquired in April 2006.
(3) Includes data for periods prior to our ownership of certain hotels.
(4) Includes data for periods hotels were not operated by the current manager.
Seasonality
Our hotels and travel centers have historically experienced seasonal differences typical of their industries with higher revenues in the second and third quarters of calendar years compared with the first and fourth quarters. This
58
seasonality is not expected to cause material fluctuations in our income or cash flow because our contractual management agreements and leases require our managers and tenants to make the substantial portion of our return payments and rents to us in equal amounts throughout a year. Seasonality may affect our hotel operating revenues, but we do not expect seasonal variations to have a material impact upon our financial results of operations or upon our managers’ or tenants’ ability to meet their contractual obligations to us.
Impact of Inflation
Inflation might have both positive and negative impacts upon us. Inflation might cause the value of our real estate investments to increase. In an inflationary environment, the percentage returns and rents which we receive based upon a percentage of gross revenues should increase. Offsetting these benefits, inflation might cause our costs of equity and debt capital and other operating costs to increase. An increase in our capital costs or in our operating costs will result in decreased earnings unless it is offset by increased revenues. In periods of rapid inflation, our managers’ or tenants’ operating costs may increase faster than revenues and this fact may have an adverse impact upon us if the operating income from our properties becomes insufficient to pay our returns or rents. To mitigate the adverse impact of insufficient income at our properties, all of our operating agreements contain security features, such as security deposits or guarantees of our returns or rents. To mitigate the adverse impact of increased costs of debt capital in the event of material inflation, we may enter into interest rate hedge arrangements in the future; the decision to enter into these agreements will be based on the amount of our floating rate debt outstanding, our belief that material interest rate increases are likely to occur and upon requirements of our borrowing arrangements.
Item 7A. 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 from December 31, 2006. Other than as described below, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.
As of December 31, 2007, our outstanding publicly tradable debt consisted of eight issues of fixed rate, senior unsecured notes and one issue of fixed rate convertible senior notes:
|
|
|
Annual |
|
Annual |
|
|
|
|
|
||
|
Principal Balance |
|
Interest Rate |
|
Interest Expense |
|
Maturity |
|
Interest Payments Due |
|
||
|
$ |
150,000 |
|
7.000 |
% |
$ |
10,500 |
|
2008 |
|
Semi-Annually |
|
|
50,000 |
|
9.125 |
% |
4,563 |
|
2010 |
|
Semi-Annually |
|
||
|
125,000 |
|
6.850 |
% |
8,563 |
|
2012 |
|
Semi-Annually |
|
||
|
300,000 |
|
6.750 |
% |
20,250 |
|
2013 |
|
Semi-Annually |
|
||
|
300,000 |
|
5.125 |
% |
15,375 |
|
2015 |
|
Semi-Annually |
|
||
|
275,000 |
|
6.300 |
% |
17,325 |
|
2016 |
|
Semi-Annually |
|
||
|
300,000 |
|
5.625 |
% |
16,875 |
|
2017 |
|
Semi-Annually |
|
||
|
350,000 |
|
6.700 |
% |
23,450 |
|
2018 |
|
Semi-Annually |
|
||
|
575,000 |
|
3.800 |
% |
21,850 |
|
2027 |
(1) |
Semi-Annually |
|
||
|
$ |
2,425,000 |
|
|
|
$ |
138,751 |
|
|
|
|
|
(1) The convertible senior notes are convertible if certain conditions are met (including certain changes in control) into cash equal to the principal amount of the notes and, to the extent the market price of our common shares exceeds the initial exchange price of $50.50 per share, subject to adjustment, either cash or our common shares at our option with a value based on such excess amount. Holders of our convertible senior notes may require us to repurchase all or a portion of the notes on March 20, 2012, March 15, 2017, and March 15, 2022, or upon the occurrence of certain change in control events.
Except as described in the footnote to the table above, 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. However, if at maturity these notes were refinanced at interest rates which are
59
10% higher than shown above, our per annum interest cost would increase by approximately $13,875. Changes in market 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. Based on the balances outstanding at December 31, 2007, and discounted cash flow analyses, a hypothetical immediate 10% change in interest rates would change the fair value of our fixed rate debt obligations by approximately $90,557. Change in the trading price of our common shares may also affect the fair value of our $575,000 of convertible senior notes.
Each of these fixed rate unsecured debt arrangements allows us to make repayments earlier than the stated maturity date. We are generally allowed to make prepayments only at face value plus a premium equal to a make-whole amount, as defined, which 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.
At December 31, 2007, we had one mortgage payable secured by one hotel, with a fixed rate of 8.3% that matures on July 1, 2011. This note requires principal and interest payments through maturity pursuant to an amortization schedule and contains a provision that allows us to make repayment at a premium to face value.
Our revolving credit facility bears interest at floating rates and matures in October 2010. We can extend the maturity for one year for a fee. At December 31, 2007, we had $158,000 outstanding and $592,000 available for drawing under our revolving credit facility. Repayments under this agreement may be made at any time without penalty. We borrow in U.S. dollars and borrowings under these agreements are subject to interest at LIBOR plus a premium. Accordingly, we are vulnerable to changes in U.S. dollar short term interest rates, specifically LIBOR. A change in interest rates would not affect the value of this floating rate debt but would affect our operating results. For example, the interest rate payable on our outstanding indebtedness of $158,000 under our revolving credit facility was 5.41% per annum at December 31, 2007. The following table presents the impact a 10% change in interest rates would have on our weighted average floating rate interest expense as of December 31, 2007:
|
|
|
Impact of Changes in Interest Rates |
|
||||||
|
|
|
Interest Rate |
|
Outstanding Debt |
|
Total Interest |
|
||
|
At December 31, 2008 |
|
5.41 |
% |
$ |
158,000 |
|
$ |
8,548 |
|
|
10% increase |
|
5.95 |
% |
$ |
158,000 |
|
$ |
9,401 |
|
|
10% reduction |
|
4.87 |
% |
$ |
158,000 |
|
$ |
7,695 |
|
The foregoing table shows the impact of an immediate change in floating interest rates. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our revolving credit facility or Acquisition Facility.
Item 8. Financial Statements and Supplementary Data
The information required by this item is included in Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our managing trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act
60
Rules 13a-15 and 15d-15. Based upon that evaluation, our managing trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management Report on Assessment of Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and board of trustees regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of December 31, 2007, our internal control over financial reporting is effective.
Ernst & Young LLP, the independent registered public accounting firm that audited our 2007 consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting. Its report appears elsewhere herein.
None.
61
Item 10. Directors, Executive Officers and Corporate Governance
We have a code of business conduct and ethics that applies to all our representatives, including our officers and trustees and employees of RMR. Our code of business conduct and ethics is posted on our website, www.hptreit.com. A printed copy of our code of business conduct and ethics is also available free of charge to any person who requests a copy. We intend to disclose any amendments or waivers to our code of business conduct and ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions on our website.
The remainder of the information required by Item 10 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference to our definitive Proxy Statement, which will be filed no later than 120 days after the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information. We may grant common shares to our officers and other employees of RMR under either our 1995 Incentive Share Award Plan or our 2003 Incentive Share Award Plan, collectively referred to as the Award Plans. In addition, each of our trustees receives 750 shares per year as part of their annual compensation for serving as our trustees and such shares may be awarded under either of these plans. The terms of grants made under these plans are determined by our board of trustees, or a committee thereof, at the time of the grant. The following table is as of December 31, 2007.
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
Number of securities |
|
|
|
future issuance under |
|
|
|
|
to be issued upon |
|
Weighted-average |
|
equity compensation |
|
|
|
|
exercise of |
|
exercise price of |
|
plans (excluding |
|
|
|
|
outstanding options, |
|
outstanding options, |
|
securities reflected in |
|
|
|
|
warrants and rights |
|
warrants and rights |
|
column (a)) (1) |
|
|
Plan category |
|
(a) |
|
(b) |
|
(c) |
|
|
Equity compensation plans approved by security holders (1995 Plan) |
|
None. |
|
None. |
|
2,740,838 |
|
|
Equity compensation plans not approved by security holders (2003 Plan) |
|
None. |
|
None. |
|
2,740,838 |
|
|
Total |
|
None. |
|
None. |
|
2,740,838 |
|
(1) The 1995 Incentive Share Award Plan was approved by our shareholder at that time; the 2003 Incentive Share Award Plan was approved by our Board of Trustees. Pursuant to the terms of the Award Plans, in no event shall the number of shares issued under both plans combined exceed 3,128,791; and 2,740,838 represents the combined total shares available under both plans on December 31, 2007.
Payments by us to RMR are described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Related Person Transactions”. The remainder
62
of the information required by Item 12 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.
63
Item 15. Exhibits and Financial Statement Schedules
(a) Index to Financial Statements and Financial Statement Schedules
The following audited consolidated financial statements and schedule of Hospitality Properties Trust are included on the pages indicated:
|
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. |
64
(b) Exhibits
|
2.1 |
|
Purchase Agreement, dated May 30, 2007, among the Company, Petro Stopping Centers Holdings, L.P. and the partners of Petro Stopping Centers Holdings, L.P. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JUNE 4, 2007) |
|
|
|
|
|
3.1 |
|
Composite copy of Amended and Restated Declaration of Trust dated August 21, 1995, as amended to date. (INCORPORATED BY REFERENCE TO THE COMPANY’S QUARTERLY REPORT ON FORM 10- Q FOR THE QUARTER ENDED MARCH 30, 2007) |
|
|
|
|
|
3.2 |
|
Articles Supplementary dated June 2, 1997. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997) |
|
|
|
|
|
3.3 |
|
Articles Supplementary dated May 16, 2000. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000) |
|
|
|
|
|
3.4 |
|
Articles Supplementary dated December 9, 2002. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002) |
|
|
|
|
|
3.5 |
|
Articles Supplementary dated February 15, 2007. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED February 16, 2007) |
|
|
|
|
|
3.6 |
|
Articles Supplementary dated March 5, 2007 (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MARCH 7, 2007) |
|
|
|
|
|
3.7 |
|
Composite copy of Amended and Restated Bylaws of the Company, as amended to date. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED DECEMBER 13, 2007) |
|
|
|
|
|
4.1 |
|
Form of Common Share Certificate. (INCORPORATED BY REFERENCE TO THE COMPANY’S REGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330)) |
|
|
|
|
|
4.2 |
|
Form of temporary 8.875% Series B Cumulative Redeemable Preferred Share Certificate. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED DECEMBER 5, 2002) |
|
|
|
|
|
4.3 |
|
Form of temporary 7% Series C Cumulative Redeemable Preferred Share Certificate. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 15, 2007) |
|
|
|
|
|
4.4 |
|
Indenture, dated as of February 25, 1998, between the Company and State Street Bank and Trust Company. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997) |
|
|
|
|
|
4.5 |
|
Supplemental Indenture No. 1, dated as of February 25, 1998, between the Company and State Street Bank and Trust Company, relating to the Company’s 7.00% Senior Notes due 2008, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997) |
|
|
|
|
|
4.6 |
|
Supplemental Indenture No. 4 dated as of July 14, 2000, between the Company and State Street Bank and Trust Company, relating to the Company’s 9.125% Senior Notes due 2010, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000) |
|
|
|
|
|
4.7 |
|
Supplemental Indenture No. 5, dated as of July 28, 2000, between the Company and State Street Bank and |
65
|
|
|
Trust Company, relating to the Company’s 9.125% Senior Notes due 2010, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000) |
|
|
|
|
|
4.8 |
|
Supplemental Indenture No. 6, dated as of July 8, 2002, between the Company and State Street Bank and Trust Company, relating to the Company’s 6.85% Senior Notes due 2012, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S QUARTERLY REPORT ON FORM 10- Q FOR THE QUARTER ENDED JUNE 30, 2002) |
|
|
|
|
|
4.9 |
|
Supplemental Indenture No. 7, dated as of January 24, 2003, between the Company and U.S. Bank National Association, as Trustee, relating to the Company’s 6 3/4% Senior Notes due 2013, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002) |
|
|
|
|
|
4.10 |
|
Supplemental Indenture No. 8, dated as of February 15, 2005, between the Company and U.S. Bank National Association, as Trustee, relating to the Company’s 5 1/8% Senior Notes due 2015, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 11, 2005) |
|
|
|
|
|
4.11 |
|
Supplemental Indenture No. 9, dated as of June 15, 2006, between the Company and U.S. Bank National Association, as Trustee, relating to the Company’s 6.30% Senior Notes due 2016, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S QUARTERLY REPORT ON FORM 10- Q FOR THE QUARTER ENDED JUNE 30, 2006) |
|
|
|
|
|
4.12 |
|
Supplemental Indenture No. 10, dated as of March 7, 2007, between the Company and U.S. Bank National Association, as Trustee, relating to the Company’s 3.80% Convertible Senior Notes due 2027, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MARCH 7, 2007) |
|
|
|
|
|
4.13 |
|
Supplemental Indenture No. 11, dated as of March 12, 2007, between the Company and U.S. Bank National Association, as Trustee, relating to the Company’s 5.625% Senior Notes due 2017, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MARCH 12, 2007) |
|
|
|
|
|
4.14 |
|
Supplemental Indenture No. 12, dated as of September 28, 2007, between the Company and U.S. Bank National Association, as Trustee, relating to the Company’s 6.70% Senior Notes due 2018, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S QUARTERLY REPORT ON FORM 10- Q FOR THE QUARTER ENDED SEPTEMBER 30, 2007) |
|
|
|
|
|
4.15 |
|
Renewed Rights Agreement, dated as of May 15, 2007, between Hospitality Properties Trust and Wells Fargo Bank, National Association, as Rights Agent, including all exhibits thereto (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MAY 16, 2007) |
|
|
|
|
|
4.16 |
|
Registration Rights Agreement, dated as of March 7, 2007 among the Company and the several initial purchasers, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as representative (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MARCH 7, 2007) |
|
|
|
|
|
8.1 |
|
Opinion of Sullivan & Worcester LLP as to certain tax matters. (FILED HEREWITH) |
|
|
|
|
|
10.1 |
|
Amended and Restated Advisory Agreement, dated January 1, 2006, between Reit Management & Research LLC and the Company. (+) (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005) |
|
|
|
|
|
10.2 |
|
Master Management Agreement, dated as of January 6, 2006, between Reit Management & Research LLC |
66
|
|
|
and the Company. (+) (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JANUARY 6, 2006) |
|
|
|
|
|
10.3 |
|
Summary of Trustee Compensation (+). (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MAY 24, 2006) |
|
|
|
|
|
10.4 |
|
The Company’s 1995 Incentive Share Award Plan (+). (INCORPORATED BY REFERENCE TO THE COMPANY’S REGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330)) |
|
|
|
|
|
10.5 |
|
Amendment to the Company’s 1995 Incentive Share Award Plan effective as of May 30, 2003 (+). (INCORPORATED BY REFERENCE TO THE COMPANY’S REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003) |
|
|
|
|
|
10.6 |
|
The Company’s 2003 Incentive Share Award Plan effective as of May 30, 2003. (+) (INCORPORATED BY REFERENCE TO THE COMPANY’S REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003) |
|
|
|
|
|
10.7 |
|
Form of Restricted Share Agreement. (+) (Incorporated by reference to the company’s report on Form 10-Q for the quarter ended June 30, 2003) |
|
|
|
|
|
10.8 |
|
Representative form of Indemnification Agreement. (+) (FILED HEREWITH) |
|
|
|
|
|
10.9 |
|
Master Lease Agreement, dated as of April 30, 1999, by and among the Company, HPTCY Properties Trust and HMH HPT Courtyard LLC. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999) |
|
|
|
|
|
10.10 |
|
Amended and Restated Credit Agreement, dated as of May 23, 2005, by and among the Company, Wachovia Bank, National Association, as Agent, and the additional agents, arrangers and financial institutions initially a signatory thereto. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MAY 23, 2005) |
|
|
|
|
|
10.11 |
|
First Amendment to Amended and Restated Credit Agreement, dated as of August 22, 2006, by and among the Company, Wachovia Bank, National Association, as Administrative Agent, and the additional agents, arrangers and financial institutions signatory thereto. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED AUGUST 22, 2006) |
67
|
|
|
|
|
10.12 |
|
Second Amendment to Amended and Restated Credit Agreement, dated as of January 12, 2007, by and among the Company, Wachovia Bank, National Association, as Agent, and the additional agents, arrangers and financial institutions signatory thereto. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JANUARY 22, 2007) |
|
|
|
|
|
10.13 |
|
Interim Loan Agreement, dated as of January 22, 2007, by and among the Company, Merrill Lynch Capital Corporation, as Administrative Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger and Lead Bookrunner, and the additional agents and financial institutions signatory thereto. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JANUARY 22, 2007) |
|
|
|
|
|
10.14 |
|
Amendment No. 1, dated as of February 26, 2007, to the Interim Loan Agreement by and among the Company, Merrill Lynch Capital Corporation, as Administrative Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger and Lead Bookrunner, and the additional agents and financial institutions signatory thereto. (INCORPORATED BY REFERENCE TO the company’s CURRENT REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006) |
|
|
|
|
|
10.15 |
|
Agreement and Plan of Merger, dated as of September 15, 2006, by and among the Company TravelCenters of America, Inc., HPT TA Merger Sub Inc. and Oak Hill Capital Partners, L.P. (INCORPORATED BY REFERENCE TO the company’s CURRENT REPORT ON FORM 8-K DATED SEPTEMBER 20, 2006) |
|
|
|
|
|
10.16 |
|
Amendment No. 1, dated as of January 30, 2007, to the Agreement and Plan of Merger by and among the Company, TravelCenters of America, Inc., HPT TA Merger Sub Inc. and Oak Hill Capital Partners, L.P. (INCORPORATED BY REFERENCE TO the company’s CURRENT REPORT ON FORM 8-K DATED FEBRUARY 2, 2007) |
|
|
|
|
|
10.17 |
|
Transaction Agreement, dated as of January 29, 2007, by and among the Company, TravelCenters of America LLC, HPT TA Properties Trust, HPT TA Properties LLC, HPT TA Merger Sub Inc. and Reit Management & Research LLC. (INCORPORATED BY REFERENCE TO the company’s CURRENT REPORT ON FORM 8-K DATED FEBRUARY 12, 2007) |
|
|
|
|
|
10.18 |
|
Lease Agreement, dated as of January 31, 2007, by and among HPT TA Properties Trust, HPT TA Properties LLC and TA Leasing LLC. (INCORPORATED BY REFERENCE TO the company’s CURRENT REPORT ON FORM 8-K DATED FEBRUARY 12, 2007) |
|
|
|
|
|
10.19 |
|
Guaranty Agreement, dated as of January 31, 2007, by TravelCenters of America LLC and certain of its subsidiaries, for the benefit of HPT TA Properties Trust and HPT TA Properties LLC. (INCORPORATED BY REFERENCE TO the company’s CURRENT REPORT ON FORM 8-K DATED FEBRUARY 12, 2007) |
|
|
|
|
|
10.20 |
|
Lease Agreement, dated as of May 30, 2007, by and among HPT PSC Properties Trust and HPT PSC Properties LLC as Landlord, and Petro Stopping Centers, L.P., as Tenant. (INCORPORATED BY |
68
|
|
|
REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JUNE 4, 2007) |
|
|
|
|
|
10.21 |
|
Guaranty Agreement, dated as of May 30, 2007, made by TravelCenters of America LLC, as Guarantor, for the benefit of HPT PSC Properties Trust and HPT PSC Properties LLC. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JUNE 4, 2007) |
|
|
|
|
|
12.1 |
|
Computation of Ratio of Earnings to Fixed Charges. (FILED HEREWITH) |
|
|
|
|
|
12.2 |
|
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Distributions. (FILED HEREWITH) |
|
|
|
|
|
21.1 |
|
Subsidiaries of the Registrant. (FILED HEREWITH) |
|
|
|
|
|
23.1 |
|
Consent of Ernst & Young LLP. (FILED HEREWITH) |
|
|
|
|
|
23.2 |
|
Consent of Sullivan & Worcester LLP. (INCLUDED IN EXHIBIT 8.1 TO THIS ANNUAL REPORT ON FORM 10-K) |
|
|
|
|
|
31.1 |
|
Rule 13a-14(a) Certification. (FILED HEREWITH) |
|
|
|
|
|
31.2 |
|
Rule 13a-14(a) Certification. (FILED HEREWITH) |
|
|
|
|
|
31.3 |
|
Rule 13a-14(a) Certification. (FILED HEREWITH) |
|
|
|
|
|
31.4 |
|
Rule 13a-14(a) Certification. (FILED HEREWITH) |
|
|
|
|
|
32.1 |
|
Section 1350 Certification. (FURNISHED HEREWITH) |
|
|
|
|
|
(+) |
|
Management contract or compensatory plan or agreement. |
69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of Hospitality Properties Trust:
We have audited the accompanying consolidated balance sheets of Hospitality Properties Trust as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hospitality Properties Trust at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hospitality Properties Trust’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2008 expressed an unqualified opinion thereon.
|
|
/s/ Ernst & Young LLP |
|
|
|
|
Boston, Massachusetts |
|
|
February 21, 2008 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of Hospitality Properties Trust:
We have audited Hospitality Properties Trust’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Hospitality Properties Trust’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Item 9A of Hospitality Properties Trust’s Annual Report on Form 10-K under the heading Management Report on Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Hospitality Properties Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2007 consolidated financial statements of Hospitality Properties Trust and our report dated February 21, 2008 expressed an unqualified opinion thereon.
|
|
/s/ Ernst & Young LLP |
|
|
|
|
Boston, Massachusetts |
|
|
February 21, 2008 |
|
F-2
HOSPITALITY PROPERTIES TRUST
(dollars in thousands, except share data)
|
|
|
As of December 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Assets |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Real estate properties, at cost: |
|
|
|
|
|
||
|
Land |
|
$ |
1,377,520 |
|
$ |
582,562 |
|
|
Buildings, improvements and equipment |
|
4,818,711 |
|
3,436,219 |
|
||
|
|
|
6,196,231 |
|
4,018,781 |
|
||
|
Accumulated depreciation |
|
(849,470 |
) |
(702,513 |
) |
||
|
|
|
5,346,761 |
|
3,316,268 |
|
||
|
Cash and cash equivalents |
|
23,401 |
|
553,256 |
|
||
|
Restricted cash (FF&E escrow) |
|
28,134 |
|
27,363 |
|
||
|
Other assets, net |
|
281,011 |
|
60,576 |
|
||
|
|
|
$ |
5,679,307 |
|
$ |
3,957,463 |
|
|
|
|
|
|
|
|
||
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Revolving credit facility |
|
$ |
158,000 |
|
$ |
— |
|
|
Senior notes, net of discounts |
|
1,842,756 |
|
1,196,130 |
|
||
|
Convertible senior notes |
|
575,000 |
|
— |
|
||
|
Mortgage payable |
|
3,635 |
|
3,700 |
|
||
|
Security deposits |
|
169,406 |
|
185,366 |
|
||
|
Dividends payable |
|
4,754 |
|
1,914 |
|
||
|
Accounts payable and other liabilities |
|
134,705 |
|
119,536 |
|
||
|
Due to affiliate |
|
4,617 |
|
3,277 |
|
||
|
Total liabilities |
|
2,892,873 |
|
1,509,923 |
|
||
|
|
|
|
|
|
|
||
|
Commitments and contingencies |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Shareholders’ equity: |
|
|
|
|
|
||
|
Preferred shares of beneficial interest, no par value, 100,000,000 shares authorized: |
|
|
|
|
|
||
|
Series B preferred shares; 8 7/8% cumulative redeemable; 3,450,000 shares issued and outstanding, aggregate liquidation preference $86,250 |
|
83,306 |
|
83,306 |
|
||
|
Series C preferred shares; 7% cumulative redeemable; 12,700,000 shares and none issued and outstanding, respectively, aggregate liquidation preference $317,500 |
|
306,833 |
|
— |
|
||
|
Common shares of beneficial interest; $0.01 par value; |
|
|
|
|
|
||
|
150,000,000 shares authorized, 93,892,719 and 86,284,251 shares issued and outstanding, respectively |
|
939 |
|
863 |
|
||
|
Additional paid-in capital |
|
3,048,881 |
|
2,703,687 |
|
||
|
Cumulative net income |
|
1,711,079 |
|
1,380,111 |
|
||
|
Cumulative preferred distributions |
|
(93,761 |
) |
(66,992 |
) |
||
|
Cumulative common distributions |
|
(2,270,843 |
) |
(1,653,435 |
) |
||
|
Total shareholders’ equity |
|
2,786,434 |
|
2,447,540 |
|
||
|
|
|
$ |
5,679,307 |
|
$ |
3,957,463 |
|
The accompanying notes are an integral part of these financial statements.
F-3
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2007 |
|
2006 |
|
2005 |
|
|||
|
Revenues: |
|
|
|
|
|
|
|
|||
|
Hotel operating revenues |
|
$ |
941,455 |
|
$ |
879,324 |
|
$ |
682,541 |
|
|
Rental income: |
|
|
|
|
|
|
|
|||
|
Minimum rent |
|
310,764 |
|
115,461 |
|
110,869 |
|
|||
|
Percentage rent |
|
6,055 |
|
5,188 |
|
3,463 |
|
|||
|
|
|
316,819 |
|
120,649 |
|
114,332 |
|
|||
|
FF&E reserve income |
|
22,286 |
|
20,299 |
|
19,767 |
|
|||
|
Interest income |
|
4,919 |
|
2,674 |
|
1,373 |
|
|||
|
Total revenues |
|
1,285,479 |
|
1,022,946 |
|
818,013 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Expenses: |
|
|
|
|
|
|
|
|||
|
Hotel operating expenses |
|
657,000 |
|
618,334 |
|
476,858 |
|
|||
|
Interest (including amortization of deferred financing costs of $3,659, $2,584 and $2,894, respectively) |
|
140,517 |
|
81,451 |
|
65,263 |
|
|||
|
Depreciation and amortization |
|
216,688 |
|
141,198 |
|
127,242 |
|
|||
|
General and administrative |
|
37,223 |
|
25,090 |
|
22,514 |
|
|||
|
Loss on asset impairment |
|
1,332 |
|
— |
|
7,300 |
|
|||
|
TA spin off costs |
|
2,711 |
|
— |
|
— |
|
|||
|
Total expenses |
|
1,055,471 |
|
866,073 |
|
699,177 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Income before income taxes |
|
230,008 |
|
156,873 |
|
118,836 |
|
|||
|
Income tax expense |
|
(2,191 |
) |
(372 |
) |
(57 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Income from continuing operations |
|
227,817 |
|
156,501 |
|
118,779 |
|
|||
|
Discontinued operations: |
|
|
|
|
|
|
|
|||
|
Income from discontinued operations |
|
7,440 |
|
12,538 |
|
11,124 |
|
|||
|
Gain on sale of real estate used by discontinued operations |
|
95,711 |
|
— |
|
— |
|
|||
|
Net Income |
|
330,968 |
|
169,039 |
|
129,903 |
|
|||
|
Preferred distributions |
|
26,769 |
|
7,656 |
|
7,656 |
|
|||
|
Net income available for common shareholders |
|
$ |
304,199 |
|
$ |
161,383 |
|
$ |
122,247 |
|
|
|
|
|
|
|
|
|
|
|||
|
Weighted average common shares outstanding |
|
93,109 |
|
73,279 |
|
69,866 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Basic and diluted earnings per common share: |
|
|
|
|
|
|
|
|||
|
Income from continuing operations available for common shareholders |
|
$ |
2.16 |
|
$ |
2.03 |
|
$ |
1.59 |
|
|
Income from discontinued operations available for common shareholders |
|
$ |
1.11 |
|
$ |
0.17 |
|
$ |
0.16 |
|
|
Net income available for common shareholders |
|
$ |
3.27 |
|
$ |
2.20 |
|
$ |
1.75 |
|
The accompanying notes are an integral part of these financial statements.
F-4
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands, except share data)
|
|
|
Preferred Shares |
|
Common Shares |
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
Series B |
|
Series C |
|
Cumulative |
|
|
|
|
|
Cumulative |
|
Additional |
|
|
|
|
|
||||||||||||
|
|
|
Number of |
|
Preferred |
|
Number of |
|
Preferred |
|
Preferred |
|
Number of |
|
Common |
|
Common |
|
Paid-in |
|
Cumulative |
|
Total |
|
||||||||
|
Balance at December 31, 2004 |
|
3,450,000 |
|
$ |
83,306 |
|
— |
|
— |
|
$ |
(51,680 |
) |
67,203,228 |
|
$ |
672 |
|
$ |
(1,287,530 |
) |
$ |
1,859,936 |
|
$ |
1,081,169 |
|
$ |
1,685,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Issuance of shares, net |
|
— |
|
— |
|
— |
|
— |
|
— |
|
4,700,000 |
|
47 |
|
— |
|
199,186 |
|
— |
|
199,233 |
|
||||||||
|
Common share grants |
|
— |
|
— |
|
— |
|
— |
|
— |
|
17,350 |
|
— |
|
— |
|
761 |
|
— |
|
761 |
|
||||||||
|
Redemption of preferred shares |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
||||||||
|
Net income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
129,903 |
|
129,903 |
|
||||||||
|
Distributions |
|
— |
|
— |
|
— |
|
— |
|
(7,656 |
) |
— |
|
— |
|
(152,659 |
) |
— |
|
— |
|
(160,315 |
) |
||||||||
|
Balance at December 31, 2005 |
|
3,450,000 |
|
83,306 |
|
— |
|
— |
|
(59,336 |
) |
71,920,578 |
|
719 |
|
(1,440,189 |
) |
2,059,883 |
|
1,211,072 |
|
1,855,455 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Issuance of shares, net |
|
— |
|
— |
|
— |
|
— |
|
— |
|
14,300,000 |
|
143 |
|
— |
|
641,509 |
|
— |
|
641,652 |
|
||||||||
|
Common share grants |
|
— |
|
— |
|
— |
|
— |
|
— |
|
63,673 |
|
1 |
|
— |
|
2,295 |
|
— |
|
2,296 |
|
||||||||
|
Net income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
169,039 |
|
169,039 |
|
||||||||
|
Distributions |
|
— |
|
— |
|
— |
|
— |
|
(7,656 |
) |
— |
|
— |
|
(213,246 |
) |
— |
|
— |
|
(220,902 |
) |
||||||||
|
Balance at December 31, 2006 |
|
3,450,000 |
|
83,306 |
|
— |
|
— |
|
(66,992 |
) |
86,284,251 |
|
863 |
|
(1,653,435 |
) |
2,703,687 |
|
1,380,111 |
|
2,447,540 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Issuance of shares, net |
|
— |
|
— |
|
12,700,000 |
|
306,833 |
|
— |
|
7,550,000 |
|
75 |
|
— |
|
343,376 |
|
— |
|
650,284 |
|
||||||||
|
Common share grants |
|
— |
|
— |
|
— |
|
— |
|
— |
|
58,468 |
|
1 |
|
— |
|
1,818 |
|
— |
|
1,819 |
|
||||||||
|
Net income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
330,968 |
|
330,968 |
|
||||||||
|
Distributions |
|
— |
|
— |
|
— |
|
— |
|
(26,769 |
) |
— |
|
— |
|
(280,158 |
) |
— |
|
— |
|
(306,927 |
) |
||||||||
|
Distribution of TA |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(337,250 |
) |
— |
|
— |
|
(337,250 |
) |
||||||||
|
Balance at December 31, 2007 |
|
3,450,000 |
|
$ |
83,306 |
|
12,700,000 |
|
$ |
306,833 |
|
$ |
(93,761 |
) |
93,892,719 |
|
$ |
939 |
|
$ |
(2,270,843 |
) |
$ |
3,048,881 |
|
$ |
1,711,079 |
|
$ |
2,786,434 |
|
The accompanying notes are an integral part of these financial statements.
F-5
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2007 |
|
2006 |
|
2005 |
|
|||
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
330,968 |
|
$ |
169,039 |
|
$ |
129,903 |
|
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|||
|
Depreciation and amortization |
|
218,319 |
|
144,404 |
|
131,792 |
|
|||
|
Amortization of deferred financing costs as interest |
|
3,659 |
|
2,584 |
|
2,894 |
|
|||
|
Straight line rent adjustments |
|
(15,851 |
) |
(113 |
) |
— |
|
|||
|
Other non-cash (income) expense, net |
|
(4,363 |
) |
(2,969 |
) |
(2,952 |
) |
|||
|
FF&E reserve income and deposits |
|
(57,912 |
) |
(46,095 |
) |
(32,338 |
) |
|||
|
Gain on sale of real estate used by discontinued operations |
|
(95,711 |
) |
— |
|
— |
|
|||
|
Loss on asset impairment |
|
1,332 |
|
— |
|
7,300 |
|
|||
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|||
|
Increase in other assets |
|
(14,089 |
) |
(2,488 |
) |
(1,091 |
) |
|||
|
Increase in accounts payable and other |
|
19,147 |
|
5,462 |
|
6,492 |
|
|||
|
Increase in due to affiliate |
|
2,730 |
|
1,729 |
|
306 |
|
|||
|
Cash provided by operating activities |
|
388,229 |
|
271,553 |
|
242,306 |
|
|||
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|||
|
Real estate acquisitions |
|
(2,629,215 |
) |
(320,776 |
) |
(443,104 |
) |
|||
|
FF&E reserve fundings |
|
(64,241 |
) |
(72,556 |
) |
(45,390 |
) |
|||
|
Real estate acquisition deposit |
|
— |
|
— |
|
(10,000 |
) |
|||
|
Sale of real estate used by discontinued operations |
|
205,350 |
|
— |
|
— |
|
|||
|
Increase (decrease) in security deposits |
|
(15,960 |
) |
2 |
|
10,000 |
|
|||
|
Proceeds from sale of real estate |
|
— |
|
— |
|
3,227 |
|
|||
|
Cash used in investing activities |
|
(2,504,066 |
) |
(393,330 |
) |
(485,267 |
) |
|||
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|||
|
Proceeds from issuance of common shares, net |
|
343,451 |
|
641,652 |
|
199,233 |
|
|||
|
Proceeds from issuance of preferred shares, net |
|
306,833 |
|
— |
|
— |
|
|||
|
Issuance of senior notes, net of discount |
|
645,843 |
|
273,974 |
|
299,442 |
|
|||
|
Issuance of convertible senior notes, net of discount |
|
575,000 |
|
— |
|
— |
|
|||
|
Draws on revolving credit facility |
|
1,022,000 |
|
511,000 |
|
319,000 |
|
|||
|
Repayments of revolving credit facility |
|
(864,000 |
) |
(546,000 |
) |
(356,000 |
) |
|||
|
Draws on interim credit facility |
|
1,400,000 |
|
— |
|
— |
|
|||
|
Repayments of interim credit facility |
|
(1,400,000 |
) |
— |
|
— |
|
|||
|
Deferred finance costs incurred |
|
(17,892 |
) |
(3,259 |
) |
(7,339 |
) |
|||
|
Distributions to preferred shareholders |
|
(23,929 |
) |
(7,656 |
) |
(7,656 |
) |
|||
|
Distributions to common shareholders |
|
(280,158 |
) |
(213,246 |
) |
(201,045 |
) |
|||
|
Distribution of TA to common shareholders |
|
(121,166 |
) |
— |
|
— |
|
|||
|
Cash provided by financing activities |
|
1,585,982 |
|
656,465 |
|
245,635 |
|
|||
|
Increase (decrease) in cash and cash equivalents |
|
(529,855 |
) |
534,688 |
|
2,674 |
|
|||
|
Cash and cash equivalents at beginning of year |
|
553,256 |
|
18,568 |
|
15,894 |
|
|||
|
Cash and cash equivalents at end of year |
|
$ |
23,401 |
|
$ |
553,256 |
|
$ |
18,568 |
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|||
|
Cash paid for interest |
|
$ |
119,200 |
|
$ |
78,157 |
|
$ |
56,597 |
|
|
Non-cash investing activities: |
|
|
|
|
|
|
|
|||
|
Property managers deposits in FF&E reserve |
|
58,668 |
|
44,946 |
|
31,056 |
|
|||
|
Purchases of fixed assets with FF&E reserve |
|
(122,138 |
) |
(116,129 |
) |
(76,860 |
) |
|||
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|||
|
Issuance of common shares |
|
1,819 |
|
2,296 |
|
761 |
|
|||
|
Distribution of net assets of TravelCenters of America LLC |
|
(216,084 |
) |
— |
|
— |
|
|||
The accompanying notes are an integral part of these financial statements.
F-6
HOSPITALITY PROPERTIES TRUST
December 31, 2007
(dollars in thousands, except per share data)
1. Organization
Hospitality Properties Trust, or HPT, we or us, is a real estate investment trust, or REIT, organized on February 7, 1995, under the laws of the State of Maryland, which invests in real estate used in hospitality industries. At December 31, 2007, HPT, directly and through subsidiaries, owned 292 hotels and 185 travel centers.
At December 31, 2007, our properties were leased to and or operated by subsidiaries of the following companies: Host Hotels & Resorts, Inc., or Host; Marriott International, Inc., or Marriott; InterContinental Hotels Group, plc, or InterContinental; Barcelo Crestline Corporation, or Barcelo Crestline; Global Hyatt Corporation, or Hyatt; Carlson Hotels Worldwide, or Carlson; and TravelCenters of America, LLC, or TA. Hereinafter these hotel and travel center operators are sometimes referred to as managers and/or tenants.
2. Summary of Significant Accounting Policies
Consolidation. These consolidated financial statements include the accounts of HPT and its subsidiaries, all of which are 100% owned directly or indirectly by HPT. We have determined that each of our taxable REIT subsidiaries, or TRSs, is a variable interest entity that must be consolidated because we are the primary beneficiary. All intercompany transactions and balances have been eliminated.
Real Estate Properties. We record real estate properties at cost. We allocate the cost of real estate acquired among building, land, furniture, fixtures and equipment, and, if applicable, the value of in-place leases, the fair market value of above or below market leases and customer relationships. We depreciate real estate properties on a straight line basis over estimated useful lives of up to 40 years for buildings and improvements and up to 12 years for personal property and we amortize finite lived intangible assets over the shorter of their useful lives or the term of the associated lease.
Intangible Assets and Liabilities. Intangible assets consist of acquired trademarks and tradenames and below market ground leases. Intangible liabilities consist of acquired above market ground leases. We do not amortize our indefinite life trademarks and tradenames, but we evaluate them for impairment. We amortize above and below market ground leases on a straight line basis over the term of the lease (19 and 11 years on a weighted average basis for intangible assets and liabilities, respectively). We include intangible assets in other assets and intangible liabilities in accounts payable and other liabilities in the accompanying consolidated balance sheet. At December 31, 2007, our intangible assets and liabilities were as follows:
|
Assets: |
|
|
|
|
|
Tradenames and trademarks |
|
$ |
142,600 |
|
|
Below market ground leases, net of accumulated amortization of $3,208 |
|
45,868 |
|
|
|
|
|
$ |
188,468 |
|
|
Liabilities: |
|
|
|
|
|
Above market ground leases, net of accumulated amortization of $2,492 |
|
$ |
8,158 |
|
F-7
We had no intangible assets or liabilities at December 31, 2006. For the year ended December 31, 2007, amortization relating to intangible assets and liabilities were $3,284 and $1,206, respectively.
As of December 31, 2007, amortization expense relating to intangible assets and liabilities is projected as follows:
|
|
|
Intangible |
|
Intangible |
|
||
|
|
|
|
|
|
|
||
|
2008 |
|
$ |
2,744 |
|
$ |
(865 |
) |
|
2009 |
|
2,744 |
|
(734 |
) |
||
|
2010 |
|
2,744 |
|
(726 |
) |
||
|
2011 |
|
2,744 |
|
(695 |
) |
||
|
2012 |
|
2,744 |
|
(653 |
) |
||
|
Thereafter |
|
32,148 |
|
(4,486 |
) |
||
|
|
|
$ |
45,868 |
|
$ |
(8,158 |
) |
Impairment of Long Lived Assets. We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of our long lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows of the asset to determine if an impairment loss should be recognized. We determine the amount of an impairment loss by comparing the historical carrying value of the asset to its estimated fair value. We estimate fair value by evaluating recent financial performance and projecting discounted cash flows of properties using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of its long lived assets. If we change estimated lives, we allocate the carrying values of affected assets over the revised remaining lives.
Cash and Cash Equivalents. We consider highly liquid investments with original maturities of three months or less at date of purchase to be cash equivalents. The carrying amount of cash and cash equivalents is equal to its fair value.
Restricted Cash. Restricted cash consists of amounts escrowed to fund periodic renovations and improvements at our hotels.
Deferred Financing Costs. We capitalize costs incurred to borrow and we amortize that cost as interest expense over the term of the related borrowing. Deferred financing costs were $25,352 and $10,335 at December 31, 2007 and 2006, respectively, net of accumulated amortization of $8,210 and $5,335, respectively, and are included in other assets, net, in the accompanying consolidated balance sheet. Future amortization of deferred financing fees to be recognized by us during the current terms of our loans as of December 31, 2007, are approximately $3,089 million in 2008, $3,063 million in 2009, $2,810 million in 2010, $1,918 million 2011, $1,909 million in 2012 and $12,563 million thereafter.
Revenue Recognition. We report hotel operating revenues for managed hotels in our consolidated statement of income. We generally recognize hotel operating revenues, consisting primarily of room, food and beverage sales when services are provided. Our share of the net operating results of our managed hotels in excess of the minimum returns due us, or additional returns, are generally determined annually. We recognize additional returns due to us under our management agreements as income at year end when all contingencies are met and the income is earned. We recognized additional returns of $24,181, $20,029 and $13,568 in 2007, 2006 and 2005, respectively.
We recognize rental income from operating leases on a straight line basis over the life of the lease agreements. Rental income includes $15,851, $113, and $0 of adjustments necessary to record rent on the straight line basis in 2007, 2006 and 2005, respectively. Percentage rent due to us under our leases is generally determined
F-8
annually and is recognized as income at year end when all contingencies are met and the rent is earned. We recognized percentage rental income of $6,055, $5,188 and $3,463 in 2007, 2006 and 2005, respectively.
We own all the capital expenditure reserves, or FF&E reserve escrows, for hotels leased to our TRSs and leased to third parties. We do not report the amounts which are escrowed as FF&E reserves for hotels leased to our TRSs as FF&E reserve income. We report deposits by our third party tenants into the escrow account as FF&E reserve income.
Per Common Share Amounts. We compute per common share amounts using the weighted average number of common shares outstanding during the period. We had no dilutive common share equivalents during the periods presented.
Reclassifications. We reclassified prior year’s financial statements to conform to the current year’s presentation.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates.
Segment Information. As of December 31, 2007, we have two reportable business segments: hotel and travel center real estate investments. Prior to January 31, 2007, our only reportable segment was hotel real estate investments.
Income Taxes. We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We are subject to income tax in Canada, Puerto Rico and certain states despite our REIT status. Further, we lease our managed hotels to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated tax return and are subject to federal, state and foreign income taxes. Our consolidated income tax provision (or benefit) includes the income tax provision (or benefit) related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our REIT status.
New Accounting Pronouncement. In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN 48. FIN 48 prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN 48, we can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement. As required, we adopted FIN 48 effective January 1, 2007, and concluded that the effect was not material to our consolidated financial statements. Accordingly, we did not record a cumulative effect adjustment related to the adoption of FIN 48. Tax returns filed for the 2003 through 2007 tax years are subject to examination by taxing authorities. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expense.
In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurement”, or SFAS No. 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurement. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that the adoption of SFAS No. 157 will have on our consolidated financial statements; however, we do not anticipate the effect, if any, will be material.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or SFAS No. 159, which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that the adoption of SFAS No. 159 will have on our consolidated financial statements; however, we do not anticipate the effect, if any, will be material.
3. Shareholders’ Equity
We reserved an aggregate of 3,128,791 shares of our common shares to be issued under the terms of the 1995 Incentive Share Award Plan and the 2003 Incentive Share Award Plan, collectively referred to as the Award Plans. During the years ended December 31, 2007, 2006 and 2005, 23,290 common shares with an aggregate market value of $950, 25,950 common shares with an aggregate market value of $1,224 and 15,850 common shares with an aggregate market value of $698, respectively, were awarded to our officers and certain employees of our manager pursuant to these plans. In January 2007, we issued 1,500 common shares with a market value of $71 to our two new trustees at the time of their election as trustees. In addition, each of our trustees were awarded 750 common shares in 2007 with an aggregate market value of $166 and 750 common shares each in 2006 with an
F-9
aggregate value of $153, as part of their annual fees. Our independent trustees were each awarded 750 common shares in 2005 with an aggregate market value of $64, as part of their annual fees. The shares awarded to our trustees vest immediately. The shares awarded to our officers and certain employees of our manager vest in three or five annual installments beginning on the date of grant. Share awards are expensed over their vesting period and are included in general and administrative expenses. At December 31, 2007, 2,740,838 of our common shares remain reserved for issuance under the Award Plans.
Under the terms of our management agreement with Reit Management & Research LLC, or RMR, on March 26, 2007, we issued 29,928 common shares in payment of an incentive fee of $1,390 for services rendered by RMR during 2006.
In January 2007, we sold 1,800,000 of our common shares at a price of $47.51 per share in a public offering pursuant to an over allotment option granted to the underwriters of our December 2006 common share offering. Net proceeds from this sale of $81,775 (after underwriting and other offering expenses) were used to partially fund our acquisition of TravelCenters of America, Inc., or TravelCenters (see Note 8).
In February 2007, we sold 5,750,000 of our common shares at a price of $47.67 per share in a public offering. Net proceeds from these sales of $261,677 (after underwriting and other offering expenses) were used to reduce borrowings under our $1,400,000 interim loan borrowing, or the Acquisition Facility (see Note 8).
In February 2007, we sold 12,700,000 Series C cumulative redeemable preferred shares at a price of $25.00 per share in a public offering. Net proceeds from these sales of $306,833 (after underwriting and other offering expenses) were used to reduce borrowings under our Acquisition Facility (see Note 8). Each of our Series C preferred shares has a distribution rate of $1.75 per annum, payable in equal quarterly amounts, and a liquidation preference of $25.00 per share ($317,500 in aggregate). The Series C preferred shares are redeemable at our option for $25.00 each plus accrued and unpaid distributions at any time on or after February 15, 2012.
Each of our 3,450,000 Series B cumulative redeemable preferred shares has a distribution rate of $2.21875 per annum, payable in equal quarterly amounts, and a liquidation preference of $25.00 ($86,250 in aggregate). Series B preferred shares are redeemable at our option for $25.00 each plus accrued and unpaid distributions at any time on or after December 10, 2007.
Cash distributions paid or payable by us to our common shareholders for the years ended December 31, 2007, 2006 and 2005, were $3.06 per share, $2.95 per share and $2.90 per share, respectively. Further, as described in Note 8, in January 2007, we distributed all of the shares of our former subsidiary, TA, to our common shareholders. The characterization for income tax reporting purposes of the distributions to our common shareholders in 2007 is as follows: 45.05% ordinary income, 11.53% capital gain, 39.23% return of capital, and 4.19% un-recaptured section 1250 gain. In 2006 and 2005, the characterization was 82.6% and 96.9% ordinary income, respectively, and 17.4% and 3.1% return of capital, respectively.
4. Management Agreements and Leases
As of December 31, 2007, we owned 292 hotels and 185 travel centers which are grouped into twelve combinations. We do not operate any of our properties. 201 of our hotels are leased to our TRSs and managed by an independent hotel operating company and 91 are leased to third parties. Our ten hotel combinations are managed by or leased to separate subsidiaries of hotel operating companies including InterContinental, Marriott, Host, Barcelo Crestline, Hyatt, and Carlson. Our hotel agreements have initial terms expiring between 2010 and 2031. Each of these agreements is for a combination of between 10 and 76 of our hotels. The agreements contain renewal options for all, but not less than all, of the affected properties, and the renewal terms total 20 to 40 years. Each agreement generally requires the third party manager or tenant to: (i) make payments to us of minimum returns or minimum rents; (ii) deposit a percentage of total hotel sales into reserves established for the regular refurbishment of our hotels, or FF&E reserves; (iii) make payments to us of percentage returns or rent of 5% to 10% of increases in gross hotel revenues over threshold amounts and/or, in certain circumstances, make payments to our TRSs of additional returns based on increases in hotel operating income. Some of the third party managers or tenants have
F-10
provided deposits or guarantees to secure their obligation to pay us. Our 185 travel centers are leased to and operated by separate subsidiaries of TA under two agreements. Our lease for 145 travel centers expires in 2022. Our lease for 40 travel centers expires in 2024 and has two fifteen year renewal options. Both of the leases with TA require them to: (i) make minimum payments to us of minimum rents; and (ii) pay us 3% of non-fuel revenue and .3% of fuel revenues over threshold amounts to be established in 2011 and 2012 respectively and (iii) maintain the leased travel centers, including structural and non-structural components. TA has provided guarantees of the tenants obligations under the leases.
As of December 31, 2007, our management agreements and leases provide for minimum return payments or minimum rents to be paid to us during the remaining initial terms as follows:
|
2008 |
|
$ |
564,604 |
|
|
2009 |
|
568,679 |
|
|
|
2010 |
|
572,693 |
|
|
|
2011 |
|
558,381 |
|
|
|
2012 |
|
563,438 |
|
|
|
Thereafter |
|
6,169,859 |
|
|
|
|
|
$ |
8,997,654 |
|
As of December 31, 2007, the average remaining initial terms of our leases and management agreements, weighted based on minimum returns or rents from third parties, was approximately 15.5 years, and the weighted average remaining total term, including renewal options which may be exercised, was 38 years.
Our hotel operating agreements generally provide that, if necessary, we will provide our managers and tenants funding for capital improvements to our properties in excess of amounts available in escrowed FF&E reserves. To the extent that we make such additional fundings, our annual minimum returns or rent generally increase by a percentage of the amount we fund. One of our leases with TA provides for us to fund up to $25 million annually for the first five years of the lease for certain specified capital improvements to the leased travel centers. This funding is cumulative and may be drawn by TA from us in subsequent years until December 2015. We will own all capital improvements funded by us under this agreement. There will not be any adjustment in our minimum rent as we fund these amounts. At December 31, 2007, we expect to provide funding for capital improvements at our hotels and travel centers of approximately $129,000 in 2008.
We settled all our outstanding claims with Prime Hospitality Corp., or Prime, a former manager, arising from its July 2003 lease default by entering a management agreement for our 24 AmeriSuites® hotels effective on January 1, 2004. The balance of the retained deposits and the value of other property received from Prime pursuant to this settlement, totaling approximately $44,281, is being amortized into our income on a straight line basis over the initial 15 year term of the management contract for the affected hotels. The unamortized balance of $32,473 at December 31, 2007, is included in accounts payable and other liabilities in the accompanying consolidated balance sheet. In October 2004, Prime was sold to the Blackstone Group, or Blackstone. In January 2005, Blackstone sold the AmeriSuites® brand and transferred operating responsibility for these hotels to Hyatt.
5. Real Estate Properties
Our real estate properties, at cost, consisted of land of $1,377,520, buildings and improvements of $4,305,529 and furniture, fixtures and equipment of $513,182, as of December 31, 2007; and land of $582,562, buildings and improvements of $3,027,204 and furniture, fixtures and equipment of $409,015 as of December 31, 2006. In December 2007, our board of trustees authorized us to pursue the sale of three hotels. In connection with this decision, we recorded a $1,332 loss on asset impairment to reduce the carrying value of one hotel to its estimated net realizable value less costs to sell. The $15,767 carrying value of the hotels held for sale at December 31, 2007, is included in other assets in the accompanying consolidated balance sheet. In February 2008, we sold one hotel with a carrying value of $6,951 for net proceeds of approximately $7,644.
F-11
During 2007, 2006 and 2005, we invested $64,241, $72,555 and $45,390, respectively, in certain of our properties that are leased to or managed by others, which resulted in increases in our annual minimum returns and rents of $6,003, $6,981 and $2,384 in 2007, 2006 and 2005, respectively.
At December 31, 2007, 14 of our hotels were on leased land. In each case, the remaining term of the ground lease (including renewal options) is in excess of 27 years, and the ground lessors are unrelated to us. Ground rent payable under nine of the ground leases is generally calculated as a percentage of hotel revenues. 12 of the 14 ground leases require minimum annual rents ranging from approximately $102 to $556 per year; future rents under two ground leases have been pre-paid. 26 of our travel centers are on land leased partially or in its entirety. The remaining terms on the leases range from two to 35 years with rents ranging from approximately $2 to $2,043 per year. Generally payments of ground lease obligations are made by our managers or tenants. However, if a manager or tenant did not perform obligations under a ground lease or did not renew any ground lease, we might have to perform obligations under the ground lease or renew the ground lease in order to protect our investment in the affected property. Any pledge of our interests in a ground lease may require the consent of the applicable ground lessor and its lenders.
6. Indebtedness
At December 31, 2007 and 2006, our indebtedness was as follows:
|
|
|
As of December 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
Senior Notes, due 2008 at 7% |
|
$ |
150,000 |
|
$ |
150,000 |
|
|
Senior Notes, due 2010 at 9.125% |
|
50,000 |
|
50,000 |
|
||
|
Senior Notes, due 2012 at 6.85% |
|
125,000 |
|
125,000 |
|
||
|
Senior Notes, due 2013 at 6.75% |
|
300,000 |
|
300,000 |
|
||
|
Senior Notes, due 2015 at 5.125% |
|
300,000 |
|
300,000 |
|
||
|
Senior Notes, due 2016 at 6.3% |
|
275,000 |
|
275,000 |
|
||
|
Senior Notes, due 2017 at 5.625% |
|
300,000 |
|
— |
|
||
|
Convertible Senior Notes, due 2027 at 3.8% |
|
575,000 |
|
— |
|
||
|
Senior Notes, due 2018 at 6.7% |
|
350,000 |
|
— |
|
||
|
Unamortized discounts |
|
(7,244 |
) |
(3,870 |
) |
||
|
Total unsecured senior notes |
|
2,417,756 |
|
1,196,130 |
|
||
|
Unsecured revolving credit facility |
|
158,000 |
|
— |
|
||
|
Mortgage Note, due 2011 at 8.3% |
|
3,635 |
|
3,700 |
|
||
|
|
|
$ |
2,579,391 |
|
$ |
1,199,830 |
|
All of our senior notes are prepayable at any time prior to their maturity date at par plus accrued interest plus a premium equal to a make whole amount, as defined, generally designed to preserve a stated yield to the noteholder. Interest on all of our senior notes is payable semi-annually in arrears.
We have a $750,000, interest only, unsecured revolving credit facility with a group of institutional lenders. Our credit facility matures in October 2010 and may be extended at our option to October 2011 upon payment of an extension fee. Funds may be drawn, repaid and redrawn until maturity, and no principal payment is due until maturity. The interest rate on drawings under the credit facility is LIBOR plus a spread (5.41% per annum at December 31, 2007). As of December 31, 2007, we had $158,000 outstanding under our revolving credit facility and $592,000 available to be drawn for acquisitions and general business purposes. During 2007, 2006 and 2005, the weighted average interest rate on the amounts outstanding under our revolving credit facility was 5.9%, 5.6% and 4.2%, respectively.
In March 2007, we sold $575,000 of 3.8% convertible senior notes due 2027. Net proceeds from these offerings of $562,525 (after placement and other offering expenses) were used to repay amounts outstanding under the Acquisition Facility (see Note 8) and for general business purposes. The convertible senior notes are convertible if certain conditions are met (including certain changes in control) into cash equal to the principal amount of the notes and, to the extent the market price of our common shares exceeds the initial exchange price of $50.50 per
F-12
share, subject to adjustment, either cash or our common shares at our option with a value based on such excess amount. Holders of our convertible senior notes may require us to repurchase all or a portion of the notes on March 20, 2012, March 15, 2017, and March 15, 2022, or upon the occurrence of certain change in control events.
On March 12, 2007, we sold $300,000 of 5.625% senior notes due 2017. Net proceeds from this offering of $296,468 (after placement and other offering expenses) were used to reduce borrowings under our Acquisition Facility (see Note 8).
On September 24, 2007, we sold $350,000 of 6.7% unsecured senior notes due 2018. Net proceeds from this offering of $344,226 (after underwriting and other offering expenses) were used to reduce borrowings under our revolving credit facility.
Our revolving credit agreement and note indenture and its supplements contain financial covenants which, among other things, restrict our ability to incur indebtedness and require us to maintain financial ratios and a minimum net worth. We were in compliance with these covenants during the periods presented.
As of December 31, 2007 and 2006, the estimated aggregate fair values of our indebtedness were as follows:
|
|
|
As of December 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
Revolving credit facility at 5.41% |
|
$ |
158,000 |
|
$ |
— |
|
|
Senior Notes, due 2008 at 7% |
|
153,738 |
|
154,860 |
|
||
|
Senior Notes, due 2010 at 9.125% |
|
55,582 |
|
57,263 |
|
||
|
Mortgage Note, due 2011 at 8.3% |
|
4,254 |
|
4,279 |
|
||
|
Senior Notes, due 2012 at 6.85% |
|
131,053 |
|
134,953 |
|
||
|
Senior Notes, due 2013 at 6.75% |
|
308,985 |
|
321,667 |
|
||
|
Senior Notes, due 2015 at 5.125% |
|
278,414 |
|
292,082 |
|
||
|
Senior Notes, due 2016 at 6.3% |
|
265,262 |
|
284,739 |
|
||
|
Senior Notes, due 2017 at 5.625% |
|
277,600 |
|
— |
|
||
|
Convertible Senior Notes, due 2027 at 3.8% |
|
604,922 |
|
— |
|
||
|
Senior Notes, due 2018 at 6.7% |
|
347,505 |
|
— |
|
||
|
|
|
$ |
2,585,315 |
|
$ |
1,249,843 |
|
We estimate fair value of our indebtedness using discounted cash flow analysis and currently prevailing interest rates.
7. Income Taxes
Our provision for income taxes consists of the following:
|
|
|
For the years ended December 31, |
|
||||||||
|
|
|
2007 |
|
2006 |
|
2005 |
|
||||
|
Current- |
Federal |
|
$ |
70 |
|
$ |
— |
|
$ |
6 |
|
|
|
State |
|
1,410 |
|
225 |
|
— |
|
|||
|
|
Foreign |
|
761 |
|
105 |
|
— |
|
|||
|
|
|
2,241 |
|
330 |
|
6 |
|
||||
|
Deferred- |
Federal |
|
— |
|
— |
|
— |
|
|||
|
|
State |
|
— |
|
— |
|
— |
|
|||
|
|
Foreign |
|
(50 |
) |
42 |
|
51 |
|
|||
|
|
|
(50 |
) |
42 |
|
51 |
|
||||
|
Income tax provision |
|
$ |
2,191 |
|
$ |
372 |
|
$ |
57 |
|
|
F-13
A reconciliation of our effective tax rate and the U.S. Federal statutory income tax rate is as follows:
|
|
|
For the year ended December 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
Taxes at statutory U.S. federal income tax rate |
|
35.0% |
|
35.0% |
|
35.0% |
|
|
Nontaxable income of HPT |
|
(35.0)% |
|
(35.0)% |
|
(35.0)% |
|
|
State and local income taxes, net of federal tax benefit |
|
4.2% |
|
4.0% |
|
3.9% |
|
|
Alternative Minimum Tax |
|
0.1% |
|
0.0% |
|
0.0% |
|
|
Foreign taxes |
|
0.2% |
|
0.1% |
|
0.0% |
|
|
Change in valuation allowance |
|
(0.5)% |
|
(1.0)% |
|
(0.2)% |
|
|
Other differences, net |
|
(3.4)% |
|
(2.9)% |
|
(3.7)% |
|
|
Effective tax rate |
|
0.6% |
|
0.2% |
|
0.0% |
|
Significant components of our deferred tax assets and liabilities are as follows:
|
|
|
For the year ended December 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
||
|
Tax credits |
|
$ |
643 |
|
$ |
101 |
|
|
Tax loss carry forwards |
|
8,659 |
|
9,948 |
|
||
|
Other |
|
124 |
|
478 |
|
||
|
|
|
9,426 |
|
10,527 |
|
||
|
Valuation allowance: |
|
(9,426 |
) |
(10,527 |
) |
||
|
|
|
— |
|
— |
|
||
|
Deferred tax liabilities: |
|
|
|
|
|
||
|
Puerto Rico basis difference |
|
(9,376 |
) |
(9,426 |
) |
||
|
|
|
(9,376 |
) |
(9,426 |
) |
||
|
|
|
|
|
|
|
||
|
Net deferred tax assets (liabilities) |
|
$ |
(9,376 |
) |
$ |
(9,426 |
) |
Deferred tax liabilities are included in accounts payable and other liabilities in the accompanying consolidated balance sheet.
At December 31, 2007 and 2006, we had a deferred tax liability related to the hotel we purchased in Puerto Rico. Specifically, we acquired all of the outstanding stock of a C corporation that owned the hotel as its primary asset, which generally would cause us to succeed to the acquired corporation’s tax bases. However, for U.S tax purposes we made an election under Section 338(g) of the Internal Revenue Code to avoid being treated as the successor to the acquired corporation’s federal income tax attributes, including its adjusted tax bases. Because we made no such election for Puerto Rico tax purposes we recorded in purchase accounting a deferred tax liability for these basis differences at our Puerto Rico effective tax rate.
At December 31, 2007 and 2006, our consolidated TRS had a net deferred tax asset, prior to any valuation allowance, of $9,426 and $10,527, respectively, which consists primarily of net operating loss carryforwards and tax credits. Because of the uncertainty surrounding our ability to realize the future benefit of these assets we have
F-14
provided a 100% valuation allowance as of December 31, 2007 and 2006. As of December 31, 2007 our consolidated TRS had net operating loss carryforwards for federal income tax purposes of approximately $22,396 which begin to expire in 2023 if unused.
8. Acquisitions
On January 31, 2007, we completed our acquisition of TravelCenters pursuant to the Agreement and Plan of Merger dated as of September 15, 2006, as amended, among TravelCenters, us, one of our former subsidiaries and the stockholders of TravelCenters. Upon completion of the acquisition, we restructured the business of TravelCenters and distributed all of the common shares of our former subsidiary, TA, to our shareholders in a spin off transaction. The acquisition of TravelCenters, the restructuring of the TravelCenters business and the spin off transaction are collectively referred to herein as the TA Transaction.
As a part of the restructuring of TravelCenters which occurred in connection with the TA Transaction, on January 31, 2007:
• TravelCenters became a subsidiary of our subsidiary, TA;
• certain real property interests of 146 travel centers that were operated by TravelCenters and certain other assets used in connection with the travel center business with an estimated total value of $1,697,221 were transferred to subsidiaries of ours that were not owned by TA;
• TA became the owner of all of the working capital of TravelCenters, including current assets (primarily consisting of cash, receivables and inventory) and current liabilities (primarily consisting of trade payables and accrued liabilities);
• we contributed cash of $121,166 to TA so that the sum of its current assets, net of current liabilities, was $200,000;
• TA became the owner of one travel center in Ontario, Canada, the operator of two travel centers leased from owners other than us, the manager of one travel center for an owner other than us, the franchisor of 13 travel centers owned and operated by third parties and the owner of certain other assets historically owned and used by TravelCenters;
• We entered into a lease of the 146 travel centers we acquired (one travel center was subsequently disposed of) and certain related assets to TA; and
• TA commenced operating the travel center business formerly conducted by TravelCenters.
After this restructuring, on January 31, 2007, we distributed all of the shares of TA to our common shareholders of record on January 26, 2007. The book value of this distribution was $337,250. Shareholders were entitled to receive one TA common share for every ten of our common shares owned on the record date. Fractional shares were issued as necessary. TA’s common shares are listed on the American Stock Exchange under the symbol “TA”. We expensed $2,711 of costs in connection with the spin off transaction.
The cost of the TravelCenters acquisition was as follows:
|
Cash consideration |
|
$ |
1,222,336 |
|
|
Indebtedness extinguished at closing |
|
681,148 |
|
|
|
Fees and other expenses |
|
9,821 |
|
|
|
|
|
$ |
1,913,305 |
|
We allocated the cost to the fair value of assets and liabilities acquired as follows:
|
Net assets and liabilities retained by TA in the restructuring |
|
$ |
216,084 |
|
|
Assets and liabilities transferred to HPT in the restructuring: |
|
|
|
|
|
Real estate |
|
1,532,895 |
|
|
|
Trademarks and tradenames |
|
142,600 |
|
|
|
Other, net |
|
21,726 |
|
|
|
|
|
$ |
1,913,305 |
|
F-15
On January 22, 2007, we entered into a new $2,000,000 interim loan agreement, or the Acquisition Facility, with a group of institutional lenders that became effective concurrently with our acquisition of TravelCenters. We funded the acquisition of TravelCenters and the capitalization of TA with a $1,400,000 borrowing under the Acquisition Facility and our then existing cash balances. We subsequently repaid all borrowings under the Acquisition Facility during the first quarter of 2007 with net proceeds from the financing transactions described in Notes 3 and 6. The annual interest rate of the Acquisition Facility was 6.02% during the period it was outstanding.
On May 30, 2007, we acquired Petro Stopping Centers Holdings, L.P., or Petro, for approximately $630,000 plus certain costs. Petro owns 40 travel centers located in 25 states. In connection with our acquisition of Petro, we acquired certain Petro properties which secure debt that was previously issued by Petro Stopping Centers, L.P., or Petro Centers, a former subsidiary of Petro acquired by TA on May 30, 2007. Upon closing of our acquisition of Petro, the Petro debt assumed by TA was covenant defeased and funds were escrowed by TA at closing and used to redeem the Petro Centers debt on February 15, 2008. We agreed to pay certain costs associated with our acquisition of Petro, including those related to the defeasance and prepayment of the Petro Centers debt and customary closing costs, that totaled approximately $25,000. Simultaneous with our acquisition of Petro, we leased the acquired travel centers to TA.
The allocation of the Petro purchase price to the fair value of assets acquired was as follows:
|
Real estate |
|
$ |
638,300 |
|
|
Leasehold interests |
|
16,700 |
|
|
|
|
|
$ |
655,000 |
|
The following table presents our pro forma results of operations as if the TA Transaction and the Petro acquisition and the related financing transactions were completed on January 1, 2006. This pro forma data is not necessarily indicative of what our actual results of operations would have been for the periods presented, nor does it represent the results of operations for any future period.
|
|
|
(unaudited) |
|
||||||
|
|
|
Twelve months ended December 31, |
|
||||||
|
|
|
2007 |
|
2006 |
|
||||
|
Total revenues |
|
$ |
1,325,286 |
|
$ |
1,255,867 |
|
||
|
Income from continuing operations |
|
236,182 |
|
220,013 |
|
||||
|
Income from continuing operations available for common shareholders |
|
206,303 |
|
190,132 |
|
||||
|
Basic and diluted per common share data: |
|
|
|
|
|
|
|
||
|
Income from continuing operations available for common shareholders |
|
$ |
2.20 |
|
$ |
2.06 |
|
||
Income from continuing operations and income from continuing operations available for common shareholders for the twelve months ended December 31, 2007, excludes $2,711, or $0.03 per common share, of costs related to the spin off of TA.
F-16
9. Discontinued Operations
On July 26, 2007, we sold 18 Homestead Studio Suites hotels for gross proceeds of $205,350 and recognized a gain on sale of $95,711. Seventeen of these hotels were sold to an unrelated party. One hotel was purchased by a subsidiary of HRPT Properties Trust, a publicly traded real estate investment trust that is managed by Reit Management & Research LLC, or RMR, which is also our manager. We used the net proceeds from these sales, totaling $189,309 after the refund of a $15,960 security deposit and payment of closing costs, to reduce amounts outstanding under our revolving credit facility. We have reclassified our consolidated statement of income for all periods presented to show the results of operations of the hotels which have been sold as discontinued. Following is a summary of the operating results of these discontinued operations:
|
|
|
Twelve Months Ended December 31, |
|
|||||||
|
|
|
2007 |
|
2006 |
|
2005 |
|
|||
|
Minimum rent |
|
$ |
9,218 |
|
$ |
15,960 |
|
$ |
15,960 |
|
|
Percentage rent |
|
267 |
|
509 |
|
439 |
|
|||
|
Total revenue |
|
9,485 |
|
16,469 |
|
16,399 |
|
|||
|
Depreciation and amortization |
|
(1,636 |
) |
(3,206 |
) |
(4,550 |
) |
|||
|
General and administrative |
|
(409 |
) |
(725 |
) |
(725 |
) |
|||
|
Income from discontinued operations |
|
$ |
7,440 |
|
$ |
12,538 |
|
$ |
11,124 |
|
10. Transactions with Affiliates
RMR originates and presents investment opportunities to our board and provides management and administrative services to us. Our contract with RMR for such services continues from year to year and is subject to annual approval by a board committee comprised of our independent trustees. RMR is compensated at an annual rate equal to 0.7% of our average real estate investments, as defined, up to the first $250,000 of such investments and 0.5% thereafter, plus an incentive fee based upon increases in cash available for distribution per share, as defined. On January 6, 2006, we entered into a management agreement with RMR to operate an office building which we acquired in connection with an adjacent hotel. Fees paid to RMR under this management agreement are based on a formula, generally 3% of gross collected rents as a property management fee and 5% of gross construction costs as a construction management fee. Aggregate fees earned by RMR from us, excluding incentive fees, for the years ended 2007, 2006 and 2005 were $29,937, $19,891 and $17,730, respectively. Incentive fees are paid in restricted common shares based on a formula. Incentive fees earned by RMR from us for 2007, 2006 and 2005 were $1,862, $1,487 and $1,397, respectively. We expect to issue 53,541 restricted common shares in satisfaction of the 2007 incentive fees in 2008. RMR also provides the internal audit function for us and for other publicly traded companies to which it provides management or other services. Our pro rata share of RMR’s costs in providing that function for the years ended 2007, 2006 and 2005 was $169, $173 and $112, respectively. As of December 31, 2007, RMR and its affiliates owned 344,856 of our common shares. RMR is beneficially owned by Barry M. Portnoy and his son, Adam D. Portnoy, our managing trustees.
In order to effect the TA Transaction, we entered into a transaction agreement effective as of January 29, 2007, with TA and RMR. That agreement provided for certain of the steps in the restructuring of the TravelCenters business and the spin off. In addition, under this agreement TA entered into a management and shared services agreement with RMR, TA granted to us a right of first refusal to purchase, lease, mortgage or otherwise finance any interest it owns or acquires in a travel center before it is purchased, sold, leased, mortgaged or otherwise financed with another party, and TA agreed to indemnify us for liabilities relating to its business and operations for periods before and after the spin off and for liabilities relating to the ownership and operation of the leased travel centers which arise during the term of our lease with TA.
F-17
11. Concentration
At December 31, 2007, our 477 properties were located in 44 states in the United States, Ontario, Canada and Puerto Rico. Between 5% and 12% of our properties, by investment, were located in each of California, Texas and Georgia. Our two hotels in Ontario, Canada and our hotel in Puerto Rico represent 1% and 2% of our hotels, by investment, respectively.
All of our managers and tenants are subsidiaries of other companies. The percentage of our minimum return payments and minimum rents, for each combination is shown below, as of December 31, 2007.
|
Manager / Tenant is a |
|
Number of |
|
Minimum Return / |
|
% of |
|
|
|
Subsidiary of: |
|
Properties |
|
Minimum Rent |
|
Total |
|
|
|
TA |
|
145 |
|
$ |
155,713 |
|
28% |
|
|
TA |
|
40 |
|
62,225 |
|
11% |
|
|
|
Host* |
|
53 |
|
58,379 |
|
10% |
|
|
|
InterContinental |
|
76 |
|
50,000 |
|
9% |
|
|
|
Marriott |
|
35 |
|
49,034 |
|
9% |
|
|
|
InterContinental |
|
14 |
|
42,873 |
|
8% |
|
|
|
InterContinental |
|
31 |
|
37,882 |
|
7% |
|
|
|
Barcelo Crestline** |
|
19 |
|
28,508 |
|
5% |
|
|
|
Hyatt |
|
24 |
|
23,050 |
|
4% |
|
|
|
InterContinental |
|
10 |
|
20,306 |
|
4% |
|
|
|
Host* |
|
18 |
|
19,287 |
|
3% |
|
|
|
Carlson |
|
12 |
|
11,890 |
|
2% |
|
|
|
Total |
|
477 |
|
$ |
559,147 |
|
100% |
|
*These hotels are subleased to Barceló Crestline and managed by Marriott.
**These hotels are managed by Marriott.
Minimum return and minimum rent payments due to us under some of our management agreements and leases are supported by guarantees. The guarantee provided by Hyatt with respect to the 24 hotels managed by Hyatt is limited to $50,000 ($36,678 remaining at December 31, 2007). The guarantee provided by Carlson with respect to the 12 hotels managed by Carlson is limited to $40,000 ($40,000 remaining at December 31, 2007). The combined guarantee provided by InterContinental for the 131 hotels managed or leased by InterContinental is limited to $125,000 ($115,922 remaining at December 31, 2007) and will expire if and when the hotels achieve stipulated operating results. The guarantees provided by TA are not limited and do not expire.
Each of our hotels is included in a combined management agreement or lease as described above. Operations at some of our managed hotels generated net financial results that were $9,780, $3,542 and $2,491 less than the guaranteed minimum returns due us in 2007, 2006 and 2005, respectively. These amounts have been paid by the hotel managers or their guarantors and are reflected as a reduction of hotel operating expenses in our consolidated statement of income.
F-18
12. Selected Quarterly Financial Data (Unaudited)
|
|
|
2007 |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
||||
|
Revenues |
|
$ |
290,668 |
|
$ |
333,741 |
|
$ |
334,310 |
|
$ |
326,760 |
|
|
Income from continuing operations |
|
40,314 |
|
51,227 |
|
52,822 |
|
83,454 |
|
||||
|
Income from discontinued operations |
|
3,058 |
|
3,055 |
|
97,038 |
|
— |
|
||||
|
Net income available for common shareholders |
|
39,013 |
|
46,812 |
|
142,390 |
|
75,984 |
|
||||
|
Income from continuing operations available for common shareholders per share (1) |
|
.40 |
|
.47 |
|
.48 |
|
.81 |
|
||||
|
Income from discontinued operations available for common shareholders per share (1) |
|
.03 |
|
.03 |
|
1.03 |
|
— |
|
||||
|
Net income available for common shareholders per share (1) |
|
.43 |
|
.50 |
|
1.52 |
|
.81 |
|
||||
|
Distributions per common share (2) |
|
.76 |
|
.76 |
|
.77 |
|
.77 |
|
||||
|
|
|
2006 (3) |
|
||||||||||
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
||||
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
||||
|
Revenues |
|
$ |
235,726 |
|
$ |
268,208 |
|
$ |
265,125 |
|
$ |
253,887 |
|
|
Income from continuing operations |
|
32,367 |
|
32,321 |
|
33,510 |
|
58,303 |
|
||||
|
Income from discontinued operations |
|
2,866 |
|
3,056 |
|
3,053 |
|
3,563 |
|
||||
|
Net income available for common shareholders |
|
33,319 |
|
33,463 |
|
34,649 |
|
59,952 |
|
||||
|
Income from continuing operations available for common shareholders per share (1) |
|
.42 |
|
.42 |
|
.43 |
|
.75 |
|
||||
|
Income from discontinued operations available for common shareholders per share (1) |
|
.04 |
|
.04 |
|
.04 |
|
.05 |
|
||||
|
Net income available for common shareholders per share (1) |
|
.46 |
|
.47 |
|
.47 |
|
.79 |
|
||||
|
Distributions per common share (2) |
|
.73 |
|
.74 |
|
.74 |
|
.74 |
|
||||
(1) The sum of per common share amounts for the four quarters differs from annual per share amounts due to the required method of computing weighted average number of shares in interim periods and rounding.
(2) Amounts represent distributions declared with respect to the periods shown. Distributions are generally paid in the quarterly period following the quarterly period to which they relate.
(3) Amounts previously reported have been adjusted to reflect the sale of a discontinued operation in July 2007 (see Note 9).
F-19
13. Segment Information
We have two reportable business segments: hotel investments and travel center investments. Prior to our acquisition of TravelCenters in January 2007, our only reportable segment was hotels.
|
|
|
Year Ended December 31, 2007 |
|
||||||||||
|
|
|
Hotels |
|
Travel |
|
Corporate |
|
Consolidated |
|
||||
|
Hotel operating revenues |
|
$ |
941,455 |
|
$ |
— |
|
$ |
— |
|
$ |
941,455 |
|
|
Minimum rent |
|
117,193 |
|
193,571 |
|
— |
|
310,764 |
|
||||
|
Percentage rent |
|
6,055 |
|
— |
|
— |
|
6,055 |
|
||||
|
FF&E reserve income |
|
22,286 |
|
— |
|
— |
|
22,286 |
|
||||
|
Interest income |
|
— |
|
— |
|
4,919 |
|
4,919 |
|
||||
|
Total revenues |
|
1,086,989 |
|
193,571 |
|
4,919 |
|
1,285,479 |
|
||||
|
Hotel operating expenses |
|
657,000 |
|
— |
|
— |
|
657,000 |
|
||||
|
Operating income |
|
429,989 |
|
193,571 |
|
4,919 |
|
628,479 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense |
|
— |
|
— |
|
140,517 |
|
140,517 |
|
||||
|
Depreciation and amortization expense |
|
147,401 |
|
69,287 |
|
— |
|
216,688 |
|
||||
|
General and administrative expense |
|
— |
|
— |
|
37,223 |
|
37,223 |
|
||||
|
TA spin off costs |
|
— |
|
— |
|
2,711 |
|
2,711 |
|
||||
|
Loss on asset impairment |
|
1,332 |
|
— |
|
— |
|
1,332 |
|
||||
|
Total expenses |
|
148,733 |
|
69,287 |
|
180,451 |
|
398,471 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income before income taxes |
|
281,256 |
|
124,284 |
|
(175,532 |
) |
230,008 |
|
||||
|
Income tax expense |
|
— |
|
— |
|
(2,191 |
) |
(2,191 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income (loss) from continuing operations |
|
$ |
281,256 |
|
$ |
124,284 |
|
$ |
(177,723 |
) |
$ |
227,817 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total assets |
|
$ |
3,247,770 |
|
$ |
2,378,651 |
|
$ |
52,886 |
|
$ |
5,679,307 |
|
F-20
Hospitality Properties Trust
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2007
(dollars in millions)
|
|
|
|
|
|
|
|
|
Costs |
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
Capitalized |
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
Initial |
|
Subsequent to |
|
Gross Amount at which |
|
|||||||||||||
|
|
|
|
|
Cost to Company |
|
Acquisition |
|
Carried at Close of Period |
|
|||||||||||||
|
|
|
|
|
|
|
Buildings & |
|
|
|
|
|
Buildings & |
|
|
|
|||||||
|
|
|
Encumbrances |
|
Land |
|
Improvements |
|
Improvements |
|
Land |
|
Improvements |
|
Total(1) |
|
|||||||
|
145 TravelCenters of America |
|
$ |
— |
|
$ |
586 |
|
$ |
885 |
|
$ |
51 |
|
$ |
596 |
|
$ |
926 |
|
$ |
1,522 |
|
|
40 Petro Stopping Centers |
|
— |
(2) |
229 |
|
401 |
|
— |
|
229 |
|
401 |
|
630 |
|
|||||||
|
71 Courtyards |
|
— |
|
127 |
|
643 |
|
40 |
|
126 |
|
684 |
|
810 |
|
|||||||
|
76 Candlewood Hotels |
|
4 |
|
86 |
|
457 |
|
2 |
|
86 |
|
459 |
|
545 |
|
|||||||
|
37 Residence Inn |
|
— |
|
69 |
|
334 |
|
13 |
|
69 |
|
347 |
|
416 |
|
|||||||
|
35 Staybridge Suites |
|
— |
|
91 |
|
353 |
|
4 |
|
91 |
|
357 |
|
448 |
|
|||||||
|
22 AmeriSuites/Hyatt Place |
|
— |
|
24 |
|
185 |
|
23 |
|
24 |
|
208 |
|
232 |
|
|||||||
|
5 InterContinental |
|
— |
|
32 |
|
196 |
|
76 |
|
32 |
|
272 |
|
304 |
|
|||||||
|
12 Crowne Plaza |
|
— |
|
67 |
|
251 |
|
8 |
|
67 |
|
259 |
|
326 |
|
|||||||
|
3 Marriott Full Service |
|
— |
|
14 |
|
90 |
|
4 |
|
14 |
|
94 |
|
108 |
|
|||||||
|
12 TownePlace Suites |
|
— |
|
17 |
|
78 |
|
1 |
|
17 |
|
79 |
|
96 |
|
|||||||
|
5 Radisson |
|
— |
|
7 |
|
81 |
|
4 |
|
7 |
|
85 |
|
92 |
|
|||||||
|
5 Country Inns & Suites |
|
— |
|
6 |
|
58 |
|
5 |
|
6 |
|
63 |
|
69 |
|
|||||||
|
3 Holiday Inn |
|
— |
|
10 |
|
24 |
|
14 |
|
10 |
|
38 |
|
48 |
|
|||||||
|
1 Park Plaza |
|
— |
|
1 |
|
16 |
|
— |
|
1 |
|
16 |
|
17 |
|
|||||||
|
2 SpringHill Suites |
|
— |
|
3 |
|
15 |
|
— |
|
3 |
|
15 |
|
18 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
2 AmeriSuites |
|
— |
|
1 |
|
10 |
|
1 |
|
1 |
|
11 |
|
12 |
|
|||||||
|
1 Park Plaza |
|
— |
|
1 |
|
5 |
|
4 |
|
1 |
|
9 |
|
10 |
|
|||||||
|
Total (477 properties) |
|
$ |
4 |
|
$ |
1,371 |
|
$ |
4,082 |
|
$ |
250 |
|
$ |
1,380 |
|
$ |
4,323 |
|
$ |
5,703 |
|
(1) Excludes $515 of personal property classified on our consolidated balance sheet as furniture, fixtures and equipment.
(2) Upon closing of our acquisition of Petro Holdings, the Petro debt was covenant defeased and funds were escrowed to redeem the Petro debt on February 15, 2008.
F-21
Hospitality Properties Trust
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2007
(dollars in millions)
|
|
|
|
|
|
|
|
|
Life on which |
|
|
|
|
|
|
|
|
|
|
|
Depreciation in |
|
|
|
|
|
|
|
|
|
|
|
Latest Income |
|
|
|
|
|
Accumulated |
|
Date of |
|
Date |
|
Statement is |
|
|
|
|
|
Depreciation(1) |
|
Construction |
|
Acquired |
|
Computed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145 Travel Centers of America |
|
$ |
(49 |
) |
1962 through 2005 |
|
2007 |
|
10 - 40 Years |
|
|
40 Petro Stopping Centers |
|
(13 |
) |
1975 through 2005 |
|
2007 |
|
10 - 40 Years |
|
|
|
71 Courtyards |
|
(176 |
) |
1987 through 2000 |
|
1995 through 2003 |
|
10 - 40 Years |
|
|
|
76 Candlewood Hotels |
|
(86 |
) |
1996 through 2000 |
|
1997 through 2003 |
|
10 - 40 Years |
|
|
|
37 Residence Inn |
|
(89 |
) |
1989 through 2002 |
|
1998 through 2005 |
|
10 - 40 Years |
|
|
|
35 Staybridge Suites |
|
(67 |
) |
1989 through 2002 |
|
1996 through 2006 |
|
10 - 40 Years |
|
|
|
22 AmeriSuites/Hyatt Place |
|
(44 |
) |
1992 through 2000 |
|
1997 through 2002 |
|
10 - 40 Years |
|
|
|
5 InterContinental |
|
(21 |
) |
1924 through 1989 |
|
2006 |
|
10 - 40 Years |
|
|
|
12 Crowne Plaza |
|
(15 |
) |
1971 through 1987 |
|
2006 |
|
10 - 40 Years |
|
|
|
3 Marriott Full Service |
|
(22 |
) |
1972 through 1995 |
|
1998 through 2001 |
|
10 - 40 Years |
|
|
|
12 TownePlace Suites |
|
(17 |
) |
1997 through 2000 |
|
1998 through 2001 |
|
10 - 40 Years |
|
|
|
5 Radisson |
|
(23 |
) |
1987 through 1990 |
|
1996 through 1997 |
|
10 - 40 Years |
|
|
|
5 Country Inns & Suites |
|
(16 |
) |
1987 through 1997 |
|
1996 and 2005 |
|
10 - 40 Years |
|
|
|
3 Holiday Inn |
|
(3 |
) |
1984 through 2001 |
|
2006 |
|
10 - 40 Years |
|
|
|
1 Park Plaza |
|
(5 |
) |
1987 through 1990 |
|
1996 |
|
10 - 40 Years |
|
|
|
2 SpringHill Suites |
|
(3 |
) |
1997 through 2000 |
|
2000 through 2001 |
|
10 - 40 Years |
|
|
|
Held for sale |
|
|
|
|
|
|
|
|
|
|
|
2 Amerisuites |
|
(3 |
) |
1992 through 2000 |
|
1997 through 2000 |
|
10 - 40 Years |
|
|
|
1 Park Plaza |
|
(2 |
) |
1988 |
|
1996 |
|
10 - 40 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (477 properties) |
|
$ |
(654 |
) |
|
|
|
|
|
|
(1) Excludes accumulated depreciation of $200 related to personal property classified on our consolidated balance sheet as furniture, fixtures and equipment.
F-22
HOSPITALITY PROPERTIES TRUST
NOTES TO SCHEDULE III
DECEMBER 31, 2007
(dollars in thousands)
(A) The change in total cost of properties for the period from January 1, 2005 to December 31, 2007, is as follows:
|
|
|
2007 |
|
2006 |
|
2005 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Balance at beginning of year |
|
$ |
3,627,587 |
|
$ |
3,255,353 |
|
$ |
2,817,608 |
|
|
|
|
|
|
|
|
|
|
|||
|
Additions: acquisitions and capital expenditures |
|
2,210,407 |
|
372,329 |
|
451,126 |
|
|||
|
Dispositions |
|
(135,438 |
) |
(95 |
) |
(13,381 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Balance at close of year |
|
$ |
5,702,556 |
|
$ |
3,627,587 |
|
$ |
3,255,353 |
|
(B) The change in accumulated depreciation for the period from January 1, 2005 to December 31, 2007, is as follows:
|
|
|
2007 |
|
2006 |
|
2005 |
|
|||
|
Balance at beginning of year |
|
$ |
531,792 |
|
$ |
448,392 |
|
$ |
379,594 |
|
|
|
|
|
|
|
|
|
|
|||
|
Additions: depreciation expense |
|
148,799 |
|
83,495 |
|
72,339 |
|
|||
|
Dispositions |
|
(26,367 |
) |
(95 |
) |
(3,541 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Balance at close of year |
|
$ |
654,224 |
|
$ |
531,792 |
|
$ |
448,392 |
|
(C) The net tax basis for federal income tax purposes of our real estate properties was $4,365,157 on December 31, 2007.
F-23
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 |
||
|
|
|
||
|
|
By: |
/s/ John G. Murray |
|
|
|
|
John G. Murray |
|
|
|
|
President and Chief Operating Officer |
|
|
Dated: |
February 28, 2008 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
/s/ John G. Murray |
|
President and |
|
February 28, 2008 |
|
John G. Murray |
|
Chief Operating Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Mark L. Kleifges |
|
Treasurer and Chief |
|
February 28, 2008 |
|
Mark L. Kleifges |
|
Financial Officer |
|
|
|
|
|
(principal financial officer |
|
|
|
|
|
and principal accounting officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Frank J. Bailey |
|
Trustee |
|
February 28, 2008 |
|
Frank J. Bailey |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ John L. Harrington |
|
Trustee |
|
February 28, 2008 |
|
John L. Harrington |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ William A. Lamkin |
|
Trustee |
|
February 28, 2008 |
|
William A. Lamkin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Adam D. Portnoy |
|
Trustee |
|
February 28, 2008 |
|
Adam D. Portnoy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Barry M. Portnoy |
|
Trustee |
|
February 28, 2008 |
|
Barry M. Portnoy |
|
|
|
|