Service Properties Trust - Quarter Report: 2012 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-11527

 

HOSPITALITY PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

617-964-8389

(Registrant’s Telephone Number, Including Area Code)

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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.

 

 

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

 

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of August 7, 2012: 123,563,407

 

 

 

HOSPITALITY PROPERTIES TRUST

 

FORM 10-Q

 

June 30, 2012

 

INDEX

 

		Page
PART I	Financial Information (unaudited)
	Item 1. Financial Statements
	Condensed Consolidated Balance Sheets — June 30, 2012 and December 31, 2011	1
	Condensed Consolidated Statements of Income and Comprehensive Income — Three and Six Months Ended June 30, 2012 and 2011	2
	Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2012 and 2011	3
	Notes to Condensed Consolidated Financial Statements	4
	Item 2.
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 3.
	Quantitative and Qualitative Disclosures About Market Risk	43
	Item 4.
	Controls and Procedures	44
	Warning Concerning Forward Looking Statements	45
	Statement Concerning Limited Liability	48
PART II	Other Information
	Item 1A.
	Risk Factors	49
	Item 2.
	Unregistered Sales of Equity Securities and Use of Proceeds	50
	Item 5.
	Other information	50
	Item 6.
	Exhibits	53
	Signatures	56

 

References in this Form 10-Q to “HPT”, “we”, “us” or “our” include Hospitality Properties Trust and its consolidated subsidiaries unless otherwise noted or the context indicates otherwise.

 

 

Part 1    Financial Information

 

Item 1.  Financial Statements

HOSPITALITY PROPERTIES TRUST

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in thousands, except share data)

 

		June 30,			December 31,
		2012			2011
ASSETS
Real estate properties, at cost:
Land		$	1,416,807		$	1,360,773
Buildings, improvements and equipment		5,084,160			4,879,908
		6,500,967			6,240,681
Accumulated depreciation		(1,446,968		)	(1,367,868		)
		5,053,999			4,872,813
Property held for sale		18,440			18,440
Cash and cash equivalents		24,771			8,303
Restricted cash (FF&E reserve escrow)		47,467			50,196
Other assets, net		218,302			183,821
		$	5,362,979		$	5,133,573
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility		$	—		$	149,000
Unsecured term loan		400,000			—
Senior notes, net of discounts		1,787,834			1,887,891
Convertible senior notes, net of discount		8,478			78,823
Security deposits		91,681			106,422
Accounts payable and other liabilities		118,798			103,668
Due to related persons		4,271			3,713
Dividends payable		8,006			4,754
Total liabilities		2,419,068			2,334,271
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; zero and 3,450,000 shares issued and outstanding, respectively, aggregate liquidation preference $86,250		—			83,306
Series C preferred shares; 7% cumulative redeemable; 12,700,000 shares issued and outstanding, aggregate liquidation preference $317,500		306,833			306,833
Series D preferred shares; 7 1/8% cumulative redeemable; 11,600,000 and zero shares issued and outstanding, respectively, aggregate liquidation preference $290,000		280,107			—
Common shares of beneficial interest, $.01 par value; 200,000,000 shares authorized; 123,563,407 and 123,521,535 shares issued and outstanding, respectively		1,236			1,235
Additional paid in capital		3,464,667			3,463,534
Cumulative net income		2,310,643			2,232,953
Cumulative other comprehensive income		3,684			1,605
Cumulative preferred distributions		(235,191		)	(213,281		)
Cumulative common distributions		(3,188,068		)	(3,076,883		)
Total shareholders’ equity		2,943,911			2,799,302
		$	5,362,979		$	5,133,573

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HOSPITALITY PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands, except per share data)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2012			2011			2012			2011
Revenues:
Hotel operating revenues		$	265,068		$	230,335		$	490,053		$	427,872
Rental income		73,688			78,240			146,948			157,773
FF&E reserve income		4,427			5,234			7,602			10,148
Total revenues		343,183			313,809			644,603			595,793
Expenses:
Hotel operating expenses		193,219			152,814			343,240			282,567
Depreciation and amortization		64,277			57,630			125,640			113,944
General and administrative		11,475			10,190			21,997			19,454
Acquisition related costs		504			763			1,564			763
Loss on asset impairment		—			7,263			889			7,263
Total expenses		269,475			228,660			493,330			423,991
Operating income		73,708			85,149			151,273			171,802
Interest income		51			14			117			43
Interest expense (including amortization of deferred financing costs and debt discounts of $1,376, $1,508, $2,954 and $3,009, respectively)		(32,714		)	(33,331		)	(66,806		)	(66,670		)
Equity in earnings of an investee		76			46			121			83
Income before income taxes		41,121			51,878			84,705			105,258
Income tax expense		(3,435		)	(235		)	(4,071		)	(567		)
Net income		37,686			51,643			80,634			104,691
Excess of liquidation preference over carrying value of preferred shares redeemed		—			—			(2,944		)	—
Preferred distributions		(10,722		)	(7,470		)	(21,910		)	(14,940		)
Net income available for common shareholders		$	26,964		$	44,173		$	55,780		$	89,751
Net income		$	37,686		$	51,643		$	80,634		$	104,691
Other comprehensive income (loss):
Unrealized gain (loss) on TravelCenters of America common shares		(3,225		)	(3,505		)	2,083			2,347
Equity interest in investee’s unrealized gains (losses)		(3		)	39			(4		)	43
Other comprehensive income (loss)		(3,228		)	(3,466		)	2,079			2,390
Comprehensive income		$	34,458		$	48,177		$	82,713		$	107,081
Weighted average common shares outstanding		123,560			123,450			123,541			123,447
Basic and diluted earnings per common share:
Net income available for common shareholders		$	0.22		$	0.36		$	0.45		$	0.73

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

		For the Six Months Ended June 30,
		2012			2011
Cash flows from operating activities:
Net income		$	80,634		$	104,691
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		125,640			113,944
Amortization of deferred financing costs and debt discounts as interest		2,954			3,009
Straight line rental income		(294		)	(2,418		)
Security deposits applied to payment shortfalls		(14,751		)	(24,675		)
FF&E reserve income and deposits		(10,785		)	(30,976		)
Loss on asset impairment		889			7,263
Equity in earnings of an investee		(121		)	(83		)
Other non-cash (income) expense, net		650			(1,325		)
Changes in assets and liabilities:
Increase in other assets		(9,529		)	(7,570		)
Increase in accounts payable and other liabilities		5,809			4,804
Increase (decrease) in due to related persons		(663		)	218
Cash provided by operating activities		180,433			166,882
Cash flows from investing activities:
Real estate acquisitions		(150,500		)	—
Real estate improvements		(110,830		)	(35,863		)
FF&E reserve fundings		(40,454		)	(6,535		)
Investment in TravelCenters of America common shares		—			(5,690		)
Cash used in investing activities		(301,784		)	(48,088		)
Cash flows from financing activities:
Proceeds from issuance of preferred shares, net		280,107			—
Proceeds from unsecured term loan		400,000			—
Redemption of preferred shares		(86,250		)	—
Repayment of senior notes		(100,829		)	—
Repurchase of convertible senior notes		(70,576		)	—
Repayment of mortgage note		—			(3,383		)
Borrowings under revolving credit facility		378,000			110,000
Repayments of revolving credit facility		(527,000		)	(101,000		)
Deferred financing costs		(2,538		)	—
Distributions to preferred shareholders		(21,910		)	(14,940		)
Distributions to common shareholders		(111,185		)	(111,100		)
Cash provided by (used in) financing activities		137,819			(120,423		)
Increase (decrease) in cash and cash equivalents		16,468			(1,629		)
Cash and cash equivalents at beginning of period		8,303			4,882
Cash and cash equivalents at end of period		$	24,771		$	3,253
Supplemental cash flow information:
Cash paid for interest		$	67,430		$	63,687
Cash paid for income taxes		1,532			1,354
Non-cash investing activities:
Property managers’ deposits in FF&E reserve		$	16,275		$	27,268
Property managers’ purchases with FF&E reserve		(64,458		)	(62,737		)
Non-cash financing activities:
Issuance of common shares		$	1,134		$	244

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Note 1.  Basis of Presentation

 

The accompanying condensed consolidated financial statements of Hospitality Properties Trust and its subsidiaries, or HPT, or we, our or us, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2011, as amended, or our 2011 Annual Report.  In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included in these condensed consolidated financial statements.  These condensed consolidated financial statements include the accounts of HPT and its subsidiaries, all of which are 100% owned directly or indirectly by HPT.  All material intercompany transactions and balances have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation.

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates.  Significant estimates in the condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets.

 

We have determined that each of our taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards CodificationTM.   We have concluded that we must consolidate each of our TRSs because we are the entity with the power to direct the activities that most significantly impact such VIEs’ performance and we have the obligation to absorb the majority of the potential variability in gains and losses of each VIE, with the primary focus on losses, and are, therefore, the primary beneficiary of each VIE.

 

Note 2.  New Accounting Pronouncements

 

In January 2012, we adopted FASB Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS.  This update clarified the application of existing fair value measurement requirements.  This update also required reporting entities to disclose additional information regarding fair value measurements categorized within Level 3 of the fair value hierarchy.  This update was effective for interim and annual reporting periods beginning after December 15, 2011.  The implementation of this update did not cause any material changes to the disclosures in, or presentation of, our condensed consolidated financial statements.

 

In January 2012, we adopted FASB Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income.  This update eliminates the prior option to report other comprehensive income and its components in the statement of shareholders’ equity.  This update is intended to enhance comparability between entities that report under GAAP and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity.  The update was effective for interim and annual reporting periods beginning after December 15, 2011.  The implementation of this update did not cause any changes to our condensed consolidated financial statements other than the presentation of the condensed consolidated statements of comprehensive income.

 

Note 3.  Revenue Recognition

 

We report hotel operating revenues for managed hotels in our Condensed Consolidated Statements of Income and Comprehensive Income. We generally recognize hotel operating revenues, consisting primarily of room and 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 to us, or additional returns, are generally determined annually. We recognize additional returns

 

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

due to us under our management agreements at year end when all contingencies are met and the income is earned. We had no deferred additional returns for the three and six months ended June 30, 2012 and 2011.

 

We recognize rental income from operating leases on a straight line basis over the term of the lease agreements.  Rental income includes ($60) and $294 for the three and six months ended June 30, 2012, respectively, of adjustments necessary to record rent on the straight line basis and $1,201 and $2,418 for the three and six months ended June 30, 2011, respectively, of adjustments necessary to record rent on the straight line basis.

 

We determine percentage rent due to us under our leases annually and recognize it at year end when all contingencies have been met and the rent is earned. We had deferred percentage rent of $1,253 and $2,562 for the three and six months ended June 30, 2012, respectively, and $395 and $936 for the three and six months ended June 30, 2011, respectively.

 

We own all the capital expenditure reserves, or FF&E reserves, for our hotels. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income. We report deposits by our third party hotel tenants into the escrow accounts as FF&E reserve income.

 

Note 4.  Per Common Share Amounts

 

We calculate per common share amounts using the weighted average number of common shares outstanding during the period. We had no dilutive common share equivalents at June 30, 2012 or 2011.

 

Note 5.  Shareholders’ Equity

 

Preferred Shares

 

In January 2012, we sold 11,600,000 Series D cumulative redeemable preferred shares at a price of $25.00 per share in a public offering for net proceeds of $280,108 (after underwriting and other offering expenses).  Each of our Series D preferred shares has a distribution rate of $1.78125 per annum, payable in equal quarterly amounts, and a liquidation preference of $25.00 per share ($290,000 in aggregate). The Series D preferred shares are redeemable for $25.00 per share each plus accrued and unpaid distributions at our option at any time on or after January 15, 2017, or at the option of the holders of the Series D preferred shares if a change of control occurs which results in our common shares (or the common securities of an acquiring or surviving entity) not being listed or quoted on the New York Stock Exchange, or NYSE, or certain other exchanges or quotation systems.  Also, upon the occurrence of such a change of control, holders of Series D preferred shares that are not redeemed may at their option convert those Series D preferred shares into our common shares (or certain alternative consideration) at a conversion rate generally based on their $25.00 liquidation preference and the market price of our common shares at the time of conversion, subject to a cap.

 

On February 13, 2012, we redeemed our 3,450,000 outstanding 8.875% Series B cumulative redeemable preferred shares at the stated liquidation preference price of $25.00 per share plus accrued and unpaid distributions to the date of redemption. We reduced net income available for common shareholders by $2,944, which represented the amount by which the liquidation preference for our Series B cumulative redeemable preferred shares that we redeemed exceeded our carrying amount for those preferred shares as of the date of redemption.

 

Distributions

 

On January 17, 2012, we paid a $0.5546875 per share distribution to our Series B preferred shareholders with respect to the period ended January 14, 2012.

 

On each of February 15, 2012 and May 15, 2012, we paid a $0.4375 per share distribution to our Series C preferred shareholders with respect to the periods ended February 14, 2012 and May 14, 2012, respectively.  On July 2, 2012, we declared a $0.4375 per share distribution to our Series C preferred shareholders of record on July 31, 2012, with respect to the period ending August 14, 2012. We expect to pay this amount on or about August 15, 2012.

 

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

On April 16, 2012 and July 16, 2012, we paid a $0.43046875 and $0.4453125, respectively, per share distribution to our Series D preferred shareholders with respect to the periods ended April 14, 2012 and July 14, 2012, respectively.

 

On each of February 23, 2012 and May 24, 2012, we paid a $0.45 per share distribution to our common shareholders.  On July 9, 2012, we declared a $0.45 per share distribution to our common shareholders of record on July 27, 2012.  We expect to pay this amount on or about August 22, 2012.

 

Common Share Issuances

 

As further described in Note 11, under the terms of our business management agreement with Reit Management & Research LLC, or RMR, on March 29, 2012 we issued 33,132 of our common shares of beneficial interest, $.01 par value per share, or our common shares, to RMR in payment of an incentive fee of approximately $741 for services rendered to us by RMR during 2011.

 

On May 9, 2012, pursuant to our equity compensation plan, we granted 2,000 common shares, valued at $25.58 per share, the closing price of our common shares on the NYSE on that day, to each of our five Trustees as part of their annual compensation.

 

Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) represents the unrealized gain (loss) on the TravelCenters of America LLC, or TA, shares we own and our share of the comprehensive income (loss) of Affiliates Insurance Company, or AIC.  See Note 11 for a description of these investments.

 

Note 6.  Indebtedness

 

We have a $750,000 unsecured revolving credit facility.  Our credit facility matures on September 7, 2015, and subject to our payment of an extension fee and meeting certain other conditions, we have the option to extend the facility for one year to September 7, 2016.  In addition, our revolving credit facility includes a feature under which maximum borrowings may be increased to up to $1,500,000 in certain circumstances.  Our revolving credit facility bears interest at LIBOR plus 130 basis points, subject to adjustments based on our senior unsecured debt ratings.  The weighted average interest rate for borrowings under our revolving credit facility was 1.58% for the six months ended June 30, 2012.  As of June 30, 2012, we had no amounts outstanding under our revolving credit facility and $750,000 available for borrowings.

 

On March 12, 2012, we entered into a five year $400,000 unsecured term loan.  The loan matures on March 13, 2017, and is prepayable, without penalty, at any time.  In addition, our term loan includes a feature under which maximum borrowings may be increased to up to $500,000 in certain circumstances.  Our term loan bears interest at LIBOR plus 145 basis points, subject to adjustment based on our senior unsecured debt ratings.  The weighted average annual interest rate for amounts outstanding on our term loan was 1.70% for the three months ended June 30, 2012 and the period from March 12, 2012 to June 30, 2012.

 

Our revolving credit facility agreement and our term loan agreement contain a number of covenants that restrict our ability to incur debts in excess of calculated amounts, restrict our ability to make distributions under certain circumstances and generally require us to maintain certain financial ratios.  We believe we were in compliance with the terms and conditions of our revolving credit facility agreement and our term loan agreement at June 30, 2012.

 

On March 20, 2012, we repurchased at par plus accrued and unpaid interest $70,576 of our 3.8% convertible senior notes due 2027 which were tendered by the holders of these notes for repurchase by us.

 

We separately account for the liability (debt) and equity (conversion option) components of our 3.8% convertible senior notes due 2027 to reflect the fair value of the liability component based on our non-convertible borrowing cost at the

 

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

issuance date. We measured the fair value of the debt components of the notes at issuance based on an estimated effective interest rate of 6.06% and amortized the resulting discount as an increase to interest expense over the expected life of the debt (assuming holders of the notes exercised in full their options to require us to repay the notes on March 20, 2012).

 

·                  The net carrying amount of our 3.8% convertible senior notes due 2027 was $8,478 and $78,823 as of June 30, 2012 and December 31, 2011, respectively.

·                  The unamortized discount on such notes was $0 and $231 as of June 30, 2012 and December 31, 2011, respectively. We amortized the discount through March 20, 2012, the first date on which the holders of our 3.8% convertible senior notes could require that we redeem them.

·                  Interest expense with respect to our 3.8% convertible senior notes for the three months ended June 30, 2012 and 2011 includes non-cash amortization of $0 and $398, respectively.  Interest expense for the six months ended June 30, 2012 and 2011 includes non-cash amortization of $270 and $790, respectively.

·                  The amount allocated as the equity component of the 3.8% convertible senior notes was $37,710 as of June 30, 2012 and December 31, 2011 and is included in additional paid in capital in our Condensed Consolidated Balance Sheets.

 

On April 11, 2012, we redeemed at par all of our outstanding 6.85% senior notes due 2012 for $100,829 plus accrued and unpaid interest.

 

Note 7.  Real Estate Properties

 

At June 30, 2012, we owned 474 properties consisting of 289 hotels and 185 travel centers that were operated under nine management agreements or leases and leased one hotel, which is operated under a separate management agreement.

 

At June 30, 2012, one of our hotels was held for sale.  In July 2012, we sold this hotel, our Marriott International, Inc. or Marriott, branded hotel in St. Louis, MO, for net proceeds of $28,850.  We expect to record a gain on sale of approximately $10,310, or $0.08 per share, in the third quarter of 2012.  See Note 13 for further information relating to our hotel held for sale.

 

During the six months ended June 30, 2012, we funded $151,284 of improvements to certain of our properties, which resulted in a $12,268 increase in our annual minimum returns and rents.

 

On January 31, 2012, we completed an acquisition of the entities which own the Royal Sonesta Hotel Boston in Cambridge, MA, or the Cambridge Hotel, (400 rooms) and lease the Royal Sonesta Hotel New Orleans in New Orleans, LA, or the New Orleans Hotel, (483 rooms) for a total cost of $153,062 ($150,500 cash consideration and $2,562 of assumed net liabilities), excluding related acquisition costs of $3,261.  We have included the results of these hotels in our condensed consolidated financial statements from the date of acquisition.  The pro forma impact of including the results of operations of the hotels from the beginning of the period is not material to our condensed consolidated financial statements.  The following table summarizes our allocation of the acquisition cost to estimated fair value of the assets we acquired and the liabilities we assumed:

 

Land		$	32,436
Building		78,764
Furniture, fixtures and equipment		19,536
Intangible assets (including the leasehold value of the New Orleans Hotel)		22,326
Goodwill		7,658
Other, net		(2,562		)
Deferred tax liability		(7,658		)
Total		$	150,500

 

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Simultaneous with this acquisition, we entered into management agreements with Sonesta International Hotels Corporation (formerly known as Sonesta Acquisition Corp.), or Sonesta.  See Notes 11 and 12 for further information about these transactions.

 

Note 8. Income Taxes

 

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and, accordingly 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 other 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.

 

During the three and six months ended June 30, 2012, we recognized current income tax expense of $3,854 and $4,826, respectively, which includes $1,836 and $2,331, respectively, of federal taxes, $17 and $52, respectively, of foreign taxes and $2,001 and $2,443, respectively, of certain state taxes that are payable without regard to our REIT status and TRS tax loss carry forwards. In addition, during the three and six months ended June 30, 2012, we recognized a deferred tax benefit of $419 and $755, respectively, related to a basis difference at our Puerto Rico and New Orleans hotels and Canadian tax losses available to offset future income.

 

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Note 9.  Segment Information

 

		For the Three Months Ended June 30, 2012
		Hotels			Travel Centers			Corporate			Consolidated
Hotel operating revenues		$	265,068		$	—		$	—		$	265,068
Rental income		22,096			51,592			—			73,688
FF&E reserve income		4,427			—			—			4,427
Total revenues		291,591			51,592			—			343,183
Hotel operating expenses		193,219			—			—			193,219
Depreciation and amortization		42,603			21,674			—			64,277
General and administrative		—			—			11,475			11,475
Acquisition related costs		504			—			—			504
Total expenses		236,326			21,674			11,475			269,475
Operating income (loss)		55,265			29,918			(11,475		)	73,708
Interest income		—			—			51			51
Interest expense		—			—			(32,714		)	(32,714		)
Equity in earnings of an investee		—			—			76			76
Income (loss) before income taxes		55,265			29,918			(44,062		)	41,121
Income tax expense		—			—			(3,435		)	(3,435		)
Net income (loss)		$	55,265		$	29,918		$	(47,497	)	$	37,686

 

		For the Six Months Ended June 30, 2012
		Hotels			Travel Centers			Corporate			Consolidated
Hotel operating revenues		$	490,053		$	—		$	—		$	490,053
Rental income		44,039			102,909			—			146,948
FF&E reserve income		7,602			—			—			7,602
Total revenues		541,694			102,909			—			644,603
Hotel operating expenses		343,240			—			—			343,240
Depreciation and amortization		82,562			43,078			—			125,640
General and administrative		—			—			21,997			21,997
Acquisition related costs		1,564			—			—			1,564
Loss on asset impairment		889			—			—			889
Total expenses		428,255			43,078			21,997			493,330
Operating income (loss)		113,439			59,831			(21,997		)	151,273
Interest income		—			—			117			117
Interest expense		—			—			(66,806		)	(66,806		)
Equity in earnings of an investee		—			—			121			121
Income (loss) before income taxes		113,439			59,831			(88,565		)	84,705
Income tax expense		—			—			(4,071		)	(4,071		)
Net income (loss)		$	113,439		$	59,831		$	(92,636	)	$	80,634

 

		As of June 30, 2012
		Hotels			Travel Centers			Corporate			Consolidated
Total assets		$	3,139,021		$	2,180,258		$	43,700		$	5,362,979

 

9

 

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Note 9.  Segment Information (continued)

 

		For the Three Months Ended June 30, 2011
		Hotels			Travel Centers			Corporate			Consolidated
Hotel operating revenues		$	230,335		$	—		$	—		$	230,335
Rental income		27,986			50,254			—			78,240
FF&E reserve income		5,234			—			—			5,234
Total revenues		263,555			50,254			—			313,809
Hotel operating expenses		152,814			—			—			152,814
Depreciation and amortization		37,338			20,292			—			57,630
General and administrative		—			—			10,190			10,190
Acquisition related costs		763			—			—			763
Loss on asset impairment		7,263			—			—			7,263
Total expenses		198,178			20,292			10,190			228,660
Operating income (loss)		65,377			29,962			(10,190		)	85,149
Interest income		—			—			14			14
Interest expense		—			—			(33,331		)	(33,331		)
Equity in earnings of an investee		—			—			46			46
Income (loss) before income taxes		65,377			29,962			(43,461		)	51,878
Income tax expense		—			—			(235		)	(235		)
Net income (loss)		$	65,377		$	29,962		$	(43,696	)	$	51,643

 

		For the Six Months Ended June 30, 2011
		Hotels			Travel Centers			Corporate			Consolidated
Hotel operating revenues		$	427,872		$	—		$	—		$	427,872
Rental income		57,687			100,086			—			157,773
FF&E reserve income		10,148			—			—			10,148
Total revenues		495,707			100,086			—			595,793
Hotel operating expenses		282,567			—			—			282,567
Depreciation and amortization		73,801			40,143			—			113,944
General and administrative		—			—			19,454			19,454
Acquisition related costs		763			—			—			763
Loss on asset impairment		7,263			—			—			7,263
Total expenses		364,394			40,143			19,454			423,991
Operating income (loss)		131,313			59,943			(19,454		)	171,802
Interest income		—			—			43			43
Interest expense		—			—			(66,670		)	(66,670		)
Equity in earnings of an investee		—			—			83			83
Income (loss) before income taxes		131,313			59,943			(85,998		)	105,258
Income tax expense		—			—			(567		)	(567		)
Net income (loss)		$	131,313		$	59,943		$	(86,565	)	$	104,691

 

		As of December 31, 2011
		Hotels			Travel Centers			Corporate			Consolidated
Total assets		$	2,905,065		$	2,202,199		$	26,309		$	5,133,573

 

10

 

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Note 10. Significant Tenant

 

TA is the lessee of 38% of our real estate properties, at cost, as of June 30, 2012.  The following table presents summary financial information for TA for the three and six months ended June 30, 2012, as reported in its Quarterly Report on Form 10-Q, or TA’s Quarterly Report:

 

		For the Three Months Ended
		June 30,
		2012			2011
Operations
Total revenues		$	2,041,507		$	2,094,957
Total cost of goods sold		1,747,284			1,818,581
Net income		29,852			21,828

 

		For the Six Months Ended
		June 30,
		2012			2011
Operations
Total revenues		$	4,036,376		$	3,877,071
Total cost of goods sold		3,498,801			3,371,212
Net income		15,667			5,256
Cash Flows
Net cash provided by (used in) operating activities		80,300			(6,932		)
Net cash used in investing activities		(68,046		)	(33,789		)
Net cash provided by (used in) financing activities		(1,120		)	52,112
Net increase in cash		11,131			11,415
Cash and cash equivalents at the beginning of the period		118,255			125,396
Cash and cash equivalents at the end of the period		129,386			136,811

 

		As of June 30,
		2012			2011
Financial Position
Current assets		$	512,273		$	515,147
Noncurrent assets		573,338			506,581
Current liabilities		344,831			310,299
Noncurrent liabilities		405,425			400,655
Total shareholders’ equity		335,355			310,774

 

The summary financial information of TA is presented to comply with applicable accounting regulations of the Securities and Exchange Commission, or the SEC.  References in these financial statements to TA’s Quarterly Report are included to show the source of the information only, and the information in TA’s Quarterly Report is not incorporated by reference into these financial statements.  See Note 11 for further information relating to our TA leases.

 

Note 11. Related Person Transactions

 

We have no employees.  Personnel and various services we require to operate our business are provided to us by RMR.  We have two agreements with RMR to provide management and administrative services to us: (1) a business management agreement and (2) a property management agreement.  Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, including TA and Sonesta.  One of our Managing Trustees, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR.  Our other Managing Trustee, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and an owner, President, Chief Executive Officer and a director of RMR.  Each of our executive officers is also an officer of RMR.  Certain of TA’s executive officers are officers of RMR.  Our Independent Trustees also serve as independent directors or independent trustees of

 

11