Service Properties Trust - Quarter Report: 2013 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, 2013

 

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)

 

 

Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458

(Address of Principal Executive Offices)  (Zip Code)

 

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 6, 2013: 139,747,424

 

 

 

 

 

HOSPITALITY PROPERTIES TRUST

 

FORM 10-Q

 

June 30, 2013

 

INDEX

 

		Page
PART I	Financial Information (unaudited)
	Item 1. Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets — June 30, 2013 and December 31, 2012	1
	Condensed Consolidated Statements of Income and Comprehensive Income — Three and Six Months Ended June 30, 2013 and 2012	2
	Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2013 and 2012	3
	Notes to Condensed Consolidated Financial Statements	4
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	37
	Item 4. Controls and Procedures	38
	Warning Concerning Forward Looking Statements	40
	Statement Concerning Limited Liability	43
PART II	Other Information
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45
	Item 6. Exhibits	46
	Signatures	48

 

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

 

 

 

 

Part 1    Financial Information

 

Item 1.  Financial Statements

 

HOSPITALITY PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands, except share data)

 

		June 30,			December 31,
		2013			2012
ASSETS
Real estate properties, at cost:
Land		$	1,469,913		$	1,453,399
Buildings, improvements and equipment		5,730,015			5,445,710
		7,199,928			6,899,109
Accumulated depreciation		(1,656,481		)	(1,551,160		)
		5,543,447			5,347,949
Cash and cash equivalents		200,737			20,049
Restricted cash (FF&E reserve escrow)		34,800			40,744
Other assets, net		260,890			226,383
		$	6,039,874		$	5,635,125
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility		$	90,000		$	320,000
Unsecured term loan		400,000			400,000
Senior notes, net of discounts		2,294,526			1,993,880
Convertible senior notes, net of discount		8,478			8,478
Security deposits		26,579			26,577
Accounts payable and other liabilities		120,498			132,032
Due to related persons		16,842			13,696
Dividends payable		6,664			6,664
Total liabilities		2,963,587			2,901,327
Commitments and contingencies
Shareholders’ equity:
Preferred shares of beneficial interest, no par value, 100,000,000 shares authorized:
Series C preferred shares; 7% cumulative redeemable; 6,700,000 shares issued and outstanding aggregate liquidation preference $167,500		161,873			161,873
Series D preferred shares; 7 1/8% cumulative redeemable; 11,600,000 shares issued and outstanding aggregate liquidation preference $290,000		280,107			280,107
Common shares of beneficial interest, $.01 par value; 200,000,000 shares authorized; 139,747,424 and 123,637,424 shares issued and outstanding, respectively		1,397			1,236
Additional paid in capital		3,851,825			3,458,144
Cumulative net income		2,457,735			2,384,876
Cumulative other comprehensive income		18,539			2,770
Cumulative preferred distributions		(269,620		)	(253,426		)
Cumulative common distributions		(3,425,569		)	(3,301,782		)
Total shareholders’ equity		3,076,287			2,733,798
		$	6,039,874		$	5,635,125

 

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,
		2013			2012			2013			2012
Revenues:
Hotel operating revenues		$	349,877		$	265,068		$	641,528		$	490,053
Rental income		61,856			73,688			124,068			146,948
FF&E reserve income		589			4,427			1,192			7,602
Total revenue		412,322			343,183			766,788			644,603
Expenses:
Hotel operating expenses		248,543			193,219			455,192			343,240
Depreciation and amortization		73,598			64,277			145,878			125,640
General and administrative		11,918			11,475			24,062			21,997
Acquisition related costs		1,814			504			2,090			1,564
Loss on asset impairment		2,171			—			2,171			889
Total expenses		338,044			269,475			629,393			493,330
Operating income		74,278			73,708			137,395			151,273
Interest income		60			51			79			117
Interest expense (including amortization of deferred financing costs and debt discounts of $1,524,$1,376, $3,036 and $2,954, respectively		(35,014		)	(32,714		)	(70,202		)	(66,806		)
Equity in earnings of an investee		79			76			155			121
Income before income taxes		39,403			41,121			67,427			84,705
Income tax benefit (expense)		5,950			(3,435		)	5,432			(4,071		)
Net income		45,353			37,686			72,859			80,634
Excess of liquidation preference over carrying value of preferred shares redeemed		—			—			—			(2,944		)
Preferred distributions		(8,097		)	(10,722		)	(16,194		)	(21,910		)
Net income available for common shareholders		$	37,256		$	26,964		$	56,665		$	55,780
Net income		$	45,353		$	37,686		$	72,859		$	80,634
Other comprehensive income (loss):
Unrealized gain on TravelCenters of America common shares		3,429			(3,225		)	15,849			2,083
Equity interest in investee’s unrealized losses		(73		)	(3		)	(81		)	(4		)
Other comprehensive income		3,356			(3,228		)	15,768			2,079
Comprehensive income		$	48,709		$	34,458		$	88,627		$	82,713
Weighted average common shares outstanding		139,743			123,560			132,624			123,541
Basic and diluted earnings per common shares:
Net income available for common shareholders		$	0.27		$	0.22		$	0.43		$	0.45

 

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

 

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HOSPITALITY PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

		For the Six Months Ended June 30,
		2013			2012
Cash flows from operating activities:
Net income		$	72,859		$	80,634
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		145,878			125,640
Amortization of deferred financing costs and debt discounts as interest		3,036			2,954
Straight line rental income		(98		)	(294		)
Security deposits applied to payment shortfalls		—			(14,751		)
FF&E reserve income and deposits		(14,311		)	(10,785		)
Loss on asset impairment		2,171			889
Equity in earnings of an investee		(155		)	(121		)
Deferred income taxes		(7,068		)	(419		)
Other non-cash (income) expense, net		(1,764		)	1,069
Changes in assets and liabilities:
Increase in other assets		(19,736		)	(9,529		)
Increase (decrease) in accounts payable and other liabilities		(2,473		)	5,809
Decrease in due to related persons		(6,435		)	(663		)
Cash provided by operating activities		171,904			180,433
Cash flows from investing activities:
Real estate acquisitions and deposits		(168,409		)	(150,500		)
Real estate improvements		(113,712		)	(110,830		)
FF&E reserve fundings		(29,720		)	(40,454		)
Cash used in investing activities		(311,841		)	(301,784		)
Cash flows from financing activities:
Proceeds from issuance of common shares, net		393,474			—
Proceeds from issuance of preferred shares, net		—			280,107
Proceeds from unsecured term loan		—			400,000
Proceeds from issuance of senior notes, net of discount		299,661			—
Redemption of preferred shares		—			(86,250		)
Repayment of senior notes		—			(100,829		)
Repurchase of convertible senior notes		—			(70,576		)
Borrowings under revolving credit facility		245,000			378,000
Repayments of revolving credit facility		(475,000		)	(527,000		)
Deferred financing costs		(2,529		)	(2,538		)
Distributions to preferred shareholders		(16,194		)	(21,910		)
Distributions to common shareholders		(123,787		)	(111,185		)
Cash provided by financing activities		320,625			137,819
Increase in cash and cash equivalents		180,688			16,468
Cash and cash equivalents at beginning of period		20,049			8,303
Cash and cash equivalents at end of period		$	200,737		$	24,771
Supplemental cash flow information:
Cash paid for interest		$	66,407		$	67,430
Cash paid for income taxes		1,944			1,532
Non-cash investing activities:
Property managers’ deposits in FF&E reserve		$	13,718		$	16,275
Property managers’ purchases with FF&E reserve		(49,382		)	(64,458		)
Non-cash financing activities:
Issuance of common shares		$	368		$	1,134

 

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 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, 2012, as amended, or our 2012 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.  The assets of our TRSs were $34,156 as of June 30, 2013 and consist primarily of amounts due from certain of our hotel managers and working capital advances to certain of our hotel managers.  These assets can be used to settle obligations of both us and our TRSs.  The liabilities of our TRSs were $26,431 as of June 30, 2013 and consist primarily of amounts payable to certain of our hotel managers.  Creditors have recourse to both us and our TRSs for these liabilities.

 

Note 2.  New Accounting Pronouncements

 

In January 2013, we adopted FASB Accounting Standards Update No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. This update gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. The update was effective for interim and annual reporting periods beginning after September 15, 2012 with early adoption permitted. The implementation of this update did not cause any material changes to the disclosures in, or the presentation of, our condensed consolidated financial statements.

 

In January 2013, we adopted FASB Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires companies to report, in one place, information about reclassifications out of accumulated other comprehensive income, or AOCI. Companies are also required to present details of reclassifications in the disclosure of change in AOCI balances. The update was effective for interim and annual reporting periods beginning after December 15, 2012 with early adoption permitted. The implementation of this update did not cause any material changes to the disclosures in, or the presentation of, our 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 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 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, 2013 and 2012.

 

We recognize rental income from operating leases on a straight line basis over the term of the lease agreements except for one lease in which there is uncertainty regarding the collection of future rent.  Rental income includes $36 and $98 for the three and six months ended June 30, 2013, respectively, of adjustments necessary to record rent on the straight line basis and ($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.

 

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 $672 and $1,282 for the three and six months ended June 30, 2013, respectively, and $1,253 and $2,562 for the three and six months ended June 30, 2012, 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 our common shares of beneficial interest, $.01 par value, or our common shares, outstanding during the period. We had no dilutive common share equivalents at June 30, 2013 or 2012.

 

Note 5.  Shareholders’ Equity

 

Distributions

 

On each of January 15, 2013, April 15, 2013 and July 15, 2013, we paid a $0.4453125 per share distribution to our Series D preferred shareholders with respect to periods ended January 14, 2013, April 14, 2013 and July 14, 2013, respectively.

 

On each of February 15, 2013 and May 15, 2013, we paid a $0.4375 per share distribution to our Series C preferred shareholders with respect to the periods ended February 14, 2013 and May 14, 2013, respectively.

 

On each of February 22, 2013 and May 24, 2013, we paid a $0.47 per share distribution to our common shareholders.  On July 10, 2013, we declared a $0.47 per share distribution to our common shareholders of record on July 26, 2013. We expect to pay this amount on or about August 23, 2013.

 

Common Share Issuances

 

On March 22, 2013, we sold 16,100,000 of our common shares at a price of $25.55 per share in a public offering for net proceeds of $393,474 after underwriting discounts and other offering expenses.

 

On May 15, 2013, we granted 2,000 of our common shares valued at $30.69 per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day, to each of our five Trustees as part of their annual compensation.

 

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Preferred Share Redemption

 

On July 1, 2013, we redeemed our 6,700,000 outstanding 7.00% Series C cumulative redeemable preferred shares at the standard liquidation preference of $25 per share plus accrued and unpaid distributions to the date of redemption.  We expect to recognize a loss in the 2013 third quarter of $5,627 on the excess of the liquidation preference of the redeemed shares over their carrying amount.

 

Other Comprehensive Income

 

Other comprehensive income represents the unrealized gain on the TravelCenters of America LLC, or TA, shares we own and our share of the comprehensive income of Affiliates Insurance Company, or AIC.  See Note 10 for further information regarding these investments.

 

Note 6.  Indebtedness

 

We have a $750,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is September 7, 2015 and, subject to the payment of an extension fee and meeting certain other conditions, includes an option for us to extend the stated maturity date by 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. Borrowings under our revolving credit facility bear interest at a rate of LIBOR plus a premium of 130 basis points. We also pay a facility fee of 30 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of June 30, 2013, the interest rate payable on borrowings under our revolving credit facility was 1.50%.  The weighted average annual interest rate for borrowings under our revolving credit facility was 1.50% and 1.51% for the three and six months ended June 30, 2013, respectively, and 1.58% for the six months ended June 30, 2012.  We had no amounts outstanding under our revolving credit facility during the three months ended June 30, 2012. As of June 30, 2013, we had $90,000 outstanding and $660,000 available under our revolving credit facility.

 

We have a $400,000 unsecured term loan.  Our term 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 a rate of LIBOR plus a premium, which was 145 basis points as of June 30, 2013. As of June 30, 2013, the interest rate for the amount outstanding under our term loan was 1.65%.  The weighted average interest rate for the amount outstanding under our term loan was 1.66% for both the three and six months ended June 30, 2013 and 1.70% for both the three months ended June 30, 2012 and the period March 12, 2012 (the date we entered into the term loan agreement) to June 30, 2012, respectively.

 

Our credit facility agreement and our term loan agreement provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including a change of control of us and the termination of our business management agreement with Reit Management & Research LLC, or RMR.  Our revolving credit facility agreement and our term loan agreement contain a number of covenants that restrict our ability to incur debt 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, 2013.

 

On June 6, 2013, we issued $300,000 of 4.5% unsecured senior notes due 2023 in a public offering for net proceeds of $297,132 after underwriting and other offering expenses.

 

Note 7.  Real Estate Properties

 

At June 30, 2013, we owned 475 properties consisting of 290 hotels and 185 travel centers that were operated under eleven management or lease agreements.

 

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

During the six months ended June 30, 2013, we funded $143,608 of improvements to certain of our properties that pursuant to the terms of our management and lease agreements with our hotel managers and tenants resulted in increases in our contractual annual minimum returns and rents of $11,534.

 

On May 17, 2013, we acquired a 426 room full service hotel located in Duluth, GA for $29,700, excluding related acquisition costs of $241.  We accounted for this transaction as a business combination.  The following table summarizes our preliminary allocation of the acquisition cost to estimated fair value of the assets we acquired.  This allocation is based on preliminary estimates and may change upon the completion of a third party appraisal.

 

Land		$	2,000
Building		24,300
Furniture, fixtures and equipment		3,400
		$	29,700

 

On June 28, 2013, we acquired the fee interest in the Royal Sonesta Hotel New Orleans in New Orleans, LA, or the New Orleans Hotel, for $120,500, excluding acquisition costs, from the third party owner from which we previously leased this hotel.  We accounted for this transaction as an acquisition of assets. In connection with this acquisition, we incurred acquisition costs of $309 which we capitalized and we reclassified $18,958 of intangible assets related to our previous leasehold interest in the hotel to land and building.  The following table summarizes our allocation of the acquisition cost to estimated fair value of the assets we acquired.

 

Land		$	12,564
Building		108,245
		$	120,809

 

Simultaneously with this acquisition, the lease with the third party terminated and we entered into an amended and restated management agreement with Sonesta International Hotels Corporation, or Sonesta. See Notes 10 and 11 for further information about this agreement.

 

On July 1, 2013, we acquired the fee interest in a travel center in Montgomery, NY we previously leased from a third party and subleased to TA.  We also acquired land parcels adjacent to three of our other travel centers and leased these to TA.  The aggregate consideration for these transactions was $6,323.  See Note 10 for further information about these transactions.

 

On August 1, 2013, we acquired a 219 room full service hotel in Florham Park, NJ for $52,750, excluding closing costs. See Note 11 for further information about this transaction.

 

On February 27, 2013, we announced that we had entered a letter of intent with NH Hoteles, S.A., or NH Hoteles, for investments with NH Hoteles in Latin America, Europe and the United States totaling approximately $375,000.  On April 24, 2013, NH Hoteles notified us that it was unable to obtain the necessary bank approvals to allow it to complete the transaction as outlined in the letter of intent.  We subsequently held discussions with NH Hoteles about possible modifications or alternatives to the proposed transaction originally announced but were unable to reach agreement and are currently no longer pursuing this transaction.

 

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

 

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

requirements.  We are subject to income tax in Canada, Puerto Rico and certain states despite our REIT status.  Also, we lease our managed hotels to our wholly owned TRSs that, unlike most of our other subsidiaries, file a separate consolidated federal corporate income tax return and are subject to federal, state and foreign income taxes.  Our consolidated income tax provision included in our condensed consolidated statements of income and comprehensive income includes the income tax provision 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, 2013, we recognized a current income tax expense of $907 and $1,637, respectively, which includes $547 and $897, respectively, of federal taxes, $31 and $62, respectively, of foreign taxes and $329 and $678, 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, 2013, we recognized a deferred tax benefit of $6,857 and $7,069, respectively, related primarily to the restructuring of certain of our TRSs.

 

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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, 2013
		Hotels			Travel Centers			Corporate			Consolidated
Hotel operating revenues		$	349,877		$	—		$	—		$	349,877
Rental income		7,908			53,948			—			61,856
FF&E reserve income		589			—			—			589
Total revenues		358,374			53,948			—			412,322
Hotel operating expenses		248,543			—			—			248,543
Depreciation and amortization		49,550			24,048			—			73,598
General and administrative		—			—			11,918			11,918
Acquisition related costs		1,814			—			—			1,814
Loss on asset impairment		2,171			—			—			2,171
Total expenses		302,078			24,048			11,918			338,044
Operating income (loss)		56,296			29,900			(11,918		)	74,278
Interest income		—			—			60			60
Interest expense		—			—			(35,014		)	(35,014		)
Equity in earnings of an investee		—			—			79			79
Income (loss) before income taxes		56,296			29,900			(46,793		)	39,403
Income tax benefit		—			—			5,950			5,950
Net income (loss)		$	56,296		$	29,900		$	(40,843	)	$	45,353

 

		For the Six Months Ended June 30, 2013
		Hotels			Travel Centers			Corporate			Consolidated
Hotel operating revenues		$	641,528		$	—		$	—		$	641,528
Rental income		16,630			107,438			—			124,068
FF&E reserve income		1,192			—			—			1,192
Total revenues		659,350			107,438			—			766,788
Hotel operating expenses		455,192			—			—			455,192
Depreciation and amortization		98,227			47,651			—			145,878
General and administrative		—			—			24,062			24,062
Acquisition related costs		2,090			—			—			2,090
Loss on asset impairment		2,171			—			—			2,171
Total expenses		557,680			47,651			24,062			629,393
Operating income (loss)		101,670			59,787			(24,062		)	137,395
Interest income		—			—			79			79
Interest expense		—			—			(70,202		)	(70,202		)
Equity in earnings of an investee		—			—			155			155
Income (loss) before income taxes		101,670			59,787			(94,030		)	67,427
Income tax benefit		—			—			5,432			5,432
Net income (loss)		$	101,670		$	59,787		$	(88,598	)	$	72,859

 

		As of June 30, 2013
		Hotels			Travel Centers			Corporate			Consolidated
Total assets		$	3,591,942		$	2,225,545		$	222,387		$	6,039,874

 

9

 

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

		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 December 31, 2012
		Hotels			Travel Centers			Corporate			Consolidated
Total assets		$	3,384,221		$	2,209,970		$	40,934		$	5,635,125

 

Note 10. Related Person Transactions

 

Relationship with TA

 

TA is our former 100% owned subsidiary and our largest tenant, and we are TA’s largest shareholder.  TA was created as a separate public company in 2007 as a result of its spin off from us.  As of June 30, 2013, we owned 2,540,000 common shares of TA, representing approximately 8.6% of TA’s outstanding common shares.  Mr. Barry Portnoy, one of our Managing Trustees, is a managing director of TA.  Mr. Thomas O’Brien, an officer of RMR and a former officer

 

10

 

 

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

of us prior to the TA spin off, is President and Chief Executive Officer and the other managing director of TA.  Mr. Arthur Koumantzelis, who was one of our Independent Trustees prior to the TA spin off, serves as an independent director of TA.  RMR provides management services to both us and TA.

 

TA is the lessee of 37% of our real estate properties, at cost, as of June 30, 2013.  Additional financial information about TA may be found on the Securities and Exchange Commission, or the SEC’s, website by entering TA’s name at http://www.sec.gov/edgar/searchedgar/companysearch.html.  Reference to TA’s financial information on this external website is presented to comply with applicable accounting regulations of the SEC.  Except for such financial information contained therein as is required to be included herein under such regulations, TA’s public filings and other information located in external websites are not incorporated by reference into these financial statements.   See below for further information relating to our TA leases.

 

TA has two leases with us, the TA No. 1 lease and the TA No. 2 lease, pursuant to which TA leases 185 travel centers from us.  The TA No. 1 lease is for 145 travel centers that TA operates under the “TravelCenters of America” or “TA” brand names.  The TA No. 2 lease is for 40 travel centers that TA operates under the “Petro” brand name.  The TA No. 1 lease expires on December 31, 2022.  The TA No. 2 lease expires on June 30, 2024, and may be extended by TA for up to two additional periods of 15 years each.  Both of these leases require TA to: (1) make payments to us of minimum rents; (2) pay us percentage rent equal to 3% of non-fuel revenues and 0.3% of fuel revenues above applicable base year revenues subject to certain limitations (with the first $2,500 of percentage rents under the TA No. 2 lease waived by us); (3) pay us at lease expiration an amount equal to an estimate of the cost of removing underground storage tanks on our leased sites and (4) maintain the leased travel centers, including structural and non-structural components.  In addition to minimum and percentage rent, TA is obligated to pay us ground rent of approximately $5,150 per year under the TA No. 1 lease.  Previously deferred rent due from TA of $107,085 and $42,915 is due in December 2022 and June 2024, respectively.  We have not recognized any of the deferred rent as rental income or as rents receivable due to uncertainties regarding future collection.

 

We recognized rental income of $53,948 and $51,592 for the three months ended June 30, 2013 and 2012, respectively, and $107,438 and $102,909 for the six months ended June 30, 2013 and 2012, respectively, under our leases with TA.  Rental income for the three and six months ended June 30, 2013 and 2012 includes $432 and $899 and ($69) and $287, respectively, of adjustments necessary to record the scheduled rent increase on our TA No. 1 lease and the estimated future payment to us by TA for the cost of removing underground storage tanks on a straight line basis.  As of June 30, 2013 and December 31, 2012, we had accruals for unpaid amounts of $30,650 and $29,300, respectively, owed to us by TA, excluding any deferred rents, which accrued amounts are included in other assets on our condensed consolidated balance sheets.  We had deferred percentage rent under our TA No. 1 lease of $672 and $471 for the three months ended June 30, 2013 and 2012, respectively, and $1,282 and $1,200 for the six months ended June 30, 2013 and 2012, respectively.  We determine percentage rent due under our TA No. 1 lease annually and recognize it at year end when all contingencies are met.

 

Under the TA No. 1 and No. 2 leases, TA may request that we fund approved amounts for renovations, improvements and equipment at leased travel centers in return for increases in TA’s minimum annual rent.  We are not required to fund these improvements and TA is not required to sell them to us.  For the six months ended June 30, 2013, we funded $45,229 for capital improvements purchased from TA under this lease provision; and, as a result, TA’s minimum annual rent payable to us increased by approximately $3,844.

 

On April 15, 2013, TA entered an agreement with Shell Oil Products US, or Shell, pursuant to which Shell has agreed to construct a network of natural gas fueling lanes at up to 100 of TA’s travel centers located along the U.S. interstate highway system, including travel centers TA leases from us.  In connection with that agreement, on April 15, 2013, we and TA amended our leases to specify the economic equivalent for natural gas sales to diesel fuel sales for the calculation of percentage rent payable to us under the leases, with the intended effect that the amount of percentage rent be unaffected by the source of fuel sold, whether diesel fuel or natural gas.  That amendment also made certain administrative changes.  Also on that date, in order to facilitate TA’s agreement with Shell, we entered into a subordination, non-disturbance and attornment agreement with Shell, whereby we agreed to recognize Shell’s license

 

11

 

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

and other rights with respect to the natural gas fueling lanes at our travel centers leased to TA on certain conditions and in certain circumstances.

 

On July 1, 2013, we purchased land that we previously leased from a third party and subleased to TA under the TA No. 1 lease.  Effective as of that date, rents due to that third party and TA’s reimbursement of those rents to us under the terms of the TA No. 1 lease ceased.  Also on that date, we and TA amended the TA No. 1 lease to reflect our direct lease to TA of that land and certain minor properties adjacent to existing travel centers included in the TA No. 1 lease that we purchased and to increase the annual rent payable by TA to us by 8.5% of our total investment in these properties, or $537.

 

Relationship with RMR

 

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, which relates to our business generally, and (2) a property management agreement, which relates to the property level operations of the office building component of only one property in Baltimore, MD, which property is adjacent to a Royal Sonesta hotel.

 

Under our business management agreement with RMR, we acknowledge that RMR also provides 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, including Mr. Ethan Bornstein, who is the son-in-law of Mr. Barry Portnoy and the brother-in-law of Mr. Adam Portnoy.  Certain of TA’s and Sonesta’s executive officers are officers of RMR.  Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Mr. Barry Portnoy serves as a managing director or managing trustee of those companies, including TA, and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies, but not TA.  In addition, officers of RMR serve as officers of those companies.

 

Pursuant to our business management and property management agreements with RMR, we recognized aggregate business management fees and property management fees of $10,050 and $9,934 for the three months ended June 30, 2013 and 2012, respectively, and $19,967 and $18,582 for the six months ended June 30, 2013 and 2012, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated financial statements.

 

Relationship with Sonesta

 

On January 31, 2012, pursuant to a series of transactions, we effectively acquired entities that owned the Royal Sonesta Hotel Boston in Cambridge, MA, or the Cambridge Hotel, and had leasehold interests in the New Orleans Hotel, for approximately $150,500.  On that date, in connection with these transactions, we entered into hotel management agreements with Sonesta to manage the Cambridge Hotel and the New Orleans Hotel.  Since that time, we have rebranded additional hotels to Sonesta brands and management.  We currently lease all hotels that we own and which are managed by Sonesta to one of our TRSs.

 

In April 2012, we entered into a pooling agreement with Sonesta that combined our management agreements with Sonesta for hotels that we owned for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and the calculation of minimum returns due to us.  We previously referred to this agreement and combination of hotels and management agreements as our Sonesta No. 1 agreement.  The management agreements for all of our hotels managed by Sonesta, excluding, until June 28, 2013, the New Orleans Hotel, were included in the Sonesta No. 1 agreement.  On June 28, 2013, we acquired the fee interest in the New Orleans Hotel from the third party owner from which we previously leased that hotel and, as a result, the lease with the third party terminated. Simultaneous with this acquisition, we and Sonesta amended and restated the prior management agreement we had with Sonesta for this hotel.  The terms of the amended and restated management agreement are substantially the

 

12

 

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

same as those contained in our other management agreements with Sonesta relating to full service hotels and this management agreement was added to our pooling agreement with Sonesta.  We now refer to the pooling agreement and combination of our 22 Sonesta branded hotels and management agreements as our Sonesta agreement.  See Note 11 for further information about our management agreements with Sonesta.

 

In May 2013, we acquired a full service hotel in Duluth, GA and this hotel has been branded a Sonesta hotel, Sonesta Gwinnett Place.  Sonesta is managing this hotel pursuant to a hotel management agreement on terms consistent with our other applicable hotel management agreements with Sonesta.  This hotel management agreement has been added to the Sonesta agreement.  We expect to invest approximately $4,600 to renovate this hotel to Sonesta brand standards.

 

Pursuant to our management agreements with Sonesta, we incurred management, system and reservation fees payable to Sonesta of $2,379 and $1,173 for the three months ended June 30, 2013 and 2012, respectively, and $3,851 and $1,633 for the six months ended June 30, 2013 and 2012, respectively.  These amounts are included in hotel operating expenses in our condensed consolidated statements of income and comprehensive income.  In addition, we also incurred procurement and construction supervision fees payable to Sonesta in connection with capital expenditures at our hotels managed by Sonesta of $1,141 and zero dollars for the three months ended June 30, 2013 and 2012, respectively, and $1,623 and zero dollars for the six months ended June 30, 2013 and 2012, respectively.  These amounts have been capitalized in our condensed consolidated balance sheets.  Under our hotel management agreements with Sonesta, routine property maintenance, which is expensed, is an operating expense of the hotels and repairs and periodic renovations, which are capitalized, are funded by us, except in the case of the New Orleans Hotel for capital expenditures incurred prior to June 28, 2013, which were borne in large part by the lessor.

 

The stockholders of Sonesta are Mr. Barry Portnoy and Mr. Adam Portnoy, who are our Managing Trustees, and they also serve as directors of Sonesta.  In addition, RMR also provides certain services to Sonesta.

 

Relationship with AIC

 

We, RMR, TA and five other companies to which RMR provides management services each currently own 12.5% of AIC, an Indiana insurance company.  All of our Trustees, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC.  RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC.  As of June 30, 2013, we have invested $5,209 in AIC since its formation in November 2008.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC.  Our investment in AIC had a carrying value of $5,703 and $5,629 as of June 30, 2013 and December 31, 2012, respectively, which amounts are included in other assets on our condensed consolidated balance sheets.  We recognized income of $79 and $76 for the three months ended June 30, 2013 and 2012, respectively, and $155 and $121 for the six months ended June 30, 2013 and 2012, respectively, related to our investment in AIC.  We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2013 for a one year term and we were charged a premium, including taxes and fees, of $6,842 in connection with that renewal, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in this program.  We periodically consider the possibilities for expanding our insurance relationships with AIC to include other types of insurance and may in the future participate in additional insurance offerings AIC may provide or arrange.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro rata share of any profits of this insurance business.

 

Note 11. Hotel Management Agreements and Leases

 

Marriott No. 1 agreement. Our lease with Host Hotels & Resorts, Inc., or Host, for 53 hotels which we have historically referred to as our Marriott No. 1 agreement expired on December 31, 2012. As required upon the expiration of the

 

13

 

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

agreement, we paid the $50,540 security deposit we held to Host. Effective January 1, 2013, we leased these hotels to one of our TRSs and continued the previously existing hotel brand and management agreements with Marriott International Inc., or Marriott. This management agreement expires in 2024. Because we no longer hold a security deposit for this agreement, the minimum returns we receive under this agreement will be limited to available hotel cash flow after payment of operating expenses.

 

Marriott No. 234 agreement.  During the three and six months ended June 30, 2013, the payments we received under our Marriott No. 234 agreement, which requires annual minimum returns to us of $104,438, were $2,584 and $4,288 less than the minimum amounts contractually required, respectively.  Pursuant to our Marriott No. 234 agreement, Marriott provided us with a limited guarantee for shortfalls up to 90% of our minimum returns through 2019.  During the three months ended June 30, 2013, the amount available under Marriott’s guaranty was replenished by $5,388 of cash flows from these hotels in excess of the guaranteed portion of our minimum returns.  Marriott was not required to make any guarantee payments during the six months ended June 30, 2013 because the hotels generated cash flows in excess of the guaranty threshold amount (90% of the minimum returns due to us).  The available balance of this guaranty was $30,707 as of June 30, 2013. Also, during the period from June 30, 2013 to August 6, 2013, the payments we received for these hotels were $1,729 less than the contractual minimum returns due to us.

 

We currently expect to fund $19,200 of capital improvements during the remainder of 2013 to complete renovations at certain of the hotels included in our Marriott No. 234 agreement. We funded $28,900 during the six months ended June 30, 2013. As we fund these improvements, the annual minimum returns payable to us increase by 9% of the amounts funded.

 

InterContinental agreement.  During the three months ended June 30, 2013, the payments we received under our agreement with InterContinental Hotels Group, plc, or InterContinental, covering 91 hotels and requiring annual minimum returns to us of $135,159, were $5,917 more than the minimum amounts contractually required.  We replenished the available security deposit with the $5,917 of excess payments to recover payment shortfalls applied to the security deposit during the first quarter of 2013.  During the six months ended June 30, 2013 we have been paid all of our minimum returns due for the period.  The available balance of this security deposit was $26,466 as of June 30, 2013.  Also, during the period from June 30, 2013 to August 6, 2013, the payments we received under our InterContinental agreement were $37 less than the minimum amounts contractually required.  We applied the available security deposit to cover these shortfalls.  The remaining balance of the security deposit was $26,429 as of August 6, 2013.

 

When we reduce the amounts of the security deposits we hold for this agreement or any other operating agreements for payment deficiencies, we record income equal to the amounts by which this deposit is reduced up to the minimum return or minimum rent due to us. However, reducing the security deposits does not result in additional cash flow to us of the deficiency amounts, but reducing amounts of security deposits may reduce the refunds due to the respective lessees or managers who have provided us with these deposits upon expiration of the respective lease or management agreement.  The security deposits are non-interest bearing and are not held in escrow.  Under all of our hotel contracts that include a security deposit, any amount of the security deposits which are applied to payment deficits may be replenished from future cash flows from the applicable hotel operations pursuant to the terms of the respective contracts.

 

We currently expect to fund $63,000 of capital improvement during the remainder of 2013 to complete renovations at certain of the hotels included in our InterContinental agreement.  We did not make any fundings during the six months ended June 30, 2013.  As we fund these improvements, the annual minimum returns payable to us increase by 8% of the amounts funded.

 

Sonesta agreement.  Our management agreement with Sonesta provides that we are paid a fixed minimum return equal to 8% of our invested capital, as defined in the management agreement, if gross revenues of the hotels, after payment of hotel operating expenses and base fees to Sonesta, are sufficient to do so.  In addition to recurring capital expenditures, we currently expect to fund an aggregate of $200,000 for rebranding, renovations and other improvements in 2013 and 2014 to these hotels.  We funded $47,715 of this amount during the six months ended June 30, 2013.  The annual

 

14

 

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

minimum returns due to us under the Sonesta agreement will increase by 8% to the extent amounts funded for these improvements exceed threshold amounts, as defined.

 

We do not have any security deposits or guarantees for our hotels managed by Sonesta.  Sonesta’s incentive management fees, but not its other fees, are only earned after we receive our minimum returns, and we may cancel these management agreements if approximately 75% of our minimum returns are not paid for certain periods.  Accordingly, the returns we receive from hotels managed by Sonesta is limited to available hotel cash flow after payment of operating expenses.

 

See Note 10 for further information regarding our relationship with Sonesta.

 

Wyndham agreement.  On August 1, 2013, we acquired a full service hotel in Florham Park, NJ for $52,750, excluding the closing costs, and added it to our Wyndham Worldwide Corporation, or Wyndham, agreement. Our annual minimum returns under the Wyndham agreement increased by $4,220 and the limited guaranty provided by Wyndham increased to $35,656 upon closing of this hotel acquisition (and the annual maximum guarantee payment increased to $17,828).

 

We currently expect to fund $75,590 of capital improvements in 2013 to complete renovations at certain of the hotels included in our Wyndham agreement, including $10,000 related to the Florham Park, NJ hotel described above. We funded $19,142 of this amount during the six months ended June 30, 2013. As we fund these improvements, the annual minimum returns payable to us increase by 8% of the amounts funded.

 

Other management agreement and lease matters.  As of August 6, 2013, all payments due to us from our managers and tenants under our other operating agreements were current.  Minimum return and minimum rent payments due to us under some of our hotel management agreements and leases are supported by guarantees. The guarantee provided by Marriott, with respect to the 68 hotels (Marriott No. 234 agreement) managed by Marriott is limited to $40,000 ($30,707 remaining at June 30, 2013) and expires on December 31, 2019. The guarantee provided by Hyatt Hotels Corporation, or Hyatt, with respect to the 22 hotels managed by Hyatt is limited to $50,000 ($16,222 remaining at June 30, 2013). The guarantee provided by Carlson Hotels Worldwide, or Carlson, with respect to the 11 hotels managed by Carlson is limited to $40,000 ($21,484 remaining at June 30, 2013). The guarantee provided by Wyndham with respect to the 21 hotels managed by Wyndham is limited to $29,000 ($15,220 remaining at June 30, 2013). Certain of these guarantees may be replenished by future cash flows from the hotels in excess of our minimum returns. The guarantee provided by Wyndham for the lease with Wyndham Vacation Resorts, Inc., or Wyndham Vacation, is unlimited. The guarantee provided by Marriott with respect to the one hotel leased by Marriott (Marriott No. 5 agreement) is unlimited.

 

Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $8,018 and $3,081 less than the minimum returns due to us for the three months ended June 30, 2013 and 2012, respectively, and $30,369 and $26,396 less than the minimum returns due to us for the six months ended June 30, 2013 and 2012, respectively. When managers of these hotels are required to fund the shortfalls under the terms of our operating agreements or their guarantees, we reflect such fundings (including security deposit applications) in our condensed consolidated statements of income and comprehensive income as a reduction of hotel operating expenses. The reduction to hotel operating expenses was $1,267 and $535 in the three months ended June 30, 2013 and 2012, respectively, and $8,772 and $20,027 in the six months ended June 30, 2013 and 2012, respectively. We had $6,751 and $2,546 of shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our operating agreements during the three months ended June 30, 2013 and 2012, respectively, and $21,597 and $6,369 during the six months ended June 30, 2013 and 2012, respectively, which represents the unguaranteed portion of our minimum returns from Marriott and Sonesta.

 

15

 

HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

 

Note 12.  Fair Value of Assets and Liabilities

 

The table below presents certain of our assets carried at fair value at June 30, 2013, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.

 

					Fair Value at Reporting Date Using
					Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
Description		Total			(Level 1)			(Level 2)			(Level 3)
Investment securities (1)		$	27,888		$	27,888		$	—		$	—
Long lived assets held and used (2)		$	4,108		$	—		$	—		$	4,108

 

(1)         Our investment securities, consisting of our 2,540,000 shares of TA, which are included in our other assets, are reported at fair value which is based on quoted market prices (Level 1 inputs).  Our historical cost basis for these securities is $9,267.  The unrealized gain for these securities as of June 30, 2013, is included in cumulative other comprehensive income in our condensed consolidated balance sheets.

 

(2)         In performing our periodic evaluation of real estate assets for impairment as of June 30, 2013, we revised our assumptions regarding one hotel that we plan to sell.  As a result, we recorded a $2,171, or $0.02 per share, loss on asset impairment during the three months ended June 30, 2013 to reduce the carrying value of this hotel to its estimated fair value.  We estimated the fair value of this hotel using standard industry valuation techniques and estimates of value developed by hotel brokerage firms (Level 3 inputs).

 

In addition to the investment securities included in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, revolving credit facility, unsecured term loan, senior notes and security deposits. At June 30, 2013 and December 31, 2012, the fair values of these additional financial instruments were not materially different from their carrying values, except as follows:

 

		June 30, 2013						December 31, 2012
		Carrying			Fair			Carrying			Fair
		Amount			Value			Amount			Value
Senior Notes, due 2014 at 7.875%		$	300,000		$	326,191		$	300,000		$	333,360
Senior Notes, due 2015 at 5.125%		280,000			295,893			280,000			298,926
Senior Notes, due 2016 at 6.3%		275,000			300,273			275,000			306,078
Senior Notes, due 2017 at 5.625%		300,000			328,136			300,000			335,173
Senior Notes, due 2018 at 6.7%		350,000			404,353			350,000			417,293
Senior Notes, due 2022 at 5%		500,000			505,412			500,000			531,343
Senior Notes, due 2023 at 4.5%		300,000			290,389			—			—
Convertible Senior Notes, due 2027 at 3.8%		8,478			8,925			8,478			9,092
Unamortized discounts		(10,628		)	—			(11,120		)	—
Total financial liabilities		$	2,302,850		$	2,459,572		$	2,002,358		$	2,231,265

 

We estimate the fair value of our indebtedness using discounted cash flow analysis and currently prevailing market interest rates (Level 3 inputs).

 

16