HOSPITALITY PROPERTIES TRUST
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-11527
HOSPITALITY PROPERTIES TRUST
Maryland 04-3262075
- ---------------------------------- ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
400 Centre Street, Newton, Massachusetts 02158
617-964-8389
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Class Shares outstanding
Common shares of beneficial at November 12, 1996
interest, $0.01 par value per share 26,856,800
<PAGE>
HOSPITALITY PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 1996
THE AMENDED AND RESTATED DECLARATION OF TRUST OF THE COMPANY, DATED AUGUST 21,
1995 A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"),
IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE
STATE OF MARYLAND, PROVIDES THAT THE NAME "HOSPITALITY PROPERTIES TRUST" REFERS
TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT
INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE
OR AGENT OF THE TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR
SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE TRUST. ALL PERSONS
DEALING WITH THE TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE TRUST
FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
INDEX
PART I Financial Information (Unaudited) Page
Condensed Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995............................................ 3
Consolidated Statements of Income - Nine Months Ended
September 30, 1996 and the period from February 7, 1995
(inception) to September 30, 1995............................ 4
Consolidated Statements of Income - Three Months Ended
September 30, 1996 and September 30, 1995.................... 5
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1996 and the period February 7, 1995
(inception) to September 30, 1995............................ 6
Notes to Condensed Consolidated Financial Statements........... 7
Management's Discussion and Analysis of Results of Operations
and Financial Condition...................................... 12
PART II Other Information.............................................. 15
2
<PAGE>
<TABLE>
<CAPTION>
HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1996 1995
(unaudited)
<S> <C> <C>
ASSETS
Real estate properties $ 834,121 $ 332,572
Accumulated depreciation (19,994) (5,820)
----------------- ------------------
814,127 326,752
Cash and cash equivalents 8,401 2,135
FF&E reserve (restricted cash) 10,528 5,342
Other assets 6,609 4,718
----------------- ------------------
$ 839,665 $ 338,947
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Credit facility $ 93,650 $ --
Security deposits 81,360 32,900
Other liabilities 2,726 8,096
Shareholders' equity
Common shares of beneficial interest 269 126
Additional paid-in capital 656,256 297,962
Cumulative net income 48,040 11,349
Dividends (42,636) (11,486)
----------------- ------------------
Total shareholders' equity 661,929 297,951
----------------- ------------------
$ 839,665 $ 338,947
================= ==================
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
<CAPTION>
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
For the Period
For the Nine February 7, 1995
Months Ended (inception) to
September 30, September 30,
1996 1995
------------------ --------------------
<S> <C> <C>
Revenues
Rental income.............................................. $ 48,661 $ 11,142
FF&E reserve income........................................ 8,798 2,460
Interest income............................................ 764 42
------------------ ---------------
Total revenues........................................... 58,223 13,644
------------------ ---------------
Expenses
....Interest (including amortization of deferred finance costs
of $176 and $0, respectively) 3,661 5,039
..............................................................
Depreciation and amortization of real estate assets........ 14,174 3,470
General and administrative................................. 3,697 775
------------------ ---------------
Total expenses........................................... 21,532 9,284
------------------ ---------------
Net income.................................................... $ 36,691 $ 4,360
================== ===============
Weighted average shares outstanding........................... 21,932
==================
Earnings per share............................................ $1.67
==================
</TABLE>
See accompanying notes
4
<PAGE>
HOSPITALITY PROPERTIES TRUST
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
For the Quarter For the Quarter
Ended September 30, Ended September 30,
1996 1995
------------------------ -----------------------
<S> <C> <C>
Revenues
Rental income $ 20,764 $ 6,268
FF&E reserve income 3,978 1,566
Interest income 136 19
------------------------ -----------------------
Total revenues 24,878 7,853
------------------------ -----------------------
Expenses
Interest (including amortization of deferred finance
costs of $66 and $0, respectively) 1,699 1,840
Depreciation and amortization of real estate assets 6,170 1,860
General and administrative 1,563 530
------------------------ -----------------------
Total expenses 9,432 4,230
------------------------ -----------------------
Net income $ 15,446 $ 3,623
======================== =======================
Weighted average shares outstanding 26,857
========================
Earnings per share $0.58
========================
</TABLE>
See accompanying notes
5
<PAGE>
HOSPITALITY PROPERTIES TRUST
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Period
For the Nine February 7, 1995
Months Ended (inception) to
September 30, September 30,
1996 1995
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 36,691 $ 4,360
Adjustments to reconcile to cash provided by operating activities
Depreciation and amortization of real estate assets................. 14,174 3,470
Amortization of deferred finance costs as interest.................. 176 --
FF&E reserve income................................................. (8,798) (2,460)
Change in assets and liabilities.................................... 998 2,315
------------------- -------------------
Cash provided by operating activities 43,241 7,685
------------------- -------------------
Cash flows from investing activities
Real estate acquisitions.............................................. (491,638) (331,877)
Increase in security deposits......................................... 48,460 32,900
Purchase of FF&E reserve.............................................. (5,500) (3,904)
Payments for purchase option.......................................... (2,500) (4,500)
------------------- -------------------
Cash used for investing activities................................ (451,178) (307,381)
------------------- -------------------
Cash flows from financing activities
Draws on credit facility............................................... 115,650 --
Repayments of credit facility...................................... (22,000) --
Dividends paid..................................................... (38,080)
Proceeds from issuance of common shares................................ 358,633 198,066
Borrowings and advances from HRP....................................... -- 165,241
Payments on borrowings and advances from HRP........................... -- (62,251)
------------------- -------------------
Cash provided by financing activities.............................. 414,203 301,056
------------------- -------------------
Increase in cash and equivalents.......................................... $ 6,266 $ 1,360
=================== ===================
Supplemental cash flow information
Interest paid........................................................ $ 3,412 $ 5,039
Non-cash investing activities
Property managers' deposits in FF&E reserve.......................... 8,928 2,460
Purchases of fixed assets with FF&E reserve.......................... 9,242 914
Non-cash financing activities
Share issuance to HRP as repayment of borrowings..................... 100,000
Cancellation of indebtedness to HRP (100,000)
</TABLE>
See accompanying notes
6
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
(unaudited)
1. The accompanying condensed consolidated financial statements of
Hospitality Properties Trust (the "Company") and its subsidiaries have
been prepared without audit. Certain information and footnote disclosures
required by generally accepted accounting principles for complete
financial statements have been condensed or omitted. The Company believes
the disclosures made are adequate to make the information presented not
misleading. However, the accompanying financial statements should be read
in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the period from February 7,
1995 (inception) to December 31, 1995 and the Company's Quarterly Reports
on Form 10-Q for the quarterly periods ended March 31 and June 30, 1996.
Operating results for interim periods are not necessarily indicative of
the results that may be expected for the full year.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) considered necessary for a fair presentation have
been included. All intercompany transactions and balances between the
Company and its subsidiaries have been eliminated.
2. The Company was incorporated on February 7, 1995. The Company was a 100%
owned subsidiary of Health and Retirement Properties Trust ("HRP") from
its inception through August 22, 1995 when it completed its initial public
offering of common shares of beneficial interest. The Company commenced
operations on March 24, 1995 with the acquisition of 21 hotels.
3. Earnings per share is computed by dividing net income by the weighted
average number of outstanding common shares of beneficial interest.
In August 1996, the Company paid a $0.58 per share dividend to
shareholders for the quarter ended June 30, 1996. On October 3, 1996, the
Trustees declared a dividend of $0.59 per share to be paid to shareholders
of record as of October 22, 1996, which will be distributed on or about
November 19, 1996.
4. The properties of the Company and its subsidiaries are leased pursuant to
long term leases. Each lease requires the lessee to pay minimum rent,
percentage rent (a percentage of increases in total hotel sales over total
hotel sales in a base year), and all operating costs associated with the
hotels. In addition, 5% of hotel sales related to each lease are paid by
the Company's hotel operators into an escrow account to fund certain
capital improvements and ongoing renovations necessary to maintain the
quality of the properties. In the case of certain leases, this escrow
account is maintained by the Company or a subsidiary.
5. As of September 30, 1996, the Company had $93,650 outstanding under its
$200,000 revolving acquisition credit facility (the "Credit Facility")
which provides for borrowings at one month LIBOR plus 150 basis points.
Borrowings may be repaid and reborrowed as necessary until December 31,
1998, at which time the outstanding balance may, at the Company's option
and with lender approval, be either repaid or converted into a 10-year
loan.
6. At September 30, 1996, all of the 53 Courtyard by Marriott(R) properties
of the Company and its subsidiary were leased to a special purpose
subsidiary of Host Marriott Corporation and managed by a subsidiary of
Marriott International, Inc. The results of operations from the period
from the later of January 1, 1996 or the date of acquisition by the
Company or a subsidiary to September 6, 1996 and summarized balance sheet
data of the Host Marriott Corporation subsidiary to which the Courtyard by
Marriott(R) hotels are leased are as follows:
7
<PAGE>
<TABLE>
<CAPTION>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
Twelve weeks ended Thirty-six weeks ended
September 6, 1996 September 6, 1996
-------------------------- -------------------------
<S> <C> <C>
(unaudited) (unaudited)
Revenues $ 23,802 $ 63,503
Investment expenses
Base and percentage rent 11,146 30,852
FF&E contribution 2,448 6,240
Management fees 4,444 11,621
Other 1,618 5,386
-------------------------- ---------------------------
Total investment expenses 19,656 54,099
-------------------------- ---------------------------
Income before taxes 4,146 9,404
Provision for income taxes 1,839 3,942
-------------------------- ---------------------------
Net income $ 2,307 $ 5,462
========================== ===========================
<CAPTION>
September 6, 1996
-------------------------
<S> <C>
(unaudited)
Assets $ 61,328
Liabilities 35,526
Equity 25,802
</TABLE>
Revenues in the statement of income above represent house profit. House
profit represents total hotel sales less property level expenses
excluding depreciation and amortization, system fees, real and personal
property taxes, ground rent, insurance and management fees. The system
fees (included in other investment expenses) and management fees
presented above, and the expenses detailed below represent all the costs
incurred directly, allocated or charged to the properties by their
management. The detail of total hotel sales and a reconciliation to
revenues from the period from the later of January 1, 1996 or the date of
acquisition by the Company or a subsidiary to September 6, 1996 follows:
<TABLE>
<CAPTION>
Twelve weeks ended Thirty six weeks
September 6, 1996 ended September 6,
1996
------------------------- ------------------------
(unaudited) (unaudited)
<S> <C> <C>
Total hotel sales
Rooms............................................ $ 44,750 $ 109,631
Food and beverage................................ 3,745 9,387
Other 1,907 4,892
------------------------- ------------------------
Total hotel sales................................ 50,402 123,910
------------------------- ------------------------
Departmental Expenses
Rooms............................................ 9,239 22,873
Food and beverage................................ 3,326 8,022
Other operating departments...................... 518 1,350
General and administrative....................... 5,115 12,656
Utilities........................................ 1,951 4,693
Repairs, maintenance and accidents............... 3,973 4,808
Marketing and sales.............................. 639 1,482
Chain services................................... 1,839 4,523
------------------------- ------------------------
Total departmental expenses...................... 26,600 60,407
------------------------- ------------------------
Revenues.............................................. $ 23,802 $ 63,503
========================= ========================
</TABLE>
8
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
7. At September 30, 1996, all of the 18 Residence Inn by Marriott(R)
properties of the Company's subsidiary were leased to a special purpose
subsidiary of Host Marriott Corporation and managed by a subsidiary of
Marriott International, Inc. The results of operations from the period
from the date of acquisition by a subsidiary of the Company to September
6, 1996 and summarized balance sheet data of the Host Marriott Corporation
subsidiary to which the Residence Inn by Marriott(R) hotels are leased are
as follows:
<TABLE>
<CAPTION>
Twelve weeks ended Period from Acquisition
September 6, 1996 September 6, 1996
------------------------ ----------------------------
<S> <C> <C>
(unaudited) (unaudited)
Revenues....................................................... $ 8,657 $ 16,186
Investment expenses
Base and percentage rent.................................. 3,532 6,623
FF&E contribution......................................... 794 1,480
Management fees........................................... 1,805 3,639
Other 674 1,164
Total investment expenses............................. 6,805 12,906
------------------------ ----------------------------
Income before taxes............................................ 1,852 3,280
Provision for income taxes..................................... 741 1,312
Net income............................................ $ 1,111 $ 1,968
======================== ============================
<CAPTION>
September 6, 1996
-----------------------
<S> <C>
(unaudited)
Assets.............................................................. $ 22,435
Liabilities......................................................... $ 18,486
Equity $ 3,949
</TABLE>
Revenues in the statement of income above represent house profit. House
profit represents total hotel sales less property level expenses
excluding depreciation and amortization, system fees, real and personal
property taxes, ground rent, insurance and management fees. The system
fees (included in other investment expenses) and management fees
presented above, and the expenses detailed below represent all the costs
incurred directly, allocated or charged to the properties by their
management. The detail of total hotel sales and a reconciliation to
revenues from the period from the date of acquisition by a subsidiary of
the Company to September 6, 1996 follows:
<TABLE>
<CAPTION>
Twelve weeks ended Period from Acquisition
September 6, 1996 September 6, 1996
------------------------- -----------------------------
<S> <C> <C>
(unaudited) (unaudited)
Total hotel sales
Rooms.................................................... $ 15,007 $ 28,097
Other.................................................... 801 1,500
------------------------- -----------------------------
Total hotel sales.................................... 15,808 29,597
------------------------- -----------------------------
Departmental Expenses
Rooms.................................................... 2,957 5,565
Other operating departments.............................. 166 313
General and administrative............................... 1,383 2,522
Utilities................................................ 698 1,252
Repairs, maintenance and accidents....................... 806 1,598
Marketing and sales...................................... 865 1,651
Chain services........................................... 276 510
Total departmental expenses.............................. 7,151 13,411
Revenues...................................................... $ 8,657 $ 16,186
========================= =============================
</TABLE>
9
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
8. The following unaudited pro forma consolidated income statement gives
effect to the completion of the Company's April 1996 completion of an
offering of 14,250,000 common shares of beneficial interest and the
acquisition of 45 additional hotels by subsidiaries of the Company during
the first and second quarters of 1996, as though such transactions
occurred on January 1, 1996. In the opinion of management, all adjustments
necessary to reflect the effects of the transactions discussed above have
been reflected in the pro forma data. The following unaudited pro forma
consolidated income statement data is not necessarily indicative of what
the actual consolidated results of operations for the Company would have
been for the period indicated, nor does it purport to represent the
consolidated results of operations for the Company for future periods.
Nine Months
Ended September
30, 1996
--------------------
Revenues
Rental income....................................... $ 62,171
FF&E reserve income................................. 9,972
Interest income..................................... 226
--------------------
Total revenues.................................. 72,369
--------------------
Expenses
Interest expense (including $65 of amortization ....
of deferred finance costs)............................... 5,061
Depreciation expense................................ 18,574
General and administrative.......................... 4,377
--------------------
Total expenses.................................. 28,012
--------------------
Net income............................................... $ 44,357
====================
Weighted average shares outstanding...................... 26,857
====================
Net income per share..................................... $ 1.65
====================
10
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Overview
Hospitality Properties Trust (the "Company") was formed in 1995 to acquire, own
and lease hotel properties to unaffiliated hotel operators. The Company has
owned 37 Courtyard by Marriott(R) hotels (the "Initial Hotels") since August of
1995. In 1996, wholly-owned subsidiaries of the Company acquired 11 Wyndham
Garden(R) hotels, 18 Residence Inn by Marriott(R) hotels and an additional 16
Courtyard by Marriott(R) hotels.
The Company's 53 Courtyard by Marriott(R) hotels are all leased to a subsidiary
of Host Marriott Corporation ("Host Marriott") and managed by a subsidiary of
Marriott International, Inc. ("Marriott International"). Annual base rent on
these 53 properties totals $50.5 million and percentage rent equals 5% of
increases in total hotel sales over base year levels. The 53 hotels have a total
of 7,610 guest rooms and are located in 23 states. During the first nine months
of 1996 (which includes periods prior to the acquisition of sixteen of these
properties by a subsidiary of the Company) the 53- property pool had average
occupancy, Average Daily Rate ("ADR") and room revenue per available room
("RevPAR") of 81.6%, $77.99 and $63.66, respectively.
The Company's 18 Residence Inn by Marriott(R) properties are all leased to a
subsidiary of Host Marriott and managed by a subsidiary of Marriott
International. Annual base rent on these 18 properties totals $17.2 million and
percentage rent equals 7.5% of increases in total hotel sales over 1996 levels.
The 18 properties have a total of 2,178 guest suites and are located in 14
states. During the first nine months of 1996 (which includes periods prior to
the acquisition of these properties by a subsidiary of the Company) the
18-property pool had average occupancy, ADR and RevPar of 87.2%, $90.04 and
$78.49, respectively.
The Company's 11 Wyndham Garden(R) hotels are all leased to and operated by
subsidiaries of the Wyndham Hotel Corporation. Annual base rent on these 11
properties totals $13.6 million and percentage rent equals 8% of increases in
total hotel sales over 1996 levels. The 11 properties have a total of 1,940
guest rooms and are located in seven states. During the first nine months of
1996 (which includes periods prior to the acquisition of these properties by a
subsidiary of the Company) the 11-property pool had average occupancy, ADR and
RevPAR of 77.8%, $84.28 and $65.57, respectively.
All of the Company's leases require 5% of total hotel sales to be escrowed by
the tenant or operator as a reserve for renovations and refurbishment ("FF&E").
References below to the Company and to items comprising the Company's results of
operations are collective references to the Company and its subsidiaries and to
consolidated items of the Company's consolidated results of operations.
Results of Operations
The Company was organized on February 7, 1995, commenced operations on March 24,
1995 with the acquisition of the first 21 of the Initial Hotels, and completed
its initial public offering of shares of beneficial interest on August 22, 1995.
The Company has been recently formed and accordingly has limited historical
financial data available.
The Company was a wholly owned subsidiary of Health and Retirement Properties
Trust from the date of inception until August 22, 1995, the date of the
Company's initial public offering, and was initially capitalized with $1 million
of equity and $163.3 million of debt. The debt was provided by HRP at rates
which were lower than the market rates which the Company would have paid on a
stand alone basis. Accordingly, the Company does not believe that its results of
operations while it was a wholly owned subsidiary of HRP are comparable to
subsequent periods.
Quarter Ended September 30, 1996 - Historical Results (dollar amounts in
thousands except per share amounts)
Total revenue for the quarter ended September 30, 1996 was $24,878 of which base
and percentage rent comprised $20,764 and FF&E reserve rent was $3,978. Total
expenses for the quarter were $9,432 which consisted of interest
11
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
expense of $1,699, general and administrative expenses of $1,563 and
depreciation and amortization of real estate assets of $6,170. Net income was
$15,446 ($.58 per share). Funds from operations (defined as net income plus
depreciation and amortization of real estate assets) and cash available for
distribution (defined as funds from operations less FF&E reserve income plus
amortization of deferred financing costs and other non-cash charges) related to
the quarter were $21,616 ($.80 per share) and $17,876 ($.67 per share),
respectively. Cash flows provided by (used for) operating, investing and
financing activities for the quarter ended September 30, 1996 were $16,149,
($334) and ($15,593), respectively.
The Company's tenants reported a 8.3% increase in combined RevPAR for the 1996
third quarter over the 1995 period, comprised primarily of a 9.1% increase in
ADR.
Nine Months Ended September 30, 1996 - Historical Results (dollar amounts in
thousands except per share amounts)
Total revenue for the nine months ended September 30, 1996 was $58,223 of which
base and percentage rent comprised $48,661 and FF&E reserve rent was $8,798.
Total expenses for the nine-month period were $21,532 which consisted of
interest expense of $3,661, general and administrative expenses of $3,697 and
depreciation of real estate assets of $14,174. Net income was $36,691 ($1.67 per
share). Funds from operations and cash available for distribution related to the
nine-month period were $50,865 ($2.32 per share) and $42,611 ($1.94 per share),
respectively. Cash flows provided by (used for) operating, investing and
financing activities were $43,241, ($451,178) and $414,203, respectively, for
the nine months ended September 30, 1996.
The Company's tenants reported a 7.5% increase in combined RevPAR for the nine
months ended 1996 over the 1995 period, comprised primarily of a 7.5% increase
in ADR. Occupancy for the nine months ended 1996 remained substantially flat to
the 1995 period at 82%.
Liquidity and Capital Resources (dollar amounts in thousands except per share
amounts)
As of September 30, 1996 total assets of the Company were $839,665. This
consists primarily of net real estate assets of $814,127.
At September 30, 1996, the Company had $8,401 of cash and cash equivalents, and
the ability to borrow up to an additional $106,350 under its credit facility
("Credit Facility"). The Company believes it will have access to various types
of financing in addition to or in place of the Credit Facility, including debt
or equity securities with which to complete future acquisitions and to otherwise
meet its long term funding requirements. The Company is currently negotiating a
debt financing secured by properties owned by two of the Company's subsidiaries,
although no assurance can be given that the Company will obtain such financing
on acceptable terms.
Pursuant to the terms of the leases and management agreements, the Company's
tenants and operators are required to fund an FF&E reserve account in amounts
equal to 5% of total hotel sales. Funds escrowed in the FF&E reserve account are
used for capitalized improvements, replacements and refurbishment of the hotels.
The Company believes that these funds will be adequate to maintain the
competitiveness of its hotels.
The Company continues to actively pursue acquisition opportunities to diversify
and expand its portfolio of hotel properties and expects to utilize
undistributed cash generated from operations and funds available under its
acquisition line or other borrowings, to complete such acquisitions. The Company
intends to balance the use of debt and equity in such a manner that the long
term cost of funds used to acquire facilities is appropriately matched, to the
extent practicable, to the terms of the investments made with such funding.
Current expenses and dividends are provided for by operations. To maintain its
status as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended, the Company must meet certain requirements including
the distribution of at least 95% of its taxable income to its shareholders. As a
REIT, the Company expects not to be subject to federal income taxes.
12
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HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
Dividends are based principally on cash available for distribution which may not
equal cash provided by operating activities because the cash flow of the Company
is affected by other factors not included in the cash available for distribution
calculation.
Seasonality
Most of the Company's hotels experience seasonal variation in operating results
typical of the hotel industry with higher revenues in the second and third
quarters of calendar years compared with the first and fourth quarters. This
seasonality is not presently expected to cause fluctuations in the Company's
rental income because the Company believes that the revenues generated by its
hotels will be sufficient to pay rents on a regular basis notwithstanding
seasonal fluctuations.
Certain Important Factors
The Company's Quarterly Report on Form 10-Q contains statements which constitute
forward looking statements. Those statements appear in a number of places in
this Form 10-Q and include statements regarding the intent, belief or
expectations of the Company, its Trustees or its officers with respect to the
declaration or payment of dividends, the adequacy of reserves, the consummation
of additional acquisitions, policies and plans of the Company regarding
investments, financings or other matters, the Company's qualification and
continued qualification as a real estate investment trust or trends affecting
the Company's or its hotels' financial condition or results of operations.
Readers are cautioned that such forward looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those contained in the forward looking statements as
a result of various factors. Such factors include without limitation changes in
financing terms, the Company's ability or inability to complete acquisitions and
financing transactions, results of operations of the Company's hotels and
general changes in economic conditions not presently contemplated. The
information contained in this Form 10-Q and the Company's Annual Report on Form
10-K for the year ended December 31, 1995, including the information under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations", identifies other important factors that could cause such
differences.
13
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
PART II Other Information
Item 5. Other Matter
The Company is not currently a party to any legal proceedings, nor is the
Company aware of any material pending legal proceedings for which it might
become liable.
The Company previously reported certain litigation affecting HRPT Advisors, Inc.
("Advisors") and two of its trustees, who are also trustees of Health and
Retirement Properties Trust ("HRP"). In the ordinary course of their business,
Advisors is occasionally involved in litigation. Early in 1995, HRP, which is
the Company's largest shareholder and is also advised by Advisors, commenced a
foreclosure action to collect on a secured indemnity agreement given in
connection with the surrender of certain leaseholds to, and the purchase of
certain properties by, HRP in 1992. In May 1995, the defendants in the
foreclosure action and parties related to HRP's former tenants and sellers
asserted cross claims against HRP, Advisors, Messrs. Barry M. Portnoy and Gerard
M. Martin (who are Managing Trustees of the Company and of HRP) and others,
including Sullivan & Worcester (which is counsel to HRP, Advisors and the
Company). The same cross-claim defendants were served in late February 1996, in
an additional action in a federal court. The cross claims and separate claims
allege, among other things, fraud (including violations of federal securities
laws), conflicts of interest, breach of fiduciary duties, legal malpractice,
civil conspiracy and violations of 18 U.S.C. ss.1962 (RICO) in connection with
the leasehold surrenders, the transactions and indemnities underlying the
foreclosure action and certain related transactions, and that the foreclosure
defendants and third-party plaintiffs suffered substantial damages as a result.
HRP Advisors and other parties to this dispute sought arbitration of all
arbitrable claims arising from this dispute pursuant to the contract under which
the dispute originated. Arbitration has been ordered in both the state and
federal court actions, and an arbitration proceeding is now underway. Advisors
recently advised the Company that a new action in the Massachusetts state courts
has been filed by an assignee and creditor of one or more defendants in the
original foreclosure action against HRP, Advisors, Messrs. Portnoy and Martin
and others, including Sullivan & Worcester alleging among other things that HRP
received fraudulent transfers as a result of the leasehold surrenders and
related transactions referred to above. The amounts claimed against HRP,
Advisors and others in the various actions referred to above are material.
Although the outcome of this litigation is currently indeterminable, the Company
has been advised that each of the cross-claim defendants believes the claims
against it in each of these actions are without merit and intends to defend and
deny the allegations in these cross claims and separate claims, and that HRP
intends to pursue the original foreclosure. The Company is not a party to any of
these actions.
Item 6. Exhibit
27. Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOSPITALITY PROPERTIES TRUST
/s/ Thomas M. O'Brien
-------------------------------------
Thomas M. O'Brien
Treasurer and Chief Financial Officer
(authorized officer and principal
financial officer)
Dated: November 14, 1996
14
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<PERIOD-START> JAN-01-1996
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