Hospitality Properties Trust (HPT) is a real estate investment trust (REIT) headquartered in Newton, Massachusetts, that owns 288 hotels and 185 highway travel centers in 44 U.S. states, Puerto Rico, and Canada.  Unlike many peers, the REIT’s business does not directly involve operating the properties it owns; instead, unaffiliated hospitality management companies operate these under 13 combination management or lease agreements. Currently, the largest of these include 145 travel centers located across 40 states, while the smallest combination includes 11 hotels spread across eight states.  Among those operating Hospitality’s hotels are some of the largest hotel management companies in the world, including Marriott International (MAR), InterContinental Hotels Group (IHG), Hyatt Corporation (H), and Carlson Hotels Worldwide (a private company).  The company’s travel centers are operated exclusively by TravelCenters of America (TA). Hospitality’s tenants must agree to a minimum level of rent payments, an arrangement designed to protect Hospitality’s cash flows, regardless of the performance of each property. 

The company was formed in 1995 from a spin-off of Health and Retirement Properties Trust, a REIT that specialized in nursing home properties.  It was listed on the New York Stock Exchange as an independent public company that same year.  Its biggest competitors include Felcor (FCH), Hersha Hospitality (HT), and Host Hotels & Resorts (HST).  Hospitality’s day-to-day operations are overseen by REIT Management & Research LLC (a privately held asset management company), which presents investment and divestment opportunities to Hospitality’s board, and provides management and administrative services as well.  As such, Hospitality has no employees, since daily tasks are carried out, instead by, REIT Management & Research.

When Hospitality Properties Trust first became public, its initial portfolio consisted of 21 Marriott International hotels.  This was quickly expanded over subsequent years, often through bulk purchases, as the company believes single management agreements and all-or-none renewal rights enhance the credit characteristics of its investments.  For example, the company acquired 45 Marriot-branded hotels in a single transaction in 1997, and a dozen properties from InterContinental Hotels Group in 2005.  The latter deal included two hotels in Toronto, the company’s first international properties. 

In 2006, Hospitality Properties Trust decided to expand its vision beyond hotels when it acquired highway truck stop chain TravelCenters of America (TA) for about $2 billion. The move into the travel convenience arena represented an attempt to offset some of the cyclicality inherent in the hotel industry, as travel centers perform relatively well even amid recession.  TravelCenters of America was one of the largest operators of truck stops along U.S. highways, and it owned most of its locations.  Soon after the acquisition, Hospitality entered into a sale/leaseback arrangement through which it retained ownership of all travel center real estate, and agreed to a long-term lease and operating contract with TA.  In so doing, Hospitality had essentially negotiated the new lease conditions with itself, and not surprisingly came away with very generous terms.  Next, because REITs face limitations on the types of assets they can own, Hospitality spun-off TravelCenters of America to its shareholders as a separate public company in early 2007.

The holes in this lease arrangement became obvious once economic activity began falling after the financial crisis struck in earnest.  TA’s gross profit started to slide in lockstep with increasingly weak trucking activity.  Though it was debt-free, the unfavorable (from TA’s perspective) lease obligations became an increasingly heavy burden that was becoming more difficult to meet.  As a result, TA was forced to defer a significant portion of the rent due Hospitality in 2008, 2009, and 2010. 

Trouble with rent obligations due Hospitality was not unique to TravelCenters of America.  The two largest hotel lessees, Marriott International and InterContinental Hotels Group, also had faced difficulties meeting their minimum obligations due to the economic squeeze.  Questions, therefore, were beginning to surface on the effectiveness of the company’s minimum rent agreements, problems the company addressed in a series of contract renegotiations last year.  The first amendment, with TA, called for an 18% reduction in the minimum rent obligation to Hospitality.  Under Marriott’s new terms, annual rent obligation remained unchanged, though it now must guarantee 90% of the minimum through 2017.  The InterContinental Hotels agreement also kept minimum rents steady, but called for the lessee to contribute an additional $37 million to top off security deposits.  Hospitality, however, is obliged to renovate the InterContinental-leased properties in return for annual rent increases of 8% of the cost.  All told, the contract revisions reduced guaranteed minimum rents across Hospitality’s portfolio by $47 million, to about $550 million.  Portfolio quality should be enhanced by sales of underperforming assets, too.

The conclusion of these agreements ought to reduce levels of cash flow uncertainty, and provide a more sustainable road forward.  Moreover, we think the resolution of the contract issues should allow the company to shift its focus more towards future growth drivers, such as acquisitions.  Indeed, Hospitality announced in November that it will purchase two hotels from Sonesta International Hotels Corporation, The Royal Sonesta Hotel Boston and The Royal Sonesta Hotel New Orleans, for a total of $150 million.  These purchases are actually part of a larger transaction, in which Sonesta is to be acquired by REIT Management and Research for $174 million through its affiliate, the Sonesta Acquisition Corporation, which was created specifically for this purpose.  This should create a platform that would enable Hospitality to lease hotels directly to the new entity in a fashion similar to TravelCenters of America’s leasing arrangements with the truck stops.  Underperforming properties could also be placed within this portfolio, improving the apparent quality of Hospitality’s assets at the expense of the new Sonesta entity.  Further, this ability could provide Hospitality leverage in any future contract negotiations with its lessees.

At the time of this article’s writing, the author did not have any positions in any of the companies named.