10-Q 1 hpt10q_3rdquarter.txt 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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 1-11527 HOSPITALITY PROPERTIES TRUST Maryland 04-3262075 (State of Incorporation) (IRS Employer Identification No.) 400 Centre Street, Newton, Massachusetts 02458 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Shares outstanding Class at November 1, 2002 --------------------------------------- ------------------- Common shares of beneficial interest, $0.01 par value per share 62,547,348
HOSPITALITY PROPERTIES TRUST FORM 10-Q September 30, 2002 INDEX PART I Financial Information (Unaudited) Page Item 1. Financial Statements Condensed Consolidated Balance Sheet - September 30, 2002 and December 31, 2001.................................................. 3 Consolidated Statement of Income - Three and Nine Months Ended September 30, 2002 and 2001........................................ 4 Condensed Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2002 and 2001.................................. 5 Notes to Condensed Consolidated Financial Statements................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 20 Item 4. Controls and Procedures.............................................. 20 Certain Important Factors................................................ 21 PART II Other Information Item 6. Exhibits and Reports on Form 8-K..................................... 22 Signatures............................................................... 23 Certifications........................................................... 24
2 PART I Financial Information Item 1. Financial Statements
HOSPITALITY PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except share and per share amounts) September 30, December 31, 2002 2001 ---------------- --------------- (unaudited) (audited) ASSETS Real estate properties, at cost................................. $ 2,783,021 $ 2,629,153 Accumulated depreciation........................................ (431,578) (363,329) ---------------- --------------- 2,351,443 2,265,824 Cash and cash equivalents....................................... 503 38,962 Restricted cash (FF&E reserve).................................. 49,267 39,913 Other assets, net............................................... 14,050 10,265 ---------------- --------------- $ 2,415,263 $ 2,354,964 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Revolving credit facility....................................... $ 83,000 $ -- Senior notes, net of discount................................... 473,934 464,781 Security and other deposits..................................... 271,129 263,983 Other liabilities............................................... 17,407 21,681 ---------------- --------------- 845,470 750,445 ---------------- --------------- Shareholders' equity: Series A preferred shares, 9.5% cumulative redeemable at $25/share, no par value; 3,000,000 shares issued and outstanding............................................... 72,207 72,207 Common shares of beneficial interest, $0.01 par value, 62,547,348 and 62,515,940 issued and outstanding, respectively 625 625 Additional paid-in capital.................................. 1,668,230 1,667,256 Cumulative net income....................................... 677,129 573,663 Cumulative preferred distributions.......................... (24,700) (19,356) Cumulative common distributions............................. (823,698) (689,876) ---------------- --------------- Total shareholders' equity................................ 1,569,793 1,604,519 ---------------- --------------- $ 2,415,263 $ 2,354,964 ================ ===============
The accompanying notes are an integral part of these financial statements. 3
HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts, unaudited) Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- ---------------------------------- 2002 2001 2002 2001 -------------- --------------- -------------- --------------- Revenues: Rental income........................... $ 62,544 $ 58,979 $ 182,973 $ 178,495 Hotel operating revenues................. 21,469 17,861 59,918 20,644 FF&E reserve income..................... 5,773 6,126 16,708 19,680 Interest income......................... 35 222 271 681 -------------- --------------- -------------- --------------- Total revenues...................... 89,821 83,188 259,870 219,500 -------------- --------------- -------------- --------------- Expenses: Hotel operating expenses................ 14,207 12,074 38,605 13,929 Interest (including amortization of deferred financing costs of $683, $605, $2,006, and $1,812, respectively)......................... 10,892 10,542 32,005 31,248 Depreciation and amortization........... 24,258 23,396 72,178 68,025 General and administrative.............. 4,219 3,902 12,016 11,508 -------------- --------------- -------------- --------------- Total expenses...................... 53,576 49,914 154,804 124,710 -------------- --------------- -------------- --------------- Net income before extraordinary item....... 36,245 33,274 105,066 94,790 Extraordinary item - loss on early extinguishment of debt................ (1,600) -- (1,600) -- -------------- --------------- -------------- --------------- Net income................................. 34,645 33,274 103,466 94,790 Preferred distributions.................... (1,781) (1,781) (5,344) (5,344) -------------- --------------- -------------- --------------- Net income available for common shareholders............................. $ 32,864 $ 31,493 $ 98,122 $ 89,446 ============== =============== ============== =============== Weighted average common shares outstanding. 62,547 60,344 62,535 57,796 ============== =============== ============== =============== Basic and diluted earnings per common share: Net income available for common shareholders before extraordinary item................................ $ 0.55 $ 0.52 $ 1.59 $ 1.55 Extraordinary item - loss on early extinguishment of debt.............. (0.02) -- (0.02) -- -------------- --------------- -------------- --------------- Net income available for common shareholders........................ $ 0.53 $ 0.52 $ 1.57 $ 1.55 ============== =============== ============== ===============
The accompanying notes are an integral part of these financial statements. 4
HOSPITALITY PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands, unaudited) Nine Months Ended September 30, ---------------------------------------- 2002 2001 ------------------ ------------------ Cash flows from operating activities: Net income............................................................ $ 103,466 $ 94,790 Adjustments to reconcile net income to cash provided by operating activities: Extraordinary item - loss on early extinguishment of debt......... 1,600 -- Depreciation and amortization..................................... 72,178 68,025 Amortization of deferred financing costs as interest.............. 2,006 1,812 FF&E reserve income and deposits.................................. (19,816) (20,698) Deferred percentage rent.......................................... 1,897 3,413 Net change in assets and liabilities.............................. (6,564) 689 ------------------ ------------------ Cash provided by operating activities......................... 154,767 148,031 ------------------ ------------------ Cash flows from investing activities: Real estate acquisitions.............................................. (147,335) (188,652) Increase in security and other deposits............................... 7,146 6,606 ------------------ ------------------ Cash used in investing activities............................. (140,189) (182,046) ------------------ ------------------ Cash flows from financing activities: Proceeds of issuance of common shares, net................................ -- 159,310 Proceeds of issuance of senior notes...................................... 124,106 -- Repayment of senior notes................................................. (115,000) -- Distributions to common shareholders...................................... (133,822) (119,205) Distributions to preferred shareholders................................... (5,344) (5,344) Draws on revolving credit facility........................................ 250,000 150,000 Repayment of revolving credit facility.................................... (167,000) (150,000) Deferred finance costs incurred........................................... (5,977) (401) ------------------ ------------------ Cash (used in) provided by financing activities................ (53,037) 34,360 ------------------ ------------------ (Decrease)/increase in cash and cash equivalents.......................... (38,459) 345 Cash and cash equivalents at beginning of period.......................... 38,962 24,601 ------------------ ------------------ Cash and cash equivalents at end of period................................ $ 503 $ 24,946 ================== ================== Supplemental cash flow information: Cash paid for interest............................................. $ 32,116 $ 33,229 Non-cash investing and financing activities: Property managers' deposits in FF&E reserve........................ 18,935 19,122 Purchases of fixed assets with FF&E reserve........................ (10,462) (10,933) Real estate acquired in an exchange................................ (28,914) -- Real estate disposed of in an exchange............................. 28,914 --
The accompanying notes are an integral part of these financial statements. 5 HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements of Hospitality Properties Trust 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. We believe 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 contained in our Annual Report on Form 10-K for the year ended December 31, 2001. 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 Hospitality Properties Trust and its subsidiaries have been eliminated. Our operating results for interim periods and those of our tenants are not necessarily indicative of the results that may be expected for the full year. Note 2. Shareholders' Equity On August 22, 2002, we paid a $0.72 per share distribution to our common shareholders for the quarter ended June 30, 2002. On October 1, 2002, we declared a distribution of $0.72 per share to be paid to common shareholders of record on October 25, 2002. This distribution will be paid on or about November 21, 2002. On September 30, 2002, we paid a $0.59375 per share distribution to our preferred shareholders. We do not present diluted earnings per share because we have no dilutive instruments. Note 3. Indebtedness On July 8, 2002, we issued $125,000 of 6.85% senior notes, due July 2012. A portion of the net proceeds of $124,106 were used to repay the then outstanding balance of our revolving credit facility. On July 18, 2002, we prepaid our $115,000 of 8.25% senior notes due November 2005. These notes were prepaid at par with cash on hand and borrowing on our revolving credit facility. In connection with this early repayment, we recognized an extraordinary loss on early extinguishment of debt of $1,600 in the 2002 third quarter related to the write-off of unamortized deferred financing costs. Our credit facility matures in June 2005 and may be extended at our option to June 2006 upon our payment of an extension fee. This facility permits borrowing up to $350,000 and includes a feature under which the maximum draw may expand to $700,000, in certain circumstances. Drawings under our credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. Interest on borrowings under the credit facility is payable at a spread above LIBOR. Note 4. Real Estate Properties In April 2002, we purchased 21 hotels for $145,000. These 21 hotels and 36 Candlewood Suites hotels we already owned, are leased to a subsidiary of Candlewood Hotel Company, Inc. through the end of 2018. During the nine months ended September 30, 2002, we funded improvements at certain hotels for $2,351, which led to an increase in the annual minimum rent due to us. During the first half of 2002, we exchanged three of our hotels with one of our tenants for three different hotels at no cost to us. No gain or loss was recognized on these non-monetary exchanges. 6 HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) Note 5. New Accounting Pronouncement In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (FAS 145). The provisions of this standard eliminate the requirement that a gain or loss from the extinguishment of debt be classified as a extraordinary item, unless it can be considered unusual in nature and infrequent in occurrence. We will be required to implement FAS 145 on January 1, 2003. Upon implementation, we will reclassify all extraordinary gains or losses from debt extinguishments in 2002 and prior as ordinary income/loss from operations. Note 6. Significant Tenant At September 30, 2002, HMH HPT Courtyard LLC, a 100% owned special purpose subsidiary of Host Marriott Corporation ("Host"), is the lessee of 53 Courtyard by Marriott(R) properties which we own and which represent 19% (20% at December 31, 2001) of our investments, at cost. The results of operations for the thirty-six weeks ended September 6, 2002 and September 7, 2001, and summarized balance sheet data of HMH HPT Courtyard LLC as provided by Host are as follows.
HMH HPT Courtyard LLC (a subsidiary of Host Marriott Corporation) Thirty-six weeks ended Thirty-six weeks ended September 6, 2002 September 7, 2001 (unaudited) (unaudited) --------------------------- -------------------------- Revenues: Rental income(1)......................... $ 35,000 $ 34,995 Interest income.......................... 208 269 Amortization of deferred gain............ 1,992 1,992 --------------------------- -------------------------- Total revenues........................ 37,200 37,256 --------------------------- -------------------------- Expenses: Base and percentage rent expense......... 36,320 37,441 Corporate expenses....................... 1,385 1,388 Other expenses........................... 107 117 --------------------------- -------------------------- Total expenses........................ 37,812 38,946 --------------------------- -------------------------- Loss before taxes...................... (612) (1,690) Provision for income taxes............. -- -- --------------------------- -------------------------- Net loss income........................ $ (612) $ (1,690) =========================== ========================== September 6, 2002 December 31, 2001 (unaudited) --------------------------- -------------------------- Assets................................... $ 67,874 $ 67,224 Liabilities.............................. 37,800 36,538 Equity................................... 30,074 30,686 (1) Percentage rental revenue of $2,561 and $7,358 for the thirty-six weeks ended September 6, 2002 and September 7, 2001, respectively, was deferred and is included as deferred rent in liabilities on the balance sheet. Percentage rent will be recognized as income during the year once specified hotel sales thresholds are achieved.
7 HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) At September 30, 2002, CCMH Courtyard I LLC, a 100% owned special purpose subsidiary of Barcelo-Crestline Corporation ("Barcelo-Crestline"), is the sublessee of the 53 Courtyard by Marriott(R) properties discussed above. The results of operations for the thirty-six weeks ended September 6, 2002 and September 7, 2001, and summarized balance sheet data of CCMH Courtyard I LLC, as provided by Barcelo-Crestline, are as follows.
CCMH Courtyard I LLC (a subsidiary of Barcelo-Crestline) Thirty-six weeks ended Thirty-six weeks ended September 6, 2002 September 7, 2001 (unaudited) (unaudited) ----------------------- ----------------------- Revenues: Hotels: Rooms................................... $ 133,620 $ 153,213 Food and beverage....................... 8,739 10,169 Other................................... 3,168 4,865 ----------------------- ----------------------- Total hotel revenues............. 145,527 168,247 ----------------------- ----------------------- Operating costs and expenses: Hotels: Property-level costs and expenses: Rooms............................... 29,029 32,853 Food and beverage................... 7,198 8,984 Other............................... 51,438 56,483 Other operating costs and expenses: System management fees.............. 4,366 5,047 Other management fees............... 10,572 16,334 Lease expense....................... 37,885 43,158 ----------------------- ----------------------- Total hotel expenses............. 140,488 162,859 ----------------------- ----------------------- Operating profit.................... 5,039 5,388 Corporate expenses............................... (253) (213) Interest expense................................. (181) (181) Interest income.................................. 1,209 172 ----------------------- ----------------------- Income before income taxes....................... 5,814 5,166 Income taxes..................................... (2,268) (2,067) ----------------------- ----------------------- Net income....................................... $ 3,546 $ 3,099 ======================= ======================= September 6, 2002 December 31, 2001 (unaudited) ----------------------- ----------------------- Assets........................................... $ 38,885 $ 34,670 Liabilities...................................... 9,232 8,563 Equity........................................... 29,653 26,107
8 HOSPITALITY PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) Operating results for these 53 Courtyard by Marriott(R) properties derived from data provided by Host and Barcelo-Crestline are detailed below:
Thirty-six weeks Thirty-six weeks ended ended September 6, 2002 September 7, 2001 (unaudited) (unaudited) ----------------------- ----------------------- Total hotel sales: Rooms................................... $ 133,620 $ 153,213 Food and beverage....................... 8,739 10,169 Other................................... 3,168 4,865 ----------------------- ----------------------- Total hotel sales....................... 145,527 168,247 ----------------------- ----------------------- Expenses: Rooms................................... 29,029 32,853 Food and beverage....................... 7,198 8,984 Other operating departments............. 1,179 1,034 General and administrative.............. 14,935 16,485 Utilities............................... 5,365 6,344 Repairs, maintenance and accidents...... 5,546 6,410 Marketing and sales..................... 5,397 5,383 Chain services.......................... 3,056 3,533 FF&E escrow deposits.................... 7,276 8,412 Real estate tax......................... 6,166 5,943 Land rent............................... 1,265 1,395 System fees............................. 4,366 5,047 Other costs............................. 1,253 1,544 ----------------------- ----------------------- Total departmental expenses............. 92,031 103,367 ----------------------- ----------------------- Hotel revenues in excess of property-level costs and expenses................................... $ 53,496 $ 64,880 ======================= =======================
Hotel revenues in excess of property-level costs and expenses, shown above, represent hotel-level cash flows after costs which are paid in priority to minimum rent due to us for this lease of $35,553 and $35,477 in the 2002 and 2001 periods, respectively. 9 HOSPITALITY PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview This discussion includes references to cash available for distribution, or CAD. We compute CAD as net income available for common shareholders plus depreciation and amortization expense, plus non-cash expenses (including only amortization of deferred financing costs and administrative expenses to be settled in our common shares), minus those deposits made into FF&E Escrow accounts which are owned by us but which are restricted to use for improvements at our properties. In calculating CAD, we also add percentage rents deferred during interim periods in accordance with GAAP. Our method of calculating CAD may not be comparable to CAD which may be reported by other REITs that define this term differently. We consider CAD to be an appropriate measure of performance for HPT, along with cash flow from operating activities, investing activities and financing activities, because it provides investors with an indication of HPT's operating performance and our ability to incur and service debt, make capital expenditures, pay distributions and fund other cash needs. Our CAD is an important factor considered by our Board of Trustees in determining the amount of our distributions to shareholders. CAD does not represent cash generated by operating activities in accordance with generally accepted accounting principles and should not be considered as an alternative to net income or cash flow from operating activities as measures of financial performance or liquidity. The following discussion should be read in conjunction with our Annual Report on Form 10-K. Current Events As a result of the terrorist attacks on the United States on September 11, 2001, concerns regarding the war on terrorism, and the impact of a recessionary economy, the U.S. hotel industry has experienced significant declines versus the comparable prior year period in occupancy, revenues and profitability. These declines primarily arise from reduced business travel and are in addition to declines which began to affect the hotel industry earlier in 2001 as a result of slowing business activity in the U.S. economy generally. Most of our hotel operators have reported declines, including during the third quarter of 2002, in the operating performance of our hotels versus comparable periods in the prior year. As of September 30, 2002, all of our rent payments are current. As described below, our leases and operating agreements contain security features, such as guarantees, which are intended to protect payment of minimum rents and returns to us in accordance with our leases and agreements regardless of hotel performance. However, the effectiveness of various security features to provide uninterrupted payments to us is not assured, particularly if travel patterns continue at depressed levels for extended periods. If our tenants, hotel managers or guarantors default in their payment obligations to us, our revenues will decline. Leases and Operating Agreements Each of our 251 hotels is included in one of nine groups of hotels of between 12 and 57 properties. These groups are each operated under pooled agreements by a third party as tenant or manager for initial terms expiring between 2010 and 2019. The agreements contain renewal options for all, but not less than all, of the properties in the same group, and the renewal terms total 20-48 years. Each agreement requires the lessee or operator to: pay all operating costs associated with the hotels; deposit a percentage of total hotel sales into reserves established for the regular refurbishment of our hotels ("FF&E Reserves"); make payments to us of minimum rents or returns; and make payments to us of additional returns equal to 5%-10% of increases in total hotel sales over sales during a specified base year. Each third party has posted a security or performance deposit with us generally equal to one year's minimum rent or return. One of the nine groups discussed above contains 35 hotels, including 18 operated by affiliates of Marriott International, Inc. ("Marriott") under long-term management contracts and leased to our 100% owned taxable REIT subsidiary, or TRS, as allowed by the tax laws applicable to REITs. The remaining 17 hotels in this group are leased to Marriott. Marriott obligations to pay rents and returns to us from the operation of all 35 of these hotels are combined for all purposes under these agreements. Each of the 17 hotels now leased to Marriott are expected to begin to be leased to our TRS and managed by Marriott from time to time prior to June 30, 2004. 10 HOSPITALITY PROPERTIES TRUST On June 15, 2001, we purchased four hotels managed by Marriott and our TRS began to lease an additional six hotels which we own. On September 7, 2001 and September 6, 2002, our TRS began to lease six and two hotels, respectively, which we own. Our TRS does not operate any hotels. Instead, after our TRS begins to lease each hotel, Marriott continues to operate the hotel as manager and our TRS begins to pay rent and FF&E reserves to our other subsidiaries. Because our TRS is consolidated with us, our consolidated income statement does not show rental income or FF&E reserve income paid by our TRS to our other subsidiaries; instead, our consolidated statements show hotel operating revenues and hotel operating expenses for these hotels. Historically, upon the transfer to us of hotel leasehold interests, the net of hotel operating revenues and hotel operating expenses has generally been equal to the rental income and FF&E reserve income previously attributable to that hotel, a condition we expect will continue as transfers occur under current market conditions. Results of Operations (dollar amounts in thousands, except per share amounts) Three Months Ended September 30, 2002 versus 2001 Total revenues for the 2002 third quarter were $89,821, an 8.0% increase over revenues of $83,188 for the 2001 third quarter. This increase is partially due to our TRS's activities and our hotel acquisitions. Rental income increased to $62,544 for the 2002 third quarter from $58,979 in the 2001 period as a result of our acquisition of 23 hotels since the end of the 2001 second quarter, which was partially offset by minimum rental income recognized in the 2001 period for hotels which subsequently began to be leased to our taxable REIT subsidiary, or TRS. FF&E reserve income represents amounts paid by our tenants into restricted accounts owned by us, the purpose of which is to accumulate funds for future capital expenditures. The terms of our leases require these amounts to be calculated as a percentage of total sales at our hotels. The FF&E reserve income for the 2002 third quarter was $5,773, a 5.8% decrease from FF&E reserve income of $6,126 for the 2001 third quarter. This decrease is due primarily to reduced levels of hotel sales attributable to the general slowdown of business travel across the United States described above, offset somewhat by a scheduled increase in the applicable percentage used to calculate FF&E reserves at some of our hotels. Part of this decrease is also due to activities related to the eight hotels which began to be leased by our TRS after the beginning of the 2001 third quarter; as discussed above, the revenues which are escrowed as FF&E reserves for hotels leased by our TRS subsidiary are not separately stated in our consolidated statements of income. Our TRS's activities have given rise to $21,469 of hotel operating revenues for the 2002 third quarter, a 20% increase in hotel operating revenues over the 2001 third quarter. Our TRS's activities have also given rise to $14,207 of hotel operating expenses for the 2002 third quarter, an 18% increase over the 2001 third quarter. The increases in hotel operating revenues and expenses were caused by activities at the eight hotels which began to be leased by our TRS subsequent to the beginning of the 2001 third quarter, partially offset by a 4.1% decline in hotel operating revenues and a 5.4% decline in operating expenses at hotels which were leased to our TRS during both periods. Hotel operating expenses during the 2002 period are reduced by payments of $859 from Marriott under the terms of its guarantee to us. These guarantee payments are $172, or 25%, higher than the amounts required in the comparable 2001 period. Interest income for the 2002 third quarter was $35, an 84.2% decrease from interest income of $222 for the 2001 third quarter. This decrease was due to a lower average cash balance and a lower average interest rate during the 2002 period. Total expenses for the 2002 third quarter were $53,576, a 7.3% increase over total expenses of $49,914 for the 2001 third quarter. The increase is due primarily to our recognition of hotel operating expenses for a larger number of hotels leased to our TRS in the 2002 period than in the 2001 period, and increases in other expenses arising from our additional hotel investments during 2001 and 2002. Interest expense for the 2002 third quarter was $10,892, a 3.3% increase over interest expense of $10,542 for the 2001 third quarter. The increase was primarily due to higher average borrowings partially offset by a lower weighted average interest rate during the 2002 period. Depreciation and amortization expense for the 2002 third quarter was $24,258, a 3.7% increase over depreciation and amortization expense of $23,396 for the 2001 third quarter. This increase was due 11 HOSPITALITY PROPERTIES TRUST principally to the impact of the depreciation of 23 hotels acquired subsequent to July 1, 2001, and the impact of the purchase of depreciable assets with funds from FF&E reserve accounts owned by us during 2001 and 2002. General and administrative expense for the 2002 third quarter was $4,219, an 8.1% increase from general and administrative expense of $3,902 in the 2001 third quarter. This increase is due principally to the impact of additional hotel investments during 2001 and 2002. Net income before extraordinary item for the 2002 third quarter was $36,245, an 8.9% increase over net income before extraordinary item of $33,274 for the 2001 third quarter. The increase was primarily due to increased rental income from new investments partially offset by a decrease in FF&E reserve income and increases in interest and depreciation expenses. In the third quarter 2002, we recognized an extraordinary loss of $1,600 to write-off the unamortized deferred financing costs associated with $115,000 of senior notes we redeemed on July 18, 2002. Net income available for common shareholders for the 2002 third quarter was $32,864, or $0.53 per share, a 4.4% increase, or 1.9% on a per share basis, over net income available for common shareholders of $31,493, or $0.52 per share, for the 2001 third quarter. This increase resulted from the investment and operating activity discussed above. The per share amount was also affected by our issuance of 6,000,000 common shares in August 2001. Cash Available for Distribution, or CAD, for the third quarters of 2002 and 2001 is derived as follows:
2002 2001 --------------- --------------- Net income available for common shareholders $ 32,864 $ 31,493 Add: Depreciation and amortization 24,258 23,396 Extraordinary item 1,600 -- Deferred percentage rents 591 430 Non-cash expenses, primarily amortization of deferred financing costs 1,084 998 Less: FF&E Reserves (1) (6,884) (7,008) --------------- --------------- Cash Available for Distribution $ 53,513 $ 49,309 =============== =============== (1)All of our leases require that our tenants make periodic payments into FF&E reserve escrow accounts for the purpose of funding expected capital expenditures at our hotels. Our net income includes $5,773 and $6,126 for the 2002 and 2001 third quarters, respectively, of tenant deposits into FF&E reserve escrow accounts owned by us, which are subtracted from net income in determining CAD because these amounts are not available to us for distributions to shareholders. The FF&E Reserves amounts shown here also include $1,111 and $882 for the 2002 and 2001 periods, respectively, of our hotel operating revenues, which we have escrowed for routine capital improvements for the hotels leased to our TRS and operated by Marriott under a long-term management agreement. Hotel revenues which are escrowed as FF&E reserves for our hotels leased by our TRS subsidiary are not separately stated in our consolidated statements of income. Some of our leases provide that FF&E Reserve escrow accounts are owned by our tenants during the lease terms while we have security and remainder interests in the escrow accounts and in property purchased with funding from those accounts. Deposits into FF&E reserve accounts owned by our tenants during the 2002 and 2001 periods, totaled $3,935 and $3,552, respectively, and are not removed here because they are not included in our income.
CAD for the 2002 third quarter was $53,513, an 8.5% increase over CAD of $49,309 for the 2001 third quarter. This increase was due primarily to the full quarter impact of our 2001 acquisition of two hotels subsequent to July 1, 2001, and the impact of our acquisition of 21 hotels during the 2002 second quarter, offset by increases in interest and general and administrative expenses, and a decrease in interest income. Nine Months Ended September 30, 2002 versus 2001 Total revenues for the first nine months of 2002 were $259,870, an 18.4% increase over revenues of $219,500 for the first nine months of 2001. This increase is partially due to our TRS's activities and our hotel acquisitions discussed above. 12 HOSPITALITY PROPERTIES TRUST Rental income in the first nine months of 2002 increased to $182,973 from $178,495 during the 2001 period, or 2.5%. This increase is a result of rents received for 25 hotels we acquired since January 1, 2001, offset by rental income for hotels which began to be leased to our TRS during this period as our TRS rents to us are eliminated in our consolidated statements of income. The FF&E reserve income for the first nine months of 2002 was $16,708, a 15.1% decrease from FF&E reserve income of $19,680 for the 2001 period. This decrease is due primarily to reduced levels of hotel sales attributable to the general slowdown of business travel described above offset somewhat by a scheduled increase in the applicable percentage used to calculate FF&E reserves at some of our hotels. Part of this decrease is also due to activities at the hotels which began to be leased by our TRS after the beginning of 2001; as discussed above, the revenues which are escrowed as FF&E reserves for hotels leased to our TRS subsidiary are not separately stated in our consolidated statements of income. Our TRS's activities have given rise to $59,918 of hotel operating revenues for the first nine months of 2002, a 190% increase in hotel operating revenues over the 2001 period. Our TRS's activities have also given rise to $38,605 of hotel operating expenses for the first nine months of 2002, a 177% increase over the 2001 period. These increases in hotel operating revenues and expenses were caused by activities at hotels which began to be leased by our TRS after January 1, 2001, offset partially by the 4.1% decline in hotel operating revenues and the 5.4% decline in operating expenses for hotels which were leased to our TRS during both periods. Hotel operating expenses during the 2002 period are reduced by payments of $3,174 from Marriott under its guarantee to us. These guarantee payments are $2,487, 362%, higher than the amounts attributable to the comparable 2001 period. Interest income for the 2002 period was $271, a 60.2% decrease from interest income of $681 for the 2001 period. This decrease was due to a lower average cash balance and a lower average interest rate during the 2002 period. Total expenses for the first nine months of 2002 were $154,804, a 24.1% increase over total expenses of $124,710 for the 2001 period. The increase is due primarily to our recognition of hotel operating expenses for a larger number of hotels leased to our TRS in the 2002 period than in the 2001 period, and increases in other expenses arising from our additional hotel investments during 2001 and 2002. Interest expense for the first nine months of 2002 was $32,005, a 2.4% increase over interest expense of $31,248 for the first nine months of 2001. The increase was primarily due to higher average borrowings, partially offset by a lower weighted average interest rate during the 2002 period. Depreciation and amortization expense for the first nine months of 2002 was $72,178, a 6.1% increase over depreciation and amortization expense of $68,025 for the 2001 period. This increase was due principally to the impact of the depreciation of 29 hotels acquired subsequent to January 1, 2001, and the impact of the purchase of depreciable assets with funds from FF&E reserve accounts owned by us during 2001 and 2002. General and administrative expense for the first nine months of 2002 was $12,016, a 4.4% increase from general and administrative expense of $11,508 in the 2001 period. This increase is due principally to the impact of additional hotel investments during 2001 and 2002, offset partially by previously unanticipated reimbursement of amounts expensed in a prior period related to a potential acquisition. Net income before extraordinary item for the first nine months of 2002 was $105,066, a 10.8% increase over net income before extraordinary item of $94,790 for the 2001 period. The increase was primarily due to increased rental income from new investments partially offset by decreases in FF&E reserve and interest income and increases in interest, depreciation and general and administrative expenses. In the third quarter 2002, we recognized an extraordinary loss of $1,600 to write-off the unamortized deferred financing costs associated with $115,000 of senior notes we redeemed on July 18, 2002. Net income available for common shareholders for the first nine months of 2002 was $98,122, or $1.57 per share, a 9.7% increase, or 1.3% on a per share basis, over net income available for common shareholders of $89,446, or $1.55 per share, for the 2001 period. This increase resulted from the investment and operating activity discussed above. The per share amount was also affected by our issuance of 6,000,000 common shares in August 2001. 13 HOSPITALITY PROPERTIES TRUST Cash Available for Distribution, or CAD, for the first nine months of 2002 and 2001 is derived as follows:
2002 2001 --------------- --------------- Net income available for common shareholders $ 98,122 $ 89,446 Add: Depreciation and amortization 72,178 68,025 Extraordinary item 1,600 -- Deferred percentage rents 1,897 3,413 Non-cash expenses, primarily amortization of deferred financing costs 3,168 2,894 Less: FF&E Reserves (1) (19,816) (20,698) --------------- --------------- Cash Available for Distribution $ 157,149 $143,080 =============== =============== (1)All of our leases require that our tenants make periodic payments into FF&E reserve escrow accounts for the purpose of funding expected capital expenditures at our hotels. Our net income includes $16,708 and $19,680 for the first nine months of 2002 and 2001, respectively, of tenant deposits into FF&E reserve escrow accounts owned by us, which are subtracted from net income in determining CAD because these amounts are not available to us for distributions to shareholders. The FF&E Reserves amounts shown here also include $3,108 and $1,018 for the 2002 and 2001 periods, respectively, of our hotel operating revenues, which we have escrowed for routine capital improvements for the hotels leased by our TRS and operated by Marriott under a long-term management agreement. Hotel revenues which are escrowed as FF&E reserves for our hotels leased by our TRS subsidiary are not separately stated in our consolidated statements of income. Some of our leases provide that FF&E Reserve escrow accounts are owned by our tenants during the lease terms while we have security and remainder interests in the escrow accounts and in property purchased with funding from those accounts. Deposits into FF&E reserve accounts owned by our tenants during the 2002 and 2001 periods, totaled $11,333 and $11,378, respectively, and are not removed here because they are not included in our income.
CAD for the first nine months of 2002 was $157,149, a 9.8% increase over CAD of $143,080 for the 2001 period. This increase was due primarily to the full impact of our acquisition of 29 hotels subsequent to January 1, 2001, offset by increases in interest and general and administrative expenses, a decrease in interest income and a decrease in deferred percentage rents. Liquidity and Capital Resources (dollar amounts in thousands, except per share amounts) Our Tenants and Operators All of our hotels are leased to or operated by third parties; we do not operate hotels. All costs of operating and maintaining our hotels are paid by these third parties for their own account or as agent for us. These third parties derive their funding for hotel operating expenses, reserves for renovations, or FF&E reserves, and rents and returns due us generally from hotel operating revenues. We define coverage as combined total hotel sales minus all expenses which are not subordinated to minimum payments to us and the required FF&E Reserve contributions, divided by the aggregate minimum payments to us. More detail regarding coverage, guarantees and other security features is presented in the table on pages 17 and 18. Eight of nine of our hotel pools, representing 227 hotels, generated coverage of at least 1.0x during 2001, and 4 hotel pools, representing 124 hotels generated coverage of at least 1.0x during their first three fiscal quarters of 2002. If a hotel pool does not generate coverage of at least 1.0x, our tenant or operator must supplement hotel operating results to make the minimum payments due us to prevent default under the agreements. In addition, 153 hotels we own in five pools, 58.2% of our total investments, at cost, are operated under leases or management agreements which are subject to full or limited guarantees of the parent companies of our tenants or operators. These parent company guarantees may provide us with continued payments if combined total hotel sales less total hotel expenses and required FF&E reserve payments fail to equal amounts due to us. Our tenants and managers or their affiliates may also supplement cash flow from our hotels in order to make payments to us and preserve their rights to continue operating our hotels. Guarantee or supplemental 14 HOSPITALITY PROPERTIES TRUST payments to us, if any, made under any of our leases or management agreements, do not subject us to repayment obligations. As of September 30, 2002, all payments due us, including those payments due under leases or operating agreements whose hotels have generated less than 1.0x coverage during 2002, are current. However, the effectiveness of various security features to provide uninterrupted payments to us is not assured, particularly if travel patterns continue at depressed levels for extended periods. If our tenants, hotel managers or guarantors default in their payment obligations to us, our revenues will decline. Our Operating Liquidity and Resources Our principal source of funds for current expenses and distributions to shareholders is our operations, primarily rents from leasing and the excess of hotel operating revenues over hotel operating expenses for hotels leased to our taxable REIT subsidiary. Minimum rents and minimum returns are received from our tenants and managers monthly in advance and percentage rents and returns are received either monthly or quarterly in arrears. This flow of funds has historically been sufficient for us to pay our operating expenses, including interest, and distributions. We believe that our operating cash flow will be sufficient to meet our operating expenses, including interest, and distribution payments for the foreseeable future. Our Investment and Financing Liquidity and Resources Various percentages of total sales at all of our hotels are escrowed as reserves for future renovations and refurbishment, or FF&E reserves, as discussed above. As of September 30, 2002, there was approximately $67,452 on deposit in these escrow accounts, of which $49,267 was held directly by us and reflected on our balance sheet as restricted cash. The remaining $18,185 is held in accounts owned by our tenants and is not reflected on our balance sheet. We have security and remainder interests in these accounts owned by our tenants. During the first nine months of 2002, $31,149 was deposited into these accounts and $16,566 was spent from these accounts to renovate and refurbish our hotels. In order to fund acquisitions and to accommodate occasional cash needs which may result from timing differences between the receipt of rents and the need to make distributions or pay operating expenses, we maintain a revolving credit facility with a group of commercial banks. The credit facility in effect at the beginning of 2002 expired in March 2002. Our new facility matures in June 2005 and may be extended at our option to June 2006 upon our payment of an extension fee. The new facility permits borrowing up to $350,000 and includes a feature under which the maximum draw may expand to $700,000, in certain circumstances. Drawings under our credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. Interest on borrowings under the credit facility is payable at a spread above LIBOR. At September 30, 2002, we had $503 of cash and cash equivalents and $267,000 available on our $350,000 revolving credit facility. We expect to use existing cash balances, borrowings under our credit facility or other lines of credit and net proceeds of offerings of equity or debt securities to fund future property acquisitions. At September 30, 2002, we had no commitments to purchase additional properties. However, we expect to make improvements and undertake a modernization program at 36 of our Courtyard by Marriott(R) hotels. These hotels contain 5,228 rooms, representing 51% of the total Courtyard by Marriott(R) rooms which we own. The majority of the expected $32.5 million of funding for this project is expected to take place before the end of the 2003 first quarter. Upon funding, our minimum annual rent related to these hotels will increase by 10% of the amount funded. We have no debt which matures in the next twelve months and no principal or sinking fund payments in the next twelve months. Our debts other than our credit facility have maturities as follows: $150,000 in 2008; $150,000 in 2009; $50,000 in 2010; and $125,000 in 2012. None of these debt obligations require principal or sinking fund payments prior to their maturity date. To the extent amounts are outstanding on our credit facility and, as the maturity dates of our credit facility and term debt approach over the longer term, we will explore alternatives for the repayment of amounts due. Such alternatives in the short term and long term may include incurring additional long term debt and issuing new equity securities. In March 2002, our shelf registration statement was declared effective by the Securities and Exchange Commission. As of September 30, 2002, we had $2,675,000 available on our shelf registration. An effective shelf registration allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for securities offered by us. Although there can be no assurance that we will consummate any debt or equity security offerings or other financings, we 15 HOSPITALITY PROPERTIES TRUST believe we will have access to various types of financing, including investment grade debt or equity securities offerings, with which to finance future acquisitions and to pay our debt and other obligations. On October 1, 2002, a distribution of $0.72 per common share was declared with respect to third quarter 2002 results and will be paid to shareholders on or about November 21, 2002, using cash on hand and borrowings under our revolving credit facility. Debt Covenants Our debt obligations at September 30, 2002, were limited to our revolving credit facility and our $475,000 of public debt. Each issue of our public debt is governed by an indenture. The indenture and its supplements and our credit facility agreement contain a number of financial ratio covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to maintain a minimum net worth, as defined, restrict our ability to make distributions under certain circumstances and require us to maintain other ratios, as defined. At September 30, 2002, we were in compliance with all of our covenants under our indenture and its supplements and our credit facility. Neither our indenture and its supplements nor our bank credit facility contain provisions for acceleration which could be triggered by our debt ratings. However, under our credit agreement, our senior debt rating is used to determine the fees and interest rate applied to borrowings. Our public debt indenture and its supplements contain cross default provisions to any of our other debts of $20,000 or more. Similarly, a default on our public indenture or any of its supplements would constitute a default under our credit agreement. As of September 30, 2002, we had no commercial paper, derivatives, swaps, hedges, guarantees, joint ventures or partnerships. As of September 30, 2002, we had no secured debt obligations. None of our debt documentation requires us to provide collateral security in the event of a ratings downgrade. We have no "off balance sheet" arrangements. Property Leases and Operating Agreements As of September 30, 2002, we owned 251 hotels which are grouped into nine combinations and leased to or managed by separate affiliates of: Marriott, Host, Barcelo-Crestline, Wyndham International, Inc. ("Wyndham"), BRE/Homestead Village ("Homestead"), Candlewood Hotel Company, Inc. ("Candlewood") and Prime Hospitality Corp. ("Prime"). The tables on the following pages summarize the key terms of our leases and other operating agreements as of September 30, 2002: 16 HOSPITALITY PROPERTIES TRUST
------------------------------ -------------------- --------------------- -------------------- -------------------- ---------------- Marriott(R)/ Residence Inn by Courtyard by Residence Inn by Residence Inn by Marriott(R)/ Wyndham(R)/ Hotel Brand Marriott(R) Marriott(R) Marriott(R)/ Courtyard by Wyndham Courtyard by Marriott(R)/ Garden(R) Marriott(R)/ TownePlace Suites TownePlace Suites by Marriott(R)/ by Marriott(R)/ SpringHill Suites SpringHill Suites by Marriott(R) by Marriott(R)(1) ------------------------------ -------------------- --------------------- -------------------- -------------------- ---------------- Number of Hotels 53 18 35 19 12 Number of Rooms 7,610 2,178 5,382 2,756 2,321 Number of States 24 14 15 14 8 Tenant Subsidiary of Host Subsidiary of Host Subsidiary of Subsidiary of Subsidiary of Subleased to Subleased to Marriott/Subsidiary Barcelo-Crestline Wyndham subsidiary of subsidiary of of Hospitality Barcelo-Crestline Barcelo-Crestline Properties Trust Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Marriott Marriott Marriott Marriott Wyndham Investment at September 30, 2002 (000s) (2) $514,139 $179,128 $453,954 $274,222 $182,570 Security Deposit (000s) $50,540 $17,220 $36,204 $28,508 $18,325 End of Initial Term 2012 2010 2019 2015 2014 Renewal Options (3) 3 for 12 1 for 10 years, 2 for 15 2 for 10 4 for 12 years each 2 for 15 years each years each years each years each Current Annual Minimum Rent/Return (000s) $51,414 $17,888 $48,288 $28,508 $18,325 Percentage Rent/Return (4) 5.0% 7.5% 7.0% 7.0% 8.0% Rent/Return Coverage (5) (6): Year ended 12/31/01 1.7x 1.4x 1.1x 1.0x 1.0x Twelve months ended 9/30/02 1.5x 1.1x 1.0x 1.0x 0.8x Nine months ended 9/30/02 1.5x 1.1x 1.0x 0.9x 0.9x Three months ended 9/30/02 1.5x 1.2x 1.0x 0.8x 0.7x Other Security Features HPT controlled HPT controlled Limited guarantee Limited guarantees Wyndham parent lockbox with minimum lockbox with minimum provided by Marriott.provided by minimum net balance maintenance balance maintenance Barcelo-Crestline worth requirement; requirement; and Marriott. requirement. subtenant and subtenant and subtenant parent subtenant parent minimum net worth minimum net worth requirement. requirement. ------------------------------ -------------------- --------------------- -------------------- -------------------- ---------------- (1) At September 30, 2002, 17 of the 35 hotels in this combination were leased to and operated by subsidiaries of Marriott. The remaining 18 hotels were operated by subsidiaries of Marriott under a management contract with our TRS subsidiary tenant. Marriott's obligations under the lease and the management contract are subject to cross default provisions and Marriott has provided us with a limited guarantee of its lease and management obligations, including the obligation to pay minimum rents and returns to us. (2) Excludes expenditures made from FF&E reserves subsequent to our initial purchase. (3) Renewal options may be exercised by the tenant or manager for all, but not less than all, of the hotels within a pool. (4) Each lease or management contract provides for payment to us of a percentage of increases in total hotel sales over base year levels as additional rent or return. (5) Coverage represents total hotel sales minus all hotel operating expenses which are not subordinated to minimum payments to us and required FF&E reserve contributions, divided by the aggregate minimum payments to us. (6) Represents data for the year ended December 28, 2001, and the 52, 36, and 12 weeks ended September 6, 2002, respectively for the hotel pools managed by Marriott.
17 HOSPITALITY PROPERTIES TRUST
------------------------------ ------------------- --------------------- -------------------- -------------------- ----------------- Summerfield Total / Suites by Wyndham(R) Candlewood Homestead Range / Hotel Brand AmeriSuites(R) Suites(R) Studio Suites(R) Average ------------------------------ ------------------- --------------------- -------------------- -------------------- ----------------- Number of Hotels 15 24 57 18 251 Number of Rooms 1,822 2,929 6,887 2,399 34,284 Number of States 8 13 27 5 37 Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Prime Candlewood Homestead Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Prime Candlewood Homestead Investment at September 30, 2002 (000s) (1) $240,000 $243,350 $434,750 $145,000 $2,667,113 Security Deposit (000s) $15,000 $25,575 (2) $47,297 $15,960 $254,629 End of Initial Term 2017 2013 2018 2015 2010-2019 (weighted average by investment, 13.6 years) Renewal Options (3) 4 for 12 3 for 15 3 for 15 2 for 15 years each years each years each years each Current Annual Minimum Rent/Return (000s) $25,000 $25,575 $45,507 $15,960 $276,465 Percentage Rent/Return (4) 7.5% 8.0% 10.0% 10.0% 5%-10% Rent/Return Coverage (5) (6): Year ended 12/31/01 1.1x 0.6x 1.1x 1.1x 0.6x-1.7x Twelve months ended 9/30/02 0.7x 0.6x 0.9x 1.0x 0.6x-1.5x Nine months ended 9/30/02 0.7x 0.7x 0.9x 1.1x 0.7x-1.5x Three months ended 9/30/02 0.7x 0.6x 0.9x 1.0x 0.6x-1.5x Other Security Features Wyndham parent Limited guarantee Candlewood parent Homestead parent minimum net worth provided by Prime, guarantee and guarantee and requirement. secured by $16.5 minimum net worth minimum net worth million cash requirement. requirement. deposit. ------------------------------ ------------------- --------------------- -------------------- -------------------- ----------------- (1) Excludes expenditures made from FF&E Reserves subsequent to our initial purchase. (2) Excludes other deposits totaling approximately $16.5 million at September 30, 2002, retained by us to secure guarantee obligations to us. (3) Renewal options may be exercised by the tenant or manager for all, but not less than all, of the hotels within a pool. (4) Each lease or management contract provides for payment to us of a percentage of increases in total hotel sales over base year levels as additional rent or return. (5) Coverage represents total hotel sales minus all hotel operating expenses which are not subordinated to minimum payments to us and required FF&E reserve contributions, divided by the aggregate minimum payments to us. (6) Represents data for the year ended December 28, 2001, and the 52, 36, and 12 weeks ended September 6, 2002, respectively for the hotel pools managed by Marriott.
18 HOSPITALITY PROPERTIES TRUST The following tables summarize the operating statistics, including occupancy, average daily rate, or ADR, and revenue per available room, or RevPAR, reported to us by our third party tenants and managers by brand for the periods indicated for the 247 hotels we own which were open for at least one full year as of January 1, 2002:
ADR Third Quarter (1) Year to Date (2) --- ----------------------------- ------------------------------- No. of No. of Brand Hotels Rooms 2002 2001 Change 2002 2001 Change ----- ------ ------ ---- ---- ------ ---- ---- ------ Courtyard by Marriott(R) 71 10,280 $93.35 $98.96 -5.7% $95.96 $102.45 -6.3% Residence Inn by Marriott(R) 36 4,543 $93.43 $102.02 -8.4% $95.37 $103.88 -8.2% Marriott Hotels Resorts & Suites(R) 3 1,356 $116.20 $124.70 -6.8% $117.23 $122.36 -4.2% TownePlace Suites by Marriott(R) and SpringHill Suites by 14 1,595 $65.30 $68.94 -5.3% $62.54 $68.29 -8.4% Marriott(R) Wyndham(R)and Wyndham Garden(R) 12 2,321 $79.96 $84.80 -5.7% $83.78 $93.82 -10.7% Summerfield Suites by Wyndham(R) 15 1,822 $98.49 $118.47 -16.9% $103.41 $124.99 -17.3% AmeriSuites(R) 21 2,556 $69.73 $71.10 -1.9% $69.78 $74.09 -5.8% Candlewood Suites(R) 57 6,887 $52.43 $55.28 -5.2% $52.85 $57.63 -8.3% Homestead Studio Suites(R) 18 2,399 $49.10 $51.05 -3.8% $49.07 $53.78 -8.8% ------- --------- -------- --------- ---------- ---------- ---------- --------- Total/Average 247 33,759 $78.59 $84.30 -6.8% $79.90 $87.44 -8.6% OCCUPANCY Third Quarter (1) Year to Date (2) --------- ----------------------------- ------------------------------- No. of No. of Brand of Hotels Rooms 2002 2001 Change 2002 2001 Change ----- --------- ------ ---- ---- ------ ---- ---- ------ Courtyard by Marriott(R) 71 10,280 72.8% 75.3% -3.3% 70.0% 74.7% -6.3% Residence Inn by Marriott(R) 36 4,543 81.8% 81.4% +0.5% 77.8% 80.0% -2.8% Marriott Hotels Resorts & Suites(R) 3 1,356 81.2% 78.1% +4.0% 78.2% 76.9% +1.7% TownePlace Suites by Marriott(R) and SpringHill Suites by 14 1,595 77.7% 75.9% +2.4% 72.3% 71.4% +1.3% Marriott(R) Wyndham(R)and Wyndham Garden(R) 12 2,321 71.5% 66.9% +6.9% 71.5% 69.7% +2.6% Summerfield Suites by Wyndham(R) 15 1,822 84.7% 75.8% +11.7% 79.9% 78.1% +2.3% AmeriSuites(R) 21 2,556 63.0% 63.8% -1.3% 64.1% 63.7% +0.6% Candlewood Suites(R) 57 6,887 78.4% 77.5% +1.2% 77.2% 75.5% +2.3% Homestead Studio Suites(R) 18 2,399 74.1% 75.8% -2.2% 75.9% 77.7% -2.3% ------- --------- -------- --------- ---------- ---------- ---------- --------- Total/Average 247 33,759 75.6% 75.2% +0.5% 73.6% 74.7% -1.5% RevPAR Third Quarter (1) Year to Date (2) ------ ----------------------------- ------------------------------- No. of No. of Brand of Hotels Rooms 2002 2001 Change 2002 2001 Change ----- --------- ------ ---- ---- ------ ---- ---- ------ Courtyard by Marriott(R) 71 10,280 $67.96 $74.52 -8.8% $67.17 $76.53 -12.2% Residence Inn by Marriott(R) 36 4,543 $76.43 $83.04 -8.0% $74.20 $83.10 -10.7% Marriott Hotels Resorts & Suites(R) 3 1,356 $94.35 $97.39 -3.1% $91.67 $94.09 -2.6% TownePlace Suites by Marriott(R) and SpringHill Suites by 14 1,595 $50.74 $52.33 -3.0% $45.22 $48.76 -7.3% Marriott(R) Wyndham(R)and Wyndham Garden(R) 12 2,321 $57.17 $56.73 +0.8% $59.90 $65.39 -8.4% Summerfield Suites by Wyndham(R) 15 1,822 $83.42 $89.80 -7.1% $82.62 $97.62 -15.4% AmeriSuites(R) 21 2,556 $43.93 $45.36 -3.2% $44.73 $47.20 -5.2% Candlewood Suites(R) 57 6,887 $41.11 $42.84 -4.0% $40.80 $43.51 -6.2% Homestead Studio Suites(R) 18 2,399 $36.38 $38.70 -6.0% $37.24 $41.79 -10.9% ------- --------- -------- --------- ---------- ---------- ---------- --------- Total/Average 247 33,759 $59.41 $63.39 -6.3% $58.81 $65.32 -10.0% (1) Includes data for the three months ended September 30th, except for our Courtyard by Marriott(R), Residence by Marriott(R), Marriott Hotels Resorts and Suites(R), TownePlace Suites by Marriott(R), and SpringHill Suites by Marriott(R) branded hotels, which include data for the 12 weeks ended September 6, 2002 and September 7, 2001. (2) Includes data for the nine months ended September 30th, except for our Courtyard by Marriott(R), Residence by Marriott(R), Marriott Hotels Resorts and Suites(R), TownePlace Suites by Marriott(R), and SpringHill Suites by Marriott(R) branded hotels, which include data for the 36 weeks ended September 6, 2002 and September 7, 2001.
19 HOSPITALITY PROPERTIES TRUST Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands) There have been no material changes in our exposures to market risk or in the manner in which we manage exposure to market risk since December 31, 2001, other than an increase in the amount outstanding on our revolving credit facility. The following table shows the impact a 10% change in interest rates would have on our interest expense for our floating rate debt:
Interest Debt Annualized Interest Impact of Circumstance Rate Outstanding Expense Change ------------ ---- ----------- ------- ------ Conditions at Sept. 30, 2002 3.2% $83,000 $2,656 -- A 10% increase 3.5% $83,000 $2,905 $249 A 10% decrease 2.9% $83,000 $2,407 ($249)
The foregoing table shows the impact of an immediate change in floating interest rates. If these changes occurred gradually over time the impact would be spread over time. Item 4. Controls and Procedures a) Within the 90 days prior to the date of this report, management of the Company carried out an evaluation, under the supervision and with the participation of our Managing Trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based upon that evaluation, our Managing Trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings. b) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls since the Company's evaluation of these controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 20 HOSPITALITY PROPERTIES TRUST CERTAIN IMPORTANT FACTORS THIS Quarterly Report on Form 10-Q contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the securities and exchange act of 1934, as amended. our forward looking statements are based upon our present beliefs and expectations; however, they are not guaranteed to occur. for example, several of our tenants and hotel operators have continued to pay amounts due to us although our hotels which they operate appear to be producing lesser amounts of operating income than the payments made to us. any inference that we will continue to receive rents and returns if these circumstances continue may be unwarranted. if the operating results at our hotels do not improve, our tenants and operators may be unable or unwilling to pay amounts due to us. our hotel operating results have declined in the past year. if our hotel operating results continue to decline or do not improve, all of the security features which we have in our leases and management agreements may be insufficient to protect our future income and the value of our properties may decline. if our tenants or hotel operators stop paying the amounts due to us, we may be unable to pay our expenses or distributions to shareholders. investors are cautioned not to place undue reliance upon forward looking statements. OUR AMENDED AND RESTATED DECLARATION OF TRUST, DATED AUGUST 21, 1995, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS 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. 21 HOSPITALITY PROPERTIES TRUST PART II Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Distributions 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K (i) On July 1, 2002, we filed a current Report on Form 8-K, reporting our appointment of Ernst & Young LLP as our independent auditor (Item 4) and our sale of $125 million of 6.85% Senior Notes due 2012 (Items 5 and 7). (ii) On October 1, 2002, we filed a current Report on Form 8-K, reporting the election of officers (Item 5). 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOSPITALITY PROPERTIES TRUST /s/John G. Murray ---------------------------------------------- John G. Murray President and Chief Operating Officer Dated: November 1, 2002 /s/Mark L. Kleifges ---------------------------------------------- Mark L. Kleifges Treasurer and Chief Financial Officer Dated: November 1, 2002 23 CERTIFICATIONS I, Barry M. Portnoy, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hospitality Properties Trust; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 /s/Barry M. Portnoy ------------------- --------------------------- Barry M. Portnoy Managing Trustee 24 I, Gerard M. Martin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hospitality Properties Trust; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 /s/Gerard M. Martin ------------------- --------------------------- Gerard M. Martin Managing Trustee 25 I, John G. Murray, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hospitality Properties Trust; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 /s/John G. Murray ------------------- ------------------------------------- John G. Murray President and Chief Operating Officer 26 I, Mark L. Kleifges, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hospitality Properties Trust; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 /s/Mark L. Kleifges ------------------- ------------------------------------- Mark L. Kleifges Treasurer and Chief Financial Officer 27