Related Person Transactions

6 Months Ended

Jun. 30, 2012

Related Person Transactions

Related Person Transactions

Note 11. Related Person Transactions

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

Pursuant to our business management and property management agreements with RMR, we incurred expenses of $9,934 and $8,589 for the three months ended June 30, 2012 and 2011, respectively, and $18,582 and $16,874 for the six months ended June 30, 2012 and 2011, respectively.  In March 2012, we issued 33,132 shares to RMR in satisfaction of the incentive fee RMR earned for services provided to us during 2011, in accordance with the terms of the business management agreement.  These amounts are included in general and administrative expenses in our condensed consolidated financial statements.

TA is our former 100% owned subsidiary.  TA became a public company in a spin off transaction in 2007. We are TA’s largest shareholder and, as of the date of this report, we owned 2,540,000 common shares of TA, or approximately 8.8% of TA’s outstanding common shares.  One of our Managing Trustees, Mr. Barry Portnoy, is also a managing director of TA.  RMR provides management services to both us and TA.

TA is our largest tenant and has two leases with us, the TA No. 1 lease and the TA No. 2 lease, pursuant to which TA currently leases 185 travel centers from us.  The TA No. 1 lease is for 145 travel centers that TA operates under the “TravelCenters of America” or “TA” brand names.   The TA No. 2 lease is for 40 travel centers that TA operates under the “Petro” brand name.  The TA No. 1 lease expires on December 31, 2022.  The TA No. 2 lease expires on June 30, 2024, and may be extended by TA for up to two additional periods of 15 years each.  Both of these leases require TA to: (1) make payments to us of minimum rents; (2) pay us percentage rent equal to 3% of non-fuel revenue and 0.3% of fuel revenues over threshold amounts established in 2011 and to be established in 2012 (with the first $2,500 of percentage rents under the TA No. 2 lease previously waived by us), respectively; and (3) maintain the leased travel centers, including structural and non-structural components.  In addition to minimum and percentage rent, TA is obligated to pay us ground rent of approximately $5,126 per year under the TA No. 1 lease.  Previously deferred rent due from TA of $107,085 and $42,915 is due in December 2022 and June 2024, respectively.  We have not recognized any of the deferred rent as rental income or as rents receivable due to uncertainties regarding future collection.

We recognized rental income from our leases with TA of $51,592 and $50,254 for the three months ended June 30, 2012 and 2011, respectively, and $102,909 and $100,086 for the six months ended June 30, 2012 and 2011, respectively.  Rental income for the three and six months ended June 30, 2012 and 2011 includes ($69) and $287, respectively, and $1,195 and $2,399, respectively, of adjustments necessary to record rent on our TA No. 1 lease on a straight line basis.  We had deferred percentage rent under our TA No. 1 lease of $471 and $1,200 for the three and six months ended June 30, 2012, respectively.  We determine percentage rent due under our TA No. 1 lease annually and recognize it at year end when all contingencies are met.

Under both of our leases with TA, TA may request that we fund additional amounts for capital improvements to the leased facilities in return for minimum rent increases; however TA is not required to request that we fund those capital improvements it makes to our properties and we are not required to fund any such request.  We funded $18,065 for capital improvements to TA under this lease provision during the six months ended June 30, 2012, which resulted in a $1,536 increase in our annual minimum rents.  See Note 10 above for more information about TA.

The stockholders of Sonesta are Mr. Barry Portnoy and Mr. Adam Portnoy, who are our Managing Trustees, and they also serve as directors of Sonesta.  As noted above, Messrs. Barry and Adam Portnoy have relationships with RMR and RMR provides services to us and to Sonesta.

On November 2, 2011, we entered into a purchase agreement, or the Purchase Agreement, with Sonesta and its wholly owned subsidiary, PAC Merger Corp., or Merger Sub, and together with Sonesta, the Sellers, to purchase from Sonesta the entities, or the Hotel Entities, that own the Cambridge Hotel and lease the New Orleans Hotel.  At that time, the Cambridge Hotel and the New Orleans Hotel were owned or leased and operated by subsidiaries of what was then known as Sonesta International Hotels Corporation, or SNSTA.  The Purchase Agreement was a component part of a transaction that involved the acquisition by merger, or the Merger, of all of SNSTA’s shares by Sonesta pursuant to an agreement and plan of merger, or the Merger Agreement, which was entered into between Sonesta, Merger Sub and SNSTA on November 2, 2011.

Pursuant to the Merger Agreement, on January 31, 2012, Merger Sub merged with and into SNSTA.  Pursuant to the Purchase Agreement, we advanced the approximately $150,500 aggregate purchase price for the Hotel Entities to the Sellers for the purpose of the Sellers consummating the Merger under the Merger Agreement.  The purchase price was reduced by the outstanding principal and accrued interest owed under a variable rate mortgage loan due in 2015 secured by the Cambridge Hotel, or the Cambridge Loan. We prepaid this mortgage loan, which had an outstanding principal balance of approximately $31,035, and unwound a related interest rate hedge agreement for $2,525 on January 31, 2012.

Pursuant to the Purchase Agreement, following the consummation of the Merger, Sonesta initiated a restructuring of SNSTA, which resulted in SNSTA owning equity interests of the Hotel Entities and certain related assets and the Hotel Entities owning only the real estate comprising the Cambridge Hotel and the leasehold for the New Orleans Hotel and related furniture, fixtures and equipment and certain other assets, and in Sonesta or its subsidiaries (other than SNSTA and its subsidiary Hotel Entities) owning the other assets of SNSTA, including its management businesses and brands and assuming all liabilities of SNSTA, other than the liabilities associated with the Cambridge Loan, income taxes, taxes related to retained assets and certain payables and other liabilities. Pursuant to the Purchase Agreement, after giving effect to that restructuring, Sonesta then transferred to us all of the then issued and outstanding capital stock of SNSTA (which then owned the Hotel Entities, which in turn own or lease the Cambridge Hotel and the New Orleans Hotel), free and clear of any liens, encumbrances or other restrictions (other than the Cambridge Loan and certain other matters).  Sonesta retained the management business of SNSTA and Sonesta has begun to manage certain of our other hotels, as described below, and we currently expect that Sonesta and its Sonesta management team will be available to operate other of our hotels, including certain hotels we now own and we are considering rebranding and hotels we may selectively acquire in the future.

Simultaneously with consummation of the Purchase Agreement on January 31, 2012, we entered hotel management agreements with Sonesta, which provide for Sonesta to manage for us each of the Cambridge Hotel and the New Orleans Hotel.  Routine property maintenance, which is expensed, is an operating expense of the hotels and repairs and periodic renovations, which are capitalized, are funded by us, except in the case of the New Orleans Hotel where capital expenditures are borne in large part by the lessor.  Under these agreements, capitalized improvements over threshold amounts are added to our invested capital.

In April 2012, we entered into a hotel management agreement with Sonesta for the Hilton Head Resort, a hotel historically owned by us and managed by a subsidiary of InterContinental Hotels Group, plc, or InterContinental, under its Crowne Plaza brand.  That hotel has been branded as a Sonesta hotel.  In addition, in April 2012, we entered into a pooling agreement with Sonesta, under which, we and Sonesta agreed that the management agreements for the Cambridge Hotel and the Hilton Head Resort, along with other hotels which in the future may be managed for us by Sonesta and which we and Sonesta may agree will be added to the pooling agreement, are to be combined for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and the calculation of minimum returns due to us.  We refer to this agreement and combination of hotels as our Sonesta No. 1 agreement.

In May 2012, we entered into a hotel management agreement with Sonesta for the Harbor Court Baltimore, a hotel historically owned by us and managed by InterContinental, under its InterContinental brand.  The Harbor Court Baltimore has been rebranded as a Royal Sonesta hotel and the management agreement for that hotel was added to the Sonesta No. 1 agreement discussed above.

In June 2012, we entered into hotel management agreements with Sonesta for two additional hotels historically owned by us and managed by InterContinental.  The first of these agreements relates to the former Staybridge Suites branded, limited service hotel located in Burlington, Massachusetts and the second relates to the former Crowne Plaza branded, full service hotel located in Philadelphia, Pennsylvania.  The former Staybridge Suites hotel has been rebranded as a Sonesta ES Suites hotel, and the former Crowne Plaza hotel has been rebranded as a Sonesta hotel.  Both of the management agreements for these hotels were added to the Sonesta No. 1 agreement discussed above.

In July 2012, we entered into seven hotel management agreements with Sonesta for seven additional hotels historically owned by us and managed by InterContinental.  Six of these agreements relate to the former Staybridge Suites branded, limited service hotels located in Orlando, Florida, Andover, Massachusetts, Parsippany, New Jersey, Malvern, Pennsylvania, Somerset, New Jersey, and Princeton, New Jersey, and one agreement related to the former InterContinental branded, full service hotel located in Houston, Texas. Three of those former Staybridge Suites hotels have been rebranded as Sonesta ES Suites hotels, and that former InterContinental hotel has been rebranded as a Royal Sonesta hotel.  We expect the other three of those Staybridge Suites hotels to be rebranded as Sonesta ES Suites hotels during August 2012.  All of the management agreements for these hotels were added to the Sonesta No. 1 agreement discussed above.

In August 2012, we entered into six hotel management agreements with Sonesta for six additional hotels historically owned by us and managed by InterContinental.  Those agreements relate to the former Staybridge Suites branded, limited service hotels located in Houston, Texas, Columbia, Maryland, Charlotte, North Carolina, Atlanta, Georgia, St. Louis, Missouri, and Myrtle Beach, South Carolina.  We expect these six hotels to be rebranded as Sonesta ES Suites hotels during August 2012.  All of the management agreements for these hotels were added to the Sonesta No. 1 agreement discussed above.

Pursuant to our management agreements with Sonesta, we incurred management fees and related expenses of $1,173 and $1,633 for the three and six months ended June 30, 2012.  These amounts are included in hotel operating expenses in our condensed consolidated financial statements.

We have provided notice to InterContinental that two additional hotels that we own and that are currently being managed by InterContinental will be removed from our management agreement with InterContinental (which InterContinental agreement is further described in Note 12 below).  In August 2012, we entered into agreements to sell these two hotels.  One agreement provides for our sale of the Staybridge Suites branded, limited service hotel located in Schaumburg, Illinois to Schaumberg Suites LLC for a cash purchase price of $2,060, and the other agreement provides for our sale of the Staybridge Suites branded, limited service hotel located in Auburn Hills, Michigan to Auburn Hills Suites LLC for a cash purchase price of $3,510.  We expect to complete the two sales in the third quarter of 2012.  The sales are subject to closing conditions, which may result in cancellation of one or both of these transactions.  We understand that the buyers intend to enter into management agreements for those hotels with Sonesta.  The buyers are affiliates of RMR, our manager, and are owned by Mr. Barry Portnoy and Mr. Adam Portnoy, who are our Managing Trustees.  As noted above, Messrs. Barry and Adam Portnoy have relationships with RMR and RMR provides services to us and to Sonesta.  The purchase price to be paid for these two hotels is equal to prices agreed between us and InterContinental and this sale was approved by our Independent Trustees after considering an appraisal report.

We have provided notice to Marriott that two hotels will be removed from the management agreement we have with Marriott that we refer to as our Marriott No. 234 agreement (which agreement is further described in Note 12 below) and rebranded as Sonesta branded hotels.  We entered into hotel management agreements with Sonesta to manage these hotels and we expect these hotels will be added to the Sonesta No. 1 agreement during the third quarter of 2012.  For more information about our management agreements with Sonesta, please see Note 12 below.

We, RMR, TA and five other companies to which RMR provides management services each currently own 12.5% of AIC, an Indiana insurance company.  One of those five other companies became a shareholder of AIC during the quarter ended June 30, 2012.  All of our Trustees, and nearly all of the trustees and directors of the other AIC shareholders currently serve on the board of directors of AIC.  RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC.  Our investment in AIC had a carrying value of $5,408 and $5,291 as of June 30, 2012 and December 31, 2011, respectively.  We recognized income of $76 and $46 for the three months ended June 30, 2012 and 2011, respectively, and $121 and $83 for the six months ended June 30, 2012 and 2011, respectively, related to this investment.  We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2012 for a one year term and we paid a premium, including taxes and fees, of $5,256 in connection with that renewal, which amount may be adjusted from time to time in response to our acquisition and disposition of properties that are included in that program.  We are also currently investigating the possibilities to expand our insurance relationships with AIC to include other types of insurance.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business.

For further information about these and other such relationships and related person transactions, please see elsewhere in this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” in Part I, Item 2, “Warning Concerning Forward Looking Statements,” and Part II, Item 5 “Other Information”, and our 2011 Annual Report, our Proxy Statement for our 2012 Annual Meeting of Shareholders dated February 29, 2012, or our Proxy Statement, our Current Reports on Forms 8-K dated April 23, 2012, May 30, 2012, June 12, 2012, July 6, 2012, July 16, 2012 and July 25, 2012, and our other filings with the SEC, including Note 8 to our Consolidated Financial Statements included in our 2011 Annual Report, the sections captioned “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” of our 2011 Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” and the information regarding our Trustees and executive officers in our Proxy Statement.  In addition, please see the section captioned “Risk Factors” of our 2011 Annual Report for a description of risks that may arise from these transactions and relationships.  Our filings with the SEC, including our 2011 Annual Report and our Proxy Statement, are available at the SEC’s website at www.sec.gov.  In addition, copies of certain of our agreements with these parties, including our business management agreement and property management agreement with RMR, various agreements we have with TA and Sonesta, our purchase and sale agreements with affiliates of RMR and our shareholders agreement with AIC and its shareholders, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.