21% ytm bonds backed by hotels and truck stops at 50% LTV. Hospitality Properties Trust (NYSE:HPT) is a conservatively operated and financed hotel and truck stop REIT with no meaningful debt maturities until 2011. Although I discuss only the 2013 notes, HPT has other durations which trade at 15-19% ytms. You may also refer to my spectacularly ill-timed 2007 writeup of HPT-PC for additional company background.
HPT today suspended their regular quarterly common dividend so cash could be directed toward debt repurchase/retirement. They will continue to pay their preferred dividends and will assess capital markets and taxable income in Q4 to determine the required common payout and whether any or all of it will be paid in stock per recent IRS ruling.
2668 - Debt 169 - Security Deposits 136 - other ------- 2974 - Total liabilities
404 - Preferred 2198 - Common equity
Notes: Think of security deposits as float. They bear no interest and are only repaid if a hotel lease expires and the tenant vacates. They are not repaid if a tenant defaults. HPT's leases are long term (14.5 year average remaining term). The leases are for groups of hotels and renewal is all-or-none, so the tenant cannot vacate a few losers and stay in the rest.
Debt includes a 3.56m mortgage due in 2011. The other debt is senior usecured, including 394m drawn on their 750m revolver. Debt also includes a 575m senior convertible nominally due in 2027 but with a 3/15/2012 put option. In February 2009 HPT repurchased and retired 113.3m of this convertible for 81.8m.
MATURITIES (MMs)
2010 - 50 2011 - 400 (396 is revolver initially due in OCT 10 plus one year extension) 2012 - 587 (includes 462 of remaining senior convertible notes) 2013 - 300 (subject of this writeup) 2015 - 300 2016 - 275 2017 - 300 2018 - 350
2012 is clearly the Big Kahuna. I believe they can roll the revolver, by granting some security if nothing else. HPT has historically avoided secured debt, but this is a historically tight credit market.
2008 CASH FLOWS
Annualizing 4Q08 gives us roughly 600m EBITDA vs. only 150m in interest. 4x coverage leaves ample headroom even as fundamentals deteriorate. Maintenance capex is nominally around 150m/year but hotels typically defer capex in downturns. HPT has been paying 325m in annual dividends. As noted above they just suspended the 295m/year common dividend. The 600m EBITDA does not include 60m/year of TA rent which is currently being deferred (see below).
HOTELS
HPT's 289 hotels are geographically distributed throughout the USA, plus two in Canada and one in Puerto Rico. A taxable REIT subsidiary (TRS) leases 2/3rds of them, hiring operators for day-to-day management. The other hotels are leased directly to third parties. The hotels operate under a variety of flags:
Courtyard by Marriott®, Candlewood Suites®, Staybridge Suites®, Residence Inn by Marriott®, Crowne Plaza Hotels & Resorts®, Hyatt Place™, AmeriSuites®, InterContinental Hotels & Resorts®, Marriott Hotels and Resorts®, Radisson® Hotels & Resorts, TownePlace Suites by Marriott®, Country Inns & Suites by Carlson®, Holiday Inn Hotels & Resorts®, SpringHill Suites by Marriott®, or Park Plaza® Hotels & Resorts.
HPT has owned the vast majority of their hotels for more than five years so book value does not reflect bubble-inflated pricing. Hotel operating results are under pressure due to overbuilding and recession. Highly levered hoteliers face restructuring, but HPT solvency is not threatened under current forecasts. HPT's 10K shows lease terms and coverage ratios for each lease group. Tenants generally dip into their own pocket during downturns to cover rent deficiencies, though they will abandon leases which promise to be uneconomic over the long term. HPT replaced a few tenants after 9/11, but actually increased their common dividend at a time when other hotel REITs were fighting off bankruptcy.
Marriott operates 125 of HPT's hotels under five separate agreemnets. Marriott is deficient under one contract covering 34 hotels. Marriott paid only 2.55m of the contracted 3.39m for the 4-week period starting 3/28/09. HPT applied 837k of the 36m security deposit to cover the shortfall and is in discussions with Marriott.
TRUCK STOPS
HPT's 185 truck stops, aka Travel Centers, operate in 39 states. HPT bought the bulk of these properties in early 2007, then created and spun off TravelCenters of America (AMeX:TA) to lease and operate them. HPT subsequently acquired additional truck stops to lease to TA. You can read more about the truck stops in past VIC writeups of TA. HPT overpaid for the truck stops and it is not clear TA can make their rent on a full-cycle basis. When crude oil spiked to $147/bbl in 2008 TA came up short. Since then TA has paid 14.6m per month in cash rent and 5m in IOUs. Note that HPT's financials (and my numbers) do not count this deferred rent as income, but TA's financials do count the deferred rent as an expense. Be sure to adjust for this if you try to "re-consolidate" the two entities.
In Q4 TA continued to defer 5m/month of cash rent but did cover the full rent on a GAAP basis due to falling oil prices, expense reductions and other operational adjustments. Time will tell if they can sustain this performance. If so it will add 60m/year to HPT's EBITDA and further improve coverage.
SUMMARY
Credit markets are rife with opportunity these days, but it's hard to find 21% ytm for paper like this. I can't fully explain the magnitude of the selloff, except to note the big 2012 maturity. It's also possible institutions are selling ahead of a potential downgrade below BBB. TEV through these bonds at today's prices is roughly 1.5b, less than 1/4th the historical cost of these cash-flowing assets.
Catalyst
Maturity in 2013 Credit market thaw Repurchase of most/all 2027 converts
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