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Hospitality Properties Trust (NYSE: HPT) is a real estate investment trust that owns over 292 hotel properties throughout United States. The company does not manage its own hotels but makes money by leasing them to third parties. A large portion of these rental fees are guaranteed, providing HPT with a stable source of income independent of short term economic conditions and shocks to travel industry.[1].
In 2007, HPT diverged from its hotel roots with its purchase of TravelCenters of America LLC (TA) . TA provides professional truck drivers with fuel, snacks and other amenities. The addition of TA, increases the company’s exposure to fuel prices. From 2005-2007, rising fuel prices have led to record bankruptcies among truckers, TA's main customers. Moreover, as trucking companies attempt to raise prices to compensate, other alternatives such as rail transportation become more attractive.
[edit] Business Financials
Hospital Properties Trust generates revenue from two key business segments. HPT generates revenue from leasing out its properties. It also receives revenue for every room that a customer stays in. Its contracts typically stipulate a lease rate, and plus a fixed amount per occupied room. A smaller third sub-category is the money earned through the percentage clause in the lease agreements. When hotels have occupancy rates above a certain percentage, HPT receives bonus payments.
In 2007 HPT branched out into a second major business segment and created TravelCenters of America.
Due to an increase in the number of travelers and stagnation in the construction of new rooms, HPT as been able to increase the average prices of an overnight stay by 30% in the past five years. This factor partially accounts for the increase in revenue over the past five years.
Another factor explaining the positive trend is the long-term effect of the terrorist attacks of September 11, 2001 on the travel industry. Following the attacks, fewer hotel rooms came online due to grim economic projections, and HPT and fellow competitors in the lodgings industry are reaping the benefits of reduced supply in a recovering travel industry.
HPT does most of its business in the southern and western parts of the country. Most of its holdings in the West are in California which along with Texas is the most heavily invested in states by HPT. This leaves the company vulnerable to both hurricanes, Katrina for example, and earthquakes. Consumer confidence would be weakened and those popular vacation destinations would suffer from tourists heading elsewhere. Since HPT has such a high concentration of properties in these areas it would suffer losses. However, since many of HPT's hotels are located in close proximity to other hotels such catastrophes would not strengthen a competitor, but rather damage the industry as a whole in that locale.
[edit] Key Trends and Forces
- Short-term and Long-term trends in Interest Rates: HPT is a highly leveraged company with 2.6 billion dollars in debt or 48% of its total book capitalization [5]. This debt is split into two key segments, fixed rate credit notes and a short-term revolving credit facility. Of the 2.6 billion in debt, 2.425 billion is in long-term fixed-rate credit notes. The notes are structured such that no principal payments are made until the maturation of the note, but interest is still collected. The first of these notes comes to maturation in 2008 [6]. At that point, HPT can either refinance the loan at a new interest rate dictated by the market or pay off the principal. Short-term fluctuations in interest rates do not affect these loans but long-term trends in rates have a large impact on HPT, especially if market conditions force them to refinance at significantly higher rates than they had before. The remainder of HPT's debt is in its revolving credit facility in which they currently have a balance of 158million, and they still have 592 million available to them. Short-term interest rates dictate how much HPT has to pay on these loans. .
- HPT has limited exposure to shocks in the travel industry: A terrorist attack, natural disaster, or other catastrophe will negatively affect consumer confidence lowering consumer demand for lodging and other travel goods. After September 11, 2001, consumer demand dropped precipitously, causing a slump that from which it took the travel industries several years to understand. of[7]. The terrorist attacks affected HPT and the industry as a whole. Immediately after the attacks employment in the sector fell 58,000 and relative equity values for hotels and leisure facilities fell by 15%[8]. Specifically HPT's holdings that year suffered a 6.8% decline in average daily rates and a 0.6% decline in occupancy, and RevPar was down 7.3%[9]. HPT also waived clauses in its agreement with certain tenants that mandated a particular net worth in the aftermath of the attacks. The bottom line was not affected because HPT the lease clauses insulate HPT from sudden market movements and their net income posted a year over year increase in 2002. International or domestic crises that have a long-term effect have a greater potential to negatively affect revenues and net income, and require HPT to rework some of their lease agreements to keep their tenants afloat and hotels running[10].
- The Effect of Oil Prices on Tourism and HPT: Higher oil prices force airlines and gas stations to charge elevated prices, and makes vacations more expensive. Higher oil prices also affect the amount of disposable income that consumers have. If the commute to work that used to cost $40 a week a year ago now costs closer to $80 then that is $40 a week that is no longer being spent on leisure. This bodes poorly for elastic goods such as vacations that are easy to eliminate to cut costs.
More directly, HPT's foray into TravelCenter of America's adds increased exposure to oil prices. Fuel is one of the key items that these locations sell. While an increase in the price of gas can sometimes be passed on to the consumer, there may no longer be as many customers as before. The stops cater to professional truck drivers, so in the short run this number will not dramatically change, but with a prolonged spike in gas prices has the potential to reduce demand for HPT's services. With some operators spending up to 20% of their operating costs on fuel, an increase of even a couple of cents makes a significant dent in already dwindling profits[11]. 2005 was a record year for truck company failures. With fuel prices nearly doubling since then trucking companies are still having financial difficulties. Goods still have to be shipped, and a cheaper more efficient alternative is rail freight. The spike in oil prices has forced trucking companies to raise prices making rail relatively cheaper and a more enticing substitute. Fewer truck drivers on the roads mean fewer customers for HPT's TravelCenters.
- Hotel Construction Rates determine HPT's ability to raise prices : Following the September 11, 2001 terrorist attacks, hotel construction declined significantly and has remained depressed even as demand begin to revive in 2003 and 2004. As a result until 2007, the imbalance in supply and demand has allowed owners of hotel properties to raise their prices from 2002-2007. [12]. HPT raised its prices 30% over the period. In 2007, however, construction of new rooms and hotels outpaced demand, and HP's occupancy rates fell.
[edit] Competitors
Like HPT, many of its competitors own similarly branded hotels and run them in similar locations. One differentiation is that HPT directly runs fewer of its hotels than its rivals which cushions it from market fluctuations, but also does not allow it to participate fully in market upswings. The InterContinential Hotel Group is unique among HPT's rivals as it is part of a more global chain of hotels of which North America is a part.
HPT's closest competitors include the following:
| Company | Occupancy Rate | Net Income | Operating Margins |
|---|---|---|---|
| HPT | 72.2%[13] | $201.05 | 28.87%[14] |
| FelCor Lodging Trust (FCH) | 70.4%[15] | $16.98 | 12.33%[16] |
| Host Hotels and Resorts (HST) | 73.3%[17] | $541.00 | 16.79%[18] |
| Intercontinental Hotel Group (ICH) | N/A | $425.10 | 28.65%[19] |
[edit] Notes
- ↑ Hospitality Properties Trust 10K 2007, Item 1A, pg.3
- ↑ Hospitality Properties Trust 10K 2007, Item 1A, pg.44
- ↑ Hospitality Properties Trust 10K 2007, Item 1A, pg.41
- ↑ Hospitality Properties Trust 10K 2007, Item 1A, pg.37
- ↑ Hospitality Properties Trust 10K 2007, Item 1A, pg.34
- ↑ Hospitality Properties Trust 10K 2007, Item 7A, pg.59
- ↑ Hospitality Properties Trust 10K 2007, Item 1A, pg.30
- ↑ US Navy 9/11 Impact Projections
- ↑ Hospitality Properties Trust 10K 2002, Item 7, pg.35
- ↑ Hospitality Properties Trust 10K 2002, Item 1A, pg.26
- ↑ Dallas Business Journal, "Trucking Industry Struggles with Fuel Costs"
- ↑ FelCor Lodging Trust 10K 2007, Item 1, pg.4
- ↑ Hospitality Properties Trust 10K 2007, Item 1A, pg.58
- ↑ Yahoo Finance
- ↑ FelCor Lodging Trust 10K 2007, Item 1, pg.4
- ↑ Yahoo Finance
- ↑ Host Hotels and Resorts 10K 2007, Item 7, pg.44
- ↑ Yahoo Finance
- ↑ Yahoo Finance
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