Hospitality Properties Trust to re-align three of its five sets of hotel management contracts with Marriott International; contracts comprise 71 hotels, provide for payments of owner's priority returns, rents to HPT totaling US$98.1M annually

Michelle Rivera

NEWTON, Massachusetts , June 15, 2011 (press release) – Hospitality Properties Trust (NYSE: HPT) today announced that it has entered agreements to re-align three of its five sets of hotel management contracts with Marriott International, Inc. (NYSE: MAR). The three sets of affected contracts (which HPT has historically referred to as its Marriott Contracts Nos. 2, 3 and 4) concern 71 hotels and currently provide for payments of owner’s priority returns and rents to HPT totaling $98.1 million/year. Among other terms the re-aligned agreements provide as follows:

* All 71 hotels will be combined economically so that any excess cash flows from any of the hotels is available to pay owner’s priority returns for all 71 affected hotels.
* The combined annual priority returns due to HPT will be $98.1 million/year; i.e., equal to the current annual amounts of owner’s priority returns and rents due to HPT. In addition, an HPT taxable REIT subsidiary (a TRS) will participate in the net cash flows from hotel operations after payment of management fees to Marriott, which fees will continue to be subordinated to HPT’s priority returns/rents.
* The new combined contracts extend through 2025. In addition, Marriott has the option to renew the contracts for two consecutive ten year terms on an all or none basis; i.e., the renewal options must be exercised for all of the hotels included in the contracts.
* The cash security deposits which secure the owner’s priority payments to HPT under two of the three affected contracts will be combined and continue to secure the owner’s priority payments under the combined contracts for all 71 hotels. These security deposits originally totaled $64.7 million. As of March 31, 2011, the amounts of these deposits totaled $10.9 million, as the deposits were reduced to fund shortfalls in the operating results from 2009 through March 31, 2011. The new contracts provide that the combined security deposit may be replenished up to the original amount of $64.7 million from 70% of the cash flows realized from operations of the 71 hotels after payment of HPT’s owner’s priority returns and working capital advances, if any, by HPT or Marriott, while 30% is paid to Marriott toward agreed amounts for management fees.
* In addition to this security deposit, Marriott will provide a limited guaranty for 90% of the owner’s priority returns due to HPT through 2017.
* The combined contracts will continue to require that 5-6% of gross revenues from hotel operations be escrowed for hotel maintenance and periodic refurbishments; i.e., a FF&E Reserve.
* In addition to amounts available in the FF&E Reserve, HPT will fund approximately $102 million for a general refurbishment of the hotels during the next two years. As such funding is advanced by HPT, the amounts of the owner’s priority payments due to HPT shall increase by 9% p.a. of the amounts funded.
* HPT and Marriott have identified 21 hotels of the 71 hotels in the combined contracts which will be offered for sale. If and as these hotels are sold, HPT will retain the sales proceeds and the amounts of the owner’s priority returns due to HPT will decrease by 9% p.a. of the sales proceeds. HPT currently expects that the proceeds it may receive from the sale of these hotels may be at least equal to the capital investment it will make during the next two years as described above; however, the timing of hotel sales and capital investments will likely differ.
* One of the sets of contracts which are re-aligned by the agreements announced today (HPT’s historical Marriott contract no. 4) concerns hotels owned by HPT which were leased to Barcelo Crestline and managed by Marriott. Simultaneously with agreements between HPT and Marriott, Marriott arranged with Barcelo Crestline to terminate that lease. Accordingly, all 71 affected hotels will be owned by HPT, leased to an HPT owned TRS and managed by Marriott. The re-aligned agreements are effective retroactive to January 1, 2011.

HPT’s two additional sets of contracts for Marriott hotels are unaffected by the agreements announced today: (i) HPT’s historical Contract No. 1 for 53 hotels that are leased by HPT to Host Hotels and Resorts (NYSE: HST) for annual rent of $65.8 million, plus percentage rents; and (ii) HPT’s historical Marriott Contract No. 5 for one resort hotel in Hawaii that is leased directly to Marriott for annual rent of $9.4 million plus CPI adjustments. All rent payments due under these two contracts and the deposit and the guaranty, respectively, which secure these payments remain in full force.

John Murray, President of HPT, made the following statement regarding the re-aligned contracts with Marriott:

“When HPT was founded in 1995, our first hotel operating agreements were with Marriott. These contracts have survived through several business cycles since then. At HPT, we are pleased that we are able to continue our business relationship with Marriott under the re-aligned contracts announced today.

“At the beginning of 2011, HPT set an internal goal to restructure its contractual relationships with three major operators of its properties: TravelCenters of America LLC, Marriott International, Inc. and InterContinental Hotels Group, plc. We have now completed this work with TravelCenters and Marriott. We are actively involved in discussions with Intercontinental Hotels Group. Moreover, with two of these three negotiations completed, we have also begun to focus on new investment opportunities.”

Hospitality Properties Trust is a real estate investment trust, or REIT, headquartered in Newton, Massachusetts, which owns 289 hotels and 185 travel centers located in 44 states, Puerto Rico and Ontario, Canada.

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