Company Quick10K Filing
Quick10K
Hospitality Properties Trust
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$27.60 164 $4,540
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-01-29 Other Events, Exhibits
8-K 2019-01-17 Other Events, Exhibits
8-K 2019-01-17 Other Events, Exhibits
8-K 2019-01-16 Enter Agreement, Exhibits
8-K 2019-01-14 Earnings
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-10-25 Officers
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-06-14 Officers, Shareholder Vote, Other Events, Exhibits
8-K 2018-05-15 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-05-14 Regulation FD, Exhibits
8-K 2018-04-12 Officers, Amend Bylaw, Exhibits
8-K 2018-02-25 Other Events, Exhibits
8-K 2018-01-30 Other Events, Exhibits
8-K 2018-01-19 Earnings
BXP Boston Properties
WY Weyerhaeuser
UDR UDR
REG Regency Centers
VER Vereit
CLI Mack Cali Realty
MNR Monmouth Real Estate Investment
PMT Pennymac Mortgage Investment Trust
KREF KKR Real Estate Finance Trust
SOHO Sotherly Hotels
HPT 2018-09-30
Part I Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation
Note 2. New Accounting Pronouncements
Note 3. Revenue Recognition
Note 4. Weighted Average Common Shares
Note 5. Shareholders' Equity
Note 6. Indebtedness
Note 7. Real Estate Properties
Note 8. Management Agreements and Leases
Note 9. Business and Property Management Agreements with Rmr Llc
Note 10. Related Person Transactions
Note 11. Income Taxes
Note 12. Segment Information
Note 13. Fair Value of Assets and Liabilities
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk (Dollar Amounts in Thousands, Except per Share Amounts)
Item 4. Controls and Procedures
Part II Other Information
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 hpt_093018xexhibitx101.htm
EX-10.2 hpt_093018xexhibitx102.htm
EX-31.1 hpt_093018xexhibitx311.htm
EX-31.2 hpt_093018xexhibitx312.htm
EX-32.1 hpt_093018xexhibitx321.htm

Hospitality Properties Trust Earnings 2018-09-30

HPT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 hptq3201810qdocument.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 
OR
 
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-11527
 
HOSPITALITY PROPERTIES TRUST
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
 
04-3262075
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer Identification No.)
 

Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458
(Address of Principal Executive Offices) (Zip Code)
 
617-964-8389
(Registrant’s Telephone Number, Including Area Code)
 
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
 
Accelerated filer ☐
 
 
 
Non-accelerated filer ☐
 
Smaller reporting company ☐
 
 
 
Emerging growth company ☐
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of November 5, 2018:   164,442,379
 
 
 
 
 



HOSPITALITY PROPERTIES TRUST
 
FORM 10-Q
 
September 30, 2018
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
References in this Quarterly Report on Form 10-Q to “HPT”, “we”, “us” or “our” include Hospitality Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

2


Part I Financial Information
 
Item 1. Financial Statements
 
HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except share data) 
 
 
September 30,
 
December 31,
 
 
2018
 
2017
ASSETS
 
 
 
 
Real estate properties:
 
 
 
 
Land
 
$
1,673,113

 
$
1,668,797

Buildings, improvements and equipment
 
7,964,429

 
7,758,862

Total real estate properties, gross
 
9,637,542

 
9,427,659

Accumulated depreciation
 
(2,998,741
)
 
(2,784,478
)
Total real estate properties, net
 
6,638,801

 
6,643,181

Cash and cash equivalents
 
19,849

 
24,139

Restricted cash
 
65,644

 
73,357

Due from related persons
 
88,164

 
78,513

Other assets, net
 
439,095

 
331,195

Total assets
 
$
7,251,553

 
$
7,150,385

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Unsecured revolving credit facility
 
$
143,000

 
$
398,000

Unsecured term loan, net
 
397,143

 
399,086

Senior unsecured notes, net
 
3,596,275

 
3,203,962

Security deposits
 
133,770

 
126,078

Accounts payable and other liabilities
 
178,321

 
184,788

Due to related persons
 
10,473

 
83,049

Total liabilities
 
4,458,982

 
4,394,963

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common shares of beneficial interest, $.01 par value; 200,000,000 shares authorized; 164,442,379 and 164,349,141 shares issued and outstanding, respectively
 
1,644

 
1,643

Additional paid in capital
 
4,544,449

 
4,542,307

Cumulative net income
 
3,684,167

 
3,310,017

Cumulative other comprehensive income (loss)
 
(108
)
 
79,358

Cumulative preferred distributions
 
(343,412
)
 
(343,412
)
Cumulative common distributions
 
(5,094,169
)
 
(4,834,491
)
Total shareholders’ equity
 
2,792,571

 
2,755,422

Total liabilities and shareholders’ equity
 
$
7,251,553

 
$
7,150,385

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3


HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands, except share data)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Hotel operating revenues
 
$
521,250

 
$
495,550

 
$
1,496,125

 
$
1,392,995

Rental income
 
80,690

 
80,896

 
243,701

 
240,274

FF&E reserve income
 
1,213

 
1,142

 
3,911

 
3,524

Total revenues
 
603,153

 
577,588

 
1,743,737

 
1,636,793

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Hotel operating expenses
 
366,994

 
343,274

 
1,056,057

 
965,546

Depreciation and amortization
 
101,007

 
98,205

 
300,308

 
286,811

General and administrative
 
13,425

 
13,404

 
38,280

 
76,097

Total expenses
 
481,426

 
454,883

 
1,394,645

 
1,328,454

 
 
 
 
 
 
 
 
 
Gain on sale of real estate
 

 
9,348

 

 
9,348

Dividend income
 
626

 
626

 
1,878

 
1,878

Unrealized gains on equity securities
 
43,453

 

 
89,348

 

Interest income
 
478

 
211

 
1,093

 
590

Interest expense (including amortization of debt issuance costs and debt discounts and premiums of $2,570, $2,194, $7,607 and $6,541, respectively)
 
(49,308
)
 
(46,574
)
 
(145,589
)
 
(135,329
)
Loss on early extinguishment of debt
 

 

 
(160
)
 

Income before income taxes and equity in earnings of an investee
 
116,976

 
86,316

 
295,662

 
184,826

Income tax expense
 
(707
)
 
(619
)
 
(1,949
)
 
(1,761
)
Equity in earnings of an investee
 
830

 
31

 
881

 
533

Net income
 
117,099

 
85,728

 
294,594

 
183,598

Other comprehensive income:
 
 
 
 
 
 
 
 
Unrealized gain on investment securities
 

 
7,273

 

 
19,923

Equity interest in investee’s unrealized gains
 
173

 
116

 
90

 
295

Other comprehensive income
 
173

 
7,389

 
90

 
20,218

Comprehensive income
 
$
117,272

 
$
93,117

 
$
294,684

 
$
203,816

 
 
 
 
 
 
 
 
 
Net income
 
$
117,099

 
$
85,728

 
$
294,594

 
$
183,598

Preferred distributions
 

 

 

 
(1,435
)
Excess of liquidation preference over carrying value of preferred shares redeemed
 

 

 

 
(9,893
)
Net income available for common shareholders
 
$
117,099

 
$
85,728

 
$
294,594

 
$
172,270

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding (basic)
 
164,232

 
164,149

 
164,212

 
164,131

Weighted average common shares outstanding (diluted)
 
164,274

 
164,188

 
164,242

 
164,168

 
 
 
 
 
 
 
 
 
Net income available for common shareholders per common share (basic and diluted)
 
$
0.71

 
$
0.52

 
$
1.79

 
$
1.05

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


4


HOSPITALITY PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 

Net income
 
$
294,594

 
$
183,598

Adjustments to reconcile net income to cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
300,308

 
286,811

Amortization of debt issuance costs and debt discounts and premiums as interest
 
7,607

 
6,541

Straight line rental income
 
(9,359
)
 
(9,208
)
Security deposits received or replenished
 
7,687

 
37,239

Loss on early extinguishment of debt
 
160

 

Unrealized gains on equity securities
 
(89,348
)
 

Equity in earnings of an investee
 
(881
)
 
(533
)
Gain on sale of real estate
 

 
(9,348
)
Other non-cash (income) expense, net
 
(2,226
)
 
(2,523
)
Changes in assets and liabilities:
 
 
 
 
Due from related persons
 
(585
)
 
(992
)
Other assets
 
(8,627
)
 
(14,710
)
Accounts payable and other liabilities
 
(21,259
)
 
(21,979
)
Due to related persons
 
(74,667
)
 
(12,619
)
Net cash provided by operating activities
 
403,404

 
442,277

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Real estate acquisitions and deposits
 
(95,208
)
 
(594,927
)
Real estate improvements
 
(111,248
)
 
(89,955
)
Hotel managers’ purchases with restricted cash
 
(89,401
)
 
(64,574
)
Hotel manager's deposit of insurance proceeds into restricted cash
 
18,000

 

Net proceeds from sale of real estate
 

 
23,438

Net cash used in investing activities
 
(277,857
)
 
(726,018
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 
Proceeds from issuance of senior unsecured notes, after discounts and premiums
 
389,976

 
598,246

Redemption of preferred shares
 

 
(290,000
)
Repurchase of convertible senior notes
 

 
(8,478
)
Borrowings under unsecured revolving credit facility
 
395,000

 
631,000

Repayments of unsecured revolving credit facility
 
(650,000
)
 
(364,000
)
Deferred financing costs
 
(12,242
)
 
(5,018
)
Repurchase of common shares
 
(606
)
 
(533
)
Distributions to preferred shareholders
 

 
(6,601
)
Distributions to common shareholders
 
(259,678
)
 
(254,623
)
Net cash provided by (used in) financing activities
 
(137,550
)
 
299,993

Increase (decrease) in cash and cash equivalents and restricted cash
 
(12,003
)
 
16,252

Cash and cash equivalents and restricted cash at beginning of period
 
97,496

 
71,352

Cash and cash equivalents and restricted cash at end of period
 
$
85,493

 
$
87,604

 
 
 
 
 
Supplemental disclosure of cash and cash equivalents and restricted cash:
 
 

 
 

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the condensed consolidated statements of cash flows:
Cash and cash equivalents
 
$
19,849

 
$
14,489

Restricted cash
 
65,644

 
73,115

Total cash and cash equivalents and restricted cash
 
$
85,493

 
$
87,604

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
158,056

 
$
149,261

Cash paid for income taxes
 
2,804

 
2,588

The accompanying notes are an integral part of these condensed consolidated financial statements. 

5

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)




Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements of Hospitality Properties Trust and its subsidiaries, or HPT, we, our or us, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, 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 condensed consolidated 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, 2017, as amended, or our 2017 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period, have been included. These condensed consolidated financial statements include the accounts of HPT and our subsidiaries, all of which are 100% owned directly or indirectly by HPT. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets, impairment of real estate and the valuation of intangible assets.
We have determined that each of our wholly owned taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification™. We have concluded that we must consolidate each of our TRSs because we are the entity with the power to direct the activities that most significantly impact such VIEs’ performance and we have the obligation to absorb losses or the right to receive benefits from each VIE that could be significant to the VIE and are, therefore, the primary beneficiary of each VIE. The assets of our TRSs were $41,224 and $33,305 as of September 30, 2018 and December 31, 2017, respectively, and consist primarily of amounts due from and working capital advances to certain of our hotel managers. The liabilities of our TRSs were $148,418 and $140,897 as of September 30, 2018 and December 31, 2017, respectively, and consist primarily of security deposits they hold and amounts payable to certain of our hotel managers. The assets of our TRSs are available to satisfy our TRSs’ obligations and we have guaranteed certain obligations of our TRSs.
 
Note 2. New Accounting Pronouncements
On January 1, 2018, we adopted FASB Accounting Standards Update, or ASU, No. 2014-09 (and related clarifying guidance issued by the FASB), Revenue From Contracts With Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU No. 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASU No. 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. The majority of our revenue is from hotels managed under TRS structures. The adoption of this update did not have a material impact on the amount or timing of our revenue recognition for revenues from room, food and beverage, and other hotel level sales of our managed hotels in our condensed consolidated financial statements. A lesser portion of our revenue consists of rental income from leasing arrangements, which are specifically excluded from ASU No. 2014-09. We have adopted ASU No. 2014-09 using the modified retrospective approach.
On January 1, 2018, we adopted FASB ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The implementation of ASU No. 2016-01 resulted in the reclassification of historical changes in the fair value of our available for sale equity securities of $78,715 from cumulative other comprehensive income to cumulative net income. We also reclassified $841 from cumulative other comprehensive income to cumulative net income for our share of cumulative other comprehensive income of our equity method investee. Effective January 1, 2018, changes in the fair value of our equity securities are recorded through earnings in accordance with ASU No. 2016-01.

6

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



On January 1, 2018, we adopted FASB ASU No. 2016-18, Restricted Cash, which requires companies to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The implementation of ASU 2016-18 resulted in an increase of $55,222 of net cash provided by operating activities and an increase of $42,563 of net cash used in investing activities for the nine months ended September 30, 2017. This update also requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheets. Restricted cash consisting of amounts escrowed by our hotel operators pursuant to the terms of our management agreements and leases to fund periodic renovations and improvements at our hotels totaled $65,644 and $73,115 as of September 30, 2018 and 2017, respectively. See Notes 3 and 8 for further information regarding our FF&E reserves. The adoption of this update did not change our balance sheet presentation.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. ASU No. 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2018-07 will have in our condensed consolidated financial statements.
Note 3. Revenue Recognition
We report hotel operating revenues for managed hotels in our condensed consolidated statements of comprehensive income. We generally recognize hotel operating revenues, consisting primarily of room and food and beverage sales, when goods and services are provided.
We report rental income for leased hotels and travel centers in our condensed consolidated statements of comprehensive income. We recognize rental income from operating leases on a straight line basis over the term of the lease agreements. Rental income includes $3,136 and $9,359 for the three and nine months ended September 30, 2018, respectively, and $3,087 and $9,208 for the three and nine months ended September 30, 2017, respectively, of adjustments necessary to record scheduled rent increases under certain of our leases, the deferred rent obligations payable to us under our leases with TravelCenters of America LLC, or TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight line basis. See Notes 8 and 10 for further information regarding our TA leases. Due from related persons includes $63,285 and $54,219 and other assets, net, includes $2,985 and $2,691 of straight line rent receivables at September 30, 2018 and December 31, 2017, respectively.
We determine percentage rent due to us under our leases annually and recognize it when all contingencies have been met and the rent is earned. We had deferred estimated percentage rent of $978 and $2,762 for the three and nine months ended September 30, 2018, respectively, and $435 and $1,384 for the three and nine months ended September 30, 2017, respectively.

7

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



We own all the FF&E reserve (as defined in Note 8) escrows for our hotels. We report deposits by our third party tenants into the escrow accounts as FF&E reserve income. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income.
 
Note 4. Weighted Average Common Shares
The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Weighted average common shares for basic earnings per share
 
164,232

 
164,149

 
164,212

 
164,131

Effect of dilutive securities: Unvested share awards
 
42

 
39

 
30

 
37

Weighted average common shares for diluted earnings per share
 
164,274

 
164,188

 
164,242

 
164,168

 
Note 5. Shareholders' Equity
Share Awards
On April 12, 2018, in accordance with our Trustee compensation arrangements, and in connection with the election of one of our Managing Trustees, we granted 3,000 of our common shares, valued at $25.07 per common share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day, to the Managing Trustee who was elected as a Managing Trustee that day.
On June 14, 2018, in accordance with our Trustee compensation arrangements, we granted 3,000 of our common shares, valued at $28.44 per common share, the closing price of our common shares on Nasdaq on that day to each of our five Trustees as part of their annual compensation.
On September 13, 2018, we granted an aggregate of 97,000 of our common shares, valued at $28.97 per common share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of The RMR Group LLC, or RMR LLC, under our equity compensation plan.
Share Purchases
On January 1, 2018, we purchased an aggregate of 3,394 of our common shares for $29.85 per common share, the closing price of our common shares on Nasdaq on December 29, 2017, from a former officer of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
On September 24, 2018, we purchased an aggregate of 17,808 of our common shares for $28.35 per common share, the closing price of our common shares on Nasdaq on that day, from our officers and certain other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
Distributions
On February 22, 2018, we paid a regular quarterly distribution to our common shareholders of record on January 29, 2018 of $0.52 per share, or $85,460. On May 17, 2018, we paid a regular quarterly distribution to common shareholders of record on April 30, 2018 of $0.53 per share, or $87,105. On August 16, 2018, we paid a regular quarterly distribution to common shareholders of record on July 30, 2018 of $0.53 per share, or $87,113. On October 18, 2018, we declared a regular quarterly distribution to common shareholders of record on October 29, 2018 of $0.53 per share, or $87,154. We expect to pay this amount on or about November 15, 2018.
Cumulative Other Comprehensive Income (Loss)
Cumulative other comprehensive income (loss), as of September 30, 2018, represents our share of the comprehensive loss of Affiliates Insurance Company, or AIC. See Note 10 for further information regarding this investment. The following table

8

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



presents changes in the amounts we recognized in cumulative other comprehensive income (loss) by component for the three and nine months ended September 30, 2018:
 
 
Three Months Ended September 30, 2018
 
 
Unrealized Gain
 
Equity in
 
 
 
 
(Loss) on Investment
 
Unrealized Gain
 
 
 
 
Securities, net
 
(Loss) of Investees
 
Total
Balance at June 30, 2018
 
$

 
$
(281
)
 
$
(281
)
Current period other comprehensive income
 

 
173

 
173

Balance at September 30, 2018
 
$

 
$
(108
)
 
$
(108
)

 
 
Nine Months Ended September 30, 2018
 
 
Unrealized Gain
 
Equity in
 
 
 
 
(Loss) on Investment
 
Unrealized Gain
 
 
 
 
Securities, net
 
(Loss) of Investees
 
Total
Balance at December 31, 2017
 
$
78,715

 
$
643

 
$
79,358

Amounts reclassified from cumulative other comprehensive income to retained earnings
 
(78,715
)
 
(841
)
 
(79,556
)
Current period other comprehensive income
 

 
90

 
90

Balance at September 30, 2018
 
$

 
$
(108
)
 
$
(108
)

Note 6. Indebtedness
Our principal debt obligations at September 30, 2018 were: (1) $143,000 of outstanding borrowings under our $1,000,000 unsecured revolving credit facility; (2) our $400,000 unsecured term loan; and (3) $3,650,000 aggregate outstanding principal amount of senior unsecured notes. Our revolving credit facility and our term loan are governed by a credit agreement with a syndicate of institutional lenders.
We have a $1,000,000 revolving credit facility that is available for general business purposes, including acquisitions. Our revolving credit facility provides that we can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. On May 10, 2018, we amended and restated the credit agreement governing our revolving credit facility and our term loan. As a result of the amendment, the interest rate payable on borrowings under our revolving credit facility was reduced from a rate of LIBOR plus a premium of 110 basis points per annum to a rate of LIBOR plus a premium of 100 basis points per annum. The facility fee remained unchanged at 20 basis points per annum on the total amount of lending commitments under this facility. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. Also as a result of the amendment, the stated maturity date of this facility was extended from July 15, 2018 to July 15, 2022, and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to further extend the maturity date of the facility for two additional six month periods. As a result of this amendment, we recognized a loss on early extinguishment of debt related to the revolving credit facility of $90 during the three months ended June 30, 2018 to write off unamortized debt issuance costs.
As of September 30, 2018, the annual interest rate payable on borrowings under our revolving credit facility was 3.09%. The weighted average annual interest rate for borrowings under our revolving credit facility was 2.97% and 3.00% for the three and nine months ended September 30, 2018, respectively, and 2.33% and 2.17% for the three and nine months ended September 30, 2017, respectively. As of September 30, 2018, we had $143,000 outstanding and $857,000 available under our revolving credit facility. As of November 5, 2018, we had $119,000 outstanding and $881,000 available to borrow under our revolving credit facility.
As a result of the amendment to our credit agreement, the interest rate payable on borrowings under our term loan was reduced from a rate of LIBOR plus a premium of 120 basis points per annum to a rate of LIBOR plus a premium of 110 basis points per annum, subject to adjustment based upon changes to our credit ratings. Also as a result of the amendment, the stated

9

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



maturity date of the term loan was extended from April 15, 2019 to July 15, 2023. Our term loan is prepayable without penalty at any time. As a result of this amendment, we recognized a loss on early extinguishment of debt related to the term loan of $70 during the three months ended June 30, 2018 to write off unamortized debt issuance costs.
As of September 30, 2018, the annual interest rate for the amount outstanding under our term loan was 3.20%. The weighted average annual interest rate for borrowings under our term loan was 3.19% and 3.02% for the three and nine months ended September 30, 2018, respectively, and 2.43% and 2.20% for the three and nine months ended September 30, 2017, respectively.
Our credit agreement also includes a feature under which maximum aggregate borrowings may be increased to up to $2,300,000 on a combined basis in certain circumstances. Our credit agreement and our unsecured senior notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR LLC ceasing to act as our business manager. Our credit agreement and our unsecured senior notes indentures and their supplements also contain a number of covenants, including covenants that restrict our ability to incur debts or to make distributions under certain circumstances and generally require us to maintain certain financial ratios. We believe we were in compliance with the terms and conditions of our credit agreement and our unsecured senior notes indentures and their supplements at September 30, 2018.
On February 2, 2018, we issued $400,000 principal amount of 4.375% senior notes due 2030 in a public offering. Net proceeds from this offering were $386,400 after discounts and expenses.
Note 7. Real Estate Properties
At September 30, 2018, we owned 325 hotels and 199 travel centers.
During the nine months ended September 30, 2018, we funded $118,733 for improvements to certain of our properties which, pursuant to the terms of our management and lease agreements with our hotel managers and tenants, resulted in increases in our contractual annual minimum returns and rents of $8,608. See Notes 8 and 10 for further information about our management and lease agreements and our fundings of improvements to certain of our properties.
Acquisitions
During the nine months ended September 30, 2018, we acquired two hotels. We accounted for these transactions as acquisitions of assets. Our allocation of the purchase price of each of these acquisitions based on the estimated fair value of the acquired assets and assumed liabilities is presented in the table below.  
Acquisition Date
 
Location
 
Purchase Price
 
Land
 
Land Improvements
 
Building and Improvements
 
Furniture, Fixtures and Equipment
6/15/2018
 
Minneapolis, MN (1)
 
75,572

 
$
2,196

 
$

 
$
68,384

 
$
4,992

6/15/2018
 
Baton Rouge, LA (2)
 
16,022

 
2,242

 
173

 
12,842

 
765

 
 
 
 
$
91,594

 
$
4,438

 
$
173

 
$
81,226

 
$
5,757

(1)
On June 15, 2018, we acquired the 360 room Radisson Blu® hotel in Minneapolis, MN for a purchase price of $75,572, including capitalized acquisition costs of $572. We added this hotel to our management agreement with Radisson Hospitality, Inc., or Radisson.
(2)
On June 15, 2018, we acquired the 117 suite Staybridge Suites® at Louisiana State University in Baton Rouge, LA for a purchase price of $16,022 including capitalized acquisition costs of $272. We added this hotel to our management agreement with InterContinental Hotels Group, plc, or InterContinental.
See Note 8 for further information regarding our Radisson and InterContinental agreements.
On October 30, 2018, we acquired a hotel with 164 suites in Scottsdale, AZ for a purchase price of $35,885, excluding acquisition related costs. In connection with this acquisition, we converted this hotel to the Sonesta Suites® brand and added it

10

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



to our management agreement with Sonesta International Hotels Corporation, or Sonesta. See Notes 8 and 10 for further information regarding our Sonesta agreement.
Note 8. Management Agreements and Leases
As of September 30, 2018, we owned 325 hotels and 199 travel centers, which were included in 13 operating agreements. We do not operate any of our properties.
As of September 30, 2018323 of our hotels were leased to our TRSs and managed by independent hotel operating companies and two hotels were leased to third parties. As of September 30, 2018, our hotel properties were managed by or leased to separate subsidiaries of Marriott International, Inc., or Marriott, InterContinental, Sonesta, Wyndham Hotels & Resorts, Inc., or Wyndham, Hyatt Hotels Corporation, or Hyatt, and Radisson under eight agreements. These hotel agreements have initial terms expiring between 2019 and 2038. Each of these agreements is for between one and 100 of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties included in each agreement, and the renewal terms range between 20 to 60 years. Most of these agreements require the third party manager or tenant to: (1) make payments to us of minimum returns or minimum rents; (2) deposit a percentage of total hotel sales into reserves established for the regular refurbishment of our hotels, or FF&E reserves; and (3) for our managed hotels, make payments to our TRSs of additional returns to the extent of available cash flows after payment of operating expenses, funding of the FF&E reserves, payment of our minimum returns, payment of certain management fees and replenishment of security deposits or guarantees. Some of our managers or tenants or their affiliates have provided deposits or guarantees to secure their obligations to pay us.
Marriott No. 1 agreement. Our management agreement with Marriott for 53 hotels, or our Marriott No. 1 agreement, provides that, as of September 30, 2018, we are to be paid an annual minimum return of $69,409 to the extent that gross revenues of the hotels, after payment of hotel operating expenses and funding of the FF&E reserve, are sufficient to do so. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. We realized minimum returns of $17,335 and $17,247 during the three months ended September 30, 2018 and 2017, respectively, and minimum returns of $51,954 and $51,657 during the nine months ended September 30, 2018 and 2017, respectively, under this agreement. We also realized additional returns of $2,584 and $5,113 during the three and nine months ended September 30, 2018 and $3,603 and $6,807 during the three and nine months ended September 30, 2017, respectively, which represent our share of hotel cash flows in excess of the minimum returns due to us for these periods. We do not have any security deposits or guarantees for our minimum returns from the 53 hotels included in our Marriott No. 1 agreement. Accordingly, the minimum returns we receive from these hotels managed by Marriott are limited to the hotels' available cash flows after payment of operating expenses and funding of the FF&E reserve.
We funded $1,769 for capital improvements to certain of the hotels included in our Marriott No. 1 agreement during the nine months ended September 30, 2018. We currently expect to fund approximately $8,200 for capital improvements to certain hotels under our Marriott No. 1 agreement during the last three months of 2018. As we fund these improvements, the annual minimum returns payable to us increase by 10% of the amounts funded.
Marriott No. 234 agreement.  Our management agreement with Marriott for 68 hotels, or our Marriott No. 234 agreement, provides that, as of September 30, 2018, we are to be paid an annual minimum return of $107,110. We realized minimum returns of $26,772 and $26,591 during the three months ended September 30, 2018 and 2017, respectively, and $80,199 and $79,771 during the nine months ended September 30, 2018 and 2017, respectively, under this agreement. Pursuant to our Marriott No. 234 agreement, Marriott has provided us with a security deposit to cover minimum return payment shortfalls, if any. Under this agreement, this security deposit may be replenished and increased up to $64,700 from a share of hotel cash flows in excess of the minimum returns due to us. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. During the nine months ended September 30, 2018, our available security deposit was replenished by $7,686 from a share of hotel cash flows in excess of the minimum returns due to us during the period. The available balance of this security deposit was $33,657 as of September 30, 2018. Pursuant to our Marriott No. 234 agreement, Marriott has also provided us with a limited guarantee which expires in 2019 for shortfalls up to 90% of our minimum returns, if and after the available security deposit has been depleted. The available balance of the guarantee was $30,672 as of September 30, 2018.
We funded $6,355 for capital improvements to certain of the hotels included in our Marriott No. 234 agreement during the nine months ended September 30, 2018. We currently expect to fund approximately $1,200 for capital improvements to certain

11

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



hotels under our Marriott No. 234 agreement during the last three months of 2018. As we fund these improvements, the annual minimum returns payable to us increase by 9% of the amounts funded.
Marriott No. 5 agreement. We lease one hotel in Kauai, HI to Marriott which requires that, as of September 30, 2018, we are paid annual minimum rents of $10,321. This lease is guaranteed by Marriott and we realized $2,580 and $2,540 of rent for this hotel during the three months ended September 30, 2018 and 2017, respectively, and $7,740 and $7,620 during the nine months ended September 30, 2018 and 2017, respectively. The guarantee provided by Marriott with respect to this leased hotel is unlimited. Marriott has four renewal options for 15 years each. On August 31, 2016, Marriott notified us that it will not exercise its renewal option at the expiration of the current lease term ending on December 31, 2019.
InterContinental agreement. Our management agreement with InterContinental for 100 hotels, or our InterContinental agreement, provides that, as of September 30, 2018, we are to be paid annual minimum returns and rents of $190,521. We realized minimum returns and rents of $47,630 and $46,404 during the three months ended September 30, 2018 and 2017, respectively, and $142,316 and $131,649 during the nine months ended September 30, 2018 and 2017, respectively, under this agreement. We also realized additional returns under this agreement of $6,653 and $8,264 during the three months ended September 30, 2018 and 2017, respectively, and $8,373 and $11,836 during the nine months ended September 30, 2018 and 2017, respectively, from our share of hotel cash flows in excess of the minimum returns and rents due to us for that period.
Pursuant to our InterContinental agreement, InterContinental has provided us with a security deposit to cover minimum payment shortfalls, if any. Under this agreement, InterContinental is required to maintain a minimum security deposit of $37,000 and this security deposit may be replenished and increased up to $100,000 from a share of future cash flows from the hotels in excess of our minimum returns and rents. The available balance of the InterContinental security deposit remained at the maximum contractual amount of $100,000 as of September 30, 2018.
We did not fund any capital improvements to our InterContinental hotels during the nine months ended September 30, 2018. We currently expect to fund approximately $44,600 during the last three months of 2018 and approximately $56,200 during 2019 for capital improvements to certain hotels under our InterContinental agreement. As we fund these improvements, the annual minimum returns and rents payable to us increase by 8% of the amounts funded.
Sonesta agreement. As of September 30, 2018, Sonesta managed 11 of our full service hotels and 39 of our limited service hotels pursuant to management agreements for each of the hotels, which we refer to collectively as our Sonesta agreement, and a pooling agreement, which combines those management agreements for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us.
Our Sonesta agreement provides that we are paid a fixed annual minimum return equal to 8% of our invested capital, as defined therein, which was $123,180 as of September 30, 2018, if gross revenues of the hotels, after payment of hotel operating expenses and management and related fees (other than Sonesta’s incentive fee, if applicable), are sufficient to do so. Our Sonesta agreement further provides that we are paid an additional return based upon operating profits, as defined therein, after payment of Sonesta’s incentive fee, if applicable. We do not have any security deposits or guarantees for our hotels managed by Sonesta. Accordingly, the returns we receive from our hotels managed by Sonesta are limited to the hotels’ available cash flows after payment of operating expenses, including management and related fees. We realized returns of $21,732 and $18,741 during the three months ended September 30, 2018 and 2017, respectively, and $61,606 and $53,808 during the nine months ended September 30, 2018 and 2017, respectively, under our Sonesta agreement.
Pursuant to our Sonesta agreement, we recognized management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third party reservation transmission fees payable to Sonesta of $9,437 and $7,432 for the three months ended September 30, 2018 and 2017, respectively, and $26,245 and $20,719 for the nine months ended September 30, 2018 and 2017, respectively. In addition, we recognized procurement and construction supervision fees payable to Sonesta of $713 and $479 for the three months ended September 30, 2018 and 2017, respectively, and $1,907 and $673 for the nine months ended September 30, 2018 and 2017, respectively, pursuant to our Sonesta agreement. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.
Our Sonesta agreement does not require FF&E escrow deposits, but does require us to fund capital expenditures that we approve at our hotels managed by Sonesta. We funded $64,032 and $21,892 for renovations and other capital improvements to certain hotels included in our Sonesta agreement during the nine months ended September 30, 2018, and 2017, respectively, which resulted in increases in our contractual annual minimum returns of $3,948 and $742, respectively. We currently expect to

12

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



fund approximately $26,900 during the last three months of 2018 and approximately $79,100 during 2019 for renovations and other capital improvements to certain of our hotels managed by Sonesta. The annual minimum returns due to us under the Sonesta agreement increase by 8% of the capital expenditure amounts we fund in excess of threshold amounts, as defined therein. We owed Sonesta $6,735 and $5,685 for capital expenditure and other reimbursements at September 30, 2018 and 2017, respectively. Amounts due from Sonesta are included in due from related persons and amounts owed to Sonesta are included in due to related persons in our condensed consolidated balance sheets.
See Notes 7 and 10 for further information regarding our transactions and relationship with Sonesta.
Morgans agreement.  Prior to May 8, 2018, we leased The Clift Hotel in San Francisco, CA to Morgans Hotel Group, or Morgans. This lease was scheduled to expire in 2103 and required annual rent to us of $7,595. During the period of January 1, 2018 through May 8, 2018, all contractual rent due to us under the Morgans lease was paid to us. On May 8, 2018, pursuant to a settlement agreement with Morgans and SBE Entertainment Group, LLC, our Morgans lease was terminated and Morgans surrendered possession of the hotel to us. We rebranded this hotel to the Royal Sonesta® brand and added it to our management agreement with Sonesta. The terms of the management agreement are consistent with the terms of our other management agreements with Sonesta for full service hotels.
Wyndham agreements. Our management agreement with Wyndham for 22 hotels, or our Wyndham agreement, provides that, as of September 30, 2018, we are to be paid annual minimum returns of $27,677. Pursuant to our Wyndham agreement, Wyndham has provided us with a guarantee, which was limited to $35,656, subject to an annual payment limit of $17,828, and expires on July 28, 2020. This guarantee was depleted during 2017 and remained depleted as of September 30, 2018. This guaranty may be replenished from a share of future cash flows from these hotels in excess of our minimum returns. The Wyndham agreement provides that if the hotel cash flows available after payment of hotel operating expenses are less than the minimum returns due to us and if the guaranty is depleted, to avoid a default Wyndham is required to pay us the greater of the available hotel cash flows after payment of hotel operating expenses and 85% of the contractual amount due to us. During the three and nine months ended September 30, 2018, we realized returns of $5,869 and $17,588, respectively, which represents 85% of the minimum returns due for the period, under this agreement. During the three and nine months ended September 30, 2017, we realized returns of $6,847 and $20,489, respectively, under this agreement.
Our Wyndham agreement requires FF&E escrow deposits equal to 5% of total hotel sales for all hotels included in the agreement subject to available cash flows after payment of our minimum return. No FF&E escrow deposits were made during the nine months ended September 30, 2018.
We funded $1,449 for capital improvements to certain of the hotels included in our Wyndham agreement during the nine months ended September 30, 2018. We currently expect to fund approximately $6,600 for capital improvements to certain hotels under our Wyndham agreement during the last three months of 2018. As we fund these improvements, the annual minimum returns payable to us increase by 8% of the amounts funded.
We also lease 48 vacation units in one of our hotels to a subsidiary of Wyndham Destinations, Inc. (NYSE: WYND), or Destinations, which requires that, as of September 30, 2018, we are paid annual minimum rents of $1,449. The guaranty provided by Destinations with respect to the Destinations lease for part of one hotel is unlimited. We recognized the contractual rents of $454 during the three months ended September 30, 2018 and 2017 and $1,361 during the nine months ended September 30, 2018 and 2017 under our Destinations lease agreement. Our lease with Destinations for 48 vacation units is subject to termination in the event of a manager default under our Wyndham agreement. Rental income for the three months ended September 30, 2018 and 2017 for this lease includes $91 and $102, respectively, and $273 and $306 for the nine months ended September 30, 2018 and 2017, respectively, of adjustments necessary to record rent on a straight line basis.

Hyatt agreement. Our management agreement with Hyatt for 22 hotels, or our Hyatt agreement, provides that, as of September 30, 2018, we are to be paid an annual minimum return of $22,037. We realized minimum returns of $5,509 during each of the three months ended September 30, 2018 and 2017 and minimum returns of $16,528 during each of the nine months ended September 30, 2018 and 2017 under this agreement. Pursuant to our Hyatt agreement, Hyatt has provided us with a guarantee, which is limited to $50,000. During the nine months ended September 30, 2018, the available guarantee was replenished by $2,415 from a share of hotel cash flows in excess of the minimum returns due to us. The available balance of the guarantee was $23,521 as of September 30, 2018.

13

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



Radisson agreement. Our management agreement with Radisson for nine hotels, or our Radisson agreement, provides that, as of September 30, 2018, we are to be paid an annual minimum return of $18,920. We realized minimum returns of $4,730 and $3,230 during the three months ended September 30, 2018 and 2017, respectively, and $11,453 and $9,690 during the nine months ended September 30, 2018 and 2017, respectively, under this agreement. In connection with our acquisition of the Radisson Blu® hotel described in Note 7, the available balance of the guaranty under our Radisson agreement was increased by $6,000 and the guaranty cap was increased to $46,000. During the nine months ended September 30, 2018, our available guarantee was replenished by $4,199 from a share of hotel cash flows in excess of the minimum returns due to us. The available balance of the guarantee was $43,563 as of September 30, 2018.
We did not fund any capital improvement costs at hotels included in our Radisson agreement during the nine months ended September 30, 2018. We currently expect to fund approximately $2,800 during the last three months of 2018 and approximately $32,200 during 2019 for capital improvements to certain hotels under our Radisson agreement.  Our annual minimum returns, the available balance of the guaranty and the limited guaranty cap under our Radisson agreement will increase by 8% of any amounts we fund.
TA leases. As of September 30, 2018, we leased to TA a total of 199 travel centers under five leases.
We recognized rental income from TA of $74,797 and $73,279 for the three months ended September 30, 2018 and 2017, respectively, and $223,458 and $217,420 for the nine months ended September 30, 2018 and 2017, respectively. Rental income for the three months ended September 30, 2018 and 2017 includes $3,037 and $2,988, respectively, and $9,066 and $8,907 for the nine months ended September 30, 2018 and 2017, respectively, of adjustments to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight line basis. As of September 30, 2018 and December 31, 2017, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of $88,164 and $78,513, respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets.
Our TA leases do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components.
Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent equal to 8.5% of the amounts funded. We funded $44,653 and $62,888 for the nine months ended September 30, 2018 and 2017, respectively, of capital improvements to our TA leases. As a result, TA’s annual minimum rent payable to us increased by $3,795 and $5,345, respectively. We currently expect to fund approximately $13,600 for renovations and other capital improvements to our travel centers during the last three months of 2018. TA is not obligated to request and we are not obligated to fund any such improvements.
In addition to the rental income that we recognized during the three months ended September 30, 2018 and 2017 as described above, our TA leases require TA to pay us percentage rent based upon increases in certain sales. We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of $934 and $435 for the three months ended September 30, 2018 and 2017, respectively, and $2,630 and $1,384 for the nine months ended September 30, 2018 and 2017, respectively.
See Note 10 for further information regarding our relationship with TA.
Guarantees and security deposits generally. When we reduce the amounts of the security deposits we hold for payment deficiencies at our managed and leased hotels, we record income equal to the amounts by which this deposit is reduced up to the minimum return or minimum rent due to us. However, reducing the security deposits does not result in additional cash flows to us of the deficiency amounts, but reducing amounts of security deposits may reduce the refunds due to the respective tenants or managers who have provided us with these deposits upon expiration of the respective lease or management agreement. The security deposits are non-interest bearing and are not held in escrow. Under these agreements, any amount of the security deposits which are applied to payment deficits may be replenished from a share of future cash flows from the applicable hotel operations pursuant to the terms of the respective agreements.
Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $9,216 and $5,699 less than the minimum returns due to us for the three months ended September 30, 2018 and 2017, respectively, and $31,030 and $18,971 less than the minimum returns due to us for the nine months ended September 30, 2018 and 2017, respectively. When

14

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



managers of these hotels are required to fund the shortfalls under the terms of our management agreements or their guarantees, we reflect such fundings (including security deposit applications) in our condensed consolidated statements of comprehensive income as a reduction of hotel operating expenses. The reduction to hotel operating expenses was $299 for the three months ended September 30, 2018 and $2,377 and $2,689 for the nine months ended September 30, 2018 and 2017, respectively. There was no reduction to hotel operating expenses for the three months ended September 30, 2017. We had shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our management agreements of $9,818 and $28,653 for the three and nine months ended September 30, 2018, respectively, which represent the unguaranteed portions of our minimum returns from our Sonesta and Wyndham agreements. We had shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our management agreements of $5,699 and $16,282 for the three and nine months ended September 30, 2017, which represents the unguaranteed portion of our minimum returns from our Sonesta agreement.
Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $21,321 and $31,355 more than the minimum returns due to us for the three months ended September 30, 2018 and 2017, respectively, and $47,901 and $67,052 more than the minimum returns due to us for the nine months ended September 30, 2018 and 2017, respectively. Certain of our guarantees and our security deposits may be replenished by a share of future cash flows from the applicable hotel operations in excess of the minimum returns due to us pursuant to the terms of the respective agreements. When our guarantees and our security deposits are replenished by cash flows from hotel operations, we reflect such replenishments in our condensed consolidated statements of comprehensive income as an increase to hotel operating expenses. We had $5,204 and $10,099 of guarantee and security deposit replenishments for the three months ended September 30, 2018 and 2017, respectively, and $14,299 and $26,319 of guarantee and security deposit replenishments for the nine months ended September 30, 2018 and 2017, respectively.
Note 9. Business and Property Management Agreements with RMR LLC
We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to our property level operations of the office building component of one of our hotels.
Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $10,430 and $10,865 for the three months ended September 30, 2018 and 2017, respectively, and $30,048 and $68,526 for the nine months ended September 30, 2018 and 2017, respectively. Based on our common share total return, as defined in our business management agreement, as of September 30, 2018, no 2018 incentive fees are included in the net business management fees we recognized for the three and nine months ended September 30, 2018. The actual amount of annual incentive fees for 2018, if any, will be based on our common share total return, as defined in our business management agreement, for the three year period ending December 31, 2018, and will be payable in 2019. The net business management fees we recognized for the three and nine months ended September 30, 2017 included $873 and $38,243, respectively, of then estimated 2017 incentive fees; in January 2018, we paid RMR LLC an incentive fee of $74,573 for 2017. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income. 
Pursuant to our property management agreement with RMR LLC, we recognized property management fees of $18 and $12 for the three months ended September 30, 2018 and 2017, respectively, and $43 and $33 for the nine months ended September 30, 2018 and 2017, respectively. These fees are payable in connection with the management of the office building component of one of our hotels. These amounts are included in hotel operating expenses in our condensed consolidated statements of comprehensive income.
We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. We reimbursed RMR LLC $56 and $40 for property management related expenses related to the office building component of one of our hotels for the three months ended September 30, 2018 and 2017, respectively, and $167 and $131 for the nine months ended September 30, 2018 and 2017, respectively, which amounts are included in hotel operating expenses in our condensed consolidated statements of comprehensive income. In addition, we are responsible for our share of RMR LLC’s costs for providing our internal audit function. The amounts recognized as expense for internal audit costs were $49 and $67 for the three months ended September 30, 2018 and 2017, respectively, and $173 and $202 for the nine months ended September 30, 2018 and 2017, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income for these periods.

15

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



Note 10. Related Person Transactions
We have relationships and historical and continuing transactions with TA, Sonesta, RMR LLC, The RMR Group Inc., or RMR Inc., AIC and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and which have trustees, directors and officers who are also our Trustees or officers. Mr. Mark L. Kleifges, our Chief Financial Officer and Treasurer, has announced his retirement from his positions with us effective December 31, 2018.
TA. TA is our largest tenant and property operator, leasing 34% of our gross carrying value of real estate properties as of September 30, 2018. We lease all of our travel centers to TA under the TA leases. We are also TA’s largest shareholder; as of September 30, 2018, we owned 3,420,000 common shares of TA, representing approximately 8.6% of TA’s outstanding common shares. RMR LLC provides management services to both us and TA, and Adam D. Portnoy, one of our Managing Trustees, also serves as a managing director of TA. As of October 10, 2018, RMR LLC owned approximately 3.8% of TA's outstanding common shares. See Note 8 for further information regarding our relationships, agreements and transactions with TA and Note 13 for further information regarding our investment in TA.
Sonesta. Sonesta is a private company owned in part by Adam D. Portnoy, one of our Managing Trustees. As of September 30, 2018, Sonesta managed 50 of our hotels pursuant to management and pooling agreements. See Note 8 for further information regarding our relationships, agreements and transactions with Sonesta.
Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. See Note 9 for further information regarding our management agreements with RMR LLC.
We have historically granted share awards to our officers and other RMR LLC employees under our equity compensation plans. In September 2018 and 2017, we granted annual awards of 97,000 and 85,000 of our common shares, respectively, to our officers and other employees of RMR LLC. In September 2018 and 2017, we purchased 17,808 and 18,559 of our common shares, respectively, valued at the closing price of our common shares on Nasdaq on the applicable date of purchase in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares to certain of our officers and other employees of RMR LLC. We include the amounts recognized as expense for share awards to our officers and other RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income.
RMR Inc. RMR LLC is a majority owned subsidiary of RMR Inc. and RMR Inc. is the managing member of RMR LLC. Adam D. Portnoy, one of our Managing Trustees, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., and a managing director, president and chief executive officer of RMR Inc. and an officer of RMR LLC. John G. Murray, our other Managing Trustee and our President and Chief Executive Officer, also serves as an executive officer of RMR LLC. Other officers of RMR LLC also serve as our officers. As of September 30, 2018, we owned 2,503,777 shares of class A common stock of RMR Inc. See Note 13 for further information regarding our investment in RMR Inc.
AIC. We, ABP Trust, TA and four other companies to which RMR LLC provides management services currently own AIC in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC. We paid aggregate annual premiums, including taxes and fees, of approximately $5,738 in connection with the renewal of this insurance program for the policy year ending June 30, 2019, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.
As of September 30, 2018 and December 31, 2017, our investment in AIC had a carrying value of $9,163 and $8,192, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income related to our investment in AIC, which is presented as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. Our other comprehensive income includes our proportionate part of unrealized gains and (losses) on securities that are owned by AIC related to our investment in AIC.
For further information about these and certain other such relationships and certain other related person transactions, refer to our 2017 Annual Report.
Note 11. Income Taxes

16

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



We have elected to be taxed as a real estate investment trust, or REIT, under the United States Internal Revenue Code of 1986, as amended, or the IRC, and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We are subject to income tax in Canada, Puerto Rico and certain states despite our qualification for taxation as a REIT. Further, we lease our managed hotels to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated tax return and are subject to federal, state and foreign income taxes. Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our qualification for taxation as a REIT.

During the three and nine months ended September 30, 2018, we recognized income tax expense of $707 and $1,949, respectively, which includes $291 and $631, respectively, of foreign taxes and $416 and $1,318, respectively, of state taxes. During the three and nine months ended September 30, 2017, we recognized income tax expense (benefit) of $619 and $1,761, respectively, which includes $125 and $486, respectively, of foreign taxes, ($6) and $30, respectively, of federal taxes and $500 and $1,245, respectively, of state taxes.

17

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



Note 12. Segment Information

We aggregate our hotels and travel centers into two reportable segments, hotel investments and travel center investments, based on their similar operating and economic characteristics.
 
 
For the Three Months Ended September 30, 2018
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Hotel operating revenues 
 
$
521,250

 
$

 
$

 
$
521,250

Rental income
 
5,893

 
74,797

 

 
80,690

FF&E reserve income 
 
1,213

 

 

 
1,213

Total revenues
 
528,356

 
74,797

 

 
603,153

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Hotel operating expenses 
 
366,994

 

 

 
366,994

Depreciation and amortization 
 
64,415

 
36,592

 

 
101,007

General and administrative 
 

 

 
13,425

 
13,425

Total expenses 
 
431,409

 
36,592

 
13,425

 
481,426

 
 
 
 
 
 
 
 
 
Dividend income
 

 

 
626

 
626

Unrealized gains on equity securities
 

 

 
43,453

 
43,453

Interest income 
 

 

 
478

 
478

Interest expense 
 

 

 
(49,308
)
 
(49,308
)
Income (loss) before income taxes and equity in earnings of an investee
 
96,947

 
38,205

 
(18,176
)
 
116,976

Income tax expense
 

 

 
(707
)
 
(707
)
Equity in earnings of an investee 
 

 

 
830

 
830

Net income (loss) 
 
$
96,947

 
$
38,205

 
$
(18,053
)
 
$
117,099

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2018
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Hotel operating revenues 
 
$
1,496,125

 
$

 
$

 
$
1,496,125

Rental income
 
20,243

 
223,458

 

 
243,701

FF&E reserve income 
 
3,911

 

 

 
3,911

Total revenues 
 
1,520,279

 
223,458

 

 
1,743,737

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Hotel operating expenses 
 
1,056,057

 

 

 
1,056,057

Depreciation and amortization 
 
189,814

 
110,494

 

 
300,308

General and administrative 
 

 

 
38,280

 
38,280

Total expenses 
 
1,245,871

 
110,494

 
38,280

 
1,394,645

 
 
 
 
 
 
 
 
 
Dividend income
 

 

 
1,878

 
1,878

Unrealized gains on equity securities
 

 

 
89,348

 
89,348

Interest income 
 

 

 
1,093

 
1,093

Interest expense 
 

 

 
(145,589
)
 
(145,589
)
Loss on early extinguishment of debt
 

 

 
(160
)
 
(160
)
Income (loss) before income taxes and equity in earnings of an investee
 
274,408

 
112,964

 
(91,710
)
 
295,662

Income tax expense 
 

 

 
(1,949
)
 
(1,949
)
Equity in earnings of an investee 
 

 

 
881

 
881

Net income (loss) 
 
$
274,408

 
$
112,964

 
$
(92,778
)
 
$
294,594

 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2018
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Total assets 
 
$
4,538,553

 
$
2,419,794

 
$
293,206

 
$
7,251,553




18

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)



 
 
For the Three Months Ended September 30, 2017
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Hotel operating revenues 
 
$
495,550

 
$

 
$

 
$
495,550

Rental income
 
7,617

 
73,279

 

 
80,896

FF&E reserve income 
 
1,142

 

 

 
1,142

Total revenues 
 
504,309

 
73,279

 

 
577,588

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Hotel operating expenses 
 
343,274

 

 

 
343,274

Depreciation and amortization 
 
61,996

 
36,209

 

 
98,205

General and administrative 
 

 

 
13,404

 
13,404

Total expenses 
 
405,270

 
36,209

 
13,404

 
454,883

 
 
 
 
 
 
 
 
 
Gain on sale of real estate
 
9,348

 

 

 
9,348

Dividend income
 

 

 
626

 
626

Interest income 
 

 

 
211

 
211

Interest expense 
 

 

 
(46,574
)
 
(46,574
)
Income (loss) before income taxes and equity in earnings of an investee
 
108,387

 
37,070

 
(59,141
)
 
86,316

Income tax expense
 

 

 
(619
)
 
(619
)
Equity in earnings of an investee 
 

 

 
31

 
31

Net income (loss) 
 
$
108,387

 
$
37,070

 
$
(59,729
)
 
$
85,728

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2017
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Hotel operating revenues 
 
$
1,392,995

 
$

 
$

 
$
1,392,995

Rental income
 
22,854

 
217,420

 

 
240,274

FF&E reserve income 
 
3,524

 

 

 
3,524

Total revenues 
 
1,419,373

 
217,420

 

 
1,636,793

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Hotel operating expenses 
 
965,546

 

 

 
965,546

Depreciation and amortization 
 
179,503

 
107,308

 

 
286,811

General and administrative 
 

 

 
76,097

 
76,097

Total expenses 
 
1,145,049

 
107,308

 
76,097

 
1,328,454

 
 
 
 
 
 
 
 
 
Gain on sale of real estate
 
9,348

 

 

 
9,348

Dividend income
 

 

 
1,878

 
1,878

Interest income 
 

 

 
590

 
590

Interest expense 
 

 

 
(135,329
)
 
(135,329
)
Income (loss) before income taxes and equity in earnings of an investee
 
283,672

 
110,112

 
(208,958
)
 
184,826

Income tax expense
 

 

 
(1,761
)
 
(1,761
)
Equity in earnings of an investee 
 

 

 
533

 
533

Net income (loss) 
 
$
283,672

 
$
110,112

 
$
(210,186
)
 
$
183,598

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
Hotels
 
Travel Centers
 
Corporate
 
Consolidated
Total assets 
 
$
4,477,512

 
$
2,476,073

 
$
196,800

 
$
7,150,385

 

19

HOSPITALITY PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)




Note 13. Fair Value of Assets and Liabilities
The table below presents certain of our assets carried at fair value at September 30, 2018, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.
 
 
 

 
Fair Value at September 30, 2018 Using
 
 
 
 
Quoted Prices in
 
 
 
 
 
 
 
 
Active Markets for
 
Significant Other
 
Significant
 
 
Carrying Value at
 
Identical Assets
 
Observable Inputs
 
Unobservable Inputs
Description
 
September 30, 2018
 
(Level 1)
 
(Level 2)
 
(Level 3)
Recurring Fair Value Measurement Assets:
 
 
 
 
 
 
Investment in TA (1)
 
$
19,494

 
$
19,494

 
$

 
$

Investment in RMR Inc.(2)
 
$
232,351

 
$
232,351

 
$

 
$


(1)
Our 3,420,000 common shares of TA, which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is $17,407 as of September 30, 2018. During the three and nine months ended September 30, 2018, we recorded unrealized gains of $7,524 and $5,472, respectively, to adjust the carrying value of our investment in TA shares to their fair value as of September 30, 2018.
(2)
Our 2,503,777 shares of class A common stock of RMR Inc., which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is $66,374 as of September 30, 2018. During the three and nine months ended September 30, 2018, we recorded unrealized gains of $35,929 and $83,876, respectively, to adjust the carrying value of our investment in RMR Inc. shares to their fair value as of September 30, 2018.
In addition to the investment securities included in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, revolving credit facility, term loan, senior notes and security deposits. At September 30, 2018 and December 31, 2017, the fair values of these additional financial instruments approximated their carrying values in our condensed consolidated balance sheets due to their short term nature or variable interest rates, except as follows:
 
 
September 30, 2018
 
December 31, 2017
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Value (1)
 
Value
 
Value (1)
 
Value
Senior Unsecured Notes, due 2021 at 4.25%
 
$
396,578

 
$
402,810

 
$
395,497

 
$
413,676

Senior Unsecured Notes, due 2022 at 5.00% 
 
495,307

 
512,548

 
494,398

 
533,908

Senior Unsecured Notes, due 2023 at 4.50%
 
499,227

 
502,033

 
499,104

 
523,275

Senior Unsecured Notes, due 2024 at 4.65%
 
347,788

 
348,565

 
347,484

 
368,804

Senior Unsecured Notes, due 2025 at 4.50%
 
345,571

 
341,129

 
345,055

 
363,589

Senior Unsecured Notes, due 2026 at 5.25%
 
341,673

 
353,250

 
340,826

 
377,431

Senior Unsecured Notes, due 2027 at 4.95%
 
393,704

 
392,696

 
393,137

 
422,914

Senior Unsecured Notes, due 2028 at 3.95%
 
389,322

 
362,642

 
388,461

 
390,930

Senior Unsecured Notes, due 2030 at 4.375%
 
387,105

 
367,644

 

 

Total financial liabilities 
 
$
3,596,275

 
$
3,583,317

 
$
3,203,962

 
$
3,394,527

(1)
Carrying value includes unamortized discounts and premiums and issuance costs.
At September 30, 2018 and December 31, 2017, we estimated the fair values of our senior notes using an average of the bid and ask price of our then outstanding issuances of senior notes (Level 2 inputs).

20


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2017 Annual Report.
Overview (dollar amounts in thousands, except share amounts)
We are a REIT organized under the laws of the State of Maryland.    
Management agreements and leases.  At September 30, 2018, we owned 325 hotels operated under eight agreements; 323 of these hotels are leased by us to our wholly owned TRSs and managed by hotel operating companies and two are leased to hotel operating companies. At September 30, 2018, our 199 owned travel centers were leased to TA under five agreements. Our condensed consolidated statements of comprehensive income include operating revenues and expenses of our managed hotels and rental income from our leased hotels and travel centers. 
Many of our operating agreements contain security features, such as guarantees and security deposits, which are intended to protect minimum returns and rents due to us in accordance with our agreements regardless of property performance. However, the effectiveness of various security features to provide us uninterrupted receipt of minimum returns and rents is not assured, especially if economic conditions generally decline for a prolonged period. Also, certain of the guarantees that we hold are limited in amount and duration and do not provide for payment of the entire amount of the applicable minimum returns. If our tenants, managers or guarantors do not earn or pay the minimum returns and rents due to us, our cash flows will decline and we may be unable to repay our debt, fund our debt service obligations, pay distributions to our shareholders or the amounts of our distributions may decline.
Hotel operations. During the three and nine months ended September 30, 2018, the U.S. hotel industry generally realized increases in average daily rate, or ADR, and revenue per available room, or RevPAR, and declines in occupancy compared to the same period in 2017. During the three months ended September 30, 2018, our 307 comparable hotels that we owned continuously since July 1, 2017 produced an aggregate year over year increase in ADR below the industry generally and larger declines in occupancy and RevPAR than the industry generally. During the nine months ended September 30, 2018, our 303 comparable hotels that we owned continuously since January 1, 2017 produced aggregate year over year increases in ADR and RevPAR below the industry generally and a larger decline in occupancy than the industry generally. We believe these results are, in part, due to the disruption and displacement at certain of our hotels undergoing renovations, increased competition from new hotel room supply in certain markets and decreased business activity in areas where some of our hotels are located.
For the three months ended September 30, 2018 compared to the same period in 2017 for our 307 comparable hotels that we have owned continuously since July 1, 2017: ADR increased 1.8% to $130.79; occupancy decreased 1.8 percentage points to 77.8%; and RevPAR decreased 0.5% to $101.75.
For the three months ended September 30, 2018 compared to the same period in 2017 for all our 325 hotels: ADR increased 1.5% to $130.42; occupancy decreased 2.5 percentage points to 76.9%; and RevPAR decreased 1.7% to $100.29.
For the nine months ended September 30, 2018 compared to the same period in 2017 for our 303 comparable hotels that we have owned continuously since January 1, 2017: ADR increased 2.0% to $129.52; occupancy decreased 0.7 percentage points to 76.5%; and RevPAR increased 1.0% to $99.08.
For the nine months ended September 30, 2018 compared to the same period in 2017 for all our 325 hotels: ADR increased 1.9% to $130.49; occupancy decreased 1.8 percentage points to 75.1%; and RevPAR decreased 0.5% to $98.00.
Additional details of our hotel operating agreements and agreements with TA are set forth in Notes 8 and 10 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the table and notes thereto on pages 32 through 34 below.


21


Results of Operations (dollar amounts in thousands, except share amounts)
Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
 
For the Three Months Ended September 30,
 
 
 
 
 
 
Increase
 
% Increase
 
 
2018
 
2017
 
(Decrease)
 
(Decrease)
Revenues:
 
 

 
 

 
 
 
 

Hotel operating revenues
 
$
521,250

 
$
495,550

 
$
25,700

 
5.2
 %
Rental income - hotels
 
5,893

 
7,617

 
(1,724
)
 
(22.6
)%
Rental income - travel centers
 
74,797

 
73,279

 
1,518

 
2.1
 %
Total rental income
 
80,690

 
80,896

 
(206
)
 
(0.3
)%
FF&E reserve income
 
1,213

 
1,142

 
71

 
6.2
 %
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Hotel operating expenses
 
366,994

 
343,274

 
23,720

 
6.9
 %
Depreciation and amortization - hotels
 
64,415

 
61,996

 
2,419

 
3.9
 %
Depreciation and amortization - travel centers
 
36,592

 
36,209

 
383

 
1.1
 %
Total depreciation and amortization
 
101,007

 
98,205

 
2,802

 
2.9
 %
General and administrative
 
13,425

 
13,404

 
21

 
0.2
 %
 
 
 
 
 
 
 
 
 
Gain on sale of real estate
 

 
9,348

 
(9,348
)
 
(100.0
)%
Dividend income
 
626

 
626

 

 

Unrealized gains on equity securities
 
43,453

 

 
43,453

 
n/m

Interest income
 
478

 
211

 
267

 
126.5
 %
Interest expense
 
(49,308
)
 
(46,574
)
 
(2,734
)
 
5.9
 %
Income before income taxes and equity earnings of an investee
 
116,976

 
86,316

 
30,660

 
35.5
 %
Income tax expense
 
(707
)
 
(619
)
 
(88
)
 
14.2
 %
Equity in earnings of an investee
 
830

 
31

 
799

 
2,577.4
 %
Net income available for common shareholders
 
$
117,099

 
$
85,728

 
$
31,371

 
36.6
 %
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding (basic)
 
164,232

 
164,149

 
83

 
n/m

Weighted average shares outstanding (diluted)
 
164,274

 
164,188

 
86

 
n/m

 
 
 
 
 
 
 
 
 
Net income available for common shareholders per common share (basic and diluted)
 
$
0.71

 
$
0.52

 
$
0.19

 
36.4
 %
 
References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended September 30, 2018, compared to the three months ended September 30, 2017.
Hotel operating revenues. The increase in hotel operating revenues is a result of our hotel acquisitions since July 1, 2017 ($19,930), increased revenues at certain of our managed hotels due to increases in ADR and higher occupancies ($17,116) and the conversion of one hotel from a leased to managed property during the 2018 period ($10,079), partially offset by decreased revenues at certain of our managed hotels primarily as a result of lower occupancies ($14,290), decreased revenues at certain of our managed hotels undergoing renovations during all or part of the 2018 period resulting primarily from lower occupancies ($5,091) and decreased revenues as a result of our hotel dispositions since July 1, 2017 ($2,044). Additional operating statistics of our hotels are included in the table on page 35.
Rental income - hotels. The decrease in rental income - hotels is primarily the result of the conversion of one hotel from a leased to managed property during the 2018 period ($1,899), partially offset by contractual rent increases under certain of our hotel leases and increases in the minimum rents due to us as we funded improvements at certain of our leased hotels since July 1, 2017 ($175). Rental income - hotels for the 2018 and 2017 periods includes $100 and $99, respectively, of adjustments to record rent on a straight line basis. 
Rental income - travel centers. The increase in rental income - travel centers is a result of increases in the minimum rents due to us for improvements we purchased at certain of our travel centers since July 1, 2017 ($1,518). Rental income - travel

22


centers for the 2018 and 2017 periods includes $3,037 and $2,988, respectively, of adjustments necessary to record scheduled rent increases under our TA leases, the deferred rent obligations payable to us under our TA leases and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks on a straight line basis.
FF&E reserve income. FF&E reserve income represents amounts paid by certain of our hotel tenants into restricted accounts owned by us to accumulate funds for future capital expenditures. The terms of our hotel leases require these amounts to be calculated as a percentage of total sales at our hotels. We do not report the amounts, if any, which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income. The increase in FF&E reserve income is the result of increased sales at certain of our leased hotels in the 2018 period.

Hotel operating expenses. The increase in hotel operating expenses is a result of our hotel acquisitions since July 1, 2017 ($16,840), the conversion of one hotel from a leased to managed property during the 2018 period ($9,251) and an increase in wage and benefit costs, sales and marketing expenses and other operating costs at certain of our managed hotels resulting primarily from higher occupancies and general price increases ($6,502), partially offset by a decrease in the amount of guaranty and security deposit replenishment under certain of our hotel management agreements ($4,895), our hotel dispositions since July 1, 2017 ($1,916), operating expense decreases at certain managed hotels undergoing renovations during all or part of the 2018 period resulting primarily from lower occupancies ($1,763) and an increase in the amount of guaranty and security deposit utilization under certain of our hotel management agreements ($299). Certain guarantees and security deposits which have been applied to past payment deficits may be replenished from a share of subsequent cash flows from the applicable hotel operations pursuant to the terms of the respective management agreements. When our guarantees and our security deposits are replenished by cash flows from hotel operations, we reflect such replenishments in our condensed consolidated statements of comprehensive income as an increase to hotel operating expenses. Hotel operating expenses were increased by $5,204 and $10,099 during the three months ended September 30, 2018 and 2017, respectively, as a result of such replenishments. When our guarantees and security deposits are utilized to cover shortfalls of hotels' cash flows from the minimum payments due to us, we reflect such utilizations in our condensed consolidated statements of comprehensive income as a decrease to hotel operating expenses. Hotel operating expenses were decreased by $299 during the three months ended September 30, 2018 as a result of such utilization. There was no such utilization or reduction to hotel operating expenses for the three months ended September 30, 2017.
Depreciation and amortization - hotels. The increase in depreciation and amortization - hotels is a result of the depreciation and amortization of improvements acquired with funds from our FF&E reserves or directly funded by us since July 1, 2017 ($4,083) and our hotel acquisitions since July 1, 2017 ($2,696), partially offset by certain of our depreciable assets becoming fully depreciated since July 1, 2017 ($4,360).
Depreciation and amortization - travel centers. The increase in depreciation and amortization - travel centers is a result of the depreciation and amortization of travel center improvements we purchased since July 1, 2017 ($1,609), partially offset by certain of our depreciable assets becoming fully depreciated since July 1, 2017 ($1,226).
General and administrative. The increase in general and administrative costs is primarily due to an increase in professional service expenses, partially offset by a decrease in business management fees primarily as a result of no estimated incentive fees being accrued for the 2018 period.
Gain on sale of real estate. We recorded a $9,348 gain on sale of real estate in the 2017 period in connection with the sale of three hotels.
Dividend income. Dividend income represents the dividends we received from our investment in RMR Inc.
Unrealized gains on equity securities. Unrealized gains on equity securities represent the adjustment required to adjust the carrying value of our investments in RMR Inc. and TA common shares to their fair value as of September 30, 2018 in accordance with new GAAP standards effective January 1, 2018.
Interest income. The increase in interest income is due to higher average cash balances and interest rates during the 2018 period.
Interest expense. The increase in interest expense is due to higher average outstanding borrowings, partially offset by a lower weighted average interest rate in the 2018 period.
Income tax expense. We recognized higher income taxes during the 2018 period primarily due to an increase in the amount of foreign sourced income subject to income taxes.

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Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of the earnings of AIC.
Net income available for common shareholders. Our net income available for common shareholders and net income available for common shareholders per common share (basic and diluted) each increased in the 2018 period compared to the 2017 period primarily due to the revenue and expense changes discussed above.


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Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
 
For the Nine Months Ended September 30,
 
 
 
 
 
 
Increase
 
% Increase
 
 
2018
 
2017
 
(Decrease)
 
(Decrease)
Revenues:
 
 
 
 

 
 
 
 

Hotel operating revenues
 
$
1,496,125

 
$
1,392,995

 
$
103,130

 
7.4
 %
Rental income - hotels
 
20,243

 
22,854

 
(2,611
)
 
(11.4
)%
Rental income - travel centers
 
223,458

 
217,420

 
6,038

 
2.8
 %