Home Featured Hospitality Properties Trust to Acquire Net Lease Portfolio for $2.4B

Hospitality Properties Trust to Acquire Net Lease Portfolio for $2.4B


Hospitality Properties Trust has entered into a definitive agreement to acquire a net lease portfolio from Spirit MTA REIT for $2.4 billion in cash, excluding transaction costs. The portfolio consists of 774 service-oriented retail properties net leased to tenants in 22 different industries.

According to a prepared release, the portfolio has a weighted average remaining lease term of 8.6 years, a weighted average property level rent coverage of 2.68x and annual cash rent of $172 million as of March 31, 2019.

The release notes that this acquisition excludes SMTA’s assets leased to certain bankrupt tenants. HPT expects this transaction to be accretive to annualized Normalized Funds From Operations, or FFO, per share in 2020.

John Murray, President and Chief Executive Officer of HPT, made the following statement:

“We believe that the acquisition of this high-quality, net lease portfolio creates a stronger HPT. The combination of this diversified portfolio with our unique lodging structure and net lease travel centers, yields a REIT with greater scale, a more secure financial profile, and greater diversity in tenant base, property type and geography.

We expect this transaction to benefit our shareholders and expect to maintain our investment grade ratings.”

Certain highlights of the portfolio include:

  • 774 net lease properties with approximately 12 million rentable square feet.
  • Geographically diverse portfolio across 43 states.
  • 98% occupied with a weighted average lease term of 8.6 years.
  • Annual cash rents of $172 million as of March 31, 2019 and weighted average rent coverage of 2.68x.
  • Leases comprising 81% of the portfolio have contractual rent increases and 52% of portfolio rents are from master leases with cross default provisions.
  • Tenants that span 22 different industries and 164 brands that include quick service and casual dining restaurants, movie theaters, health and fitness, specialty retail, automotive parts and services, and other service-oriented and necessity-based industries.
  • Manageable near-term lease expirations averaging 4% of contractual rents per year over the next six years.
  • Certain expected benefits of the transaction include:
  • Expected to be accretive to shareholders.
  • Strengthens HPT’s property level rent coverage – HPT expects the acquisition will result in stronger property level rent coverage for its consolidated portfolio. On a pro forma basis, coverage for the consolidated portfolio for the twelve-month period ending March 31, 2019 would have increased from 1.21x to approximately 1.46x.
  • Provides greater scale – The number of HPT properties will increase from 506 properties to 1,280 properties, and HPT’s gross assets will increase from $10.2 billion to $12.6 billion, before expected asset sales.
  • Diversifies HPT’s tenant concentration – HPT will have a more diverse and resilient portfolio with the mix of net lease income increasing from 31% to 43%.
  • Limited capital expenditure requirements -Tenants under the leases bear the cost of maintaining the portfolio.

Murray adds that “Since HPT’s inception, its hotel agreements have functioned like triple net leases due to their strong credit support, subordinated base management fees and all-or-none renewal options. HPT’s 179 travel centers are leased under long-term triple net leases and contain over 500 quick service restaurants and 179 casual dining restaurants, truck repair businesses, stores and large gas stations. Beyond the improved coverage, diversity, scale, and capital expenditure benefits, which today’s announced acquisition is expected to create, the transaction also provides an additional avenue for HPT’s growth. In the future, we expect to invest in additional service and necessity-based retail properties on a triple net basis, preferably in portfolios, in addition to our continued focus on hotels and travel centers.”

Deal Structure, Approvals and Timing
To finance the transaction, HPT has secured commitments from lenders for an up to $2.0 billion unsecured term loan facility. HPT may use the proceeds from this term loan facility, borrowings under its existing revolving credit facility, proceeds from the sale of certain assets and/or proceeds from the issuance of new unsecured notes to finance the transaction. In addition to the $2.4 billion purchase price, HPT has agreed to pay the prepayment penalties to extinguish the existing mortgage debt on the portfolio, which are estimated to be approximately $72 million. HPT intends to sell approximately $500 million of the acquired assets and approximately $300 million of hotel and other assets following the closing of the acquisition in order to reduce its debt levels to approximately 6.0 times Adjusted EBITDA for real estate, or Adjusted EBITDAre.

Based on estimated GAAP net operating income and pending completion of HPT’s accounting analysis, HPT believes the acquisition capitalization rate will be approximately 7.2%. HPT’s accretion estimate for 2020 assumes that debt incurred with this transaction is refinanced with longer term debt financing at current market rates and is after expected asset sales.

HPT does not plan to issue common shares in connection with this transaction.

The purchase price is subject to certain adjustments. The transaction is subject to approval by SMTA shareholders and other customary conditions and is expected to close in the third quarter of 2019.

BofA Merrill Lynch is acting as exclusive financial advisor and Hunton Andrews Kurth LLP is acting as legal advisor to HPT in connection with this transaction. Joint Lead Arrangers for the unsecured term loan are BofA Securities, Inc., Citigroup, Morgan Stanley Senior Funding, Inc., RBC Capital Markets, and Wells Fargo Securities, LLC.