Hospitality Properties Trust To Buy $2.4B Net Lease Portfolio

NEWTON, MA—Hospitality Properties Trust is expanding its scope of investment with a definitive agreement to buy a net lease portfolio from Spirit MTA REIT for $2.4 billion in cash, excluding transaction costs.

HPT plans to sell $500 million of the acquired assets and $300 million of hotel and other assets following the closing of the acquisition in order to reduce its debt levels.

The deal also represents a critical step in the full wind-down of SMTA. “Looking ahead, Spirit will continue to partner with SMTA’s Board of Trustees to liquidate the few remaining assets and seek maximum recovery on the Shopko B-1 Term Loan,” said Jackson Hsieh, Chairman of SMTA and President and Chief Executive Officer of Spirit Realty Capital, in a prepared statement.

The portfolio consists of 774 service-oriented retail properties net leased to tenants that range from quick service and casual dining restaurants, movie theaters, health and fitness, specialty retail, automotive parts and services. 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.

Hospitality Properties’ assets are primarily lodging and net lease travel centers, with its hotel agreements functioning like triple net leases due to their strong credit support, subordinated base management fees and all-or-none renewal options, according to CEO John Murray. As for HPT’s 179 travel centers, these 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.

By adding the net lease portfolio from Spirit MTA, which represents more than 22 different industries, it will create a more diversified portfolio, Murray says. HPT intends to continue along this path, he adds. “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,” he says.

When the transaction closes, 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. HPT’s mix of net lease income will increase from 31% to 43%.

To finance the transaction, HPT has secured commitments from lenders for an up to $2 billion unsecured term loan facility. 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. 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 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.

Hunton Andrews Kurth LLP represented Hospitality Properties Trust in this transaction.