Service Properties Trust SEC 10-Q Report

Service Properties Trust, a real estate investment trust (REIT) specializing in hospitality and service-focused retail properties, has released its Form 10-Q report for the third quarter of 2024. The report provides a comprehensive overview of the company's financial performance, business operations, strategic initiatives, and the challenges it faces in the current economic environment.

Financial Highlights

• Total Revenues: $491.171 million, decreased by 1.1% compared to the same period in 2023.
• Hotel Operating Revenues: $390.935 million, decreased by 1.2% compared to the same period in 2023.
• Rental Income: $100.236 million, decreased by 1.0% compared to the same period in 2023.
• Hotel Operating Expenses: $328.535 million, increased by 3.4% compared to the same period in 2023.
• Net Lease Operating Expenses: $4.791 million, decreased by 0.2% compared to the same period in 2023.
• Depreciation and Amortization: $89.005 million, decreased by 5.8% compared to the same period in 2023.
• General and Administrative: $10.472 million, decreased by 3.5% compared to the same period in 2023.
• Loss on Asset Impairment, Net: $13.692 million, increased significantly compared to the same period in 2023.
• Gain on Sale of Real Estate, Net: $4.105 million, increased significantly compared to the same period in 2023.
• Interest Income: $0.537 million, decreased by 90.5% compared to the same period in 2023.
• Interest Expense: $99.126 million, increased by 20.5% compared to the same period in 2023.
• Loss on Early Extinguishment of Debt, Net: $0.133 million, recorded in the 2024 period.
• Income Tax Benefit: $0.077 million, decreased by 96.6% compared to the same period in 2023.
• Equity in Earnings of an Investee: $2.963 million, increased by 59.0% compared to the same period in 2023.
• Net Loss: $46.901 million, increased significantly compared to the same period in 2023.
• Net Loss Per Common Share (Basic and Diluted): $0.28, increased significantly compared to the same period in 2023.

Business Highlights

• Hotel Portfolio Performance: As of September 30, 2024, the company owned 214 hotels with 36,875 rooms or suites. The U.S. hotel industry saw increases in revenue per available room (RevPAR) and average daily rate (ADR) compared to the same periods in 2023. However, the company's comparable hotels experienced a slight decline in RevPAR, attributed to renovation disruptions and decreased business activity in certain areas.
• Net Lease Portfolio: The company owned 745 service-focused retail net lease properties with an aggregate of 13,332,131 square feet leased to 176 tenants. These properties were 97.6% occupied with a weighted average lease term of 8.3 years. The largest tenant, TravelCenters of America Inc. (TA), leased 175 travel centers under five master leases expiring in 2033.
• Hotel Operating Agreements: The company had four hotel operating agreements as of September 30, 2024. Sonesta managed 189 hotels, Hyatt managed 17 hotels, Radisson managed seven hotels, and IHG managed one hotel. The Sonesta agreement, which covers 50.1% of the company's total historical real estate investments, is set to expire on January 31, 2037.
• Renovation Impact: The company has been implementing significant renovations, causing disruption and displacement at certain hotels, which contributed to a decline in RevPAR.
• Future Hotel Sales: On October 16, 2024, the company announced plans to sell 114 focused service hotels managed by Sonesta, with an aggregate of 14,925 keys and a net carrying value of $850,000. The sales are expected to occur in 2025, with proceeds used to repay debt and save approximately $725,000 in capital expenditures over six years.
• Reduction in Distributions: To improve liquidity, the company reduced its regular quarterly cash distribution on common shares from $0.20 to $0.01 per share, expected to result in $127,000 of annual savings.
• Hotel Operating Revenues: The decrease in hotel operating revenues for the three months ended September 30, 2024, was primarily due to the sale of certain hotels and lower RevPAR at some hotels.
• Rental Income: The decrease in rental income for the three months ended September 30, 2024, was mainly due to lower rental income recognized at certain net lease properties and the sale of some net lease properties.
• Hotel Operating Expenses: The increase in hotel operating expenses for the three months ended September 30, 2024, was driven by higher wages and benefits and other operating expenses, partially offset by the sale of certain hotels.
• Depreciation and Amortization: The decrease in depreciation and amortization for the three months ended September 30, 2024, was due to certain assets becoming fully depreciated and the sale of some properties.
• General and Administrative Costs: The decrease in general and administrative costs for the three months ended September 30, 2024, was primarily due to lower business management fees.
• Loss on Asset Impairment: The company recorded a net loss on asset impairment during the three months ended September 30, 2024, to reduce the carrying value of four hotels and two net lease properties to their estimated fair value.
• Gain on Sale of Real Estate: The company recorded a net gain on the sale of real estate during the three months ended September 30, 2024, in connection with the sale of six hotels and four net lease properties.
• Interest Expense: The increase in interest expense for the three months ended September 30, 2024, was due to higher weighted average interest rates.
• Equity in Earnings of an Investee: The company's proportionate share of earnings from Sonesta increased for the three months ended September 30, 2024.
• Hotel Operating Revenues (Nine Months): The increase in hotel operating revenues for the nine months ended September 30, 2024, was primarily due to a hotel acquisition in 2023, partially offset by lower RevPAR and the sale of certain hotels.
• Rental Income (Nine Months): The increase in rental income for the nine months ended September 30, 2024, was mainly due to amended TA leases effective from May 2023.
• Hotel Operating Expenses (Nine Months): The increase in hotel operating expenses for the nine months ended September 30, 2024, was driven by a hotel acquisition, higher wages and benefits, property insurance, and other operating expenses.
• Depreciation and Amortization (Nine Months): The increase in depreciation and amortization for hotels was due to capital expenditures and a hotel acquisition, partially offset by fully depreciated assets and the sale of some hotels.
• General and Administrative Costs (Nine Months): The decrease in general and administrative costs for the nine months ended September 30, 2024, was primarily due to lower business management fees and other professional fees.
• Loss on Asset Impairment (Nine Months): The company recorded a net loss on asset impairment during the nine months ended September 30, 2024, to reduce the carrying value of ten hotels and eight net lease properties to their estimated fair value.
• Gain on Sale of Real Estate (Nine Months): The company recorded a net gain on the sale of real estate during the nine months ended September 30, 2024, in connection with the sale of seven hotels and seven net lease properties.

Strategic Initiatives

• Hotel Sales: The company announced a plan to sell 114 focused service hotels managed by Sonesta with an aggregate of 14,925 keys and a net carrying value of $850 million. The sales are expected to be completed in 2025, with the net proceeds used to repay debt.
• Renovation Plan: The company has been implementing a significant renovation plan that has caused disruption at certain hotels.
• Capital Contribution: The company made a $3.392 million pro rata capital contribution to Sonesta to support its growth initiatives, including franchising efforts.
• Debt Management: The company issued $700 million of 8.375% senior guaranteed unsecured notes due 2029 and $500 million of 8.875% senior guaranteed unsecured notes due 2032, with net proceeds of $1.162 billion. These notes are fully and unconditionally guaranteed by all subsidiaries except for certain excluded ones. The company redeemed all outstanding 7.50% senior unsecured notes due 2025 and repurchased $272.803 million of 4.50% senior unsecured notes due 2025.
• Distributions: The company declared and paid regular quarterly distributions totaling $99.484 million and reduced its regular quarterly cash distribution on common shares from $0.20 to $0.01 per share, expected to result in $127 million of annual savings. Additionally, the company purchased 149,472 common shares for tax withholding and payment obligations.
• Future Outlook: The company expects to complete the sale of 114 focused service hotels in 2025, resulting in approximately $725 million in capital expenditure savings over six years. The company plans to use the net sales proceeds to repay debt, improving liquidity. The company also anticipates maintaining its reduced quarterly cash distribution on common shares to enhance financial flexibility.

Challenges and Risks

• Economic and Market Conditions: Consumer confidence, corporate travel, and lodging demand are affected by economic and market conditions, inflationary pressures, high interest rates, unemployment levels, work-from-home policies, use of technologies, and broader economic trends. Increased labor costs and other price inflation may continue to negatively impact hotel operations and tenant operations. An economic recession or disruptions in financial markets could adversely affect financial condition, hotel operations, tenant renewals, rent payments, financing availability, cost of capital, and property values.
• Renovation Disruptions: The company is implementing a significant renovation plan that has caused disruption at certain hotels, potentially affecting revenue and occupancy rates.
• Hotel Sales and Debt Repayment: The company plans to sell 114 focused service hotels managed by Sonesta, expecting to use the net sales proceeds to repay debt. This could impact the company's revenue streams and operational focus.
• Reduced Cash Distributions: To improve liquidity, the company reduced its regular quarterly cash distribution on common shares from $0.20 to $0.01 per share, which may affect shareholder returns and market perception.
• Hotel Performance: The company's comparable hotels produced year-over-year declines in RevPAR, partially due to renovation disruptions and decreased business activity in certain areas.
• Net Lease Portfolio: The net lease properties were 97.6% occupied, with lease renewals and new leases at lower average rents compared to prior rents, indicating potential challenges in maintaining rental income levels.
• Interest Rate Risk: The company is exposed to risks associated with market changes in interest rates. Fixed rate debt will not be affected by changes in market interest rates during the term of the debt, but refinancing at higher rates could increase annual interest costs by approximately $56,821. Changes in market interest rates would affect the fair value of fixed rate debt obligations.
• Floating Rate Debt: The company had no amounts outstanding under its revolving credit facility as of September 30, 2024. Borrowings under the facility are subject to interest rate changes based on SOFR plus premiums, making the company vulnerable to changes in short-term interest rates and interest rate premiums upon renewal or refinancing.
• Inflation and Federal Reserve Actions: In response to significant and prolonged increases in inflation, the U.S. Federal Reserve has raised interest rates multiple times since 2022. Although there have been recent rate reductions, future rate changes remain uncertain, potentially impacting the company's interest obligations and refinancing costs.
• No Material Changes: There have been no material changes to risk factors from those previously disclosed in the 2023 Annual Report. However, the ongoing economic conditions, interest rate fluctuations, and operational challenges highlighted in the current report underscore the persistent and evolving risks the company faces.

SEC Filing: Service Properties Trust [ SVC ] - 10-Q - Nov. 06, 2024