Service Properties Trust Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Dividend Reduction: Reduced regular quarterly common dividend from $0.20 to $0.01 per share, saving $127M annually for deleveraging.
• Hotel Sales: Plan to sell 114 focused service hotels in Sonesta portfolio (14,925 keys, net carrying value $850M), targeting $1B proceeds in 2025, saving $725M in CapEx.
• Capital Improvements: $82M in capital improvements in Q3, $300M expected for full year 2024. Renovations at full-service hotels in LAX, White Plains, Miami Airport.
• Net Lease Performance: 97.6% leased, strong tenant coverage, stable cash flows.

Segment Performance

• Hotel Portfolio: Mixed performance. Comparable RevPAR declined 80 basis points year-over-year, but excluding renovation properties, comparable RevPAR increased 1.7%. Full-service portfolio RevPAR declined less than 1%, but excluding renovations, grew 2.5%. Extended stay portfolio RevPAR declined 1.5% due to renovation and lower longer-term stays. Select service portfolio RevPAR declined 20 basis points, with Sonesta Select up 50 basis points but offset by Hyatt renovations.
• Net Lease Portfolio: 97.6% leased, weighted average lease term 8.3 years. Aggregate coverage of minimum rents 2.2 times, excluding TA properties 3.7 times. Sold four net lease properties and entered into an agreement to sell another.

Guidance

• Q4 Hotel EBITDA: Projected $34M to $39M, Q4 RevPAR $82 to $85.
• 2025 Plans: Expect $1B from hotel sales to repay debt.

Risks

• Renovation Impact: Uncertainty in RevPAR recovery from renovations, especially in extended stay and select service properties.
• Market and Demand: Softening leisure demand, potential delays in hotel sales impacting liquidity and deleveraging.
• Interest Rate Risk: Impact of interest rate changes on debt servicing and refinancing.

Question and Answer

Q: Longer-term outlook for renovation activity and full-service hotels?

A: Todd Hargreaves said they expect lower CapEx in 2025, some full-service hotels need further capital, Nautilus renovation starts in 2025, Hyatt renovations should lift RevPAR in next quarters.

Q: Retained hotels' CapEx needs and EBITDA margins?

A: Retained hotels have mixed margins, full-service hotels need to improve margins to 20-30%, focused service hotels have higher margins.

Q: Interest in 114 hotel sales portfolio?

A: Received significant interest from institutional groups looking to buy portfolios, early stages but high demand expected.

Q: EBITDA performance and RevPAR trends?

A: EBITDA affected by renovations, disruption, cost pressures, but expect improvement as renovations complete and hotels are sold.

Q: Liquidity and debt obligations?

A: Comfortable with short-term liquidity, plan to use sale proceeds for debt repayment, can refinance debt as needed.