Service Properties Trust Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Hotel Portfolio: RevPAR softened due to pullback in government and international travel, but post-renovation performance and group revenue growth were bright spots. Plan to sell 125 hotels in 2025 for an estimated $1.1B, with proceeds to be used for balance sheet deleveraging and growth opportunities.
• Net Lease Portfolio: Steady cash flow, diversified tenant base with 175 tenants under 136 brands, low expirations in 2025. Recently acquired 9 net lease properties, focusing on growing and diversifying the portfolio.
• Financial Results: Normalized funds from operations (FFO) were $10.8 million ($0.07 per share), adjusted EBITDAre was $115.8 million. Interest expense decreased $10.1 million year-over-year. Hotel portfolio adjusted EBITDA was $23 million, down 20.5% year-over-year but within guidance.

Segment Performance

• Hotel Portfolio: Comparable hotel RevPAR grew 2.6% year-over-year. Excluding 8 hotels under renovation, comparable RevPAR increased 3.7%. Full service hotels saw 1.9% RevPAR increase (would be 3.2% without renovation). Select service portfolio had 10.6% RevPAR growth. Extended stay RevPAR was flat. Adjusted hotel EBITDA declined 20.5% year-over-year but was within guidance. The 17 renovated Hyatt Place hotels saw 35% RevPAR improvement and adjusted hotel EBITDA increased $2.9M year-over-year.
• Net Lease Portfolio: Owns 739 service-oriented retail net lease properties with $381M annual minimum rents, nearly 98% leased, weighted average lease term 8 years. Minimum rents expiring minimally in 2025. Coverage ratio of 2.07x trailing 12 months. Recently acquired 9 net lease properties for $33M with weighted average lease term 16 years, average rent coverage 3.0x, and average cash/GAAP cap rates 7.3%/8.4% respectively.

Guidance

• Hotel: Projected Q2 RevPAR is $99 to $102, and adjusted hotel EBITDA is $69 million to $74 million. Plan to sell 119 hotels in 2025 with 15,912 keys.
• Balance Sheet: $5.8 billion of debt outstanding at quarter end with a weighted average interest rate of 6.4%. $80 million cash on hand and $50 million outstanding on a $650 million revolving credit facility.
• Capital Expenditures: Approximately $250 million planned for the year, including $120 million to $140 million for maintenance capital and the rest for renovation and redevelopment initiatives.

Risks

• Macroeconomic Uncertainty: Impact on travel and lodging, including pullback in government and international travel, airline flight reductions, and consumer sentiment shifts.
• Tariffs and Supply Chain: Potential impact on capital expenditures, including delays and cost increases due to tariffs and supply chain issues.
• Disposition Process: Uncertainties in timing and pricing of hotel sales, including potential one-time expenses and disruption from the marketing process.

Question and Answer

Q: Good morning. Thank you for taking my questions. First one for me, wanted to parse into the RevPAR trends in the quarter. Look there's and I know there's lots of macroeconomic uncertainty out there, but Chris, you mentioned a slowdown over the quarter. Can you walk us through kind of the monthly progression and how the quarter came in relative to your initial expectations and then also any thoughts or color on where April ended up?

A: Yes. I think kind of more broadly, I think overall RevPAR kind of came in kind of where expected. But as I think about the quarter specifically, we started higher kind of in January at just over 2.5% and that that shows some deceleration going into March down to about half of a point. And so I think that's how I would think about the trajectory and the slowdown as far as overall RevPAR. I would say for April, Brian's given some guidance on kind of where we expect that RevPAR guidance to be for the quarter. Softness in April is initially or at least the preliminary numbers are showing about a decrease of 1% year-over-year. And so we expect there to be some ramp as the quarter progresses, all things being equal.

Q: Thanks, Meredith Jensen with HSBC. And just how do you view sort of this discussion in terms of the value of your stake in Sonesta and sort of the relationship there?

A: Yes, the 34%, Meredith, Sonesta's as we're going through transitions with our hotel portfolio, they too are transitioning to more of a franchise platform and have done a lot of initiatives to improve that higher margin business at the operating company. So that's a big part of their growth strategy. So we believe that there'll be increasing value as time goes on as they continue to expand the footprint of Sonesta through that franchise platform. Again, it's a very high margin business and it'll flow through to us over time. The equity stake and how we account for it, we do pick up our 34% of their earnings and their EBITDA in our numbers. Yes. So the balance sheet reflects around $100 million of an investment. But we believe over time that will grow.

Q: Hey, good morning. Thanks for taking the question. So I guess just circling back to the hotel dispositions, prior expectations of closing on the majority of the dispositions by the end of Q2 to now kind of somewhere between Q2 and Q3. Can you walk us through specifically what happened there? What drove that kind of shifting, right? Was it buyers taking a little bit more time with due diligence? The kind of general slowdown in transaction markets with all of the uncertainty entered in April? Just some color there on what drove the shift in timing would be helpful.

A: Yes, I mean, really, it's just a function of the process and diligence when you're dealing with larger portfolios, I think it's not a customary for these things to kind of tend to ebb and flow. I would say it's not specific to the broader market and any concern around risks that may have been introduced since awarding it to these buyers. It's really just a function of going through the process. And again, I think these being taken down in phases just kind of extends that timeline for overall execution and coming out of the system. So again, it's really just the size of the portfolio, the depth that goes into a transaction of this size.

Q: Good morning. So I'm sorry if I missed this. Just with regards to the net lease acquisitions, just kind of more broadly, you gave a couple metrics around it, but what were the actual properties themselves and what kind type of property?

A: The question is the actual assets we purchased or we're looking at the types of properties. Yes. So for -- Yes, that we purchased the two properties during the quarter. One was a car wash and another one was a casual dining concept.