Service Properties Trust Q2 FY2025 earnings call

Key Managerial Messages

• Hotel Disposition Program: Made significant progress on hotel dispositions, sold 8 hotels for $46 million, with 114 Sonesta hotel portfolio having 111 hotels with due diligence completed and nonrefundable deposits received, and remaining 3 hotels in purchase and sale agreement. Removed a full-service hotel in Atlanta from marketing.
• Hotel Performance: RevPAR increased 40 basis points Y/Y, driven by occupancy and ADR gains; group and contract segments outperformed transient. Retained hotels like Royal Sonestas in Hawaii and San Juan, and downtown Chicago hotels performed well. Renovated hotels showed double-digit revenue growth.
• Net Lease Portfolio: Diversified portfolio with 97% leased, weighted average lease term 7.6 years, lease expirations laddered. Active asset management with over 350,000 square feet of leasing in Q2.
• Financial Results: Normalized FFO was $57.6 million or $0.35 per share, adjusted EBITDAre decreased to $163.8 million. Q3 guidance includes RevPAR $98-$101 and adjusted hotel EBITDA $54M-$58M.

Hotel Segment

• Financial Performance: During the quarter, 8 hotels were sold for $46 million. On track to complete 122 hotel sales in 2025 totaling nearly 16,000 keys for gross proceeds of $966 million. Second quarter RevPAR increased 40 basis points year-over-year, outperforming the industry. Hotel-level EBITDA declined due to elevated labor costs and renovations, but retained 84 hotels saw RevPAR increase 150 basis points year-over-year.
• Revenue Contribution %: Not explicitly stated in terms of overall revenue contribution, but hotel dispositions are a key part of the strategic shift to net lease.

Net Lease Segment

• Financial Performance: The net lease portfolio consists of 742 service-oriented retail net lease properties with annual minimum rents of $387 million, more than 97% leased with a weighted average lease term of 7.6 years. Sold 5 net lease properties for $15 million, marketing 6 additional properties expected to generate $2.5 million to $3.5 million. Acquired 20 net lease retail properties for $55 million, with $10.3 million expected in Q3.
• Revenue Contribution %: Pro forma for expected hotel sales, net lease assets are projected to account for over 70% of adjusted EBITDAre.

Forward-Looking Guidance

• Q3 Guidance: Projecting Q3 RevPAR $98 to $101 and adjusted hotel EBITDA $54 million to $58 million, considering seasonality and headwinds.
• 2026 CapEx: Expecting full-year CapEx in 2026 to be approximately $150 million, with $64 million related to discretionary renovation capital.
• Debt Management: Early redemption of $350 million notes, proceeds from hotel sales to repay debt and improve financial covenants.

Risks Identified

• Debt Covenant Issues: Below the 1.5x debt service coverage covenant at 1.49x, prohibiting additional debt until compliance.
• Seasonality and Industry Headwinds: Q3 expected to have sequential decline due to seasonality and travel/lodging industry headwinds.
• Uncertainty in Compliance: Need to address operational improvements and asset sales to get back in compliance with debt covenants.

Question and Answer Session

• Q: Tyler Batory on guidance for hotel portfolio, renovation disruption, and travel headwinds A: Brian E. Donley noted Q3 seasonality and leisure travel softness, with some improvement in Q4. Chris Bilotto added less disruption from renovations in future years will moderate EBITDA.
• Q: John Massocca on net lease investments, debt covenant, and hotel dispositions A: Christopher J. Bilotto discussed steady net lease acquisition run rate, debt covenant progress with note redemption, and hotel dispositions proceeding as planned with strong counterparties.
• Q: Jack Armstrong on debt, hotel dispositions, renovation returns, and management agreement A: Brian E. Donley explained credit facility draw and potential 0 coupon bonds, Christopher J. Bilotto discussed hotel disposition pricing and renovation return expectations, and both addressed management agreement changes as market-based and strategic.