Service Properties Trust Q2 FY2026 earnings call

Strategic Priorities & Capital Allocation

• The company is executing a capital recycling strategy: disposing of underperforming non-core hotel assets to reduce leverage, cut interest costs, and redirect resources to higher-performing retained assets that deliver margin improvement.
• $540 million in net proceeds from the April 2026 equity offering, combined with proceeds from year-to-date asset sales, were used to redeem $550 million of 2027-maturing unsecured debt, generating $30 million in annual interest savings and strengthening the balance sheet.
• Since Q2 2026 began, the company has sold 20 properties (19 net lease, 1 hotel) for ~$32 million; year-to-date 2026 net lease dispositions total 21 properties sold for $15 million, with an expected $15 million more in dispositions in H2 2026.

Retained Hotel Operating Initiatives

• Management is targeting margin expansion across the retained portfolio via three core pillars:
  1. Revenue optimization: Shift bookings from higher-cost online travel agencies (OTAs) to lower-cost direct/brand.com channels, grow contract, group, and ancillary revenue (food and beverage, parking).
  2. Labor efficiency: Implement dynamic, lean staffing models aligned with demand to reduce reliance on expensive contract labor; early results show improved labor productivity across major operators already this quarter.
  3. Fixed cost optimization: Capture savings from group benefits, property insurance, and energy controls; the portfolio has already achieved a 20% reduction in property insurance costs effective July 1, 2026.
• Key renovation projects are ongoing, most notably the Nautilus South Beach redevelopment, which caused temporary revenue displacement in Q2; the project is on track for completion in November 2026 and will drive upside once stabilized.
• Momentum has carried into Q3 2026, with preliminary July RevPar for retained hotels up 7.1% year-over-year.

Hotel Disposition Update

• The company remains on track to sell the previously announced 15 non-core hotels; one 133-key hotel sold for $18.4 million in July 2026, 13 of the remaining 14 are under purchase agreements or letters of intent, and one is actively marketed. Most remaining dispositions will close by the end of 2026.
• A 495-key IHG-managed full-service hotel in Atlanta's Perimeter submarket, previously pulled from marketing, will be re-listed for sale in Q3 2026, following a hold-sell analysis as its management agreement approaches expiration; sale proceeds will be used for further balance sheet strengthening.

Net Lease Portfolio Update

• Year-to-date 2026, the company has invested $9 million to acquire 4 net lease properties in the QSR and automotive services sectors, with a weighted average cash cap rate of 7.9% and weighted average lease term of 15 years. The company is under agreement to acquire 5 more properties for $14.2 million, expected to close in Q3 2026, putting the company well ahead of its full-year $25 million acquisition target.
• The team executed 210,000 square feet of new lease transactions in Q2, with a weighted average lease term of 7 years. Only 1% of annualized base rent expires by the end of 2026, and just 3.8% expires by the end of 2027, creating a manageable near-term expiration schedule.

Corporate Governance: The board is actively searching for an additional independent trustee with deep hospitality industry experience to support the company's ongoing strategic repositioning.

Consolidated: Normalized FFO totaled $55 million, a 4.5% decrease year-over-year. Net operating income (NOI) for the full portfolio was supported by steady performance across both segments.

Hotel Segment: The 78-property retained hotel portfolio generated adjusted hotel EBITDA of $57 million, a 4.2% year-over-year increase. Excluding three hotels under active renovation, adjusted hotel EBITDA increased 13.4% year-over-year. RevPar increased 6.6% year-over-year, with a 19.4% adjusted EBITDA margin for the quarter. 15 non-core exit hotels produced $1.9 million in losses this quarter, contributing a $15 million annual negative EBITDA drag that will be eliminated once all dispositions are completed. For 93 comparable hotels, RevPar increased 6.5% year-over-year, and adjusted hotel EBITDA came in flat at $55 million year-over-year.

Net Lease Segment: NOI for the net lease portfolio increased $1.3 million year-over-year, with 2.2% sequential quarterly cash-basis NOI growth. The portfolio holds 745 properties with $400 million in annualized base rent, contributing over 95% of revenue from leases with built-in contractual rent growth or inflation protection. Portfolio occupancy held steady at 96.6%. Aggregate trailing 12-month rent coverage improved to 2.09x, with travel center (TA) rent coverage rising 10 basis points to 1.34x (the second consecutive quarter of growth, a 12% increase from Q4 2025), and the rest of the portfolio holding rent coverage above 3.5x.

• Management is maintaining full-year 2026 guidance, with the normalized FFO range held at $124 million to $144 million, or $1.20 to $1.35 per diluted share (based on a weighted average 105 million share count).
• Full-year guidance for hotel EBITDA, NOI, and consolidated adjusted EBITDA RE is reaffirmed at prior ranges.
• Full-year 2026 capital expenditure guidance is maintained at $120 million to $140 million, driven by ongoing hotel renovation activity.
• Management continues to expect positive cash flow available for distribution (CAD) for full-year 2026, matching prior outlooks.

• Renovation projects on key assets (including Nautilus South Beach) create temporary top-line and margin displacement that impacts near-term results, and project completion timelines or stabilization could differ from current expectations.
• The market for mid-price point hotel assets ($50 million to $100 million) is currently softer than other segments, which could impact the timing or pricing of remaining non-core hotel dispositions. One remaining disposition may not close until early 2027.
• Refinancing of upcoming 2027 debt maturities depends on market conditions, and terms could differ from current expectations, even with strong collateral backing for the secured notes.
• Retained hotel margin improvement initiatives depend on successful execution by third-party hotel operators, and benefits may take longer to materialize or be smaller than currently projected.

Q: What is the timeline for margin improvement initiatives at retained hotels, what is the near-term margin impact from renovation activity, and what long-term margin target does management target? / A: Most renovation-related negative impacts were concentrated in H1 2026, with the Nautilus project on track to open in November 2026, bringing a positive uplift starting in Q4 2026. Near-term benefits like the 20% property insurance cut are already active this fiscal year, while larger operator-driven initiatives will mostly flow through by the end of 2026, with the biggest benefits hitting Q1 2027. Eliminating the $15 million annual EBITDA drag from exit hotels and absorbing renovation displacement will drive material incremental margin starting in 2027. Management will provide specific margin targets after the new hotel management team completes its portfolio review, expected by Q3 2026.

Q: When will the 15 planned non-core hotel dispositions close, what is the state of the hotel asset sale market, and are more hotel dispositions expected after 2026? / A: 13 of the 15 properties are already under contract, with ~$20 million to $30 million in proceeds expected to close in Q3 2026, and the balance closing in Q4 2026; one may push into early 2027. The Atlanta property is expected to close in early 2027. The current asset sale market is mixed: focused service and luxury hotels see strong demand, but mid-price hotels between $50 million to $100 million are softer. Future dispositions will be determined by the ongoing multi-year portfolio performance review; management will provide more detail on 2027 disposition plans after completing 2026's exit program.

Q: What is the expected stabilization path for the Nautilus South Beach, what is the annual EBITDA drag in 2026, and what is the target OTA booking percentage for the portfolio? / A: The full-year 2026 cash drag from the Nautilus renovation is ~$4.5 million. Prior to renovation, the property generated $5 million to $6 million in annual EBITDA, and management expects that figure to increase significantly post-stabilization. OTA bookings currently hover around the mid-20% range, down from historical levels; management targets a medium-term range of 20% to 25% via growing direct, loyalty, contract, and group booking channels to cut distribution costs.

Q: What is the company's plan for upcoming 2027 debt maturities after the equity offering, and what refinancing structure is expected for the $580 million zero-coupon secured notes? / A: The $45 million variable funding maturing in January 2027 will be paid down with asset sale proceeds. The $650 million revolving credit facility maturing in June 2027 has a one-year extension option that the company is prepared to use if needed. The zero-coupon notes maturing September 2027 are backed by high-quality travel center collateral, and post-equity raise management expects to refinance them with a traditional cash-interest secured debt instrument, as the company now has sufficient covenant flexibility to support this structure.