Historical Overview and Portfolio Composition
Established in 1995 under the laws of the State of Maryland, SVC has evolved over the decades to become a leading player in the hospitality and net lease real estate sectors. The company initially invested in hotel and retail properties, focusing on service-oriented businesses. In its early years, SVC grew its portfolio through acquisitions, expanding its reach across the United States. The company's strategy was to own properties leased to tenants in the service industry, providing stable rental income.
As of September 30, 2024, the company owned 214 hotels with over 36,000 guest rooms and 745 service-focused retail net lease properties comprising 13.33 million square feet. This diverse portfolio is a result of SVC's evolution over time, which included a mix of hotel and net lease retail properties.
SVC's hotel portfolio is diversified across various service levels, including 47 full-service, 60 select-service, and 107 extended-stay properties. These hotels operate under well-known brands such as Sonesta, Hyatt, Radisson, and IHG. On the net lease side, SVC's 745 properties are leased to 176 tenants, spanning 21 distinct industries.
A major milestone for SVC was its acquisition of TravelCenters of America Inc. (TA) in 2023, which significantly increased the company's exposure to the travel center and service station business. SVC now leases 175 travel centers to TA under long-term triple-net leases, making TA the company's largest tenant.
Throughout its history, SVC has faced various challenges, including the impact of the COVID-19 pandemic on its hotel properties and managing a diverse portfolio of assets across the hotel and net lease sectors. The company has had to navigate changes in consumer preferences and economic conditions that affected both its hotel and retail tenants over the years.
Navigating Challenging Times
Like many hospitality-focused REITs, SVC has faced headwinds in recent years due to the impact of the COVID-19 pandemic and ongoing economic uncertainties. The company's comparable hotel RevPAR (revenue per available room) declined by 80 basis points in the third quarter of 2024, while gross operating profit margin contracted by 380 basis points to 27.5%.
To mitigate these challenges, SVC has taken proactive measures to strengthen its financial position and optimize its portfolio. In the third quarter of 2024, the company reduced its quarterly common dividend from $0.20 per share to $0.01 per share, resulting in $127 million in annual savings. This strategic move is expected to improve SVC's liquidity and provide greater financial flexibility.
Transforming the Hotel Portfolio
A key aspect of SVC's strategic plan is the sale of 114 Sonesta-branded focused service hotels, comprising 14,925 keys across the Extended Stay Suites, Simply Suites, and Select brands. The company launched the formal marketing effort for these assets in January 2025 and has already received over 50 sub-portfolio bids from a deep and well-capitalized buyer pool.
The decision to sell these hotels is driven by SVC's desire to generate additional liquidity, reduce leverage, and focus its Sonesta portfolio on full-service hotels and higher-performing focused service properties. The company expects to net at least $1 billion from these sales, which would imply a valuation multiple of 16.5 times the 2024 hotel EBITDA of $60.5 million for the properties.
Concurrent with the Sonesta hotel sales, SVC has also been executing on a plan to sell 22 non-core, underperforming hotels. During the third quarter of 2024, the company sold 8 of these hotels with 1,004 keys, and since the quarter's end, has sold an additional hotel and reached agreements to sell 5 more.
Optimizing the Net Lease Portfolio
While the hotel portfolio transformation is a key priority, SVC is also focused on optimizing its net lease business. As of September 30, 2024, the company's net lease assets represented 44.2% of its overall portfolio based on investment, with a weighted average lease term of 8 years and a diverse tenant base of 177 operators across 136 brands.
SVC is actively exploring opportunities to grow its net lease portfolio through well-vetted acquisitions, with a focus on properties leased to operators with established brands and located in retail corridors with durable land values and appealing demographics. The company is also engaging with existing tenants to identify organic growth opportunities within the current portfolio.
Financial Performance and Liquidity
In the third quarter of 2024, SVC reported normalized funds from operations (FFO) of $52.9 million, or $0.32 per share, down from $0.56 per share in the prior-year period. Adjusted EBITDAre declined 11.6% year-over-year to $155 million, primarily due to a $9.4 million increase in interest expense and an $8.4 million decrease in interest income.
For the most recent quarter, SVC reported revenue of $456,559,000 and a net loss of $76,392,000. Operating cash flow (OCF) and free cash flow (FCF) were both negative at $9,652,000. The company experienced declines in revenue, net income, OCF, and FCF compared to the prior year quarter, primarily due to lower RevPAR at certain hotels, increased interest expense, and declines in interest income.
As of September 30, 2024, SVC had $5.7 billion of fixed-rate debt outstanding with a weighted average interest rate of 6.4%. The company maintains a strong liquidity position, with over $700 million in total liquidity, including full availability under its $650 million revolving credit facility. SVC had $61 million in cash on hand, with $50 million outstanding on its revolving credit facility. The company's current ratio and quick ratio were both 0.289.
SVC's hotel investments segment, which comprises the majority of its business, reported occupancy of 67.3%, average daily rate (ADR) of $140.66, and RevPAR of $94.73 for comparable hotels during the three months ended September 30, 2024. Hotel operating revenues for the three and nine month periods were $390.94 million and $1.14 billion, respectively, with corresponding hotel operating expenses of $328.54 million and $961.87 million.
The net lease investments segment, consisting of 745 service-focused retail net lease properties, maintained a 97.6% occupancy rate with a weighted average remaining lease term of 8.3 years. Rental income from this segment was $100.24 million and $300.71 million for the three and nine month periods, respectively.
Outlook and Conclusion
Looking ahead, SVC's focus remains on strengthening its balance sheet through asset sales, reinvesting in its highest-performing hotel assets, and growing its net lease portfolio. The company expects 14 hotels to undergo renovations in 2025, with notable projects including the conversion of its Sonesta properties in Washington, D.C. and South Beach, Miami to the James brand.
SVC's recent performance and guidance show signs of recovery and strategic repositioning. In Q4 2024, the company's comparable hotel RevPAR grew 4.2% year-over-year, outpacing the industry by 60 basis points. The full-service hotel portfolio RevPAR grew 6.3% year-over-year, excluding the 3 hotels under renovation, while the select service portfolio RevPAR grew 9.6% and the extended stay portfolio RevPAR grew 1.2%.
For Q1 2025, SVC is projecting full quarter RevPAR of $82 to $84 and adjusted hotel EBITDA in the $20 million to $24 million range. The company expects full-year 2025 capital expenditures to be approximately $250 million, with $110 million to $130 million allocated towards maintenance capital and the remainder for renovation initiatives. Beyond 2025, SVC anticipates its total capital spending to trend lower in 2026 and 2027 as the pace of the hotel renovation program slows.
By executing on its strategic plan, SVC aims to position its hotel portfolio for long-term success, reduce leverage, and enhance the stability and diversification of its overall real estate investments. As the company navigates the ongoing challenges in the hospitality industry, its commitment to transforming its asset mix and optimizing its capital structure positions it well for the future.