Service Properties Trust (SVC) is a real estate investment trust (REIT) that owns and leases a diversified portfolio of hotels and service-focused retail net lease properties across the United States, Canada, and Puerto Rico. With a history spanning over 25 years, SVC has navigated through various economic cycles, adapting its strategy to capitalize on evolving market conditions.
In the third quarter of 2024, SVC reported a 11.6% year-over-year decline in Adjusted EBITDAre to $155 million, while Normalized FFO decreased to $52.9 million, or $0.32 per share, from $0.56 per share in the prior-year quarter. These results were impacted by higher interest expense and lower hotel EBITDA, which declined $15.4 million year-over-year to $60.1 million. The company's comparable hotel RevPAR decreased by 80 basis points, with gross operating profit margin declining 380 basis points to 27.5%.
Financials
Despite the challenges, SVC remains committed to optimizing its portfolio and balance sheet. The company recently announced plans to sell 114 focused service hotels with 14,925 keys, representing a net carrying value of $850 million. These hotels generated $60 million in EBITDA on a trailing 12-month basis. By selling these assets, SVC expects to save approximately $725 million in capital expenditures that were projected to be spent over the next six years. The company intends to use the net sales proceeds to repay debt, enhancing its liquidity and financial flexibility.
In addition to the strategic asset sales, SVC has taken other measures to improve its position. The company reduced its regular quarterly common dividend from $0.20 per share to $0.01 per share, a move that is expected to result in $127 million in annual savings. This decision demonstrates SVC's focus on deleveraging and maintaining a strong balance sheet.
For the most recent fiscal year (2023), SVC reported revenue of $1.87 billion, with a net loss of $32.78 million. Operating cash flow and free cash flow both stood at $485.55 million. In the most recent quarter (Q3 2024), revenue was $491.17 million, representing a year-over-year decline of 1.1%, primarily due to lower RevPAR at certain hotels and the sale of certain hotels since Q3 2023. The net loss for the quarter was $46.90 million, with operating cash flow at $106.15 million and free cash flow at $248.53 million.
Looking ahead to Q4 2024, SVC projects full quarter RevPAR of $82 to $85 and hotel EBITDA in the $34 million to $39 million range. The company expects the full year 2024 capital expenditure spend to be around $300 million.
Liquidity
SVC's portfolio is diversified across hotel and net lease assets, with the net lease segment providing a stable source of cash flow. As of September 30, 2024, the company's 745 service-focused retail net lease properties were 97.6% leased, with a weighted average lease term of 8.3 years. The net lease portfolio generated a coverage ratio of 2.2x on a trailing 12-month basis, highlighting the strength and resilience of this segment.
The company's liquidity position remains solid, with over $700 million in total liquidity, including full availability under its $650 million revolving credit facility. SVC's fixed-rate debt outstanding totaled $5.7 billion as of September 30, 2024, with a weighted average interest rate of 6.4%. The next major debt maturity is $350 million of senior unsecured notes due in February 2026.
As of September 30, 2024, SVC had $48.59 million in cash and a current ratio and quick ratio of 0.28. The company's $650 million revolving credit facility had no amounts outstanding, providing additional financial flexibility.
Business Strategy and History
SVC's business strategy has evolved significantly since its inception in 1995. The company has expanded its portfolio beyond its initial focus on hotels and service-focused retail net lease properties. A notable development in SVC's history was the acquisition of a 34% equity stake in Sonesta International Hotels Corporation in 2015. This strategic investment integrated Sonesta into SVC's hotel portfolio, with Sonesta taking over management of many of SVC's hotel properties, enhancing operational synergies and control.
The company has faced and overcome various challenges throughout its history. In 2020, the COVID-19 pandemic severely impacted SVC's hotel business as travel demand plummeted. SVC responded by obtaining additional financing and suspending its dividend to navigate the difficult operating environment. In 2021, the company made a significant strategic move by selling its equity stake in TravelCenters of America Inc., its largest tenant, after TA was acquired by a third party. While this transaction provided SVC with additional liquidity, it also reduced the company's diversification, as TA had represented a substantial portion of SVC's rental revenues.
Portfolio Composition
Despite these challenges, SVC has maintained a diversified portfolio of hotels and net lease retail properties. As of 2023, the company owned 214 hotels and 745 service-focused retail net lease properties located across the United States, Canada, and Puerto Rico. SVC's hotel portfolio includes a mix of full-service, select-service, and extended-stay properties, while its net lease portfolio is primarily comprised of travel centers, restaurants, and other service-oriented retail tenants.
SVC operates two main business segments: hotel investments and net lease investments. The hotel investments segment consists of 214 hotels operated by four hotel management companies - Sonesta (189 hotels), Hyatt (17 hotels), Radisson (7 hotels), and IHG (1 hotel). These hotels are leased to SVC's wholly-owned taxable REIT subsidiaries, which in turn have hotel management agreements with the operators. SVC receives an annual "owners priority return" from the hotel operations, as well as a share of operating profits after the priority return is paid.
The net lease investments segment comprises 745 service-focused retail net lease properties leased to 176 tenants under triple-net lease agreements. TravelCenters of America Inc. (TA) remains the largest tenant, leasing 175 travel centers under five master leases. Other notable tenants include Petro Stopping Centers, The Great Escape, Life Time Fitness, and various restaurant, automotive, and other service-oriented brands.
Challenges and Adaptation
SVC's business strategy has not been without challenges. In 2023, the company faced headwinds from the COVID-19 pandemic, which impacted travel demand and hotel operations. Additionally, the company's hotel portfolio has been undergoing a significant renovation program, resulting in revenue displacement and disruption. These factors, combined with inflationary pressures and labor market challenges, have weighed on the company's financial performance.
The U.S. hotel industry has seen mixed performance, with some recovery in demand offset by labor shortages and inflationary pressures. RevPAR for SVC's comparable hotels declined 0.8% year-over-year in Q3 2024, reflecting these industry-wide challenges.
Despite these challenges, SVC has demonstrated its ability to adapt and navigate through difficult times. The company's decision to sell its focused service hotel portfolio and reduce its dividend reflects a proactive approach to strengthening its balance sheet and positioning the business for long-term success. As SVC continues to execute its strategic plan, investors will be closely watching the company's ability to drive improved operational and financial results.
Conclusion
In conclusion, Service Properties Trust (SVC) is a diversified REIT that is taking decisive actions to optimize its portfolio and balance sheet. By selling a significant portion of its focused service hotel portfolio and reducing its dividend, SVC is positioning itself to weather the current storm and emerge as a more financially resilient and strategically focused organization. While the company faces ongoing challenges, its proven ability to adapt and its commitment to enhancing shareholder value make it a REIT worth monitoring in the years ahead. The company's strategic moves, including the planned sale of 114 focused service hotels and the reduction of its dividend, demonstrate a clear focus on deleveraging and improving its financial position in the face of industry headwinds and operational challenges.