Service Properties Trust (NASDAQ:SVC) Q1 2024 Earnings Call Transcript May 8, 2024
Service Properties Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Service Properties Trust First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Stephen Colbert, Director of Investor Relations. Please go ahead.
Stephen Colbert: Good morning. Joining me on today’s call are Todd Hargreaves, President and Chief Investment Officer, and Brian Donley, Treasurer and Chief Financial Officer. Today’s call includes a presentation by management followed by a question-and-answer session with analysts. Please note that the recording, retransmission and transcription of today’s conference call is prohibited without the prior written consent of SVC. I would like to point out that today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SVC’s present beliefs and expectations as of today, May 8, 2024.
Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC, which can be accessed from our website at svcreit.com or the SEC’s website. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today’s conference call. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO and adjusted EBITDAre. Reconciliations of these non-GAAP financial measures to net income as well as components to calculate AFFO are available in our financial reporting package, which can be found on our website.
And finally, we are providing guidance on this call including hotel EBITDA. We are not providing a reconciliation of this non-GAAP measure as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. With that, I’ll turn the call over to Todd.
Todd Hargreaves: Thank you, Stephen, and good morning. Our first quarter results are indicative of typical seasonality patterns in our lodging portfolio as well as the stability of our net lease portfolio. Our full service hotels experienced top line growth through increased group demand, while our select service hotels were impacted by softening transit travel and renovation activity. Our focus remains on improving the performance and quality of our portfolio through the disposition of non-core hotels and capital projects to put our operators in the best position for long-term success. Beginning with the hotel portfolio for the quarter, comparable RevPAR declined 3.5% year-over-year. When excluding the 23 active renovations, ADR declined 0.7% and occupancy declined 0.2%, leading to a RevPAR decline of 1.1%.
The renovation hotels, which include our Hyatt Place portfolio, Sonesta Hilton Head and others experienced approximately $3.9 million of displacement during the quarter. Cost pressures led to a hotel EBITDA margin decline of 290 basis points over the prior-year quarter for our 218 comparable hotels as wages, property taxes and insurance increases more than offset our operators improved reliance on contract labor. Full service was our top performing segment during the quarter where we gained 80 basis points of RevPAR over the previous year quarter led by increases in group and contract sales. Full service group performance was led by our Royal Sonesta Hotels in San Juan, San Francisco and Kauai, while the increase in contract revenues was led by our Sonesta Hotels in Redondo Beach in Denver.
F&B revenue gains occurred across our full service hotels as well led by our Royal Sonesta in St. Louis and Kauai. Our portfolio of select service hotels continued to see the most disruption during the quarter as 18 of our 61 hotels were under renovation, including our 17 Hyatt Place hotels, which began renovations in 2023. Overall, select service RevPAR declined by 13.2% due to these disruptions as well as decreased year-over-year income from our five select service hotels located in the Phoenix area that benefited from the 2023 Super Bowl. Our extended stay portfolio experienced a 4.6% decline in RevPAR year-over-year. Consistent with the trend from previous quarters, our longer-term extended stay occupancy, stays of seven plus nights, has been declining due to the loss of non-repeat project-based room nights.
While Sonesta successfully pivoted to shorter term stays at these hotels to fill occupancy, the increased room nights were not enough to offset the reduced rates. Group pace is up $15 million, or 12.3% over the same time last year due to increases in room nights and ADR in both the Sonesta and Radisson portfolios. The most notable gains were related to corporate group at the Royal Sonesta Cambridge and our Sonesta Chicago hotels, where the Democratic National Convention will be held in August. Combined revenues from our business travel for our operators declined slightly year-over-year due to the ongoing renovations in our Hyatt portfolio and the shift in the Easter holiday from April last year to March this year. While business travel increased in our Sonesta portfolio from key corporate accounts at our select service hotels.
OTA revenue as a percentage of total revenues declined from 25.6% to 24.8% year-over-year during the quarter, and our operators continue to concentrate efforts on driving bookings to their websites to lessen the dependency on third-party channels that charge commissions. Sonesta remains focused on building its brand through numerous initiatives and recently merged its Travel Pass Rewards program with the Legacy Red Lion Loyalty program doubling its overall size. During the quarter, 25.9% of our Sonesta full service hotel revenues were from loyalty program members, up 3.5 percentage points from 2023. Other ongoing Sonesta initiatives include a focus on driving ancillary revenues at the hotel, building out the sales organization and investing in technology.
Turning to our net lease portfolio, which represents 44% of SVC’s portfolio by investment. As of March 31, 2024, our 749 service oriented retail net lease properties were 97.3% leased with a weighted average lease term of 8.7 years. Our lease maturities are well laddered and only 1.3% of our net lease minimum rents expire prior to the end of 2024. The aggregate coverage of our net lease portfolio’s minimum rents was 2.37 times on a trailing 12-month basis as of March 31, 2024. The decline sequentially is largely driven by softer [EBITDAre] (ph) reported by TA for Q1 2024. Transaction activity during the quarter was limited to three net lease dispositions and one hotel disposition, the Country Inn & Suites in suburban Minneapolis for an aggregate sales price of $6.2 million.
We continue to market 22 Sonesta hotels with a book value of $160 million. The sale process is well underway and we are working with potential buyers to negotiate terms. In conclusion, we are optimistic that our hotel portfolio will see meaningful operational improvements as the result of our renovation program, as hotels benefit from much needed refreshes over the coming quarters. Additionally, the performance of our net lease portfolio remained steady and is anchored by an investment-grade rated tenant BP. With more than $700 million of liquidity and no debt maturities in 2024, we are well positioned to implement our strategic plan. I will now turn the call over to Brian to discuss our financial results in more detail.
Brian Donley: Thanks, Todd, and good morning. Starting with our consolidated financial results for the first quarter of 2024, normalized FFO was $21.1 million or $0.13 per share versus $0.23 per share in the prior-year quarter. Adjusted EBITDAre declined 1% year-over-year to $115.5 million. Financial results this quarter as compared to the prior-year quarter were impacted by higher interest expense and a decline in hotel EBITDA. Rental income increased by $5.6 million this quarter compared to the prior year due to higher rental income recognized under our TA leases as a result of the BP transaction last May. Turning to the performance of our hotel portfolio, for our 218 comparable hotels this quarter, RevPAR decreased by 3.5%, gross operating profit margin percentage declined by 200 basis points to 23.3% and gross operating profit decreased by $6.5 million from the prior-year period.
Below the GOP line, costs at our comparable hotels increased $2.8 million from the prior year, driven primarily by increased insurance expense. Our 220 hotels generated hotel EBITDA of $28.9 million, a decline from the prior year, but in line with our guidance range provided last quarter. By service level, hotel EBITDA year-over-year increased $676,000 for our 48 full service hotels, declined $5.6 million for our 61 select service hotels and $3.4 million for our 111 extended stay hotels. Turning to our expectations for Q2, we’re currently projecting full quarter Q2 RevPAR of $95 to $99 and hotel EBITDA in the $80 million to $85 million range. Turning to the balance sheet, we currently have $5.6 billion of fixed rate debt outstanding with a weighted average interest rate of 5.9%.
Our next debt maturity is $350 million of unsecured senior notes maturing in March 2025. We currently have $80 million of cash and our $650 million revolving credit facility remains undrawn for total liquidity of over $700 million. Turning to our investing activity during the first quarter, we sold one hotel and three net leased properties for an aggregate sales price of $6.2 million. We made $69 million of total capital improvements in our properties during the first quarter. We currently expect full year capital expenditures of $300 million to $325 million, up from our previous guidance range of $250 million to $275 million. We currently expect maintenance-type capital to be $100 million of the total spend this year. Our capital program is focused on ensuring the best guest experiences, upgrades to brand standards and positioning the hotels to improve their respective market share.
To-date, we’ve completed renovations at nine Sonesta hotels and we’re pleased with the post-renovation returns we’re seeing thus far. We expect 22 hotels across all service levels to be under renovation in the second quarter and expect to have completed major renovations at 33 hotels during the calendar year, including five full service hotels, 18 select service hotels and 10 extended stay hotels. Finally, in April, we announced our regular quarterly common dividend of $0.20 per share, which we believe is well covered representing a 51% normalized FFO payout ratio for trailing12 months ended March 31, 2024. That concludes our prepared remarks. We’re ready to open the line for questions.
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