Service Properties Trust: Q1 2024 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2024; balance-sheet figures are as of March 31, 2024. Service Properties Trust is a REIT owning hotels and service-focused retail properties. Its portfolio included 220 hotels and 749 net-lease properties at quarter-end. Unless noted, figures below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Total revenue | $436.3 million | $429.2 million; up 1.6% |
| Hotel operating revenue | $336.2 million | $334.8 million; up 0.4% |
| Rental income | $100.0 million | $94.4 million; up 5.9% |
| GAAP net income (loss) | $(78.4) million; $(0.48) per share | $26.0 million; $0.16 per share |
| FFO / Normalized FFO | $21.1 million / $21.1 million; $0.13 per share each | $35.9 million / $37.1 million; $0.22 / $0.23 per share |
| Cash from operating activities | $(0.9) million | $12.4 million |
| Cash and restricted cash | $87.3 million, including $71.3 million unrestricted cash | $195.8 million at March 31, 2023 |
| Debt principal outstanding | $5.63 billion; no revolver borrowings | — |
| Quarterly distribution | $0.20 per share; $33.2 million total | $0.20 per share |
Hotel operating revenue less hotel operating expenses was $31.2 million, approximately 9.3% of hotel revenue, versus $35.2 million, approximately 10.5%, in Q1 2023. Comparable hotel RevPAR fell 3.5% to $77.35, with occupancy down 1.6 percentage points to 56.2% and ADR down 0.9% to $137.61. Net-lease occupancy was 97.3%; portfolio rent coverage was 2.37x versus 2.98x a year earlier.
Debt included $5.025 billion of senior notes and $608.1 million of net-lease mortgage notes. The $650 million secured revolving facility was undrawn. Debt maturities include approximately $1.152 billion in 2025, $802 million in 2026, $852 million in 2027 and $1.001 billion in 2028. Management reported compliance with debt covenants. Covenant measures included total debt to adjusted assets of 52.9% against a 60% maximum and debt-service coverage of 1.78x against a 1.50x minimum.
Material changes versus the prior comparable period
- Net results swung to a $78.4 million loss from $26.0 million income. The comparison is affected by Q1 2023 gains of $49.4 million on TA shares and $41.9 million on hotel sales; neither gain recurred in Q1 2024. Q1 2024 also included $3.0 million of real-estate sale losses and a $2.5 million impairment charge.
- Interest expense rose $9.8 million, or 12.1%, to $91.4 million, primarily due to higher weighted-average rates. Management cited lower hotel returns and higher interest expense as drivers of the operating cash-flow decline.
- Comparable hotel RevPAR weakened despite management’s observation that the U.S. hotel industry generally recorded RevPAR growth. Management attributed the company’s decline partly to renovation disruption and weaker activity in some hotel markets.
- Cash and restricted cash fell by $110.5 million during the quarter. Investing cash outflow was $74.8 million, including $76.3 million of real-estate improvements; financing cash outflow was $34.7 million, including distributions.
Outlook, risks and unusual items
- Management believes operating cash sources and available liquidity will cover operating needs, capital expenditures, debt service and distributions for at least the next 12 months. This is subject to managers and tenants continuing to pay contractual returns and rents.
- The company expects to fund approximately $232 million of hotel capital improvements during the remaining nine months of 2024, using cash on hand and potentially the revolver. It funded $67.7 million of hotel improvements in excess of available FF&E reserves during Q1.
- Management declared a further $0.20-per-share quarterly distribution in April 2024, expected to be paid in May. The Q1 distribution of $0.20 per share exceeded Q1 Normalized FFO of $0.13 per share.
- The company was marketing 22 Sonesta hotels and 12 net-lease properties for sale. Management cautioned that hotel sales, sale prices and completion of pending property sales are uncertain; proceeds may be used for general purposes, including debt repayment.
- Concentration and operating risks include TA, the largest tenant, accounting for 67.7% of annualized net-lease minimum rent, and Sonesta managing 195 of 220 hotels. TA lease payments have a BP guarantee subject to a cap. Sonesta is also a related party in which SVC owns 34% and recorded a $5.3 million equity-method loss in Q1.
- Management highlighted sustained high interest rates, inflation, labor and supply-chain pressures, possible recession, weaker lodging demand, tenant or manager payment risk, refinancing access and cost, and related-party conflicts. It stated the Federal Reserve may lower rates in 2024 but that this is not assured. No specific earnings or FFO guidance was provided.
Important facts for investors to verify
- Near-term refinancing and liquidity against the $1.152 billion of 2025 maturities, interest costs, and the availability and covenant conditions of the secured revolver.
- Whether cash generation can support planned hotel capital spending and the $0.20 quarterly distribution, given negative Q1 operating cash flow and distributions above quarterly Normalized FFO.
- TA rent coverage, its large share of portfolio rent, and the scope and remaining capacity of the BP lease guarantee.
- Hotel operating trends, especially comparable RevPAR and Hyatt-managed hotel performance during renovations, plus the timing and cost of the expected hotel improvements.
- Progress and realized proceeds from planned property sales, and the continuing effects of related-party relationships with RMR and Sonesta.