Service Properties Trust — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. SVC is a REIT investing in hotels and service-focused retail net-lease properties. At quarter-end it owned 298 hotels and 786 net-lease properties.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $393.8 million | $261.2 million | +50.8% |
| Hotel operating revenue | $297.4 million | $169.0 million | +76.0% |
| Net-lease rental income | $96.4 million | $91.7 million | +5.1% |
| Net loss | $119.8 million | $195.0 million | Loss narrowed |
| Net loss per share | $0.73 | $1.19 | Loss per share narrowed |
| Normalized FFO (non-GAAP) | $(3.4) million | $(42.0) million | Deficit narrowed |
| Cash from operating activities | $(12.0) million | $(62.7) million | Cash use decreased |
| Cash, cash equivalents and restricted cash, quarter-end | $972.6 million | $879.6 million | — |
Hotel recovery drove the revenue improvement: comparable-hotel occupancy rose to 53.6% from 39.8%, ADR to $114.85 from $88.59, and RevPAR to $61.56 from $35.26. Net-lease portfolio occupancy was 97.6%, with annual minimum rent of $372.0 million and weighted-average remaining lease term of 10 years. Net-lease coverage was 2.67x, up from 2.19x.
Total expenses were $415.4 million. Hotel operating expenses increased 48.6%, partly reflecting higher occupancy, wages and benefits, insurance and management fees. Interest expense was $92.3 million, versus $89.4 million. The company recorded a $5.5 million impairment charge and a $5.5 million gain on property sales, while a $10.3 million unrealized loss on TA shares affected results. Debt was approximately $7.2 billion: $1.0 billion drawn on the revolving facility and $6.2 billion of senior notes. Shareholders’ equity was $1.43 billion.
Material changes and notable items
- Revenue increased substantially as hotel demand improved from the pandemic-affected prior-year quarter. Hotel-segment loss narrowed to $49.7 million from $113.7 million; net-lease segment income before corporate items rose to $46.8 million from $30.8 million.
- The company sold five hotels and two net-lease properties during Q1 for aggregate gross proceeds of $65.5 million, recording a $5.5 million net gain. It classified 62 hotels and 19 net-lease properties, with $452.1 million carrying value, as held for sale at quarter-end.
- In April, SVC amended its credit agreement, repaid $200 million, reduced the revolver commitment from $1.0 billion to $800 million and extended its maturity to January 15, 2023. As of May 3, cash and cash equivalents were $916.1 million. SVC expected to repay $500 million of notes due August 2022 using cash on hand.
- After quarter-end, SVC sold 16 hotels and four net-lease properties and had agreements to sell another 42 Sonesta hotels and five net-lease properties. The company expected most pending sales to close by the end of Q2, subject to conditions.
Outlook, liquidity and risks
Management described the hotel recovery as gradual, potentially inconsistent and likely to take multiple years; it said a return to pre-pandemic operating levels remained uncertain. It cited continued risks from COVID-19, labor shortages and costs, inflation, supply-chain challenges, and macroeconomic conditions. The company expected to fund approximately $180 million of hotel capital improvements during the final nine months of 2022 using cash on hand.
At March 31, SVC’s debt-service coverage ratio was 1.32x, below the 1.50x threshold required under its public-debt covenants to incur additional debt; it therefore could not incur additional debt until meeting the requirement. The April credit amendment imposed a $650 million minimum liquidity requirement until repayment of the August 2022 notes, then generally $150 million, and revised covenant terms. SVC stated that it believed it had sufficient liquidity, but also warned that operating cash flows, asset sales and access to financing could be adversely affected.
Management said it expected to maintain the quarterly distribution at $0.01 per share for the foreseeable future, subject to REIT requirements and other constraints. Q1 distributions were $0.01 per share. The filing also highlights concentration and related-party risks: Sonesta managed 256 of 298 hotels, TA was the largest tenant and accounted for 66.2% of net-lease annual minimum rent, and SVC disclosed significant relationships with Sonesta, TA and its manager RMR.
Investor verification priorities
- Track the August 2022 $500 million note repayment, liquidity levels, and compliance with revised credit-facility covenants and extension conditions.
- Confirm completion, proceeds and timing of the pending hotel and net-lease property sales; proceeds and sale terms remain subject to closing conditions.
- Monitor hotel occupancy, rates, operating costs and capital spending against management’s multi-year recovery outlook.
- Assess Sonesta’s ability to generate hotel returns and TA’s capacity to meet rent obligations, given operator and tenant concentration.
- Review the sustainability of the $0.01 distribution alongside negative Q1 Normalized FFO and operating cash flow, and evaluate disclosed related-party arrangements.
The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.