Service Properties Trust (Nasdaq: SVC) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. SVC is a REIT with hotel and service-oriented net lease investments.
Business context
At year-end, SVC owned 238 hotels with 40,053 rooms and 765 net lease properties totaling 13.4 million square feet. The portfolio is highly concentrated in key operators: Sonesta managed 196 hotels, while TA leased 177 travel centers. SVC reported two segments: hotel investments and net lease investments.
Financial and operating highlights
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $1.863 billion | $1.496 billion |
| Hotel operating revenue | $1.467 billion | $1.105 billion |
| Rental income | $395.7 million | $390.9 million |
| Net loss | $132.4 million | $544.6 million |
| Net loss per share | $0.80 | $3.31 |
| FFO per share (non-GAAP) | $1.48 | $(0.07) |
| Normalized FFO per share (non-GAAP) | $1.50 | $0.34 |
| Net cash from operating activities | $243.1 million | $49.9 million |
Hotel recovery drove revenue growth: comparable-hotel occupancy rose to 61.4% from 52.5%, ADR to $133.72 from $110.39, and RevPAR to $82.10 from $57.95. Net lease occupancy was 97.6%; annual minimum rent was $372.4 million and reported portfolio rent coverage was 3.00x.
Hotel operating expenses increased 21.4% to $1.227 billion, reflecting higher occupancy and related labor and operating costs. Total expenses declined slightly to $1.699 billion, partly because 2021 included higher transaction and impairment charges. Interest expense fell 6.5% to $341.8 million, while net gains on property sales were $47.8 million. Impairment charges were $11.0 million, compared with $78.6 million in 2021.
At December 31, 2022, total assets were $7.488 billion, total liabilities $6.099 billion, and shareholders’ equity $1.389 billion. Debt was $5.7 billion, all senior unsecured notes; no borrowings were outstanding on the revolving credit facility. Cash and cash equivalents were $38.4 million, plus $7.1 million restricted cash. Operating cash flow improved, while cash and restricted cash fell from $947.4 million at the prior year-end, principally reflecting debt repayment and other financing outflows.
Cash distributions declared for 2022 totaled $0.23 per share: $0.01 per share for each of the first three quarters and $0.20 for the fourth quarter. The company reported a current quarterly rate of $0.20 per share, but future distributions remain subject to board discretion and financial and debt restrictions.
Material changes and transactions
- SVC sold 65 hotels and 21 net lease properties in 2022 for aggregate gross proceeds of $559.8 million, using net proceeds for debt repayment and general purposes.
- In 2022, SVC repaid $500 million of 5.00% notes due 2022, reduced its revolving facility from $1.0 billion to $800 million, and extended its maturity to July 15, 2023. SVC said it was in compliance with debt covenants at year-end.
- After year-end, SVC issued $610.2 million of non-recourse, property-secured notes, with approximately $555.0 million net proceeds, and announced redemption of $500 million of 4.50% notes due 2023. The filing said the redemption was expected around March 8, 2023. As of February 24, 2023, SVC reported $616.9 million of cash or cash equivalents and no revolving-facility borrowings.
- In February 2023, SVC agreed to consent to BP’s proposed acquisition of TA for $86 per TA share and to amend the travel-center leases and guarantees if the transaction closes. The proposed leases cover 176 properties, with $254 million annual minimum rent, 2% annual increases, no percentage rent, and a 10-year initial term with extension options. BP’s guarantee would have an initial aggregate cap of approximately $3.04 billion. SVC expected approximately $379.3 million in total cash from its TA shares, certain trademarks and prepaid rent. Closing was expected by mid-2023, subject to approvals and other conditions; it was not completed as of the filing.
Outlook, risks and unusual items
- Management described hotel demand recovery as uneven and potentially multi-year; business transient and group travel remained below pre-pandemic levels. Inflation, rising interest rates, labor shortages and supply-chain costs could pressure operators and tenants.
- The July 2023 revolving-credit-facility maturity was a key liquidity risk. SVC said it expected to refinance or replace the facility, but gave no assurance of success or favorable terms. Fixed-rate debt maturities include $500 million in 2023, $1.175 billion in 2024 and $1.15 billion in 2025.
- SVC expected to fund approximately $250 million of hotel capital improvements in 2023. Most hotel owner priority returns were no longer supported by parent guarantees or security deposits, and Sonesta returns depend on available hotel cash flow.
- Concentration is material: Sonesta managed about 47.6% of historical real estate investment and TA represented about 29.3%. The filing also identifies related-party and governance conflicts involving RMR, Sonesta and TA.
- Net loss improved substantially, but remained a loss. Non-GAAP FFO and Normalized FFO improved; these measures are not substitutes for GAAP earnings or operating cash flow.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. The filing identifies real estate impairment estimates as a critical audit matter. SVC reported no litigation expected to have a material adverse effect.
Important facts for investors to verify
- Whether the BP–TA acquisition closed, and whether the amended leases, BP guarantee, prepaid rent and expected cash proceeds became effective as described.
- How the July 2023 revolving-facility maturity was refinanced or replaced, and the resulting borrowing capacity, covenants, rates and collateral requirements.
- Whether hotel recovery and operator cash flows supported owner priority returns, particularly at Sonesta-managed hotels, and whether planned 2023 capital spending was funded.
- Tenant-level rent collections, coverage calculations and credit quality; the filing notes some tenant data are unaudited or estimated where information is unavailable.
- Whether the $0.20 quarterly distribution was sustainable relative to cash flow, debt service, capital needs and REIT distribution requirements.