Service Properties Trust — Q3 2021 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2021. Service Properties Trust is a REIT owning hotels and service-focused retail properties. At quarter-end it owned 304 hotels and 794 net-lease properties; Sonesta operated 261 hotels, and TravelCenters of America (TA) was its largest tenant.
Financial performance and liquidity
- Q3 revenue: $437.1 million, up 47.4% year over year. Hotel operating revenue rose 69.4% to $338.4 million; net-lease rental income rose 2.7% to $98.7 million.
- Q3 earnings: Net loss was $59.7 million, or $0.36 per share, versus a $102.6 million loss, or $0.62 per share, in Q3 2020. Unrealized gains on TA shares contributed $24.3 million to Q3 results.
- Nine-month results: Revenue was $1.074 billion, up 7.9%; net loss widened to $345.8 million, or $2.10 per share, from $173.6 million, or $1.06 per share. Normalized FFO was $27.6 million ($0.17 per share), versus $224.4 million ($1.37 per share) in 2020; FFO and Normalized FFO are non-GAAP measures.
- Cash flow: Operating cash flow was $1.0 million for the first nine months, down from $65.5 million. Investing used $87.4 million; financing provided $909.1 million, primarily reflecting the drawdown of the revolving facility. Cash and restricted cash totaled $914.2 million at September 30.
- Debt and liquidity: Debt included $1.0 billion drawn on the fully utilized revolving facility and $6.2 billion of senior notes. Total liabilities were $7.58 billion. The revolver bears 2.85% at quarter-end and matures July 2022, subject to extension conditions; $500 million of notes mature in 2022. The company reported a 1.06x debt-service coverage ratio against a 1.50x covenant threshold and cannot incur additional debt while below the required level.
- Distributions: The quarterly distribution remained $0.01 per share; management expected to maintain that rate for the foreseeable future, subject to REIT requirements and other constraints.
Changes versus comparable periods
- Hotel demand improved: comparable-hotel Q3 occupancy increased 15.4 percentage points to 60.9%, ADR rose 22.4% to $111.18, and RevPAR rose 63.7% to $67.71. For the nine-month period, comparable RevPAR increased 13.6%, although ADR declined 4.7%.
- Higher hotel revenue was accompanied by higher costs: Q3 hotel operating expenses increased 63.2%; nine-month hotel operating expenses increased 46.8%, partly reflecting fewer guaranty and security-deposit utilizations than in 2020.
- Nine-month results included $28.9 million of transaction costs, including hotel transition costs, Marriott arbitration expenses and a $3.7 million write-off of Hyatt-related working capital. The 2020 comparison included a $62.4 million insurance settlement gain and $55.5 million of impairment losses.
- The company transitioned 88 hotels from Marriott and five from Hyatt to Sonesta during 2021. It sold six hotels and five net-lease properties in the first nine months.
Outlook, risks and contingencies
- Management said lodging recovery was improving but expected a gradual, uneven, multi-year recovery, particularly for business transient and group demand. It cited uncertainty from COVID-19, labor availability, supply-chain costs and inflation.
- The company was marketing 68 Sonesta-branded hotels, with net carrying value of approximately $579 million, and expected sales by the end of Q1 2022. Four net-lease property sales were also under agreement, expected by year-end 2021. These are expectations, not completed transactions.
- Management stated it believed liquidity was sufficient for the next 12 months, while also warning that operators might fail to pay contractual returns or rent and that available borrowing capacity could be limited. The fully drawn revolver, covenant shortfall, 2022 maturities and conditions for extending or refinancing the facility are significant funding risks.
- Marriott arbitration concerns termination of management agreements and Marriott’s asserted right to a $19.1 million refund of 2020 advances; the company is also seeking repayment of working-capital advances. The outcome is uncertain.
- Radisson’s prior $47.5 million guarantee was exhausted after $13.2 million of payments in the first nine months. Sonesta’s hotel returns depend on available operating cash flow, and the company has no guarantee or security deposit under its Sonesta agreement.
- TA accounted for approximately 66% of net-lease annualized minimum rent. Deferred rent owed by TA was $26.4 million, payable through January 2023. Other tenant rent deferrals totaled $10.8 million across 15 tenants.
Important facts for investors to verify
- Progress on the 1.50x debt-service coverage requirement, the revolver extension or refinancing, and repayment/refinancing of the 2022 notes.
- Actual operating cash flow and hotel recovery, including whether improved Q3 occupancy and RevPAR translate into returns to the REIT.
- Completion, timing and proceeds of the planned 68-hotel and four-property sales.
- Outcomes of the Marriott arbitration and collection of tenant rents, including TA deferred rent and other rent deferrals.
- Whether the $0.01 quarterly distribution remains supportable given cash generation, capital needs and debt restrictions.