Service Properties Trust — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. SVC is a REIT owning hotels and service-oriented net lease properties. At year-end, it owned 303 hotels and 788 net lease properties; Sonesta operated 261 hotels and TA leased 179 travel centers.
Financial results and liquidity
- Revenue: $1.496 billion, up 18.2% from $1.265 billion in 2020. Hotel operating revenue rose 26.2% to $1.105 billion; net lease rental income increased 0.4% to $389.1 million.
- Profitability: Net loss was $544.6 million, or $3.31 per share, versus a $311.4 million loss, or $1.89 per share, in 2020. Hotel operating expenses rose 48.0% to $1.011 billion, faster than hotel revenue. FFO was negative $11.5 million; Normalized FFO was $55.6 million, down from $221.1 million and $202.0 million, respectively, in 2020. These are non-GAAP measures.
- Unusual expense and gains: 2021 included $78.6 million of property impairment charges and $64.8 million of transaction-related costs, including unrecoverable advances, hotel transitions and Marriott arbitration costs. 2020 included a $62.4 million insurance settlement gain related to Hurricane Maria.
- Hotel performance: Across all hotels, occupancy improved to 53.0% from 42.0%, ADR to $105.36 from $100.77, and RevPAR to $55.84 from $42.32. Comparable-hotel RevPAR increased 24.4%.
- Cash flow: Operating cash flow was $49.9 million, compared with $37.6 million in 2020. Investing used $101.3 million; financing provided $907.4 million, primarily reflecting revolver borrowing. Cash and restricted cash totaled $947.4 million at year-end; cash and equivalents were approximately $959.5 million on February 22, 2022.
- Debt and covenant position: Total debt was $7.2 billion, including a fully drawn $1.0 billion revolving facility and $6.2 billion of senior notes. Debt service coverage was 1.20x versus a 1.50x threshold for incurring additional debt, restricting new borrowing. Total debt/adjusted assets was 56.4% against a 60% maximum.
- Near-term maturities: The $1.0 billion revolver matures July 15, 2022; $500 million of notes mature in August 2022. The company was discussing a facility extension and additional covenant relief and said it expected to repay or extend 2022 maturities.
- Distributions: The quarterly common-share distribution was $0.01, or $0.04 for 2021, compared with $0.57 for 2020. Management expected to maintain the nominal rate for the foreseeable future, subject to REIT requirements and debt restrictions.
Changes, outlook and key risks
- Lodging demand improved year over year, but management described recovery as uneven and potentially multi-year; pre-pandemic levels were uncertain. Labor shortages, rising labor and commodity costs, and supply-chain inflation could weigh on hotel results.
- Operator concentration increased: Sonesta represented 50.9% of historical real estate investment; TA represented approximately 27.5%. Hotel returns depend on operating cash flow, and SVC has no guarantee or security deposit under its Sonesta agreements.
- In January 2022, SVC extended Sonesta agreements for 194 retained hotels through January 2037, with annual owner’s priority returns initially set at $325.2 million. It also planned renovations and expected to fund approximately $200 million of hotel capital improvements in 2022.
- SVC had agreements to sell 45 properties for $402.4 million, against $352.5 million carrying value, and was marketing or had letters of intent for 43 more properties with $151.0 million carrying value. Completion was expected by the end of Q2 2022, but was not assured.
- Marriott arbitration concluded in January 2022: SVC did not recover the sought $19.9 million of advances, received approximately $1.1 million on a related claim, and was determined to own 16 hotels free of Marriott contracts. SVC expected to sell or transition those hotels in Q2 2022.
- Other material risks include refinancing and covenant relief, potential inability to pay debt or sustain distributions, further rent relief or operator defaults, property-sale execution, interest-rate exposure, capital needs, and related-party conflicts involving RMR, Sonesta and TA. S&P downgraded SVC’s issuer rating to B+ in November 2021.
Most important facts for investors to verify
- Whether SVC extended or refinanced the revolver and repaid or refinanced the $500 million notes due in 2022, and the resulting covenants and collateral.
- Subsequent debt-service coverage, liquidity after debt maturities, and cash available after planned hotel capital spending.
- Actual proceeds and timing for the announced property sales, including whether proceeds were applied to debt.
- Sonesta hotel operating performance, owner’s priority return collections, required funding, and the status and cost of renovations.
- TA’s ability to meet lease obligations and the effects of concentrated tenant and operator exposure.
- Whether hotel recovery and net lease tenant health support improved FFO and any change in the distribution rate.