Service Properties Trust (SVC) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. SVC is a REIT owning hotels and service-focused retail properties. At quarter-end it held 221 hotels and 761 net-lease properties. Unless noted, amounts below are in millions of dollars.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $496.8 | $498.3 | $1,429.8 | $1,407.8 |
| Net income (loss) | $(4.1) | $7.5 | $10.5 | $(101.0) |
| Net income (loss) per share | $(0.03) | $0.05 | $0.06 | $(0.61) |
| FFO per share | $0.56 | $0.54 | $1.34 | $1.04 |
| Normalized FFO per share | $0.56 | $0.54 | $1.36 | $1.06 |
- Q3 hotel operating revenue declined 1.2% to $395.5 million, while rental income rose 3.6% to $101.3 million. Total revenue was down 0.3%. Nine-month revenue increased 1.6%.
- Comparable hotel RevPAR rose 0.8% in Q3 and 7.0% for the nine-month period. For comparable hotels, Q3 occupancy improved 0.9 percentage points, while ADR fell 0.5%. Across all hotels, Q3 RevPAR increased 0.6%.
- Net-lease occupancy was 95.8%; weighted average remaining lease term was 9.1 years. Portfolio rent coverage was 2.72x, down from 2.88x a year earlier. Renewals covering 206 properties were signed at rents 9.5% above prior rents.
- Nine-month net income improvement versus 2022 chiefly reflects the absence of the prior-year impairment and other effects, plus a $48.8 million gain on TA shares and $42.0 million of real estate sale gains. These gains are not equivalent to recurring operating earnings.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $402.0 million, versus $147.1 million in 2022; investing cash flow was $51.0 million, versus $397.0 million; financing cash outflow was $62.8 million, versus $1,413.4 million.
- Cash and cash equivalents were $418.2 million, with another $17.4 million restricted, at September 30, 2023. Cash plus restricted cash totaled $435.5 million.
- Debt principal totaled approximately $5.81 billion: $5.20 billion of senior unsecured notes and $609.1 million of mortgage notes. There were no revolver borrowings. The balance sheet reports debt net of discounts, premiums and issuance costs.
- Senior-note principal maturities include $1.175 billion in 2024 and $1.15 billion in 2025. Management reported covenant compliance; debt covenant tests included debt to adjusted assets of 53.2% against a 60% maximum and interest coverage of 2.02x against a 1.50x minimum.
- The secured revolving facility is $650 million, matures in June 2027, and carried a 7.93% borrowing rate at quarter-end. The new $609.1 million net-lease mortgage financing carries a weighted average 5.60% coupon and matures in February 2028.
- SVC paid $0.20 per share quarterly during the first three quarters of 2023. It declared another $0.20 distribution after quarter-end, payable in November. Management said expected operating cash, cash on hand, asset-sale proceeds and available financing should cover anticipated needs for the next 12 months, while warning that adverse conditions could force a distribution reduction or suspension.
Material changes, outlook and risks
- BP completed its acquisition of TravelCenters of America (TA) on May 15, 2023. SVC amended leases covering 176 travel centers: annual minimum rent is $254.0 million, with 2% annual increases, and leases expire in 2033 subject to extension options. TA received $188 million of prepaid rent and annual rent credits of $25 million over the initial term. BP’s affiliate guarantees the leases subject to an initial aggregate cap of approximately $3.04 billion.
- SVC received approximately $379.3 million in connection with the TA transaction, including prepaid rent, $101.9 million for TA shares and $89.4 million for tradenames and trademarks. TA is no longer a related party. TA represents 67.8% of net-lease annualized minimum rent, making tenant concentration an important exposure.
- SVC acquired a 250-room Miami Beach hotel for approximately $165.9 million including closing costs. It sold 18 hotels and four net-lease properties in the first nine months, recognizing $42.0 million of net gains. It also recorded $9.5 million of impairment losses on 16 net-lease properties.
- Management expected to fund approximately $75 million of hotel capital improvements in Q4 2023. It planned to use cash, operating cash flow, revolver capacity, asset-sale proceeds, and potentially new debt or equity for operations, capital needs and maturities. Certain net-lease property sales were pending or being marketed.
- Management cited inflation, labor costs, high interest rates, possible recession, lodging and corporate-travel demand, tenant and manager ability to pay, and refinancing access and cost as material uncertainties. A 1 percentage-point increase in refinancing rates would add approximately $58.1 million of annual interest cost if the fixed-rate debt were refinanced at higher rates.
- The filing reports related-party relationships and potential conflicts involving RMR and Sonesta; RMR provides SVC’s management services, and Sonesta managed 195 hotels and was approximately 34%-owned by SVC. Management stated disclosure controls were effective and reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether TA’s rent payments and guarantee remain reliable, including the cap, rent-credit schedule and concentration of SVC’s rental income.
- Plans and available funding for the $1.175 billion of 2024 note maturities, and the cost and feasibility of refinancing in prevailing credit markets.
- Whether hotel operating trends, net-lease tenant coverage and rent collection support recurring cash flow and the current distribution.
- Actual capital spending needs, results and timing of pending property sales, and the impact of impairment or further dispositions on the portfolio.
- How nonrecurring TA-share and property-sale gains affect reported earnings relative to recurring FFO, and the implications of RMR/Sonesta related-party arrangements.