Service Properties Trust annual report, FY2021

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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

  1. Whether SVC extended or refinanced the revolver and repaid or refinanced the $500 million notes due in 2022, and the resulting covenants and collateral.
  2. Subsequent debt-service coverage, liquidity after debt maturities, and cash available after planned hotel capital spending.
  3. Actual proceeds and timing for the announced property sales, including whether proceeds were applied to debt.
  4. Sonesta hotel operating performance, owner’s priority return collections, required funding, and the status and cost of renovations.
  5. TA’s ability to meet lease obligations and the effects of concentrated tenant and operator exposure.
  6. Whether hotel recovery and net lease tenant health support improved FFO and any change in the distribution rate.