Service Properties Trust — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; this is an annual filing, not a standalone 2020 fourth-quarter report. The company is a REIT owning hotels and service-oriented net-lease properties. At year-end it owned 310 hotels and 799 net-lease properties.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $1.265 billion | $2.316 billion |
| Net income (loss) | $(311.4) million | $259.8 million |
| Net income (loss) per share | $(1.89) | $1.58 |
| Cash from operating activities | $37.6 million | $617.7 million |
| Funds from operations (FFO) | $221.1 million; $1.34 per share | $608.4 million; $3.70 per share |
| Normalized FFO | $202.0 million; $1.23 per share | $620.7 million; $3.78 per share |
- Hotel operating revenue fell 56.0% to $875.1 million, reflecting pandemic-related declines in occupancy and room rates. Net-lease rental income rose 21.0% to $390.0 million, primarily from the 2019 SMTA portfolio acquisition.
- For all hotels, occupancy was 42.0% (down 31.0 percentage points), average daily rate was $100.77 (down 23.0%), and RevPAR was $42.32 (down 55.7%). Comparable-hotel RevPAR fell 51.6%.
- The company recorded $55.8 million of property impairment losses, $62.4 million of insurance-settlement gain related to its San Juan hotel, and $9.4 million of debt-extinguishment losses. Interest expense rose 36.1% to $306.5 million.
- Net-lease occupancy was 98.7%, with $369.6 million of annualized minimum rent and a 10.9-year weighted average lease term. Net-lease rent collections were 94.0% in 2020; January 2021 collections were 89.3%.
- Year-end cash and cash equivalents were $73.3 million, plus $18.1 million of restricted cash. Operating cash flow declined sharply to $37.6 million. The filing reports $957.7 million of cash or cash equivalents as of February 26, 2021, after the company drew its revolving facility; it was fully drawn at that date.
- Year-end debt was approximately $6.3 billion: $6.2 billion of senior notes and $78.4 million outstanding on the $1.0 billion revolver. Net debt to total gross assets was 51.8%. The debt-service coverage ratio was 1.56x, down from 2.86x in 2019.
- Quarterly common distributions were cut to $0.01 per share beginning in the second quarter of 2020; full-year distributions were $0.57 per share, including the first-quarter $0.54 payment. Management expected the reduced quarterly rate to continue for the foreseeable future, subject to REIT requirements and debt restrictions.
Material changes, outlook and risks
- COVID-19 materially damaged hotel operations and tenant businesses. Nineteen hotels suspended operations during March and April 2020; 17 had reopened by February 26, 2021. Hotel performance improved from April’s lows but remained well below pre-pandemic levels.
- Management expected recovery in lodging and related industries to begin no earlier than the second half of 2021, to be gradual and uneven. It highlighted a slow return of corporate and group travel and uncertainty around consumer confidence, vaccination and the broader economy.
- Hotel operator protections weakened: IHG and Marriott guarantees/security deposits were exhausted, Hyatt’s limited guaranty was exhausted, and the remaining Radisson guarantee was expected to be exhausted by the second quarter of 2021. Sonesta agreements have no guarantee or security deposit. SVC funded $65.3 million of Sonesta hotel operating losses in 2020 and advanced $123.5 million of working capital to hotel operators overall.
- SVC terminated its IHG agreement and terminated its Marriott agreement amid payment disputes. It transitioned 193 hotels previously managed by IHG, Marriott and Wyndham to Sonesta between September 2020 and February 2021, and expected to transition 10 more Marriott hotels in March 2021. Sonesta was expected to operate 256 of 310 hotels after those transitions. Hyatt had given notice of termination for its 22 hotels; discussions were ongoing, with a possible Sonesta transition in April 2021.
- Two subsidiaries initiated arbitration against Marriott over termination and payment issues. Marriott asserted SVC should refund approximately $19.1 million of minimum-return advances; SVC also sought repayment of working-capital advances. The outcome and timing were uncertain.
- The November 2020 credit amendment waived existing credit-agreement financial covenants through July 15, 2022, but imposed restrictions on distributions, acquisitions, debt and certain capital spending, and required minimum liquidity. The company expected its debt-service coverage ratio could fall below the 1.5x public-debt covenant threshold in first-quarter 2021, which would prevent additional debt incurrence under that test. Management planned to use asset-sale proceeds to repay debt.
- Management expected to fund approximately $192 million of capital expenditures in 2021. Acquisitions were restricted under the credit agreement. SVC sold 18 hotels and 21 net-lease properties during 2020 and had additional sales agreements, subject to closing conditions.
- TA, the largest net-lease tenant, was current on rent as of February 26, 2021, but represented substantial concentration: its leases accounted for 66.6% of net-lease annualized minimum rent. SVC deferred $12.1 million of rent for 46 tenants as of that date.
- Other material risks include high leverage and refinancing needs, potential covenant constraints or default, operator and tenant concentration, property impairments and sale-price uncertainty, related-party conflicts involving RMR, Sonesta and TA, and REIT qualification and environmental risks. The company reported effective internal controls and received an unqualified audit opinion; impairment valuation was identified as a critical audit matter.
Important facts for investors to verify
- Whether hotel occupancy, ADR and RevPAR recover, and whether the Sonesta-managed portfolio can generate sufficient cash to meet contractual returns without guarantees.
- Current liquidity after the revolver draw, actual cash burn, future working-capital advances and the effect of the fully drawn facility and debt-service covenant headroom.
- Net-lease rent collections, deferred-rent repayment and the financial condition and rent coverage of TA and other stressed tenants.
- Progress and final proceeds from announced property sales, 2021 capital spending, and any additional impairment charges.
- Resolution of Marriott arbitration, Hyatt management discussions, and the sustainability of the $0.01 quarterly distribution under debt covenants and REIT rules.