Service Properties Trust — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. SVC is a REIT owning hotels and service-focused retail net-lease properties. At quarter-end it owned 247 hotels and 775 net-lease properties. Unless noted otherwise, dollar amounts below are in millions.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $515.8 | $375.9 | $909.5 | $637.1 |
| Net income (loss) | $11.4 | $(91.1) | $(108.5) | $(286.1) |
| Net income (loss) per share | $0.07 | $(0.55) | $(0.66) | $(1.74) |
| Normalized FFO per share | $0.54 | $0.16 | $0.52 | $(0.10) |
| Operating cash flow | Not presented by quarter | $59.3 | $(21.2) |
- Q2 hotel revenue was $419.0 million; rental income was $96.8 million. For the first half, hotel revenue was $716.4 million and rental income was $193.2 million.
- Q2 total expenses were $445.3 million, including hotel operating expenses of $325.2 million and depreciation and amortization of $100.5 million. First-half total expenses were $860.7 million.
- Q2 net income included a $38.9 million gain on real estate sales, partly offset by a $10.1 million unrealized loss on TA shares. First-half results included a $44.4 million property-sale gain and a $20.3 million unrealized loss on TA shares.
- Hotel operating statistics improved: comparable RevPAR rose 56.9% in Q2 and 65.4% for the first half year over year, on higher occupancy and average daily rates. Companywide Q2 occupancy was 66.6%, versus 56.6% in 2021.
- Cash and cash equivalents were $635.2 million and restricted cash was $64.9 million at June 30. Total cash and restricted cash declined to $700.1 million from $947.4 million at year-end 2021.
- Debt at quarter-end comprised $800 million drawn on the revolver and $5.7 billion principal amount of senior notes. The $800 million revolver was fully drawn and matures January 15, 2023; a further six-month extension is conditional. SVC redeemed $500 million of notes due 2022 in June.
- Senior-note covenant tests were met at June 30, but the interest-coverage covenant had limited headroom: 1.59x against a 1.50x minimum. Covenant testing under the amended revolver resumes with the quarter ending September 30, 2022; minimum liquidity is $150 million.
Changes versus prior period
- Revenue increased 37.2% in Q2 and 42.8% in the first half, chiefly reflecting stronger hotel demand versus pandemic-affected 2021 periods. Hotel operating expenses also rose, including from higher occupancy-related costs, wages, and management fees.
- Q2 moved to net income from a loss; the first-half loss narrowed substantially. The comparisons also reflect lower 2021 transition/rebranding costs and changes in asset-sale gains and TA-share fair-value adjustments.
- Operating cash flow improved by $80.5 million year over year for the first half, to $59.3 million. Investing cash flow was $399.3 million, mainly reflecting property-sale proceeds; financing used $705.9 million, primarily for debt repayments.
- During the first half, SVC sold 56 hotels and 13 net-lease properties for aggregate gross proceeds of about $500.9 million. At August 3, it had sold additional properties, had agreements to sell four hotels and two net-lease properties, and was marketing 20 more hotels.
Outlook, risks and notable items
- Management expects hotel recovery to be gradual, inconsistent, and potentially multi-year; it gave no specific revenue or earnings guidance. It expected to fund about $100 million of hotel capital improvements in the second half of 2022 and expected most marketed hotel sales to close by year-end.
- Management stated it believed liquidity was sufficient for the next 12 months and foreseeable future, while warning that operator cash flows, refinancing access, and liquidity could weaken. The revolver was fully drawn at quarter-end, making refinancing and the remaining extension conditions important.
- Risks highlighted include lingering COVID-19 effects, recession concerns, inflation, labor shortages and costs, supply-chain challenges, rising interest rates, and uncertain lodging demand. SVC specifically noted that business-transient and group travel recovery may be slow.
- Operator and tenant concentration is material: Sonesta managed 205 of 247 hotels, while TA leased 179 travel centers and represented 66.1% of net-lease annual minimum rent. SVC also owned approximately 34% of Sonesta and 8% of TA; related-party relationships and transactions are disclosed.
- For Sonesta-managed retained hotels, the annual owner’s priority return was initially set at $325.2 million, but payments depend on available hotel cash flow. The filing notes no guarantee or security deposit under the Sonesta agreement. SVC planned renovations, with funded capital increasing the contractual priority return by 6% of amounts funded.
- Common distributions remained $0.01 per share quarterly; a further $0.01 distribution was declared in July. The filing cautions distributions may be reduced or eliminated.
Key facts for investors to verify
- Whether the revolver can be refinanced or extended before its January 2023 maturity, and whether SVC maintains covenant and minimum-liquidity compliance.
- Progress and realized proceeds from pending and marketed property sales, and how proceeds are applied to debt and liquidity.
- Hotel demand, operating costs, and actual owner’s priority returns received relative to contractual amounts, particularly for Sonesta-managed properties.
- TA’s rent-payment capacity and operating performance, given its share of portfolio rent and SVC’s equity investment in TA.
- Whether planned hotel renovations and the stated second-half capital spending can be funded without further pressuring cash and debt capacity.
- The extent to which reported GAAP earnings depend on property-sale gains and market-value changes in TA shares; FFO and Normalized FFO are non-GAAP measures and are not operating cash flow.