Business context and reporting period
Service Properties Trust (Nasdaq: SVC) is a Maryland REIT reporting for the fiscal year ended December 31, 2023; this 10-K covers the full year, not only the fourth quarter. The company owned 221 hotels with 37,777 rooms and 752 service-focused retail net lease properties with 13.34 million square feet. Its two reporting segments are hotel investments and net lease investments.
Hotel operating returns depend on third-party managers, while net lease tenants generally pay property operating costs under triple-net leases. Sonesta managed 195 hotels, and TA was the tenant at 176 travel centers at year-end.
Financial and operating performance
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $1,873.9 million | $1,863.0 million |
| Net loss | $32.8 million | $132.4 million |
| Net loss per share | $0.20 | $0.80 |
| FFO per share | $1.65 | $1.48 |
| Normalized FFO per share | $1.66 | $1.50 |
| Cash provided by operating activities | $485.5 million | $243.1 million |
- Revenue increased 0.6%. Hotel operating revenue rose 0.7% to $1,478.0 million; rental income was essentially unchanged at $395.8 million.
- Comparable hotel occupancy was 62.6%, up 0.9 percentage points; ADR rose 3.3% to $139.86 and RevPAR increased 4.8% to $87.55. Across all hotels, RevPAR rose 4.5% to $88.09.
- Net lease occupancy was 97.1%. Portfolio rent coverage declined to 2.46x from 3.00x. In 2023, renewed leases averaged rents 9.4% above prior rents, and new leases averaged 21.9% above prior rents.
- Interest expense declined 1.6% to $336.3 million as lower debt balances partly offset higher borrowing rates. The company recorded a $43.2 million real estate sale gain and a $48.8 million gain on equity securities, principally reflecting the TA shares’ fair-value adjustment before their sale.
- Net loss improved by $99.6 million year over year. FFO and Normalized FFO are non-GAAP measures and should not be treated as substitutes for net income or operating cash flow.
Debt, liquidity and distributions
- Year-end principal debt was $5.63 billion: $4.025 billion of senior unsecured notes, $1.0 billion of senior secured notes and $608.6 million of net lease mortgage notes. The balance-sheet carrying amount was $5.52 billion, net of discounts and issuance costs.
- Year-end cash and cash equivalents were $180.1 million; restricted cash was $17.7 million. The $650 million secured revolving credit facility had no borrowings outstanding and matures in June 2027, with two possible six-month extensions subject to conditions.
- Debt maturities include approximately $1.152 billion in 2025, $802.0 million in 2026, $852.0 million in 2027 and $1.001 billion in 2028. The 2025 maturity includes $800 million of 7.5% notes.
- The company issued $1.0 billion of 8.625% senior secured notes due 2031 and $610.2 million of net lease mortgage notes during 2023, using proceeds in part to redeem nearer-term notes. The mortgage notes are secured by 308 net lease properties; the 2031 notes are secured by interests in subsidiaries associated with 70 travel centers.
- Management stated that it believes operating cash flows, cash on hand, the revolving facility and asset-sale proceeds will meet operating needs, capital spending, debt service and distributions for the next 12 months and beyond. This assessment is subject to the risks described in the filing.
- Cash distributions were $0.80 per share in 2023, compared with $0.23 in 2022. The current quarterly rate was $0.20 per share; future payments and amounts remain at the Board’s discretion and subject to debt restrictions and liquidity.
Material changes, outlook and risks
- The May 2023 BP acquisition of TA led to amended leases for 176 travel centers, with $254 million of annual minimum rent, 2% annual increases during the initial 10-year term and a limited BP subsidiary guarantee. SVC received $379.3 million in cash, including $188 million of prepaid rent, $101.9 million for its TA shares and $89.4 million for TA-related trademarks and trade names. TA receives $25 million of annual rent credits over the initial term.
- The company sold 18 hotels and 13 net lease properties for aggregate proceeds of $170.3 million and acquired one 250-room Miami Beach hotel for $165.9 million. It expects to fund approximately $250 million of hotel capital improvements in 2024. No specific earnings or operating guidance was provided.
- Leasing concentration is significant: TA represented 68.2% of net lease annualized minimum rent, and its leases for 176 travel centers expire in 2033 before renewal options. Sonesta operated about 49.8% of historical real estate investment. Sonesta is also a related-party investee in which SVC owns 34%.
- Management highlighted high interest rates, inflation, labor costs, economic slowdown and refinancing conditions as risks. Other material exposures include hotel demand and business-travel recovery, tenant or operator defaults, property values and dispositions, capital needs, REIT qualification, climate and environmental liabilities, and related-party conflicts. The filing also notes that a failure of the intended independent-contractor treatment for hotels leased to taxable REIT subsidiaries could create material REIT tax exposure.
- Debt agreements impose financial covenants and can restrict distributions during defaults. SVC reported compliance at year-end; reported senior-note covenant metrics included total debt to adjusted total assets of 52.4% against a 60% maximum and debt-service coverage of 1.79x against a 1.50x minimum.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Real estate impairment estimates were identified as a critical audit matter; SVC recorded $9.5 million of impairment losses in 2023.
Important facts for investors to verify
- Confirm the timing and available funding for the substantial 2025–2028 maturities, refinancing costs and continued access to the secured revolving facility.
- Track TA lease performance, the limits and terms of BP’s guarantee, and concentration in travel centers and Sonesta-managed hotels.
- Assess whether hotel operating improvements and net lease tenant coverage can support contractual returns, rent payments and the current distribution rate.
- Review planned 2024 hotel capital spending, asset-sale completions and proceeds, and whether these affect leverage or liquidity as intended.
- Monitor REIT compliance, taxable REIT subsidiary and independent-contractor arrangements, impairment assumptions, and the potential effects of related-party relationships.