Service Properties Trust — Q2 2020 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2020. SVC is a REIT owning hotels and service-oriented retail properties; it reported 329 hotels and 809 net-lease properties. COVID-19 sharply affected lodging and some retail tenants.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $214.9m | $610.6m | $698.7m | $1,135.5m |
| Net income (loss) | $(37.3)m | $8.8m | $(71.0)m | $234.6m |
| Diluted EPS | $(0.23) | $0.05 | $(0.43) | $1.43 |
| FFO / Normalized FFO | $117.9m / $78.2m | $168.8m / $168.8m | $241.0m / $201.2m | $313.4m / $313.4m |
| Cash from operations | Not separately presented | Not separately presented | $48.8m | $239.9m |
Amounts are in U.S. dollars; financial statement figures are converted from thousands. Q2 revenue fell 64.8% year over year and first-half revenue fell 38.5%. Hotel operating revenue declined 78.3% in Q2 and 49.7% for the first half. Net-lease rental income rose 51.4% in Q2 and 54.1% for the first half, largely reflecting the 2019 SMTA portfolio acquisition. Net margin was approximately (17.4)% for Q2 and (10.2)% for the first half, versus approximately 1.4% and 20.7% in the respective prior-year periods.
For all hotels in Q2, occupancy was 27.8% versus 77.2%, ADR was $84.34 (down 36.4%), and RevPAR was $23.45 (down 77.1%). Net-lease occupancy was 99%; reported portfolio rent coverage was 2.16x. All six hotel operating agreements had coverage below 1.0x for the twelve months ended June 30, 2020.
First-half investing cash use was $74.8m and financing cash use was $5.4m. Cash and cash equivalents were $20.2m and restricted cash was $29.7m at June 30. Total assets were $8.88bn, shareholders’ equity was $2.35bn, and principal debt was approximately $6.23bn: $5.8bn of senior notes, a $400m term loan and $33.1m drawn on the revolving facility.
In June, SVC issued $800m of 7.50% notes due 2025 and repurchased $350m principal amount of 4.25% notes due 2021, recording a $7.0m extinguishment loss. The revolver had $966.9m available at quarter-end and $967.9m on August 6, subject to credit agreement conditions. The May covenant amendment waived certain financial covenants through March 31, 2021, requires at least $125m of unrestricted liquidity, raises borrowing spreads, restricts distributions and certain investments, and generally directs specified proceeds to debt repayment.
Material changes, outlook and risks
- COVID-19 and hotel operations: SVC temporarily closed 19 hotels; nine had reopened by August 6. Hotel occupancy improved from 21.0% in April to 35.5% in June and 42.4% for the 28 days ended July 25, but management cautioned that recovery could reverse. First-half working-capital advances to hotel operators totaled $80.5m.
- Operator defaults and security: IHG failed to pay amounts due after its security deposit was exhausted; SVC issued default and termination notices and was discussing a resolution. If unresolved, SVC planned to transition 103 hotels to Sonesta. Marriott’s security deposit and $30m limited guaranty were also exhausted. SVC said it expected to exhaust Hyatt’s remaining guaranty in Q4 based on current estimates.
- Retail rent collection: SVC collected 58.7% of Q2 rents from other net-lease tenants and 80.0% of July rents. It had deferred $11.3m for 80 tenants, generally repayable over 12–24 months beginning September 2020. TA, its largest tenant, was current as of August 6; TA accounted for 25.6% of consolidated annual minimum returns and rents.
- Distributions and liquidity: Quarterly distributions fell from $0.54 to $0.01 per share, and SVC said it expected that rate to continue for the foreseeable future, subject to REIT requirements and debt restrictions. Management believed resources would cover needs for the next twelve months, while warning that prolonged economic weakness could further impair cash flows and liquidity.
- Unusual items: SVC recorded a $62.4m insurance-settlement gain related to its San Juan hotel and a related $15.7m deferred tax liability. It also recorded $45.3m of first-half impairment losses and $9.8m of net losses on property sales. First-half operating cash flow was reduced in part by $100.2m of security deposits utilized.
- Portfolio and capital plans: SVC had agreements to sell nine hotels for $48.8m and seven net-lease properties for $6.9m, subject to conditions; expected closing dates were in Q3 or Q4 2020. It expected to use proceeds to repay debt. It also planned a transition of 20 Wyndham hotels to Sonesta when the Wyndham agreement expired in September 2020. Future results depend on pandemic severity, tenant and operator performance, financing access, covenant compliance and completion of planned sales.
The filing provides no formal earnings guidance. Management’s outlook statements are conditional and subject to substantial pandemic-related uncertainty.
Most important facts for investors to verify
- Whether IHG cures its defaults or the planned management transition proceeds, and how hotel returns and transition costs are affected.
- Whether Marriott and other hotel operators fund contractual shortfalls as guarantees and deposits are depleted.
- Subsequent hotel occupancy, tenant rent collections, deferred-rent repayments and any additional working-capital advances or concessions.
- Compliance with the amended credit agreement, the $125m minimum liquidity requirement, and the restrictions on distributions, investment and use of proceeds.
- Actual completion, timing and proceeds of announced property sales, and whether proceeds reduce outstanding debt.
- Whether the $0.01 quarterly distribution remains sustainable and whether any further impairment or liquidity pressure arises.