Service Properties Trust — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Dollar amounts below are in millions unless stated otherwise. SVC is a REIT owning hotels and service-focused net-lease properties; at quarter-end it held 242 hotels and 769 net-lease properties.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $498.3 | $437.1 | $1,407.8 | $1,074.2 |
| Net income (loss) | $7.5 | $(59.7) | $(101.0) | $(345.8) |
| Net income (loss) per share | $0.05 | $(0.36) | $(0.61) | $(2.10) |
| Normalized FFO per share | $0.54 | $0.27 | $1.06 | $0.17 |
| Operating cash flow | Not separately presented for Q3 | $147.1 | $1.0 |
Q3 hotel revenue increased 18.3% year over year; rental income declined 0.9%. Hotel operating expenses rose 11.6%, while total expenses increased 1.1%. Hotel operating revenue less hotel operating expenses was $82.2 million, or about 20.5% of hotel revenue, versus $53.1 million, or about 15.7%, a year earlier. The Q3 profit included $23.1 million of unrealized gains on SVC’s TA shares. For the nine-month period, the $101.0 million GAAP loss included $44.2 million of gains on property sales, $9.7 million of impairment losses, and $2.7 million of unrealized TA-share gains. Normalized FFO is a non-GAAP measure and should not be treated as operating cash flow.
Hotel recovery drove the improvement: comparable-hotel Q3 occupancy was 65.9% versus 59.3%, ADR was $140.05 versus $120.08, and RevPAR rose 29.6% to $92.29. These comparisons reflect the prior-year pandemic impact and exclude hotels not open and operating throughout the periods. The hotel portfolio was also smaller than a year earlier.
Balance sheet, cash flow and distributions
- At September 30, total assets were $7.63 billion and shareholders’ equity was $1.45 billion. Cash and cash equivalents were $67.2 million, plus $10.9 million of restricted cash, down sharply from $944.0 million of cash at year-end 2021.
- Debt principal totaled $5.795 billion: $5.700 billion of senior notes and $95 million drawn on the $800 million revolving credit facility. The notes’ carrying value was $5.653 billion, net of discounts, premiums and issuance costs. Interest expense for nine months was $263.9 million.
- Nine-month investing cash flow was positive $397.0 million, including $518.0 million of net real-estate sale proceeds and $45.5 million invested in Sonesta. Financing cash flow was negative $1.413 billion, including repayment of $500 million of 2022 notes and $925 million of revolver repayments.
- SVC sold 80 properties during the first nine months for $531.7 million gross proceeds. It reported $73.95 million of capital expenditures in the period.
- Quarterly distributions paid in the first nine months were $0.01 per share each quarter. After quarter-end, SVC declared a $0.20-per-share distribution, payable in November 2022.
Changes, outlook and key risks
In October 2022, SVC extended its revolver maturity to July 15, 2023. The amended agreement requires at least $600 million of liquidity until the $500 million of 4.50% notes due June 2023 are repaid or refinanced, and at least $150 million thereafter. SVC reported $114 million of cash or cash equivalents as of November 1, 2022. Management said it expected to refinance or replace the facility, but gave no assurance of success. At September 30, SVC said it was covenant-compliant; its senior-note debt-service coverage was 1.72x against a 1.50x minimum, and management noted limited headroom to incur additional debt.
Management expects the hospitality recovery to take multiple years, with business-transient and group recovery gradual and uneven. It cited inflation, higher interest rates, labor cost increases and shortages, supply-chain pressures, and recession risk as potential burdens on hotel results, tenants, property values and financing access. Management stated that available sources were expected to cover operating and capital needs, debt service and distributions for the next twelve months, while warning that weaker operator payments or refinancing constraints could require reduced or suspended distributions.
Important concentration and execution risks include Sonesta managing 200 of 242 hotels and TA leasing 179 travel centers and accounting for 66.1% of net-lease minimum rent. SVC has a 34% interest in Sonesta and disclosed extensive related-party relationships involving Sonesta, TA and its manager RMR. Pending hotel sales totaling $162.5 million were subject to conditions; SVC expected most to close by the end of Q1 2023. The filing also reports planned hotel renovation funding and impairment charges, and notes that refinancing the 2023 maturities depends on market access and covenant compliance.
Investor verification points
- Confirm progress and terms for refinancing the July 2023 revolver and June 2023 notes, including compliance with the $600 million interim liquidity requirement.
- Track hotel operating recovery, especially business-transient and group demand, and whether improved occupancy and rates offset rising labor and other costs.
- Verify completion and realized proceeds of pending hotel dispositions; sale agreements may be delayed, changed or not completed.
- Monitor TA rent payments and tenant coverage, as well as concentration exposure to TA and Sonesta and the effects of their related-party arrangements.
- Assess distribution sustainability: the $0.20-per-share distribution declared after quarter-end is materially above the $0.01 quarterly payments made during the first nine months.