Service Properties Trust — Q1 2021 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. The REIT owned 310 hotels and 798 net-lease properties. COVID-19 continued to materially affect hotel operations and cash flows.
Financial performance and position
- Revenue: $261.2 million, down 46.0% from $483.8 million. Hotel operating revenue fell 55.9% to $169.0 million; net-lease rental income fell 7.6% to $91.7 million.
- Profit: Net loss was $195.0 million, or $1.19 per share, versus a $33.7 million loss, or $0.20 per share. Q1 2021 included $19.6 million of hotel transition costs tied to rebranding 88 hotels, $6.5 million of unrealized losses on TA shares, and $1.2 million of property impairment. Normalized FFO was a loss of $42.0 million ($0.26 per share), compared with positive $123.1 million ($0.75 per share).
- Cash flow: Operating activities used $62.7 million, versus providing $97.0 million in Q1 2020. Investing activities used $68.8 million. Financing provided $919.6 million, mainly reflecting the draw on the revolving facility. Cash and restricted cash ended at $879.6 million, including $874.5 million of unrestricted cash.
- Debt and liquidity: Debt comprised $1.0 billion drawn on the $1.0 billion revolver and $6.2 billion of senior notes. The revolver was fully drawn at quarter-end and May 6. The debt-service coverage ratio was 1.12x, below the 1.50x public-debt covenant threshold; the company said it could not incur additional debt until it meets the required level. Management believed available cash, net-lease cash flows, improving lodging trends and expected asset sales would provide liquidity for at least 12 months.
- Portfolio and operating indicators: Hotels’ Q1 occupancy was 40.1%, ADR $88.02 and RevPAR $35.30; year over year, these represented a 16.5 percentage-point occupancy decline, 29.6% ADR decline and 50.1% RevPAR decline. Net-lease occupancy was 98.5%, with $375.8 million annualized minimum rent and 2.19x reported coverage.
- Distributions: The company paid $0.01 per share for the quarter and declared another $0.01 per share for payment in May 2021.
Material changes versus Q1 2020
- Hotel revenue decreased primarily because of pandemic-related occupancy weakness; total hotel metrics remained substantially below the prior-year quarter.
- Hotel operating expenses declined 20.7%, but by less than hotel revenue; Q1 2020 expenses had benefited from $70.5 million of security-deposit and guarantee utilization, compared with $10.4 million in Q1 2021.
- Interest expense increased 25.8% to $89.4 million, attributed to higher average borrowings and a higher average rate.
- Operating cash flow reversed from positive to negative, while the company’s quarter-end cash balance rose sharply following its January revolver draw.
Outlook, risks and notable items
- Management expected lodging demand may improve more meaningfully in the second half of 2021, but said recovery to historical levels could take several years and business-transient and group recovery would likely be gradual and uneven. No specific revenue or earnings guidance was provided.
- The company expected to fund $140 million of hotel capital expenditures during the remaining nine months of 2021. Expected hotel and net-lease property sales were subject to conditions; proceeds generally were to be used for business purposes or debt repayment.
- Sonesta managed 256 hotels and the company held approximately 34% of Sonesta. Sonesta hotels generated $37.4 million of net operating cash flow deficits in Q1; the company also contributed $25.4 million to Sonesta in March. Hyatt’s termination notice for 22 hotels was extended to May 22, 2021, while discussions over continued management were ongoing.
- The company was in arbitration with Marriott, including over Marriott’s assertion that $19.1 million of minimum-return advances should be refunded. TA, the largest tenant, represented 65.5% of net-lease annualized minimum rent; its remaining deferred rent obligation was $35.2 million.
- Net-lease tenants paid 93.1% of rents due in Q1 and 97.7% in April. Deferred rent outstanding was $10.6 million across 45 tenants; reserves for uncollectible rents were $23.1 million at quarter-end.
- Management identified COVID-19-related operating and collection uncertainty, debt-covenant restrictions, refinancing and liquidity exposure, property sale execution, hotel operator concentration, tenant concentration, and related-party conflicts as important risks. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether hotel demand, occupancy and RevPAR recover as expected, and whether Sonesta and any successor hotel managers can improve hotel cash generation.
- Compliance with the 1.50x debt-service coverage covenant, the timing and terms of any refinancing, and liquidity after the revolver is fully drawn.
- Actual completion and proceeds of pending property sales and delivery of the expected hotel capital program.
- Collection of deferred rents and continuing rent payments from major tenants, particularly TA, and the resolution of Marriott arbitration and Hyatt management discussions.
- The effects of related-party relationships involving RMR, Sonesta and TA on governance, expenses and operating decisions.