Service Properties Trust — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. SVC is a REIT owning hotels and net-lease service-oriented retail properties. At quarter-end, it owned 304 hotels and 796 net-lease properties; 261 hotels were operated by Sonesta, and TravelCenters of America (TA) was its largest tenant.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $375.9 million | $214.9 million | $637.1 million | $698.7 million |
| Net loss | $91.1 million | $37.3 million | $286.1 million | $71.0 million |
| Net loss per share | $0.55 | $0.23 | $1.74 | $0.43 |
| Normalized FFO | $25.8 million ($0.16/share) | $78.2 million ($0.48/share) | $(16.2) million ($(0.10)/share) | $201.2 million ($1.22/share) |
| Cash from operating activities | Not presented quarterly | Not presented quarterly | $(21.2) million | $48.8 million |
Q2 hotel operating revenue was $280.1 million, up 138.7% year over year, while hotel operating expenses rose to $243.2 million from $47.0 million. The filing attributes much of the expense increase to higher occupancy and substantially less use of guarantees and security deposits to cover hotel shortfalls. Six-month hotel revenue fell 10.3% year over year. No single consolidated operating-margin measure is presented.
Comparable hotel occupancy in Q2 increased to 57.9% from 30.6%, and RevPAR rose 107.1% to $53.61. For the first half, comparable occupancy improved to 49.6% from 44.2%, but RevPAR declined 5.8% to $44.21. The net-lease portfolio was 98.5% occupied, with $371.9 million of annual minimum rent and 2.29x reported rent coverage.
At June 30, cash and cash equivalents were $915.3 million, versus $73.3 million at year-end 2020; restricted cash was $1.3 million. Total liabilities were $7.60 billion and shareholders’ equity was $1.81 billion. Debt comprised $1.0 billion drawn on the revolving facility and $6.2 billion of senior notes. The revolver was fully drawn and carried a 2.85% rate. Senior-note principal maturities include $500 million in 2022 and $500 million in 2023; the revolver matures July 2022, with conditional extension options.
Changes, outlook and material items
- Revenue increased sharply in Q2 against the pandemic-affected 2020 comparison, but the first-half revenue total declined. SVC remained loss-making, and normalized FFO fell materially in both the quarter and half-year.
- Operating cash flow turned negative for the first half. The increase in cash balances largely reflects financing: SVC drew substantially on its revolver as a precautionary liquidity measure.
- SVC was below the public-debt covenant requiring income available for debt service to debt service of at least 1.50x; its June 30 ratio was 1.00x. It therefore could not incur additional debt until covenant compliance is restored. The company reported compliance with other covenants, subject to waivers and stated exceptions.
- Management said it expected adequate liquidity for at least the next 12 months, citing cash, anticipated operator receipts, improving lodging trends and planned asset sales. It cautioned that COVID-19’s impact remained significant and the hospitality recovery would be uneven and potentially multi-year; business-transient and group recovery was expected to be gradual.
- SVC was marketing 69 Sonesta-branded hotels with a $627.3 million net carrying value and expected sales by the end of Q1 2022. It also expected to sell four net-lease properties by the end of Q3 2021. Management anticipated approximately $100 million of hotel capital improvements in the second half of 2021.
- The quarterly distribution was maintained at $0.01 per share; management expected to continue at that rate for the foreseeable future, subject to REIT requirements and other constraints.
- In June, SVC amended its Hyatt agreement: Hyatt will manage 17 hotels for a 10-year term, with a $12 million annual minimum return and a limited $30 million guarantee beginning in 2023. SVC also agreed to fund about $50 million of renovations by the end of 2022. Separately, the Radisson guarantee was exhausted, and discussions over continued management were ongoing.
- SVC was in arbitration with Marriott over agreement terminations, payment issues and a disputed $19.1 million claim for repayment of minimum-return advances; SVC also sought repayment of working-capital advances.
- Unusual comparisons include the $62.4 million Hurricane Maria insurance-settlement gain recorded in Q2 2020. Q2 2021 included $6.2 million of transaction-related costs; first-half costs were $25.8 million, including hotel rebranding, Hyatt working-capital impairment and Marriott legal expenses.
Most important facts for investors to verify
- Whether SVC can restore the 1.50x debt-service covenant and regain the ability to incur debt before liquidity or debt maturities become pressing.
- Whether cash balances, operator payments and planned dispositions are sufficient to fund operations, debt service and the stated capital program; cash from operations was negative in the first half.
- Progress, timing and realized proceeds from the proposed sale of 69 hotels and other properties, and the use of sale proceeds under debt-agreement requirements.
- Hotel recovery and operator performance, particularly Sonesta’s ability to generate cash returns, and the effect of concentration in Sonesta and TA.
- Outcomes of the Marriott arbitration and Radisson management discussions, including any payment, transition or capital consequences.
- Collection of deferred and contractual rents, tenant credit quality, and the sustainability of the $0.01 quarterly distribution.