Service Properties Trust quarterly report, Q1 FY2020

Service Properties Trust — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless stated otherwise. SVC is a REIT owning hotels and service-oriented retail properties, including travel centers leased to TravelCenters of America (TA).

Financial performance and key metrics

Metric	Q1 2020	Q1 2019
Total revenue	$483.8 million	$524.9 million
Net income (loss)	$(33.7) million	$225.8 million
Basic and diluted earnings per share	$(0.20)	$1.37
FFO and Normalized FFO	$123.1 million; $0.75 per share	$144.6 million; $0.88 per share
Cash from operating activities	$97.0 million	$43.9 million

• Hotel operating revenue fell 15.7% to $383.5 million. Net lease rental income rose 57.4% to $99.3 million, mainly reflecting properties acquired in the 2019 SMTA transaction. Total revenue declined 7.8%.
• Q1 2020 net loss included a $16.7 million real estate impairment loss, a $6.9 million loss on property sales and a $5.0 million unrealized loss on equity securities. Q1 2019 net income included a $159.5 million gain on real estate sales and $21.0 million of unrealized equity-security gains, making the year-over-year earnings comparison unusually affected by nonrecurring and market-value items.
• Depreciation and amortization was $127.9 million, up 28.7%; interest expense was $71.1 million, up 42.8%, principally reflecting debt used to finance the SMTA transaction. The net loss was approximately 7.0% of revenue.
• At March 31, cash and cash equivalents were $55.2 million and restricted cash was $44.5 million. Operating cash flow rose year over year, but was affected by noncash adjustments and security-deposit utilization; it should not be read as a direct measure of rent collections.
• Debt included $457 million drawn on the $1.0 billion revolving facility, a $400 million term loan and $5.35 billion principal amount of senior notes. The balance sheet reported $6.15 billion of debt, net of applicable discounts and issuance costs. Revolver availability was $543 million at quarter-end and $500 million on May 7. Senior-note principal maturities begin with $400 million in February 2021.
• Quarter-end total assets were $9.00 billion and shareholders’ equity was $2.38 billion. Q1 distributions paid were $0.54 per share; a subsequent quarterly distribution was reduced to $0.01 per share.

Material changes and operating conditions

• COVID-19 materially disrupted hotel and service-retail operations. Comparable hotel RevPAR decreased 19.5%; across all 329 hotels, occupancy fell 11.3 percentage points to 56.1%, ADR declined 5.4% to $123.06, and RevPAR fell 21.2% to $69.04.
• All six hotel operating agreements generated coverage below 1.0x for the twelve months ended March 31, 2020; aggregate hotel coverage was 0.73x, versus 0.95x a year earlier. Management reported hotel security deposits and guarantees of $129.5 million available at quarter-end and expected these protections to be substantially exhausted by as early as Q2 2020.
• The net lease portfolio comprised 813 properties, was 98% leased, and had reported coverage of 2.28x. TA accounted for 25.5% of SVC’s total annual minimum returns and rents. TA was current on rent as of May 7, but SVC collected only 45% of April rent due from other net lease tenants. By May 7, rent deferrals totaling $8.6 million had been granted to 84 tenants.
• Hotel operators received $70.7 million of working-capital advances in April to cover projected losses. Additional advances of $8.7 million were requested in May and expected to be funded. These advances are generally recoverable only from future hotel cash flows under the applicable agreements.
• As of quarter-end, SVC had suspended or agreed to suspend FF&E reserve contributions under several hotel agreements. It also suspended one hotel in March and 18 more in April. Management described expense-reduction measures including staffing reductions, furloughs and service cutbacks.
• The February 2020 Sonesta restructuring reduced minimum returns on 14 full-service hotels from $99.0 million to $69.0 million, called for the sale, rebranding or repurposing of 39 extended-stay hotels, and gave SVC an approximately 34% equity interest in Sonesta. SVC reported a $0.7 million equity-method loss on the investment in Q1.

Outlook, financing, risks and unusual items

• Management said it believed available resources could support operations and obligations, while emphasizing that the pandemic’s duration, severity and ultimate effects could not be determined. The filing does not provide a numerical earnings or revenue forecast.
• On May 8, 2020, after quarter-end, SVC amended its credit agreement and obtained a waiver of certain financial covenants through March 31, 2021, subject to conditions. The amendment requires at least $125 million of unrestricted liquidity, raises loan interest-rate premiums by 50 basis points, restricts distributions to specified permitted amounts including $0.01 per share quarterly, limits investments and certain capital spending, and generally directs specified proceeds to debt repayment. Certain subsidiary equity interests were pledged as collateral.
• Management expected planned hotel sales to be delayed until later in 2020 or 2021, and cautioned that sales could be delayed further or not occur. Sales of seven net lease properties for $59.5 million were expected by Q3 2020.
• Key risks include further tenant or operator nonpayment, hotel losses and depleted guarantees, additional rent-relief requests, reduced property values, restricted access to capital, covenant compliance and refinancing debt. Hotel sale delays may also postpone planned deleveraging. The filing identifies material related-party relationships involving RMR, TA and Sonesta.

Most important facts for investors to verify

• Subsequent hotel and retail rent collections, tenant deferrals and operator requests for additional working-capital support.
• Remaining hotel security deposits and guarantees, and whether operators continue paying minimum returns as those protections are depleted.
• Compliance with the amended credit agreement, liquidity minimum, collateral requirements and distribution restrictions.
• Progress and realized proceeds from planned hotel and net lease property sales, alongside the 2021 debt maturity and broader refinancing needs.
• Whether the $0.01 quarterly distribution can be maintained and how hotel demand, occupancy and tenant operating conditions recover.