Service Properties Trust

Good morning. Welcome to the Service Property Trust Fourth Quarter 2021 Financial Results Conference Call. All participants will be in the Synony mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. At this time, for opening remarks and introductions, I'd like to turn it over to Director of Investor Relations, Kristen Brown. Please go ahead.

Thank you, and good morning. Joining me on today's call are John Murray, President, Brian Donley, Chief Financial Officer, and Todd Hargreaves, Chief Investment Officer. Today's call includes a presentation by management, followed by a question and answer session with analysts. Please note that the recording, retransmission, and transcription of today's conference call is prohibited without the prior written consent of FCC. I would like to point out that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SEC's present beliefs and expectations as of today, February 25, 2022. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through violence with the Securities and Exchange Commission, or SEC. In addition, this call may contain non-GAAP financial measures, including normalized funds from operation or normalized FFO and adjusted EBITDA RE. Reconciliations of these non-GAAP financial measures to net income, as well as components to calculate AFFO, are available in our supplemental package down in the investor relations section of the company's website. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our form 10-Q on file with the SEC and in our supplemental operating and financial data down on our website at www.svcre.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. And with that, I'll turn the call over to you, John.

Thank you, Kristen, and good morning. Last night, we reported fourth quarter normalized FFO of 17 cents per share an adjusted EBITDA RE of $119 million, representing an 83% increase from the prior year quarter, reflecting a generally improving hotel portfolio, as well as steady performance from our net lease service-oriented retail properties. Demand across the portfolio continues to be stronger on weekends versus weekdays due to strength in leisure demand in warmer climates. Spiking COVID cases driven by the Omicron variant resulted in canceled room nights in late December and impacted January most acutely. Certain conferences opted to go virtual, dampening the return of business transient demand in what is already a seasonally weak month. As an example, the decision to move the January J.P. Morgan Healthcare Conference virtual wiped out $3 million of revenue at the Clift Hotel in San Francisco. With COVID cases subsiding, related mandates being lifted, and more employees returning to office work, we believe that the lodging recovery resumed in February and expect further improvement as business travel rebuilds, leisure demand remains elevated, and extended stay occupancies remain stable. We expect the trajectory of recovery will accelerate as we move through 2022, particularly as urban markets and CBD office buildings reopen. Historically, SVC's select service and urban full-service hotels have generated approximately 75 to 80% of their revenues from business-related travel or meetings, and we believe a more widespread return to in-office work is important to seeing that level of business demand resume. 50% of room nights were booked through OTA channels that have select properties this quarter due to lagging business transient demand. We believe 70% of the margin weakness at Sonesta select hotels reflects business travel related revenue weakness rather than cost pressure. For the fourth quarter, SBC's comparable REVPAR was 72% of 2019 levels, an improvement from 69% of 2019 levels in the third quarter, and ahead of our expectation to achieve between 63% and 65% of 2019 fourth quarter REVPAR levels. Our extended stay hotels continue to maintain strong occupancy premiums relative to the industry, and compared to our non-extended stay hotels. Our 159 extended stay hotels reported occupancies of 65.9% during the quarter, compared with occupancies of 48.6% and 46.6%, respectively, for our 51 full-service hotels and 93 select service hotels. Extended stay RevPAR is also the closest service level to 2019 levels, at 83% of the 2019 quarter, with each of our extended stay brands achieving occupancies above 90% of 2019 levels. On the expense side, labor continues to pose a challenge for the industry in our portfolio. Wage increases and the use of expensive contract labor have negatively impacted results. At semester this quarter, wage-related costs were approximately 8% higher than Q3 due to wage increases to attract and retain employees, use of contract labor, retention bonuses for employees at sale hotels, and overtime due to open positions. On a cost per occupied room basis, wages and benefits increased 7.5% year over year for the fourth quarter. Wage inflation was partially offset by increased productivity and labor savings due to open positions and adapted brand standards. Effective January 1, we amended our management agreements with Senesta. We previously announced we would sell 68 hotels Two of them have been sold to date, with the remainder to be sold over the next few months. The 194 retained semester hotels are included in a master management agreement with a 15-year term and two 15-year renewal options. This amended agreement sets our annual onus priority return for the retained hotels at $325.2 million, a 30% reduction from the onus priority return amounts for hotels that were transferred from other operators. We have also agreed to invest approximately $600 million of expected revenue-enhancing renovations over the next three years to upgrade to the portfolio's brand standards. For the sale hotels, the term was extended to the early of December 31st, 2022, or until the hotels are sold. SVC's Owners Priority Return will be reduced by the current Owners Priority Return for these assets, or $82.7 million once the remaining 66 hotels are sold. The sale process has rolled out well with over 70% retaining long-term Semester branding, agreeing to PIPs, and in some cases agreeing to additional future franchises. These sales are strategic to improving the overall quality of our hotel portfolio and an important step to improve our liquidity. Todd will discuss the sales process in more detail. SVC transitioned 206 hotels to Semester over the past five quarters under very challenging industry conditions. but we believe the transition disruption is behind us and that Senesta's brand awareness is growing. In addition to benefiting from the recovery in hotel industry demand and increasing brand awareness, Senesta is also realizing the benefits of its larger scale, including savings from renegotiated contracts that have reduced pricing on key products and services at our hotels. With business demand still anemic versus pre-pandemic levels, OTA usage was elevated this quarter, which drove higher commission expense. Although Sonesta OTA commission rates have decreased approximately 25% over the past year as a result of its increased scale, reliance on these more costly channels is still elevated. Targeted promotions and the expected rollout of a new mobile app should increase direct bookings and reduce reliance on the higher-cost OTA channels. As hotel industry fundamentals continue to improve, we expect Sonesta will deliver solid results on both the top and bottom line. Sonesta has rolled out several new revenue initiatives, and seen good traction with corporate negotiated room nights at Sonesta Select hotels. They have also further adjusted labor standards and enhanced their scheduling tools to maximize labor efficiency. On the group business front, 2022 is pacing well ahead of 2021 despite Omicron effects in January, though pace remains behind 2019 levels. Group rates have generally recovered to or slightly above 2019 levels. As a 34% shareholder, we are encouraged by Senesta's continued progress following a period of major growth and disruption. To give market participants a chance to get to know the Senesta brand and highlight its recent evolution as a company, we will be hosting an investor day with the Senesta and SVC management teams for analysts and institutional investors at the end of March in Chicago. The day will include a tour of some of SVC's Chicago hotel assets managed by Senesta and and the presentation portion will also be webcast. Please reach out to Investor Relations for more details if you are interested in attending. Turning to our net lease assets, this portfolio is continuing to provide a stable base of cash flows. As you may have seen, our largest net lease tenant, Travel Centers of America, reported strong earnings earlier this week as its transformation plan continues to produce financial and operating improvement. As an 8% shareholder, we are the beneficiaries of this significantly improved performance. Our other net lease tenants also continue to perform well with 100% rent collection rate for the fourth quarter. Overall, we remain encouraged by declining COVID cases, the end of related restrictions in many markets, and an increasingly positive outlook for a return to normalcy. With the recent performance of our hotel operators and net lease tenants, as well as the progress on our initiatives to reduce leverage and improve liquidity, which Brian will discuss in more detail, we believe SVC is well-positioned to benefit as the lodging sector recovers from this historic downturn. With that, I'll turn the call over to Todd to discuss hotel dispositions of the recent transaction activity and our net lease portfolio in more detail.