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spk02: 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.
spk00: 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.
spk03: 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.
spk05: Thanks, John. The Sinesta branded hotel sales and portfolio optimization initiative continues to be a primary focus of management, and we continue to make progress on the previously announced sales of 68 Sinesta branded hotels. We have closed on two hotels for $28 million, one during Q4 2021 and one during Q1 2022. We are under purchase and sale agreement to sell 45 hotels for $402 million and are under letter of intent to sell an additional 19 hotels for $132 million. There are two hotels for which we have not yet selected a buyer. Aggregate pricing for the hotels remains in line with expectations we discussed on our third quarter earnings call and we expect to close the majority of these sales over the balance of Q1 and early Q2. We expect aggregate sale proceeds for the 66 hotels either sold or under agreement to total about $560 million, or approximately $66,000 per key. Approximately 72% of the sale hotels are expected to be sold encumbered by long-term Synesta branding. Maintaining Synesta's distribution and assisting in jump-starting franchising efforts for the Synesta brands as well as providing SVC with an additional future revenue stream through its ProRata ownership in Sonesta and the royalties it will receive from these franchisees. An additional 13% of the sale hotels are expected to be sold under short-term franchise agreements, while the buyers explore multifamily alternatives, which could potentially convert to more permanent branding arrangements if the buyers determine lodging is the highest and best use. The balance of the sale hotels will be rebranded or converted to an alternate use. We believe the timing of these sales has been favorable given the excess demand of buyers targeting hotels relative to the supply being offered. While most of the hotels will retain the Senesta brand, the hotels that are being sold unencumbered of long-term franchising agreements are being sold at prices that command at a premium compared to offers received to keep them as Senesta branded hotels. We believe our overall execution strategy on these sales will provide the maximum long-term benefit to SVC. In terms of other transaction activity during the fourth quarter, we sold six net lease properties totaling 52.6,000 rentable square feet for an aggregate sales price of $9.1 million. For the full year 2021, we sold seven hotels and 11 net lease properties for total proceeds of $52 million. In addition to the hotel sales previously discussed, we are under agreement to sell one property for $4.1 million, which we expect to close in the second quarter. As of December 31st, 2021, we own 788 net lease service-oriented retail properties, including our travel centers, with 13.5 million square feet requiring annual minimum rents of $370 million. Representing 42.5% of our overall portfolio based on investment, our net lease assets were 98.1% leased by 174 tenants with a weighted average lease term of 10.2 years and operating under 134 brands in 21 distinct industries at year-end. The aggregate coverage of our net lease portfolio's minimum rents was 2.58 times on a trailing 12-month basis as of December 31, 2021, and we collected all of the rents due from our net lease tenants during the fourth quarter, including all deferred amounts then due. As of December 31, 2021, $7.6 million of deferred rents remain outstanding, with seven tenants who represent approximately 2% of our annualized rental income from our net lease portfolio, including TA. We also reduced our reserves for uncollectible rents by $600,000 this quarter, compared to reducing our rental income by $4.5 million for reserves for uncollectible rents recorded in the prior year quarter. In 2022, we have only 384,000 square feet of leases expiring, representing less than 1% of our overall net lease rents. I'll now turn the call over to Brian.
spk04: Thanks, Todd. Starting with our consolidated financial results for the fourth quarter of 2021, normalized FFO was $27.9 million, or 17 cents per share, a $50.4 million increase over the prior year quarter, and a sequential decrease of $15.8 million over the third quarter of 2021. Adjusted EBITDA RE was $119 million for the fourth quarter, a $54 million increase over the prior year quarter, and an $18.3 million, or 13.3%, sequential decrease over last quarter. The major drivers impacting normalized FFO this quarter included the results from our hotel portfolio, which generated $28.4 million of hotel EBITDA for the fourth quarter of 2021, compared to negative $26.1 million of hotel EBITDA in the prior year quarter. Guarantee payments that supported our hotel returns under our historical agreements declined $13.4 million, negatively impacting year-over-year comparisons. Rental income from our leased properties for the fourth quarter of 2021 increased $8.6 million over the prior year quarter, primarily as a result of a $4.3 million increase in annual percentage rents recognized under our leases with TA and a $4 million decline in reserves for uncollectible rents. Interest expense increased $9.7 million over the prior year quarter as a result of our senior notes issuance in November 2020 and our revolver draw in January of 2021. G&A expense decreased $445,000 or 3% in the current year quarter, primarily as a result of lower legal and other professional service costs, largely offset by higher business management fees due to RMR as a result of an increase in our market capitalization compared to the prior year period. We account for our investment in Sinesta under the Equity Method of Accounting and include our share of Sinesta's results in our earnings. Our share of Sinesta's normalized FFL recognized from our 34% ownership interest was $397,000, an increase of $4.6 million, or 3 cents per share, over the prior year quarter. Net loss for the fourth quarter of 2021 includes a $76.5 million impairment charge as a result of reducing the carrying value of 35 hotels and 21 net lease properties to their estimated fair value. Given our current expectations on pricing compared to the book value of the other 32 hotels that are held for sale, we expect to record aggregate gains on sale of real estate, largely offsetting these impairment charters when those hotels are sold in 2022. That net, our total proceeds on the 68 hotels are projected to approximate the unadjusted carrying values we disclosed last quarter of approximately $579 million. We also recorded a $35.8 million charge this quarter related to our write-off of working capital advances we had funded in 2020 under our agreements with Marriott and ISG that those amounts are no longer expected to be recoverable. Turning to our hotel portfolio results for our 298 comparable hotels this quarter, RevPar increased 77%, gross operating profit margin percentage increased by 18.8 percentage points to 25.2%, and gross operating profit increased by approximately $65.8 million from the prior year period. Below the GOP line costs at our comparable hotels increased $5.4 million from the prior year, with increased management fees driven by higher revenues at our hotels and an increase in insurance costs were partially offset by a decrease in real estate taxes. Our consolidated portfolio of 303 hotels generated hotel leave up to $28.4 million Our 159 extended stay hotels continue to have the strongest performance, generating $24 million of hotel leave. 51 full-service and 93 select-service hotels generated $2.4 and $2 million, respectively. Overall, REVPAR declined 10% sequentially to $62 this quarter due to normal seasonality, although Q4 REVPAR was above our expectations at approximately 72% of fourth quarter 2019 levels, an improvement compared to Q3, which was 70% of Q3 2019 levels. REVPAR for the month of December was 80% of December 2019 levels. January 2022 was negatively impacted by the Omicron variant in an already seasonally weak period, and our hotels generated repar of $48, which was 61% of January 2019 repar levels. Overall, although we expect the first quarter of 2022 to be softer relative to Q4 21, we are seeing signs of increased activity in February and expect to see similar lifts from leisure demand in March as we did last year. With more people returning to the office, mandate rollbacks, and markets reopening, We are optimistic business travel will begin to ramp up more meaningfully in the coming months. Regarding the 67 hotels to be sold in 2022, these hotels generated rev par of $46 for the full year of 2021, compared to rev par of $58 for our 236 non-exit hotels. Hotel EBITDA for these 67 sale hotels was $3 million for the full year of 2021, compared to $58 million for the non-exit hotels. Turning to investing activity, during the fourth quarter, we made $30.4 million of capital improvements at our properties and $103.6 million for the full year 2021. We anticipate our capital spend for 2022 to be around $200 million, including $62 million we have committed to spend under our amended Hyatt and Radisson agreements for renovations, as well as to renovate a significant number of Sonesta hotels. As John mentioned, we expect to invest $600 million over three years in our Sonesta portfolio. Turning to the balance sheet, our upcoming debt maturities include $500 million of senior notes due in August, which we expect to redeem with cash on hand. Our $1 billion revolving credit facility matures in July of 2022, and we are currently in discussions with our lending group regarding extending the maturity date and additional covenant relief. As a reminder, our credit facility is fully collateralized, and we are optimistic we will come to terms in the coming weeks. We currently have approximately $950 million of cash on our balance sheet and expect an additional $550 million from the hotel sales in the next few months. We believe between our expectations on extending the revolver and the enhancement to our liquidity, we will be well positioned to support our operations as we hopefully turn the corner from the effects of the pandemic. Finally, regarding our common dividend, we expect to maintain the current quarterly distribution rate of one cent per share through late 2022. Operator, that concludes our prepared remarks. We are ready to open up the line for questions.
spk02: Thank you. As mentioned, we will now begin the question-and-answer session. If you would like to ask a question, you may press star, then 1 on your touchtone phone. To withdraw your question, please press star, then 2. Please hold while we assemble our roster. And the first question comes from Brian Maher with B. Reilly Securities.
spk01: Good morning. And, Brian, thanks for the comments on this. you know, the capital stack and the expected maturities that kind of hit some of my questions here. But once all is said and done, and it seems like you're well positioned through 2022, where would you like the cash position to be once you've paid off the $500 million, you know, kind of taking care of the revolver, you know, holding a billion dollars in cash, you know, clearly is not ideal. Where should we think that that level is, you know, three or four quarters from now?
spk04: Brian, great question. Thank you and good morning. Our expectation is through late 2022, we'll probably keep the cash on hand. And the real catalyst will be when we're out of the so-called penalty box under our bond covenant, that 1.5 times incurrence test we're currently not meeting, we do expect to hopefully get past that later in the year, by the end of the year. At that point, our ability to incur debt and use the revolver as it's intended, at that point, we then consider taking the cash off the balance sheet.
spk01: Okay. And as it relates to CapEx, the $600 million over three years, I know you said $200 million this year, but should we expect the other $400 million also to be equally split amongst 2023 and 2024?
spk03: Brian, yeah, I think that's a good estimate for now. We're planning out and strategizing about the order in which we'll renovate the hotels. We might... Just because of supply chain issues and other timing issues, we might get a later start on some of those renovations on Senesta properties this year. So it's a possibility that it could be a little bit lighter this year and a little bit more than $200 million in the next couple. But for now, I think the best estimate is that we'll spread it out evenly.
spk01: Great. And then the recovery and extended stay in select service hotels has been pretty well documented in the You know, you're seeing it in your portfolio, but maybe John, could you give us a little color on how the urban full service hotels are doing in some of your markets? And is there, you know, any notable highlights, you know, where you're seeing a faster recovery than you might've thought?
spk03: Yeah, that's a good question, Brian. We've seen a couple of markets, like St. Louis has picked up some good business from Wells Fargo recently, and their performance is picking up. Full-service hotels in resort and other southern markets are doing well. Hotels like San Juan and Fort Lauderdale and Miami Airport, which has been doing a super job with both some local corporate business as well as capitalizing on airline industry distress and COVID impacts. Those types of hotels are doing very well. Even Hilton continues to generate leisure business, and particularly around the year-end holidays did much better than expected. But where we are seeing weakness continues to be Cities like Washington, DC, San Francisco, where we expected the year to get off to a great start, but then the JPMorgan Healthcare Conference got canceled. The Clift Hotel was one of the centerpieces of that conference. So several million dollars of revenue just disappeared overnight. So San Francisco has been struggling. Philadelphia remains a little bit weak. So I think that's, on balance, that's kind of the mix. Tougher in the northernmost cities, like Minneapolis as well.
spk01: Okay. And once you're comfortable, you know, with results across the hotel segment, you know, the sale of the hotels, full service starts to recover, and you start to get, you know, back to normal, for lack of a better word, And when you start to move back into growth mode, whenever that might be, 2023, 2024, where across your three segments, you know, hotels, I break it down, hotels, net lease, and travel centers, do you think you might pursue the most growth?
spk03: Well, that's a good question. I think that, you know, TA has been actively franchising and acquiring assets for their own account, and I don't expect in 2022 or 2023 that there'll be any noticeable activity between us and for TA properties. I do think that there'll be a balance of retail and hotel acquisitions. And, you know, Sonesta has been actively bidding on some hotel properties on their own and also looking at potential franchise growth. And to the extent that they do transactions, you know, we might get capital calls to maintain our 34% interest. So there may be some growth from maintaining that interest in ownership interest in Sonesta. And then I think that as we look at our portfolio, markets like New York, Miami, Los Angeles are markets where we don't have enough penetration, we don't think. And we could probably benefit from having a little bit more resort exposure. I think that that has benefited some of our peers. over the past couple of quarters as revenge travel has come out of the gates pretty strong. Remains to be seen how reopening of international markets impacts that, but I think we could use more in the way of resorts.
spk01: Just to follow up on your TA comment, I think at one time you guys had a ROFO on any properties TA would look to acquire. Is that still in place and are they putting properties to you to see if you want them first before buying them themselves?
spk03: That's correct. You have an excellent memory. There is a right of first offer and so when TA acquires properties they are required first to show them to us. When they franchise properties, because we own the TA brand, there's some consents required before they can franchise, and there's some trade area protections that we have as well regarding how close new TA franchises might be located to our existing sites, 75 mile radius. So, which sounds like a big distance, but it's not very much when you drive in between travel centers. So anyway, yes, we do have those provisions in our leases, and our board regularly, just about every quarter, reviews that activity and makes decisions about it, our independent trustees.
spk01: Thanks. And just last for me, and I know you touched upon it, but I think I might have missed some of it. Can you give us a little bit more color on the labor issue and how and when you see that starting to dissipate, you know, hopefully some point this year or early next?
spk03: Yeah, I mean, it's challenging. You know, we see it TA is probably doing a little bit better than our healthcare and hotel operating companies at attracting employees. I think maybe TA is down about 15% from its normal levels. Sinester is about 20% of their normal positions are unfilled, and so there's an active effort to fill those positions and to offer pay rates that are compelling so that employees stay for a long period of time. The more less skilled the positions, the higher the turnover seems to be. Throughout this past year, we've run, Sonesta has run at about a 20% deficit in terms of open positions. And so, you know, they've tried to manage brand standards, how often they clean rooms. Obviously, it depends on the price point of the hotel and how you manage guest expectations. But then they've had some housekeeping and food and beverage employees working extra shifts and overtime. They've had, in some hotels, they've had front desk employees helping at peak hours to clean rooms with sales staff covering the front desk. Those types of measures, while it's great to see teamwork and everybody pulling together, it causes burnout and some job dissatisfaction as well. And so it's been a constant battle. The contract labor is very expensive. So Sonesta, I think, is getting better at, as well as Marriott, IHG, Hyatt, and Radisson, they're all getting better at managing their shifts to try to get the least amount of contract labor, the least amount of overtime, but to make sure that they're getting all the rooms cleaned and all the guests who are in the restaurant waited on. I think that it's a little bit speculation that all of the operators are keenly focused on this and I think they're doing a better job with each passing day. As business levels both continue to grow and become more predictable, the effort on the labor front becomes easier. It's when you think you have everything figured out and you're on a good trajectory and then a new variant comes out of the woodwork and business dries up that the labor management really becomes problematic. So we're confident that the worst is behind us and that we'll see less of these contract labor and less overtime and that the wage increase issue will abate.
spk01: Thank you. That's all for me.
spk02: Thank you. This concludes the question and answer session. Now I'd like to turn the call to John Murray for any closing comments.
spk03: Thank you everyone for joining us today, and we look forward to hopefully seeing some of you in Chicago at the end of the month.
spk02: Thanks. Thank you. The conference is now concluded. Thank you for attending today's presentation.
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