Service Properties Trust

Good morning and welcome to Service Properties Trust's second quarter 2022 financial results conference call. This call is being recorded. If you require operator assistance, please press star then zero. At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Kristen Brown. Please go ahead.

Good morning. Good morning. Joining me on today's call are Todd Hargraves, President and Chief Investment Officer, and Brian Donnelly, Treasurer and Chief Financial 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 SBC. 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 SBC's present beliefs and expectations as of today, August 5, 2022. The company undertakes no obligation to revise or publicly release the results of any revisions to these forward-looking statements made on today's call, other than through filings with the Securities and Exchange Commission, or SBC. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO and adjusted EBITDA REs. Reconciliation of these non-GAAP financial measures to net income, as well as components to calculate ASFO, are available in our supplemental package found 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 found on our website at www.sbcreit.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, Tom.

Thank you, Kristen, and good morning. Our second quarter results reflect sequential monthly improvement in our hotel portfolio throughout the period, as comparable rev par increased from 81% of 2019 levels in April to 86% of 2019 in June, resulting in Q2 2022 rev par that was 83% of the 2019 second quarter, compared with 67% of 2019 in Q1. The recovery of SVC's urban full service and suburban select service hotels contributed to the improvement as more workplaces reopened and employees returned to the office. As a result, when combined with the solid performance of our leisure and extended stay portfolios, room rates have now surpassed 2019 figures with ADR increasing from 95% of 2019 levels in April to 101% of 2019 levels in June. This trend has continued into the third quarter with preliminary July ADR of $142, 103% above 2019 levels. Notably, our full-service portfolio rep par in June increased to 93% of 2019 levels, highlighted by considerable occupancy increases at some of our city center hotels. This segment of our lodging portfolio, specifically the hotels in the Midwest and Northeast, has trailed in the recovery, but we are now experiencing significant and quantifiable improvements. Examples include our three Chicago hotels, where occupancy increased to 50% in Q2 from 15% in Q1, and the Royal Sonesta Cambridge, where occupancy increased to 63% in Q2 from 50% in Q1. Our full-service hotel EBITDA in Q2 was $51.1 million, compared to negative $1.5 million in Q1, with over half of that improvement driven by occupancy increases at our urban hotels. We have been extremely successful in maximizing rate of many of our hotels located in resort markets, with ADRs well above 2019 levels. Two of our top performers, Sonesta Miami Airport and Sonesta Hilton Head, achieved Q2 2022 rates of 165% and 137% respectively of 2019 Q2 ADR, and our leisure hotels and markets such as San Juan, Kauai, and New Orleans each reported Q2 2022 ADR of more than 110% of 2019 levels. While the recovery of our select service portfolio is trailing our other service levels, the gap relative to industry is tightening. Relative to Q2 2021, rev par for our select service hotels improved 54%, outpacing industry rev par growth by 15 percentage points. Specifically, our Senesta select portfolio increased rev par by 63% year over year. In terms of segmentation, group mix grew to 16% in the second quarter, up from 7% during the previous year quarter, and is now back in line with 2019 levels. This increase was largely driven by elevated leisure group demand, the post-pandemic ramp of corporate group, and an increase in citywide events. The largest gains were reported in Chicago, Boston, Nashville, New Orleans, and Philadelphia. With the increase in group and corporate negotiated demand, SBC's portfolio witnessed a significant decline in its OTA bookings, as its percentage of room revenues during Q2 from these more costly channels dropped from 37% to 30% from the previous year quarter. This is a trend we expect to continue into the third quarter. While hotel EBITDA is not back to 2019 levels, the improvement of our hotel portfolio during the second quarter has now put us back in compliance with our debt covenants, an important milestone in our recovery, giving us flexibility going forward in terms of operating the business and addressing our upcoming debt maturities, which Brian will discuss in further detail in a moment. As it relates to our ongoing plan to sell 68 Nesta branded hotels, we have now closed on 60 hotels for aggregate proceeds of $518 million and are under purchase and sale agreements for four additional hotels for an aggregate price of $24 million. The other four hotels remain for sale and two of these are under letters of intent with potential buyers. We believe we have effectively navigated the volatile transaction markets and remain on track to achieve the pricing expectations we set last year. As we had hoped, we have successfully sold a large percentage of these hotels encumbered of long-term Senesta franchise agreements. SVC views franchising as a platform that can facilitate Senesta's future unit growth, scale, and brand exposure. And as we have highlighted in the past, SVC will directly benefit through its 34% ownership share in Senesta. As previously disclosed, we are marketing our remaining 16 Marriott branded hotels for sale on an unencumbered basis and are pleased with the strong level of interest we have received from a wide range of investors. I would also like to reiterate the superior relative rev par margin and growth prospects of the hotels we are retaining versus those we are exiting. We believe our disposition initiative has and will allow SVC and its operators to focus on a more profitable, higher quality lodging portfolio. Turning to net lease, our diversified portfolio of retail net lease assets continues to provide SBC with a steady, secure cash flow stream, and our largest net lease tenant, Travel Centers of America, reported another exceptional quarter earlier this week. Our holdings of 8% of TA's common equity provides additional value to SBC as TA continues to perform. Our other net lease tenants are also operating at a high level, reporting increased rent coverage from prior periods. In the second half of 2022, we have 302,000 square feet of leases expiring, representing 2% of our net lease rents, excluding TA. This is comprised of four tenants across multiple properties known to be vacating and represents approximately $2.5 million of annual revenues. We are evaluating both leasing and sale options for these properties. During the quarter, we sold 11 vacant net lease properties for an aggregate sales price of $7.7 million. Subsequent to quarter end, we have sold two additional vacant net lease properties for an aggregate sales price of $400,000. Overall, we are extremely encouraged by the recovery in lodging demand we saw this quarter across our portfolio. We are optimistic that our operating performance will continue to improve through the second half of the year, with positive trends in business travel benefiting our hotel portfolio, steady performance from our net lease portfolio, and added flexibility in managing our balance sheet now that we are back in compliance with our debt covenants. I'll now turn the call over to Brian to discuss our financial results in more detail.