Service Properties Trust

Good morning and welcome to the Service Properties Trust 3rd Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal Conference Specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then 1 on your telephone keypad. To withdraw your question, please press Star then 2. Please note this event is being recorded. Online Christiana Comfort or Stephen Colbert, Director of Investor Relations. Please go ahead.

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 prior written consent of SVC. I'd 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 SVC's present beliefs and expectations as of today, November 4th, 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 as required by law. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations, 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 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.svcreit.com. And with that, I'd like to turn the call over to Todd.

Thank you, Steven, and good morning. Our third quarter results are highlighted by the ongoing improvement in our hotel portfolio. As comparable, REVPAR was 86% of 2019 for the third quarter. compared with 83% of 2019 in Q2. The continued recovery of SVC's urban full service and suburban select service hotels contributed to the improvement as travel patterns normalized and workplace expectations for employees slowly shift toward prior standards. Combined with the solid performance of our leisure and extended stay hotels, room rates have surpassed 2019 figures for the third quarter, a trend that has continued into the fourth quarter, with preliminary October ADR of $143, 2% above October 2019 levels. Notably, our full-service portfolio rep part for the quarter increased to 91% of 2019 levels, highlighted by the strong year-over-year performance of our hotels in Kauai, Austin, Toronto, San Francisco, and Chicago, which benefited from elevated leisure travel, improved group demand, and the continued ramp of business travel. REVPAR growth continues to be driven through ADR increases at many of our leisure and urban hotels, resulting in our hotels in Fort Lauderdale, Hilton Head, Chicago, Miami Airport, and Kauai, all reporting ADR during the quarter in excess of 125% of 2019 third quarter levels. While the recovery of our select service portfolio is trailing our other service levels, it continues to be a primary focus of ours, and the gap relative to industry is tightening. Compared to Q3 2021, REF PAR for our select service hotels improved 28%, outpacing industry REF PAR growth by 2.4 times. Specifically, REF PAR at our Senesta Select portfolio increased by 40% year-over-year for the quarter. In terms of segmentation, group mix was 16% in the third quarter, up from 12% during the previous year quarter, and now above 2019 levels of 15%. This increase was largely driven by elevated leisure group demand, as well as the return of corporate group in markets including Boston, Chicago, and Philadelphia. Weekend occupancy in the portfolio is approximately five percentage points higher than weekday occupancy, a gap we expect to shrink in the next year as corporate group and transient travel returns. Group pace across our operators is positive, led by leisure group demand, but also due to notable corporate group and citywide increased demand. SVCS hotels did not experience a material impact from Hurricane Fiona or Hurricane Irma during the third quarter, as any losses were offset by incremental revenue we received from guests displaced to our Sonesta Fort Lauderdale hotel, which was not directly impacted by the storms. Inflationary pressures are impacting hotel-level operating expenses related to labor, utilities, and insurance, leading to compressed GOP and EBITDA margins. We are working with our operators to reduce the reliance on more costly contract labor and are encouraged by the improvement in permanent staffing levels and hope to see a deceleration of labor-related costs increases in upcoming quarters. Also, during the third quarter, we entered into an agreement to sell our remaining 16 Marriott-branded hotels for $137 million, excluding closing costs, which we expect will close in Q1 2023. And we continue to wind down the disposition process of the previously announced Sonesta-branded hotels, with only five of the original 68 still to be closed. To reiterate what we have said on past calls, the hotels which we have sold or plan to sell are relative underperformers, and we are retaining the hotels with superior rev par, margin, and growth prospects. As of September 30, 2022, we own 769 service-oriented retail net lease properties, including our travel centers, with 13.4 million square feet. Representing 45% of our overall portfolio based on investment, our net lease assets were 98% leased by 178 tenants with a weighted average lease term of 9.8 years and operating under 136 brands in 21 distinct industries as of quarter end. The aggregate coverage of our net lease portfolio's minimum rents was 2.88 times on a trailing 12-month basis as of September 30, 2022, an increase versus last quarter, and an improvement from 2.37 times in the same period last year. I would like to highlight that for TA, our largest tenant, site-level rent coverage on a trailing 12-month basis was 2.54 times, up from 2.46 times last quarter. We believe the diversity of our net lease tenants and the continued strong performance of TA is an ongoing strength of our portfolio. In the fourth quarter, we have 205,000 square feet of leases expiring, representing less than 1% of our net lease rents, excluding TA. This includes six tenants across multiple properties known to be vacating and represents less than $1 million of annual revenue. We are evaluating leasing, redevelopment, and sale options for these properties. Also, Cineworld, the parent of Regal Cinemas, our second largest movie theater tenant, filed for Chapter 11 bankruptcy during the quarter. Regal has rejected just one of the six leases it has with SVC, and we are in discussions with the tenant regarding the remaining five sites. Before handing it to Brian, I would like to emphasize that while we remain focused on working with our operators to return our hotels to pre-pandemic levels, we are encouraged by the improvement that we saw this quarter across our portfolio. We are optimistic that our operating performance will continue to improve into 2023 with positive trends in business travel benefiting our hotel portfolio, along with the reliability of cash flows from our sizable net lease portfolio. In addition, the improvement across the portfolio and our positive view of our businesses going forward has allowed us to return to paying a meaningful common dividend to shareholders, an important milestone for the company. I will now turn the call over to Brian to discuss our financial results in more detail.