Service Properties Trust

Good morning and welcome to the Service Properties Trust fourth quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by 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 touchtone phone. And to withdraw your question, please press star then two. I would now like to turn the conference over to Mr. Stephen Colbert, Director of Investor Relations. Please go ahead, sir.

Good morning. Joining me on today's call are Tard 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 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, March 1st, 2023. 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 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-K on file with the SEC and in our supplemental operating and financial data found on our website at www.svcrept.com. And with that, I'll turn the call over to Todd.

Thank you, Steven, and good morning. Our fourth quarter results are highlighted by the ongoing improvement in our hotel portfolio. As comparable hotel rev par increased by 21.4% versus the prior year period, with ADR up 14.5% and occupancy increasing by 3.3 percentage points, leading to a 98.3% increase in comparable hotel EBITDA over the same period last year. The continued recovery of SVC's urban full service and suburban select service hotels contributed to the improvement as travel maintained its pace of recovery, consistent with typical seasonality, and business-related travel reflected more in-person engagements. Combined with the steady performance of our leisure and extended stay hotels, room rates again surpassed 2019 figures in the fourth quarter. Notably, our full-service portfolio REF PAR for the quarter increased by 31.1% from 2021 levels, largely driven through ADR increases at many of our leisure and urban hotels. Our hotels in Fort Lauderdale, Hilton Head, Chicago, Miami, and Kauai led the strong performance of our full-service segment which achieved aggregate ADR of $174.48 during the quarter, 14.5% above 2021 fourth quarter levels. While the overall performance of our select service portfolio remains behind our other service levels, we are encouraged that Q4 REF PAR of our scaled down post-disposition portfolio of 45 Senesta Select branded hotels improved 25% versus the same quarter last year, outpacing any other SVC focused service brand and 8.7 percentage points above total nationwide industry growth. In terms of segmentation, group mix was 16.6% in the fourth quarter, up from 12% during the previous year quarter, and above 2019 levels of 14.5%. This increase was broadly attributable to increased demand for corporate, association, and citywide group business, particularly in Philadelphia, New Orleans, and Houston. Revenues as a percentage of total room revenue for the more costly OTA channels decreased from 30.8% in Q4 2021 to 26.4% in Q4 2022. Inflationary pressures seen across the economy are continuing to impact hotel-level operating expenses related to utilities, insurance, and specifically labor. Our operators remain focused on reducing the reliance on more expensive, less efficient contract labor and increasing permanent staffing levels, measures which we will expect will result in helping to offset some of these labor cost pressures during 2023. Our largest hotel operator, Senesta, continues to establish itself as a leader in the North American lodging sector, and we expect SVC to benefit as it increases its brand awareness with national corporations as well as business and leisure travelers. Senesta recently launched a multimillion-dollar advertising campaign, And this loyalty program is gaining momentum with travel press revenues as a percent of total revenue increasing from 13.6% in 2021 to 21.2% in 2022. Travel pass ADR increased 22.1% year over year and room nights nearly doubled over the same timeframe. As referenced earlier, looking at the bottom line, SVC's Q4 hotel EBITDA increased by 98.3% year over year. largely a result of the performance of some of SVC's premier destination hotels and what we view as some of our flagship lodging assets, our Royal Sinestas in Kauai, Boston, Chicago downtown, and New Orleans, all of which contributed heavily to SVC's year-over-year EBITDA improvement. Turning to our net lease portfolio, which represents 45% of SVC's portfolio by gross assets, as of December 31st, 2022, We own 765 service-oriented retail net lease properties, including our travel centers, with 13.4 million square feet. Our net lease assets were 98% leased by 180 tenants with a weighted average lease term of 9.6 years and operating under 138 brands in 21 distinct industries as of quarter end. The aggregate coverage of our net lease portfolio's minimum rents was 3.0 times on a trailing 12-month basis as of December 31, 2022, an increase versus the same period last year, and an improvement from 2.88 times in the third quarter. For TA, our largest tenant, site-level coverage on a trailing 12-month basis was 2.74 times, up from 2.54 times last quarter, and TA reported another extremely strong quarter last night. We have 271,000 square feet of leases expiring in 2023, representing only 0.6% of our net lease rents. This includes five tenants across multiple properties known to be vacating, representing $732,000 of annual revenue. We are evaluating various options for the known vacates, which includes re-leasing, redevelopment, and marketing for sale. As announced last month, the acquisition of TA by VP upon completion will be extremely positive for SVC, as the revised lease agreements we negotiated will not only provide $379.3 million in upfront funds, but will also significantly enhance the credit quality of our core Travel Center tenant, providing long-term investment-grade cash flows with fixed increases that we expect will result in a meaningful increase to FFO from prior levels. Before turning it over to Brian, as we have now wrapped up the fourth quarter and moved on to 2023, I would like to take a minute to summarize some of the accomplishments SVC achieved during 2022 and the early part of 2023. We substantially completed the disposition of approximately 20% of our hotel portfolio in an extremely challenging market to sell properties at our targeted pricing, helping to reduce leverage and improving the overall quality of the portfolio in the process. We improved the overall performance of our hotel portfolio and returned to the necessary levels to regain compliance with our debt covenants earlier than originally anticipated. Overall, we repaid $1.5 billion of debt in 2022. We reinstated a meaningful dividend to shareholders. Our largest hotel operator, Sonesta, continued to establish itself as a leading hotel brand, expanding into New York through its acquisition of four hotels with over 900 keys. We successfully completed a secured financing, monetizing some of our net lease portfolio, and retiring our June 2023 debt maturities. Finally, we recently came to an agreement regarding the amendment of our travel center leases in connection with BP's announced acquisition of TA, which once completed, will provide an improved tenant credit profile and additional liquidity. I will now turn the call over to Brian to discuss our financial results in more detail. Thanks, Todd, and good morning.