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Operator
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.
Stephen Colbert
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.
Tard Hargraves
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.
Steven
Starting with our consolidated financial results for the fourth quarter of 2022, normalized FFO was $73.3 million, or 44 cents per share, a 162% increase over the prior year quarter. Adjusted EBIT to RE was $150.5 million for this quarter, a 26.5% increase over the prior year quarter. The major drivers impacting normalized FFO over the prior year quarter included the improving performance of our hotel portfolio, which generated an additional $25.7 million of hotel EBITDA, or a 90% increase over the prior year quarter. A repayment of $500 million of senior notes in the second quarter and repaying the remaining balance on a revolving credit facility, which was fully drawn as of year end 2021, resulted in a $14.6 million decline in interest expense. G&A expense declined $3.9 million over the prior year as a result of a $2.4 million decline in business management fees and a $1.5 million decrease in legal and other corporate expenses. Turning to the performance of our hotel portfolio, for our 236 comparable hotels this quarter, rent power increased 21.4%, gross operating profit margin percentage increased by 4.1 percentage points to 28.4%, Gross operating profit increased by $31.6 million from the prior year period. Below the GOP line, costs at our comparable hotels increased $4.4 million from the prior year as a result of increased management fees driven by higher revenues at our hotels and an increase in insurance costs. Our consolidated portfolio of 238 hotels generated hotel leave up to $54 million, resulting in a net margin of 15.4%. By service level, the increases were driven primarily by improvement in our 49 full-service hotels, which generated $26 million of hotel leave during the quarter, compared to just $2.7 million in the prior year quarter. Our 114 extended-stay hotels remained steady, generating $21 million of hotel leave during the quarter. Our 75 select-service hotels improved, generating hotel leave of $7 million in the fourth quarter, an increase of $3.7 million compared to the prior year period. The fourth quarter results of our hotels were generally in line with our expectations as we entered seasonally weaker months for the portfolio. January 2023 rev par was $65.53, and as we look to the rest of the first quarter, we're currently projecting full quarter Q1 rev par of $70 to $80, and Hotel Ibiza projected to be in the $28 to $35 million range. Turning to the balance sheet, early this month, we successfully executed on a new five-year $610.2 million secured financing with a 5.6% coupon and a provided notice that will redeem our $500 million of 4.5% senior notes that were originally scheduled to mature in June. Pro forma for these transactions, we have $5.8 billion of fixed rate debt with a weighted average interest rate of 5.1%. Our next debt maturity is $350 million of senior notes maturing in March 2024. We currently have no amounts outstanding on our revolving credit facility, which matures in July of 2023. We have begun discussions with our lenders on a new credit agreement and currently expect the process to recast the line to be completed in the coming months. Turning to investing activity, during the fourth quarter, we sold four hotels for a total price of $25.8 million and two net lease properties for $2.3 million. We have sold eight hotels since year end for proceeds of $53.3 million, and we are currently undergoing to sell 10 additional hotels for a combined sales price of $103.1 million, which we expect to close by the end of the first quarter. We made $36.8 million of capital improvements at our properties during the fourth quarter, and we currently expect full year 2023 capital expenditures of $200 to $250 million. Regarding our recent TA announcement, our leases with TA currently require a fixed minimum rents of $243 million over the life of the leases and require percentage rent on non-field revenues, which totaled $10.6 million in 2022. Rents under the amended 10-year term will be set at $254 million with 2% fixed rent increases annually. BP will prepay $188 million of rent and will receive credits of $25 million per year against rents due. In addition to the rent growth we have secured as part of this deal, the transaction will provide the SVC $379.3 million of additional liquidity upon closing, including $101.9 million for the TA common shares SVC owns, $89.4 million for the sale of the TA brands to BPAY, and the $188 million of prepaid rents. We expect the transaction will increase the value of our largest portfolio, which represents 64.8% of our net lease segment, and 29.3% of our overall portfolio. Our leases with TA will be backed by BP, which will provide a significant credit enhancement to our tenant base and give us additional financial flexibility going forward. That concludes our prepared remarks. We're ready to open the line up for questions. Thank you.
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Brian Maher with vRiley Securities. Please go ahead.
Brian Maher
Thanks. Good morning, Todd and Brian. Just a couple for me. On the asset securitization that you just completed, Can you share with us which types of assets you pledged on that? Was it hotels? Was it TAs? Was it net lease? How should we think about that? And going forward, if you use that same structure for your 2024s and your 2025s, do you tend to get a better rate on those depending upon which assets you pledge?
Steven
Thanks, Brian, and good morning. I'll take that one. So as far as the assets pledged, it was a mix and cross section of the entire net lease segment, excluding travel centers. And there were no hotels in that deal. It was all single tenant net lease properties with a significant concentration of quick service restaurants, fitness centers, auto change, oil repair shops, and that kind of thing. So really a good cross section of what we have in the portfolio. As far as going forward, our preference would still be to tap on secure debt, but the ability to use securitization in the portfolio has been demonstrated and it's something we'll continue to compare and contrast based on market conditions and what we see in rates and spreads in the debt markets.
Brian Maher
Okay. And in the past, I think maybe a year ago when you came off the first quarter, hotel margins, you provided a bit of an outlook for your expectations for the balance of 2022. Can you share with us what you're thinking about for hotel margins for 2023?
Steven
Yeah, I mean, I think in the prepared remarks, I've given the outlook for Q1, not for the full year, but we do expect improvement over 2022. And we'll see how the year plays out. But we still think we have room to make up based on the performance starting last year and the ramp up that really didn't start until Q2 of last year. You know, so our focus is definitely on the bottom line and improving margins. You know, that's one of our primary goals this year is to continue to close the gap from where we were in 19 and get back to where we should be.
Brian Maher
Thanks. And just two more for me. On the hotel dispositions, is that going to continue or are you starting to wind that down? And then lastly, what are your usage thoughts for the $380 million you'll be getting in a few months?
Tard Hargraves
Sure. Good morning, Brian. I'll take the first part of the question. So we are currently wrapping up the current dispositions. We are of the original 68 Sonesta branded hotels that we started to market for sale over a year ago now. We've sold 67 of the 68 and we expect the 68 to close this quarter. later this month and the 68 Marriott branded hotels we also expect those to be wrapped up this month those were selling to the same same buyer group but we've agreed to close those in three phases so we closed the first seven last week and the next two phases we expect will close this month there's no other hotels in the portfolio that we've identified for sale at this time but That's something we can consider throughout 2023 as we look at our hotel portfolio and the performance overall, but nothing slated at the current time. And some of that, too, is just driven. It's a tough time to be selling any types of assets right now, so it's probably not the right time to sell, but it's certainly an option for us down the road. And then, Brian, do you want to?
Steven
Yeah, and as far as the proceeds and cash we'll receive from the BP deal, you know, it's something, you know, we'll continue to discuss with the board in the coming months. Obviously, we have significant debt maturities coming next year, but whether or not we deploy early or look to invest in opportunistic-type investments that could be accretive remains to be seen, but, you know, we'll let that play out over the course of the next few quarters. Okay, thank you. Thanks, Brad.
Operator
Again, if you have a question, please press star, then 1. Our next question will come from Tyler Batori with Oppenheimer. Please go ahead.
Tyler Batori
Good morning. Thank you. First question, a follow-up on the guidance. You know, if I'm doing my math right, it looks like 10% to 12% roughly that margin in terms of Q1. So did I do that math correctly? And just help us think about, you know, what margin in Q1 was like pre-pandemic, kind of what you're expecting for your operating expenses in Q1 in terms of growth year over year.
Steven
Hey, Tyler, good morning. Yeah, so the math you've talked through is roughly correct. And, you know, we've We sort of expected January and early February to be weaker, given the seasonality in our portfolio, and it's definitely more so on the occupancy side than the rate side. We expect the portfolio to ramp up fairly quickly as we go into March and into early spring. So we'll see that sort of improve in the coming months. As far as expense pressures, Yeah, I think we're seeing the same thing everybody's seeing with continued pressure on costs, whether it be labor, utilities, and other operating costs. But yeah, we're still, from a margin standpoint, we're still lagging where we were at 19, but we expect that gap to close pretty quickly as we move through the middle part of the year.
Tyler Batori
Okay, that's great. In terms of the Senesta, branded hotels. And you gave some positive commentary, I thought, in the prepared remarks. But a little more, perhaps, in terms of brand awareness, REVPAR index, just kind of how Senessa is doing in the marketplace vis-a-vis some of the other brands out there.
Tard Hargraves
Sure. Good morning, Tyler. Thanks for the question. Yeah, I think Sinesta's very focused on increasing the brand awareness, which is obviously critical. I mean, you look back three, four years ago, Sinesta was only 60 hotels, and through the conversion of some of our owned hotels, the acquisition by Sinesta of the Red Lion franchise platform, the launching of the franchise platform for Sinesta-branded hotels, their acquisition of four hotels in New York, they're one of the largest hotel brands in North America, so it's certainly very critical for them to increase their brand awareness. In January, they did launch a multi-million dollar digital marketing campaign, so we expect to start to see the results from that shortly. And there's some other areas that we're tracking as well. There's a lot more business coming from the Synesta.com website. And that takes away the bookings from some of the more costly OTA channels. We're seeing an increase in their travel pass usage and the percentage of revenues that they get from their loyalty program. So we are seeing the results. I think there's still a lot of room to go, which is a positive. But we are seeing all the right things happening. You know, with RFPs, they're increasing their RFPs requested and RFP business. So we are starting to see the results of their push on the brand awareness side. The second part of the question, you know, Sonesta has shown the ability to compete on a number of the brands. The Royal Sonestas. The Simply Suites, which is a relatively new brand, it's the mid-scale, extended stay brand, they're between 90% and 95% of where they were in 2019 from a Revpar perspective. We're starting to see a lot of the pickup on the more urban, full-service hotels as well. It's a similar commentary to last quarter and the previous quarter. It's the Select Service, the Sonesta Select brand, which is a new brand for them where they still have the most room to grow. And I think the reason is kind of twofold. It's, you know, business travel has not come back. But at the same time, I think Synesta needs to improve upon their ability to take market share in that segment. So, and again, they are, you know, I think I said in the prepared remarks, they've increased REF by 25% year over year. So we are seeing the improvement. They still have a ways to go, but that's the one brand that continues to be the focus where we don't think we're back to where we need to be yet, but we're optimistic there.
Tyler Batori
Okay, great. Last one for me, the CapEx side, $200 to $250 is right in line with what we were looking for. Just remind us what's maintenance assumed in that number? And then kind of what exactly is some of the spending going to be allocated to this year?
Steven
Sure. Yeah. So the maintenance number for our portfolio is roughly $65 to $75 million for the year. A big part of the spend in 23 will be to renovate our Hyatt portfolio. It's something we had originally slated for 2022 and based on you know, cost inflations and scheduling and scoping changes to try to control cost inflation, we pushed it off to 23. So we're going to do that string of hotels, one Radisson Hotel and then about a dozen Sinestas across a couple of different of the brand segments for next year.
Tyler Batori
Okay, great. That's all from me. Thank you. Thanks, Tyler.
Operator
The next question will come from Dory Kessin with Wells Fargo. Please go ahead.
Doris
Thanks. Good morning. Is there anything in the BP amendment that deals with incremental CapEx for that portfolio?
Steven
Hey, Dori. Good morning. So, in the historical leases, TA had the option to request SVC reimburse or buy the CapEx that they made at our sites in return for an 8.5% rent increase. The mechanics of that goes away under the amendment agreements. BP has made it clear they're going to invest billions into these sites, and they weren't looking to us to pay for that or increase their lease liability. So that feature is no longer part of the leases.
Doris
Okay. Sorry. Just to be clear. So they're going to be paying for this, not you?
Steven
all CapEx at these travel centers will be funded by BP on their own balance sheet.
Doris
Okay, that's great. And then I think you were addressing this a little bit in the prior question of the 65 to 70 million maintenance CapEx. And for the hotels, you'll be spending 200 to 250 million annually over the next several years, the majority of which I think is Senesta. I guess within the Senesta properties, how much do you view as I guess, defensive versus offensive, you know, over this three-year period. And I guess what kind of returns would you expect for the more offensive? I just want to make sure that we have that potential upside in our estimates.
Steven
Yeah, I'd say, you know, if you back up to $75 million, you're looking at, you know, $125 to $150 million-ish of offensive capital. And we've said in prior commentary that we expect around an 8% return on those dollars.
Doris
Okay. And then I know you're not acquiring right now, but I'm sure you're keeping a pulse on what's on the market for hotels and net lease. Can you just talk about cap rates that you're seeing and maybe just the quality and quantity of what is on the market right now?
Tard Hargraves
Sure. Good morning, Doris. Yeah, we are actively evaluating a number of opportunities. We don't have anything under agreement, but we are closely looking at Selective assets, we've said in the past that now that we have exposure through SNESTA in New York City, there's a couple of other markets where we think we want to increase our exposure on the hotel side. So Miami and Los Angeles, there's a number of opportunities that we're looking at. And then on the net lease side, again, we continue to evaluate a number of opportunities, more kind of portfolio level deals, I think. You know, from a cap rate perspective, I think especially over the last, you know, rates have moved out of the past several weeks. And I think cap rates overall have moved out. We're not seeing, we've certainly seen a slowdown in overall transaction activity. Doesn't mean deals aren't on the market, but we've certainly seen a slowdown in deals getting done. On the hotel side, I think there's certain markets and certain types of properties I think there's a lot of interest in, both from owners as well as lenders. But there's a lot of deals out there that just are not transacting because the sellers are not getting anywhere close to their ask. So, you know, cap rates have certainly moved out on the hotel side and certainly have moved out on the net lease side as well. I mean, there's some properties that tend to, you know, some of the smaller granular properties go to the 1031 exchange, all cash buyers. I don't think you've seen those move out as much, but generally I would say cap rates on the net lease side have moved out maybe 75 basis points. On the hotel side, I think CapRates have moved out as well. It's an interesting time because there are opportunities out there. If the right one presents itself, there's a chance you could see us transact.
Doris
Okay. Thank you.
Operator
Sure. This concludes our question and answer session. I would like to turn the conference back over to Mr. Todd Hargreaves for questions. President and Chief Investment Officer, for any closing remarks. Please go ahead, sir.
Tard Hargraves
Thank you, and thank you, everyone, for joining today's call. We appreciate your continued interest in SVC. Thank you.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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