Service Properties Trust

Good morning and welcome to the Service Properties Trust first quarter 2023 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 a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Stephen Colbert, Director of Investor Relations. Please go ahead.

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, May 9th, 2023. 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 filings with the SEC, which can be accessed from our website at svcreep.com, or the FCC's website. 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. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations, or normalized FFO, and adjusted EBITDA RE. Reconciliations of the non-GAAP financial measures to net income, as well as components to calculate AFFO, are available in our enhanced earnings release presentation, which can be found on our website. We believe this combined presentation will be helpful for analysts and investors to efficiently digest information about our company and financial results. On today's call, we will be discussing the previously announced terms of our agreement with BP that will be effective upon the completion of their acquisition of Travel Centers of America. EPA's special shareholder meeting to vote on the transaction is scheduled for tomorrow, May 10th, and we will not be taking questions on that merger. With that, I'll turn the call over to Tom.

Thank you, Steven, and good morning. Last night, SVC reported first quarter results, which reflect improvement in our hotel portfolio compared to the previous year quarter, a period that was significantly impacted by the Omicron variant and lagging recovery in our northern U.S. urban hotels. Led by the strong performance in Fort Lauderdale, Hilton Head, New Orleans, and Phoenix, comparable hotel rev par increased by 22% versus the prior year period, with ADR up 13.9% and occupancy increasing by 3.8 percentage points. This strong performance translated to a 251% increase in comparable hotel EBITDA over the same period last year. Our operators were successful in continuing to close the performance gap to the market as SVC's portfolio REFAR growth exceeded the industry by 5.3 percentage points, an indication that the initiatives of our primary operator, Synesta, are leading to greater success and increased brand awareness. Our full-service portfolio grew by 30.6% through increased group demand in business transit and travel, specifically Miami, Boston, and Toronto, and events such as the J.P. Morgan Healthcare Conference in San Francisco and the NCAA Tournament in Salt Lake City, Utah. Our hotels located in urban markets saw the greatest year-over-year REF PAR increase at 38.9%, while the growth at our resort hotels was more moderate at 20%. Our select service portfolio continued to show top-line improvement as well, with REF PAR increasing 27.2% year-over-year, led by occupancy gains that were 3.2 times greater than industry. Revenues were driven by increased transient business, up 21.7%, from both business travel and OTA, and group, up 58.1%, largely driven by Super Bowl demand in February at our Phoenix properties. In our Extended State Portfolio, REVPAR increased 9% over the previous year quarter, led by our Sonesta Simply Suites Portfolio, which outpaced industry mid-scale chain growth by 4.8%. Simply Sweets, a relatively new brand launched during the pandemic, reported record ADR during the quarter, and this quickly established itself as a preferred option for the mid-scale extended stay guest. While inflationary factors continue to negatively impact margins, we are seeing signs of moderation, specifically on the labor front. Q1 contract labor expense per occupied room decreased by 6.6% from Q4 2022, and Zanesta was able to reduce its contract labor employee headcount by 19%. However, as we enter the higher demand periods of the year in Q2 and Q3, we expect to see an uptick in contract labor, although year-over-year comparison should improve. Our largest operator, Senesta, remains our primary focus, and portfolio initiatives have led to quantifiable improvements, including the Stay More, Save More winter promotion, and Senesta's internal lead referral program is seeing substantial improvement in both leads and conversion rate. Together, these two programs generated $69.3 million of revenues during the quarter. Further, our hotels have benefited from more direct bookings on Senesta.com and less reliance on OTA channels, leading to a 3 percentage point year-over-year decline in OTA revenues as a percentage of total room revenue. Turning to our net lease portfolio, which represents 46% of SVC's portfolio by gross assets, as of March 31, 2023, we own 765 service-oriented retail net lease properties, including our travel centers, with 13.3 million square feet. Our net lease assets were 97% leased by 179 tenants, with a weighted average lease term of 9.4 years and operating under 139 brands in 21 distinct industries as of quarter end. Our aggregate net lease rents declined slightly in the quarter as a result of three AMC theaters vacating, and one Regal Cinema site surrendered as part of their previously announced bankruptcy. For AMC, we currently have eight open locations, and for Regal, we are still working through lease negotiations on the remaining five theaters. The aggregate coverage of our net lease portfolio's minimum rents was 2.98 times on a trailing 12-month basis as of March 31, 2023, an increase versus the same period last year. For TA, our largest tenant site-level coverage on a trailing 12-month basis was 2.67 times, up from 2.29 times in the prior year period. We have 116,000 square feet of leases expiring in the remainder of 2023 where the tenant will not renew. These expirations represent $801,000 of annual revenue, or just 0.2% of our net lease rents, and we are evaluating various options for these known vacates, which include releasing, repurposing, and potential disposition. Finally, the shareholder vote on the pending acquisition of TA by BP is scheduled for tomorrow, May 10th. As we previously reported, upon completion, SVC will receive $379.3 million in upfront funds, increased rents compared to the current TA leases, and enhanced investment-grade credit quality for our core tenant. Before I turn it over to Brian, I want to acknowledge the recent publication of the RMR Group's Annual Sustainability Report, which provides a comprehensive overview of our managers' commitment to long-term ESG goals. We are deeply committed to enhancing SVC's corporate sustainability practices and continue to advance initiatives that will position the company to thrive over the long term. I will now turn the call over to Brian to discuss our financial results in more detail.