Service Properties Trust

Good morning, and welcome to the Service Properties Trust's second quarter 2023 earnings conference call. All participants will be in a listen-only mode, and should you need any 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. Please also note that this event is being recorded today. I would now like to turn the call over to Stephen Colbert, Director of Investor Relations. Please go ahead, sir.

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 SEC. 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 SVC's present beliefs and expectations as of today, August 8, 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 SEC'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 these non-GAAP financial measures to net income, as well as components to calculate AFFO, are available in our supplemental operating and financial data package, which can be found on our website. With that, I'll turn the call over to Todd.

Thank you, Stephen, and good morning. SVC's second quarter results reflect the continued improvement in our hotel portfolio. as year-over-year comparable RevPAR gains outpaced the industry for the sixth consecutive quarter, driven by increases in both ADR and occupancy. Portfolio RevPAR for our 219 comparable hotels increased 2.8%, with ADR increasing 2.4% and occupancy increasing by 30 basis points. While leisure demand has softened in markets like Miami, Scottsdale, Fort Lauderdale, and Hilton Head, SVC's portfolio benefited due to our higher relative exposure to urban markets and reliance on business travel. We reported year-over-year REVPAR gains in our select service and full-service portfolios of 3.8% and 3.6% respectively, resulting from the recovery of urban markets, specifically on the East Coast and Midwest, and improving trends in business transient group and contract business. Revenues at our 48 comparable full-service hotels increased by $19.7 million from the previous year quarter, with Sunessa posting a record quarter for ADR for its 39 full-service hotels, driven by sizable year-over-year increases in group, corporate negotiated, and contract of 25%, 16%, and 11%, respectively. The largest increases in business travel were in Los Angeles, Boston, and Washington, D.C., And the increase in contract-related business was largely driven by our hotels in Redondo Beach and Fort Lauderdale. The negative impact from reduced leisure demand was mostly experienced at our hotels in Kauai, Hilton Head, New Orleans, and Florida. Our portfolio of 61 select service hotels reported revenues that were $3.1 million greater than the previous year quarter. The revenue gains were driven by group business, which was up 35% or $2.3 million. Excluding four properties under renovation, REF ARDA portfolio of 40 Senesta Select hotels increased 7% year-over-year, and REF ARDA portfolio of 17 Hyatt Place hotels increased 3.6%. Lastly, our portfolio of 110 Extend Stay hotels increased revenues by $1.6 million over the previous year quarter, as both ADR and group revenues came in with the highest figures since the most recent brand conversions in 2021. Weekday occupancy, specifically at our Senesta Select Hotels, has lagged the balance of our portfolio, but we are now seeing the gap between weekday and weekend occupancy converge as leisure demand softens and business travel increases. In June, Senesta's portfolio reached a new post-pandemic weekday occupancy high of 68.7%. Senesta is also seeing improvement in its loyalty program as travel pass revenue as a percent of total revenue increased from 19.8% in Q2 2022 to 21.9% in 2023. On the expense side, we continue to see inflation headwinds and costs like insurance and labor continue to pressure margins. For example, our annual insurance program was recently renewed and our largest operator, Senesta, expects to see premium increases of 60% or $6.8 million for the second half of 2023. On the labor front, contract labor expense per occupied room declined for a third consecutive quarter, However, we expect the use of contract labor will remain elevated given challenges in hiring full-time positions such as housekeepers, F&B attendants, and engineers. Turning to our net lease portfolio, which represents 45.4% of SQC's portfolio by investment, as of June 30, 2023, our 763 service-oriented retail net lease properties were 96.1% occupied with a weighted average lease term of 9.3 years. Importantly, our largest tenant in the portfolio, TA, which represents 68% of our minimum rents, is now backed by an investment-grade rated subsidiary of BP. The aggregate coverage of our net lease portfolio's minimum rents was 2.94 times on a trailing 12-month basis as of June 30, 2023, an increase versus the same period last year. Our near-term lease expirations are manageable as we have 856,000 square feet of leases expiring in the remainder of 2023 and 2024, representing only 3% of aggregate annualized minimum rent, most of which we expect will renew. Regarding our movie theater exposure, annualized minimum rents from our AMC movie theater portfolio declined by $2.1 million from the previous year quarter, related to AMC vacating three properties and converting to a percentage rent structure on two others, and by $1.8 million due to the recent lease restructures in connection with Regal's bankruptcy. In June, we completed the acquisition of the Nautilus Hotel, an upper-upscale hotel in a near-replaceable location in the heart of Miami's South Beach, which upon renovation will be rebranded under Senesta's lifestyle brand, The James. This hotel expands our resort destination offerings, provides an important entry into the South Beach market, and is representative of the type of hotel SVC may target as we take a disciplined approach to adding to the portfolio. Finally, before I turn it over to Brian, I want to emphasize the actions the company has taken over the last several quarters through refinancings, asset sales, and improved hotel performance to position SVC to address our upcoming debt maturities in 2024 and 2025. After the recent completion of our $650 million revolving credit facility, And closing on the TA transaction, we now have over $1 billion of liquidity and have a large pool of valuable unencumbered assets, including all of our TA travel centers, which provide us access to a range of financing alternatives where we can be selective in securing the best relative execution from both a leverage and cost standpoint in these ever-fluctuating capital markets. I will now turn the call over to Brian to discuss our financial results in more detail.