Service Properties Trust

2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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 Todd Hargraves, President and Chief Investment Officer, and Brian Donley, 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 FCC. 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, February 29, 2024. 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 svcreit.com or the FEC'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. And with that, I'll turn the call over to Todd.

Thank you, Stephen, and good morning. SVC's fourth quarter results reflect themes we are witnessing across the lodging industry as demand is moderated and high operating costs are impacting profits. While we expect market softness to continue during the first half of 2024, we are optimistic that the back half of the year should improve due to macroeconomic factors and improve business and inbound international travel. We are using this time to invest capital into our hotels, which we expect will lead to improved performance and an attractive return on investment. Now onto our results. During the quarter, we experienced a moderate top-line decline in our hotel portfolio, as year-over-year comparable ADR growth was offset by reduced occupancy, leading to a REVPAR decline of 2.2% and reduced hotel EBITDA, largely due to disruption from 23 active renovations during the quarter. Excluding the hotels experiencing renovation impacts, REF PAR was flat, decreasing by 30 basis points from the previous year quarter, while total revenues increased $7.1 million, led by F&B sales. We expect the pace of renovations to remain elevated during 2024. Our portfolio of full-service hotels gained 40 basis points of REF PAR over the previous year quarter. led by gains in our group and contract segments, which were up 6.2% and 10.2% year-over-year, respectively. Strong group business was driven by corporate demand at our hotels in Cambridge, Las Vegas, and San Francisco, and contract revenues fueled sizable ADR increases at our Sonesta-branded hotels in Redondo Beach, San Juan, and Kauai. The notable $7.1 million of increased revenues mentioned earlier was mostly the result from banquet and catering, as well as expanded hours at our F&B outlets and our three downtown Chicago Royal Sinesta properties. Our portfolio of select service hotels experienced the most disruption during the quarter, leading to a ref bar decline of 5.8% year-over-year, as 18 of our 61 hotels were under renovation. Our Sinesta select portfolio grew ref bar by 1.3%, much of which was driven by airline contract revenues in the Atlanta, Phoenix, and Los Angeles markets. Our extended stay portfolio experienced a 2.8% decline in rev par year-over-year when excluding three hotels under renovation. This segment has seen reduced occupancy from non-repeat long-term extended stay business for medical-related and project-based accounts, while shorter-term stays with higher ADRs have increased. The results in this segment were largely market dependent with positive red par relative to 2022 at our extended stay hotels in Boston, San Francisco, and Sunnyvale, offset by declines in San Diego, Reno, Dallas, and Atlanta. Segmentation in our portfolio shifted away from transient, which represented 72.5% of total revenues in Q4 due to a continued softening in leisure demand while group X increased 1.3% year over year to 18.1% of revenues and contract mix increased 80 basis points to 7.3%. 2024 full-year group pace is up $19 million, or 22.5% over the same time last year, with strong growth across all our operators. OTA revenue as a percentage of total revenues decreased from 27.6% to 25.9% year-over-year during the quarter, and our operators continue to focus efforts on driving bookings to their websites to lessen the dependency on third-party channels that charge commissions. Nesta remains focused on building its brand through spend on advertising, marketing, and IT initiatives. Travel Pass continues to see increased consumer adoption, evidenced by the mix of room nights at Nesta's full-service hotels, increasing by 16.5% year-over-year. Heightened operating expenses are impacting margins, and while our operators lessen their reliance on contract labor by filling open positions, Below the GOP line, expenses have increased, notably real estate taxes up $2.5 million from Q4 2022 and insurance costs up $2.4 million from increased premiums as well as deductibles paid on a higher number of claims. We expect near-term disruption in our portfolio as renovations are completed during the upcoming quarters. However, we are already starting to see the benefits of these renovations at some of our recently renovated hotels, with substantial rent par increases, and we are expecting upcoming renovation hotels to also benefit from these much-needed improvements. Turning to our net lease portfolio, which represents 45% of SVC's portfolio by investment as of December 31, 2023, our 752 service-oriented retail net lease properties were 97.1% leased with a weighted average lease term of 8.8 years. Our lease maturities are well-adhered, and only 2.1% of our net lease minimum rents expire prior to the end of 2024. The aggregate coverage of our net lease portfolio's minimum rents was 2.46 times on a trailing 12-month basis as of December 31, 2023. The decline sequentially is largely driven by softer EBITDA reported by TA for Q4 2023. Notably, the increase in fuel margins that TA benefited from post-pandemic due to increased trucking activity has returned to more normalized levels consistent with levels immediately preceding the pandemic. And these properties remain some of our most stable investments as rent payments are guaranteed by investment grade rated subsidiary of BP. Rent coverage for other retail net lease tenants was stable at 3.7 times. Transaction activity during the quarter consisted of no acquisitions and nine net lease dispositions for an aggregate sales price of $8.8 million. As we have discussed previously, we continually evaluate opportunities to optimize our portfolio, specifically trimming our lodging portfolio of lower-performing hotels that have been a headwind to overall EBITDA. After careful analysis, we have begun to market 22 Senesta hotels totaling 2,832 keys for disposition, including nine Senesta ES Suites, five Simply Suites, seven Senesta Selects, and one full-service Senesta Hotel. These hotels have a net book value of $162 million and an aggregate reported negative EBITDA of $4.7 million during 2023. In addition, each of these hotels were slated for renovation in future years, which should reduce our overall capex spend. We expect that aggregate REVPAR and hotel EBITDA margins for the remaining hotel portfolio will improve with the removal of this subset of hotels. We also have one other hotel under contract to sell for $3.3 million that is part of our Radisson agreement. To wrap up my comments before turning it over to Brian, we are confident that the hotel portfolio will see improved financial and operational performance as renovation capital is invested and after the expected dispositions of the 22 hotels that I discussed. In addition, our net lease portfolio provides consistent, dependable cash flows with 68% of annual minimum rents coming from an investment-grade rated tenant and VP. With over $750 million of total liquidity and a large pool of highly valuable unencumbered assets, our balance sheet is well-positioned with no debt maturities until 2025. I will now turn the call over to Brian to discuss our financial results in more detail.