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spk02: Good morning and welcome to the Service Properties Trust First Quarter 2024 Earnings Conference Call. All participants will be in 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. 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.
spk05: 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 SVC. 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, May 8, 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 meetings with the FCC, which can be accessed from our website at svcreet.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. Reconciliation of these non-GAAP financial measures to net income as well as components to calculate ASFO are available in our financial package, which can be found on our website. Finally, we are providing guidance on this call, including Hotel EBITDA. We are not providing a reconciliation of this non-GAAP measure as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. With that, I'll turn the call over to Todd.
spk06: Todd Johnson Thank you, Stephen, and good morning. Our first quarter results are indicative of typical seasonality patterns in our lodging portfolio as well as the stability of our net lease portfolio. Our full service hotels experienced top-line growth through increased group demand while our select service hotels were impacted by softening transit travel and renovation activity. Our focus remains on improving the performance and quality of our portfolio through the disposition of nine core hotels and capital projects to put our operators in the best position for long-term success. Beginning with the hotel portfolio, for the quarter, comparable rep par declined .5% -over-year. When excluding the 23 active renovations, ADR declined .7% and occupancy declined 0.2%, leading to a rep par decline of 1.1%. The renovation hotels, which include our Hyatt Place portfolio, Sonesta Hilton Head, and others, experienced approximately $3.9 million of displacement during the quarter. Pulse pressures led to a Hotel EBITDA margin decline of 290 basis points over the prior quarter. For our 218 comparable hotels, as wages, property taxes, and insurance increases more than offset our operators' improved reliance on contract labor. Full service was our top performing segment during the quarter where we gained 80 basis points of rep par over the previous year quarter, led by increases in group and contract sales. Full service group performance was led by our Royal Sonesta Hotels in San Juan, San Francisco, and Kauai, while the increase in contract revenues was led by our Sonesta Hotels in Redondo Beach and Denver. F&B revenue gains occurred across our full service hotels as well, led by our Royal Sonestas in St. Louis and Kauai. Our portfolio select service hotels continued to see the most disruption during the quarter as 18 of our 61 hotels were under renovation, including our 17 Hyatt Place hotels, which began renovations in 2023. Overall, select service rep par declined by .2% due to these disruptions, as well as decreased -over-year income from our five select service hotels located in the Phoenix area that benefited from the 2023 Super Bowl. Our extended stay portfolio experienced a .6% decline in rep par -over-year, consistent with a trend from previous quarters, our longer-term extended stay occupancy, stays of 7-plus nights, has been declining due to the loss of non-repeat project-based room nights. While Sonestas successfully pivoted to shorter-term stays of these hotels to fill occupancy, the increased room nights were not enough to offset the reduced rates. Group pace is up $15 million, or .3% over the same time last year, due increases in room nights and ADR in both the Sonesta and Radisson portfolios. The most notable gains were related to corporate group at the Royal Sonesta-Cambridge, and our Sonesta Chicago hotels, where the Democratic National Convention will be held in August. Combined revenues from our business travel for operators declined slightly -over-year due to the ongoing renovations in our HIE portfolio and the shift in the Easter holiday from April last year to March this year, while business travel increased in our Sonesta portfolio from key corporate accounts at our select service hotels. OTA revenue as a percentage of total revenues declined from .6% to .8% -over-year during the quarter, and our operators continue to concentrate efforts on driving bookings to their websites to lessen the dependency on third-party channels that charge commissions. Sonesta remains focused on building its brand through numerous initiatives and recently merged its travel pass rewards program with the legacy Red Lion loyalty program, doubling its overall size. During the quarter, .9% of our Sonesta full-service hotel revenues were from loyalty program members, up 3.5 percentage points from 2023. Other ongoing Sonesta initiatives include a focus on driving insulated revenues at the hotel, building out a sales organization, and investing in technology. Turning to our net lease portfolio, which represents 44% of STC's portfolio by investment, as of March 31st, 2024, our 749 service-oriented retail net lease properties were .3% leased with a weighted average lease term of 8.7 years. Our lease maturities are well laddered, and only .3% 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 2.37 times on a trailing 12-month basis as of March 31, 2024. The decline sequentially is largely driven by reported by TA for Q1 2024. Transaction activity during the quarter was limited to three net lease dispositions and one hotel disposition, a country in Sweden, suburban Neapolis, for an aggregate sales price of $6.2 million. We continue to market 22 Sonesta hotels with a book value of $160 million. The sale process is well underway, and we're working with potential buyers to negotiate terms. In conclusion, we're optimistic that our hotel portfolio will see meaningful operational improvements as the result of our renovation program, as hotels benefit from much-needed refreshes over the coming quarters. Additionally, the performance of our net lease portfolio remains steady and is anchored by an investment-grade rated tenant and VP. With more than $700 million of liquidity and no debt maturities in 2024, we are well positioned to implement our strategic plan. I will now turn the call over to Brian to discuss our financial results in more detail.
spk04: Thanks, Todd, and good morning. Starting with our consolidated financial results for the first quarter of 2024, normalized FFO was $21.1 million or 13 cents per share versus 23 cents per share in the prior year quarter. Adjusted EBITDA RE declined 1% -over-year to $115.5 million. Financial results this quarter as compared to the prior year quarter were impacted by higher interest expense and a decline in Hotel EBITDA. Rental income increased by $5.6 million this quarter compared to the prior year due to higher rental income recognized under our TA leases as a result of the BP transaction last May. Turning to the performance of our hotel portfolio, for our 218 comparable hotels this quarter, rent par decreased by 3.5%. Gross operating profit margin percentage declined by 200 basis points to 23.3%. And gross operating profit decreased by $6.5 million from the prior year period. Below the GOP line, costs at our comparable hotels increased $2.8 million from the prior year driven primarily by increased insurance expense. Our 220 hotels generated hotel EBITDA of $28.9 million, a decline from the prior year but in line with our guidance rates provided last quarter. By service level, Hotel EBITDA -over-year increased $676,000 for our 48 full-service hotels, declined $5.6 million for our 61 select service hotels, and $3.4 million for our 111 extended-stay hotels. Turning to our expectations for Q2, we're currently projecting full-quarter Q2 rent par of $95 to $99 in Hotel EBITDA in the end to $85 million range. Turning to the balance sheet, we currently have $5.6 billion of fixed rate debt outstanding with a weighted average interest rate of 5.9%. Our next debt maturity is $350 million of unsecured senior notes maturing in March 2025. We currently have $80 million of cash and our $650 million revolving credit facility remains undrawn for total liquidity of over $700 million. Turning to our investing activity during the first quarter, we sold one hotel and three net lease properties for an aggregate sales price of $6.2 million. We made $69 million of total capital improvements in our properties during the first quarter. We currently expect full-year capital expenditures of $300 to $325 million, up from our previous guidance range of $250 to $275 million. We currently expect maintenance-type capital to be $100 million of the total spend this year. Our capital program is focused on ensuring the best guest experiences, upgrades to brand standards, and positioning the hotels to improve their respective market share. To date, we've completed renovations at nine Sonesta hotels and we're pleased with the post-renovation returns we're seeing thus far. We expect 22 hotels across all service levels to be under renovation in the second quarter and expect to have completed major renovations at 33 hotels during the calendar year, including five full-service hotels, 18 select service hotels, and 10 extended stay hotels. Finally, in April, we announced our regular quarterly common dividend of $0.20 per share, which we believe is well covered, representing a 51% normalized FFFO payout ratio for the 21-12 month, headed March 31, 2024. That concludes our prepared remarks. We're ready to open the line for questions.
spk02: We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Brian Mayer with B-Riley Securities. Please go ahead.
spk01: Thank you. Good morning, Todd and Brian. Maybe just sticking with the capex for a minute, your $50 million increase, I think I did that math right, can you talk about why and what that $50 million is going to be allocated to?
spk04: Good morning, Brian. Thanks for the question. Yeah, a lot of it is this pace of projects, and as we plan the rest of the year, each quarter we decide which projects we think we should move forward with, which ones make sense from a timing standpoint to limit disruption. We also have a combination of major renovations in certain hotels, as well as more routine stuff that we want to get this year to continue to improve the position of the hotel. It is a combination of a couple of things, but it is more so just the pace of projects has moved a little quicker than it has in past quarters, so it is more of a planning thing than anything. This is a multiyear program that we have now started at the end of last year, and it will continue for a couple of years.
spk01: Would you consider some or all of that $50 million a pull forward from what you would have spent in 2025? Some of it, yes. Yes. Okay, and when we think about the Hyatt renovation disruption, can you talk about when you think that that is fully wound down and maybe give us some ideas as to how much you are spending per key on those renovations and kind of how deep they are?
spk06: Sure, I can take that one,
spk01: Brian. Good morning.
spk06: So, the Hyatt, we started those late last year. I would say we are through the majority of those, or we should be getting through the majority of those shortly. I would expect most of that to wrap up this quarter and have those back online fully. So, I think we should start to see the benefit of that starting in the second quarter, but really fully, hopefully, in the third quarter. The total cost for those renovations is right around $90 million, which Brian is calculating the per key cost now. Yeah, per key it is around $40,000. Yeah, $40,000. Yeah, and it is Rome's common areas, facades. It is a pretty intensive renovation. Those hotels have not been renovated in a while, so we expect to see a pretty significant pickup once those
spk01: renovations are complete. Okay, and maybe kind of the same dialogue on Sonesta, kind of how much more, what you are spending per key. I think you mentioned in your prepared comments that you are selling 22 hotels, book value 162. I mean, what does that sales due to your kind of future cap expense that you had been planning for?
spk04: Yeah, from a Sonesta standpoint, it depends on the chain scale and the brand. The simply suite at the lower end is $30,000 to $35,000 per key and could be upwards of $50,000 a key for some of the better boxes that we are doing. We have got various full service hotels that are planned for this year, including our hill bed property and some of the airport hotels. But as we look at different chain scales and different needs when the last refresh happens.
spk06: Yeah, and that should take off probably another $150 million total that we otherwise would have had to spend at these hotels.
spk01: And just two more for me. What kind of uplift are you looking for in RevPAR, roughly speaking, from the Hyatt renovations and the Sonesta renovations, if you can break them out? I don't know what the best way to break it out is. But clearly, you thought about what your RevPAR uplift would be. Can you share with us what you are thinking there?
spk04: Yeah, I mean, I think RevPAR index is one metric. I mean, we are very focused on bottom line and we expect high single digit returns on a lot of the money we are deploying for what we are calling renovation capital. You are not going to get that same lift from more routine stuff that is just maintenance type capital. But there are various ROI projects built into our program and the amount of money we are putting in, we expect a significant lift that will high single digit returns over the longer term post renovation periods. We finished nine Sonestas this quarter. Not a lot of anecdotal evidence yet of some of these. They are only a couple of months post renovation, but some of the ones that have been finished for close to a year, if you look at the periods prior to when, before we started the renovations to the ramp up period afterwards, we are seeing those returns that we had forecasted. Okay, thank you.
spk02: Thank you. The next question is from Dory Keston with Wells Fargo. Please go ahead.
spk07: Wow, thanks. Good morning. I appreciate the Q2 RevPAR and Hotel EBITDA guide. I was wondering what you are thinking of for the back half of the year. I know peers have highlighted a strong second half versus first, but I am not sure if you feel the SEC portfolio would participate given limited group exposure in the renovation. That
spk04: is a great question, Dory. Thank you. I think our trends will mirror patterns that we have had in previous years. We expect Q2 to be a stronger period, obviously, than Q1. We think Q3 will be in line with Q2 before it starts trailing off. There is a lot of noise in our portfolio given the renovation activity we have highlighted. So when we do see ramp up from certain hotels and picking up different business and market share, that could be weighed down by some of the other hotels that we are moving into renovation.
spk07: Okay. As you wrap up negotiations on the 22th synestas, I am wondering what did you learn from the marketing process and negotiation process so far? Based on level of interest, would you expect there to be a round two of asset sales or would you consider yourself done for the year after these 22?
spk06: Sure, Dory. The marketing process, so just to clarify, we have gone through multiple rounds of bidding on the hotels. We have identified buyers for the majority of those hotels and so we are, as you point out, negotiating contracts. It is not going to be a portfolio sale. It is not going to be to two or three buyers. There is going to be likely more than 10 buyers for these 22 hotels and we are likely to maximize proceeds that way. I think the process has gone somewhat as expected in terms of interest level from a lot of smaller operators for these types of hotels, a lot of local operators. If you recall, these hotels today are losing, they are negative EBITDA for most part. They need capex so local operators are coming in and really focusing on turning around some of these hotels. We did get a lot of interest and I think the types of hotels that are trading, even with transaction activity down, are these types of hotels, kind of the lower price point hotels where buyers can come in at a good basis. Again, it was similar to what we expected. There was a lot of repeat buyers from the time we sold the 68 hotels a couple of years ago as well. I am not sure we necessarily learned anything further. I think there continues to be interest in these hotels or continues to be interest in groups buying these hotels and entering into franchise agreements with Sonesta, which was a positive to see as well. To answer your question on more hotels, I think we want to get through these first, but there could be other hotels in the system. I think it is just going to be a continuing evaluation of the performance of the hotels. There could be other hotels, but we have not identified any yet.
spk07: My last one is just on tracking trends. You talked about the normalization of trends and therefore it makes sense your rent coverage is coming in post pandemic. For context, what level of rent coverage would make you consider the trend less of a normalization and more worrisome? To be clear, I do not think you are there. I am just wondering what your line of sand is.
spk06: Right. It remains to be seen. We agree with that commentary. Back in 2017, 18, 19, you know, the coverage for those assets was probably closer to one eight or one nine times. Once the pandemic hit and trucking activity picked up significantly, e-commerce activity picked up significantly, and you saw diesel volumes and more importantly, margins get to levels that we had not seen before. That really drove coverage up. I think what you get back down to more what we view as normalized levels. We do not have nearly as much insight now given the lease amendment to the performance of these sites, but we are following what BP says publicly. We have very little concern given the investment grade credit backing these properties and leases and just the underlying value of the real estate. But I do not have necessarily a number where I would say I would start to be concerned, but we are far away from that number.
spk07: Okay. Thank you so much.
spk02: No problem. The next question is from Tyler Bittori with Oppenheimer. Please go ahead.
spk03: Good morning. Thank you. Follow-up question on the guidance for the second quarter. It looks like REVPAR at the midpoint flat, year over year 80 to 85 of Hotel Ibidah, margin still down year over year. Is there anything about the renovation disruption that is in those numbers? Then talk a little bit more about what needs to happen maybe outside or even including renovation disruption. What needs to happen for you to really see some margin improvement and margin growth?
spk04: Hey, Tyler. Good morning and thanks for the question. I will start if you want to add anything. But as far as disruption goes in Q2, it is going to be more of the same. I think it will have a little bit more of a lift side of the thing. Portfolio from the height coming out of renovation, all 17 of those hotels are going to be coming out throughout the quarter. So we are going to start seeing some lift from that. It is going to negate some of the disruption we are seeing. These are some of our stronger seasonal periods. We are going to try to limit rooms that are on our servers. It is tough to fully quantify. Once you start a project and get into it, how fast it moves, how many rooms you take out can vary. The bigger overall question, how to drive margin, we believe it is an occupancy issue. We need to drive more demand in our hotels. We are doing that through various initiatives including the CapEx program. So that is our operators. Our other operators are also very focused on driving demand through different initiatives and marketing, promotions and other projects they are working on to drive business.
spk06: I will just add to that. We are very pleased with how the full service portfolio did, especially with the Royal Sonestas that grew over 6% in rent per year over year, driven by group business, but also our urban hotels really were increased as well, just driven by increased citywide demand. So I think we are really optimistic with what we are on the full service side of things. We touched on a couple of things in the prepared comments, especially on the – it is tough to get a good comp on the select service portfolio because so many were out of – were disrupted during the quarter. But in terms of the extended stay, I think our focus really is on having our operators really get back to getting that true tier four extended stay business of more than seven nights. In some cases you can get 30 to 60 nights, especially in the seasonally weak quarters, you really rely on that occupancy for those types of hotels. But ideally we see some of that more longer term project based business come back online. I think that is something our operators, especially Sonesta, are very focused on.
spk03: Okay. Okay. Great. So in terms of the Sonesta brand, I think you cited 30% of stays in the quarter were loyalty members. I think it is a little bit lower than some of the other brands that are out there. Obviously this loyalty program is still pretty new. So just talk a little bit more about kind of the adoption of the loyalty program and more broadly just kind of an update on how Sonesta is resonating in the marketplace for travelers.
spk06: Right. And the number was about 26%, I believe, for the full service hotels. It is a little bit lower on the focus service hotels. But we are seeing increases there. I think the full service, we saw 300 basis point increase year over year. So we are really seeing the adoption, especially on the Sonesta and Royal Sonesta hotels. But as you know, especially on the select service side, so much of business oriented hotels, you see it with some of the other brands, is really driven by loyalty members. So that is really where we need to continue to see pickup. But it is certainly a positive that you are seeing it on the full service side, an increase of that much in terms of bookings through the loyalty program. So Sonesta is still at this size, is a relatively newer, younger company. So we are seeing things move in the right direction and we are seeing that brand adoption in some of the numbers.
spk03: Okay. Great. And then last question for me, obviously no maturity this year. At what point do you start to think more about the 2025s and what sort of options might be on the table for those? And as you said today, you know, can you rank order, you know, kind of what looks most attractive to you in terms of handling those maturities?
spk04: Hey, Tyler, that is a great question. You know, we continue to monitor the debt markets and we are going to be continue to be proactive on our debt maturities. You know, as we have demonstrated, we have got multiple options using SEC's portfolio, but our real reference is unsecured corporate debt. So that is something we are going to take a hard look at in the near term to stay ahead of our maturity wall, but we do have multiple options out there.
spk02: Okay.
spk03: That is all for me. Thank you.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Todd at Hargraves for any closing remarks.
spk06: Todd Hargraves Thank you, everyone, for joining today's call. We appreciate your continued interest in SVC. Thank
spk02: you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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