Service Properties Trust

Good day and welcome to the Service Properties Trust second quarter 2024 earnings 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 IR. Please go ahead.

Good morning. Joining me on today's call are Todd Hargraves, President and Chief Investment Officer, Ryan Donley, Treasurer and Chief Financial Officer, and Jesse Hebert, Vice President. Today's call includes a presentation by management, followed by a question and answer session with analysts. that the recording, retransmission, and transcription of today's conference call is prohibited without the prior written consent of FCC. 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 security laws. These forward-looking statements are based on SVC's present beliefs and expectations as of today, August 7, 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 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 REITs. We are also introducing our calculation of cash available for distribution, or CAD, this quarter. Reconciliations of these non-GAAP financial measures to net income as well as components to calculate ASFO are available in our financial reporting package, which can be found on our website. And finally, we are providing guidance on this call, including Hotel Ibiza. 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. And with that, I'll turn the call over to Todd.

Thank you, Stephen, and good morning. As Steven mentioned, Jesse Hebert joined SVC in June as our vice president. Jesse is also a vice president at the RMR Group, where he leads a team responsible for the sourcing, underwriting, entitlement, and leasing of all development projects managed by RMR. Welcome, Jesse. Now onto our results. During the quarter, we experienced rep-par growth at our full-service and select-service portfolios, led by gains in our group and contract segments, while our extended stay hotels continue to be impacted by reduced occupancy related to longer-term stays. While we are seeing a pullback in leisure travel, our 34 urban hotels outpaced the market with a 4.1% ref par increase. Eight of our top 10 performing hotels from a top-line perspective in terms of year-over-year improvement were Sonesta full-service hotels, much of which was driven by group and our urban concentration, while our bought and performing hotels were either under renovation during the quarter or experienced softer transient demand due to non-repeat market-specific events in markets such as Chicago, Nashville, and Atlanta. Portfolio-wide, performance was affected by revenue displacement at our hotels that were under renovation during the quarter. Excluding the renovation properties, Portfolio RepR increased 1.6% year-over-year, led by occupancy, which improved by 1.7 percentage points, and was highlighted by a 13.8% increase in group room nights at our Royal Sinesta hotels. Moving to performance by service level. Our full service portfolio experienced top-line gains in our group and contract segments, where rev par increased 10.6% and 5.5% respectively. This was offset by a decline in transient rev par of 3.5%, resulting from market softness and renovation displacements. Excluding the five hotels under renovation, our full-service portfolio REF PAR increased by 2.9% year-over-year, outpacing the industry. Increased group revenues at our Sonesta-branded hotels in Cambridge, Washington, D.C., Redondo Beach, and Denver, as well as our Radisson-managed hotels in San Diego and Seattle, contributed to the improvement, and the increased group demand led to higher F&B revenues, which increased $1.2 million during the quarter. Notably, we experienced outside RevPAR growth in some of the hotels and markets that have been most challenged, including 38% growth at our Royal Cinesse in Minneapolis and 34% growth at our Royal Cinesse in Seattle. Our extended stay portfolio experienced a 1.6% decline in RevPAR year over year. Consistent with the trend from previous quarters, our longer-term extended stay occupancy has been decreasing, with notable declines experienced at our hotels in Salt Lake City, Portland, Oregon, and Dallas. Performance at our select service hotels was led by our Senesta Selects, reporting increased rev par of 3.3% year-over-year, and by our contract segment at our hotels in Philadelphia, Nashville, and Atlanta. Hotel operating expenses impacted margins during the second quarter due to cost increases in insurance premiums and deductibles, as well as labor, our largest expense, representing 44% of total FX, where we realized a 5.5% increase year-over-year on a per available room basis. Segmentation is shifting away from transient towards a group, which now represents 20.8% of total revenues, up from 19.3% during the previous year quarter. And group pace is up 11.9% from the same time last year, with strong contributions across all our operators. Tenesta has made progress on its brand-building initiatives, measured by its travel path revenue mix, which increased 8.6 percentage points in the full-service portfolio to 29.4%, And travel pass on property enrollments are up 7% year-over-year. Turning to our net lease portfolio, which represents 44% of SVC's portfolio by investment, as of June 30, 2024, our 749 service-oriented retail net lease properties were 97.3% leased with a weighted average lease term of 8.4 years. Our lease maturities are well-laddered, and only 3.4% of our net lease minimum rents expire before 2026. The aggregate coverage of our net lease portfolio's minimum rents was 2.25 times on the trailing 12-month basis as of June 30, 2024. The decline from the previous year quarter results from the lower EBITDA reported by TA and increased TA rents. As an update to our previously announced 22 non-core planned hotel dispositions, subsequent to quarter end, we closed on two hotels at an aggregate sales price of $10.8 million. and are under purchase and sale agreement to sell 16 hotels for $113.2 million. We are either marketing or negotiating contracts for the remaining four hotels, which have an aggregate net bulk value of $23 million. In conclusion, we expect our hotel portfolio to benefit from the needed renovations, although we may see mixed results due to revenue displacement until they are completed. Ultimately, these refreshed properties, combined with the anticipated removal of some of our more challenged hotels as sales are completed, will allow Synesta to focus on offering a higher quality portfolio and improve our market share. Furthermore, our balance sheet is well-positioned with no debt maturities until 2026, and the performance of our net lease portfolio remains strong and is anchored by an investment-grade rated tenant in BP. I'll now turn the call over to Brian to discuss our financial results in more detail.