Service Properties Trust

Good morning and welcome to the Service Properties Trust third quarter 2024 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. To ask a question, you may press star then one on your telephone keypad and to withdraw from the queue, you may press star then two. As a reminder, this conference is being recorded. I would now like to hand the call to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thanks for joining us today. With me on the call are Todd Hargraves, President and Chief Investment Officer, Jesse Hebert, Vice President, and Brian Donley, Treasurer and Chief Financial Officer. In just a moment, they will provide details about our business and our performance for the third quarter of 2024, followed by a question and answer session with sell-side analysts. I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note 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 beliefs and expectations as of today, November 7, 2024, and actual results may differ materially from those that we project. 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. Additional information concerning factors that can cause those differences is contained in our filings with the SEC, which can be accessed from our website at svcreap.com or the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO, cash available for distribution or CAD, and adjusted EBIT to RE. A reconciliation of these non-GAAP figures to net income are available in SVC's earnings release presentation that we issued last night, which can be found on our website. And 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 will turn the call over to Todd.

Thank you, Kevin, and good morning. Our third quarter results reflect a continued trend of mixed performance across our lodging portfolio due to our ongoing hotel capital improvement renovation program, balanced by the stable cash flow generation within our net lease portfolio. Before discussing results, I would like to highlight some actions we are taking to improve our liquidity and reduce leverage. On October 16th, we announced the reduction of our regular quarterly common dividend from $0.20 per share to $0.01 per share. The reduction will result in approximately $127 million of annual savings, providing us with significant flexibility to accelerate deleveraging while continuing to execute on our portfolio optimization initiatives. We also announced our plans to sell 114 focused service hotels in the Senesta portfolio, which have an aggregate of 14,925 keys and a net carrying value of $850 million. We expect to sell these hotels in 2025 and are targeting proceeds of approximately $1 billion. Additionally, we expect the sales of these hotels will result in savings of approximately $725 million in capital expenditures, which is forecast to be spent on these properties over a six year period. These divestitures will transform our Sonesta portfolio to focus on full service hotels, as well as certain higher performing focus service hotels. Upon completion of the disposition plan, we expect that Senesta will continue to manage 39 full-service hotels, 14 extended-stay hotels, and six select service hotels owned by SVC. SVC will continue to own 34% of Senesta. Turning to our results for the hotel portfolio, during the quarter, overall performance continued to be affected by revenue displacement at certain of our hotels undergoing renovation. While comparable REVPAR declined 80 basis points year-over-year, Excluding the renovation properties, comparable RevPAR experienced an increase of 1.7% year over year. Beginning with our full service portfolio, which reported a RevPAR decline of less than 1%, strength within group was offset by the impact of renovation displacement on transient revenues, as well as top line weakness in contract business. Excluding the four full service hotels under renovation during the quarter, full service portfolio RevPAR grew by 2.5% year over year, outpacing industry growth by 160 basis points. Eight of our top 10 performing hotels in terms of year-over-year improvement were Sonesta full-service hotels. More specifically, our Royal Sonesta Hotel in New Orleans benefited from improved group results, along with a related uplift in banquet revenue. The Royal Sonesta Houston Galleria experienced an increase in demand in the aftermath of Hurricane Beryl, and our properties in Chicago generated gains from the Democratic National Convention. Our extended stay portfolio experienced the most disruption in our portfolio as 11 hotels were under renovation during the quarter, compared to only three in Q3 2023. In addition, lower longer-term stays at our hotels in Atlanta, San Diego, and Las Vegas led to lower extended stay occupancy. Based on this multi-quarter trend, Sonesta is currently focused on enhancing value from shorter-term stay bookings through OTA and wholesale channels. In total, REF PAR for our extended stay portfolio declined 1.5% year-over-year. Within our select service portfolio, semester select generated 50 basis points of REF PAR growth, driven by increased occupancy and growth within contract business, specifically at our hotels in Philadelphia and Atlanta. However, this increase was offset by residual effects from recently completed renovations within the high portfolio, resulting in a total select service REF PAR decline of 20 basis points year-over-year. Turning to hotel operating expenses, despite strategic shifts towards in-house staffing and reductions in contract labor, rising wage rates across all service levels continue to weigh on hotel profitability. Occupancy growth in our whole service portfolio led to the most pronounced labor cost increases. Beyond labor, the largest cost increases during the third quarter consist of group commissions and real estate taxes. In terms of customer segmentation, we continue to see a declining mix of transient business offset by an increase in group revenues on a year-over-year basis. During the third quarter, transient group customers represented approximately 74% and 19% of our total hotel revenues, respectively, followed by contract business representing 6%. Sonesta remains focused on increasing brand loyalty with an emphasis on growing its travel pass program. Across our full-service and focused-service Sonesta hotels, TravelPass revenue represented more than 25% of room revenue during the quarter, with over three percentage points of growth within full-service hotels year-over-year. We continue to make progress on strategic dispositions during the quarter, selling six hotels with an aggregate of 822 keys for an aggregate sales price of $44.9 million. Since quarter end, we have sold five additional hotels with an aggregate of 642 keys for an aggregate sales price of $32.2 million. We've also reached agreement to sell eight hotels with an aggregate of 985 keys for a combined sales price of $44.2 million. In closing, we are taking measures to increase our liquidity and reduce leverage, highlighted by our recent announcement to sell 114 hotels and reflective of the continuation of our long-term strategy to build a managed portfolio in key growth markets. I will now turn the call over to Jesse to discuss the net lease portfolio in more detail.