Service Properties Trust

Good morning, and welcome to the Service Properties Trust first quarter 2025 earnings conference 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 a 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 that this event is being recorded. I would now like to turn the call over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining us today. With me on the call are Chris Bellotto, President and Chief Executive 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 first quarter of 2025, 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, May 7, 2025, 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 could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from our website at SBCREIT.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 and adjusted EBITDA RE. A reconciliation of these non-GAAP figures to net income is 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 adjusted 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 with unreasonable efforts or at all. With that, I will turn the call over to Chris.

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Last night, we reported first quarter earnings results that were in line with our expectations, highlighted by comparable REV PAR growth of 2.6% within our lodging portfolio, steady operating performance from our net lease retail properties, and growth in adjusted EBITDA RE year over year. Additionally, we advanced our strategic plans to optimize our portfolio by selling assets to deleverage our balance sheet and reinvest in growth opportunities. I will begin our discussion with an overview of our hotel portfolio performance during the quarter and an update on our investment activities. Then Jesse will discuss our net lease portfolio. And finally, Brian will review our financial results and guidance. At a macro level, we continue to monitor the broader economic activity trade tariff policy and shifts in overall consumer sentiment. While performance within our lodging portfolio was in line with expectations, REVPAR softened as the quarter progressed, partially driven by a pullback in government and inbound international travel, as well as airlines reducing flight commitments and crew business. Conversely, positive post-renovation performance with certain hotels in our portfolio, favorable trends with our group revenue pace, and a stable outlook for our net lease retail portfolio remain bright spots as we continue through the year. In the meantime, we are proceeding with the priorities and objectives we set for the year and continue to monitor this evolving market backdrop while maintaining flexibility to adjust our operating plans and capital investments as necessary. As it relates to our disposition activities, We are currently tracking with our plans to sell 123 hotels during 2025 with estimated proceeds of $1.1 billion. We plan to use these proceeds to strengthen SVC's balance sheet through debt repayments and strategies to improve the overall portfolio through certain triple net lease acquisitions and capital spending on hotels. Turning to our hotel portfolio performance during the first quarter. Overall, comparable hotel rev par grew 2.6% year-over-year, outpacing the industry by 40 basis points, despite meaningful revenue displacement from renovation activity. Excluding eight hotels under renovation during the quarter, comparable rev par increased 3.7%, with transient and group revenues outperforming contract. Rev par growth was supported by occupancy and ADR gains, lift from hotels under renovation last year, as well as citywide events. GOP and adjusted hotel EBITDA declined year-over-year, primarily due to active hotel renovations, increases in labor, and higher utility costs with a colder-than-average first quarter. By service level, our full-service hotels reported a 1.9% increase in REVPAR, excluding one hotel under renovation during the quarter. Full-service portfolio REVPAR would have been 3.2% year-over-year. Strong growth in group was supported by elevated leisure demand at Royal Sinestra in both Kauai and San Juan, with the Royal Sinestra in New Orleans and DuPont, Washington, D.C., driving demand from the Super Bowl and inauguration, respectively. Other notable improvements were driven by increased transient revenue from our IHG and Radisson hotels, with increased OTA and retail business, and from post-renovation lift at Sinestra White Plains. Our select service portfolio produced exceptional growth with RevPar up 10.6% year-over-year, mainly driven by occupancy growth in our Hyatt Place and Sonesta Select portfolios. Notably, RevPar growth was driven by a 15% occupancy rise and 2.7% improvement in ADR at our recently renovated Hyatt Place hotels. RevPar growth at Sonesta Select hotels reflect the fourth consecutive quarter of year-over-year occupancy gains, specifically in Boca Raton, Camarillo, California, and Philadelphia. In our extended stay portfolio, rev part was essentially flat as a modest increase in ADR was offset by a decline in occupancy. Renovation activity continues to have a more pronounced impact on our ES suites portfolio performance as six hotels were under renovation during the first quarter compared to one hotel in the prior year period. To mitigate this disruption, Sylvester remains focused on driving short-term stays and additional room nights with transient discounts and targeted marketing through wholesale channels. Turning to investment activity. As we enter 2025, our focus remains on strengthening our balance sheet and portfolio through asset sales, reinvesting in our hotels with the highest opportunity for upside, and a gradual investment in net lease acquisitions. Notable hotel completions will include the renovation of our Sonesta Los Angeles Airport and our Sonesta Hilton Head during the first half of 2025 and our Sonesta in Atlanta and Simply Suites in Burlington, Massachusetts during the back half of the year. Forecasted displacement from ongoing renovations will be less significant in Q2 and Q3 with projected strong year-over-year performance gains with nine hotels completing renovations in early 2025. These gains are expected to mitigate renovation-related disruptions with planned construction starting on four full-service hotels in Q4. During the first quarter, as part of the 22 portfolio set of hotels we launched for disposition in early 2024, we sold four of these hotels with 514 keys for a combined sales price of $19.6 million. We are under contract to sell the remaining hotels four hotels within this portfolio, which includes 492 keys for a combined sales price of $26.5 million. We anticipate these will close during the second quarter. Also during the first quarter, we completed a robust marketing effort for the sale of 114 Senesta hotels. These assets receive strong buyer interest, reflecting a deep and well-capitalized buyer pool, concluding with over 30 bids under the Senesta brand. The portfolio was awarded to four buyers and includes both new and existing Sinesta franchise relationships. Buyers are actively engaged and following a customary diligence period, we anticipate the sales will be completed in phases over the next few quarters. In total, we plan to sell 125 hotels in 2025 for approximately $1.1 billion. The pricing implies an 18 times multiple on hotel EBITDA of $60 million over the trailing 12 months. This valuation is well above SVC's multiple of approximately 11 times trillion 12 months adjusted at EBITDA RE. Turning to our triple net lease assets. We are making meaningful progress with our capital recycling initiatives. As Jesse will elaborate, since the end of the quarter, we have acquired or are under agreements to acquire nine net lease retail properties for $33 million. We view this as a strategic growth initiative and plan to gradually expand our retail acquisition activity over time to capitalize on accretive opportunities in our pipeline. Upon completion of our hotel disposition program and noted retail acquisitions, we estimate that SVC's composition by investment will shift from 56% lodging assets and 44% net lease properties today to 54% triple net lease and 46% lodging assets. Based on this allocation, we believe that investors will begin to re-rate shares of SVC based on a triple net lease valuation basis as opposed to a lodging rate. In sum, we are off to a solid start in 2025. While the current macroeconomic environment has created uncertainty, we believe our portfolio optimization initiatives, durable cash flows from our triple net lease assets, and capital management initiatives will be significant drivers of long-term value creation. I will now turn it over to Jesse to discuss the net lease portfolio.