Service Properties Trust

Good morning and welcome to the Service Properties Trust Second Quarter 2025 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. 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 Kevin Berry, 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 second 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, August 6, 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 SEC, which can be accessed from our website at svcreit.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 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 Chris.

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Last night, we reported second quarter financial results that were in line with our expectations and continued to advance on many of our strategic priorities. I will begin today's call with an update on our business plans, including the recent progress of our hotel disposition program, and provide further highlights within our hotel and net lease portfolios during the quarter. Then, Jeff, you will discuss in more detail our net lease portfolio and the acquisitions that we have made to build on our existing platform. Finally, Brian will review our financial results and quarterly guidance. Starting with our current business plan. During the past quarter, we have made significant progress on previously announced hotel dispositions, advanced many of our hotel renovations as a catalyst to drive performance and improve the quality of our assets, and pursued selected net lease acquisitions and dispositions. These efforts are part of our ongoing strategic initiative to transform SVC toward becoming a predominantly net-based REIT. Entering into 2025, we have continued to execute on our strategy of divesting select hotels while focusing our retained portfolio on primarily full-service, urban, and leisure-oriented properties that offer greater potential for EBITDA growth and enhanced overall value. To date, we have sold eight hotels for proceeds of $46 million and continue to make meaningful progress on the previously communicated 114 Senesta Hotel portfolio. We removed from the marketing process one full-service hotel located in Atlanta as we continue to evaluate broader opportunities for the retained hotel portfolio. Regarding the 114 Senesta hotel sales, due diligence has been completed and non-refundable deposits have been received for 111 hotels with four unique buyers for a sales price of $900 million. we have entered into a purchase and sale agreement with diligence underway for the remaining three hotels with a sales price of $20 million. Closing on the hotels is expected to commence in Q3 and finish before year end. Including the eight hotels we already sold this year, in 2025, we are on track to complete 122 hotel sales, totaling nearly 16,000 keys for gross proceeds of $966 million. This pricing implies evaluation of 18.4 times hotel EBITDA of $53 million over the trailing 12 months. Turning to hotel performance during the second quarter. RevPAR increased 40 basis points year-over-year, outperforming the broader industry by 90 basis points and marking the third consecutive quarter of relative outperformance. SVC's growth was driven by gains in both occupancy and ADR, with group and contract segments outpacing transient business. Top performing properties during the quarter are within our retained hotel portfolio and include our Royal Sonestas in Kauai and San Juan, which benefited from strong leisure demand through OTA and wholesale channels. We also saw solid performance at our three downtown Chicago hotels and the Clift Royal Sonesta in San Francisco, supported by a rebound in citywide group business. Additionally, Recently renovated hotels are consistently delivering double-digit revenue growth with notable strength across our Hyatt portfolio, Sonesta White Plains, and Sonesta LAX. Hotel-level EBITDA declined during the quarter primarily due to elevated labor costs and broader inflationary pressures. Additionally, displacement in hotels with active renovations contributed to $2.4 million of year-over-year negative EBITDA. However, we expect this to moderate in Q3 and fluctuate modestly thereafter as renovations advance. The 84 hotels we currently plan to retain delivered relatively solid performance, with RevPar increasing 150 basis points year-over-year, driven by gains in both occupancy and ADR. Over the past several years, we have made substantial capital investments across our retained portfolio, enhancing many of our flagship properties, and premier destinations such as Hilton Head, Hawaii, and San Juan. These capital enhancements are expected to drive ongoing EBITDA growth. Given our prior investments in the portfolio, coupled with the completion of our remaining hotel dispositions, this positions us to meaningfully lower capital spend with 2026 guidance now set at $150 million. Within our triple net lease segment, We are making steady progress with our capital recycling program and prioritizing accretive opportunities within our pipeline. Since the beginning of the quarter, we have completed the sale of five net lease properties for a total of $15 million, and we are in the early stages of marketing six additional properties, which are expected to generate between $2.5 million and $3.5 million in total proceeds. Concurrently, we have acquired or entered into agreements to acquire 20 net lease retail properties for $55 million. As Jesse will discuss further, our net lease portfolio continues to provide stable and predictable cash flows with minimum capital requirements, and we view net lease real estate as a naturally defensive and less volatile asset class. In conclusion, the second quarter marked meaningful progress in SVC's ongoing strategic transformations. Pro forma for our expected hotel sales, net lease assets are projected to account for over 70% of SVC's pro forma Q2 adjusted EBITDA RE, representing a meaningful shift in our asset composition and positioning SVC shares for a potential re-rating at more attractive net lease multiples. Looking ahead, we intend to maintain our capital recycling and deleveraging strategy to 2026, pursuing further hotel dispositions as property performance and overall market conditions continue to improve. I will now turn it over to Jesse to discuss the NetLease portfolio.