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.

Thank you, Chris. The strategic shift underway at SEC will ultimately result in a portfolio that benefits from minimal CapEx needs, long-term leases with annual escalators that provide a bond-like risk-return profile, and cash flows that can be relied upon even in uncertain economic environments. The net lease market is deep, liquid, and highly fragmented, creating conditions that are conducive to scalable expansion if and when we choose to do so. Additionally, as we have demonstrated with mortgage financing, SBC's net lease assets provide access to attractively priced financing options to support our growth. That growth will build off the existing backbone of net lease retail properties that we already own. Our portfolio is anchored by 175 TA travel centers backed by BP's investment-grade credit. As a reminder, SBC's current leases with TA have eight years of remaining term and include 50 years of extension options. While the rent coverage for the TA assets has experienced degradation over the past few quarters, this decline has begun to level off as freight demand normalizes coming off its COVID-era peak. Moreover, we are seeing investments in real estate from BP in the form of EV charging stations and other initiatives that are intended to drive revenue from non-fuel offerings at these locations. The overall net lease portfolio consists of 742 service-oriented retail net lease properties with annual minimum rents of $387 million. These assets were more than 97% leased with a weighted average lease term of 7.6 years. We have 174 tenants operating under 136 brands, spanning 21 distinct industries. The diversity and breadth of the portfolio provides opportunity for organic growth as we continue to source modest transactions with both new and existing operators. Our lease expiration schedule remains well-laddered, with 1.7% of our minimum rent scheduled to expire through the remainder of 2025 and 3% expiring in 2026. Our asset management platform has been actively engaged with our existing tenants, as well as potential new tenants, resulting in over 350,000 square feet of leasing during the second quarter that averaged 12 years of term and a 5.7% roll-up in cash rents. As of quarter end, the aggregate coverage of our net lease portfolio's minimum rents was 2.04 times on a trailing 12-month basis, remaining essentially unchanged from the prior quarter. Excluding the BP-backed TA leases, rent coverage remained strong at 3.7 times. With respect to investments, we remain committed to growing and optimizing the portfolio in a manner that enhances tenant and geographic diversity, increases weighted average lease term, and expands annual minimum rents. Our investment thesis focuses on properties in e-commerce-resistant, necessity-based sectors that have proven resilient across cycles. This includes quick service and casual dining restaurants, grocery stores, auto services, and other daily needs providers. Since ramping up our acquisitions platform in the second half of 2024, we have developed a robust pipeline, resulting in the acquisition of 14 net lease properties year-to-date for a total of $44 million. These transactions have a weighted average lease term of 15 years, average rent coverage of 2.5 times, and an average cap rate of 7.4%. We are also under agreement to acquire six additional properties in Q3 for a total of $10.3 million, with similar economic terms as the closed transactions. As SBC migrates to a predominantly net lease grief, our asset management and acquisition teams are actively curating the net lease portfolio and fostering new relationships with retail operators. These efforts, coupled with the strong foundation we have already established in this space, will put us in position to efficiently grow this side of the business going forward. I'll now turn the call over to Brian to discuss our financial results.

Thanks, Jesse. Good morning. Starting with our consolidated financial results for the second quarter of 2025, normalized FFO was $57.6 million, or $0.35 per share, versus $0.45 per share in the prior year quarter. Adjusted EBITDA RE decreased $7.7 million year-over-year to $163.8 million. Overall financial results this quarter as compared to the prior year quarter were primarily impacted by an $8.8 million increase in interest expense and lower hotel returns. For our 200 comparable hotels this quarter, rent power increased by 40 basis points, and gross operating profit margin percentage declined by 300 basis points to 30.2%. Below the GOP line, costs at our comparable hotels decreased less than 1% from the prior year, driven by lower property insurance premiums. Our hotel portfolio generated adjusted hotel leads of $73 million, a decline of 11.3% from the prior year, but towards the high end of our guidance range. The four hotels that were under renovation during the quarter represented $2.4 million, or 24% of the decline in adjusted hotel EBITDA year-over-year. The 116 Sedesta exit hotels, including two that sold in July, generated rep par of $75, a decline of 1.8%, and adjusted hotel EBITDA of $19.9 million, a decline of 12% year-over-year. The 84 hotels we expect to retain generated rent par of $121, an increase of 1.5% year-over-year. An adjusted hotel leave of $53.5 million during the quarter, a decrease of $7 million, or 11.7% year-over-year. Most of the decline year-over-year in the retained portfolio is related to elevated labor costs, repairs and maintenance expenses, and renovation disruptions. Turning to our expectations for Q3, we're currently projecting third quarter rep bar of $98 to $101 and adjusted hotel EBITDA in the $54 to $58 million range. This guidance considers a sequential decline due to seasonality in the third quarter, as well as recent headwinds in the travel and lodging industries. Guidance does not include the impact of completing any of the 114 sunset hotel dispositions expected to close later in Q3 and Q4. Turning to the balance sheet, The key objective for our hotel disposition program is to address our debt maturities and improve our credit metrics. At quarter end, we had $5.8 billion of debt outstanding with a weighted average interest rate of 6.4%. Our next debt maturity is $350 million of senior unsecured notes maturing in February of 2026. As of our earnings release, our 1.5 times debt service coverage covenant was below the minimum requirement at 1.49 times. This prohibits us from incurring additional debt to our back-end compliance on a pro forma basis. In July, we fully drew down our $650 million credit facility as a precautionary measure to preserve our liquidity in anticipation of potentially not meeting the minimum level of debt service coverage. As of today, we have approximately $670 million of cash on hand. Yesterday, we announced the early redemption of the $350 million of 5.25% unsecured senior notes due in February at par plus secured interest. The redemption will be funded with cash on hand in early September. The $920 million of expected proceeds from the sale of the 114 hotels will be used to repay the $450 million of senior unsecured notes maturing in October of 26 and amounts outstanding on our revolving credit facility. We currently expect closing of the asset sales and the repayment of outstanding debt will have a positive impact to our financial covenants. We're also currently evaluating different strategies to improve our credit metrics and our covenant measures, including considering additional asset sales, operational improvements at our hotels, and potential financing opportunities. Turning to our capital expenditure activity. During the second quarter, we invested $39 million in capital improvements at our properties, Notable activity this quarter included projects at the Royal Sonesta Cambridge and the Sonesta Hilton Head Resort. For the full year, we continue to expect capital expenditures to be approximately $250 million, including $120 million to $140 million of maintenance capital, with the rest going towards renovation and redevelopment initiatives. Looking ahead to next year, we expect full-year capbacks in 2026 to be approximately $150 million, Of the $150 million, we expect $64 million relate to discretionary renovation capital with the balance going to recurring maintenance capital. We expect with the reduction in capex spending, the repayment of debt, operating improvements expected from our completed hotel renovations, SVC's cash flows will improve significantly as we move into next year. That concludes our prepared remarks. We're ready to open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Our first question will come from Tyler Battery with Oppenheimer. Please go ahead.

Good morning. Thanks for taking my questions. First one for me on the guidance for the hotel portfolio. I understand on the EBITDA line there's some seasonality there sequentially from Q2, but can you expand a little bit more on some of the renovation disruption in Q3 and then talk, too, about the commentary you mentioned, just in general headwinds and travel and lodging, please?

Sure. I'll start, Tyler. Good morning, and thank you for the question. You know, we definitely see some softness in Q3 and, you know, especially in the August timeframe, you know, we typically see a seasonal drop off in activity and leisure travel as we get into early fall. You know, some of our forward-looking numbers and some of the group pace, you know, starting to improve as we get into Q4, but we definitely see some weakness in Q3. Things have been softer and trends have been continuing. So as we pace, looking year over year, it's very comparable to what we saw in Q2 year over year, some declines year over year.

Okay, perfect. And then the CapEx commentary you gave for 2026, we appreciate that, the $150 million number. The remainder of that, that's discretionary, the $86 million. Is that still a little bit elevated compared to what you might think is more is more normal and just kind of how would you think about a maintenance cap X run rate long-term for the portfolio?

Yeah, I think, you know, as we look at 26, it's a significant reduction from what we've been spending the last few years, the pace of our discretionary numbers. And just to clarify, $64 million, yes, will be discretionary of the $150 million with the rest going to renovations. Our overall CapEx spend is I think if you benchmark that to our current portfolio, it's closer to 15% of revenues. I think as we move forward, industry norms are probably closer to 10% to 12% of total revenues, and that's where we think we want to be longer term. But for 26, we still have some significant projects we're doing, including our repositioning of the South Beach Hotel and some other larger projects. But the pace of our renovations and just the scale of how much we're deploying will continue to trend down.

Yeah, and I think bigger picture, just, you know, there'll be less active hotels under renovation in a given year, you know, albeit we're talking about the $150 million in totality. And so, I think the other compliment to that is less disruption in the business. And so we should see just EBITDA generally be more moderated in future years because we have less renovations underway at any given time.

Okay. Excellent. Point of clarification on the asset sales. You know, I think last quarter, you were talking about, you know, billion one of gross proceeds. You know, now that, Numbers 966. So I just want to be clear on just the delta between those numbers and what's changed.

Yeah, it's twofold. So, you know, one of the bigger pieces is we pulled a full-service hotel from the marketing efforts, a hotel we have in Atlanta. That's a performing hotel. I think generally speaking, you know, we weren't necessarily happy with what we were seeing as far as pricing goes. And so retaining that hotel seemed to be more prudent, at least currently. And then the balance, kind of the lesser amount, was more around the conclusion of diligence. As I mentioned in the prepared remarks, where we're at now with the lion's share of the $900 million of asset sales is diligence is complete, deposits are hard, and we're on the other side to closing. And so anything related to any pricing changes is no longer is in play. Uh, and so that's, uh, kind of the other gap, uh, with respect to that number.

Okay. Very helpful. Um, last one for me, um, you know, the net lease side of things, I'm making a lot of progress on that strategy in terms of transaction activity. Um, talk a little bit more about the pipeline for deals. You know, I understand, um, you know, part of this is capital recycling. But is there a point where maybe the acquisitions could be significantly larger than the dispositions? And just really trying to get a sense of expectations. I know you probably can't get specific guidance on this, but just trying to get a sense of maybe rough run rate or maybe some guideposts on how much in terms of dollars you'd like to allocate towards acquisitions, whether it's the next couple of quarters or the next couple of years. Just trying to get a sense of how that could evolve looking ahead.

Yeah, I think generally speaking, and we talked about this, you know, on the onset of this endeavor, is that we wanted to do kind of modest acquisitions on the net lease side. And there's a range of strategies. You know, we've been net sellers over the years, more specifically in that segment. You know, as you're familiar with, we have an attractive business kind of balance sheet mechanism with the ABS, the mortgage financing. And as part of that, you know, is a good opportunity for the company medium term favorable pricing. And so refreshing that accordingly with the right assets as part of the driver with respect to some of these acquisitions. And then again, just overall portfolio enhancements. I mean, what we like about it today, absent of just the types of assets we're buying and how we're growing the portfolio, is we're able to do it partially with asset sales. And so, you know, we're getting kind of the true benefit of the capital recycling aspect of the growth. But look, you look at kind of Q2, where we started transacting just under $30 million. You know, we're, you know, at 14 million to date through Q3, and Jesse alluded to another 10 million. And so, you know, that's probably a fair run rate for the time being. This is not a scenario where we expect to do some sort of outsized growth, you know, currently, but we'll look to opportunities to grow and find proceeds through sales and other initiatives to kind of help balance that. And then I think your question around the types of assets, you know, where we've been transacting today has been more weighted towards casual dining and QSR. There's been some automotive in there with respect to car washes and similar type uses. And then we expect that to continue to diversify as we look at certain medical type opportunities. and things around, you know, some dollar general to a smaller scale and some other similar type uses are things we're targeting. But I think kind of net for us, part of that allocation will be tied to how we can use it as a creative financing tool, given some parameters around what that type of portfolio you can assemble for that.

Okay. Very good detail. Thank you. That's all for me.

Again, if you have a question, please press star, then one. Our next question will come from John Massica with B. Reilly Securities. Please go ahead.

Good morning. Maybe kind of building on Tyler's question, is the kind of outlook that if you wanted to get more aggressive on the net lease investments, that's something that maybe happens kind of post-closing of some of these strategic hotel dispositions? Just trying to think about when that, you know, from a timing perspective, when that kind of net lease acquisition kind of machine could really start ramping into gear.

Yeah, I think that's probably fair. It's going to be steady state based on the run rate, you know, I just alluded to. And then as we get further, you know, kind of into next year and kind of just see, you know, how performance continues across the portfolio, we don't want to kind of shift the focus around kind of the deleveraging component that we're focused on. And certainly there are other variables we want to be mindful of. But look, you know, coming out of the sales this year, thinking about select sales next year, you know, looking at opportunities to grow EBITDA through the retained portfolio and narrow that margin gap. Those are all kind of net positives, less capital, as we alluded to, bringing that number down by 100 million year over year. And I think as we kind of work our way through that at the beginning of the year, we'll be in a better position to assess, you know, kind of the opportunity to further ratchet up on anything related to more sales or, excuse me, more acquisitions outside of the run rate we just talked about.

Okay. And then as I think about the 900 million of hotel sales that are kind of maybe more advanced, what was kind of left to do there between now and closing? Just, you know, given due diligence is done, deposits are hard. I mean, are there any kind of variables or factors that could derail those transactions? And I guess what's left to kind of do from either your perspective or the buyer's perspective to kind of get those across the line, or is it just literally a matter of we have dates that, you know, For their reasons, for our reasons, whatever it may be, it's going to close between 3Q and 4Q.

It's the latter. I mean, you know, look, it's four unique buyers. We're on the other side in the sense that there's no more or no contingencies related to these sales. This is kind of common course whereby, you know, following conclusion of diligence, you then have a pace. to close given the size of the portfolio with each of the buyers, it's a rolling close. And so there'll be incremental takedowns between, you know, now and the end of the year. And, you know, I think, look, I think kind of where we stand today, I would say upwards of maybe 20% of those proceeds could be realized in Q3 with the balance in Q4. And, again, there are ultimately hard outside dates tied to those. And so, you know, that's where we get comfortable with kind of the 2025 execution.

Okay. And understanding that they have an obligation and it wouldn't get them out of their deposits. But these are, you know, without commenting too much, I'm sure you can't give too much detail, but these are kind of strong counterparties and there isn't, you know, any finance needs on their end that are, you know, fulfilling this deal, these deals.

There's no contingency, you know, and so the deposits are hard at this stage. And I would just echo that our experience in selling assets is this is just normal course. And there's nothing to, in our view, that would suggest that the transactions won't close as planned.

Okay. Appreciate that. And then in terms of the incurrence covenant on the debt service coverage ratio, how far off are you from kind of meeting that? And I guess, you know, is there like a timeline or a series of actions you think, I mean, understanding that there's some variability in the performance of the portfolio, but like, How quickly do you think you could get back in kind of compliance with that covenant and be kind of, you know, able to be a more active participant in the debt markets if need be?

Sure, John. It's a great question. You know, at Q1, we were right at the threshold of 150 times. And the numbers we reported yesterday were at 1.49 times. And depending on which side of the ratio you're talking about, it's, you know, $4 million of EBITDA, $3 million of interest. You know, we did announce, you know, to get to the 1-5, we did announce the redemption of the February 26 notes. So, on a pro forma basis, removing that interest, you know, gives us some temporary relief on that. But we did draw the revolver, so there are variables on how that ratio will work as we get into Q3 and, you know, when we get to Q3 filing. We'll have to see where our earnings are at. So we're not happy at the levels. Even if we are passing the covenant, we need to get more cushion there to not have to worry about an incurrence test to, as you said, participate in capital market transactions. But there are things we could do, further asset sales, operational improvements that are going to give us cushion. And we're going to continue to think strategically about it.

And then one last one on the hotel dispositions. Is pricing – and apologies if I missed this earlier in the call or in the prepared material – but is pricing what you were kind of anticipating, say, at the 1Q call?

Yeah, I mean, barring kind of what I mentioned earlier, right, there was some slight adjustments. But I think the bigger – I mean, we're very pleased with the pricing. You look at kind of that $900 million ad. just shy of a kind of a 16 multiple, I think that is indicative of, you know, just kind of the strong participation in those assets and the pricing we're able to achieve accordingly.

Okay. That's it for me. Thank you very much.

Our next question will come from Jack Armstrong with Wells Fargo. Please go ahead.

Hey, good morning. Thanks for taking the question. Just Just kind of picking back up on the debt side there. Can you walk us through the decision to fully draw the credit facility and in terms of kind of other ways that you could look to address the debt situation, would you consider issuing a zero coupon bond that would lower your cash interest and get you back into compliance with the debt covenant so you could refinance existing charities?

Sure. Jack, thank you for that. You know, as we were getting close to the end of Q2, And looking where our May actuals and year-to-date actuals were trending on the hotel portfolio, we had anticipated our Q2 filing might put us right below that threshold, which is why we drew the revolver, to protect liquidity. Because on a pro forma basis, if you're below the 1.5 times, it's an occurrence test, so you can't draw on the revolver if you're under that level. So we did that proactively to make sure we have access to that liquidity, which is important for us. you know, the timing of the asset sales, you know, being later in the year, you know, and having the $350 million due, you know, all played into that decision. So, you know, we'll continue to evaluate, you know, whether or not we hold cash, repay the revolver, and when we repay off the next tranche of notes that are due later in October of 26. Regarding your other question, you know, the zero coupon idea is certainly something on the table. You know, we have a lot of exploratory conversations with you know, stakeholders, bankers, and things of that nature. And that's something that can, yes, provide relief to this covenant and significant relief given the zero coupon structure. So those are the kind of things we will evaluate going forward.

Okay. And then as we're thinking about the 27 maturities, you know, when should we expect you to start addressing those maturities? Is that a you know, kind of early 26th event as you start to consider some additional hotel sales, or do you think you'll try and do a refinance instead of waiting for additional sales proceeds?

Look, I think as Brian alluded to, you know, we're thinking about kind of multiple lovers that would ultimately benefit the company, but certainly the structure around additional hotel sales in 26 will be used to delever and specifically around the 27s given, you know, with the current dispositions and kind of the payoff Brian alluded to of the early part of the 26s, you know, that's going to be covered through those proceeds. So, again, looking out to 27 and asset sales and, again, just being mindful of, you know, different opportunities as we continue to stay close to, you know, those 27th, you know, being kind of the next trance for us to address.

Okay. And can you characterize, you know, what are the next hotels that you'd look to take out of the portfolio just from kind of a chain scale location and brand perspective?

Yeah, I think, look, I think it's a little preliminary. I don't want to kind of lose sight of the focus on what we're closing on. But, you know, It's probably a combination of different chain scales. You know, there's a scenario where there's some full service on the table. We talked about the one we pulled from Atlanta. And then there's others that may be lower performing in certain markets that we would consider. And that's something we're really starting to kind of get our arms around with now. And then being a position we can time it accordingly. And so we've got a little runway. to do that. So we'll have more detail to share on future calls, but it's something, you know, again, we're assembling, which would kind of, I think, be considered across the chain scale.

Okay. And then can you provide us with some updated return expectations on the hotel renovation program, just from a cash-on-cash perspective, and help us frame what the lift will look like in 26 and 27 in terms of how it breaks out between occupancy and rate?

Sure. I mean, the way we've been looking at some of these projects, you know, there's different tiers of what we expect from the money we're deploying. You know, obviously, we put aside the recurring maintenance stuff, but the renovations and redevelopment initiatives, you know, there can be a wide range of expectations in how we perform some of those projects, you know, whether it's, you know, normal course, you know, recycling slash renovation programs in the 8% to 10% range as far as lift expectations and RDI improvements. We have some larger scale projects like at the South Beach Hotel I mentioned where we expect returns in the 20 plus percent range and other projects. So there can be a wide range. But the lift can take six, 12, 18 months to be realized on a pro forma basis as hotels stabilize, get reintroduced to the market. Yeah, but we're seeing a lot of good early signs from some of the bigger boxes that we've completed in recent months. And, you know, we're going to continue to be thoughtful around how we deploy capital. And, you know, that goes into part of the strategy to selectively pick renovations and how we're deploying CapEx. Okay.

And then you mentioned in the deck some changes coming to the management agreement with Sinesta. Can you – Explain what those will look like and to the extent that they're just changes to structure and not in terms of the actual agreement with Sinesta. Why are you not pushing for a more favorable contract with them, just given how much of a headwind to margins Sinesta management has been?

Yeah, look, I think that the overall terms for the agreement are market and You know, really a lot of the strategy around kind of reference to the management agreement is predicated on the fact that, you know, this is currently a pooled agreement. And as we think about the sales that are kind of underway currently and those that will likely happen in future years, I think a change to the structure so we can have and forego the pooled agreement and align incentives more specifically to kind of performance-based initiatives is all part of the expectation with any changes to the management agreement. And so, again, I think economically we don't anticipate any impact. It's more just to kind of right-size and align with where we're going with the strategy and, again, on market terms.

Okay. That's it for me. Thanks so much.

This concludes our question and answer session. I would like to turn the conference back over to Chris Bellotto, President and Chief Executive Officer, for any closing remarks.

Yep. Thank you for joining today's call. We look forward to keeping you updated on our ongoing strategic initiative to transform the company, strengthen our balance sheet, and enhance overall performance. Please reach out to Investor Relations if you're interested in scheduling a meeting with SBC. And that concludes our call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.