Q2 2021 Service Properties Trust Earnings Call
[music] [music].
Good day and welcome to the service properties Trust second quarter 2021 financial results Conference call. This call is being recorded at this time for opening remarks and introductions I would now like to turn the call over to director of Investor Relations Kristin Brown. Please go ahead.
Good morning, and joining me on today's call are John Murray, President and Brian Donley, Chief Financial Officer, and Todd Hargreaves Chief Investment Officer on today's call includes a presentation from management followed by a question and answer session with analysts. Please note that the recording retransmission and transcription of today's conference call is prohibited without prior written and on ASP.
I see.
I would like to point out that today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 and other securities losses.
These forward looking statements are based on SEC's present beliefs and expectations as of today August 6.2021 and.
The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statement statements made on today's conference call other than through filings with the Securities and Exchange Commission or SEC. And addition, this call may contain non-GAAP financial measures, including normalized funds from operations our normalized <unk>.
GAAP and adjusted EBITDA already reconciliations of normalized <unk> and adjusted EBITDA to.
Net income as well as components to calculate <unk> are available on our supplemental and our supplemental package found on the Investor Relations section of the company's website and actual results may differ materially from those projected in any forward looking statements.
Additional information concerning factors that could cause those differences is contained in our form 10-Q on file with the SEC and and our supplemental operating and financial data and on our website at www Dot FCC rate Dot com and investors are cautioned not to place undue reliance upon any forward looking statements and with that I'll turn it over to John.
Thank you Kristen and good morning.
Last night, we reported second quarter normalized <unk> per share and adjusted EBITDA of $118.6 million, which reflects improvement in economic fundamentals for our properties as the economy has continued to reopen and stabilized from the Covid pandemic.
This has led to steady improvement in revenue that our hotels continued strong performance of our travel centers and steady cash collections and improving operations and a net lease service oriented retail properties, whose businesses are operating and a more normal environment.
Our second quarter operating results reflect improvement and Sbcs hotel portfolio as we move past the transition disruption from the rebranding of over 200 hotels to Sonesta and Ho.
<unk> EBITDA turned positive in April and hotel fundamentals steadily improved each month for March through June despite headwinds created by industry wide labor shortages and concern over Covid variance.
Demand remains the strongest and leisure oriented properties like our sonesta hotels, and Hilton had San Juan and Miami, which posted occupancies in excess of 80% during the quarter with.
With summer travel underway demand across the portfolio continues to be stronger on weekends versus weekdays, but weekday stays have shown a noticeable increase as we begin to see the early stages of business travel returning and while the COVID-19 Delta variant presents a potential risk to recovery for business travel and we anticipate increased.
Momentum after labor day when.
And when schools reopen and person and more employees returned to the office.
Average occupancy for our 283 comparable hotels was 57, 9% and the second quarter average daily rate was $92.59.
And Revpar was $53.61.
Our extended stay hotels have maintained double digit occupancy premiums relative to the industry and compared to a non extended stay hotels trends we've seen throughout the pandemic.
And our 160 extended stay hotels reported occupancy of 71, 6% during the quarter.
Compared with occupancy as a 45, 7% and 46, 4% respectively for a 93 select service and 51 full service hotels.
Our full service hotels outperformed industry growth on a year over year basis due to strong occupancy gains across all of Spc's operators and supported by leisure travel and the reopening of many urban locations.
Excluding the potential impacts of the Delta variant, we expect the second half of 2021 to show further progress towards recovery and stabilization and for Revpar to continue to improve and the secondhand as business travel slowly emerging and extended stay occupancy has remained stable or growing.
Labor continues to pose a challenge for the lodging industry and our portfolio wage increases to attract and retain staff to use of expensive contract labor and lost revenues from out of order rooms, which could not be clean and.
Negatively impacted results.
Offsetting these costs was increased productivity on a cost per occupied room basis, which was approximately 22% lower than a year ago, partially due to labor savings due to open positions and relax brand standards.
Now I'll provide more color on the hotels that we transitioned to sonesta and the fourth quarter of 2020, which included 112 hotels.
Branded primarily in December.
So and that's that has now manage these hotels for 2 full quarters and we are generally pleased with the progress to date.
With revpar, increasing over 58% to $55.67, and the second quarter compared to $35.12, and the first quarter.
For the 88 hotels, we rebrand and February March and we're also seeing steady progress with revpar, increasing over 83% to $61.64, and June compared with $33.60 for March.
And while hotel transitions are always destructive disruptive and it is difficult to build brand awareness. During the pandemic. We believe sonesta brand awareness is growing and most of the transition disruption is behind us.
Even as hotel industry demand recovers and its brand awareness and proves sonesta is realizing the benefits of its much larger scale.
For example, sonesta increased size is enabling us to utilize cluster staffing and concentrated markets like Atlanta, Dallas, and Chicago to reduce labor costs.
And this is also integrated systems to reduce expenses and lowered per transaction reservation cost through its own network and 2 otas by approximately 15% to 20% versus 2019.
As hotel industry fundamentals continued to improve we expect sonesta will deliver solid results on both the topline and Bottomline SB.
SPC is well positioned to participate and any upside realized by the evolution of sonesta as a major hotel brand management and franchise company towards 34% ownership.
I also want to provide and update on our relationship with Radisson limited guarantee provided by Radisson to support Spc's minimum returns was exhausted during the second quarter.
We are attempting to negotiate a mutually agreeable path forward for some or all of the hotels under this management agreement and we are reasonably optimistic about how this is going.
Turning to our net lease assets. This portfolio is largely back on track rent collections, including our largest tenant travel centers of America.
For 98% during the second quarter.
While we continue to work with select tenants and the most impacted retail sectors. We are not receiving new requests for rent deferrals.
As you may have seen earlier this week Ta reported very strong earnings as its transformation plan takes hold.
This is good news for Ta is our largest tenant and also because we own approximately 8% of their shares.
We have taken steps to preserve capital and solidify our liquidity, including maintaining a nominal dividend deferring nonessential capital spending.
And working with our operators to control costs and completing select asset sales to further improve liquidity last week, we initiated the sales process with respect to approximately 69, sonesta branded hotels, which we expect to sell encumbered by the current brand and which Todd will discuss in more detail.
Supported by steady cash flow from Ta and our net lease portfolio with our hotels now cash flow positive, we are well capitalized with ample liquidity and well positioned with a diverse portfolio of assets to improve the company's overall performance.
With that I'll turn it over to Todd to discuss and net lease portfolio and for the detail as well as our recent transaction activity and planned dispositions.
Thanks, John as of June 32021, we earned 796 net lease service oriented retail properties, including our travel centers with $13.4 million square feet and require annual minimum rents of $371.9 million.
And representing 42, 5% of our overall portfolio based on investment and our net lease assets for 98, 5%. We used a 171 tenants with a weighted average lease term of 10.5 years and operating on our 130 brands and 21 distinct industries at quarter end.
The aggregate coverage of our net lease portfolios and minimum rents was 2.3 times on trailing 12 month basis as of June 32021.
Rent collections from our net lease tenants were stable at 98% for the second quarter versus 93% and the first quarter and a low of 81% for April 2020.
During the second quarter, and we entered into rent deferral agreements for $1.1 million for 2 net lease tenants and us.
And as of June 32021, and $10.2 million of deferred rents remain outstanding.
During the second quarter, we also reported reserves for uncollectible revenues of $1.2 million for.
For certain of our net lease tenants, primarily select movie theaters and restaurant leases compared to $4.8 million during the first quarter.
As a reminder, we recognize all changes and the Collectability assessment for an operating lease as an adjustment to rental income.
Turning to our recent transaction activity during the second quarter, we sold 6 hotels with 576 rooms for an aggregate sales price of $32 million and 2 net lease properties totaling 35000 square feet for an aggregate sales price of $1.7 million, excluding closing costs.
Sbcs entered agreements to sell for net lease properties with an aggregate of 27000 square feet for an aggregate sales price of $2.2 million, excluding closing costs.
Subject to certain closing conditions, we expect to complete these sales by the end of the third quarter.
As we've discussed on previous calls we continue to evaluate both the legacy and recently transitioned sonesta hotels to determine which assets we view as disposition candidates based on various criteria and putting properties and markets or locations for SBC wants to reduce exposure as well as hotels on our historical underperformers relative to the <unk>.
And for our portfolio.
We have made significant progress and have identified 69, sonesta branded hotels and 27 states to market for sale encumbered and brand.
This includes 46 and extended stay hotels with 5.4% and <unk>.
19 select service hotels, with 2000, and 461 keys and.
And for full service hotels with 1090 <unk>.
These hotels on an aggregate net carrying value of $627.3 million as of June 32021.
We have engaged brokers and plan to formally launch the offer for our operating processes and August with the intention of executing a majority of sales by the end of the first quarter of 2022.
I will now turn the call over to Brian.
Thank you Todd.
Starting with our consolidated financial results for the second quarter of 2021 normalized <unk> was $25.8 million or <unk> 16 per share a sequential increase of $67.8 million over the first quarter of 2021.
Adjusted EBIT or EBITDA was $118.6 million for the second quarter our second.
Sequential increase of 143% over last quarter.
The major drivers impacting normalized <unk> for this quarter included the results from our hotel portfolio, which generated $29.9 million of positive hotel EBITDA for the second quarter of 2021 compared to negative $48.5 million and hotel EBITDA and the prior year quarter and negative $38.2 million and the first quarter of 2021.
Guarantee payments and security deposit utilization that supported our hotel returns under our historical agreements declined $115.8 million.
Negatively impacting year over year comparisons.
Rental income from our leased properties for the second quarter of 2021 declined $1.8 million year over year, primarily as a result of the conversion of 1 hotel from being subject to a lease agreement and the prior year to being operated under a management agreement and the current year.
Interest expense increased $19.3 million over the prior year quarter as a result of our 2020 financing activities and our revolver draw on January of 2021.
G&A expense increased $2.6 million on the current year quarter, primarily as a result of increased business management fees due to RMR as a result of an increase and our market capitalization and compared to the prior year period.
We account for our investments sonesta under the equity method of accounting and include our share of <unk> results and our earnings our chefs and <unk> normalized <unk> recognized from our 34% ownership interest was $2.4 million and increase of $4.1 million or <unk> <unk> per share over the prior year quarter.
Our share of senescence adjusted EBITDA for the quarter was $2.4 million and increase of $4.3 million over the prior year quarter.
Turning to our hotel portfolio results for our 283 comparable hotels this quarter Revpar increased 107, 1% gross operating profit margin percentage increased by 27, 4 percentage points to 27, 5% and gross operating profit increased by approximately $61.1 million from the prior year.
Period.
Below the GOP line costs of our comparable hotels increased $8.9 million from the prior year, primarily as a result of an increase and management fees driven by higher revenues at our hotels and increased insurance costs.
Our consolidated portfolio of 300 for hotels generated hotel EBITDA of $29.9 million compared to operating losses of $48.5 million from the prior year quarter.
Our 160 extended stay hotels continue to have the strongest performance generating $24.5 million of hotel EBITDA during the quarter.
Both are 51 full service and 93 select service hotels also turn positive for the quarter generating $4 million and $1.4 million respectively.
78% of our hotels had positive cash flow for the month of June compared to 44% in March.
Overall, Revpar increased 62, 7% sequentially to $57. This quarter as a result of strong leisure demand and the ramp up from rebranding 88 hotels in Q1.
Revpar is still down approximately 46% from the second quarter of 2019 levels, but improved from 61% decline in Q1.2021 as compared to Q1.2019.
The positive trends, we have been seeing since March continued into July with overall revpar of $703.42.
And 11, 9% sequential increase compared to June 2021.
Turning to liquidity and our overall corporate cash flow was positive before capital expenditures for the second quarter.
Based on our current outlook and expectation for improved logging activity and the back half of 2021 and stable rent collections from our triple net lease portfolio. We continue to expect to be cash flow positive for the full year 2021 at the corporate level before capital expenditures.
Capital improvements made at our properties was $24 million during the second quarter, and we expect to fund $100 million over the second half of 2021 for a total of $150 million projected for the full year.
Regarding our common dividend, we continue to expect to maintain the current quarterly distribution rate of <unk> <unk> per share through mid 2022.
At quarter, and we had approximately $915 million of cash on our balance sheet and our next debt maturities and the third quarter of 2022.
We currently believe we have adequate liquidity through 2022, and we will continue to assess and explore all of our options to ensure we are well positioned until the effects of the pandemic are behind us and lodging fundamentals stabilize.
Operator that concludes our prepared remarks, we're ready to open up the line for questions.
Thank you and we will now begin the question and answer session to ask for your question. You May Press Star then 1 and you touched on phone.
And if youre using a keypad.
If you would like to withdraw your question. Please press Star then 2 once again that it started and 1 to ask a question and at this time, we will pause momentarily to assemble the roster.
My first question today will come from Bryan Mayer with B Riley FBR. Please go ahead.
Good morning, just wanted to drill down a little bit on the asset sales and kind of the criteria you used and identifying those properties.
Yes.
To get strong pricing led to these properties needed more capex than the rash was the competitive new supply how did you think about that when deciding on which ones to sell.
Hey, Brian Good morning, this is Todd.
We looked at I think the primary criteria is that these hotels relative to.
The overall portfolio lagged in terms of occupancy ADR and Revpar were generally in market square.
We're projecting flat or.
Decreased.
Rate growth going forward some of them were older with capex needs. Some were adjusted and markets, where we wanted to reduce sbcs and exposure.
But at the same time like you point out we wanted to put together a portfolio that would get a lot of interest and.
These are these are quality assets I think if you look at FCC's portfolio overall they are.
The bottom tier, but these are probably higher quality than the assets that we brought to market and sold last.
And last year, but all indications so far is that theres going to be a lot of interest and these theres really not a lot of product out there for sale.
Right now, especially.
This amount of hotels on the.
Extended stay and select service specifically, so we think it's a good timing to go out to market now and we think we will.
We'll get we'll get good execution on pricing as well.
Great and kind of like a second derivative of that when we think about your capex spend and I think you said $1.50 for this year with 100 and the back half of the year for.
First of all is that total portfolio or is that mainly just the hotels.
Brian Thanks for the question, yes, that's the total portfolio, so a $100 million for the back half of the year.
$35 million of that is renovations at some of the full service hotels.
3 specific assets.
Putting significant capital and 2 to reposition and about.
And about $50 million of that is maintenance capex and we still have some carryover of the conversion cost based on delays of getting some of those projects done.
And so when we think about 2022 and I know, it's a little bit early would you think that there is some deferred capex, you're kind of pushing out from 'twenty, 1 into 'twenty, 2 and and what would be the size of that would be like $25 million $50 million.
Yes, Brian and I think yes, you're right we've been pretty careful on our capex spending is to protect our liquidity. This year. So there's definitely some stuff that we've deferred and they'll just be general lags and deploying capex projects.
But the range is a fair number but I think overall, that's sort of $125 million to $150 million for for a calendar year is safe and sort of a safe guesstimate at this point and time.
We did announce that the Hyatt portfolio would go under significant renovation, so there's $50 million with dedicated for that portfolio alone.
Plus our typical sort of maintenance Capex number, which we have said before is 65% to $75 million.
Okay, Great and then I would just add to that Brian net.
Sonesta has been and addition to transitioning the.
On the hotels that they took over they've been working on new brand standards for.
And for their newer brands and.
So some of the some of the deferral was just waiting to make sure that.
Sure.
And well established brand standards.
To work from.
Great and just last for me and then I'll hop back into the queue is.
With the use of proceeds you're going to be a sizable amount of cash if you get anywhere close to the carrying costs.
And the plant you simply reduce debt for.
Or would you be looking to eventually recycle some of that capital into new assets.
I think we expect to do.
And quite a bit better based on our opinions of value than carrying costs.
And the first statement.
John.
But at the current and the current time because of our.
Covenant situation as a result of the pandemic.
And we don't have the.
Ability to.
Invest in new assets.
So initially the expected use of proceeds is to reduce indebtedness and maintain liquidity until such time as we are and compliance and can go back on offense, which probably won't be until the early part of next year.
Okay. Thank you.
And our next question will come from Jim Sullivan with <unk>. Please go ahead.
Thank you.
So John and I have couple of questions on the hotel business.
And you know.
And what so far has a pretty.
RSO for rate of recovery.
The first of all when you talk about the.
The assets sold can you just clarify I think there was a comment on the pre to.
To this service to this effect and the prepared comments or the assets initially being offered subject to suggest a management contract.
And number 1 and and number 2.
And how will.
You know what would be the response, if a buyer would like the entire package but.
Got to buy it.
And not subject to the management agreement.
Thanks, Jim and pose a.
Good questions.
The plan is to sell them encumbered by brand, but not encumbered by the Sonesta management agreement.
So.
So investors who.
And.
And who.
Mifi portfolio or groups of hotels within the portfolio encumbered by brand could manage themselves or engage third party managers.
And they so choose or they could engage sonesta.
And we're expecting that.
And that these are probably going to be sold.
And.
Small portfolios.
And between 5 and 10 hotels in different regions of the country.
But we expect that we also will get some some portfolio bids and we're going to evaluate whether the bids come in and encumbered or unencumbered.
Going to evaluate all of the offers.
And do what we think and the <unk>.
Long term best interest of.
And of SBC.
On.
So.
1 of the benefits of selling encumbered is that it maintains and maintains the.
Growth profile.
Sonesta.
And we will.
Enable them to have a broader base of.
Franchisees for.
On which they should be able to continue to grow the franchise revenue stream.
And that maintaining the distribution and brand awareness and.
And continuing to grow.
The.
The platform without without SBC, having to put additional capital and.
I think as a.
34% owner of Sonesta.
And net positive for us, but obviously if somebody is if somebody is willing to pay more for.
On to get it unencumbered.
And we'll certainly do the math and where the differences and do what's best for thresholds.
Okay, Thanks for that and.
There was a prepared and the prepared comments.
There was a comparison between second quarter Revpar yeah.
And this year versus I think 2019 was the comparison of course July numbers or you know that much stronger than what you just reported in June.
And I'm curious.
There's obviously seasonality impacts, particularly and leisure business as we're approaching the end of the summer, but what do you think about the third quarter potential.
And as the as the July and number of representative of the trend you're expecting by month and the quarter I continued strength and both pricing.
And second quarter.
Yes, I think we.
Continue to see.
Trends across the portfolio.
Still largely driven by.
Leisure travel, we expect leisure travel.
And to continue even past labor day, although at a slower pace once.
Schools back in session colleges are back in session, but we think that there is still.
A lot of pent up demand for.
And for travel and there are a lot of.
Young professionals, and particular, who are working remotely and can do.
And long weekends, where there perhaps working on a Friday and Monday, but.
Still and Fort Lauderdale, and Hilton head.
San Juan or other locations like that so so we expect that business to hold up pretty good and.
The wildcard is going to be once you get to September how quickly.
On the business travel returns.
Yes, it's a big focus and the portfolio now is we've got an occupancy to a pretty good level.
But we really need to start pushing rate.
Lot of the business that we've gotten.
And this past quarter.
It came through OTT channel.
We have on.
A number of strategies to <unk>.
Push that business towards towards brand dot com and to and to push rate and.
And a lot of that comes through the extended stay side we are.
We had very high occupancies throughout the pandemic.
A lot of a lot of that business was traveling nurses and government business some construction business.
But lower rated 2 to maintain high occupancies, but now that we are.
Over 70% occupancy and the extended stay hotels.
We're moving to.
Better balance the mix of length of stay so we get some transient business and there as well and that will drive higher rates and the extended stay segment too.
And then and John and I, just wonder if you could help us because obviously some of your hotel rate tiers.
Talk a lot about the timing of the business transient as well as the business group rate.
Calgary.
And some of them well most of those companies have not change brands and whether.
And whether it's a marriott or Hilton and what have your day.
And those those those major brands that have been operating for many years have kind of a.
Our profile in terms of how much up there and how much of their total demand as business versus leisure, but they are corporate rate business, which you know they can talk about corporate rate, whether it's coming back or not and the business groups and so forth and.
And I Wonder if you could just update us on it you know I know that you don't run sonesta, but.
And so maybe you do on net Philly sure, but if.
If you could help us understand so and that's this pace of business travel and what they're doing to ensure that the portfolio doesn't lose ground.
And with its share of the business travel as we get past Labor day.
Sure.
I'm not running sonesta.
Correct.
What day.
Yes sonesta is on.
And number of initiatives I think historically they've.
We're a smaller company and.
Competed.
Better with the big brands on.
On the leisure side more so than for business travel they didn't have the same.
Customer accounts with.
National accounts, because they didn't have a on.
National presence on to the same extent to some of the larger brands.
That has changed with the transition of.
Over 200 hotels.
Over the last 6 months or so.
And so sonesta is accurately.
<unk> engaged and Rfps to get established.
Established.
Customer accounts with those national brands.
And so that they can drive more.
Business travel and Theyre also running promotions and local markets and have a.
I think a fairly sophisticated sales program that is getting out and driving business and at the local market level.
Backed up with with some marketing and advertising.
I think.
And the opportunity in addition to pushing rate the opportunity for sonesta is.
On the day, they have I think a well trained group of salespeople, who are aggressively looking for business and.
And finding some success with that whereas our our experience.
Generally with larger brands is that.
And they've gotten a little bit.
And maybe this is changing as a result from the pandemic, but they were getting complacent.
There was enough business coming in from brand Dot com and that they didn't actually have to go out and sell and.
So really.
And being good salespeople as I think sonesta salespeople are better than the salespeople that you would find.
At some of the other brands and so.
It's going to take some time and you don't build brand awareness overnight, but we think that sonesta is going to close that gap that currently exists between.
Their business travel performance and the larger brands performance.
Okay. Thanks for that trial and 1 final question on the hotel business and Sonesta.
Really relates to Red Lion.
There's been some discussion on.
And the earlier calls about the franchising initiative at the time of the Red Lion acquisition, and Red Lion as a as a <unk>.
Hotel company had actually been losing.
Yes.
And no units and to some extent that may have been directed by the Red line given quality concerns or what have you but I.
Just curious as you think about the potential for sonesta to grow the Red Lion brand and the other brands that they got when they acquired Red line through franchising.
Are you optimistic or confident that the the hotels under the Red Lion stable of brands will increase beginning next year.
I think.
Sonesta is team.
And that has been put in place.
And at Red Lion.
As.
Really.
Started out doing a really great job.
The EBITDA.
Generated at Red Lion is substantially higher than what we had originally projected on already.
Yes.
The loss of franchisees has has abated and the Red line and brands are growing again, albeit slowly and.
Net.
We saw definite value and the Red line brands and the ability to grow those.
Lower tier hotels, and those lower tier segments, but a large part of the value we saw and the Red Lion acquisition was <unk>.
The ability to have a platform.
And we could quickly get franchise disclosure documents filed for the sonesta brands and.
And in particular on the extended stay side.
We believe that.
The franchise development team at Red line, which is now also the <unk>.
Sonesta franchise development team.
We'll have disclosure documents filed and hopefully by October 1 and.
We will be able to.
Significantly.
Bolster franchise sales in the Sonesta brand as well as the Red line brands. So we're.
So far our expectations have been exceeded and.
We're tracking well with getting the sonesta.
Documents filed so we feel very good about that acquisition and those brands.
Okay. Thanks, John.
And this will conclude the question and answer session I would like to turn the conference back over to John Murray for any closing remarks.
Thank you all for very much for joining us on today's call and we look forward to hopefully seeing some of you at NAREIT.
During the year. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Okay.
[music].
Thanks, John.
And John.
Yes.
And the dividend.
Okay.
John.
And.
[music].