Q4 2021 Service Properties Trust Earnings Call
Okay.
Good morning, welcome to the surface property Trust's fourth quarter 2021 financial results Conference call.
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At this time for opening remarks, and instructions I electronic over to director of Investor Relations Kristin Brown. Please go ahead.
Thank you and good morning.
Turning me on today's call are John Murray, President, Brian Donley, Chief Financial Officer, and Todd Hargreaves.
Today's call includes a presentation by 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 the prior rate.
Sir.
I'd like to point out 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 SEC's present beliefs and expectations as of today February 22, 2000 22022.
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 other than through filings with the Securities Exchange Commission or SEC.
In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized <unk> and adjusted EBITDA.
Reconciliations of these non-GAAP financial measures to net income as well as components to calculate <unk> are available in our supplemental package download the investor Relations section of the company's website.
Actual results may differ materially from those projected in any forward looking statement additional information.
Information concerning factors that could cause those differences.
As contained in our Form 10-Q .
Q on file with the SEC and in our supplemental operating and financial data and on our website at Www <unk> com investors are cautioned not to place undue reliance upon any forward looking statements.
Turn the call over to you John .
Thank you Kristen and good morning.
Last night, we reported fourth quarter normalized <unk> of <unk> 17 per share and adjusted EBITDA of $119 million, representing an 83% increase from the prior year quarter, reflecting a generally improving hotel portfolio as well as steady performance from our net lease service oriented retail properties.
Demand across the portfolio continues to be stronger than weekends versus weekdays due to strength in leisure demand in warmer climates spiking COVID-19 cases, driven by the omicron variance resulted in canceled room nights in late December and impacted January most acutely.
Certain conferences opted to go virtual dampening the return of business transient demand and what is already a seasonally weak month as.
As an example, the decision to move the January JP Morgan Health care conference virtual wiped out $3 million of revenue at the Clift Hotel in San Francisco.
With Covid cases, subsiding related mandates being lifted and more employees returning to office work, we believe that the lodging recovery resumed in February and expect further improvement as business travel rebuilds leisure demand remains elevated and extended stay occupancy has remained stable.
We expect the trajectory of recovery will accelerate as we move through 2022, particularly as urban markets in CBD office buildings reopened.
Storage lease SPC select service in urban full service hotels have generated approximately 75% to 80% of their revenues from business related travel and meetings and we believe a more widespread return to in office work is important to see that level of business demand resume.
50% of room nights were booked through OTT channels that have select properties this quarter due to lagging business transient demand.
We believe 70% of the margin weakness that semester select hotels reflects business travel related revenue weakness rather than cost pressure.
For the fourth quarter Scc's comparable Revpar was 72% of 2019 levels, an improvement from 69% of 2019 levels in the third quarter and ahead of our expectation to achieve between 63 and 65% of 2019 fourth quarter Revpar levels.
Our extended stay hotels continue to maintain strong occupancy premiums relative to the industry and compared to a non extended stay hotels.
Our 159 extended stay hotels reported Occupancies of 65, 9% during the quarter compared with Occupancies of 48, 6% to 46, 6% respectively for a 51 full service hotels and 93 select service hotels.
Extended stay Revpar is also the closest service level to 2019 levels at 83% of two of the 2019 quarter.
With each of our extended stay brands, achieving occupancies above 90% of 2019 levels.
On the expense side labor continues to pose the challenge for the industry and our portfolio wage increases in the use of expensive contract labor have negatively impacted results.
Sonesta this quarter wage related costs were approximately 8% higher than Q3 due to wage increases to attract and retain employees use of contract labor retention bonuses for employees that sale hotels and overtime due to open positions.
On a cost per occupied room basis wages and benefits increased seven 5% year over year for the fourth quarter.
Wage inflation was partially offset by increased productivity and labor savings due to open positions and adapted brand standards.
Effective January one we amended our management agreements with Sonesta, we previously announced we would sell 68 hotels two of them have been sold to date with the remainder to be sold over the next few months.
194 retained sonesta hotels are included in our Master management agreement with a 15 year term at 215 year renewal options. This amended agreement sets our annual owner's priority return for the retained hotels or $325 2 million, a 30% reduction from the owner's priority return amounts for hotels that were transfer.
Third from other operators.
We have also agreed to invest approximately $600 million of expected revenue enhancing renovations over the next three years to upgrade to the portfolio of brand standards.
For the sale of hotels. The term was extended to the earlier of December 31, 2022 or until the hotels the soul S.
Spc's owner's priority return will be reduced by the car.
Current owners prior to return for these assets were $82 $7 million once the remaining 66 hotels.
Hotels are sold.
Sale process is rolled out well with over 70% retaining long term sonesta branding agreeing to pips and in some cases agreed to additional future franchises.
These sales are strategic to improving the overall quality of our hotel portfolio and is an important step to improve our liquidity.
Todd will discuss the sales process in more detail.
SBC transitioned 206 hotels to sonesta over the past five quarters under very challenging industry conditions, but we believe the transition disruption is behind us and that Sonesta is brand awareness is growing and.
In addition to benefiting from the recovering hotel industry demand and increasing brand awareness Sonesta is also realizing the benefits of its largest scale, including savings from renegotiated contracts that have reduced pricing on key products and services at our hotels.
With business demand is still anemic versus pre pandemic levels OTA usage was elevated this quarter, which drove higher commission expenses, Although sonesta OTA Commission rates have decreased approximately 25% over the past year as a result of its increased scale reliance on these more costly channels is still elevated.
Targeted promotions and the expected rollout of a new mobile app should increased direct bookings and reduce reliance on higher cost OTA channels.
This hotel industry fundamentals continued to improve we expect sonesta will deliver solid results on both the top and Bottomline Sonesta has rolled out several new revenue initiatives and seeing good traction with corporate negotiated room nights at Sonesta select hotels.
They are also further adjusted labor standards and enhance their scheduling tools to maximize labor efficiency.
On the group business front 2022 is pacing well ahead of 2021, despite omicron effects in January they'll pace remains behind 2019 levels.
Group rates are generally recovered two or slightly above 2019 levels.
As a 34% shareholder we are encouraged by semesters continued progress following a period of major growth in disruption.
To give market participants a chance to get to know the sonesta brand and highlight its recent evolution as a company we will be hosting an investor day with the Sonesta and SPC management teams for analysts and institutional investors at the end of March in Chicago.
The day will include a tour of some of SBC Chicago Hotel assets managed by Sonesta in the presentation portion will also be webcast.
Please reach out to Investor relations for more details if you're interested in attending.
Turning to our net lease assets. This portfolio is continuing to provide a stable base of cash flows.
As you may have seen our largest net lease tenant travel centers of America reported strong earnings earlier. This week as its transformation plan continues to produce financial and operating improvements.
It's an 8% shareholder we are the beneficiaries of this significantly improved performance.
Our other net lease tenants also continued to perform well with a 100% rent collection rate for the fourth quarter.
Overall, we remain encouraged by declining Covid cases at the end of related restrictions in many markets and an increasingly positive outlook for a return to normalcy.
With the recent performance of our hotel operators of net lease tenants as well as the progress on our initiatives to reduce leverage and improve liquidity, which Brian will discuss in more detail. We believe <unk> is well positioned to benefit as the lodging sector recovers from this historic downturn.
With that I'll turn the call over to Todd to discuss hotel dispositions of the recent transaction activity and our net lease portfolio in more detail.
Thanks, John .
The sonesta branded hotel sales and portfolio optimization initiatives continues to be a primary focus of management.
And we continue to make progress on the previously announced sales of 68 sonesta branded hotels.
We have closed on two hotels for $28 million one during Q4 2021 and one during Q1 2022.
We are under purchase and sale agreement to sell 45 hotels for $402 million and are under letter of intent to sell an additional 19 hotels for $132 million. There are two hotels for which we have not yet selected a buyer.
Aggregate pricing for the hotels remains in line with expectations, we discussed on our third quarter earnings call and we expect to close the majority of these sales over the balance of Q1 and early Q2.
We expect aggregate sale proceeds for the 66 hotels, either sold or under agreement to sell about $560 million or approximately $66000 per key.
Approximately 72% of the sale of hotels are expected to be sold encumbered by long term sonesta branding, maintaining sonesta distribution and assisting in Jumpstarting franchising efforts to the sonesta brands as.
As well as providing SPC with an additional future revenue stream through its pro rata ownership and sonesta and the royalties that we will receive from these franchisees.
An additional 13% of the sale of hotels are expected to be sold on a short term franchise agreements, while the buyers explore multifamily alternatives, which could potentially convert to more permanent branding arrangements. If the bias determined lodging is the highest and best use.
The balance of the sale of hotels will be rebranded or converted to an alternate use we believe the timing of these sales has been favorable given the excess demand of buyers targeting hotels relative to the supply that you offer.
While most of the hotels will retain the sonesta brand. The hotels that are being sold unencumbered of long term franchising agreements are being sold at prices that commanded a premium compared to offers received to keep the message ester branded hotels.
We believe our overall execution strategy on these sales will provide the maximum long term benefit of SCC.
In terms of other transaction activity during the fourth quarter, we sold six net lease properties totaling $52 6000, rentable square feet for an aggregate sales price of $9 $1 million for the full year 2021, we sold seven hotels and 11 net lease properties for total proceeds of $52 million.
In addition to the hotel sales previously discussed we are under agreement to sell one property for $4 1 million.
Which we expect to close in the second quarter.
As of December 31, 2021, we owned 788 net lease service oriented retail properties, including our travel centers with $13 5 million square feet, requiring annual minimum rents of $370 million.
Representing 42, 5% of our overall portfolio based on investment are net lease assets were 98, 1% leased.
By 174 tenants with a weighted average lease term of 10 two years and.
And operating under 134 brands in 'twenty, one distinct industries at year end.
The aggregate coverage of our net lease portfolios minimum rents was $2 five eight times on a trailing 12 month basis as of December 31, 2021.
And we collected all of the rents due from our net lease tenants during the fourth quarter, including all deferred amounts then do.
As of December 31, 2021, $7 $6 million of deferred rents remain outstanding with seven tenants, who represent approximately 2% of our annualized rental income from our net lease portfolio, including today.
We also reduced our reserves for uncollectible rents by $600000 this quarter compared to reducing our rental income by $4 $5 million for reserve shrug collectible rats recorded in the prior year quarter.
In 2022, we have only 384000 square feet of leases expiring representing less than 1% of our overall net lease Reits.
Now I'll turn the call over to Brian .
Thanks, Todd starting with our consolidated financial results for the fourth quarter of 2021 normalized <unk> was $27 9 million or <unk> 17 per share a $54 million increase over the prior year quarter, and a sequential decrease of $15 $8 million over the third quarter of 2021.
Adjusted EBITDA was $119 million for the fourth quarter, a $54 million increase over the prior year quarter, and an $18 3 million or 13, 3% sequential decrease over last quarter.
The major drivers impacting normalized <unk>. This quarter included the results from our hotel portfolio, which generated $28 $4 million of hotel EBITDA for the fourth quarter of 2021 compared to negative $26 $1 million of hotel EBITDA in the prior year quarter.
Guarantee payments and supported our hotel returns under our historical agreements declined $13 4 million negative.
Negatively impacted year over year comparisons.
Rental income from our leased properties for the fourth quarter of 2021 increased $8 $6 million over the prior year quarter, primarily as a result of a $4 $3 million increase in annual percentage rent recognized under our leases with Ta and a $4 million decline in reserve for uncollectible rents.
Interest expense increased $9 $7 million over the prior year quarter as a result of our senior notes issuance in November 2020, and our revolver draw in January of 2021.
G&A expense decreased $445000 or 3% in the current year quarter, primarily as a result of lower legal and other professional service costs, largely offset by higher business management fees due to RMR as a result of an increase in our market capitalization compared to the prior year period.
Sure.
We account for our investments sonesta under the equity method of accounting and include our share of semesters results in our earnings our share of senescence normalized <unk> recognized from our 34% ownership interest was $397000, an increase of $4 $6 million or <unk> <unk> per share over the prior year quarter.
Net loss for the fourth quarter 2021 includes a $76 $5 million impairment charge as a result of reducing the carrying value of 35 hotels and 21 net lease properties to their estimated fair value.
Given our current expectations on pricing compared to the book value of the other 32 hotels that are held for sale, we expect to record aggregate gains on sale of real estate largely offsetting these impairment charges. When those hotels are sold in 2022.
That our total proceeds on the 68 hotels are projected to approximate the unadjusted carrying values, we disclosed last quarter of approximately $579 million.
We also recorded a $35 $8 million charge this quarter related to a write off of working capital advances. We had funded in 2020 under our agreement with Marriott and IHG as those amounts are no longer expected to be recoverable.
Turning to our hotel portfolio results for our 298 comparable hotels this quarter Revpar increased 77% gross operating profit margin percentage increased by 18 eight percentage points to 25, 2% and gross operating profit increased by approximately $65 million from the prior year period.
Below the GOP line costs at our comparable hotels increased $5 $4 million from the prior year with increased management fees driven by higher revenues at our hotels and an increase in insurance costs were partially offset by a decrease in real estate taxes.
Our consolidated portfolio of 303 hotels generated hotel EBITDA of $28 4 million.
Our extent of 159 extended stay hotels continued to have the strongest performance generating $24 million of hotel EBITDA.
51 full service at 93 select service hotels generated two four and $2 million respectively.
Overall, revpar declined 10%, 10% sequentially to $62 this quarter due to normal seasonality, although Q4 revpar was above our expectations at approximately 72% of fourth quarter 2019 levels, an improvement compared to Q3, which was 70% of Q3 19 levels.
As far for the month of December was 80% of December 2019 levels.
January 2022 was negatively impacted by the omicron Barrington and already seasonally weak period in our hotels generated revpar of $48, which was 61% of January 2019 Revpar levels.
Overall, although we expect the first quarter of 2022 to be softer relative to Q4 'twenty. One we are seeing signs of increased activity in February and expect to see similar lifts from leisure demand in March as we did last year.
With more people returning to the office mandate rollbacks in markets reopening we are optimistic business travel will begin to ramp up more meaningfully in the coming months.
Regarding the 67 hotels to be sold in 2022. These hotels generated revpar of $46 for the full year of 2021 compared to Revpar $58 for our 236 non exit hotels.
EBITDA for these 67 sale of hotels was $3 million for the full year of 2021 compared to $58 million for the non exit hotels.
Turning to investing activities during the fourth quarter, we made $34 million of capital improvements at our properties and $103 $6 million for the full year 2021.
We anticipate our capital spend for 2022 to be around $200 million, including $62 million, we have committed to spend under our amended Hyatt and radisson agreements for renovations as well as to renovate a significant number of sonesta hotels.
As John mentioned, we expect to invest $600 million over three years and our sonesta portfolio.
Turning to the balance sheet, our upcoming debt maturities include $500 million of senior notes due in August , which we expect to redeem with cash on hand or $1 billion revolving credit facility matures in July of 2022, and we are currently in discussions with our lending group regarding extending the maturity date and additional covenant relief as a REIT.
Minder, our credit facilities fully collateralized and we are optimistic we will come to terms in the coming weeks.
We currently have approximately $950 million of cash on our balance sheet and expect an additional $550 million from our hotel sales in the next few months, we believe between our expectations on extending the revolver and the enhancement to our liquidity, we will be well positioned to support our operations as we hopefully turn the corner from the effects of the pandemic.
Finally regarding our common dividend, we expect to maintain the current quarterly distribution rate of <unk> 10 per share through late 2022.
Operator that concludes our prepared remarks, we are ready to open up the line for questions.
And as mentioned we will now begin the question and answer session.
I would like to ask a question you May Press Star then one on your Touchtone phone.
I'm sorry. Your question. Please press Star then two.
Please hold while we assemble our roster.
And the first question comes from Bryan Maher with B Riley Securities.
Good morning.
Brian Thanks for that John .
Yeah, the capital stack and we are expecting the charities that kind of hit some.
Some of my questions here.
Once all is said and done and it seems like you're well positioned through 2022.
Where would you like the cash position could be once you've paid off the $500 million kind of taking care of the revolver.
Holding $1 billion in cash clearly is not ideal where should we think that that level is three or four quarters from now.
Brian Great question, Thank you and good morning.
Yeah, our expectation is through late 2022, we will probably keep the cash on hand, and the real catalyst will be when we're out of the so called penalty box under our bond covenants that one five times incurrence test.
We're currently not meeting.
We do expect to hopefully get past that later in the year.
By the end of the year and at that point.
Our ability to encourage that and use the revolver as its intended.
At that point, we would then consider yes.
Taking the cash off the balance sheet.
Okay and as it relates to Capex, the $600 million over three years I know you said $200 million this year.
Should we expect the other $400 million offset to be equally split amongst 2023 and 2024.
Brian Yes.
That's a good estimate for now we are.
We're planning out and strategizing about the order in which we'll renovate the hotels.
We might.
Just because of supply chain issues and other timing issues, we might get a later start on some of those renovations.
Sonesta properties this year so.
Possibility that it could be a little bit lighter this.
This year at a little bit a little bit more than $200 million in the next couple but for now I think the best estimate is that we will spread it out evenly.
Great.
The recovery in extended stay and select service hotels has been pretty well documented what youre seeing in your portfolio, but maybe John could you give us a little color on how the urban full service hotels are doing some of your markets.
Is there any notable highlight where you're seeing a faster recovery than you might have thought.
Yes, that's a good question Bryan we.
We've seen a couple of markets.
St. Louis has picked up some good business from Wells Fargo recently.
Their performance is picking up.
Full service hotels in resort and other southern markets are doing well.
Hotels, like San Juan and Fort Lauderdale, Miami Airport, which.
<unk> has been doing a super job with both.
Some corporate local corporate business as well as.
Capitalizing on.
Airline industry distress and Covid impacts.
Those types of hotels are doing very well, even Hilton had had continues to generate leisure business.
And particularly around the.
Year end holidays did much better than expected.
But where we are seeing weakness continues to be.
Cities like Washington D C.
San Francisco, where we expected the year to get off to a great start, but then the JP Morgan healthcare conference that canceled the Clift hotel was one of the.
<unk> pieces of that.
Of that conference so several million dollars of revenue just.
Disappeared overnight.
So San Francisco has been struggling.
Sure.
Philadelphia remains a little bit weak so.
I think that's.
On balance that that's kind of the mix tougher.
Tougher in the northern most of these like Minneapolis as well.
Okay.
Once you're comfortable.
With results across the hotel segment, the sale of the hotels full service starts to weak.
Start to get back.
Back to normal for lack of a better word.
And when you start to move back into growth mode whenever that might be 2023, 2024, where across your three segments.
Hotels I'd break it down hotels net lease and travel centers do you think you might pursue the most growth.
Well.
That's a good question I think that.
Ta has been actively Fran.
Franchising and acquiring.
Assets.
For their own account and I don't expect.
In 2022, and 2023 that there'll be any noticeable activity between us and fatigue Ta properties.
I do think that there'll be a balance of.
Retail and hotel acquisitions.
And <unk> has been actively bidding on some hotel properties on their own.
And also looking at.
Sure.
Potential franchise growth and to the extent that they do transactions.
You might we might get capital calls to maintain a 34% interest. So there may be some growth from maintaining that interest in ownership interest in sonesta and then.
I think that.
As we look at our at our portfolio.
Markets like New York.
Miami, Los Angeles are markets, where we don't have.
Enough.
Penetration, we don't think and.
And we could probably benefit from.
Having a little bit more resort exposure I think that that has benefited some of our peers over the past couple of quarters as revenge travel has.
<unk> come out of the gates pretty strong.
Remains to be seen how reopening of.
International markets.
Sure.
Impacts that but.
But I think we could use more in the way of resorts.
Just a follow up on your comment.
At one time, you guys had a ROFO on any property Ta would look to acquire that's still in place and are they putting properties to you to see if you want them first before buying them themselves.
That is correct you have an excellent memory.
There is a right of first offer.
And so when when Ta acquired properties they are required for us to.
To show them to us when they franchise properties.
Because we own the Ta brand.
Theres some consents required before they can.
Franchise, and there's some trade area of protections that we have as well.
Regarding how close new ta franchises might be located to our existing sites.
75 mile radius.
Which sounds like a big distance, but it's not very much.
Driving between travel centers.
So anyway, yes, we do have those we do have those.
Revisions in our lease leases and our board regularly.
Just about every quarter reviews.
That activity and makes decisions about our independent trustees.
Thanks, and just last from me and I know you touched upon it but I think I might have missed some of it can you give us a little bit more color on the labor issue and how and when you see that starting to dissipate hopefully some point this year really matched.
Yeah, I mean, it's.
It's challenging and how we see it.
Ta is probably doing a little bit better than 10 hour healthcare and hotel operating companies at.
Attracting employees there.
I think maybe ta, maybe it's down about 15% from its normal levels.
Semesters.
About 20% of their.
Normal positions are unfilled.
So.
It's.
There is an active effort to fill those positions and.
Offer pay rates that.
Our compelling so that employees.
Stay for a long period of time, but.
Yes.
The more less skilled.
Physicians the the higher the turnover seems to be so.
Throughout this past year, we've run that sonesta has run at about 20% deficit in terms of open positions and.
And so.
They've tried to manage brand standards, how often they clean.
Rooms.
Obviously, it depends on the price point of the hotel and how you manage guest expectations, but.
And then they've they've had.
Yes.
Some housekeeping and food and beverage employees working extra shifts and overtime. They have had in some hotels they've had front desk employees, helping at peak hours to clean rooms with sales staff covering the front desk.
Those types of measures while.
While it's great to see teamwork and everybody pulling together.
Because the burn out and.
Some job dissatisfaction as well and so.
So.
It's been a constant battle the contract labor.
As you know is very expensive so.
So that's what I think is getting better at.
And as well as Marriott IHG Hyatt Radisson Theyre all.
Getting better.
Managing their shifts to try to get the.
The least amount of contract labor.
Least amount of overtime.
But to make sure that they're getting all the rooms cleaned and all the gaps in the restaurant Wade.
Weighted on so.
I think that it's.
It's a little bit speculation that.
And all of the operators are keenly focused on this and I think to get doing a better job with each passing day and as as business levels.
Both continued to grow and become more predictable the effort on the labor front becomes easier.
When you think you have everything figured out.
And you're on a good trajectory and then new variant comes out of the woodwork and business drives up.
Labour management really becomes problematic so.
So we're confident that.
That the worst is behind us and that we'll see less of these.
Contract labor and less.
Less overtime and.
And that the wage increase issue will will will abate.
Thank you that's all for me.
Thank you. This concludes the question and answer session I would like to turn the call John Murray for any closing comments.
Thank you everyone for joining us today, we look forward to hopefully seeing some of you in Chicago at the end of the month.
Thank you.
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