Q1 2022 Service Properties Trust Earnings Call
[music].
Good morning, welcome to the surface property Trust's first quarter 2022 financial results Conference call.
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I now would like to turn the conference over to Kristin Brown director of Investor Relations. Please go ahead.
Good morning.
Joining me on today's call are Todd her Grand President and Chief Investment Officer, and Brian Donley, Treasurer, and Chief Financial Officer.
Today's call includes a presentation by management, followed by a question answer session with analysts.
Please note that the recording retransmission and transcription of today's conference call is prohibited without the prior written consent of SBC.
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 1995 and other securities laws.
These forward looking statements are based on SEC's present beliefs and expectations as of today may seven 2022.
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.
Then through filings with the Securities and Exchange Commission.
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 found in the Investor Relations section of the company's website.
Actual results may differ materially from those projected in these 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 in our supplemental operating and financial data found on our website.
Investors are cautioned not to place undue reliance upon any forward looking statements and with that I'll turn the call over to you.
Thank you Kristen and good morning.
Our first quarter results reflect sequential monthly improvement throughout the period as comparable Revpar increase from 63% of 2019 levels on the crowd impacted month of January .
74% of 2019 in March resulting in Q1 2022, Revpar that was 69% of the same quarter of 2019.
The improvement has continued into the second quarter with preliminary April revpar of $83 equal to approximately 82% of April 2019 levels.
Room rates are beginning to approach 2019 figures with ADR improving from 83% of 2019 in January to 95% of 2019 in April .
Notably our full service portfolio ABR has also returned to 95% of 2019 Q1 levels highlighted by two of our best performers Sonesta Hilton head and Sonesta, Miami Airport, achieving rates of 144% and 135% respectively of 2019, Q1, ADR along with other leisure and urban.
<unk> markets, such as Fort Lauderdale, San Juan Scottsdale, and New Orleans, each outperforming Q1, 2019, ADR by more than 110%.
We have also seen considerable occupancy increases as some of our full service urban hotels.
While sonesta Toronto increased occupancy from 26% in January to 76% in April and the Royal Sonesta, Austin improved Occupancies and 35% in January to 82% in April .
The recovery of SPC suburban select service in urban full service hotels, which have historically generated approximately 75% to 80% of their revenues from business related travel or meetings.
To lag our airport and resort locations with that gap should continue that gastric closes more workplaces reopen and employees return to the office.
While trailing 2019 group pace of FCC's hotel operators is considerably above 2021 levels in both room nights and revenues, specifically sonesta with pace increases of 37% 38 comparable full service hotels.
And that's just beginning to realize the benefits of its larger scale and increased national footprint to compete for more corporate business.
While there are key markets domestic will need to further penetrate to maximize reach notably Miami and Los Angeles.
We recently established a major presence in one of the top International hotel markets through the acquisition of four hotels totaling 900 At&t's in Manhattan.
As part of the acquisitions must also purchased the intellectual property of a well known lifestyle brand James hotels, which it intends to scale across the sonesta national portfolio, leveraging the brand's extensive industry wide recognition.
And that has implemented multiple portfolio wide initiative to support for performance, including utilizing its increased scale to renegotiate agreements with its OTT business partners.
Appointment of a new website and mobile app to improve brand dot com contribution and revenue strategies to capture incremental non room income across the portfolio.
As it relates to our ongoing plan to sell 68 Master branded hotels, we have closed on 22 hotels for $238 million.
We are under purchase and sale agreements for 42 hotels for an aggregate price of $301 million.
We continue to market for the hotels for sale, one of which is under letter of intent.
Pricing for the hotels remains in line with expectations, we discussed in our fourth quarter earnings call. We expect to close most of these sales over the balance of the second quarter.
While our initial timeline on these hotels has moved back as we worked through negotiation diligence and closing coordination with over 20 different buyers. Our goal with these dispositions is to maximize value to SPC, which we believe we will accomplish through sales to this buyer mix of smaller portfolios.
It is also worth noting that the impact of the volatile in the debt markets has not had a material impact on our sales process and the prices we expect to achieve.
Over 70% of the sale of hotels are expected to be sold encumbered by long term sonesta branding.
<unk> domestic distribution as well as benefiting SCC through our 34% ownership in sonesta.
The balance of the shell hotels has or will be rebranded or otherwise converted to an alternate use such as workforce housing.
As we have stated previously this is an opportune time to be selling select service and extended stay hotels, given investor demand in the market.
We're looking forward to optimizing the portfolio through the sale of any of our relative underperformers. So that we can focus on what we view as our core strategic sonesta branded portfolio.
SBC as non exec hotels held a $36 ADR premium to the exit of hotels.
And a 20 dollar revpar premium during the quarter and grew revpar by 80% over the previous year quarter versus 40% for the exits highlighting the relative quality of performance interchanged hotels.
As a thank assistant throughout the pandemic the weakness in the lodging sector has been counterbalanced by the stability of our diversified net leased assets our largest at least had travel centers of America reported another strong quarter earlier. This week, our holdings of 8% of Tas equity provides additional benefits to SPC continues to excel.
Our other net lease tenants also continued to perform with strong collections and increased rent coverage.
2022, we had 180000 square feet of leases expiring, representing one 9% of our overall net lease rents excluding this.
This includes three tenants across multiple properties known to be vacating, we're evaluating both leasing and sale options for these assets.
We sold two vacant properties for an aggregate sales price of $5 $4 million in the first quarter subsequent to quarter end, we sold four net lease properties for an aggregate sales price of $3 $5 million and are under agreement to sell an additional five properties for $3 $8 million, which we expect to close in the second quarter.
In closing we remain encouraged by the accelerated wind down of many COVID-19 related restrictions and an increasingly positive outlook for a return to normalcy.
With the improving trends in business travel and the solid performance of our net lease portfolio.
As well as the progress we have made on our initiatives to reduce leverage through asset sales and improved liquidity, which Brian will discuss in a moment.
We believe SBC is well positioned to benefit as lodging sector rebounds, with a higher quality optimized hospitality portfolio.
We're also looking forward to introducing the sonesta branded leadership team to market participants and highlights message recent evolution is one of the largest hotel brand and management companies in the country at the reschedule of SBC Investor Day later this month in Chicago.
The day will include a tour of for SBC hotels managed by Sonesta as well as the presentation from the SPC and Sonesta management teams.
The presentation portion will be webcast. So please reach out to investor relations for more details if you're interested in attending in person.
I'll now turn the call over to Brian to discuss our financial results in more detail.
Thanks, Todd and good morning.
Starting with our consolidated financial results for the first quarter of 2022 normalized <unk> was negative $3 4 million or <unk> <unk> per share of $38 6 million increase over the prior year quarter.
Adjusted EBITDA was $90 1 million for the first quarter 41 $4 million increase over the prior year quarter.
Although the first quarter is typically a seasonally weak quarter for our hotel portfolio and was compounded by the effect of the pandemic at the start of the year. These results exceeded our expectations from where we were projected in February .
Demand accelerated in late February and has continued through today.
The major drivers impacting normalized <unk> over the prior year quarter include the results from our hotel portfolio, which generated $5 $2 billion of hotel EBITDA for the first quarter of 2022.
Barry to losses of $38 2 million in the prior year quarter.
Guarantee payments that supported our hotel returns under our historical agreements declined $10 4 million.
Negatively impacting year over year comparisons.
Net operating income from our leased properties for the first quarter of 2022 increased $5 $3 million over the prior year quarter, primarily as a result of a decrease in reserve for uncollectible rents for certain tenants.
Interest expense decreased $3 million over the prior year quarter as a result of our revolver draw on January 2021.
G&A expense decreased $675000 or 5% to $12 million in the current year quarter, primarily as a result of lower legal and other professional service costs and lower business management fees due to RMR.
We expect G&A to increase to approximately $13 million in the second quarter, largely driven by annual noncash stock grant to our trustees.
Lastly, our share of normalized <unk> recognized from a 34% ownership interest in sonesta increased $1 8 million or one cent per share over the prior year quarter.
Turning to our hotel portfolio results for our 295 comparable hotels this quarter Revpar increased 75% gross operating profit margin percentage increased by 18, two percentage points to 21% and gross operating profit increased by approximately $56 8 million from the prior year period.
Below the GOP line costs at our comparable hotels increased $12 million from the prior year with increased management fees driven by higher revenues at our hotels and an increase in insurance costs, partially offset by a decrease in real estate taxes.
Our consolidated portfolio of 298 hotels generated hotel EBITDA of $5 2 million.
Our 157 extended stay hotels continue to have the strongest performance generating $10 $4 million of hotel EBITDA during the quarter.
<unk> 49, full service and 92 select service hotels generated losses of $1 5 million and $3 $3 million respectively.
Extended stay performance has benefited from strong occupancy premiums relative to the industry and compared to our non extended stay hotels with occupancy of 64, 6% during the first quarter compared with Occupancies of 46, 3% at 44%, respectively for our full service and select service hotels.
Overall, revpar decreased one 8% sequentially to $61.42 this quarter due to normal seasonality and the impact that the omicron Varian January but improved on a monthly basis from $48 in January to $83 in April or 82% of April 2019 levels.
We currently expect these trends to continue and are projecting full quarter Q2, revpar of 85 to $88 or around 82% of 2019 levels.
Regarding the remaining 62 of the 68 hotels to be sold as of quarter end 'twenty two of which have closed in April and May to date. These hotels generated revpar of $45 eight in the first quarter compared to Revpar of $64.51 for our 230 economics at hotels.
Hotel EBITDA for the 62 remaining sale hotels was negative $3 4 million in the first quarter compared to positive $9 $1 million for the non exit hotels.
Despite the strong performance of hotels, and leisure markets and warmer climates, our hotels in certain urban markets were weighed weighed on results this quarter.
For example, our three full service hotel in Chicago generated operating losses of $5 million in the quarter on Revpar of $22. These.
These three Chicago assets improved revpar to $59 in April and we expect significant ramp up in the summer months.
The Clift hotel in San Francisco, another strategic asset for Us lost $1 $6 million on revpar of $60 in the quarter.
Revpar more than double the $122 in April for this asset.
Our full service assets in Cuba in Irvine, California lost a combined $2 million in Q1 as they were negatively impacted by renovation disruption.
Looking ahead to the second quarter. We currently expect the portfolios hotel EBITDA margins to be in the 19% to 22% range versus just under 2% in the first quarter as we enter our seasonally stronger periods and demand continues to accelerate.
Turning next to our net lease portfolio as of March 31, 2022, we owned 786 service oriented net lease retail properties, including our travel centers with $13 5 million square feet, requiring annual minimum rents up $372 million.
Representing 42, 7% of our overall portfolio based on investment are net leased assets were 97, 6% leased by 174 tenants with a weighted average lease term of 10 years and operating under 133 brands in 21 distinct industries as of quarter end.
In addition to fixed minimum rents over 90% of our net leased assets have some form of rent escalator to help mitigate against inflation, 3% to fixed rent increases CPI based adjustments our percentage rents based on site revenues.
The aggregate coverage of our net lease portfolios minimum rents was 267 times on a trailing 12 month basis as of March 31, 2022, an improvement from $2 five eight times last quarter led by our travel center properties and tenants and industries that we are deeply impacted by COVID-19, including movie theaters and fitness centers.
Turning to the balance sheet last month, we successfully amended our revolving credit facility and extended the maturity date to January 2023.
As part of the amendment, we reduced the size of the facility to $800 million.
Extended covenant relief through year end and agreed to minimum liquidity levels to address near term debt maturities.
The amendment also allows for up to $300 million of acquisition and increases the limited amount of SBC can fund for certain equity investments.
We have $1 six month option remaining subject to meeting certain conditions that could extend the maturity date further to July 2023.
Turning to investing activities during the first quarter, we made $28 9 million of capital improvements at our properties and anticipate our capital spend for the full year 2022 to be approximately $200 million.
Capex is being deployed to renovate our Hyatt place portfolio, our full service Radisson hotel in Salt Lake City, a dozen limited service sonesta hotels and to complete phased renovations at two full service Sonesta hotels.
Our maintenance capital is expected to be around $70 million of our total capital expenditures.
In April 2022, we made a $25 million capital contribution to sonesta to partially fund their acquisition of the portfolio of hotels in New York City, Todd mentioned earlier.
We expect to fund another $21 million later this year as part of this transaction.
After our $200 billion pay down of the revolver and receipt of additional sales proceeds after quarter end today, we have over $900 million of cash on our balance sheet and expect another $300 million of sales proceeds by the end of June .
Our next debt maturity is $500 million of senior notes due in August , which we expect to redeem with cash on hand.
Under our debt agreements the ratio of consolidated income available for debt service to debt service is required to be at least one five times on a pro forma basis to incur additional debt as of March 31, 2022, we remain below the minimum level at 132 times. We currently expect to exceed the minimum ratio as at the end of the third quarter.
<unk> 2022.
Finally regarding our common dividend, we expect to maintain the current quarterly distribution rate of <unk> <unk> per share through year end 2022 as agreed to as part of our credit agreement amendments.
Operator that concludes our prepared remarks, we're ready to open up the line for questions.
Yes, Thank you <unk>.
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 are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Bryan Maher with B Riley.
Good morning, Todd and Brian and congratulations on the promotion there recently.
Can you talk a little bit about the expense side of the equation on the hotels.
There are you most concerned, whereas the most pressure coming from I suspect labors high up there.
But can you talk also about maybe taxes utility supply chain issues and Brian I think you mentioned that margins were 2% in the first quarter are expected to be 19% to 22% in the second quarter, how sustainable are those increases and.
I guess the concern as we say back from there after we get through the seasonally strong second and third quarters. So can you give some color on that thank you.
Sure Thanks, Brian for the question.
I'll start and then Brian can.
And but.
Youre right on the expense side.
Labor is certainly.
One that.
We are tracking closely.
We're seeing wage increases across all positions front office housekeeping.
Servers.
We saw about a $3.
Hourly rate increase year over year and Theres a lot.
Higher increases in the hospitality industry relative to retail as well.
Yes.
Where our operators are increasing their recruitment efforts they are offering.
Referral bonuses.
Hi.
Got it.
Looking at other things that to retain employees, but there has been an impact I mean, theres been more out of order rooms through the housekeeping shortages.
There is certainly a reliance on more expensive contract labor as well.
While unemployment overall is down so as the workforce participation rate and we're seeing we're continuing to see hotel workers leave for other industries.
They are what they are going to work for Amazon or Uber or other other just going out of the industry overall, but.
We're also seeing expense increases.
You pointed out on the on the insurance side.
As well as on the utility side real estate taxes, we're actually saving some money is we're going back and our operators are going back in and challenging some valuation. So we're seeing some decreases in real estate taxes, but overall they are certain certainly inflationary pressures on a lot of the expenses.
As far as your question on the margins Brian .
What I mentioned for Q2 was a range of 19% to 22% I would think in Q3, there is some incremental improvement there and seasonally in Q4 there'd be some pullback, but nothing like we saw in Q1 I expect a more modest pullback as we go through the curve of the seasons.
Okay, and then I missed the last thing we did notice that sonesta purchase of I think it was for New York City hotels in.
You mentioned, the $25 million capital commitment the $21 million. Later this year is that further contribution to the purchase of those hotels or is that going to some type of capex needed at those properties.
Brian I'll take that one that was more of a liquidity thing for SBC.
SBC and sonesta in their other shareholder agreed based on liquidity constraints at SBC to defer our contribution until we get more of the sale proceeds behind us. So all in sbcs, 34% contribution would be.
Combined amounts.
Yes.
I'll just add to that 34% that is the equity portion of the deal.
And there is some renovations taking place as well as the hotels, but that will cover.
But what the purchase price as well as any additional capex, so that should be it after the additional.
And do they do they have to clear that with you first I would suspect as being at 34% shareholder that youre going along with that.
Yes, we had to provide contract.
Okay.
And then just kind of shifting gears to Rev par.
Now that you've converted.
The IHG Marriott property to the Sonesta flag.
I I think I don't know if it was a quarter or two or three eight go there was some optimism that you could get revpar backup to a comparable Marriott in Jakarta level I don't think most of the buy side that I speak too.
Not that that was realistic but thought that the kind of puts and takes are being so thats been the more flexibility.
Slightly lower fees et cetera made it worthwhile, but but now that you've had these for several quarters. What are your thoughts on the ability to push revpar. It's in that study mainly to select service extended stay step closer to that as you know more bigger brands that they were before.
Yes, Brian that's a good question and something we're looking at very closely as well and monitoring.
It depends.
Did it with the select specifically, which is a new brand for sonesta are relatively newer brands to the others, but we're seeing a lot more success in.
Market share on rate and occupancy at some of the leisure hotels some of the airport hotels.
There is certainly more room to make up on the select service side.
So thats something Brian and I are working closely with our asset managers and sonesta really.
To really create measurable goals for them and we are seeing them start to close the gap on those as an example.
In December the Sonesta Slacks, if you take out the exits were at 73% occupancy and accident and we set a goal for them to try to get to 80% by the end of the quarter and they didn't they got to 79%. So I think that's something we're going to do and we're going to continue to monitor we realize there is a gap to close.
To market, especially on Sonesta slash the other area, where we have had more of a gap to close as the.
<unk> and Royal Sonesta.
Our urban hotels, but I think a lot of that is.
The competitive comparison has is more heavily weighted to leisure hotels. So.
Our full service hotels.
<unk>.
I have more more full service urban hotels, so I think as.
<unk> returned to office and more business travel comes back relative to leisure I think youll see us close that gap.
A focus for US right now is on the <unk> specifically.
But we are performing comparable on a lot of the other service levels.
Okay.
Okay.
Okay.
That answer your question Brian .
Yes, sorry, you guys put out there for a second.
Last for me and maybe this isn't a fair question, but I'm going to ask it anyways, having covered the company for almost 25 years, you know you've evolved from hotels only to then travel centers to now net lease in.
I get a lot of calls would you ever part with your travel centers, which are easily you probably were at $3 $5 billion. If you if you need to raise capital.
Can you maybe prioritize how you think of the importance of hotels versus travel centers versus net lease and again, it's kind of unfair because G. As in net lease performed very well during the pandemic relative to hotels, but hotels, where how the company was formed.
Mitch maybe your answers we love all of our children. The same but can you give us thoughts on the prioritization within the firm.
Sure, Brian I'll take a crack at that.
As you point out, especially during the pandemic given the cyclicality of the lodging industry.
Our net lease both ta and non Ta really.
Really has helped us during the during the pandemic, especially recently I mean Ta didn't Miss a beat at all our net lease we had some challenges with our movie theaters and fitness centers.
But those quickly recovered as well.
I'm not sure I'm not sure how to answer the prioritization I think.
And maybe you've asked this on previous calls, but where do you see the.
Allocation of assets going forward the mix.
I think we will I think we see.
Hotels being anywhere long term from 50% to 60% of the portfolio.
Which theyre right in the middle of that today.
It's going to depend it's going to depend right now our focus is on getting through the asset sales.
Managing our liquidity, but ideally will be in a position where we can be equation again.
And a lot of that is going to depend on.
The relative value of acquisitions I think that's one of the benefits of having the diversification is yes.
Sometimes it's going to be more in favor to buy hotels, sometimes can be worn favorite to buy net lease so it.
It gives us some flexibility there as well.
Long term I E.
I hope that answers your question on prioritization or not but long term I think we'll still be above that 50% level.
<unk> side, and then the remainder will be that the net lease in the travel centers.
Okay. That's helpful and maybe we can kick it around why at NAREIT, but thank you for your comments.
Sure no problem.
Thank you and the next question comes from Dougherty <unk> with Wells Fargo.
Thanks.
And when you think through your Capex spend over the next few years.
That's one nine annually should we expect operating headwinds in the first year and neutral in the second and tailwind by the third.
Yes, I would say that we try to mitigate disruption on any renovation project and a lot of these projects go through the planning phases during peak seasons, and they're measured and phased by floor to limit limit disruption. So I think it'll be spread out dori.
Yes, it's a good question and the exact timing is difficult to predict because a lot of these projects are taking longer to get off the ground based on just market factors and supply chain issues, and obviously rising cost as we might change scope if prices continue to rise but typically.
Typically capex.
Is more weighted towards the back end of the year given the R. R.
Our seasonally weak periods, our Q4 and early Q1.
Okay.
Is there any plan will then that now that.
James brand two to rebrand in Union City Center Hotel.
With that brand.
Yes.
Is evaluating our portfolio now, but I think you could see that I think some of our hotels in Chicago and.
Washington D C. Some of the former.
Kimpton just for example, I think it would be a good fit for that but that evaluation is happening now dark.
Okay.
And then after the 500 million notes mature in mid August there pay down.
And I think you said in Q3, you should exceed your minimum covenant is that when you would expect to pay down the credit facility balance or would you expect to hold on to the cash for some time longer.
Yes, that's a great question and there's still some things to play out as far as the 23 notes that come due in June .
One of the things sort of tied neck and neck with the revolver and how we structured that last amendment.
We have to make sure we have adequate liquidity to take out the June 23 notes.
But our expectation is by the end of the year by the end of the calendar year, we'll be able to come.
Commence with normal refinancing activities.
Take out either the revolver.
Bulk that revolve around the senior notes.
We want to get back to being able to use the revolver as it is intended and not sit on cash, but I think late late 'twenty. Two early 'twenty three is the best guess on timing.
Okay.
My My last question ill turn it back to Brian about the margins.
I think at prior peak you are in the mid 20 range, maybe 25% margins.
Understand with these asset sales coming up it will it should be slightly higher.
But when you compare that to your peers, whether it's like a full service theyre materially lower in some sense trying to get.
I'm trying to get a sense of if the Egypt, the hotel's location management.
Mike.
What is what do you attribute most of those lower levels and.
What can you do it can be higher.
20th Sterne is possible.
Yes.
That's something we monitor as well as the worry.
Especially on.
It's not the <unk> side of things where.
They are improving relative to the market, especially in terms of GOP margin.
Our operators are looking at.
Expense management strategies, one thing sonesta has been able to do through their increased scale.
Not just on the managed side, but on the franchise side they've been successful in renegotiating the.
OTA commissions.
We're looking at some of their.
With rising cost of food commodities that are looking at different ways to maximize their menu options and reduce cost that way. So they have <unk>.
Cost reduction initiatives initiatives in place to really try to help drive those margins up but again, it's something it's a fair point and something we're monitoring.
I would just add.
The select brand.
A little under a year since that was launched and we really want to be able to see business travel back and more for us before we can sort of form any conclusions, but we do expect the margin C&I again Q1, I think it's an anomaly.
We will get closer to that 20% range as we roll through going forward.
Alright, thank you.
Okay.
Thank you.
And this concludes our question and answer session I would like to turn the Colorado Tom argues for any closing comments.
Great. Thank you everyone for joining and we look forward to seeing many of you at our Investor Day later in Chicago This month.
Yeah.
Thank you.
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