Q2 2022 Service Properties Trust Earnings Call
Good morning, and welcome to service properties Trust's second quarter 2022 financial results Conference call. This call is being recorded if you require operator assistance. Please press Star then zero at this time for opening remarks, and introductions I would like to turn the call over to the direct.
You're a investor relations Kristin Brown. Please go ahead.
Yeah.
Good morning, joining me on today's call are Tom Bradley President and Chief.
That's an officer and Brian <unk>, Treasurer, and Chief Financial Officer. 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 written consent.
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.
95, and other securities laws.
These forward looking statements are based on SEC's present beliefs and expectations as of today August .
2022.
The company undertakes no obligation to revise or publicly release the results of any revision to these forward looking statements made on today's call other than through filings with the Securities and Exchange Commission or S&P.
In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized <unk> and adjusted EBITDA.
Conciliation 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 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 in our supplemental operating and financial data found on.
On our website.
Www Dot FCC really dot com.
Investors are cautioned not to place undue reliance upon any forward looking statements and with that I'll turn the call over to your house.
Thank you Kristen and good morning, our second quarter results reflect sequential monthly improvement in our hotel portfolio throughout the period.
As comparable Revpar increased from 81% of 2019 levels in April to 86% of 2019 and June resulting in Q2 2022, Revpar that was 83% of the 2019 second quarter.
Paired with 67% of 2019 in Q1.
The recovery of <unk> urban full service in suburban select service hotels contributed to the improvement is more workplaces reopened and employees return to the office.
As a result, when combined with the solid performance of our leisure and extended stay portfolio's room rates have now surpassed 2019 figures with ADR, increasing from 95% of 2019 levels in April to 101% of 2019 levels in June .
This trend has continued into the third quarter with preliminary July ADR of $142, 103% above 2019 levels.
Notably our full service Revpar, our full service portfolio Revpar and June increased to 93% of 2019 levels highlighted by considerable occupancy increases as some of our city Center hotel.
This segment of our lodging portfolio, specifically the hotels in the Midwest and northeast as trailed in the recovery, but we are now experiencing significant quantifiable improvement.
Examples include our three Chicago hotels, where occupancy increased to 50% in Q2 from 15% in Q1, and the Royal Sonesta, Cambridge, where occupancy increased to 63% in Q2 from 50% in Q1.
Our full service hotel EBITDA in Q2 was $51 1 million compared to negative $1 5 million in Q1 with over half of that improvement driven by occupancy increases at our urban hotels.
We have been extremely successful in maximizing rate of many of our hotels located in resort markets with ADR is well above 2019 levels.
Two of our top performer Sonesta, Miami Airport, and Sonesta Hilton had achieved Q2 2022 rates of 165% and 137% respectively.
19, Q2, ADR and our leisure hotels in markets, such as San Juan Hawaii, and New Orleans, each reported Q2, 2022, ADR more than a 110% of 2019 levels.
While the recovery of our select service portfolio is trailing our other service levels the gap relative to industry is tightening.
Relative to Q2 2021, Revpar for our select service hotels improved 54%.
Facing industry Revpar growth by 15 percentage points.
Specifically, our sonesta select portfolio increased revpar by 63% year over year.
In terms of segmentation group mix grew to 16% in the second quarter up from 7% during the previous year quarter and is now back in line with 2019 levels.
This increase was largely driven by elevated leisure group demand the post pandemic ramp of corporate group and an increase in citywide events. The largest gains were reported in Chicago, Boston, Nashville, New Orleans and Philadelphia.
With the increase in group and corporate negotiated demand spc's portfolio witnessed a significant decline in this OTA bookings as a percentage of room revenues starting to.
During Q2 from these more costly channels dropped from 37% to 30% from the previous year quarter.
This is a trend we expect to continue into the third quarter.
While hotel EBITDA is not back to 2019 levels the improvement of our hotel portfolio. During the second quarter has now put us back in compliance with our debt covenants.
An important milestone in our recovery, giving us flexibility going forward in terms of operating business and addressing our upcoming debt maturities, which Brian will discuss in further detail in a moment.
As it relates to our ongoing plan to sell 68 <unk> branded hotels, we have now closed on 60 hotels for aggregate proceeds of $518 million and are under purchase and sale agreements for four additional hotels for an aggregate price of $24 million. The other four hotels remain for sale and two of these are under letters of intent with potential.
<unk>.
We believe we have effectively navigated the volatile transaction markets and remain on track to achieve the pricing expectations, we set last year.
As we had hoped we are successfully sold a large percentage of these hotels encumbered of long term sonesta franchise agreements.
SPC views franchising franchising as a platform that can facilitate sonesta future unit growth scale and brand exposure and as we have highlighted in the past SBC will directly benefit towards 34% ownership share in sonesta.
As previously disclosed we are marketing our remaining 16 Marriott branded hotels for sale on an unencumbered basis and are pleased with the strong level of interest we have received from a wide range of investors.
I would also like to reiterate the superior relative revpar margin and growth prospects of the hotels, we are retaining versus those we are exiting we.
We believe our disposition initiative has and will allow SPC and its operators to focus on a more profitable higher quality lodging portfolio.
Turning to that lease our diversified portfolio of real estate net lease asset of retail net lease assets continues to provide STC with a steady secure cash flow stream and our largest net lease tenant travel centers of America reported another exceptional quarter earlier this week.
Our holdings of 8% of Ta's common equity provides additional value to SPC S. Ta continues to perform.
Our other net lease tenants are also operating at a high level reported increased rent coverage from prior periods.
In the second half of 2022, we have 302000 square feet of leases expiring, representing 2% of our net lease rents excluding ta.
This is comprised of four tenants across multiple properties known to be vacated and represents approximately $2 $5 million of annual revenues.
We are evaluating both leasing and sale options for these properties.
During the quarter, we sold 11 vacant net leased properties for an aggregate sales price of $7 7 million.
Subsequent to quarter end, we have sold two additional bacon net leased properties for an aggregate sales price of $400000.
Overall, we are extremely encouraged by the recovery in margin demand, we saw this quarter across our portfolio.
We are optimistic that our operating performance will continue to improve through the second half of the year with positive trends in business travel benefiting our hotel portfolio steady performance from our net lease portfolio and added flexibility in managing our balance sheet now that we're back in compliance with our debt covenants.
I will now turn the call over to Brian to discuss our financial results in more detail.
Thank you Todd and good morning.
Starting with our consolidated financial results for the second quarter of 2022 normalized <unk> was $89 $2 million or <unk> 54 per share a $63 $3 million increase over the prior year quarter adjusted.
Adjusted EBITDA was $181 9 million for the second quarter of $63 $3 million increase over the prior year quarter.
The major drivers impacting normalized <unk> over the prior year quarter with the improving performance of our hotel portfolio, which generated $90 million of hotel EBITDA for the second quarter of 2022 compared to $30 million in the prior year quarter.
Guarantee payments that supported our hotel returns under our historical agreements declined $5 3 million.
Negative impacting year over year comparisons.
Net operating income from our leased properties for the second quarter of 2022 increased $2 $2 million over the prior year quarter, primarily as a result of a decrease in reserve for uncollectible rents with certain tenants.
Interest expense decreased $1 $6 million over the prior year quarter as a result of repaying $200 million of the outstanding balance on our revolving credit facility in April and the early redemption of $500 million of 5% senior notes due in August and mid June .
Our share of normalized <unk> recognized from our 34% ownership interest in sonesta increased $1 3 million.
Our <unk> per share over the prior year quarter.
Lastly, G&A expense decreased $851000 or 6% to $12 $7 million in the current year quarter, primarily as a result of lower business management fees due to RMR, partially offset by increased legal and professional service costs during the quarter.
Turning to our hotel portfolio results for our 244 comparable hotels this quarter Revpar increased 57% gross operating profit margin percentage increased by 29, four percentage points to 36% and gross operating profit increased by approximately $74 1 billion from the prior year period.
Below the GOP line costs at our comparable hotels increased $11 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.
Overall, revpar increased 45% sequentially to $92 19, this quarter due to strong occupancy gains in our urban full service hotels in a more gradual recovery in our suburban select service hotels.
Our consolidated portfolio of 247 hotels generated hotel EBITDA of $90 million, resulting in a net margin of 21, 5%. This.
This compared with $6 $9 million in the first quarter and $25 $4 million in the prior year quarter.
The increase was driven primarily by improvement in our 49 full service hotels, which generated $51 $1 million of hotel EBITDA in the quarter compared with losses of $1 $1 $5 million in the first quarter and positive EBITDA of $3 $7 million in the prior year quarter.
Our full service portfolio exceeded industry trends driven from elevated leisure demand increase citywide events and the continued ramp up of business travel.
Our 82 select service hotels also improved generating hotel EBITDA of $13 million in the second quarter compared with losses of $2 2 million in the first quarter and hotel EBITDA of $2 5 million in the prior year quarter.
Our 116 extended stay hotels continued to deliver solid performance generating $26 $1 million in hotel EBITDA during the quarter compared with $10 $6 million in the first quarter and $19 4 million in the prior year quarter.
Revenue management sales strategies to increase Revpar was successful during the quarter by capitalizing on increased summer demand increased rates for long term guest and reducing various discount offerings.
The 24 hotels that are expected to be sold which includes the 16 Marriott hotels currently being marketed for sale generated hotel EBITDA of $3 $6 million in the second quarter compared to $87 1 million for the non exit hotels.
Looking ahead to the third quarter. We are currently projecting full quarter Q3, revpar of 88 to $91 <unk>.
Hotel EBITDA is projected to be in the 90% to $97 million range with net margins in the 21% to 24% range.
Preliminary July Revpar was $95 97.
And we do expect a seasonal slowdown in demand in late August early September .
Turning next to our net lease portfolio as of June 32022, we owned 775 service oriented retail net lease properties, including our travel centers with $13 4 million square feet, requiring annual minimum rents of $372 million.
Representing 45% of our overall portfolio based on investment are net lease assets were 98, 8% leased by 176 tenants with a weighted average lease term of 10 years and operating under 134 brands in 22 distinct industries as of quarter end.
The aggregate coverage of our net lease portfolio with minimum rents was two eight times on a trailing 12 month basis as of June 32022, an increase versus last quarter and an improvement from $2. Two nine times in the same period last year led by our trauma center properties and tenants and industries that continue to ramp up including movie theaters and fitness.
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It's worth noting for <unk>, our largest tenant site level rent coverage on a trailing 12 month basis was 246 times up from two eight times last quarter.
<unk> had another strong quarter and continues to produce high margins. We believe ta's performance contributes to the significant underlying value of our travel centers and along with our other net leased retail properties continued to be a stable investment portfolio for SBC.
Turning to the balance sheet in April we successfully amended our revolving credit facility and extended the maturity date to January 2023, and we have one six month extension options remaining.
Part of the amendment, we reduced the size of the facility to $800 million in extended covenant relief through year end.
In June we redeemed $500 million of senior notes that were maturing in August 2022.
Our improving hotel operating results this quarter put us in compliance with our financial covenants required under our debt agreements as of June 30.
A schedule of our previous estimates.
This will give us greater flexibility in managing the balance sheet.
We currently have over $790 million of cash and today, we are repaying $650 million of the amounts outstanding on our revolving credit facility in order to manage our exposure to rising interest rates versus sitting on significant cash balances.
Our next debt maturity is $500 million of four 5% senior notes due in June 2023, which we expect to either refinance or redeem with cash on hand.
We will continue to monitor market conditions, and reevaluate strategies on our debt maturities, but will also remain patient and look to execute on the most cost efficient options that maybe available to us.
Turning to investing activity, we made $27 million of capital improvements at our properties during the second quarter and $49 $5 million a year to date.
We currently expect our capital spend for the rest of the year to be in the $80 to $100 million range, bringing our total for the year to an expected range of $130 million to $150 million, a decrease to our previous guidance of $200 million.
Capital projects have been moving slower than anticipated as we are being mindful of project scoping and timing due to inflationary pressures and supply chain challenges and some of the projected spend could carry over to 2023 as we strategically planned deployment during the seasonally weaker months to minimize operational disruption.
Also during the.
The second quarter, we made a $45 $5 billion capital contribution to sonesta to partially fund their previously announced portfolio acquisition of four hotels in New York City.
Finally regarding our common dividend as a reminder, as part of our credit agreement amendments are common distributions are currently limited to <unk> <unk> per share per quarter through the end of 2022.
Operator that concludes our prepared remarks, we are ready to open the lineup for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
At any time your question has been addressed and you'd like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Bryan Maher with B Riley FBR.
Please go ahead.
Good morning, again, and thanks for those comments and that was a terrific quarter you guys put up some good news there.
Hum.
Can you talk a little bit more about the margin improvement I think you guided in your prepared comments.
What percent for <unk>.
<unk> is it safe to say that their performance like in <unk> 'twenty two that's behind us.
We should stay at Kennedy's elevated 20 plus margin levels.
Brian . Thank you and good morning, that's a great question I think the guidance I just mentioned for Q3, where we have pretty good visibility in the low twenties range is what we expect I do expect Q4 to trail off as we get through.
The late fall surge of demand into the holiday season, we could see anything from 15% to 20% reduction in Revpar as we go through the end of the year, but I do believe Q1 'twenty two wasn't anomaly barring any repeat of a shutdown and omicron and all that stuff I expect more normalized.
Albeit seasonally weaker demand, but higher certainly higher than Q1 'twenty two.
I'll just good morning, Brian I'll, just jump in as well as Brian mentioned, sorry on the Q1 was impacted by omicron, probably five or six weeks, but it was also impacted by that.
Performance of some of our urban.
Full service hotels is really where we saw the underperformance in Q1, and Thats really where we saw the improvement in Q2, specifically Chicago, San Francisco and those markets just had fully reopened yet.
We don't we don't.
Like Brian said that Q1 is likely an outlier so.
Short of any.
Strange.
Colgate that impact.
Performance, we don't see it returning to that.
Okay, and then moving onto the net lease asset sales and I know dollar wise.
Been pretty small.
But what's driving that is it just pruning the portfolio of non core non strategic assets.
There are any kind of common theme among what it is you're selling.
Yeah, you're right. It is it is there more granular assets.
And I think Youll see this more of a long term trend with our net lease assets outside of Ta is that a lot of these assets when they are purchased or when there is long term sale leaseback Don.
A lot of these assets if you don't renew on their ending.
And there are near or at the end of their useful lives sometimes the best.
As to our demo to buildings and send them to sell them for land value.
So I think you'll see that continue into the future I think.
Obviously, we will first try to renew them, but I think a lot of our peers in the net lease space you will see the same thing.
Again, we bought this portfolio back at the end of 2019 targeting early 2020, we didn't really get back into.
We weren't acquiring properties over the past couple of years, So I think with that portfolio and you will see us exit some of those types of properties and recycle that back into longer term leases with some of our current tenants through sale leasebacks or through.
Acquisitions.
From third parties.
But most of those that the ones, we're selling a lot of them are.
Were former pizza huts that.
That were.
That concept with the larger footprints.
At Pizza hut.
Lot of those types of tenants have had a move towards smaller footprints focus more on take out mobile orders rather than shut down a lot of these more and more tertiary markets and a lot of these properties. We identified back in 2019 as noncore properties properties that we knew may be vacating so.
That's a lot of what words, you saw this quarter and over over the last couple of quarters and a lot of these we take to auction and sell them through auction rather than third party brokers.
Okay, and just last from me on the semester.
Capital contributions.
Guessing that that was related to the four New York City assets that were acquired earlier. This year is there any thought or dialogue going on.
Queen SBC and Sonesta is kind of what the scope of investment in owned to Sonesta is might be over the next year or two.
Sure that's a good question.
For the owned Sonesta is in the majority of that was really are those for New York City hotels nine over 900 to use across the Royal full service and extended stay in a select.
The way that deal was structured it was financed.
And the loan was structured so that the lender funded a certain percentage of the purchase price and then all the additional improvements are funded 100% by the lender through additional funding so.
The major.
Capital outlay at those hotels and really for any of the sonesta owned hotels that would require.
Additional contribution to rescue which is 34% ownership share.
That's going to be funded 100% by the lender so really at the <unk> Hotel is the major project is there theyre doing a major renovation at the.
Former Benjamin which is the Ross sonesta.
<unk> and <unk>.
That will not require any additional contribution equity contribution from either sonesta Es received that'll be 100% funded by the lenders. So long way of answering your question. That's it's very very limited.
Okay, maybe just one more on Capex. It seems like some of the start for this year is probably good.
I'd like Jane issues.
Should we be thinking about 2023 is a $150 million number plus or minus in the ZIP code or $1 50 to 175 any initial thoughts there.
Sure, Brian I'll take that one.
Given some of the delays we've seen in sort of going back to the drawing board to control costs to make sure not only we deliver a good product, but also contained costs.
Some of that will get pushed into the first quarter, but we still behind that are planning renovations that we had expected.
The sonesta portfolio the big one we're trying to get out of the gate is the Hyatt portfolio, which we agree to renovate which we do expect to start in the fourth quarter and into the first quarter, but I think to answer your question it could be elevated.
In the $200 million to $250 million range next year, if all goes to plan.
We get a dozen or so or 15 sonesta is off the ground as far as the repositioning and renovating.
Okay. Thank you.
Thank you. The next question comes from Tyler Batori with Oppenheimer and company. Please go ahead.
Hey, good morning, just a follow up on that last line of questioning in terms of the Capex that 200 to 250, you just cited I'm assuming that includes maintenance capex as well I mean, what are you thinking in terms of.
Maintenance Capex number in the past I think you had talked about 600 to 700 million spending after the sonesta portfolio over three years to four years.
That's still in the ballpark of what we what we should assume in terms of.
Total spending there.
Tyler. Thank you for that yes, I think from a from a maintenance capital standpoint that is included in the all in number and we historically quote around 65% to $75 million of maintenance capex as far as the longer term capital spend in.
I think yes, so over the next three to four maybe even five years, depending on how quickly we can deploy stuff that's sort of $200 million per year is probably a good number for them for that horizon.
Okay, Okay, Okay great.
And then in terms of the 16 Marriott hotels for sale, you'll talk a little bit more about.
Interest pricing I mean, a little bit of a difficult environment out there. So how are you thinking about the timing for use with these assets as well.
Sure Good morning, Tyler and thanks, Thanks for the question.
So in terms of those 16 hotels you are right that the markets have been extremely volatile I would say I think they've settled down a little bit with what.
Benchmark 10 year treasury coming in considerably and I think now lenders.
Have a better idea of where where deals are going to get price that youre seeing lenders come back into the market. There is a point in time price four or five weeks ago, where we saw transactions for the most part come to a standstill and we're calling deals from the market.
Anyone who is relying on any type of leverage can get anything done.
But again I think things have settled back.
In terms of these hotels specifically.
We took these to market we had our first round call for offers on July 20th So a couple of weeks ago and interest exceeded our expectations at least given given the market environment. We have received interest from groups that.
Several groups that want to buy the entire portfolio. We have received interest from groups that want to buy.
Portions of the portfolio. We received most of the interest is from hotel operators.
Hotel owner operators, but we've also received interest from.
Multifamily developers for the three extended stay hotels.
But.
I think we said on the last call. Maybe are are that carrying value is just under $100 million for those hotels.
With the caveat that Werent, a volatile transaction volatile market right now with with where that is.
I would say.
We expect to exceed.
That amount.
Yes again.
Very strong interest and I think we've had the benefit of and we've had a lot of success with the 68.
Sale of hotel portfolio, a lot of success with with those buyers a lot of those same buyers. We're strongly considering this time around as well.
Which is important because.
It's even more critical right now to be able to really fully understand how you are selling to who can deliver.
Who is well capitalized who is going to require financing. So I think in this process is going to be very critical to vet. These buyers. So we understand who can close in Japan.
Yes.
Okay I appreciate that last question for me.
The hotel performance really strong when you look at sonesta broadly near mixture sonesta properties and you're seeing indication that.
You are starting to take some market share perhaps.
There is.
Brand awareness for four sonesta that's.
That's really starting to improve and is really contributing to some of these these better better performance metrics.
Sure Yeah, I think the answer is yes.
It varies by back on a service level.
A lot of the improvement this quarter came from our Royal Sonesta hotels, but we also saw <unk>.
Significant improvement on our.
Sonesta select hotels, as well, which is really.
Our primary area of focus Brian and I are spending a lot of time working with our hotel asset management teams <unk> operations team to really.
Drive performance at those hotels that squarely, where we received most of the opportunity for growth in most of.
The GAAP to close to get back market share and get back to where.
The previous operator was was operating these hotels.
We're we're really looking closely at the analytics, there and looking at the performance and setting goals.
For each specific hotel and taking different initiatives to really look at.
Improving both the topline and the Bottomline and the Sonesta select for example day at the market share in January was 66% and in June It was 80%. So we are seeing significant improvement in <unk>.
It's.
Very.
High level of priority for the management team here at <unk>.
Okay.
That's all from me thank you for the detail.
Of course.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Todd Hargreaves for any closing remarks.
Thank you everyone for joining today's call and we appreciate your continued interest in SAIC. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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Okay.
Yes.
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