Q4 2022 Service Properties Trust Earnings Call
Good morning, and welcome to the service properties Trust fourth quarter 2022 earnings Conference call all participants will be in a listen only mode.
Need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone and to withdraw. Your question. Please press Star then two I would now like to turn the conference over to Mr. Stephen Colbert Director of Investor Relations. Please go ahead Sir.
Good morning.
Joining me on today's call are Todd Hargreaves, 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 and answer session with analysts. Please note that the recording retransmission and transcription.
Today's conference call is prohibited without the prior written consent of FCC.
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 March one 2023, 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 other than as Rick.
Wired by law.
In addition, this call may contain non-GAAP financial measures.
<unk> normalized funds from operations or normalized <unk> and adjusted EBITDA Ari.
Reconciliations of these non-GAAP financial measures to net income as well as components to calculate a SFO 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-K on file with the SEC and in our supplemental operating and financial data found on our website at Www Dot SBC REIT Dot com.
And with that I'll turn the call over to Todd.
Thank you Steven and good morning, our fourth quarter results are highlighted by the ongoing improvement in our hotel portfolio as.
Comparable hotel Revpar increased by 21, 4% versus the prior year period, with ADR up 14, 5% and occupancy increasing by 3.3 percentage points, leading to a 98, 3% increase in comparable hotel EBITDA over the same period last year.
The continued recovery of SBC the urban full service in suburban select service hotels contributed to the improvement as travel maintained its pace of recovery consistent with typical seasonality in business related travel reflected more in person engagements.
Combined with the steady performance of our leisure and extended stay hotels room rates against surpassed 2019 figures in the fourth quarter.
Notably our full service portfolio Revpar for the quarter increased by 31, 1% from 2021 levels.
Largely driven through ADR increases at many of our leisure and urban hotels.
Our hotels in Fort Lauderdale, Hilton head, Chicago, Miami, and coli, but the strong performance of our full service segment, which achieved aggregate ADR of $174.48 during the quarter.
$14, 5% above 2021 fourth quarter levels.
While the overall performance of our select service portfolio remains behind our other service levels. We are encouraged that Q4 revpar of our scaled down post disposition portfolio 45, sonesta select branded hotels.
Improved 25% versus the same quarter last year outpacing any other SPC focused service brand.
And eight seven percentage points above total nationwide industry growth.
In terms of segmentation group mix was 16, 6% in the fourth quarter up from 12% during the previous year quarter and above 2019 levels of 14, 5%.
This increase was probably attributable to increased demand for corporate and association and citywide group business, particularly in Philadelphia, New Orleans and Houston.
Revenues as a percentage of total room revenue for the more costly O T. A channels decreased from 38% in Q4 2021 to 26, 4% in Q4 2022.
Inflationary pressures seen across the economy are continuing to impact hotel level operating expenses related to utilities insurance and specifically labor.
Our operators remain focused on reducing their reliance on more expensive less sufficient contract labor and increasing permanent staffing levels measures, which we will expect will result in helping to offset some of these labor cost pressure starting 2023.
Our largest hotel operator sonesta continues to establish itself as a leader in the North American lodging sector, and we expect US we see the benefits benefit as it increases brand awareness with national corporations, as well as business and leisure travelers.
Sonesta recently launched a multimillion dollar advertising campaign.
And its loyalty program is gaining momentum with travel press revenues as a percent of total revenue increasing from 13, 6% in 2021.
21, 2% in 2022.
Travel pass ADR increased 22, 1% year over year and room nights nearly doubled over the same timeframe.
As referenced earlier looking at the bottom line S species Q4 hotel EBITDA increased by 98, 3% year over year, largely a result of the performance of some of our species premier destination hotels, and what we view as some of our flagship lodging assets our.
Our Royal Sonesta isn't why Boston, Chicago Downtown and New Orleans all.
All of which contributed heavily to ask species year over year EBITDA improvement.
Turning to our net lease portfolio, which represents 45% of our species portfolio by gross assets as of December 31, 2022, we own 706, 765 service oriented retail net lease properties, including our travel centers with $13 4 million square feet.
Our net lease tenants are net leased assets, where 98% leased by 180 tenants with a weighted average lease term of nine six years and operating under 138 brands and 21 distinct industries as of quarter end.
The aggregate coverage of our net lease portfolio was minimum rents was 3.0 times on a trailing 12 month basis as of December 31, 2022.
An increase versus the same period last year and an improvement from two eight times in the third quarter.
For T. A our largest tenant site level coverage on a trailing 12 month basis was $2 seven four times up from 2.54 times last quarter and Ta reported another extremely strong quarter last night.
We have 271000 square feet of leases expiring in 2023.
Presenting on the 0.6% of our net lease Reits.
This includes five tenants across multiple property is known to be vacating representing $732000 of annual revenue.
We are evaluating we are evaluating various options for the known Vacates, which includes re leasing redevelopment and marketing for sale.
As announced earlier, then as announced last month.
The acquisition of Ta Ta by D. P. Upon completion will be extremely positive for S. P C.
As the revised lease agreements, we negotiated will not only provide $379.3 million in upfront thoughts.
But it will also significantly enhance the credit quality of our core travel center tenant providing long term investment great cash flows with fixed increases that we expect will result in a meaningful increase to <unk> from prior levels.
Before turning it over to Brian as we've now wrapped up the fourth quarter and moved on to 2023, I would like to take a minute to summarize some of the accomplishments SBC achieved during 2022 and the early part of 2023.
We substantially completed the disposition of approximately 20% of our hotel portfolio in an extremely challenging market to sell properties at our targeted pricing, helping to reduce leverage and improving the overall quality of the portfolio in the process.
We improved the overall performance of our hotel portfolio and returned to the necessary levels to regain compliance with our debt covenants.
Earlier than originally anticipated.
Overall, we repaid $1 $5 billion of debt in 2022.
We reinstated a meaningful dividend to shareholders.
Our largest hotel operator, sonesta continued to establish itself as a leading hotel brand expanding into New York through its acquisition of four hotels with over 900 keys.
We successfully completed a secured financing monetizing some of our net lease portfolio and retiring our June to June 2023 debt maturities.
Finally, we recently came to an agreement regarding the amendment of our travel center leases in connection with BP has announced the acquisition of Ta, which once completed will provide an improved tenant credit profile and additional liquidity.
I will 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 fourth quarter of 2022 normalized <unk> was $73 $3 million or <unk> 44 per share for 162% increase over the prior year quarter.
Adjusted EBITDA was $155 million for this quarter of 26, 5% increase over the prior year quarter.
The major drivers impacting normalized <unk> over the prior year quarter included the improving performance of our hotel portfolio, which generated an additional $25 $7 million of hotel EBITDA or a 90% increase over the prior year quarter.
The repayment of $500 million of senior notes in the second quarter and repay the remaining balance on our revolving credit facility, which was fully drawn as of year end 2021 resulted in a $14 $6 million decline in interest expense.
G&A expense declined $3 $9 billion over the prior year as a result of a $2 $4 million decline in business management fees, and a $1 5 million a decrease in legal and other corporate expenses.
Turning to the performance of our hotel portfolio for our 236 comparable hotels. This quarter Revpar increased 21, 4% gross operating profit margin percentage increased by four one percentage points to 28, 4% gross operating profit increased by $31 $6 million from the prior year period.
Below the GOP line costs at our comparable hotels increased $4 $4 million from the prior year as a result of increased management fees driven by higher revenues at our hotels and an increase in insurance costs.
Our consolidated portfolio of 238 hotels generated hotel EBITDA of $54 million, resulting in a net margin of 15, 4%.
By service level, the increases were driven primarily by improvement in our 49 full service hotels, which generated $26 million of hotel EBITDA during the quarter compared to just $2 $7 million in the prior year quarter.
Our 114 extended stay hotels remained steady generating $21 million in hotel EBITDA during the quarter.
Our 75 select service hotels improved generating hotel EBITDA of $7 million in the fourth quarter, an increase of $3 $7 million compared to the prior year period.
The fourth quarter results of our hotels were generally in line with our expectations as we enter the seasonally weaker months of the portfolio.
January 2023, Revpar was $65 53.
And as we look to the rest of the first quarter were currently projecting full court full quarter Q1, Revpar of 70 to $80 and hotel EBITDA projected to be in the $28 million to $35 million range.
Turning to the balance sheet earlier. This month, we successfully executed on our new five year $610 $2 million secured financing with a five 6% coupon and it provided notice that will redeem our $500 million of four 5% senior notes that were originally scheduled to mature in June .
Pro forma for these transactions, we have $5 8 billion of fixed rate debt with a weighted average interest rate of five 1%.
Our next debt maturity is $350 million of senior notes maturing in March 2024.
We currently have no amounts outstanding on our revolving credit facility, which matures in July of 2023.
We have begun discussions with our lenders on a new credit agreement and currently expect the process to recast allowed to be completed in the coming months.
Turning to investing activity during the fourth quarter, we sold four hotels for a total price of $25 $8 million and two net lease properties for $2 3 billion.
We have sold eight hotels since year end for proceeds of $53.3 million and we are currently under agreement to sell 10 additional hotels for a combined sales price of $103 $1 billion, which we expect to close by the end of the first quarter.
We made $36 $8 million of capital improvements at our properties during the fourth quarter and we currently expect full year 2023 capital expenditures of $200 million to $250 million.
Regarding our recent T. Aegon often are leases with Ta currently require a fixed minimum rents of $243 million over the life of the leases and require a percentage rent on non fuel revenues, which totaled $10 $6 million in 2022.
Rent under the amended 10 year term will be set at $254 million with 2% fixed rent increases annually.
BP will prepay $188 million of rent and will receive credits of $25 million per year against residue.
In addition to the rent growth we have secured as part of this deal the transaction will provide the SBC $379 $3 million of additional liquidity upon closing, including $101 $9 million for the Ta common shares SBC owns.
$89 $4 million for the sale of the Ta brands to BP and the $188 million of prepaid rents.
We expect the transaction will increase the value of our largest portfolio, which represents 64, 8% of our net lease segment and 29, 3% of our overall portfolio.
Our leases with Ta, we backed by BP, which will provide a significant credit enhancement to our tenant base and give us additional financial flexibility going forward.
That concludes our prepared remarks, we're ready to open the island question second.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Brian made her with B Riley Securities. Please go ahead.
Thanks, Good morning, Todd and Brian just a couple from me.
On the asset securitization that you just completed.
Can you share with us which types of assets you pledged on that was it hotels with Tas was it net lease them, how should we think about that and going forward. If you use that same.
Structure for 2020 fours in your 2020 Fives do you tend to get a better rate on those depending upon which assets you pledge.
Thanks, Brian and good morning, I'll take that one so as far as the assets pledged it was a mix in cross section of the entire net lease segment, excluding travel centers and there were no hotels in that deal. It was all a single tenant net lease properties with a with a significant concentration of quick serve.
Service restaurants.
Fitness centers auto change well repair shops, and that kind of thing so really a good cross section of what we have in the portfolio.
As far as going forward do you know our preference would still be to tap unsecured debt, but the the ability to use securitization of the portfolio has been demonstrated and it's something we'll continue to compare and contrast based on market conditions and what we see.
In rates and spreads in the debt markets.
Okay and in the past that I think about maybe a year ago. When you came off the first quarter Hotel margins you provided a bit of an outlook for your expectations for the balance of 2022 can you share with us what youre thinking about for hotel margins for 2023.
Yeah, I mean, I think in the prepared remarks of given that the outlook for Q1.
Not for the full year, but we do expect improvement over 2022.
We'll see how the year plays out, but we still think we have room to make up based on the performance starting last year and the ramp up that really didn't start until Q2 of last year.
So our focus is definitely on the bottom line and improving margins that that's one of our primary goals. This year is to continue to close the gap from where we were at <unk> 19.
You can get back to where we should be.
Thanks, and just two more for me on the hotel dispositions is that going to continue or are you starting to wind that down.
And then lastly, what are your usage, our thoughts for the $380 million, you'll be getting in a few months.
Sure Good morning, Brian I'll take the first part of the question.
So we are we are currently wrapping up our current dispositions. We are of the original 68 sonesta branded hotels that we started to market for sale over a year ago. Now we sold 67 68 and we expect.
The 68 to close this quarter.
Later this month.
And the 60, a marriott branded hotels.
We also expect those to be wrapped up this month goes we're selling to the same same buyer group, but.
We've agreed to close those three phases. So we closed the first seven last week.
The next two phases, we expect will close there.
This month.
Theres no other hotels in the portfolio that we've identified for sale at this time, but.
That's something we can consider throughout 2023, as we look at our hotel portfolio and our performance overall, but not nothing slated at the current time and some of that too is just driven it's it's a tough time to be selling any types of assets right. Now so it's probably not the right time to shell.
But it's it's certainly an option for us down the road.
And then Brian you want to yes.
As far as the proceeds in cash we'll receive from the BP deal. That's something we'll continue to discuss with the board in the coming months.
Obviously, we have significant debt maturities coming next year, but whether or not we deploy early or look to invest in opportunistic type investments to do that could be accretive.
It remains to be seen but we'll let that play out over the course of the next few quarters.
Okay. Thank you.
Thanks, Laura.
Again, if you have a question. Please press Star then one our next question will come from Tyler Batori with Oppenheimer. Please go ahead.
Good morning, Thank you.
First question a follow up on the on the guidance.
Yeah, if I'm doing my math right it looks like 10% to 12% roughly that.
<unk>.
Margin.
In terms of Q1, so did I did I did I did that math correctly and just help us think about you know what margin in Q1 with like pre pandemic kind of what you're expecting for your operating expenses in Q1 in terms of in terms of in terms of growth year over year.
Hey, Tyler good morning.
So the math.
Talk through is roughly correct.
We sort of expected January and early February to be weaker given the seasonality of our portfolio and it's definitely more so on the occupancy side on the rate side, we expect the portfolio to ramp up fairly quickly as we go into March and into early spring.
Yeah. So so we will see that sort of improve in the coming months as far as expense pressures. Yes, I think we're seeing the same thing everybody is saying with continued pressure on costs, whether it be labor utilities and other operating costs.
But yeah, we're we're still from a from a margin standpoint, and we're still lagging where we were at 19.
But we expect that gap to close pretty quickly as we move through.
Yeah, the ladder to the middle part of the year.
Okay. Okay, that's great.
Terms of the sonesta.
<unk> hotels and he gave some some some positive commentary I thought in the prepared remarks, but you're a little more perhaps in terms of brand awareness Revpar index.
Just kind of kind of house and that's what it's doing in the marketplace vis vis some of the other brands out there.
Sure. Good morning, Tyler. Thanks for the question Yeah, I think sonesta is very focused on on increasing the brand awareness, which is obviously critical and you look back three or four years ago Sonesta was only 60 hotels.
Through the conversion of some of our owned hotels the acquisition by Sonesta of the Red Lion franchise platform. The launching of the franchise platform for Sonesta branded hotels their acquisition of.
For hotels in New York are there one of the largest hotel brands in North America. So, it's certainly very critical for them to.
Increase their brand awareness in January they did launch.
Multimillion dollar digital marketing campaign so they're.
There, we expect to start to see the results.
From that shortly.
And then there's some other areas that we're tracking as well, there's a lot more business coming from the sonesta Dot com website.
And that takes away.
The bookings from some of the more costly O T. A channels, we're seeing an increase in there.
Travel passenger usage and the percentage of revenues that they get from their loyalty program. So we are seeing the results I think there's still a lot of room to go which is a positive but we are.
We are seeing.
All the right things happening.
There.
With Rfps that are increasing their rfps requested an RFP business. So we are starting to see the results of up there.
Of their push on the brand awareness side.
The second part of the question.
Sonesta has shown the ability to compete on.
Number of the brands the Royal Sonesta.
Simply switch, which is a relatively new brand in the Midscale extended stay brand there.
Between 90, and 95% of where they Werent 2019 from a revpar perspective, we're starting to see a lot of the pick up on that more urban full service hotels as well it's similar.
Commentary to last quarter in the previous quarter at its the.
Select service the Sonesta snap select brand, which is a new brand for them, where they still have the most room to grow.
And I think.
I think the reason is it's kind of twofold. Its business travel has not come back but at the same time, I think sonesta sonesta needs to improve upon their ability to take market share in that segment.
So and again they are you know I think I said in the prepared remarks, they've they increased revpar, 25% year over year. So we are we are seeing the improvement they still have a ways to go but that's the one the one brand that continues to be the focus where.
Where we don't think we're back to where we need to be yet, but we're we're optimistic there.
Okay. Okay, Great last one for me the Capex Guide 250.
In line with what we were looking for you just remind US you know, what's what's maintenance assumed in that number and then I'm kind of what exactly some of the spending going to be allocated through this year.
Sure Yeah. So the maintenance number for our portfolio is roughly $65 million to $75 million for the year.
A big part of our spend in 'twenty three will be to renovate our hyatt portfolio. Its something we had originally slated for 2022 and based on.
Cost inflations in scheduling and scoping changes to try to control cost inflation, we pushed it off of 'twenty three.
So we're going to we're going to do that starting up hotels, one one radisson hotel within about a dozen sonesta is across a couple of different of the branch segments for.
So next year.
Okay, Great. That's all for me. Thank you.
Thanks Pat.
The next question will come from Dori Kesten with Wells Fargo. Please go ahead.
Thanks, Good morning.
Is there anything in the in the V. P amendment that deals with incremental Capex.
And that portfolio.
Hey, Dara good morning, so so in the historical leases G I had the option to.
Request SBC.
Reimburse or by the Capex that they.
At our sites in return for an eight 5% rent increase.
Okay.
Functioned out the mechanics of that goes away under the amendment agreements.
<unk> has made it clear they're going to invest billions into these sites and they werent looking to us to.
Pay for that or increase their lease liabilities. So that that feature is no longer part of the leases.
Okay, sorry, just to be clear.
They are they are going to be things, where does not yet.
So all capex at these travel centers will be funded by BP on their own balance sheet.
Okay, Great and then I think you were addressing this a little bit in a prior question is the 65 to 70 million on maintenance Capex.
The hotel's you'll be spending 200 to 250 million annually over the next several years the majority of which I think is sonesta key I guess within this announcement properties how much do you view as.
I guess the defense diverse no offense is you know over this three year period.
And I guess, what kind of returns that you can expect for the more often so I just wanted to make sure that we have that potential upside in our estimates.
Yeah, I'd say you know if you're if you back out the 75 million you're looking at one or two.
$25 million to $150 million ish offensive capital.
And we've said in prior commentary that we expect around at 8% return on those dollars.
Okay.
And then.
And I know youre not firing you know right now, but I'm sure you're keeping a pulse on what's on the market for hotels and at least can you just talk about you know cap rates that you're seeing and.
The quality and quantity of one is on the market right now.
Sure Good morning Dori.
Yeah. We are we are actively evaluating a number of opportunities. We don't have anything under agreement, but we are we are closely looking at.
Selective assets, we've said in the past that now that.
We have exposure through sonesta in New York City, There's a couple of other markets, where we think were.
We want to increase our exposure on the hotel side, So Miami and Los Angeles, There's a number of opportunities that we're looking at.
And then on the net lease side.
We continue to evaluate a number of opportunities more kind of portfolio level level deals I think in.
From a cap rate perspective, I think especially over the last you know.
<unk>.
Rates have moved out of the past several weeks and I think cap rates overall have moved out.
We're not seeing we've certainly seen a slowdown in overall transaction activity doesn't mean deals aren't on the market, but we've certainly seen a slowdown in deals getting done.
On the hotel side I think there is certain markets and certain types of properties I think theres a lot of interest in both problem.
Owners as well as lenders, but there is a lot of deals out there that just are not.
Are not transacting because the sellers are not getting there getting anywhere close to their to their ask.
So cap rates have certainly moved out on the hotel side and certainly have moved out on the on the net lease side as well I mean, there are some properties that tend to you know some of the smaller granular properties go to the 10 31 exchange all cash buyers I you know I don't think you've seen those move out as much but generally I would say cap rates on that.
We decided moved out maybe 75 basis points.
And on the hotel side, I think cap rates have moved out as well. So it's an interesting time, because it's there are opportunities out there. So if the right. One presents itself. There's there's there's a chance you could see us.
Transact.
Okay. Thank you sure.
This concludes our question and answer session I would like to turn the conference back over to Mr. Todd Hargreaves for President and Chief investment Officer for any closing remarks. Please go ahead Sir.
Thank you and thank you everyone for joining today's call. We appreciate your continued interest in SPC. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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