Q1 2023 Service Properties Trust Earnings Call
Good morning, and welcome to service properties Trust first quarter 2023 earnings Conference call.
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I would now like to turn the conference over to Stephen Colbert Director of Investor Relations. Please go ahead.
Good morning.
Joining me on today's call are card.
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.
Note that the recording retransmission and transcription of today's conference call is prohibited without the prior written consent of as they say.
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 may nine 2023.
Actual results may differ materially from those projected in these forward looking statements.
Additional information concerning.
Concerning factors that could cause those differences is contained in our filings with the SEC, which can be accessed from our website at S V C Dot com.
Or the SEC's website.
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.
In addition.
This call may contain non-GAAP financial measures, including normalized funds from operations or normalized F F L and adjusted EBITDA Ari.
Reconciliations of these non-GAAP financial measures to net income as well as components to calculate a F. F. O are available in our enhanced earnings release presentation, which can be found on our website.
We believe this combined presentation will be helpful for analysts and investors to efficiently Digest information about our company and financial results.
Finally on today's call, we will be discussing the previously announced the terms of our agreement with BP that will be effective upon the completion of their acquisition of travel centers of America.
T a special shareholder meeting to vote on the transaction is scheduled for Tomorrow May 10, and we will not be taking questions on that merger.
And with that I'll turn the call over to Tom.
Thank you Stephen and good morning.
Last night, <unk> reported first quarter results, which reflect improvement in our hotel portfolio.
Compared to the previous year quarter, a period that was significantly impacted by the omicron variant and lagging recovery in our northern U S urban hotels.
Led by the strong performance in Fort Lauderdale, Hilton Head New Orleans in Phoenix.
Comparable hotel Revpar increased by 22% versus the prior year period, with ADR up 13, 9% and occupancy increasing by three eight percentage points.
The strong performance translated to a 251% increase in comparable hotel EBITDA over the same period last year.
Our operators were successful in continuing to close the performance gap to the market as a species portfolio revpar growth exceeded the industry by five three percentage points, an indication that the initiatives of our primary operator, sonesta are leading to greater success and increase brand awareness.
Our full service portfolio grew revpar by 36% to increase group demand in business transient travel specifically in Miami, Boston, and Toronto and events such as the Jpmorgan Health care conference in San Francisco, and the Ncw tournament in Salt Lake City, Utah.
Our hotels located in urban markets saw the greatest year over year Revpar increase of 38, 9%, while the growth the growth at our resort hotels was more moderate at 20%.
Our select service portfolio continued to show top line improvement as well with Revpar, increasing 27, 2% year over year led by occupancy gains that were three two times greater than industry.
Revenues were driven by increased transient business up 21, 7% from both business travel and O T. A.
And grew up 58, 1% largely driven by Super Bowl demand in February at our Phoenix properties.
And our extended stay portfolio Revpar increased 9% over the previous year quarter.
Led by our sonesta simply suites portfolio, which outpaced industry mid scale chain growth by four 8%.
<unk> suites, a relatively new brand launch during the pandemic reported record ADR during the quarter and has quickly established itself as a preferred option for the Midscale extended stay guest.
While inflationary factors continued to negatively impact margins, we are seeing signs of moderation specifically on the labor front.
Q1 contract labor expense per occupied room decreased by six 6% from Q4 2022.
Domestic was able to reduce contract labor employee head count by 19%.
However, as we entered the higher demand periods of the year in Q2, and Q3, we expect to see an uptick in contract labor, although year over year comparison should improve.
Our largest operator sonesta remains our primary focus and portfolio initiatives have led to quantifiable improvements include.
Including the stay more save more winter promotion Sns's internal lead referral program is seeing substantial improvement both leads and conversion rate.
Together these two programs generated $69 $3 million of revenues during the quarter.
Further our hotels have benefited for more direct bookings on sonesta, dotcom and less reliance on OTA channels, leading to a three percentage point year over year decline in OTC revenues as a percentage of total room revenue.
Turning to our net lease portfolio, which represents 46% of saic's portfolio by gross assets as of March 31, 2023, we owned 765 service oriented retail net lease properties, including our travel centers with $13 3 million square feet.
Net leased assets were 97% leased 579 tenants with a weighted average lease term of nine four years and operating under a 139 brands in 'twenty, one distinct industries as of quarter end.
Our aggregate net lease rents declined slightly in the quarter as a result of three AMC theatres, vacating and one Regal cinema sites surrendered as part of their previously announced bankruptcy.
For AMC. We currently have eight opened locations and for Regal, we're still working through lease negotiations on the remaining five theaters.
The aggregate coverage of our net lease portfolio as a minimum rent was 298 times on a trailing 12 month basis as of March 31 2023.
An increase versus the same period last year.
For <unk>, our largest tenant state level coverage on a trailing 12 month basis was 267 times up from $2 two nine times in the prior year period.
We have 160000 square feet of leases expiring in the manner of 2023, where the tenant will not renew.
These explorations represent $801000 of annual revenue or 0.2% of our net lease rents and we are evaluating various options for these known Vacates, which include re leasing repurposing and potential disposition.
Finally, the shareholder vote on the pending acquisition of Ta by BP is scheduled for Tomorrow may 10 as.
As we previously reported upon completion SBC will receive $379 $3 million in upfront funds.
Increased rents compared to the currency aliases and enhanced investment grade credit quality for our core tenant.
Before I turn it over to Brian I want to acknowledge the recent publication of the RMR group's annual sustainability report, which provides a comprehensive overview of our managers commitment to long term ESG goals.
We are deeply committed to enhancing <unk> corporate sustainability practices and continue to advance initiatives that will position the company to thrive over the long term.
I will now turn the call over to Brian to discuss our financial results in more detail.
Thank you Todd and good morning.
Charting with our consolidated financial results for the first quarter of 2023 normalized <unk> was $37 $1 million or 23 per share versus negative <unk> <unk> per share in the prior year quarter.
Adjusted EBITA was $116 $8 million for this quarter, a 30% increase over the prior year.
The major drivers impacting normalized <unk> over the prior year quarter included the improving performance of our hotel portfolio, which generated an additional $25 million of hotel EBITDA or 277% increase over the prior year quarter.
The repayment of amounts drawn on our revolving credit facility, which was fully drawn as of March 31, 2022, and the repayment of $500 million of senior notes in the second quarter of 2022 resulted in a $10 $8 million decrease in interest expense.
Rental income declined $1 $9 million this quarter compared to the prior year as a result of unfavorable changes in our reserves for uncollectible rents as well as the vacancy of four movie theaters, three amcs and one Regal cinema.
Turning to the performance of our hotel portfolio for our 219 comparable hotels this quarter Revpar increased 22% gross operating profit margin percentage increased by 373 basis points to 25, 2% and gross operating profit increased by $27 $8 million from the prior year period.
Below the GOP line costs at our comparable hotels increased $2.4 million from the prior year driven by higher base management fees as a result of our topline growth.
Our consolidated portfolio of 220 hotels generated hotel EBITDA of $35 million by service level. The increase was driven primarily by improvement in our 48 full service hotels, which generated $15 $4 million of hotel EBITDA during the quarter compared to losses of $1 million in the prior year quarter.
111 extended stay hotels generated $14 $5 million of hotel EBITDA during the quarter of 36% increase over the prior year.
Our 61 select service hotels improved generated hotel EBITDA of $5 $2 million in the first quarter compared to a small loss during the prior year period.
These first quarter results of our hotels were in line with the estimates we communicated during our fourth quarter of 2022 earnings call.
Looking ahead preliminary April 2020 through Revpar was $96 from 'twenty one.
And we are currently projecting full quarter Q2, revpar of 97 to $103 and hotel EBITDA in the $93 million to $103 million range.
Turning to the balance sheet in February we successfully executed a new five year $610 $2 million secured financing with a five 6% coupon and redeemed our $500 million of four 5% senior notes that were originally scheduled to mature on June one.
We're pleased with this transaction and believe it highlights the flexibility that we have going forward to address future debt maturities.
We currently have $5 8 billion of fixed rate debt outstanding with a weighted average interest rate of 575%.
Our next debt maturity is $350 million of senior notes maturing in March 2024.
As of March 31, 2023, we had no amounts outstanding on our revolving credit facility, which matures in July .
We are well underway to recast the lines and currently expect to complete the process by the end of the second quarter.
Turning to investing activities during the first quarter, we sold 18 hotels for a total price of $157 $8 million.
We made $22 million of capital improvements at our properties during the first quarter and we currently expect full year 2023 capital expenditures of $200 million to $250 million the.
The spend will be weighted to the back half of the year as we continue to move forward with renovations of our Hyatt portfolio as well as several sonesta hotels.
In April we announced our regular comp quarterly common dividend of <unk> 20 per share, which we believe is well covered representing a 46% normalized <unk> annualized payout ratio on the trailing 12 months ended March 31 2023.
Our cash position as of today is over $200 million and we expect the BP transaction will provide <unk> $379 3 million of additional liquidity upon closing.
That concludes our prepared remarks, we're ready to open the line up for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And the first question today comes from Bryan Maher with B Riley. Please go ahead.
Thank you good morning.
Questions for me.
I think up to the 'twenty 'twenty, four and 'twenty 'twenty, five maturities, which are meaningful.
How are you guys thinking about that today I mean between the cash you have and the cash you're about to get you know minus capex spend this year.
Probably $500 million or so leftover is there any thoughts related to taking the enhanced T. A credit bid BP and maybe you know securitizing some of that is that debt to get lower cost debt for the 'twenty 'twenty four and maturity.
Good morning, Brian . Thank you that's a great question and it's it's it's something that's on our short term radar to address and start thinking about the maturities for next year as I mentioned in the remarks, we have $350 million due in March.
And another $800 million in the fall of 2024, and the cash position, we have today plus the BP proceeds we think will put us some pretty good footing as we look to deal with those maturities in due course, but to answer your specific question, yes, I think that the Ta transaction is going to provide a significant.
<unk> ability.
With finance financing options as we look to do something in 'twenty four.
And whether that be secured financing or some sort of a bond offering remains to be seen and we will think that through as time passes here, but we believe that that transaction is going to give us.
Yes.
Pretty good credit to work down the coupon as you mentioned.
Do you have any initial thoughts as to what that savings might be with that enhanced credit is that you know maybe 50 beds of or what you might have got before I give or take.
Yeah, it's tough to say exactly because it really will depend on what market, we go to and what what the actual terms could be but.
I think the credit compared to.
Today versus having an a minus tenants backing those leases, we believe will be significant.
And would definitely be <unk>.
Something that would be more cost effective than where our bonds are trading today.
I think it gives us just just to add I think it just gives us another option for for when we wanted to address those maturities.
Similar to how.
We did the ABS facility this year one.
One of the reasons. We went that route is because it was close to a 300 basis point savings versus doing.
Our typical senior a senior unsecured so it just gives us another option, it's hard to say exactly what the savings would be versus those other options, but it is another option.
Okay, and then maybe shifting gears.
To the growth side of the business.
What are your current thoughts about you know all this discussion about the back half of 2023, He's gonna see full service gateway hotels, where owners can't refinance it.
And some of those assets coming to market I mean, clearly the you know higher end Royal Sonesta exposure to it.
Alrighty of gateway markets could use enhancing it is there a thought to maybe pursue some transactions there and then kind of part two of the question is there any thought to bringing the four properties, that's and that's that S. E. T acquired last year fully into the FCC portfolio.
Sure.
I'll take the first one first.
Yes, it is certainly an interesting.
Market right now.
For higher end hotels.
I don't think it's necessarily something you got to wait for the end of the year either worked closely evaluating a number of opportunities in markets that we think are strategic to our growth we've talked about on previous calls I, notably Miami and Los Angeles, Our two markets, we think were.
Under exposed in and even even today its theres not a lot of transactions happening.
And I wouldn't say, it's necessarily even.
Transactions, where sellers have to sell but it's more.
Maybe defined as sunsetting or if they don't want to put in the capital to do a renovation, but theres certainly opportunities out there and it's a good time to be a buyer, especially if youre able to take something down without putting.
Secured property level debt on it lenders.
For hotels for any property type right now are being extremely conservative.
<unk> rates are extremely high as well our leverage levels are low so that that creates interesting opportunities for a group like us that has the ability to take something down without putting secured financing on it.
So.
Again, we're evaluating a couple of opportunities now and we will continue to do that throughout the year.
But we're being opportunistic I think we're seeing opportunities today that we didn't see 12 months ago, we didn't see back in 2019, we may not see 12 months from now so.
We think there is there is potential opportunity to take advantage of that.
And like you say grow into markets that we think we're underexposed.
And then the second part of your question. The short answer is no. There's no. There's no current discussion about bringing those four new York hotels into our industrial portfolio.
Okay, and then just lastly quickly on the wealth Sonesta hotel that'll be opening on 'twenty, Matt that.
I think sometime in the next couple of months is there any meaning.
Meaningful capex youre going to need to spend to get the doors open on that property and I think you get a free rent period for some number of quarters. When do you actually start paying rent on that property and it is at a fixed rate and what might that be.
Hey, Brian just to clarify that's not an SBC on properties OPI office properties income trust owns that.
And I don't know the exact terms I think there is some sort of free rent period that they have but yeah. That's a relationship between so that's an opioid.
Okay. So there's no real financial impact you guys at all other than that you are 34% is domestic.
That's right.
Okay. Thank you.
Thanks, Brian .
As a reminder, if you would like to ask a question. Please press Star then one to be joined into the question queue.
The next question comes from Tyler Battery with Oppenheimer. Please go ahead.
Hi, Good morning, guys. This is Jonathan on for Tyler Thanks for taking my questions.
One for me can you provide some color on more recent demand trends any pockets of weakness or slowing that are worth calling out whether that's in urban or beat here at extended stay properties just given some of the volatility that we've seen over the past few months any anything worth calling out there.
Sure Hey, Jonathan Yes, I mean, just overall trends, we're seeing I mean, we're we're continuing to see.
Strong year over year growth in pretty much all areas of the business I think youre starting to see a softening more on the <unk>.
Leisure a resort destination type hotels, which we.
We have relative under exposure to.
But we still saw a 20% increase year over year in Revpar.
Out of that the stronger year over year growth has shifted more towards group.
Our business.
Travel markets.
We're seeing an uptick certainly in group occupancy.
As well as business transient revenues.
A couple of data points.
So thats just portfolio for example in terms of segmentation and Q1 of last year group represented about 17% of total revenues that's up to 28% so.
Certainly seeing a significant shift there.
Over the past few months I wouldn't say there was any significant change in the trends, we're seeing we kind of expect to continue to see.
A softening on the leisure side of the business and a continued uptick in AR and.
In business transient group.
Okay excellent. Thank you for the color on that and then.
Similar vein I'm curious your perspective on the financing markets right now given.
The regional bank issues had been going on since March and has that caused any noticeable changes in the conversations you've had with your lenders.
That's a good question and the short answer is no.
The regional banks and some of the banks effect in the news recently.
We don't have relationships with really any of those banks, we don't use them for cash investing.
None of them are in for example that she sees revolver, we typically deal with the larger financial institutions.
We think are pretty good footing so.
Okay excellent and then last one for me if I could now that you've worked through the planned asset dispositions can you provide some color on how youre thinking about capital allocation property here and there.
He is a priority on that front, just maybe a quick reminder for us.
Sure Yeah, I mean, there is yes, we are like you pointed out we are now fully through.
The sale of a 68 sonesta branded hotels for 16, Marriott branded hotels and I think that was we view that as a pretty pretty good success, given the volatility in the transaction markets, especially towards the end there.
There is no immediate plans to sell anything else I think we've.
Right size for the portfolio.
Shifted more towards a mix that we kind of view as long term.
It doesn't mean, we won't continue to evaluate the transaction the transaction market and evaluate our portfolio.
There's a potential that we saw something down the road again just to reiterate there is no immediate plans or anything targeted.
I think if we did sell something it would be.
More.
In terms of <unk>.
Strategically capital.
Recycling capital into other areas or geographies that we want to kind of shift the portfolio to but again nothing immediate.
Okay, great understood. Thank you for all the color that's all for me.
Great. Thanks for the question.
This concludes our question answer session.
Like to turn the conference back over to Todd for any closing remarks.
Thank you everyone for joining today's call and we appreciate your continued interest in SBC. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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