Q2 2023 Service Properties Trust Earnings Call
Good morning, and welcome to the service properties Trust second quarter 2023 earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions.
Please also note that this event is being recorded today.
I would now like to turn the call over to 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 <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 of <unk>.
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 August eight 2023 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 filings with the SEC, which can be accessed from our website at <unk> 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 SFO.
Adjusted EBITDA Ari.
Reconciliations of these non-GAAP financial measures to net income.
As well as components to calculate <unk> are available in our supplemental operating and financial data package, which can be found on our website.
With that I'll turn the call over to Todd.
Thank you Steven and good morning.
<unk> second quarter results reflect the continued improvement in our hotel portfolio.
The year comparable revpar gains outpaced the industry for the sixth consecutive quarter driven by increases in both ADR and occupancy.
Folio Revpar for our 219 comparable hotels increased two 8% with ADR, increasing two 4% and occupancy increased by 30 basis points.
Well leisure demand has softened in markets like Miami, Scottsdale, Fort Lauderdale, Hilton head pest species portfolio benefited due to our higher relative exposure to urban markets and reliance on business travel.
We reported year over year Revpar gains in our select service and full service portfolio is up three 8% and three 6% respectively.
Resulting from the recovery of urban markets, specifically on the East coast, Midwest and improving trends in business transient group and contract business.
Revenues at our 48 comparable full service hotels increased by $97 million from the previous year quarter with sonesta, posting a record quarter for ADR for its 39 full service hotels, driven by sizable year over year increases in group corporate negotiated and contract of 25%, 16% and 11% respectively.
The largest increases in business travel were in Los Angeles, Boston, and Washington D C and.
The increase in contract related business was largely driven by our hotels in Redondo Beach Fort Lauderdale.
The negative impact from reduced for leisure demand was mostly experienced at our hotels in Hawaii Hilton Head New Orleans in Florida.
Our portfolio of 661 select service hotels reported revenues that were $3 $1 million greater than the previous year quarter.
The revenue gains were driven by group business, which was up 35% or $2 $3 million.
Excluding four properties under renovation revpar at our portfolio of 40, Sonesta select hotels increased 7% year over year and Revpar of our portfolio of 17 Hyatt place hotels increased three 6%.
Lastly, our portfolio of 110 extended stay hotels increased revenues by $1 $6 million over the previous year quarter.
As both ADR group revenues came in with the highest figures since the most recent brand conversions in 2021.
Weekday occupancy specifically at our Sonesta select hotels has lagged the balance of our portfolio, but we are now seeing the gap between weekday and we day week.
Weekend occupancy converge as leisure demand softened in business travel increases.
In June Sonesta portfolio reached a new post pandemic weekday occupancy high of 68, 7%.
There is also seeing improvement in this loyalty program is travel pass revenue as a percent of total revenue increased from 19, 8% in Q2 2022.
21, 9% in 2023.
On the expense side, we continue to see inflation headwinds and costs like insurance and labor continue to pressure margins.
Example, our annual insurance program was recently renewed at our largest operator sonesta expects to see premium increases of Sig.
Premium increase of 60% or $6 $8 million for the second half of 2023.
On the labor front contract labor expense per occupied room declined for a third consecutive quarter. However, we expect the use of contract labor will remain elevated given challenges in hiring full time positions such as housekeepers F&B attendance and engineers.
Turning to our net lease portfolio, which represents 45, 4% investigation portfolio by investment.
June 32023, or 763 service oriented retail net lease properties.
96, 1% occupied with a weighted average lease term of nine three years.
Importantly, our largest tenant in our portfolio, which represents 68% of our minimum rents is now backed by an investment grade rated subsidiary of BP.
The aggregate coverage of our net lease portfolio as minimum rent was 294 times on a trailing 12 month basis as of June 32023 and <unk>.
<unk> versus the same period last year.
Our near term lease expirations are manageable as we have 856000 square feet of leases expiring in the remainder of 2023 and 2024, representing only 3% of aggregate annualized minimum Bret most of which we expect will renew.
Regarding our movie theater exposure annualized minimum rents from our AMC movie theater portfolio declined by $2 $1 million from the previous year quarter related to AMC vacating three properties and converting to a percentage rent structure on to others and.
And by $1.8 million due to the recent lease restructures in connection with Rico's bankruptcy.
In June we completed the acquisition of the Nautilus Hotel and upper upscale hotel and the narrow place mall location in the heart of Miami, South Beach, which upon renovation will be rebranded under sonesta lifestyle brand the James.
This hotel expands our resort destination offerings provides an important entry into south beach market.
And is representative of the type of hotel SBC may target as we take a disciplined approach to adding to the portfolio.
Finally, before I turn it over to Brian I want to emphasize the actions. The company has taken over the last several quarters through refinancings asset sales and improved hotel performance to position SBC to address our upcoming debt maturities in 2024 25.
After the recent completion of our $650 million revolving credit facility and closing on the Ta transaction. We now have over $1 billion of liquidity. They have a large pool of valuable unencumbered assets, including all of our trout Ta travel centers, which provides us access to a range of financing alternatives, where we can be selective and securing the best relative.
Execution from both our leverage and cost standpoint, and these ever fluctuated capital markets.
I will now turn the call over to Brian to discuss our financial results in more detail.
Thank you Todd and good morning, Steve.
Starting with our consolidated financial results for the second quarter of 2023 normalized <unk> $95 1 million or <unk> 58 per share versus 54 per share in the prior year quarter, an increase of over 7%.
Adjusted EBITA increased one 9% year over year to $185 $3 million.
The increase in normalized <unk>. This quarter was driven by lower interest expense increased rental income and improved hotel results, partially offset by a provision for income taxes.
The decline in interest expense is largely the result of repaying amounts outstanding on our revolving credit facility and senior notes that were maturing last year.
Regarding our income tax provision, we recorded a tax benefit of $3 $8 million in the first quarter of 2023. This quarter, we recorded a tax expense of $5 $2 billion with <unk> per share.
Swings sequentially as a result of the seasonal ramp up of our hotel portfolio.
Projecting a full year tax expense of $1 $5 million.
Most of our tax provision related to certain state income taxes as well as our foreign operations.
Rental income increased by $2 $7 million this quarter compared to the prior year largely as a result of the Ta transaction closing the quarter.
We recognized $3 $5 billion of percentage rent during the quarter under the legacy Ta lease terms.
As a reminder, the new lease structures, a 10 year term and calls for fixed annual 2% increases with no percentage rent component.
We also prepaid $188 million of rent and we received $25 million of rent credits annually in return.
Annual cash rents for the first year of our Ta leases $254 million of fixed rate less the $25 million prepayment credit.
We will recognize $271 billion of annualized rental income in our earnings over the 10 year lease term, which reflects aren't recognition of the fixed rents, 2% rent escalators and the effect of the prepaid brands on a straight line basis in accordance with generally accepted accounting principles.
The increase in rental income this quarter from Ta was partially offset by an increase in reserve for uncollectible rents in the movie theater closures that Todd outlined.
Turning to the performance of our hotel portfolio for our 290 comparable hotels. This quarter Revpar increased two 8% gross operating profit margin percentage declined by 128 basis points to 34, 4% gross operating profit increased by $3 5 million from the prior year period.
Below the GOP line costs at our comparable hotels decreased $3 million from the prior year driven by successful tax abatements and lower insurance costs, driven by a deductible of expense in the prior year period related to various insurance claims.
Our hotel portfolio generated hotel EBITDA of $93 1 billion three 5% increase over the prior year.
By service level, the increase was driven primarily by improvement in our 111 extended stay hotels, which generated $28 million of hotel EBITDA during the quarter. The 11, 6% increase over the prior year quarter.
Our 61 select service hotels also improved generated hotel EBITDA of $13 $5 billion in the second quarter of 26, 2% increase over the prior year period.
Our 49 full service hotels generated hotel EBITDA of $51 6 million or three 1% decline over the prior year period.
Turning to our expectations for Q3 preliminary July 2023, Revpar was $100 52.
Currently projected full quarter Q3, revpar of 91 to $97 and hotel EBITDA of $76 million to $86 million range.
Turning to the balance sheet in June we successfully executed on a new four year $650 million secured revolving credit facility.
Facilities are secured by 66 hotels and three net lease properties and bears interest at Sulphur plus 250 basis points.
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.
We have over 600 unencumbered assets across both of our real estate segments, including all of our travel centers leased at Ti.
Our gross book value of over $7 billion.
We believe this vast asset pool will provide us flexibility as we look to address our 2024 debt maturities in the coming quarters.
Turning to investing activity during the second quarter, we acquired the Nautilus Miami Beach for $165 billion and sold to that lease properties for a total price of $620000.
As far as the Ta transaction. We received 102 billion also the value of the Ta common shares we held an $89 million for the Ta trading and we sold the BP.
We've made 42 8 million total capital improvements at our properties during the second quarter, and we expect capital expenditures of $140 million to $160 million over the remainder of 2023.
We currently have over $1 $1 billion of total liquidity, including $500 million of cash today.
In July we announced our regular quarterly common dividend of <unk> 20 per share, which we believe is well covered representing a 45% normalized <unk> annualized payout ratio on a trailing 12 months ended June 32023.
That concludes our prepared remarks, we're ready to open the line for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
And our first question here will come from Bryan Maher with B Riley Securities. Please go ahead.
Thank you and good morning.
Maybe maybe starting with a big picture question on leisure travel.
Softening in <unk>.
Years is not the first company to be part of that.
How much of that do you think is related to maybe revenge travel exhaustion post COVID-19 and how much do they do you think might be related to you know, maybe some consumer belt tightening or pushed back versus the rates that the industry has been pushing.
Hey, Brian Good morning.
Yeah.
We're certainly seeing the softening of leisure travel in our portfolio I think.
The good news with our portfolio as we do have more relative exposure to urban hotels and hotels that are more focused on business travel but.
I think our overall year over year Revpar growth, especially in full service would've bet would've been even higher.
It wasn't for the hotels it was more focused on leisure.
I think it's I think it's a combination I think it's a lot of the reasons that you pointed out.
Is the revenge travel component.
That we saw in 2021 and 2022.
Just right now people have less money to spend on discretionary travel.
Interest rates are out people are spending more on car payments and other things.
I think we're also seeing it.
For.
And what we're seeing at least in most of our most of most of our hotels are domestic but.
I think you're also seeing a lot more outbound international travel.
The strength of the dollar.
Is kind of leading to that as well I think.
Most travel restrictions.
Have been lifted so you're seeing more people travel to Europe , or some cases Asia.
Rather than go onto our hotels in Hilton head or Fort Lauderdale, or New Orleans or Scottsdale. For example, so I think it's a mixed up.
Revenge travel, but the belt tightening as well as.
More and more outbound international travel.
Okay. Thanks for that and then shifting to your liquidity and your capital availability.
And then a charity that I and I know you addressed this in your prepared comments, but when we think about your liquidity over $1 billion and then the recent purchase of the Nautilus for 165, and I think that Theres a couple of air pockets, maybe in some gateway or leisure markets, where you might want to have any nautilus type situation.
How should we think about deploying some of that capital.
Should we think about maybe another one or two of those type of assets, but not four or five in order to not want to stretch your liquidity position no part of next year.
Where's your head on that.
Sure, Yes, it's a good question and something we're.
Certainly.
Scuffing here every.
Everyday with.
We are looking at potential acquisitions, but we obviously have other uses of that cash whether it's capex into that hotels are.
These.
Debt maturities that are coming up in 2020 for 2025 I.
I think the Nautilus was a very unique opportunity.
In a market that.
We felt we are underexposed into a critical gateway market for a hotel company of our size to have something in but.
But we looked at.
Yeah, we look very hard at 10 to 15 hotels in different areas of Miami motion South Beach, but also critical in coral gables in coconut Grove.
It's difficult it's challenging to find an opportunity that kind of worked for for SBC, given our cost of capital and given our yield hurdles. The nautilus with something we we think we.
We could get in there.
To do a renovation reposition that hotel and getting outsized yield, especially for that specific area of South Beach.
Got it and then what do you think there is a very good basis, but frankly.
Frankly, we're not seeing a lot of opportunities like that we didn't see a lot of other opportunities like that in South Beach. We're also looking like we've talked about before in southern California other destination type markets.
And especially with the hotel recovery I think a lot of we're not seeing a lot of distress sales I think a lot of owners are looking at our portfolio and saying.
We've made it through the worst of it I don't want to sell something for 70 or 80 cents on the dollar financing markets are tough so it's.
We're being very aggressive in looking at opportunities, but we're not finding a lot of things that make sense and we're not going to force it.
Again, we have other other needs for that capital. So so back to your initial question.
Certainly not going to be four or five.
Either it could very well be that the nautilus is the only <unk>.
Property acquisition SPC makes in 2023.
So I think it's either you see either zero or one or two most likely.
Okay. Thanks, and just last from me.
On the net lease portfolio ex the Ta do you plan on doing continued selective pruning there and specifically as it relates to the movie theaters I think you have 18, or so $160 million investment yes.
Given that movies are I mean that in the press. These days in a fairly big way is there any bid on those types of assets at this time.
Sure Yeah, we haven't really necessarily been pruning that portfolio, I think where we're more or less selling assets that.
May have become vacant or assets that we don't think we're gonna have success, releasing which is common for these type of granular assets a lot of times the best exit is going to be.
Through disposition toward a developer for example, yeah. So on the movie theater side, where that we're down to eight a M. A CS we're down to five <unk> and then.
For Bnb and one Marcus Theatre.
Yes, I mean movies movies are coming back.
Box office revenues are getting.
Getting back to 2019 levels. So I think I think the theaters that.
That are doing well and we have a number of those in our portfolio I think you're starting to see those.
So it will come back and those may be beige strong long term holds for us.
I don't think its the right time to sell I don't think youre going to get anything better than.
We had no 10 cap on any movie theater today, maybe.
Excellent location, you could but we.
We haven't we haven't taken any of the market, we don't really plan too but.
Maybe in a couple of years that would be the right time to dispose of some of those assets.
Thanks Todd.
Thanks, Brian .
And our next question will come from Dori Kesten with Wells Fargo. Please go ahead.
Hi, Thanks, good morning.
Your reduced expectations for Capex. This year can you can you walk through the reason for that and a few are ex Nicholson with a hospital pushed to 'twenty four.
Good morning, I'll take that one.
Some of it's just timing.
Originally projected up to $250 million for the year.
Some of the projects are slower to get started particularly with our Hyatt portfolio our in place portfolio.
We are in the still in the planning phase ordering necessity that sort of thing with the renovations will kick in later this year. So some of it is just going to be a spillover to 2024.
Got it.
We haven't really changed our plan as far as the number of hotels, we plan to deploy capital into it's just a matter of timing at this point.
Okay and is your three year guide still around 750.
Not a lot.
That's right Yeah. That's our best guess now is sort of a 250 billion dollar run rate for the next three years.
Okay.
Based on internal expectations for 2000 and for taxable income versus 23, when would you expect to need to increase your quarterly dividend.
That's a good question I don't believe we would be forced to under REIT rules and have any sort of required distribution.
We see and I'm sure a lot of other lodging Reits.
Some nols from what we've seen in the last few years that we can offset taxable income on.
So my short answer is no.
The dividend today is very well covered is something we talk about all the time and if we continue to see improvement in the hotel portfolio. That's a conversation we'd go out as far as you know.
We moved the dividend.
Okay, where where your Nols today.
We have.
<unk> Nols at the hotels slash taxable REIT subsidiary level as well as the corporate level call it around $500 million today.
Okay and then.
Key takeaways from your first few months partnering with BP and do you have a sense of how much capital they will be investing in these assets all of them a few years.
Yeah, I mean, I think at this point BP is really just like any other tenant it's no longer sort of a related party connection as we had in the prior periods.
Sure.
Being an affiliate of RMR.
Beyond what their public statements, where when they announced a deal we don't really have much visibility into what the deploy today, but they did say they.
We're going to invest upwards of $200 million per year in this portfolio various initiatives. They are looking to do whether it be for ESG purposes and others.
Thank you.
Thank you.
And again, if you have a question or follow up you May Press Star then one to join the queue.
Our next question will come from Tyler <unk> with Oppenheimer. Please go ahead.
Thank you. Good morning first question for me in terms of the Sonesta brand.
Can you talk a little bit about how it's resonating with consumers how it's competing in the marketplace.
What youre seeing in terms of Revpar index.
Any uptick in the loyalty program usage as well.
Sure Good morning Tyler.
Yes, the Sonesta Sonesta brand continues to make improvement.
I think it is.
It's different depending on the service level. If you look at our Royal Sonesta branded hotels as you look at our simply suites Hotel, which is our two hotels, which is a mid scale extended stay brand Thats NASA launched during the pandemic both of those are competing at the high end with.
There appears.
With those brands.
Select service hotels to the Sonesta select.
<unk> talked about this on previous calls.
That continues to be the area, where they are lagging the competition the most.
Those are the hotels that are very reliant on that midweek business traveler.
But like you pointed out tither that those hotels are also.
Very dependent on more than any other service level in terms of.
Rewards points.
Guests are using rewards points to travel with those hotels so.
We're seeing the right signs in the right trends with sonesta it is gradual.
They are the.
Loyalty program revenues.
The travel pass continues to increase went up from 19, 8%.
Close to 22% year over year, but if you look at some of that.
Brands that are leaders in that space some of that virus close to 50%. So there's still a lot of room to go there, but sonesta continues to.
We continue to see results from their advertising and brand awareness campaigns.
Continue to see more traffic coming in through brand Dot com.
Thank <unk>.
Tells that they opened in New York, the New hotel that we just purchased in Miami, where all may lead to more kind of brand recognition for four sonesta, So still a lot of room to go but.
They're headed in the right direction.
Okay. Thank you.
How about on EBITDA margin.
For the hotel portfolio.
Guidance implies low twenties for Q3, you called out some of the items impacting that.
Kind of based on seasonality and the timing of some of those.
I mean is it reasonable to expect margin to decelerate.
In Q4 versus Q3, and then also remind us where EBITDA margin roughly was for this portfolio on a comparable basis pre COVID-19.
Sure I'll take.
With that one.
Is it reasonable to expect the fourth quarter will soften and margins will decline.
Fourth quarter starts off pretty strong October through mid November and then Youll see the seasonal drop off as we get into the holiday season.
So we do expect.
Bottom line hotel EBITDA margins call. It the high teens at this point for Q4, which for the average for the year will put us in that high teens low 20 range.
As far as the portfolio pre COVID-19.
We were sort of in that mid twenties.
High 20% range.
Okay.
A follow up on the capital allocation topic, and you were talking about acquisitions on the hotel side of things.
What are you seeing in terms of net lease transactions is that something that might make sense is there anything interesting out there or maybe from a from a portfolio perspective that you that you could book to.
To grow Youre not lease exposure.
Sure Yeah, we continue to.
Yeah, No we focused on hotels in the previous question from Brian , but yes, we're looking at justice hardest net lease acquisitions as well.
I think we're seeing a similar challenge in terms of finding at yields that really makes sense for FCC I mean, there's there's some assets some portfolios out there that.
Could work given our cost of capital, but frankly, they're just not.
Quality, both from a real estate.
And kind of quality that we're that we're looking looking for we are starting to see cap rates.
Continue to move out slowly so there could be some opportunities out there but.
Just like on the hotel side, we don't we don't feel the need to.
<unk> said.
But we continue to look at look at net lease properties.
Eventually we're going to be back in a period, where we're going to be more acquisitive.
We want to grow that portfolio long term so.
We just don't know right now is the right time to do it.
Okay.
And then last question for me in terms of options on the table for the for the 2020 fours.
We're a market rates right now.
Security versus unsecured debt and if you did utilize the travel center assets what.
What sort of pricing improvement could you see versus the transaction you did earlier this year.
Sure. It's a great question, it's top of mind for us as we look to take out those maturities in the coming quarters.
If you look at where our public bonds are trading today be in the 9% to 10% range, which is obviously very expensive debt.
We did the ABS debt lease transaction in Q1 at an effective yield of 7%.
If we want to utilize the assets.
Probably be in that ballpark looking through to Bp's credit on those leases.
It's going to give us a lot of flexibility and value.
To be able to raise money utilizing those assets. If we chose if we choose to go down that path.
So we think there is easily 200 plus basis points.
Between the public bonds and what we can do in.
The secured markets and really it just comes down to what exactly we put together for a package that we're going to do a secured financing.
Okay. That's all from me thank you for the detail.
Thank you.
This concludes our question and answer session I'd like to turn the call back over to Todd Hargreaves for any closing remarks.
Thank you everyone for joining today's call. We appreciate your continued interest in SBC.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.