Q3 2023 Service Properties Trust Earnings Call
Good morning, and welcome to the service properties Trust third quarter 2023 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity.
Two last questions.
Ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded 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 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 of today's conference call is prohibited without written consent of SPC.
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 November seven 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.
SPC re 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.
And adjusted EBITDA Ari.
Reconciliations of these non-GAAP financial measures to net income.
As well as components to calculate a S. S. O are available in our supplemental operating and financial data package, which can be found on our website.
And with that I will turn the call over to Todd.
Thank you Steven and good morning.
<unk> solid third quarter results reflect moderate top line improvement in our hotel portfolio.
Year over year comparable Revpar increased <unk>, 8% and comparable hotel EBITDA was generally flat despite displacement from 12 active renovations during the quarter impacting performance.
Top line performance was led by Sonesta with an 11.9% gain in group revenue and a 17, 6% gain in contract revenue mitigating some of the softening demand we are experiencing at our leisure oriented hotels.
Our full service portfolio continues to outperform our other service levels driven by improvement at our urban hotels as full service Revpar increased two 5% year over year, and EBITDA increased by $2 $4 million.
Revpar at our select service portfolio declined 0.2% year over year with occupancy gains of 0.8 percentage points, while revpar at our portfolio of extended stay hotels decreased one 3%.
Removing the hotels under renovation Revpar at our select service hotels increased two 7% in.
Revpar at our extended stay portfolio increased <unk>, 7% as 53 of our extended stay hotels reported a positive indexed to 2022.
There has been a notable shift in segmentation as Q3 transient revenues as a percentage of total hotel revenues declined from 78, 1% to 75, 4% from the previous year quarter.
While group increased from 15, 5% to 17, 2%.
And contract revenues increased five 4% to five 9%.
The largest decrease in transient occurred in our full service portfolio due to market driven declines in San Francisco, Chicago, and New Orleans.
Group revenues were led by our full service segment with gains at our Royal Sonesta, Cambridge, Royal Sonesta, Minneapolis, Sonesta, Denver, and Crowne Plaza Atlanta, as a result of strong corporate group as well as increased citywide events.
Our sonesta full service portfolio led the increase in contract related business with new airline crew activity and increased rates for existing accounts at our properties and we're Dod obese, San Jose and Nashville.
All of our hotel operators remain focused on CRE bookings to their respective websites and direct sales channels to lower lower commissions in.
In OTC revenues as a percentage of total revenues decreased from 38% to 29, 4% year over year.
Business travel continues to trend positively as corporate negotiated revenue increased by one 3% year over year and our species portfolio is now at 76, 1% of 2019 levels up from last quarter's index of 78%.
The recovery has been led by small and mid market accounts, while the larger national accounts have been slower to return.
The gap between week weekend and weekday occupancy is narrowing and sonesta is weekend occupancy has outpaced weekday by four nine percentage points in September down from a five eight percentage point gap in September 2022.
Our largest operator sonesta remains focused on increasing its brand awareness towards advertising and media campaigns and build out of its loyalty program.
Revenue from Sonesta travel pass program as a percentage of total revenue increased from 22, 5% in Q3, 2022% to 25.9% Q3, 2023 led by room nights, which increased by 15, 1% with ADR, increasing one 4%.
Group pace improved across all of our operators led by Sonesta, which is 32, 5% ahead of last year.
Gains were widespread with 85% of our full service hotels reporting positive group pace.
Led by the Royal Sonesta is in San Francisco, St. Louis Houston, Washington, D C and the Sneath Nashville.
Hotel operating expenses across our portfolio remain elevated and continue to pressure margins.
Insurance premiums increased by $1 $6 million or 15% year over year, an increase we expect will continue into Q4.
On the labor front, our hotels are relying less on contract labor shifting more labor in house, which has resulted in contract labor per occupied room decreasing in each of the last four quarters.
However, wages for in house employees are increasing in the portfolio experienced a 4% increase in total wages pushed benefits on a cost per occupied room basis over the previous year's quarter.
Turning to our net lease portfolio, which represents 45% of spc's portfolio by investment.
As of September 32023, or 761 service oriented retail net lease properties were 95, 8% leased with a weighted average lease term of nine one years.
Our lease maturities are well ladder and only 8% of our net lease minimum rents expire prior to the end of 2026.
The aggregate coverage of our net lease portfolios in minimum rents was 2.72 times on a trailing 12 month basis as of September 30th just 23.
The decline sequentially from 294 times is largely driven by increased rents in our Ta leases as a result of our Med mentioned Bay and softer EBITDA reported by Ta for Q3 2023.
Importantly, ta is our largest tenant in our portfolio and the rent payments are guaranteed by investment grade rated subsidiary of B P.
Rent coverage for our other retail net lease tenants improved to 368 times in Q3 up from 3.58 times in Q2 2023.
Transaction activity during the quarter was relatively muted with no acquisitions and limited net lease dispositions.
We continue to evaluate select acquisition opportunities specifically full service hotels in target markets.
But we remain disciplined in this volatile capital markets as we carefully consider how we allocate capital.
While Brian will provide more detail on the balance sheet I'd like to emphasize the strong position as we see isn't to refinance our upcoming debt maturities due in 2024 and 2025.
Our hotel portfolio continues to demonstrate improved financial and operational performance in our net lease portfolio provides dependable cash flows was 68% of annual minimum rents coming from an investment grade rated tenant V P.
With over $1 billion of total liquidity and a large pool of highly valuable unencumbered assets, including all of our travel centers leased the ta.
We plan to be proactive in determining the most efficient and cost effective solutions to address these maturities in the near future.
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 third quarter of 2023 normalized <unk> was $92 1 million or <unk> 56 per share versus 54 cents per share in the prior year quarter.
Adjusted EBITDA increased 1% year over year to $175 $3 billion.
Earnings this quarter as compared to the prior year quarter benefited from three cents per share of additional interest income earned on our cash balances and <unk> <unk> per share related to an income tax benefit recorded partially offset by a <unk> <unk> per share decline in hotel results.
Rental income increased by $3 $5 billion this quarter compared to the prior year largely as a result of a full quarter impact of our amended ta leases that were effective in may 2023.
Turning to the performance of our hotel portfolio for our 290 comparable hotels. This quarter Revpar increased by 80 basis points gross operating profit margin percentage declined by 160 basis points to 31, 3% and gross operating profit decreased by $2 $2 million from the prior year period.
Below the GOP line costs at our comparable hotels decreased $1.4 million from the prior year driven by a reduction in real estate taxes offset by increased property insurance expense.
Our 221 hotels generated hotel EBITDA of $75 5 million or.
At 1.6% decline from the prior year.
By service level hotel EBITDA year over year declined $2 $3 million for our 111 extended stay hotels and declined $900000 for our 61 select service hotels, partially offset by a $2 million increase from our 48 full service hotels.
Turning to our expectations for Q4 preliminary October 2023, Revpar was $96.62 and we're currently projecting full quarter Q4, revpar of 76 to $79 and hotel EBITDA in the $45 million to $49 million range.
Please note do you expect a decline in hotel EBITDA sequentially is largely due to the seasonal patterns. Our hotel portfolio has historically seen as demand softens typically beginning mid November it continues to be early winter months.
Regarding our income tax provision, we recorded a tax benefit of $2 2 million third quarter of 2023, we expect this benefit to reverse in the fourth quarter and reaffirm our projection of a full year tax expense of $1 $5 million.
Turning to the balance sheet. We currently have $5 8 billion of fixed rate debt outstanding with a weighted average interest rate of five 2%.
Our next debt maturity is $350 million of senior notes maturing in March 2024, followed by $825 million of senior notes maturing in October 2024.
We're currently evaluating various options to address these maturities in the coming months and we will look to mitigate the impact of higher interest rates.
Our real estate portfolio and closing includes over $8 $5 billion of unencumbered assets based on gross book value, including all of our travel centers leased the ta as well as a large diverse hotel portfolio, we could look to for possible strategies to manage our debt maturities and the current rate environment.
Currently at $432 million of cash and $650 million.
Of Undrawn credit facility capacity for total liquidity of over $1 billion.
Turning to investing activities during the third quarter, we had no acquisitions and sold two net lease properties for total price of $3 $7 million.
$65 million of total capital improvements at our properties during the third quarter, and we expect to make capital expenditures of $65 million to $75 million in the fourth fourth quarter of 2023.
We will provide guidance on our planned 2020 for spend on our fourth quarter earnings call.
In October we announced our regular quarterly quarterly common dividend of <unk> 20 per share, which we believe is well covered representing a 44% normalized <unk> annualized payout ratio on a trailing 12 months ended September 32023.
That concludes our prepared remarks, we are ready to open the lines of 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 you're using a speaker phone. Please pick up your handset before pressing the keys.
And any time your question has been addressed and you would 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 Mayer with B Riley Securities. Please go ahead.
Great. Thank you good morning.
Maybe sticking with Capex for a minute.
You just touched upon that Brian.
Can you give us a little color as to why it was slow getting off the ground in the first half of 2023.
And the number you just threw out for the fourth quarter I think 65 to 75 million do you suspect that that's kind of a peak type of number I mean, I know you said, you'll give us color on 2024, and a couple of months, but certainly I wouldn't expect the run rate to stay at that level.
Good morning, Brian. Thank you for the question.
Yeah.
Some of the delays in getting started in some of these projects has been whether it be scoping planning trying to avoid disruption.
Yeah, we've talked for the last couple of quarters about our Hyatt portfolio Thats been slow out of the gate, but that's now fully underway I do expect Q1, given how many highest are currently under renovation to be elevated from a capex standpoint, we're also kicking off a bunch of renovations at various sonesta hotels across <unk>.
Both segments.
So originally in 2023, we had guided 200 or $250 million of Capex.
As sort of a preview I think it's going to be in that range for 2024, as we do have a multi year renovation plan going on so it'll be a little choppy quarter to quarter, because again, we like to obviously point and things to avoid as much disruption as we can especially during the peak summer months.
So there could be some bookends effects Q1 versus Q4.
Okay. Thanks for that and suffice it to say I would expect that your acquisition appetite will be somewhat muted until you addressed the 2020 fours unless it.
Yeah, that's something that just too good to turn down would that be a correct process.
Good morning, Brian that's that's an accurate statement, our priority remains addressing our upcoming debt maturities.
That being said, we continue to evaluate acquisition opportunities similar to what we bought in June with the Nautilus and.
But at the current time, we have no nothing under purchase sale agreement were underwriting a couple of transactions, but that said, it's unlikely we buy anything the rest of this calendar year.
As you know we've bought one asset in the past three years, we've sold over 100 hotels for $1 billion of proceeds. So we have been net sellers, but we'll continue to.
Opportunistically evaluate transactions, but again priority is the upcoming maturities.
Just another couple of quick ones and I'll turn it over to somebody else.
Brian when you look at the Ta portfolio.
As the potential you know security for a fairly meaningful debt refinance can you give us any broad strokes thoughts on what the interest rate might be on something like that given its high security with the BP leases.
Yeah, It's a great question and it's something we're studying very closely there is a couple of different ways you could do it whether it be property level debt, some sort of secured bonds or some other bank that uses the portfolio's collateral.
And some of our potential paths.
To look at where our bonds are trading and look at it relative spreads and there's all sorts of different permutations, we could look at.
I would just say that a far end of the goalpost is where our unsecured debt bonds are trading which is on the 10% range.
We've done unsecured financing this year as low as 7% obviously rates have moved since the first quarter of 2023.
So we're somewhere in that ballpark and between those goalposts as my best guess today.
Okay. Just lastly, its insurance rates continued to get.
You know ridiculously higher given that you have so many unencumbered assets do you ever get to the point, where you just think about self insuring.
No I don't think that that's really an option for us.
At this point.
Okay. Thanks, that's all for me.
The next question comes from Tyler Batori with Oppenheimer. Please go ahead.
Hi, Good morning. This is Jonathan on for Tyler. Thanks for taking my questions first one for me can you provide some additional color on October revpar in the Q4 guidance and understanding seasonality is a factor but are you expecting more of the same demand trends in the fourth quarter, but with stronger than kind of a slowing leisure.
<unk>.
Yes, it's a great question. Thank you in October.
It was one of the stronger months in our hotel portfolio and continue sort of the summer trend before things start tapering off.
Coupled with the seasonal patterns with demand changes.
Sort of a temporary.
Activity that we saw in the second half of Q3 I think that's.
A reasonable explanation of why our projections might be a little lower than what we achieved last year. So those same trends are continuing.
With leisure and different different segmentation.
Group versus transient and that sort of thing.
Okay, Great I appreciate the color there and then on the on the group business helpful commentary.
Repaired remarks on where group is now but can you remind us what percent of your historical.
Total mix typically grouped and then looking ahead.
Any thoughts on the booking pace into 2024 and kind of a near term sustainability of group strength that we've seen.
So group is.
Probably where it is today is.
Probably a little lower than it has been historically, but certainly a sizeable shift in segmentation from where we saw last year's quarter, which isn't surprising just given.
What we're seeing overall in the industry with just overall leisure transient decreasing.
But yes group pace going forward to 2024 is we're seeing strong strong pace there as well.
We're well ahead of 2022 were not back most of our operators specific of senescence is not back to 2019 levels by you're seeing a lot more booking happening happening in the quarter for the quarter or so.
Those booking windows are changing a little bit.
Okay, and then last one for me if I could 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 are you seeing in terms of Revpar index in any.
Uptick in the loyalty program usage there.
Sure Jonathan that's a good question and something we monitor very closely.
There has been very focused on their advertising campaigns in their media campaigns to really get that the brand name out there we're seeing the metrics we track on the loyalty program in terms of number of number of actual members in our loyalty program, but also a percentage of revenues that are booked through the loyalty program.
Continue to increase year over year, they're not at the levels of some of the competing brands.
Our sometimes closer to 50% of total revenues booked through the loyalty program. So there's still a lot of room to grow there, but we are seeing.
We are to answer your question, we are seeing it resonate more with more with consumers the sonesta brand in terms of.
Indexing.
You know it you need to look at it by service level, there's certain service levels and brands that competes very effectively in for example, our Royal Sonesta branded hotels are at 93% of 2019, our sonesta hotels and resorts, which are other full service hotels.
92%, our sonesta simply suites are 89% of 2019 the area. We've touched on this as you know Jonathan on prior calls to the Sonesta select portfolio, which is very reliant on.
Business travel so it's a little bit of a market.
Market issue, but also just with business travel overall industry industry, not having to return to 2019 levels, but we acknowledge that it's also.
Shifting the brand to sonesta select which has caused some of the lag in the recovery there.
It's a small percent.
Okay.
Alright, and just say, yes. It is a small percentage of the portfolio. The Sonesta shall act was 8 million out of the total 75 million of EBITDA for the quarter, but again something we're very focused on we have sold some of the lower performing Sinatra select hotels in the past, but again, something where we're very focused on improving that.
Excellent. Thank you very much that's all for me.
Thanks, Jonathan.
<unk>.
The next question comes from Chris <unk> with HSBC. Please go ahead.
Oh I see.
Yes.
Nation.
Regarding the whole.
Including geography wise.
Wondering if you could share.
All right.
Business is leisure.
What in terms of hotel portfolio and revenue that would be great.
Sure so to clarify Youre looking for the next business versus leisure.
Yes.
Sure. So historically it's been.
Our portfolio has been very concentrated in more business relative to leisure at anywhere from 75% to 80% of our demand has been from.
Ben from business.
And obviously that's been that's lagged the recovery relative to leisure leisure was the area that really recovered and saw the double digit revpar growth adjusted 'twenty, one 2020 two you're starting to see that shift now you're starting to see some declines in leisure related revpar in travel overall there has been.
More outbound international travel that there has been inbound.
So you are seeing that business travel on our portfolio pick up year over year, it's still not back to 2019 levels.
Through what we've sold and acquired over the past few years Youre seeing a shift more towards leisure.
But we're still well above 50% in terms of business relative to leisure, but I think over the next few years, we may see a shift in our portfolio more towards leisure relative to business.
Thank you.
The next question is.
If you could shed some color on definitely our franchising strategy and also the format, which is having the most success is the biggest focus for Suntrust.
Additionally, it would be great. If you could shed and update on definitely God direct booking that is it's just not true and bulky platform because in 2022. It has increased to 24 sandwiches like up from 18% in 2021.
That any recent kind of help would be great.
Great. Thank God, I think I've got that all.
So starting with starting with the franchising effort, that's something the sonesta franchising team is very focused on and where we expect the majority of the growth to occur at sonesta.
There is a lot of momentum and a franchise franchising hotels for sonesta across all the different sonesta brands as well as the legacy Red Lion brands.
It's a very competitive industry right now theres not a lot of new construction happening. So a lot of it is.
Is it as conversions.
From from other brands, but there's a lot of momentum there sonesta will typically.
Put out a press release when they open a new franchise hotel as well so that's something.
That is out there.
For the public the brand.
The one of the benefits of of Sonesta as they have.
They have a large family of brands all the way from the Red line economy hotels, all the way to upper upscale Royal Sonesta hotels. So they really have the ability to offer every brand out there the brands that we own in our portfolio, they're very focused on including the sonesta slacks Sonesta extended stay Es suites.
As well as the simply suites. They also recently launched a new brand called <unk> Central which is a select service hotel with a lighter F&B component that they've had a lot of success with and that was one of the reasons day. They launched that brand just because they were getting feedback from a lot of their franchisees that that's what they wanted to see.
So theres been a lot of momentum there again were.
SBC, 134% of the equity and sonesta so.
We're very interested in seeing them grow that brand.
Grow the franchising business.
It helps not only with the value of about 34% to US just overall helps the brand recognition and the brand awareness across the portfolio and there is a lot of room to grow.
Not just in the U S, but internationally as well.
In terms of the direct bookings and O T a.
I'm not sure I, followed the statistics you were quoting but.
Sonesta Sonesta is percentage of <unk>.
Revenues that were booked through otas declined from 30% to 29% year over year.
For the quarter. So it did decrease some of that a lot of that was due to lower <unk> and rates charged at some of our leisure oriented hotels.
Actual room nights were constant or may have increased even a little bit.
Otas, obviously, there's the high commissions that you're paying anytime you use the otas you would always prefer the direct booking you always prefer customers go on your website and booking there but at the same time Otas can help backfill occupancy at our select service hotels, especially midweek occupancy.
They are also helping fill occupancy if some of our extended stay hotels.
And you can get you can sometimes get higher rates than you weighted the longer term extended stay when youre booking through otas on.
Just transient revenues so they can help as well but.
For the most part.
Again revenues declined over a year as a percentage of O T a and direct bookings through the sonesta website have generally stayed stayed flat to slightly increase.
Great. Thank you so much is it okay. If I can.
In a couple of small questions.
Q.
Of course.
Perfect. Thank you go ahead.
So this is again related to this one.
Is it possible for you to disclose that I'm bleed off sooner.
Robert Bosch members. If he has any color you might provide regarding.
Youre not defensive in terms of the length of stay or the Bts.
Nearly all when do you expect.
Red Lion family of who does what do you like 90 day programs do we expect it to be unified into one program and whatnot.
So <unk> is a private company so we can't share specific data on.
On what you are asking but in.
In terms of.
The Red Lion brands Sonesta is as you noticed but sonesta purchase Red Lion, probably two years ago. So they are.
Far along in the process of integrating those two companies because they have essentially been integrating but you still have to.
Two different companies that have come together. So the idea of long term is to have one loyalty program, one app one website, but.
But right now essentially that those teams are working together and the integration has occurred on both.
Specifically.
Kind of merging that management franchise companies together.
Thank you so much.
Welcome.
At this time as this concludes the question and answer session I would like to turn the conference back over to Todd Hargreaves, President and Chief investment officer for any closing remarks.
Thank you everyone for joining today's call and we appreciate your continued interest in SBC and hope to see many of you next week in Los Angeles for the NAREIT conference. Thank.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.
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