Q4 2024 Service Properties Trust Earnings Call
Speaker Change: Good morning and welcome to the Service Properties Trust fourth quarter 2024 earnings conference call. All participants will be in a listen-only mode.
Speaker Change: With me on the call are Todd hard graves, President and Chief investment Officer.
Speaker Change: Jesse a bare vice president and Brian Donley, Treasurer, and Chief Financial Officer in just a moment they will provide details about our business and our performance for the fourth quarter of 2024, followed by a question and answer session with sell side analysts I would like to note that the recording and retransmission of today's conference call is prohibited.
Speaker Change: The prior written consent of the company also note that todays 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 <unk> beliefs and expectations as of today February 27, 2025, and actual results may differ materially.
Speaker Change: At least from those that we project.
Speaker Change: 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.
Speaker Change: 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 investors are cautioned not to place undue reliance upon any forward looking statements.
Speaker Change: In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized <unk> and adjusted EBITDA already a reconciliation of these non-GAAP figures to net income is available in Scc's earnings release presentation that we issued last night, which can be found on our website.
Finally, we are providing guidance on this call, including adjusted Hotel EBITDA, we are not providing a reconciliation of this non-GAAP measure as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all with that I will turn the call over to Todd.
Todd: Thank you Kevin and good morning last night, we reported solid fourth quarter earnings results that reflect Saic's strongest hotel revenue growth in almost two years.
Speaker Change: As well as continued steady performance from our net lease retail properties.
Speaker Change: I'll begin today's call by providing an overview of the hotel portfolio.
Speaker Change: Including an update on the process of the sales of 114 Sonesta hotels.
Speaker Change: Before turning it over to Jesse to discuss our net lease portfolio and Brian for financial results.
Speaker Change: Overall comparable hotel Revpar grew four 2% year over year outpacing the industry by 60 basis points. Despite.
Speaker Change: Despite meaningful revenue displacement for renovation activity.
Speaker Change: Excluding 14 hotels under renovation during the quarter comparable Revpar increased six 8%.
Speaker Change: Driven by increased transient and group occupancy.
Speaker Change: The continued effects of hotel renovations and pressures on expenses, including labor and real estate taxes impacted overall hotel profitability.
Speaker Change: With GOP flat year over year, and adjusted Hotel EBITDA declined to one 4%.
Speaker Change: Our full service hotels reported an increase in revpar of four 3%.
<unk> within group and transient was partially offset by a modest decline in contract business.
Speaker Change: Excluding the three full service hotels under renovation during the quarter full service portfolio Revpar grew by six 3% year over year.
Speaker Change: Seven of our top 10, performing hotels in terms of year over year improvement were sonesta full service hotels.
Speaker Change: More specifically, our three sonesta hotel in downtown Chicago benefited from citywide compression and double digit market share gains from improved corporate performance.
Speaker Change: The Royal Sonesta Hotel in New Orleans benefited from improved transit results from citywide demand and an increase in contract business drove such strong top line growth at Royal Sonesta, San Juan and Chase Park Plaza in St. Louis.
Speaker Change: Our select service portfolio produced exceptional growth with Revpar up nine 6% year over year, mainly driven by occupancy growth in both our Hyatt place and sonesta portfolios.
Speaker Change: Notably Revpar growth grew to 26% year over year at our recently renovated Hyatt place hotels.
Speaker Change: Revpar at Sonesta, slack or approximately 4% driven by occupancy discount and contract segments, specifically, Miami, Philadelphia and Atlanta.
Speaker Change: And our extended stay portfolio Revpar grew one 2% with increased occupancy more than offsetting a decline in ADR.
Speaker Change: Renovation activity continues to have a more pronounced impact on our es suites portfolio performance set hotels were under renovation during the fourth quarter compared to one in the prior year period.
Speaker Change: To mitigate this disruption sonesta remains focused on driving short term stays and additional room nights with transient discounts and targeted marketing at government and wholesale channels.
Speaker Change: As we announced in October we are marketing the sale of 114 focused service Sonesta hotels with a total of 14925 keys across the Es suites simply suites in select brands and plan to utilize the proceeds to reduce spc's leverage.
Speaker Change: We launched our formal marketing effort January sell the properties and have asked interested buyers to submit offers for one or more sub portfolios that.
Speaker Change: They range from eight to 18 hotels at a group base not James scale and regional geography.
Speaker Change: Earlier. This month, we received first round offers as we expected the buyer pool is deep and well capitalized and resulted in more than 50 sub portfolio bids with multiple bids for each portfolio.
Speaker Change: Given the strength of the initial bids we expect SBC to net sales proceeds of at least $1 billion.
Speaker Change: Most if not all of the hotels will likely remain under the Sonesta brand, which we believe which we believe will provide a long term benefit just SBC as theres, a 34% owner of sonesta through our tariff related royalty fee streams.
Speaker Change: We have moved to a second round of bidding with golf selecting buyers and enduring purchase and sale agreements in March.
Speaker Change: Began closing on sub portfolios during the second quarter.
Speaker Change: In addition to commencing our marketing of the 114th Sonesta hotels, we further executed on the plan, we announced early in 2020 for yourself.
Speaker Change: 22, noncore underperforming hotels during.
Speaker Change: During the fourth quarter, we saw AWS hotels with 1004 keys for an aggregate sales price of $49 $1 million.
Speaker Change: And increased the total number of hotels sold for the year 2015.
Speaker Change: Since quarter end, we have sold one additional hotel with 149 keys for a sales price of $4 million.
Speaker Change: We have also we have also reached agreements to sell five hotels with an aggregate of 620 <unk> used for a combined sales price of $28 $5 million.
Speaker Change: Further we have commenced marketing the sale of our remaining IHG managed hotel afforded 95 key property and the primary submarket of Atlanta.
Speaker Change: Yeah.
Speaker Change: Assuming the completion of the sales Spc's portfolio will consist of 83 retained hotels, which during the fourth quarter experienced a revpar increase of six 3% to approximately $101 in adjusted hotel EBITDA increase of 10% year over year to $36 million in.
Speaker Change: In comparison for the 123 exit hotels Revpar grew 60 basis points to $64 in adjusted Hotel EBITDA declined 23% year over year to $12 $4 million.
Speaker Change: As we enter 2025, our focus remains on strengthening our balance sheet through asset sales and reinvesting in our hotels with the highest opportunity for upside.
Speaker Change: We expect 14 hotels will be under renovation this year.
Speaker Change: Notable completions will include the renovation of our Sonesta, Los Angeles Airport, and our Sonesta Hilton head.
Speaker Change: First half 2025.
Speaker Change: And our sonesta in Atlanta, and simply suites in Burlington, Massachusetts during the back half of the year.
Speaker Change: We remain confident that the current renovation program, coupled with our portfolio rationalization efforts will lead to continued meaningful occupancy and rate gains in the year ahead, I will now turn it over to Jessica to discuss the net lease portfolio.
Jessica: Thank you Todd.
Jessica: Our net lease portfolio continues to generate stable and reliable cash flows for SBC.
Jessica: As of December 31, we owned 742 service oriented retail net lease properties with annual minimum rents of $381 million or net lease assets, which represented 44, 2% of our overall portfolio based on investment were 97, 6% leased with a weighted average lease term.
Jessica: Eight years.
Jessica: Our diverse tenant base consists of 177 tenants.
Jessica: Operating under 136 brands spanning 21 distinct industries, thereby mitigating our exposure to any one retail sector and offering opportunities to grow our existing relationships with a variety of different operators.
Jessica: Our lease maturities for me well ladder with only two 2% of our net lease minimum rents scheduled to expire in 2025 and approximately 3% in each of the following years through 2029.
Jessica: The aggregate coverage of our net lease portfolio has been about rents was two one times on a trailing 12 month basis as of this time.
Jessica: We're at 31, 2024, which was down less than 110th of a point on a sequential quarter basis.
Jessica: Excluding our Ta travel center properties, which are backed by Bp's investment grade credit minimum rent coverage held steady at three seven times essentially unchanged compared to the prior quarter.
Jessica: In light of the strong credit of our Ta leases and healthy coverage for the balance of the portfolio combined with our diversified tenant base and staggered expiration schedule. We expect our net lease portfolio will continue to serve as a dependable income stream for SBC.
Jessica: On the transaction side, we sold three net lease properties during the quarter containing a combined 10000 square feet, resulting in $2 million in aggregate proceeds.
Jessica: The end of the quarter, we have sold or entered into agreements to sell an additional four net lease properties for an aggregate price of $7 1 million.
Jessica: Given the consistent performance of our net leased assets, we are evolving our strategy to focus on growing this portfolio through well vetted and strategically located acquisitions.
Jessica: Our investment criteria for an externally sourced growth will prioritize properties leased to operators expanding their networks with established brands and that are in retail quarters that exhibit durable land values with appealing demographics.
Jessica: Properly curated these acquisitions can enhance our tenant and geographic diversity increased portfolio weighted average lease term and offer flexibility in terms of future rate years.
Dan: Dan SBC is under agreement to acquire net lease retail property with an 18 year remaining lease term for $5 $3 billion and we are actively evaluating additional targets as we build out our acquisition pipeline.
Dan: We are also seeing meaningful growth opportunities within our existing portfolio and are expanding our outreach efforts to identify tenants with whom we can partner for organic growth.
Dan: With proactive asset management efforts and opportunistic acquisitions in the coming year. We believe we can drive upward optimize the makeup of our net lease portfolio and ultimately increase the portfolio economic contributions to the SPC platform.
Dan: I will now turn the call over to Brian to discuss our financial results.
Brian Donley: Thanks, Jessie and good morning, starting with our consolidated financial results for the fourth quarter of 2020 for normalized <unk> was $28 6 million or <unk> 17 per share versus <unk> 30 per share in the prior year quarter.
Adjusted EBIT declined seven 4% year over year to $130 6 billion.
Brian Donley: Financial results this quarter as compared to the prior year quarter were impacted most by a $9.4 million increase in interest expense and an $8 $4 million decline in interest income.
Brian Donley: For our 205 comparable hotels this quarter Revpar increased by four 2% gross operating profit margin percentage declined by 160 basis points to 25, 3% and GOP was flat compared to the prior year period.
Brian Donley: Below the GOP line costs at our comparable hotels increased $759000 or one 7% from the prior year, driven primarily by increased real estate taxes.
Brian Donley: Our 206 hotels generated adjusted hotel EBITDA of $43 1 billion a decline of two 4% from the prior year exceeding our guidance range.
Brian Donley: By service level adjusted hotel EBITDA year over year decreased $900000 for our 47 full service hotels increased $1 $6 million that are sub 59 select service hotels and decreased $1 8 billion for 100 extended stay hotels.
Brian Donley: For the 14 hotels that were under renovation during the quarter adjusted hotel EBITDA declined $8 million.
Brian Donley: In 2025, we plan to sell 123 hotels with 16426 keys in the fourth quarter of these 123 hotels generated revpar of $64 in adjusted Hotel EBITDA of $12 4 billion.
Brian Donley: Representing a decline of 23% year over year.
Brian Donley: Assuming we sell about 114th Sonesta hotel portfolio for at least $1 billion that pricing would imply a 16 five times multiple on 2024 hotel EBITDA of $65 million.
Brian Donley: This valuation is well above sbcs multiple of approximately 10 times full year of 2024 adjusted EBITDA sorry.
Brian Donley: As it relates to the retained portfolio. The 83 hotels FCC plans to key generated revpar of $101 in adjusted hotel EBITDA of $31 million during the quarter or an increase of nine 7% year over year.
Brian Donley: Turning to our expectations for Q1 were currently projecting full quarter Q1, Revpar of 82 to $84 adjusted hotel EBITDA in the 20% to $24 billion range.
Brian Donley: We will continue to see softer seasonal results through the remainder of the winter months before activity picks up in the spring our portfolio. We'll also see continued disruption in 2025 at hotels, we have under renovation and the timing of our dispositions may impact our results.
Brian Donley: Turning to the balance sheet at quarter end, we had $5 8 billion of debt outstanding with a weighted average interest rate of six 4%.
Brian Donley: Our next debt maturity is $350 million of senior unsecured notes maturing in February of 2026.
Brian Donley: We currently have $61 million of cash on hand, and $50 million outstanding on our $650 million revolving credit facility.
Brian Donley: Turning to our investing activities, we made $85 million of total capital improvements at our properties during the fourth quarter, bringing our full year spend of $303 million, which is in line with our previous guidance.
Brian Donley: We completed renovations at 28 hotels in 2024 with the largest spend for our Hyatt place portfolio full service Sonesta hotels, it lacks white Plains, New York and Miami Airport.
Brian Donley: We currently expect full year 2025 capital expenditures to be approximately $250 million.
Brian Donley: Notable initiatives will include the kick off of multiyear projects to convert our Royal Sonesta, Washington, DC of Dupont Circle, and the Nautilus and South Beach to the James brands as well as projects at the Royal Sonesta, New Orleans and Cambridge.
Brian Donley: Of the 2025 capital expense, we expect $110 million to $130 million of maintenance capital with the rest going towards renovation initiatives.
Brian Donley: Beyond this year, we expect our total capital spending to continue to trend lower in 2026 and 2027 as the base of our hotel renovation program flows.
Brian Donley: That concludes our prepared remarks, we're ready to open the line for questions.
Brian Donley: Thank you Sir.
Brian Donley: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Brian Donley: You are using a speakerphone please pick up your handset before pressing the keys.
Brian Donley: Anytime a question has been addressed me like to withdraw your question. Please press Star then two again and our Star then one to ask a question at this time, we will just pause momentarily to assemble our roster.
Speaker Change: The first question, we have will come from Dori.
Dori Gaston: Gaston of Wells Fargo. Please go ahead.
Dori Gaston: Thanks, Good morning.
Dori Gaston: Now that you won't be spending capex for the 115 assets can be sold how have your return expectations changed for the remaining assets.
Dori Gaston: Good morning, George and thank you for the question. This is Brian I'll take that one I think generally speaking our expectations are the same.
Dori Gaston: Hi.
Dori Gaston: Single digit return.
Dori Gaston: Versus prior positioning of the property before the renovations that can fluctuate depending on the property in the market and bidding on the scope of the projects.
Dori Gaston: For example, the.
Dori Gaston: So James the conversion for the James that auto is property in South Beach.
Dori Gaston: Upscale lifestyle brand initiative, there in Washington, we expect much higher returns as we repositioned the property that these projects, we're expecting ROI, 20% to 30% range. So it will differ across the portfolio, but on average it's still sort of a high single digit target.
Dori Gaston: Okay.
Speaker Change: And you mentioned, a new focus on acquiring Nat leaf asset can you put some context around what that acquisition volume maybe hanging all basis.
Speaker Change: Yes, I think for particularly the first half this is Jesse <unk> for the first half of the year.
Speaker Change: The intent here is to get out and get a feel for what's out in the market build out our pipeline I think initially this will be relatively small volume small dollars individual.
Speaker Change: Asset acquisitions.
Speaker Change: I think as we get towards the middle and the end of the year, we can kind of reevaluate the strategy at that point once we have a better sense of kind of.
Speaker Change: Where we're transacting.
Speaker Change: Okay.
Speaker Change: And then just a few balance sheet questions how much of the $1 50 that you borrowed on the line in Q4.
Speaker Change: It has now been pulled back I guess to date in Q1.
Speaker Change: Yeah.
Speaker Change: There's 50 outstanding today.
Speaker Change: That draw at the end of the year for liquidity management purposes.
Speaker Change: Hotel results are pretty soft at December January into February and.
Speaker Change: And just from a working capital standpoint, we made that draw.
Speaker Change: But again <unk> is outstanding today.
Speaker Change: Okay and then.
Speaker Change: Can you guys, maybe one for you amended the credit facility to reduce the minimum debt service coverage.
Speaker Change: I think that's one three from one five.
Speaker Change: What are you what are you modeling for that ratio I guess throughout this year.
Dori Gaston: Yeah, there's a couple of reasons, we did that dori.
Dori Gaston: The hotel hotel portfolio that secures the credit facility includes a lot of the hotels. We are selling it includes properties that we have been renovating so the results have been declining.
Dori Gaston: We're getting up against that some of the covenants within our credit agreement, which are different than how the calculations are done for the public debt.
Speaker Change: Yes, so we wanted to make sure we werent in breach of anything so we were able to reach an agreement to bend, we are swapping out hotel collateral release, all the sonesta hotels that are in that collateral package as we are selling a good portion of them.
Dori Gaston: Slopping that out with one of the travel Center Bulls.
Dori Gaston: Okay. So that means throughout this year would you are you expecting to get close to that one three or you think it will stay around where it ended around one five.
Dori Gaston: Yeah.
Dori Gaston: Yeah, I don't think we'll get we're not going to really below that one five it was more precautionary, but also making sure there's adequate cushion and we will have much more stability with the way the collateral package works for the revolver covenants.
Dori Gaston: Okay, great. Thanks, so much.
Speaker Change: Again, if you would like to ask a question. Please press Star then one on a touchtone phone again on a star then one.
Tyler: Next we have Tyler battery of Oppenheimer.
Speaker Change: Hi, Good morning. Thank you. So I wanted to start on the hotel portfolio specifically the guidance for Q1, we got a lot of moving pieces, the 20% to 24 hotel EBITDA number applies a margin.
Tyler: That's down a little bit year over year.
Tyler: The isolated or think about the performance above the 83 with teams hotels in Q1.
Tyler: Additionally, when you think about those 83 hotels and I'm not sure. If you gave this number.
Tyler: What was the EBITDA contribution or the EBITDA margin for those properties for the full year 2024.
Tyler: Hi, Tyler for the for the 83.
Retained hotels, we were.
Tyler: About 15% margin.
Tyler: Yeah.
Speaker Change: But the sonesta hotels, we were $60 million of EBITDA, Brian do you have the EBITDA for the other two.
Tyler: Two portfolios.
Tyler: Yes.
Tyler: The Hyatt place portfolio.
Tyler: That that prop those portfolio those properties were under renovation still and just coming out of renovation so call it 10% on average.
Tyler: As we look to Q1.
Tyler: Remember the retain hotels is heavily concentrated with full service hotels. So we do expect that year over year decline will continue to see softness in Q1 from our concentrations in Chicago and some other some other areas where margins are definitely weaker in Q1.
Tyler: So should we will see that degradation as you said the decline year over year.
Tyler: Margins, but the typical seasonal patterns plus Darwin the weight of some of the renovations at the boxes <unk> X.
Tyler: For example that won't be done until the end of Q1.
Tyler: We're also doing the public space there. So some other hotels, we will continue to.
Have a meaningful impact to our results early in Q1, and then if you look at the fourth quarter. The adjusted EBITDA for those 80 through retained hotels actually increased 10% relative to the overall portfolio, which declined a couple of percent.
Speaker Change: Okay. Okay. Thank you follow.
Speaker Change: Follow up on the on the asset sales and you gave some good commentary on the process, which I appreciate but on a lot of investors are really focused on what's going on here. So just talk a little bit more about how the process is going versus your expectations.
Speaker Change: Maybe the interest is perhaps a little bit higher than you might have thought I'm not sure and then the comments in terms of selling all of those hotels with the Sonesta brand.
Speaker Change: Is that a little bit of a change from what you were thinking before and kind of walk through the price dynamics.
Speaker Change: Selling those assets encumbered versus unencumbered fleet.
Speaker Change: Sure.
Speaker Change: Yes, the process the process has gone very well so far.
Speaker Change: Probably a little better than expected, but we have been in the market with.
Speaker Change: A lot of hotels over the past few years. So I think we have a pretty good SaaS.
Speaker Change: Who are the buyers are what the interest level is and these hotels in particular.
Speaker Change: The select service and extended stay hotels Theres, just not a lot of portfolio sales of this scale in this magnitude that event in the market. There in the market that are coming to market and theres a lot of groups that wanted to grow.
Speaker Change: These service levels in our portfolio so.
Speaker Change: I am not surprised the level of interest that we've gotten from a lot of larger institutional hotel owners.
Speaker Change: In terms of.
Speaker Change: In terms of.
Speaker Change: Price.
Speaker Change: We're already close to what our initial guidance was if you take the top bids from each of the sub portfolios.
Speaker Change: Not not.
Speaker Change: It's not a surprise, but certainly.
Speaker Change: Certainly a positive.
Speaker Change: I think an indication of how strong and deep and a competitive.
Speaker Change: <unk>.
Speaker Change: And buyer all have been so far.
Speaker Change: So again, we're very pleased with where things are so far in.
Speaker Change: Ideally.
Speaker Change: <unk> will come up even more in the second round.
Speaker Change: In terms of the encumbrances.
Speaker Change: Most.
Speaker Change: If not all of these hotels, we do expect to be sold.
With long term sonesta franchise agreements.
Speaker Change: I wouldn't say that's unexpected in the past the hotels that we have sold that way.
Speaker Change: Our sonesta branded advantaged.
Speaker Change: Say on average about 80% of the hotels were sold encumbered and the ones that were sold unencumbered where we're from.
Speaker Change: Groups that came in and neither wanted.
Redevelop the properties and convert to used in multifamily and we're willing to pay a significant premium above the encumbered offers to do that or they were hotels that.
Speaker Change: We're in markets that other brands.
Other competing brands might not have.
Speaker Change: Had a presence Diana so they were a lot more aggressive in terms of.
Speaker Change: Key money or or trying to get.
Speaker Change: Forget their flag on the hotels I think these hotels are a little different for the most part they're there are strong performing hotels there are in better markets than what we saw in the past. So a lot of the competing brands are already there.
Speaker Change: And if we do receive unencumbered offers.
Speaker Change: So the way we look at that relative to encumbered offers as we put a value on the royalty fee stream.
Speaker Change: Look at Sbcs, 34% share.
As a 34% owner of sonesta.
Speaker Change: Fly an appropriate multiple to that apply an expense load to that and then.
Speaker Change: Comparing the two offers and.
Speaker Change: That's how we would look at any unencumbered offers versus encumbered offers to the extent we receive those on this portfolio.
Speaker Change: Okay, Okay very good detail. Thank you.
Speaker Change: Follow up on the on the Capex and $250 million number.
Speaker Change: Is any of that spend on hotels that are going to be sold this year and then the 110 to 130 maintenance portion is that a good run rate to be thinking about for the for the 83 retained hotels going forward.
Tyler: Hey, Tyler.
Tyler: There will be some spillage for properties, we are exiting for projects that are underway or just some maintenance items that we need to do regardless as we get ready for sale.
Tyler: It's not a large percentage call it $20 million to $25 million for the hotels that are exiting.
Tyler: As far as the maintenance capital. It is oversize the 110 range to a 130 that I mentioned.
Speaker Change: Yes, we do expect a more normalized range for the what's going to be left in this hotel portfolio to be closer to $65 to $75 million going forward.
Speaker Change: So we are doing some deferred maintenance catch up in some of the stuff that we're doing.
Speaker Change: It won't be repeated ongoing.
Speaker Change: Okay.
Speaker Change: And then my last one.
More open.
Speaker Change: Perhaps.
Speaker Change: As we sit here at the start of the year just help us think about your capital priorities as we go through 2025, you've got a lot going on with asset sales I'm sure focused on leverage it sounds like maybe going on the offensive side would that be subtle, but that's probably going to be pretty small just kind of walk.
Speaker Change: Through kind of rank order. If you will just what you are prioritizing as 2025 goes one.
Speaker Change: Sure Tyler I'll start and then.
Speaker Change: Others can jump in but the priority once we start recognizing the sale proceeds will be to address our 2026 debt maturities that that is first and foremost.
Speaker Change: Got the $350 million due in Q1, and then another large bullet.
Speaker Change: In the fall of 2006 were looking to address all of that with the hotel sales and then as far as the Capex investment is next and ranking as far as our priority is to continue to enhance our hotel portfolio and position these properties to succeed.
Speaker Change: Longer term.
Speaker Change: And then from there it's.
Speaker Change: Starting to.
Speaker Change: Recycle that lease and grow net lease I think are the priorities.
Speaker Change: I'll add onto that I think that.
Speaker Change: I think we see as Jesse mentioned earlier, we see an opportunity in the net lease space.
Speaker Change: I think you've seen what we've done through the asset sales and the planned asset sales as well as the.
Speaker Change: The limited acquisitions, we've done over the past few years in terms of.
Speaker Change: What we want this portfolio overall to look like long term and you've seen us.
Speaker Change: Continue to sell some of the select service and extended stay hotels focus more on the full service assets shift more of our mix on the hotel side from truck business to leisure oriented where we've been under concentrated historically.
Speaker Change: And on the net lease side.
Speaker Change: You look at you look at that portfolio and that portfolio has been.
Speaker Change: It's been an excellent performer for us over the past several years backed by the travel center assets.
Speaker Change: Investment grade.
Speaker Change: Behind that and then.
Speaker Change: Very strong performing other net lease portfolio.
Speaker Change: That's three times three seven.
EBITDAR to rent coverage so.
Speaker Change: We think there is opportunity to add assets to that side of the bed side of the portfolio.
Speaker Change: Yes, we're really going to be focused on strong operators and good sectors.
Speaker Change: With lease term and we think we can get.
Speaker Change: Yield on those assets so.
Speaker Change: That is again that's.
Speaker Change: Priority number one is paying down debt number two is capex into our hotels and then the third priority is.
Speaker Change: Acquiring some more net lease assets.
Speaker Change: Throughout the year.
Speaker Change: Okay. That's all for me thank you.
Next we have Meredith Janssen.
Speaker Change: HSBC.
Meredith Janssen: Yes. Good morning. Thanks, I was wondering if you could speak a little bit more about the net lease portfolio are there.
Meredith Janssen: Portfolio assets that you would also sort of prune as you add more such as the net amount stays stable and I guess, what im getting at is sort of the long term next investment pie.
Meredith Janssen: SBC investments between hotels and net lease.
Meredith Janssen: I think in terms of pruning the net lease portfolio.
Meredith Janssen: We're pretty consistently going through those assets and identify sectors, we see growth versus sectors, we go and making disposition decisions along those lines as well as I think at this point, we're really quick quick to identify.
Meredith Janssen: When those assets go dark whether we think there is a release or redevelopment scenario and if not if those will tend to go to.
Meredith Janssen: Positioned as well.
Meredith Janssen: I'll, let Todd speak to kind of the overall mix between the hotel and.
Meredith Janssen: And that lease.
Meredith Janssen: Within the portfolio, but I think historically, we've always shopper. Some version of a 40 60 split 50 50 somewhere in that.
Meredith Janssen: Going in either direction, but sure I think you covered it well.
Meredith Janssen: <unk>.
Meredith Janssen: And the only thing I'll add to that is as we look to kind of.
Speaker Change: Assets in that portfolio, you may see us be a little more opportunistic in terms of selling leased assets, whether thats S. Jesse pointed out to kind of reduce our exposure to certain industries or brands or tenants that we have.
Speaker Change: We are concerned about are not as optimistic on.
Speaker Change: But you'll also see us execute a lease renewal and then sell a property as an example, as well so you could see us doing some more of that.
Speaker Change: Look to recycle that capital back into back into the net lease space.
Speaker Change: And then overall similar to the answer I gave Tyler as we received a net lease portfolio is a strength of our portfolio.
Speaker Change: That doesn't mean, we don't see the lodging as a strength as well and I think we're optimizing that portfolio now.
Speaker Change: The performance of those hotels this last quarter, where you saw adjusted EBITDA rose, 10% is that any indication.
Speaker Change: We're keeping the better performing hotels, we're keeping our hotels that have the most upside and we will keep at the hotels that are going to benefit most from the renovations. So we're app.
Speaker Change: Before these sales I think were 54% hotels after the sales will be 47%.
Speaker Change: Like Jessica said, I don't envision us going down below 40% on the hotels, but.
Speaker Change: Anywhere from kind of that 40% to 60% range long term.
Speaker Change: Okay, Great that's super helpful.
Speaker Change: Now, there's a lot of matrix and a lot of information.
Speaker Change: In the deck.
Speaker Change: Geography, and sort of location urban versus suburban but if you could just narrow the scope to the hotels that you'll be keeping sort of some guidance in terms of seasonality.
Speaker Change: Sort of geography, and how to think about.
Speaker Change: <unk>.
Speaker Change: Basically through the year in 2026, as we start cross what that portfolio Revpar and quarterly cadence will be.
Speaker Change: Sure I can start.
Speaker Change: So.
Speaker Change: And I'll focus more on this NASA portfolio, because thats where were trend we're transacting for the most part.
Speaker Change: And that all those are all good points and were all factors as we selected what we wanted to sell.
Speaker Change: What we wanted to keep but for the most part on the extended stay and select service, we're keeping that the better performers there.
Speaker Change: On average for 'twenty for those hotels did did over 30% margins. So they're good performers we're selling most of.
Speaker Change: Hotels that are in suburban business parks that really rely on that midweek business traveler Thats just really.
Speaker Change: The only bit challenge for that to come back over the past few years, a lot of the select service and extended stay we have are good strong more urban infill markets.
Speaker Change: And then our full service portfolio, we will have 39 of those hotels in the sonesta portfolio, all Royal Sonesta and full service Sonesta. We also have a couple of hotels that were.
Speaker Change: Turning over to James brand this year as well.
Speaker Change: Those right now are more focused urban then they are kind of true destination resort hotels.
Speaker Change: But over the next few years I think as we continue to build out the hotel portfolio I think you'll see us acquire more assets like <unk> acquisition that we bought a couple of years ago. So that's really what we're more focused on right now our portfolio is more urban or <unk>.
Speaker Change: This at least is more urban and more concentrated in.
Speaker Change: The other part of the U S.
Meredith Janssen: Yes for modeling purposes, Meredith I think.
Meredith Janssen: The seasonality standpoint, Q1, 'twenty five Q4 'twenty five.
Meredith Janssen: The goalpost for the Bell curve.
Meredith Janssen: Portfolio will be strongest in Q2, and Q3, so my guidance of $20 million to $24 million of cash.
Meredith Janssen: Cash flow hotel EBITDA.
Meredith Janssen: Ah represents a high single digit margin, we expect that margin in Q2 to two <unk>.
Meredith Janssen: 20%, so you see that ramp up into our strong summer spring and summer periods.
Meredith Janssen: That will affect how the seasonality trends play out for the year and beyond that when we sell the hotels, though there'll be some.
Meredith Janssen: Okay.
Meredith Janssen: More normalization of the of the seasonality trends as we exit so many hotels, but generally Q1 in Q4, we will continue to be the weaker weaker quarters for SBC So co portfolio.
Speaker Change: Thanks Thats Super helpful. Last question is it there it does seem just hearing that the process is going.
Speaker Change: He quickly but in terms of closing and all of that you think that there is.
Speaker Change: Debt Paydown and full exit could happen all in in 2025, just trying to see when we have a clean slate for.
Speaker Change: The hotel.
It's going to be 27 over 2006 or it'll bleed further further out.
Meredith Janssen: Meredith I think it's I think it's safe to assume that the hotels will all be closed.
Speaker Change: During 2025, and where we should be selecting buyers here in the next few weeks and moving moving to close we have we have a goal maybe an aggressive goal to close these by by June 30th Some may go past that but we should have all.
Meredith Janssen: These clothes by by the third quarter.
Speaker Change: And Brian you were talking about.
Speaker Change: The debt repayment.
Meredith Janssen: Once we have.
Meredith Janssen: No certainty in that the cash in hand, and Pat <unk>.
Meredith Janssen: Proceeds of mass, we'll look to use that to address leverages, we've talked about with the proceeds.
Meredith Janssen: Great. Thanks, so much that's super helpful.
Meredith Janssen: Thank you sure thanks for the questions.
Speaker Change: Well. This concludes our question and answer session I would now like to turn the conference call back over to Mr. Todd Hargreaves for any closing remarks Sir.
Speaker Change: Thank you everyone for joining today's call and for your continued interest in SBC.
Speaker Change: Okay.
Speaker Change: Today's conference call. The conference call has now concluded at this time you may disconnect. Your lines. Thank you take care and have a great day everyone.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].