Q1 2025 Service Properties Trust Earnings Call

Speaker Change: Good morning, and welcome to the Service Properties Trust First Quarter 2025 earnings conference call. All participants will be in all this in only mode, should you need assistance please single a conference specialist by pressing the star key followed by a zero.

Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded.

Speaker Change: I would now like to turn the call over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining us today.

Speaker Change: With me on the call, our Chris Palato, President and Chief Executive Officer, Jesse Abair, Vice President, and Brian Donley, Trifor and Chief Financial Officer.

Speaker Change: In just a moment, they'll provide details about our business and our performance for the first quarter of 2025, followed by a question and answer session with cell side analysts. I'd like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company.

Speaker Change: Also note that today's conference call contains four lifting statements within the meeting of the private securities litigation reform act of 1995 and other securities laws.

Speaker Change: These four looking statements are based on SVC's beliefs and expectations as of today, May 7th, 2025, and actual results made different materially 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 fileings with the Securities and Exchange Commission, which can be accessed from our website at spcreep.com or the SEC's website. Investors are cautioned not to place undue reliance upon any forward lifting statements.

In addition, this call may contain non-GAAP financial measures.

Speaker Change: including normalized funds from operations or normalized FFO and adjusted even to ARI. A reconciliation of these non-GAAP figures to net income is available in SBC's earnings release presentation that we issued last night, which can be found on our website.

Speaker Change: And finally, we are providing guidance on this call, including adjusted hotel e to duff. We are not providing reconciliation of this non-gett 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 Chris.

Chris: Thank you Kevin, good morning everyone and thank you for joining the call today.

Chris: Last night, we reported first quarter earnings results that were in line with our expectations.

Chris: highlighted by comparable red part growth of 2.6% within our lodging portfolio, steady operating performance from our net lease retail properties, and growth in adjusted EBITDA RE year over year.

Chris: Additionally, we advance our strategic plans to optimize our portfolio by selling assets to de-leverage our balance sheet and reinvest in growth opportunities.

Chris: I will begin our discussion with an overview of our Hotel Portfolio performance during the quarter and an update on our investment activities. Then Jesse will discuss our net lease portfolio, and finally, Brian will review our financial

Chris: At a macro level, we continue to monitor the broader economic activity, trade terror policy and shifts an overall consumer sentiment.

Chris: While performance within our lodging portfolio was in line with expectations, Rev Park Soften as a Quirp Progress, partially driven by a pullback in government and inbound international travel, as well as airlines reducing flight commitments and crew business.

Chris: Conversely, positive post-runnovation performance with certain hotels in our portfolio, fairable trends with our group revenue pace, and a stable outlook for our net least retail portfolio remain bright spot as we continue through the year.

Chris: In the meantime, we are proceeding with the priorities and objectives we set for the year and continue to monitor this evolving market backdrop while maintaining flexibility to adjust our operating plans and capital investments as necessary.

Chris: As it relates to our disposition activities, we are currently tracking with our plans to sell 123 hotels during 2025 with estimated proceeds of $1.1 billion.

Chris: We plan to use these proceeds to strengthen FVC's balance sheet through debt repayments and strategies to improve the overall portfolios with certain triple net lease acquisitions and capital spending on hotels.

Turning to our hotel portfolio performance during the first quarter.

Chris: Overall, comparable hotel rev card grew to 2.6% year-over-year outpacing the industry by 40 basis points despite meaningful revenue displacement and renovation activity.

Chris: excluding 8 hotels under renovation during the quarter. Comparable rev-part increased 3.7% with transient and group revenues outperforming contracts.

Chris: Brev Park Road was supported by occupancy and ADR gains, lived from hotels under renovation last year, as well as citywide events.

Chris: GOP and Adjustment Hotel EBITDA declined year-over-year, primarily due to active hotel renovations, increases in labor, and higher utility costs with a colder than average first quarter.

Chris: By service level, our full service hotel reported a 1.9% increase in Repar, excluding one hotel under renovation during the quarter, full service portfolio Repar would have been 3.2% year

Chris: Strong growth in group was supported by elevated leisure demand at Royal Sinister and both Kauai and San Juan with the Royal Sinister, New Orleans and Depont Washington DC driving demand from the Super Bowl and inauguration respectively.

Chris: Other notable improvements were driven by increased transient revenue from our IHG and Radisson Hotels with increased OTA and retail business and from post-renovation to live this and as the White Plants.

Chris: Our Select Service portfolio produced exceptional growth with Rev Parup 10.6% year-over-year, mainly driven by occupancy growth in our higher places than us to select portfolios.

Chris: Notably, Rev Park Road was driven by a 15% occupancy rise and 2.7% improvement in ADR at our recently renovated higher place hotels.

Chris: Rev Park rose at Sinasta Select Hotels, reflect the fourth consecutive quarter of year-over-year occupancy gains, specifically in Book of Our Tone, Camarillo, California, and Philadelphia.

Chris: In our extended state portfolio, RevPAR was essentially flat as a modest increase in ADR was offset by a decline in occupancy.

Chris: Renovation activity continues to have a more pronounced impact on our ES Sweden's portfolio performance as six hotels were under renovation during the first quarter compared to one hotel in the prior year period.

Chris: To mitigate this disruption, semester remains focused on driving short-term stays and additional room nights with transient discounts and targeted marketing through wholesale channels.

Chris: Turning to investment activity. As we enter 2025, our focus remains on strengthening our balance sheet and portfolio through asset sales, reinvesting in our hotels with the highest opportunity for outside and a gradual investment in net-leafs acquisitions.

Chris: Notable hotel completions will include the renovation of our Sinesa Los Angeles airport and our Sinesa Hilton head during the first half of 2025 and our Sinesa and Atlanta and Simply Suites in Burlington, Massachusetts during the back half of the year.

Chris: Forecasted Displacement from ongoing renovations will be less significant in Q2 and Q3 with projected strong year-over-year performance gains with nine hotels completing renovations in early 2025.

Chris: These gains are expected to mitigate renovation related disruptions with planned construction starting on four full service hotels in Q4.

Chris: During the first quarter as part of the 22 portfolio set of hotels we launched for disposition in early 2024. We sold four of these hotels with 514 keys for a combined sales price of $19.6 million.

We are under contract.

Chris: To sell the remaining four hotels within this portfolio, which includes 492 keys for a combined sale price of $26.5 million, we anticipate these will close during the second quarter.

Chris: Also during the first quarter, we completed a robust marketing effort for the sale of 114 Sinasta hotels. These assets received strong buyer interest, reflecting a deep and well-capitalized buyer pool concluding with over 30 bids under the Sinasta brand.

Chris: The portfolio was awarded to four buyers and includes both new and existing semester franchise relationships.

Chris: Buyers are actively engaged in following a customary diligence period. We anticipate the sales will be completed in phases over the next few quarters.

Chris: In total, we plan to sell 125 hotels in 2025 for approximately $1.1 billion.

Chris: The pricing implies an 18 times multiple on hotel EBITDA of $60 million over the trailing 12 months This valuation is well above SVC's multiple of approximately 11 times trailing 12 months adjusted at EBITDA RE

Turning to our triple knee net lease assets.

Chris: We are making meaningful progress with their capital recycling initiatives. As Jesse will elaborate, since the end of the quarter, we have acquired or under agreements to acquire nine net lease retail properties for $33 million.

Chris: We view this as a strategic growth initiative and plan to gradually expand our retail acquisition activity over time to capitalize on a creative opportunities in our pipeline.

Chris: Upon completion of our hotel disposition program and noted retail acquisitions, we estimate that SBC's composition by investment will shift from 56% lodging assets and 44% net lease properties today to 54% triple net lease and 46% lodging assets.

Chris: Based on this allocation, we believe that investors will begin to re-rate shares of SBC based on a triple net lease valuation basis, as opposed to a lodging reed.

Chris: And some, we are off to a solid start in 2025.

Chris: While the current macroeconomic environment has created uncertainty, we believe our portfolio optimization initiatives, durable cash flows from our triple net lease assets, and capital management initiatives will be significant drivers of long-term value creations.

Chris: I will now turn it over to Jesse to discuss in that least more follow-up .

Thank you, Chris.

Jesse: The recent macro volatility underscores the benefits that our steady cash flow generating that least portfolio contributes to SVC.

Chris: As of March 31st, we own 739 service-oriented retail net-less properties with annual minimum of grants of $381 million.

Jesse: Our net lease assets were nearly 98% leased with the weighted average lease term of 8 years.

Jesse: Our tenant base consists of 175 tenants 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.

Jesse: Only 2.1% of our minimum rents are scheduled to expire in 2025.

Jesse: and approximately 3% in each of the following years through 2029.

Jesse: As of quarter-end, the aggregate coverage of our net-least portfolios minimum rents was 2.07 times on a trailing 12-month basis, which was essentially flat on a sequential quarter basis.

Jesse: Excluding our TA Travel Center Properties, which are backed by BP's investment grade credit, minimum rent coverage remains strong at 3.6 times, down a tenth of a turn compared to the prior quarter.

Jesse: By design, then at least portfolio, which largely provides non-discretionary goods and services to consumers, should continue to form well, even during challenging economic times.

Jesse: In fact, many of our tenants, such as our quick service restaurants and grocery stores, typically benefit from the trade down effect during periods of lower consumer confidence

Jesse: Others, like our travel centers, have the flexibility to pass pricing pressures onto customers, particularly in the case of fuel costs.

Jesse: Just as our net least portfolio, whether it's a pandemic-related disruption, we anticipate it will exhibit a consistency even in the event of sustained volatility in the near term.

Jesse: The essential businesses of our tenants, the strong credit backing RTA leases, and the portfolio's healthy coverage ratios, vote well for ongoing resiliency, irrespective of macroeconomic conditions.

Jesse: With respect to investments, as we signaled last quarter, we are underway on our strategy to prudently grow the net least segment of our business in an effort to enhance the tenant and geographic diversity of the portfolio, increase weighted average lease term, and expand annual minimum rents.

Jesse: To that end, we recently acquired or entered agreements to acquire nine net lease properties for a total of $33 million dollars.

Jesse: These transactions have a weighted average lease term of 16 years, average rent coverage of 3.0 times and average cash and gap cap rates of 7.3% and 8.4% respectively.

Jesse: We are funding the acquisition of these properties with a combination of capital recycling and flexible financing.

Jesse: During the quarter, we utilized the increased equity value within our Netflix portfolio and closed on a $45 million dollar variable funding note facility.

Jesse: This new financing, along with the asset-backed security financing we implemented in 2023, highlights our ability to use our net-least portfolio to obtain attractively priced financing options.

Jesse: Looking ahead, we see opportunities to further expand the portfolio through acquisitions with attractive lease economics and a creative yield.

Jesse: While our transaction volume will remain relatively modest in the near term, as Chris highlighted, we anticipate that our net lease portfolio will contribute more significantly to the overall SVC platform in the future.

Speaker Change: Before I pass it to Brian , I want to acknowledge the recent publication of the RMR Group's annual Sustainability Report, which provides a comprehensive overview of our manager's commitment to sustainability.

Speaker Change: We will continue our ongoing efforts at SBC to advance the sustainability initiatives which today have resulted in tangible improvements to energy efficiency, operating costs, and tenant satisfaction. I will now turn the call over to Brian to discuss our financial results.

Brian: Thanks Jesse, good morning. Starting with our consolidated financial results for the first quarter of 2025, normalized FFO was $10.8 million or $0.7 per share versus $0.13 per share in the prior year quarter.

Adjusted the even Dori, increased slightly, year over year to $150.8 million.

Brian: Financial results this quarter has compared to the prior quarter were impacted most by a 10.1 million dollar increase in interest expense.

Brian: For our 201 comparable hotels this quarter, Red Power increased by 2.6% and gross operating profit margin percentage declined by 330 basis points to 21.4%.

Brian: Although the GOP line costs at our comparable hotels decrease $1.7 million or 3.4% from the prior year, driven primarily by lower property insurance premiums.

Brian: Our hotel portfolio generated just a hotel leave with up $23 million, a decline of 20.5% from the prior year, but within our guidance range.

Brian: By service level, adjusted hotel fee with the year-over-year, decreased $4 million for our full service hotels, increased $2.4 million for our select service hotels, and decreased $4.3 million for our extended stay hotels.

Brian: The eight hotels that were under renovation during the quarter represented $3.88 million or 60% of the decline of adjusted to a hotel even to a year over year

Brian: The renovations that are 17 high place hotels were completed in the first quarter of 2025 and we saw a 35% year-over-year improvement in $77.00 and adjusted hotel to increase $2.9 million year-over-year.

Brian: Both our high and radicent agreements include limited guarantees of performance thresholds that are now in full effect post renovations.

Brian: During Q1, our earnings benefited from a $2.9 million increase in guarantee utilization under these agreements to cover the shortfalls in hotel cash flows available to pay our

Brian: Throughout the remainder of 2025, we plan to sell 119 hotels with 15,912 keys.

Brian: During the first quarter of these 119 hotels, generated red bar of $65, and adjusted the hotel to $8.6.9 billion, representing a decline of 30% year-over-year.

Brian: The result of these exit hotels were impacted by one-time expenses and general disruption we expected from the marketing process.

Brian: The 83 hotels we expect to retain generated red part of $99 in adjusted hotel EBITDA of $17.7 million in the quarter. A decrease of $4.5 million or 20% over here.

Brian: Most of this decline year over year in the retained portfolio is related to renovation disruption, notably at our Soneta LAX in Royal Sonesta in Cambridge, Massachusetts.

Brian: Turning to our expectations for Q2, we are currently projecting 2nd quarter rep bar of $99 to $102 and adjusted hotel fee of $69 to $74 million.

Brian: While we typically see a seasonal benefit the hotel operating results in the second quarter, we anticipate the headlines in the travel and lodging industries to affect key segments like government and leisure.

Brian: Additionally, the court's lawyer will be impacted by revenue displacement from ongoing hotel renovations.

Brian: This guidance does not include the impact of any potential activists' positions

Brian: Turning to the balance sheet at quarter end, we had $5.8 billion of debt outstanding with a weighted average interest rate of 6.4%

Brian: Our next maturity is $350 million of senior unscored notes, maturing in February of 2026.

Brian: As of quarter end, we had $80 million of cash on hands and $50 million of outstanding on our $650 million dollar revolving, credit facility.

Brian: Turning to our capital expenditure activity. During the first quarter, we invested $46 million in Capitol Hooper, Winston R. Properties.

Brian: Notable projects in this quarter, included in HVAC project in one of the towers at Arroyo Sonesta Boston, amounts to the extensive renovation of our Sonesta LAX in the public space renovation of our Sonesta Holtnet Resort.

Brian: For the full year, we continue to expect capital expenditures to be approximately $250 million. This includes $120 to $140 million of maintenance capital, with the rest going towards renovation and redevelopment initiatives.

Brian: We are monitoring the potential impact that tariffs may have on the cost of capital improvements as well as potential delays and uncertainties in the supply chain that may impact the availability of materials. We are adapting our plans as necessary to mitigate these external pressures.

Brian: That concludes our prepared remarks. We're ready to open the line for questions.

Speaker Change: I will now begin the question and the answer session. To ask a question you may press star then one on your touchstone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two.

Speaker Change: And your first question today will come from Jonathan Jenkins with Oppenheimer and Company. Please go ahead.

Jonathan Jenkins: Good morning. Thank you for taking my questions. First one from me, wanted to parse into the red part trends in a quarter.

Jonathan Jenkins: and I know there's lots of macroeconomic uncertainty out there, but Chris, you mentioned this slow down over the quarter. Can you walk us through kind of the monthly progression and how the quarter came in relative to your initial expectations and then also any thoughts or color on where April ended up?

Chris: Yeah, I think kind of more broadly, you know, I think overall Rev Bar kind of came in kind of where expected but as I think about the quarter specifically

Chris: You know, we started higher kind of in January at just over two and a half percent and that shows of the celebration going into March down to about a half of a point and so

Chris: I think that's how I would think about the trajectory in the slowdown as far as overall rev par.

Chris: I would say for April , you know, Brian's given some guidance on kind of where we expect that rep are a guidance fee for the quarter, softness in April is initially, or at least the preliminary numbers are showing about a decrease of 1% year over year.

Chris: and so we expect there to be some ramp as the quarter progresses, you know, all things being equal.

It's a very helpful moment.

Speaker Change: might be difficult, but can you provide some color on how much international and government business your hotels have and what you're seeing real time from those two parts of demand? And maybe as a follow-up to the last question, your thoughts on how much of what you're seeing in April or saw in April and March is attributable to calendarships versus more of a structural flowdown in demand?

Speaker Change: Yeah, I mean, the international travel kind of question is a little bit more tricky. I think, you know, I think the way we might think about it is you think about kind of our broader full-service portfolio and more so kind of on the retained side, about 30% of our portfolio is located, what we would call kind of the top 10 markets.

Speaker Change: And so I think from that standpoint, we kind of a manageable amount of assets as it might be impacted by international travel.

Speaker Change: and cancellations across the government contract business with just overall efficiency efforts.

Speaker Change: But I think more specifically, some of the bright spots are, I think, more akin to the fact that we're seeing strong group revenue pace.

Speaker Change: It's up about 6.5% over the same time last year which is close to $9 million and then we expect to kind of see some outsized ramp with respect to our renovation hotels as those continue to kick in and produce positive EBITDA throughout the quarters and so...

Speaker Change: You know, there's some taken-give with some of the more broader kind of macroeconomic trends alongside just some of the initiatives that are specific to our portfolio that I think will provide kind of a healthy balance as we progress throughout the year.

Speaker Change: Okay, that's excellent color there. And then switching gears to the hotel disposition sounds like they're progressing nicely. Can you help us think about your confidence level and completing the sales at the price point that you talked about this year? And any updated thoughts on maybe how that's progressing relative to initial expectations would be helpful?

Speaker Change: Yeah, I mean, look, I think that, you know, we had a robust process, right, with respect to, you know, the selection and award-advires. We have a pretty deep bench with respect to the amount of offers, which I think gives us some confidence in managing expectation on pricing through a competitive process.

Speaker Change: We're active in the diligence process. We have sign turn sheets with four different buyers where we divided up the pool. We've done a lot of what I would call kind of early stage diligence work with third party reports and other things which are actively being reviewed and updated as necessary.

and I think the process is progressing. I mean...

Speaker Change: You know, it's a very different process when you're selling, you know, a small subset of hotels, you know, one, two, five hotels versus larger portfolios, such as we're doing. And so, I think we feel good about the trajectory and the pace we're at today.

Speaker Change: and from a transaction standpoint, there's nothing to suggest that we won't transact as planned.

Speaker Change: and I think that the bigger change from kind of expectations is we expect the take down of these portfolios to happen in phases, just given the size and so

Speaker Change: You know, that's going to kind of show transactions occurring over more than one quarter, for example, as we continue to, you know, wind down the disposition effort specific to the 114 hotels.

Speaker Change: That's great to hear. And as a follow-up on that, when we think about the two debt and the charities coming in 2026 is the plan still to repay those with the asset sales.

That's correct, that plan has not changed.

Speaker Change: Okay, perfect. And then maybe it's the last one from me. Chris, you talked about the shift towards increased net lease exposure and devaluation change.

Speaker Change: At a high level when you look out at FBC in five or ten years, do you think we'll continue to see those trends of...

Speaker Change: Decreasing Hotel Exposure and increasing that lease properties to a point where the SPC at some point could entirely just be a net lease read or do you think you'll always continue to have hotel exposure and some capacity in the future.

Speaker Change: Yeah, I mean, the plan today is we'll continue to have hotel exposure. That change, that's not a change that we're anticipating.

Speaker Change: I think, you know, given kind of the outside view on kind of where the opportunities reside specifically on the net lease side, we would expect the gap to widen over time.

Speaker Change: with respect to kind of the investments specific to NetLease relative to Hotel.

Speaker Change: But I don't want to lose sight of the fact that even with the hotels we're retaining, there's going to be a continual opportunity to drive EBITDA, so I think from kind of a net net, we would expect to see performance progress on both sides just through kind of

Speaker Change: More organic growth on the net least retail and then kind of the EBITDA piece on the hotel side.

Speaker Change: I think more specifically, we're going to often be looking at our portfolios across the board at optimization opportunities and we'll evaluate those and present those as appropriate but I think given what we have today we've got a lot of great things we're working on. I think working through those, selling these assets. I think we're going to have a lot of great things we're going to have today.

Speaker Change: Advancing Capital projects and other initiatives is really where our focus is going to be for 2025.

Speaker Change: Okay, that's great. I appreciate all the color from everyone today. Thank you very much. That's all for me.

Thank you.

Speaker Change: Again, if you have a question, please press star and then one and your next question today will come from Meredith Jensen with HSBC. Please go ahead.

Speaker Change: Thanks. A lot of great questions asked specifically, the last one was the biggest one for me. And maybe I could just ask another sort of piece to that, although your answer was fairly clear. What might have caused sort of the the pivot to have um.

Speaker Change: More enthusiasm to sort of build back up or re-evaluate the net lease portfolio as being a greater strength.

Speaker Change: that the hotel portfolio has been sort of harder to manage in the cost side of it, or is there anything in particular regarding the hotels and the pursuit of sort of a broader hotel portfolio that might have changed?

Speaker Change: Look, I mean, I think generally speaking, you know, the hotel business, you know, is something that we continue to have conviction on. It is kind of a more capital intensive type business, but nonetheless, we do see pockets of opportunity for ROI and growth, and we've communicated what that looks like for how we're investing capital.

Speaker Change: You know, when you think about the NetLease side, look, we've got a large portfolio on the NetLease side where we haven't been in a position to execute on strategies for growth.

Speaker Change: and I think more specifically being in a position where we can improve overall fundamentals around the portfolio through driving Walt, through driving kind of better brands and opportunities in the portfolio, I think our view is just going to open other doors for the company with respect to how we think about financing opportunities, valuations.

Speaker Change: and other relative pieces. Continuing to bolster and strengthen that and take it in strides is just, in our view, a great opportunity to round out the portfolio on a go-forward basis.

Speaker Change: Yeah, the 34% Meredith, you know, Sinestas, as we're going through transitions with our hotel portfolio, they too are transitioning from over-franchised platform and have done a lot of initiatives too.

improve that higher margin business at the operating company.

Speaker Change: So that's a big part of their growth strategy, so we believe that they'll be increasing value as time goes on as they continue to expand the footprint of Sonata through that franchise platform. Again, it's a very high.

Margin Business, and it'll flow through to us over time.

Speaker Change: The equity stake and how we account for it we do we do pick up our 34% of their earnings and their even in our numbers so the balance sheet reflects around a hundred million dollars of an investment but we believe over time that will grow.

Speaker Change: Okay, that's super helpful. Thank you, and just sort of clarification on two things discussed on...

Speaker Change: thought that it would be a pretty clean site in sort of 2nd quarter June sort of time frame. How should we model the hotels leading the system?

Speaker Change: I think it's more appropriate to assume that Q2 and Q3 is where we'll start to kind of see the allocation of those leaving the system.

okay

Speaker Change: But we're just a follow up on that. We're modeling it. It'll exit by the end of Q3.

is the way we're doing it.

Speaker Change: Okay, thank you. And on you were speaking about international and group and what I heard that 2.5 million what percentage of nights

Speaker Change: with Group and International and sort of business transient and leisure transient B. And when you speak about groups, what would the average size for Group B?

Speaker Change: Yeah, it's a tough kind of a tough question in general. I think that

Speaker Change: Qualifying more specifically on the size of the group. And as I mentioned overall, that's kind of a net positive impact of close to six and a half percent or about nine million dollars.

Speaker Change: and so I think that's kind of more of a better proxy and Bryan can elaborate a little bit more. Yeah, I mean most of our hotels, I mean we don't have any large convention sites, so hotels are the most more, we get a lot of smaller, smurf type group business, especially on the weekends.

Speaker Change: Obviously, some of our urban hotels have larger groups, but generally speaking, they're medium-tabric-sized group business.

Speaker Change: and the percentages of government, international kind of the sort of pie.

Speaker Change: Yeah, let us follow up with you on that. Yeah, we don't have that in front of us. Okay, great. Thank you so much.

Speaker Change: Your next question today will come from Jack Armstrong with Wells Fargo. Please go ahead.

Jack Armstrong: Hey, good morning. Thanks for taking the question. So I guess just to circle back to the hotel this position, you know, prior expectations of closing on the majority of the dispositions by the end of Q2 to now kind of somewhere between Q2 and Q3. Can you walk us through specifically what happened there? You know, what drove that kind of shifting rate was it?

Jack Armstrong: Buyers taking a little bit more time with due diligence, the general flowdown and transaction markets with all of the uncertainty entered in April , just some color there on what you're shifting timing will be helpful.

Jack Armstrong: Yeah, I mean, really, it's just a function of the process and diligence when you're dealing with larger portfolios. I think it's not...

Jack Armstrong: Not a customary for these things to tend to ebb and flow. I would say it's not specific to the broader market and any concern around risks that may have been introduced since awarding it to these buyers, it's really just a function of...

going through the process. And again, I think...

Jack Armstrong: You know, these being taken down in phases just kind of extends, you know, that timeline for overall execution and coming out of the system. So again, it's really just, you know, the size of the portfolio, the depth that goes into a transaction of the size.

Jack Armstrong: Okay, helpful, helpful there. Just kind of jumping over to your CAPEX program. How do you risk your CAPEX spend for the year? You mentioned particularly programs in Q4,

Jack Armstrong: To the extent that tariffs remain in place, and there's some pressure on FFME and other goods you're getting from, you know, particularly China, you know, is there a capacity you think to pull back on that program deferred some time to next year?

Jack Armstrong: A lot of the stuff we have in motion for the rest of the county year, for the most part, sort of locked in pricing and we're underway with a lot of projects as we continue to scope out.

Jack Armstrong: plans to begin projects in 2026. We're going to start talking about...

Jack Armstrong: That's when we're looking at, you know, where do we source our...

Jack Armstrong: Products from, you know, we're looking for our suppliers to help direct us where things might be, you know, not as impactful from a tariff standpoint, you know, we're going to look at us go, you know, we'll re-evaluate.

Jack Armstrong: The cost, the overall cost and potential impact. So there's different things we're going to do and continue to do to mitigate any sort of cost-preach. We generally put in some sort of cost contingencies when we're planning our projects.

Jack Armstrong: But in general, we're just monitoring the situation with tariffs in specific countries where goods are coming from as everybody else is and we'll react accordingly.

Jack Armstrong: Okay, and on the at least acquisitions, I guess, what's given you the confidence to go out and be a positive in this environment? The capital plan and exiting from the hotels, you kind of expect incremental capital to start to go into paying down debt, so what's given you the confidence in this environment to go out and get those acquisitions done?

Jack Armstrong: Yeah, I mean, there's a handful of things I think kind of, you know, as we discussed, I think improving the overall composition of the portfolio is going to open up other opportunity for us, kind of medium and long term with respect to portfolio composition, other financing initiatives.

Jack Armstrong: You know, we have an ABS instrument in place that benefits from certain KPIs and potential to kind of recast that at a more creative...

Yields

Jack Armstrong: And I think kind of just more broadly speaking, we're seeing an opportunity where we're able to kind of push pricing and certain opportunities with kind of a bit asked, red of 30 to 50 basis points, which are going to continue to kind of create opportunity for us to buy if we would think what we believe to be attractive pricing.

and, you know, again, it's just-

Jack Armstrong: It's a small piece to kind of a broader strategy with respect to Exit's capital investment and other related items, but it's just healthy more specifically given we have some arbitrage there to kind of enhance the overall portfolio.

Jack Armstrong: Okay, and then in quarter, you know, you've broken as an impairment on 16 hotels.

Speaker Change: Is it a fair breed of the hotels actually in the portfolio? There's only 16 that have moved to the stage and at this position process where you're recognizing an impairment?

Jack Armstrong: or is that just the only impaired portion of the larger portfolio? And then as we're thinking about modeling on a go-for basis, you know, is that level of impairment for 16 hotels, you know, roughly applicable to the size of the rest of the portfolio?

Bum!

Jack Armstrong: Short answer on the last part now, but to the point about which hotels were impaired this quarter.

The 114 Sanasta Hotels

Speaker Change: All were evaluated for indicators impairment under general accepted accounting principles and the way it broke down is as Chris mentioned, there are four buyers of the 114 hotels, pools of hotels ranging from 15 to 45 hotels, I believe.

Speaker Change: The smallest of the pools of 15, the fair value, the sales price was below, which represents the fair market was below the carrying costs, so we did take a charge on those 15.

Speaker Change: The remaining 99 hotels, the sales price, slash fair value, all exceeded the book value. So in aggregate, we expect to recognize a game on sale at real estate when the dust sale is only 114.

Speaker Change: Okay, and you don't anticipate, you know, during the process of due diligence that that impairment could go up.

Speaker Change: Again, overall, we've been talking north of $1 billion for the portfolio and the carrying values in the $800 and something million range, so we expect a gain on sale or real estate when we close everything.

Okay, interesting, thank you, Mr. Jagan, questions [inaudible]

Speaker Change: If you're next question today, we'll come from John Masaka with B Riley, please go ahead.

Good morning.

John Masaka: So I'm sorry if I missed this. Just with regards to the NETLIS acquisition, it's kind of a broadly, I gave a couple metrics around it, but what were the actual properties themselves, and what kind of type of properties?

John Masaka: The question is, is the actual assets we purchased, or we're looking at the types of properties?

John Masaka: We purchased the two properties during the quarter. One was a car wash, and another one was a casual dining concept.

Bye.

Speaker Change: And was that the entire sheriff and the church at $33 million?

No, so that was always required.

Speaker Change: Then we have the pipeline of kind of what's under L.O.Y.

Speaker Change: some opportunities with the grocer, but the majority of those opportunities are in casual dining in QSR.

Speaker Change: and then one fitness concept we're looking at, so that kind of rounds out the types of concept with kind of, again, the larger component by number of properties being on the QSR and casual dining side.

Speaker Change: Okay. And on the debt side, it's just kind of curious why the variable funding note, you know, is that something that could increase or you could do more of to continue acquiring on the netleaf side or just kind of curious there.

Speaker Change: Sure, John . When we did the ABS Security Financing a couple of years ago, you know, we...

Speaker Change: We put that master trust in place, in addition, as we looked at our financing alternatives more recently.

Speaker Change: You know, we took a look at what's in that portfolio that is secured by the massive trust that realized the valuations have gone up.

Speaker Change: So we tap the equity and we think in a cost effective way. I think the sizing for now I think is short of adding more properties. We don't expect to increase that particular instrument. Put we later, if we add more properties into the security pools, short. We're going to add more properties into the security pools. We're going to add more properties into the security pools.

Speaker Change: But we felt good about the pricing on that and as part of the broader strategy to tap that in at least portfolio, to not only as a cost of capital for financing, but also as a part of the strategy. Chris, I'll run on the acquisition front.

Speaker Change: Is the room within the existing portfolio to add more assets that would allow you to pull out more equity or is that maxed out in terms of either what you want to put into the master trust today or what you can put into the master trust?

Speaker Change: I mean, we can grow the Master Trust as much as we want, and we do grow it, and we put more into it.

Speaker Change: We could then utilize the additional equity from a financing standpoint, and as long as we're keeping the whole the entirety of the portfolio and relationship to whatever debt we have within that master trust.

Speaker Change: sort of at the current levels from alone to value standpoint and at other metrics then.

Speaker Change: Geographic and industry and brand concentrations, the walls, the rent coverage, all that stuff goes into it. So it's our strategy regarding what we do add or what we might acquire overall.

Speaker Change: to keep alignment with the existing portfolio given the execution on the UZBS notes we did. We think it's a very efficient way to finance at a lower cost than capital. What we could see today, doing a bond deal, for example.

Speaker Change: And when you say like, I just kind of think within the existing portfolio, right, I don't know if there's more LTV, you can kind of essentially take out of the net least.

versus by a third of more things in finance in that way.

Speaker Change: Yeah, the 350 in properties that are in the master trust, cured by ABS notes, we just took a fresh look and tap what we believe is the extent of the equity we're going to look to pull out for now.

Speaker Change: But we have another several segment of Mellies Properties that are not financed or not encumbered that we could utilize in the future.

Speaker Change: Okay, and then just one quick one on the hotel side, you know, with the act, sorry, with the dispositions that are planned, particularly 114 hotels.

Speaker Change: Is the outlook still that those would continue to have the Sinesta flag on them? Or is there some wiggle room around that maybe with various tranches or just kind of curious if that's still what the outlook is today?

Speaker Change: Yeah, that's the plan. The plan is that these will be with the Sinesa franchise agreements.

Okay, that's it for me. Thank you very much Thank you.

Speaker Change: This will conclude our question and answer session. I would like to turn the conference back over to Chris Bellato, President and Chief Executive Officer for any closing remarks.

Chris Bellotto: Thank you for joining our call today. We look forward to seeing many of you at the upcoming Navy conference in June . Please reach out to our investor relations team if you're interested in scheduling a meeting with SVC. Thank you.

Chris Bellotto: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.