Service Properties Trust (SVC) Earnings Call Transcript & Summary

Thank you. Good day and welcome to the Service Properties Trust Second Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to hand the call over to Kevin Berry, Senior Director of Investor Relations.

Please go ahead. Good morning. Thank you for joining us today. With me on the call are Chris Bellotto, President and Chief Executive Officer, Jesse Hebert, Vice President, and Brian Domley, Treasurer and Chief Financial Officer. In just a moment, they will provide details about our business and our performance for the second quarter of 2026, 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 without the prior written consent of the company. Also note 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 SVC's beliefs and expectations as of today, August 6, 2026, and actual results may differ materially from those that we project. 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. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from our website at svcreit.com or the SEC's website. investors are cautioned not to place undue reliance upon any forward-looking statements. of these non-GAAP figures, the net income is available in SVC's earnings release presentation that we issued last night, which can be found on our website. And lastly, we will be providing guidance on this call, including estimated 2026 normalized FFO, hotel EBITDA, net operating income or NOI, and adjusted EBITDA RE. not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all.

We'll now turn the call over to Chris. Thank you, Kevin. Good morning, everyone. And thank you for joining the call today. I will begin today's call with an update on our strategic priorities and highlights from our hotel portfolio performance during the second quarter. Jesse will then discuss our net lease business, and Brian will conclude with a review of our financial results, balance sheet, and outlook. Last night, we reported second quarter results that reflect continued momentum, advancing SVC strategic priorities, and strengthening the company's financial profile. Our net lease portfolio delivered steady NOI growth, providing a highly predictable cash flow stream that anchors our portfolio. And within our hotel segment, RevPAR outperformed the industry benchmark for the seventh consecutive quarter. Overall, normalized FFO per share of 43 cents was in line with consensus expectations and we are maintaining our full year earnings guidance. Starting with our strategic priorities, we remain focused on enhancing our net lease portfolio, improving the cash flows and operating performance of our retained hotel portfolio and further enhancing our balance sheet through disciplined capital allocation. Since the beginning of the second quarter, we have sold 20 properties for approximately $32 million, including 19 net lease assets and one hotel. A portion of these proceeds, combined with over $540 million of net proceeds from SVC's successful equity offering in April, was used to redeem $550 million of unsecured debt, reducing our leverage profile and decreasing annual interest expense, while providing the company with enhanced flexibility to focus on operational execution, and cash flow growth. Turning to hotel performance. Our retained hotel portfolio, excluding the 15 sales hotels, delivered another quarter of improved operating results. RevPar increased 6.6% year over year with balanced growth and occupancy in ADR and relative strength in full service and upper upscale hotels. RevPar growth partially offset by expected displacement related to our active redevelopment and renovation projects most notably the Nautilus South Beach. Excluding the Nautilus short-term disruption, underlying Breitbart growth across the balance of the portfolio was meaningfully stronger at 9%, reinforcing our confidence in the improved fundamentals in our portfolio. The portfolio continued to benefit from completed renovations, a 22% lift in contract segment revenue, as well as rate-driven demand related to World Cup and Selecto Cities. Importantly, this positive momentum has carried into the third quarter with preliminary July rev par for a retained hotel portfolio of 7.1%. year-over-year. Retained Hotel Evanda increased 4.2% this quarter, with notable strengths at the Sinestro properties in Hilton Head and Miami Airport, as well as Radisson in Salt Lake City. To put this performance into context, our retained hotel portfolio generated a quarterly adjusted hotel EBITDA margin of approximately 19.4%. By comparison, the 15 hotels we are exiting operated at a negative EBITDA margin over that same period. This gap is the core economic logic behind our capital recycling strategy. Rather than continuing to dedicate capital and management attention to a cohort of assets with structurally negative returns, we are redirecting those resources toward a retained portfolio that is already demonstrating a clear trajectory of margin improvement. Building on this, we see significant additional opportunities for improved profitability across our retained hotel portfolio. Our asset management group continues to work with our operators on several opportunities to expand hotel EBITDA margins, both at Senesca and our other operators. These efforts are initially centered on three primary pillars. The first pillar relates to revenue optimization, targeting customer acquisition costs by driving more business to the direct and most profitable channels like brand.com, therefore reducing reliance on higher cost OTAs. This also includes a continuous focus on driving contract and group base along with ancillary revenue streams such as food and beverage and parking. Second, in support of improved labor efficiency, our operators are implementing a leaner and more dynamic labor model to better align staffing with demand and reduce reliance on costly contract labor. Within the quarter, we're already seeing the benefits of this with Senessa, Radisson, and ISG all improving labor productivity year over year. The third pillar relates to capitalizing on operating leverage with anticipated savings from benefits plans, property insurance, and diligent controls over energy and utility costs. As our renovated hotels stabilize and occupancy grows, this will provide an enhanced pricing power and position the property to capture additional event-driven demand which in turn will absorb fixed costs more effectively, ultimately driving profitability. Well, early in the process, initial benefits are starting to materialize, including the positive trend with labor productivity, a recent 20% reduction in property insurance cost across the portfolio, the noted 22% lift from contract revenue, largely from new airline crew business, and the adoption of certain technologies and process that will drive margin improvement. As these initiatives progress, we provide further updates on targeted revenue and expense benefits. Beyond these initiatives, SBC is positioned to capture meaningful performance upside from the elimination of approximately $15 million of negative e-credit drag from our exit hotels. The gradual burn off of displacement and corresponding performance growth from our hotel renovations most notably the ongoing redevelopment of the Nautilus in Miami Beach. These benefits will be realized over time. They provide a roadmap for improvement in hotel EBITDA and cash flow generation, complementing our top-line initiatives focused on driving market share across the portfolio. Turning to our hotel dispositions, we remain on track to sell the previously disclosed 15 hotels, which included the sale of a 133-key hotel in July for $18.4 million. Today. To date, we are under a purchase and sale agreement or letter of intent with 13 hotels and are marketing one hotel. We expect the majority of the remaining dispositions to be mostly completed over the balance of 2026, with proceeds continuing to support debt reduction and to further improve our financial flexibility. As part of this process, we also intend to bring to market our remaining IHG managed full service hotel, a 495 key property located in the Atlanta perimeter sub market. As some may recall, we removed this asset from the marketing process last year, while we evaluated varying strategies with the in place agreement and capital outlook. This followed a comprehensive hold versus sell analysis undertaken as the hotel's management agreement approached its schedule expiration. While the property has performed well operationally, we believe a sale represents the more attractive path to unlocking value for shareholders relative to continuing to own and reinvest in the asset. We expect marketing to commence in Q3 and look forward to providing future updates. Before I conclude, I would also like to briefly touch on corporate governance. As we previously announced, our board continues to actively evaluate candidates for an additional independent trustee. Search remains focused on identifying an individual with meaningful hospitality industry experience who can further complement the board's experience and support SVC's ongoing strategic evolution. Looking ahead, our priorities remain clear. Translate the operating momentum in our retained portfolio into sustained margin and cash flow improvement while completing the exit of our non-core hotels to further strengthen SVC's financial profile. With a stronger balance sheet and the initiatives we have underway to further enhance performance, we believe SVC is well-prepared. position to unlock value across the portfolio to drive long-term shareholder returns. I will now turn it over to Jesse to discuss the NetLease portfolio in more detail.

Thank you, and good morning. Our net lease assets continue to serve as a dependable source of cash flow for SVC, with minimal capital requirements, long-duration leases, and a diversified tenant base. The portfolio exhibited strong performance in the second quarter, led by meaningful NOI growth, sustained leasing momentum, and continued improvement in the performance of our travel services. HIGHLIGHTS FROM THE QUARTER INCLUDE AN INCREASE OF 2.2% IN CASH BASIS NOI QUARTER OVER QUARTER AS A RESULT OF CONTRIBUTIONS FROM RECENT ACQUISITIONS, CONTRACTUAL RENT GROWTH FROM OUR EXISTING LEASES, AND A REDUCTION IN OUR CREDIT DESERVES. OCCUPANCY WAS UNCHANGED FROM THE PRIOR QUARTER AT 96.6%, ALTHOUGH WE EXPECT TO SEE INCREMENT IN THE NEXT FEW YEARS. growth in occupancy throughout the remainder of the year, given the current state of our leasing pipeline and our asset management team's dedicated efforts to efficiently dispose of vacant properties and cycle in new brands. Optimizing our portfolio and developing new operator relationships will be an ongoing focus for our team as we continue to transition SVC toward the net lease side of the business. The aggregate rent coverage of our portfolio improved to 2.09 times on a trailing 12-month basis. The improvement was driven primarily by our TA travel centers, where rent coverage increased 10 basis points to 1.34 times. This is the second straight quarter of coverage growth for TA in representation of the current rate of travel. since a 12% increase since the fourth quarter of last year. For the balance of the portfolio, rent coverage again came in north of three and a half times as tenant credit quality and operating performance remained stable. On the leasing front, our asset management team executed deals totaling 210,000 square feet with a weighted average lease term of roughly seven years. With just 1% of annualized base rent scheduled to expire through year end and 3.8% rolling through the end of 2027, our near-term expiration schedule remains very manageable and our Our asset management team has been proactively engaging with tenants that have upcoming expirations to negotiate renewables. Turning to capital recycling, we continue to execute our measured growth strategy. On the acquisition side, year-to-date, we've invested approximately $9 million across four properties operating in the QSR and automotive services industries. Thank you. These acquisitions were completed at weighted average cash and gap cap rates of 7.9% and 8.8%, respectively. carried weighted average lease terms of approximately 15 years. We are under agreement on another five properties, a mix of dollar stores and casual dining concepts, for a total of $14.2 million, which we expect to close in the third quarter. These transactions, funded through capital recycling, put us well ahead of schedule for our target of $25 million of annual acquisition activity. Since the beginning of the year, we have sold 21 properties for $15 million, and we expect a similar level of dispositions during the second half of 2026. The NetLease portfolio now consists of 745 properties with annualized base rent of nearly $400 million and a tenant roster that includes 185 businesses operating under more than 140 brands across a diverse range of industries led by travel centers, quick service restaurants, fitness centers, and grocery stores. More than 95% of our annualized base rent is derived from leases that contain contractual rent increases or percentage rent provisions, providing embedded NOI growth and inflation protection over time. As we work to reposition SBC toward a more net lease-oriented company, our focus will be on enhancing portfolio quality, maintaining strong occupancy and credit metrics, extending WALT, and generating durable cash flow growth. We believe our disciplined asset management and capital allocation strategies will ensure SBC's measured transition. to a primarily net lease platform. And with that, I'll turn the call over to Brian to discuss our financial results. Thank you, Jesse, and good morning.

As we previously announced, SVC affected a one-for-five reverse share split in early July, and all share information on our earnings report in 10Q have been retroactively adjusted. Additionally, given SVC's recent equity issuance, comparing per share data to prior periods is not meaningful. So, let's look at the earnings report. Starting with our consolidated financial results for the second quarter of 2026, normalized FFO was $55 million, down $2.6 million, or 4.5% compared to the prior year quarter. Normalized FFO this quarter, as compared to the prior quarter, were primarily impacted by a $20 million decline in hotel results, largely from our hotel disposition activity, partially offset by a $15 million decline in interest expense, and a $2.3 million increase in performance from our retained hotels, and a $1.3 million increase in our hotel sales. an NOI from the net lease portfolio. Turning to our hotel portfolio performance, for our 93 comparable hotels this quarter, REVPIRE increased by 6.5%. Gross operating profit margin percentage declined by 60 basis points to 28.7%. The low of the GOP line costs at our comparable hotels increased by $3.5 million from the prior year, driven primarily by higher insurance costs. Our 93 comparable hotels generated adjusted hotel leave at $55 million during the quarter, which was relatively flat compared to the prior year quarter. The 78 hotels in our retained portfolio generated rep par $135, an increase of 6.6% year over year. adjusted hotel evens up $57 million during the quarter, representing an increase of 4.2% year-over-year. Excluding the three hotels under renovation, Hotel Ibiza increased $6.5 million, or 13.4%. The Senesta Exit Hotel, which is sold or continuing to market for sale, produced losses of $1.9 million during this quarter, a decline in profitability of $2.2 million year over year. An OI from our net lease portfolio increased $1.3 million over the year prior year as a result of our acquisition and leasing activity, partially offset by vacancies and credit losses. Turning to the balance sheet, we have been active in the capital markets and took steps to further strengthen our balance sheet, improve our debt maturity profile, and our cash flows. During the quarter, we raised net proceeds of $542 million from our equity offering and redeemed all $450 million of our outstanding 5.5% senior guaranteed unsecured notes due 2027 and the remaining $100 million of outstanding 4.95% senior unsecured notes due 2027. This activity resulted in an additional annual cash interest savings of $30 million. We currently have $4.7 billion of debt outstanding with a weighted average interest rate of 5.66%. As of today, there are no amounts outstanding on our $650 million revolving credit facility. credit facility matures in June 2027, and we have a one-year extension option available to us. Our $580 million of zero-coupon senior secure notes mature in September of 2027, and they're supported by strong net lease collateral, which we believe provides refinancing optionality. Turning to our capital expenditure activity, during the second quarter, we invested $30.5 million in capital improvements, which continue to be driven by the renovation of the Nautilus in Miami, as well as projects at the Royal Sonestas in Boston, New Orleans, and Columbus. Turning to our annual guidance, we are reaffirming our full year electra hotel EBITDA, at least NOI, and consolidated adjusted EBITDA. We're maintaining our normalized FFO range of $124 to $144 million, or $1.20 to $1.35 per share. The per share amounts assume a weighted average share count of 105 million shares. This full year guidance assumes midpoint interest expense of $360 million and G&A expense of $40 million. This guidance does not reflect the impact of completing the remaining semester hotel's plan for disposition, and it continues to assume $25 million of capital recycling on that lease portfolio. continue to expect total capex of the year for the year of 120 million to 140 million dollars Cash flow available for distribution was $42.5 million for the quarter, and we continue to expect to generate positive CAD for the full year 2026. That concludes our prepared remarks. We're ready to open the line for questions. We will now begin the question and answer session.

To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. At this time we will pause momentarily to assemble the roster. And our first question will come from Tyler Battery of Oppenheimer. Please go ahead.

Hey, good morning. Thanks for taking my questions. You on the hotel portfolio first, and I'm really focused on the retained hotels, talk bit more about the renovation activity that I believe was impacting margin in Q2. And you talked about a number of initiatives to improve the margin performance at the hotels. Just talk through a little bit in terms of the timeline on when some of those initiatives might start to show up in the performance of the margin side of things. And just remind us again where you'd like to go in terms of moving margin in the Retainable Talent portfolio.

Hey, good morning Tyler. This is Brian. I'll start and then Chris will jump in with some of the more forward-looking stuff. Yes, for the three hotels, we earmarked as under renovation. I mean, those hotels, I mean, the biggest one is obviously the South Beach property, which we've been talking about. But those hotels, you know, generated a million dollars of revenue this quarter, but it was a $3.3 million decline last year. year over year. One of the three is an exit property, so it's a little bit of noise on both fronts, but the Nautilus is projected to be completed by the end of October and early November. with some phase completions with rooms in public space. That's our biggest project for the year. It's got a lot of financial impacts on both the RepPAR top line and bottom line. And, you know, this Q1, Q2 is the high season for Miami. So that was a particular drag in our results. But as we look forward to Q4, we should see a positive uplift from that property, amongst others. Some of the other properties under renovation or that recently completed renovation have also started ramping up. Simply Suites in Las Vegas, for example, We're doing work in Cambridge, I mentioned, in New Orleans. So there's still a bit of noise and moving pieces.

Yes, I would just add in kind of to the back half of your question, you know, with respect to kind of some of the initiatives. Look, it's iterative, right? This is a kind of a broader strategy kind of in line with what we've talked about coming into the year and over, you know, even into Q1. I think, you know, some of kind of the small wins, you know, we've, you know, reduced our property insurance by 20% effective 7-1. So that's a fiscal year. And there's also some benefits that come with that with reduced deductible. And so we would expect there to be kind of just less overall costs. Just the insurance premium alone is a couple of million dollars for the for the fiscal year. We're starting to kind of see the inflow of other types of ancillary revenue alongside contract business. So those are all kind of near-term initiatives. I think kind of the bigger piece is much more of the work being done with our operators. And so that's just a big piece of that. As you recall, there's a new management team. that started their effective August 1st. And I think it goes without saying, kind of giving them room and runway to really kind of dig in and unpack opportunities within the portfolio is something that they've been focused on. And many of these strategies are kind of tied to. And so we would expect for more of that to flow through towards the end of the year and predominate like some of the bigger things like benefits in Q1 of next year. And I think the idea is that we'll provide kind of more specific numbers tied to these levers after we've given them kind of the needed time to vet through that. So, you know, potentially as early as this next Q3. The other thing I would, you know, highlight, which I think kind of goes without is selling these assets, you get rid of negative $15 million of EBITDA drag. That's the addition by subtraction. In our guidance, we have $12 million of displacement occurring with these renovations. And so getting that money back gets you to zero, let alone the uplift that's going to come when performance turns around. And so when you start to add up up, you know, these numbers, they become very material. And I think all those will just kind of continue to fold in and ramp up specifically as we get into 2027.

Okay, great. And to follow up on the RevPAR side of things, we thought P2 was really strong, which kept the four-year guidance range. So just talk about the outlook for the rest of the year, I'm not sure if the renovation activity or anything else is impacting that outlook. But curious if there's any extra conservatism in terms of what you're providing for the or what's implied for the second half of the year.

Sure, Tyler, thank you. And, you know, I think from our standpoint, you know, Q2 was definitely strong. You know, we've seen our preliminary July results, which, you know, gives us, you know, some optimism, you know, going into the third quarter. But if you look at our portfolio and the seasonality of it, we do expect to slow down in the back half of August and then into Q4. It's just the way our portfolio trends and some of our geographies. But we feel comfortable with the guidance range as we sit here today. And there's a lot of different things and moving pieces in motion As we look to the back half of the year, as Chris outlined, and throw in some of the disposition activity and the potential timing, some of that could affect our numbers and hopefully to the upside.

Okay. And last question from you on the asset sales. Remind us that the timeline there, I think the prepared remarks you said by the end of 2026, but any sort of the execution risk in terms of getting those completed and then In a bigger picture question, just talk a little bit about the market overall for asset sales and help us think through any updated thoughts in terms of future assets that might be on the market for sale. I know you're now marketing that asset in Atlanta. I'm not sure if there's anything else in the portfolio that might make sense. Yes.

down the road here? Yes. So I think first and foremost, you know, with respect to the 15 properties that we've been active with, You know, given where we are with those groups, again, mostly under contract, it's really kind of a Q3, Q4X, you know, type of execution. I would say, you know, of the quantum, which is just shy of $100 million, representing kind of that bucket of under contract, you know, maybe between 20 and 30 million might transact in Q3 with the balance in Q4. There's one that we're marketing that might, might find its way into kind of the early part of 2027. And then certainly I think with respect to the Atlanta perimeter, just given where we are in the process, I think it's fair to say that, you know, an early 2027 is a reasonable expectation, depending on where pricing comes in. And so, you know, to your broader question, like, look, you know, our plan has been and continues to be to really really kind of dig into each hotel and figure out where we can optimize performance. And we've contemplated and communicated that that's a multi-year journey. I think what we're selling this year and then even the introduction of this hotel in Atlanta is a testament to kind of how we think about, you know, when the timing is right, we're ready to come to market. But I think, you know, more importantly, I would set the expectation that driving performance to drive value is a big part of our business. and that's something that we will adhere to. I think that the last question you had about the broader market is it's mixed. I think for focus service hotels, I think we've continued to see some level of strength, just kind of given where that price point is. And then for more luxury hotels, there seems to be kind of capital chasing, you know, those types of concepts. And then in between, depending on that price point, you know, the $50 to $100 million price point, it's a little bit softer. And so, it doesn't mean that there's not an ability to transact, but I think most of the transactions are coming from more kind of stabilized hotels versus kind of the German where we're on is kind of turning around performance to kind of get us to that point. Great. Very helpful. That's all from me. Thank you.

The next question, once again, if you would like to ask a question, please press star, then one. And our next question will come from Jack Armstrong of Wells Fargo. Please go ahead.

Hey, good morning and thanks for taking the question. You provide us with your updated thoughts on the ramp for the Nautilus, when you expect it to open, what the EBITDA drag is in the third and fourth quarters, and then where you expect the asset to stabilize and the pathway to get there.

Sure, Jack, good morning. The Nautilus project is underway today. We expect delivery by November. just ahead of where the season starts ramping up for that market. You know, I think from a from a cash drag standpoint for the full year, it's around four and a half million dollars for that property. Yes, it's a significant swing. Our expectations going forward as it ramps up, you know, we'll obviously get more color as we get into next year's guidance. But, you know, the property did around five or six million before renovation on an annual run rate. We expect that to significantly increase going forward. between that property and some of the others that are still ramping. You know, we're optimistic. We'll continue to see the right results.

A helpful color there. And then just can you touch on what percentage of your bookings were through the OTAs in Q2 and then maybe where that's been historically and then what the goal is there going forward out of some of the initiatives you talked about?.

Yes, I mean, typically, you know, the bookings across the OTA have kind of hovered in the You know, where that bogey needs to be, I think, is still TBD. I mean, certainly we want that to come down, you know, closer to 20%. But I think that's a, you know, there's a lot of work that needs to go in to do that. So between 20 and 25 is probably kind of a healthy expectation in the medium term. And then again, I think that's going to come through the things that I referenced with respect to kind of just changing some of the channels, you know, kind of allocating more resources through growing kind of loyalty programs and driving business through loyalty programs. And I think as we bolster other areas within the business, whether it's group or contract. business, let alone transient, that in itself will kind of just truncate where that percentage comes from. But I think to answer your question, it's kind of getting closer down to that 20% mark.

And then maybe one on the net lease side, can you give us your updated thoughts on credit losses in the back half of the year? Maybe provide an update on where the two franchisee bankruptcies stand and any changes to your tenant loss list at the first look.

Yes, Jack, this is Jesse. I'll take that one. With respect to the two bankruptcies we announced, I think good news on both of those fronts. The Popeyes franchisee will be emerging from bankruptcy in Q3. to assign those assets to back to corporate. So there'll be a credit bump there. All remaining economics of those existing, the existing master lease will stay the same. So they're already back to a rent paying status. So probably net net, that's a good story, a positive story. And then with respect to the other franchisee, again, this is another QSR, We have a similar story. We expect all those to remain open and get assigned to corporate, so we'll see that credit bump as well. Still negotiating the deal terms. with respect to exactly how it's going to play out in terms of the rent going forward. I would say that the big story on the net lease side of things for us relates to the TA coverage piece, and this is now the second straight quarter. We've seen a pretty meaningful bump. You know, as best as we can tell, we think that's probably a function of a few things. You know, we're seeing double-digit growth, both in terms of freight pricing as well as, you know, diesel margins, right? Those are two pretty big indicators of how that business is going to go. The diesel margins may be a little more transitory and related to the Middle East conflict, but I think the thinking across the board in the freight industry is that that increase in demand is probably something that we expect to be persistent throughout 2026. So again, a really good indicator for that business. And maybe the third piece to that is we may be seeing some early fruits of the business improvement plan that BEP has implemented with respect to those TA assets. They've now had several quarters of new management and the opportunity to execute on that plan. So multifactorial, certainly. But I think the big news in terms of how we think of the net lease portfolio is driven by the increased performance in TA. Really helpful. That's it for me. Thanks. Thanks.