Service Properties Trust Announces Third Quarter 2019 Results

Third Quarter Net Income of $0.24 Per Common Share

Third Quarter Normalized FFO of $0.95 Per Common Share

Completed Acquisition of Net Lease Portfolio of Service-Oriented Retail Properties for $2.4 Billion

Sold or Entered Agreements to Sell 128 Properties for $500 Million

NEWTON, Mass.–(BUSINESS WIRE)–Service Properties Trust (Nasdaq: SVC) (formerly known as Hospitality Properties Trust) today announced its financial results for the quarter and nine months ended September 30, 2019:

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

2019

 

2018

 

2019

 

2018

 

($ in thousands, except per share and RevPAR data)

Net income

$

40,074

 

 

$

117,099

 

 

$

274,643

 

 

$

294,594

 

Net income per common share

$

0.24

 

 

$

0.71

 

 

$

1.67

 

 

$

1.79

 

Adjusted EBITDAre (1)

$

209,545

 

 

$

225,676

 

 

$

624,418

 

 

$

655,530

 

Normalized FFO (1)

$

155,635

 

 

$

174,653

 

 

$

469,041

 

 

$

505,714

 

Normalized FFO per common share (1)

$

0.95

 

 

$

1.06

 

 

$

2.85

 

 

$

3.08

 

  1. Additional information and reconciliations of net income determined in accordance with U.S. generally accepted accounting principles, or GAAP, to certain non-GAAP measures including EBITDA, EBITDAre, Adjusted EBITDAre, FFO and Normalized FFO, for the three and nine months ended September 30, 2019 and 2018 appear later in this press release.

John Murray, President and Chief Executive Officer of SVC, made the following statement:

As previously announced, during the third quarter we completed our acquisition of a high-quality net lease portfolio of 767 service-oriented retail properties for $2.4 billion in cash consideration plus $82.1 million of prepayment penalties to extinguish mortgage debt on the portfolio. We believe this transaction provides us with increased scale, a more secure financial profile and greater diversity in tenant base, property type and geography. We have also made significant progress on our previously announced disposition plan. We sold two net lease properties for $63 million and entered an agreement to sell 126 additional net lease properties for $438 million.

In the third quarter, comparable hotel RevPAR declined 0.3% compared to the prior year period due in part to occupancy decreases from 13 hotels under renovation, six of which were relatively higher revenue contributing full service hotels that impacted our IHG, Sonesta and Radisson Hotel Group portfolios. For hotels not impacted by renovations, comparable RevPAR increased by 0.9%.”

Results for the Three and Nine Months Ended September 30, 2019 and Recent Activities:

  • Net Income: Net income for the quarter ended September 30, 2019 was $40.1 million, or $0.24 per diluted common share, compared to net income of $117.1 million, or $0.71 per diluted common share, for the quarter ended September 30, 2018. Net income for the quarter ended September 30, 2019 includes an $8.5 million, or $0.05 per diluted common share, loss on early extinguishment of debt and $4.0 million, or $0.02 per diluted common share, of unrealized losses on equity securities. Net income for the quarter ended September 30, 2018 includes $43.5 million, or $0.26 per diluted common share, of net unrealized gains on equity securities. The weighted average number of diluted common shares outstanding was 164.3 million for each of the quarters ended September 30, 2019 and 2018.

    Net income for the nine months ended September 30, 2019 was $274.6 million, or $1.67 per diluted common share, compared to net income of $294.6 million, or $1.79 per diluted common share, for the nine months ended September 30, 2018. Net income for the nine months ended September 30, 2019 includes a $159.5 million, or $0.97 per diluted common share, gain on sale of real estate, $43.8 million, or $0.27 per diluted common share, of net unrealized losses on equity securities and an $8.5 million, or $0.05 per diluted common share, loss on early extinguishment of debt. Net income for the nine months ended September 30, 2018 includes $89.3 million, or $0.54 per diluted common share, of net unrealized gains on equity securities. The weighted average number of diluted common shares outstanding was 164.3 million and 164.2 million for the nine months ended September 30, 2019 and 2018, respectively.

  • Adjusted EBITDAre: Adjusted EBITDAre for the quarter ended September 30, 2019 compared to the same period in 2018 decreased 7.1% to $209.5 million.

    Adjusted EBITDAre for the nine months ended September 30, 2019 compared to the same period in 2018 decreased 4.7% to $624.4 million.

  • Normalized FFO:Normalized FFO for the quarter ended September 30, 2019 were $155.6 million, or $0.95 per diluted common share, compared to Normalized FFO of $174.7 million, or $1.06 per diluted common share, for the quarter ended September 30, 2018.

    Normalized FFO for the nine months ended September 30, 2019 were $469.0 million, or $2.85 per diluted common share, compared to Normalized FFO of $505.7 million, or $3.08 per diluted common share, for the nine months ended September 30, 2018.

Recent Acquisition, Disposition and Investment Activities: As previously announced, in July 2019, SVC sold all 2,503,777 of its class A common shares of The RMR Group Inc., or RMR Inc., in an underwritten public offering at a price to the public of $40.00 per common share. SVC received net proceeds of $93.6 million from this sale, after deducting underwriting discounts, commissions and other costs, that it used to repay debt.

As previously announced, in September 2019, SVC completed its acquisition of a net lease portfolio of service-oriented retail properties from Spirit MTA REIT (NYSE: SMTA) for $2.4 billion in cash, excluding transaction costs, or the SMTA Transaction. In addition to the $2.4 billion purchase price, SVC paid $82.1 million of prepayment penalties related to SMTA’s extinguishment of mortgage debt on the portfolio. SVC funded the SMTA Transaction with net proceeds from its recently completed $1.7 billion principal amount of unsecured senior notes offerings described below and by drawing on its revolving credit facility.

In October 2019, SVC acquired the 261 room Kimpton Palomar Hotel in Chicago, IL for a purchase price of $55.0 million, excluding acquisition related costs. SVC added this Kimpton® branded hotel to its management agreement with InterContinental Hotels Group, plc (LON: IHG; NYSE: IHG (ADRs)), or IHG.

Also, in October 2019, SVC sold two net lease properties it acquired in the SMTA Transaction with an aggregate of 242,189 square feet with leases requiring annual minimum rents of $4.5 million, for aggregate net proceeds of $63.3 million, excluding closing costs.

In addition, in October 2019, SVC entered into an agreement to sell 126 net lease properties it acquired in the SMTA Transaction with approximately 2.4 million square feet in 26 states with leases requiring an aggregate of $34.3 million of annual minimum rents for an aggregate sales price of $438.0 million, excluding closing costs. SVC expects this sale to be completed prior to December 31, 2019.

Financing Activities: As previously announced, in September 2019, SVC issued $825.0 million principal amount of 4.35% unsecured senior notes due 2024, $450.0 million principal amount of 4.75% unsecured senior notes due 2026 and $425.0 million principal amount of 4.95% unsecured senior notes due 2029 in underwritten public offerings. The aggregate net proceeds from these offerings of $1.68 billion after underwriting discounts and other offering expenses were used to finance, in part, the SMTA Transaction.

In connection with the completion of these offerings, SVC terminated the unused commitments previously announced available to SVC under its previously announced $2.0 billion senior unsecured term loan facility and record an $8.5 million loss on extinguishment of debt during the three months ended September 30, 2019.

Hotel Portfolio:

As of September 30, 2019, SVC had eight operating agreements with six hotel operating companies for 328 hotels with 51,086 rooms, which represented 59% of SVC’s total annual minimum returns and rents.

  • Hotel RevPAR (comparable hotels): For the quarter ended September 30, 2019 compared to the same period in 2018 for SVC’s 322 comparable hotels: average daily rate, or ADR, decreased 1.6% to $126.80; occupancy increased 1.0 percentage point to 77.9%; and revenue per available room, or RevPAR, decreased 0.3% to $98.78.

    For the nine months ended September 30, 2019 compared to the same period in 2018 for SVC’s 320 comparable hotels: ADR decreased 0.7% to $127.39; occupancy decreased 0.9 percentage points to 74.2%; and RevPAR decreased 1.9% to $94.52.

  • Hotel RevPAR (all hotels):For the quarter ended September 30, 2019 compared to the same period in 2018 for SVC’s 328 hotels that were owned as of September 30, 2019: ADR decreased 2.2% to $127.82; occupancy was unchanged at 77.0%; and RevPAR decreased 2.2% to $98.42.

    For the nine months ended September 30, 2019 compared to the same period in 2018 for SVC’s 328 hotels that were owned as of September 30, 2019: ADR decreased 0.9% to $129.91; occupancy decreased 1.2 percentage points to 73.9%; and RevPAR decreased 2.5% to $96.00.

  • Hotel Coverage of Minimum Returns and Rents: For the quarter ended September 30, 2019, the aggregate coverage of SVC’s minimum returns or rents decreased to 0.90x from 1.07x for the quarter ended September 30, 2018.

    For the nine months ended September 30, 2019, the aggregate coverage ratio of SVC’s minimum returns or rents decreased to 0.90x from 1.04x for the nine months ended September 30, 2018.

Hotel Managers and Tenants:

  • Marriott Agreements: As of September 30, 2019, 122 of SVC’s hotels were operated by subsidiaries of Marriott International, Inc. (Nasdaq: MAR), or Marriott, under three agreements. SVC’s Marriott No. 1 agreement includes 53 hotels and provides for annual minimum return payments to SVC of $71.7 million as of September 30, 2019 (approximately $17.9 million per quarter). During the three months ended September 30, 2019, SVC realized returns under its Marriott No. 1 agreement of $19.9 million, of which $2.0 million represents SVC’s share of hotel cash flows in excess of the minimum returns due to SVC for the period. Because there is no guarantee or security deposit for this agreement, the minimum returns SVC receives under this agreement are limited to available hotel cash flows after payment of hotel operating expenses and funding of an FF&E reserve. SVC’s Marriott No. 234 agreement includes 68 hotels and requires annual minimum returns to SVC of $109.0 million as of September 30, 2019 (approximately $27.3 million per quarter). During the three months ended September 30, 2019, SVC realized returns under its Marriott No. 234 agreement of $27.3 million. SVC’s Marriott No. 234 agreement is partially secured by a security deposit and a limited guaranty from Marriott; during the three months ended September 30, 2019, the available security deposit was replenished by $1.2 million from a share of hotel cash flows in excess of the minimum returns due to SVC during the period. As of September 30, 2019, the available security deposit from Marriott for the Marriott No. 234 agreement was $36.6 million and there was $30.7 million available under Marriott’s guaranty for up to 90% of the minimum returns due to SVC to cover future payment shortfalls if and after the available security deposit is depleted. SVC’s Marriott No. 5 agreement includes one resort hotel in Kauai, HI which is leased to Marriott on a full recourse basis. The contractual rent due to SVC for this hotel for the three months ended September 30, 2019 of $2.6 million was paid to SVC.
  • IHG Agreement: As of September 30, 2019, 102 of SVC’s hotels were operated by subsidiaries of IHG under one agreement requiring annual minimum returns and rents to SVC of $207.4 million as of September 30, 2019 (approximately $51.9 million per quarter). During the three months ended September 30, 2019, SVC realized returns and rents under its IHG agreement of $51.9 million. SVC’s IHG agreement is partially secured by a security deposit. During the three months ended September 30, 2019, SVC reduced the available security deposit by $2.4 million to cover shortfalls in hotel cash flows available to pay the minimum returns and rents due to SVC during the period. As of September 30, 2019, the available IHG security deposit which SVC held to pay future payment shortfalls was $85.7 million.
  • Sonesta Agreement: As of September 30, 2019, 51 of SVC’s hotels were operated under a management agreement with Sonesta International Hotels Corporation, or Sonesta, requiring annual minimum returns of $131.2 million as of September 30, 2019 (approximately $32.8 million per quarter). During the three months ended September 30, 2019, SVC realized returns under its Sonesta agreement of $15.6 million. Because there is no guarantee or security deposit for this agreement, the minimum returns SVC receives under this agreement are limited to available hotel cash flows after payment of hotel operating expenses including management and related fees.
  • Wyndham Agreement: As of September 30, 2019, 22 of SVC’s hotels were operated under a management agreement with subsidiaries of Wyndham Hotels & Resorts, Inc. (NYSE: WH), or Wyndham, requiring annual minimum returns of $28.0 million as of September 30, 2019 (approximately $7.0 million per quarter). As previously announced, SVC is exiting its relationship with Wyndham and expects to sell or rebrand all 22 hotels managed by Wyndham. SVC amended its agreement with Wyndham in October 2019 whereby the term of the management agreement will expire on September 30, 2020 unless sooner terminated by SVC with respect to any hotels that are sold or rebranded. As of September 30, 2019, Wyndham was paying 85% of the annual minimum returns due to SVC to avoid a default. Under the amendment, Wyndham will pay to SVC all available cash flows of the hotels after payment of hotel operating expenses, and Wyndham will not be entitled to any base management fees for the remainder of the agreement term.

    On November 1, 2019, SVC rebranded two full-service hotels previously managed by Wyndham in Chicago, IL and Irvine, CA to the Sonesta brands under a short term agreement with Sonesta that expires on December 31, 2020. SVC currently leases 48 vacation units in the Chicago hotel to a subsidiary of Wyndham Destinations, Inc. (NYSE: WYND), or Destinations, which requires annual minimum rent of $1.5 million (approximately $0.4 million per quarter). SVC amended this lease so the term of the lease expires on March 31, 2020, at which time Destinations will vacate the leased space.

  • Other Hotel Agreements: As of September 30, 2019, SVC’s remaining 31 hotels were managed under two agreements: one management agreement with a subsidiary of Hyatt Hotels Corporation (NYSE: H), or Hyatt, for 22 hotels requiring annual minimum returns of $22.0 million (approximately $5.5 million per quarter); and one management agreement with a subsidiary of Radisson Hospitality, Inc., or Radisson, for nine hotels, requiring annual minimum returns of $20.4 million (approximately $5.1 million per quarter); minimum returns and rents due to SVC are partially guaranteed under the Hyatt and Radisson agreements.

Net Lease Portfolio:

As of September 30, 2019, SVC owned 946 net lease service-oriented retail properties with 17.6 million square feet requiring annual minimum rent of $418.6 million which represented 41% of SVC’s total annual minimum returns and rents. The portfolio was 98% leased by 279 tenants with a weighted (by annual minimum rent) average lease term of 11.3 years operating under 163 brands in 23 distinct industries. As of the quarter ended September 30, 2019, the aggregate coverage of SVC’s net lease portfolio’s minimum rent was 2.27x. TravelCenters of America Inc. (Nasdaq: TA), or TA, is SVC’s largest tenant. As of September 30, 2019, SVC leased to TA a total of 179 travel centers under five leases that expire between 2029 and 2035 and require annual minimum rents of $246.1 million.

Conference Call:

At 10:00 a.m. Eastern Time this morning, John Murray, Chief Executive Officer, Brian Donley, Chief Financial Officer, and Todd Hargreaves, Vice President, will host a conference call to discuss SVC’s third quarter 2019 financial results. The conference call telephone number is (877) 329-3720. Participants calling from outside the United States and Canada should dial (412) 317-5434. No pass code is necessary to access the call from either number. Participants should dial in about 15 minutes prior to the scheduled start of the call. A replay of the conference call will be available through Friday, November 15, 2019. To access the replay, dial (412) 317-0088. The replay pass code is 10134938.

A live audio webcast of the conference call will also be available in a listen-only mode on SVC’s website, www.svcreit.com. Participants wanting to access the webcast should visit SVC’s website about five minutes before the call. The archived webcast will be available for replay on SVC’s website for about one week after the call. The transcription, recording and retransmission in any way of SVC’s third quarter conference call is strictly prohibited without the prior written consent of SVC.

Supplemental Data:

A copy of SVC’s Third Quarter 2019 Supplemental Operating and Financial Data is available for download at SVC’s website, www.svcreit.com. SVC’s website is not incorporated as part of this press release.

Service Properties Trust (formerly known as Hospitality Properties Trust) is a real estate investment trust, or REIT, which owns a diverse portfolio of hotels and net lease service and necessity-based retail properties across the United States and in Puerto Rico and Canada with 185 distinct brands across 24 industries. SVC’s properties are primarily operated under long term management or lease agreements. SVC is managed by the operating subsidiary of RMR Inc. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, Massachusetts.

Non-GAAP Financial Measures and Certain Definitions:

SVC presents certain “non-GAAP financial measures” within the meaning of applicable Securities and Exchange Commission, or SEC, rules, including EBITDA, EBITDAre, Adjusted EBITDAre, FFO and Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income as indicators of SVC’s operating performance or as measures of SVC’s liquidity. These measures should be considered in conjunction with net income as presented in SVC’s condensed consolidated statements of income. SVC considers these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income. SVC believes these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of SVC’s operating performance between periods and with other REITs.

Please see the pages attached hereto for a more detailed statement of SVC’s operating results and financial condition and for an explanation of SVC’s calculation of FFO and Normalized FFO, EBITDA, EBITDAre and Adjusted EBITDAre and a reconciliation of those amounts to amounts determined in accordance with GAAP.

Comparable Hotels Data:

SVC presents RevPAR, ADR and occupancy for the periods presented on a comparable basis to facilitate comparisons between periods. SVC generally defines comparable hotels as those that were owned by it and were open and operating for the entire periods being compared. For the three months ended September 30, 2019 and 2018, SVC excluded six hotels from its comparable results. Three of these hotels were not owned for the entire periods and three were closed for major renovations during part of the periods presented. For the nine months ended September 30, 2019 and 2018, SVC excluded eight hotels from its comparable results. Five of these hotels were not owned for the entire periods and three were closed for major renovations during part of the periods presented.

For the nine months ended September 30, 2019 and 2018, SVC excluded eight hotels from its comparable results. Five of these hotels were not owned for the entire period and three were closed for a major renovation during part of the periods presented.

Minimum Rent and Return Coverage:

Hotel coverage is calculated as total hotel revenues minus all hotel expenses and FF&E reserve escrows which are not subordinated to minimum returns due to SVC divided by the minimum returns or rents due to SVC.

SVC defines net lease coverage as annual property level adjusted earnings before interest, taxes, depreciation, amortization and rent, or EBITDAR, divided by the annual minimum rent due to SVC weighted by the minimum rent of the property to total minimum rents of the net lease portfolio. The annual property level adjusted EBITDAR is determined based on the most recent operating statements, if any, furnished by the tenant. Properties that do not report operating information are excluded from the coverage calculations.

SERVICE PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

2019

 

2018

 

2019

 

2018

Revenues:

 

 

 

 

 

 

 

 

Hotel operating revenues (1)

 

$

525,290

 

 

$

520,618

 

 

$

1,521,368

 

 

$

1,494,283

 

Rental income (2)

 

73,619

 

 

81,322

 

 

210,509

 

 

245,543

 

FF&E reserve income (3)

 

863

 

 

1,213

 

 

3,365

 

 

3,911

 

Total revenues

 

599,772

 

 

603,153

 

 

1,735,242

 

 

1,743,737

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Hotel operating expenses (1)

 

377,895

 

 

365,526

 

 

1,076,011

 

 

1,052,121

 

Other operating expenses

 

1,707

 

 

1,468

 

 

4,419

 

 

3,936

 

Depreciation and amortization

 

103,160

 

 

101,007

 

 

301,721

 

 

300,308

 

General and administrative (4)

 

12,464

 

 

13,425

 

 

36,906

 

 

38,280

 

Total expenses

 

495,226

 

 

481,426

 

 

1,419,057

 

 

1,394,645

 

 

 

 

 

 

 

 

 

 

Gain on sale of real estate (5)

 

 

 

 

 

159,535

 

 

 

Dividend income

 

 

 

626

 

 

1,752

 

 

1,878

 

Unrealized gains and (losses) on equity securities, net (6)

 

(3,950

)

 

43,453

 

 

(43,761

)

 

89,348

 

Interest income

 

688

 

 

478

 

 

1,774

 

 

1,093

 

Interest expense (including amortization of debt issuance costs and debt discounts and premiums of $2,689, $2,570, $7,829 and $7,607, respectively)

 

(52,375

)

 

(49,308

)

 

(151,742

)

 

(145,589

)

Loss on early extinguishment of debt (7)

 

(8,451

)

 

 

 

(8,451

)

 

(160

)

Income before income taxes and equity in earnings of an investee

 

40,458

 

 

116,976

 

 

275,292

 

 

295,662

 

Income tax expense

 

(467

)

 

(707

)

 

(1,266

)

 

(1,949

)

Equity in earnings of an investee

 

83

 

 

830

 

 

617

 

 

881

 

Net income

 

$

40,074

 

 

$

117,099

 

 

$

274,643

 

 

$

294,594

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

164,321

 

 

164,232

 

 

164,294

 

 

164,212

 

Weighted average common shares outstanding (diluted)

 

164,348

 

 

164,274

 

 

164,332

 

 

164,242

 

 

 

 

 

 

 

 

 

 

Net income per common share (basic and diluted)

 

$

0.24

 

 

$

0.71

 

 

$

1.67

 

 

$

1.79

 

See Notes on pages 9 and 10

SERVICE PROPERTIES TRUST

RECONCILIATIONS OF FUNDS FROM OPERATIONS,

NORMALIZED FUNDS FROM OPERATIONS, EBITDA, EBITDAre AND ADJUSTED EBITDAre

(amounts in thousands, except share data)

(Unaudited)

   

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2019

 

2018

 

2019

 

2018

Calculation of FFO and Normalized FFO: (8)

 

 

 

 

 

 

 

Net income

$

40,074

 

 

$

117,099

 

 

$

274,643

 

 

$

294,594

 

Add (Less):

Depreciation and amortization

103,160

 

 

101,007

 

 

301,721

 

 

300,308

 

 

Gain on sale of real estate (5)

 

 

 

 

(159,535

)

 

 

 

Unrealized (gains) and losses on equity securities, net (6)

3,950

 

 

(43,453

)

 

43,761

 

 

(89,348

)

FFO

 

147,184

 

 

174,653

 

 

460,590

 

 

505,554

 

Add:

Loss on early extinguishment of debt (7)

8,451

 

 

 

 

8,451

 

 

160

 

Normalized FFO

 

$

155,635

 

 

$

174,653

 

 

$

469,041

 

 

$

505,714

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

164,321

 

 

164,232

 

 

164,294

 

 

164,212

 

Weighted average common shares outstanding (diluted)

164,348

 

 

164,274

 

 

164,332

 

 

164,242

 

 

 

 

 

 

 

 

 

 

Basic and diluted per common share amounts:

 

 

 

 

 

 

 

 

FFO

$

0.90

 

 

$

1.06

 

 

$

2.80

 

 

$

3.08

 

 

Normalized FFO

$

0.95

 

 

$

1.06

 

 

$

2.85

 

 

$

3.08

 

 

Distributions declared per share

$

0.54

 

 

$

0.53

 

 

$

1.61

 

 

$

1.58

 

Contacts

Kristin Brown, Director, Investor Relations

(617) 796-8232

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