Service Properties Trust [SVC] Conference call transcript for 2023 q1
2023-05-09 16:01:10
Fiscal: 2023 q1
Operator: Good morning, and welcome to the Service Properties Trust First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Stephen Colbert, Director of Investor Relations. Please go ahead.
Stephen Colbert: Good morning. Joining me on today's call are Todd Hargreaves, President and Chief Investment Officer; and Brian Donley, Treasurer and Chief Financial Officer. Today's call includes a presentation by management, followed by a question-and-answer session with analysts. Please note that the recording retransmission and transcription of today's conference call is prohibited without the prior written consent of SVC. I'd like to point out that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SVC's present beliefs and expectations as of today, May 9, 2023. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC, which can be accessed from our website at svcreit.com or the SVC website. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations, or normalized FFO and adjusted EBITDAre. Reconciliations of the non-GAAP financial measures to net income, as well as components to calculate AFFO are available in our enhanced earnings released presentation, which can be found on our website. We believe this combined presentation will be helpful for analysts and investors to efficiently digest information about our company and financial results. Finally, on today's call, we will be discussing the previously announced terms of our agreement with BP that will be effective upon the completion of their acquisition of TravelCenters of America. TA's special shareholder meeting to vote on the transaction is scheduled for tomorrow, May 10. And we will not be taking questions on that merger. And with that, I'll turn the call over to Todd.
Todd Hargreaves: Thank you, Stephen and good morning. Last night SVC reported first quarter results, which reflect improvement in our hotel portfolio compared to the previous year quarter, a period that was significantly impacted by the Omicron variant, and lagging recovery in our Northern U.S. urban hotels, led by the strong performance in Fort Lauderdale, Hilton Head, New Orleans and Phoenix comparable hotel RevPAR increased by 22% versus the prior year period, with ADR up13.9% and occupancy increasing by 3.8 percentage points. This strong performance translated to a 251% increase in comparable hotel EBITDA over the same period last year. Our operators were successful and continuing to close the performance gap to the market as SVC's portfolio RevPAR growth exceeded the industry by 5.3 percentage points an indication that the initiatives of our primary operators Sonesta are leading to greater success and increased brand awareness. Our full service portfolio grew RevPAR by 30.6% through increased group demand and business transient travel, specifically Miami, Boston and Toronto, and events such as the JPMorgan Healthcare Conference in San Francisco, and the NCAA Tournament in Salt Lake City, Utah. Our hotels located in urban markets are the greatest year-over-year RevPAR increase at 38.9% while - the growth at our resort hotels was more moderate at 20%. Our select service portfolio continued to show top line improvement as well, with RevPAR increasing 27.2% year-over-year, led by occupancy gains that were 3.2 times greater than industry. Revenues were driven by increased transient business up 21.7% from both business travel and OTA and grew up 58.1%, largely driven by Super Bowl demand in February at our Phoenix properties. In our extended stay portfolio RevPAR increased 9% over the previous year quarter, led by our Sonesta Simply Suites portfolio which outpaced industry - midscale chain growth by 4.8%. Simply Suites a relatively new brand launched during the pandemic reported record ADR during the quarter and has quickly established itself as a preferred option for the mid-scale extended stay guest. While inflationary factors continue to negatively impact margins, we are seeing signs of moderation specifically on the labor front. Q1 contract labor expense per occupied room decreased by 6.6% from Q4, 2022 and Sonesta was able to reduce its contract labor employee headcount by 19%. However, as we enter the higher demand periods of the year in Q2 and Q3, we expect to see an uptick in contract labor although year-over-year comparison should improve. Our largest operator Sonesta remains our primary focus and portfolio initiatives have led to quantifiable improvements, including the stay more save more winter promotion as Sonesta as internal lead referral program is seeing substantial improvement in both leads and conversion rates. Together, these two programs generated $69.3 million of revenues during the quarter. Further, our hotels have benefited from more direct bookings on sonesta.com and less reliance on OTA channels, leading to a three percentage point year-over-year decline in OTA revenues as a percentage of total room revenue. Turning to our net lease portfolio, which represents 46% of SVC's portfolio by gross assets as of March 31, 2023 we owned 765 service oriented retail net leased properties, including our TravelCenters with 13.3 million square feet. Our net leased assets were 97% leased by 179 tenants, with a weighted average lease term of 9.4 years and operating under 139 brands and 21 distinct industries as of quarter end. Our aggregate net lease rents declined slightly in the quarter as a result of three AMC Theatres vacating and one Regal Cinema site surrendered as part of their previously announced bankruptcy. For AMC, we currently have eight open locations and for Regal we are still working through lease negotiations on the remaining five theatres. The aggregate coverage of our net lease portfolios minimum rents was 2.98 times on the trailing 12-month basis as of March 31, 2023, an increase versus the same period last year. For TA, our largest tenant site level coverage on a trailing 12-month basis was 2.67 times up from 2.29 times in the prior year period. We have 160,000 square feet of leases expiring in the remainder of 2023 where the tenant will not renew. These expirations represent $801,000 of annual revenue, or just 0.2% of our net lease rents. And we're evaluating the various options for these known vacates, which include releasing repurposing and potential disposition. Finally, the shareholder vote on the pending acquisition of TA by BP is scheduled for tomorrow, May 10. As we previously reported upon completion, SVC will receive $379.3 million in upfront funds, increased rents compared to the current TA leases, and enhanced investment grade credit quality for our core tenant. Before I turn it over to Brian, I want to acknowledge the recent publication of the RMR Group's annual sustainability report, which provides a comprehensive overview of our managers' commitment to long-term ESG goals. We are deeply committed to enhancing SVC's corporate sustainability practices and continue to advance initiatives that will position the company to thrive over the long-term. I will now turn the call over to Brian to discuss our financial results in more detail.
Brian Donley: Thank you, Todd and good morning. Starting with our consolidated financial results for the first quarter of 2023 normalized FFO was $37.1 million, or $0.23 per share, versus negative FFO of $0.02 per share in the prior year quarter. Adjusted EBITDAre was $116.8 million for this quarter, a 30% increase over the prior year. The major drivers impacting normalized FFO over the prior year quarter, included the improving performance of our hotel portfolio, which generated an additional $25 million of hotel EBITDA or 277% increase over the prior year quarter. The repayment of amounts drawn on our revolving credit facility which was fully drawn as of March 31, 2022 and the repayment of $500 million of senior notes in the second quarter of 2022 resulted in a $10.8 million decrease in interest expense. Rental income declined $1.9 million this quarter compared to the prior year, as a result of unfavorable changes in our reserves for uncollectable rents, as well as the vacancy of four movie theatres, three AMC and one Regal Cinema. Turning to the performance of our hotel portfolio for our 219 comparable hotels this quarter RevPAR increased 22%, gross operating profit margin percentage increased by 373 basis points to 25.2% and gross operating profit increased by $27.8 million from the prior year period. Below the GOP line costs at our comfortable hotels increased $2.4 million from the prior year, driven by higher base management fees as a result of our top line growth. Our consolidated portfolio of 220 hotels generated hotel EBITDA of $35 million. By service level, the increase was driven primarily by improvement in our 48 full-service hotels, which generated $15.4 million of hotel EBITDA during the quarter compared to losses of $1 million in the prior year quarter. Our 111 extended stay hotels generated $14.5 million of hotel EBITDA during the quarter, a 36% increase over the prior year. Our 61 select service hotels improved generating hotel EBITDA of $5.2 million in the first quarter compared to a small loss during the prior year period. These first quarter results of our hotels were in line with the estimates we communicated during our fourth quarter 2022 earnings call. Looking ahead preliminary April 2023 RevPAR was $96.21 and we are currently projecting full quarter Q2 RevPAR of $97 million to $103 in hotel EBITDA in the $93 million to $103 million range. Turning to the balance sheet, in February, we successfully executed on a new five years $610.2 million secured financing with a 5.6% coupon and redeem our $500 million of 4.5% senior notes that were originally scheduled to mature in June. We are pleased with this transaction and believe it highlights the flexibility that we have going forward to address future debt maturities. We currently have $5.8 billion of fixed rate debt outstanding with a weighted average interest rate of 5.75%. Our next debt maturity is $350 million of senior notes maturing in March 2024. As of March 31, 2023, we had no amounts outstanding on our revolving credit facility which matures in July. We are well underway to recast the line and currently expect to complete the process by the end of the second quarter. Turning to investing activity, during the first quarter we sold 18 hotels for a total price of $157.8 million. We made $22 million of capital improvements in our properties during the first quarter, and we currently expect full year 2023 capital expenditures of $200 million to $250 million. The spend will be weighted to the back half of the year as we continue to move forward with renovations of our Hyatt portfolio as well as several Sonesta hotels. In April, we announced our regular comp quarterly common dividend of $0.20 per share, which we believe is well covered, representing a 46% normalized FFO annualized payout ratio and a trailing 12 months ended March 31, 2023. Our cash position as of today is over $200 million dollars and we expect the BP transaction will provide SVC $379.3 million of additional liquidity upon closing. That concludes our prepared remarks. We're ready to open the line up for questions.
Operator: [Operator Instructions] And the first question today comes from Bryan Maher with B. Riley. Please go ahead.
Operator: [Operator Instructions] The next question comes from Tyler Batory with Oppenheimer. Please go ahead.
Operator: This concludes our question-and-answer session. I'd like to turn the conference back over to Todd Hargreaves for any closing remarks.
Todd Hargreaves: Thank you, everyone for joining today's call and we appreciate your continued interest in SVC. Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
