Service Properties Trust Earnings Call: Mixed Outlook

Service Properties Trust ((SVC)) has held its Q1 earnings call. Read on for the main highlights of the call.

The recent earnings call for Service Properties Trust painted a mixed picture of the company’s current standing and future prospects. While there were notable achievements such as RevPAR growth and a successful strategy for asset dispositions, challenges like declines in adjusted hotel EBITDA and RevPAR softening were also highlighted. The overall sentiment from the call suggests a neutral outlook for the company moving forward.

Comparable RevPAR Growth

The earnings call revealed that Service Properties Trust experienced a 2.6% year-over-year growth in RevPAR within its lodging portfolio. This growth outpaced the industry by 40 basis points, despite revenue displacement due to ongoing renovation activities. This indicates a strong performance in comparison to the broader market.

Select Service Portfolio Performance

The select service portfolio showed impressive results with a 10.6% increase in RevPAR year-over-year. This growth was driven by a 15% rise in occupancy and a 2.7% improvement in ADR at recently renovated Hyatt Place hotels, showcasing the positive impact of strategic renovations.

Successful Hotel Disposition Strategy

Service Properties Trust has outlined a plan to sell 125 hotels by 2025, aiming to generate approximately $1.1 billion. This strategy applies an 18x multiple on hotel EBITDA of $60 million over the trailing 12 months, reflecting a focused approach to asset management.

Net Lease Portfolio Resilience

The company’s net lease assets demonstrated resilience, with nearly 98% of properties leased and a weighted average lease term of eight years. These assets provided stable cash flows, generating annual minimum rents of $381 million.

Net Lease Property Acquisitions

Service Properties Trust has acquired or entered agreements to acquire nine net lease properties for $33 million. These properties boast a weighted average lease term of 16 years and average cash cap rates of 7.3%, indicating a strategic expansion of their portfolio.

Decline in Adjusted Hotel EBITDA

A notable challenge for the company was a 20.5% decline in adjusted hotel EBITDA year-over-year. This decline was primarily attributed to hotel renovations, increases in labor costs, and higher utility expenses, highlighting areas of financial pressure.

RevPAR Softening

As the quarter progressed, RevPAR softened due to a reduction in government and inbound international travel, coupled with airlines reducing flight commitments. This trend poses a challenge for maintaining growth in the lodging sector.

Extended Stay Portfolio Challenges

The extended stay portfolio faced challenges with RevPAR remaining flat. A modest increase in ADR was offset by a decline in occupancy, significantly impacted by renovation activities, indicating a need for strategic adjustments.

Interest Expense Decrease Impact

The financial results were impacted by a $10.1 million decrease in interest expense, contributing to a decline in normalized FFO to $0.07 per share from $0.13 per share in the prior year quarter. This reflects the financial adjustments the company is navigating.

Forward-Looking Guidance

Looking ahead, Service Properties Trust provided guidance for the upcoming quarters. The company expects to continue its hotel disposition strategy, projecting proceeds of $1.1 billion from the sale of 123 hotels in 2025. Additionally, they anticipate a shift in their investment composition towards 54% triple net lease and 46% lodging assets. For the second quarter of 2025, they project RevPAR between $99 and $102 and adjusted hotel EBITDA between $69 million and $74 million.

In conclusion, the earnings call for Service Properties Trust highlighted a balanced mix of achievements and challenges. While there are areas of growth and strategic initiatives underway, the company also faces financial pressures and market uncertainties. The neutral sentiment from the call reflects these dynamics, with the company poised for both opportunities and challenges in the coming quarters.