Service Properties Trust ((SVC)) has held its Q2 earnings call. Read on for the main highlights of the call.
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Service Properties Trust’s recent earnings call revealed a mixed performance, highlighting both strategic achievements and pressing challenges. The company reported significant progress in hotel dispositions and positive trends in Revenue per Available Room (RevPAR), yet faced hurdles such as increased interest expenses, declining EBITDA, and issues with debt covenants.
Significant Progress in Hotel Disposition
Service Properties Trust has made notable strides in its hotel disposition strategy, having sold eight hotels for $46 million. Furthermore, the company has received nonrefundable deposits for 111 of the 114 Sonesta hotels, amounting to $900 million, with the transaction expected to close by the end of the year.
Positive RevPAR Performance
The company reported a 40 basis point increase in RevPAR year-over-year, outperforming the broader industry by 90 basis points. This positive trend underscores the company’s effective revenue management strategies.
Net Lease Portfolio Expansion
Service Properties Trust has expanded its net lease portfolio by acquiring or agreeing to acquire 20 retail properties for $55 million. The focus remains on e-commerce-resistant sectors, which are expected to provide stable returns.
Strong Retained Hotel Portfolio Performance
The retained hotel portfolio, consisting of 84 hotels, demonstrated strong performance with a 150 basis point increase in RevPAR year-over-year, indicating robust demand and effective management.
Decline in Hotel EBITDA
Despite positive RevPAR trends, hotel-level EBITDA declined due to elevated labor costs and inflationary pressures, compounded by a $2.4 million negative impact from ongoing renovations.
Debt Covenant Concerns
The company faces challenges with its debt service coverage covenant, which is slightly below the required level at 1.49x. This has led to a full draw on the $650 million credit facility, highlighting liquidity management concerns.
Interest Expense Increase
Interest expenses have risen by $8.8 million year-over-year, adversely affecting the company’s overall financial results and highlighting the impact of rising interest rates on operational costs.
Lower Normalized FFO
Service Properties Trust reported a decrease in normalized Funds from Operations (FFO) to $57.6 million or $0.35 per share, down from $0.45 per share in the previous year, reflecting the financial pressures faced during the quarter.
Forward-Looking Guidance
Looking ahead, Service Properties Trust expects to close on the sale of 122 hotels, generating gross proceeds of $966 million. The company projects a RevPAR of $98 to $101 for the third quarter and adjusted hotel EBITDA between $54 million and $58 million. Additionally, the net lease portfolio remains robust, with a 97% lease rate and a weighted average lease term of 7.6 years. Capital expenditures are expected to decrease to $150 million in 2026, down from $250 million in 2025, as part of their strategy to enhance EBITDA growth and overall value.
In summary, Service Properties Trust’s earnings call highlighted a balanced mix of achievements and challenges. While strategic hotel dispositions and positive RevPAR trends are promising, increased interest expenses and debt covenant issues pose significant concerns. The company’s forward-looking guidance suggests a focus on maintaining robust operational performance and enhancing shareholder value.