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Service Properties Trust Announces Third Quarter 2019 Results

November 8, 2019 7:00 AM

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:

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 Managers and Tenants:

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

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

Calculation of EBITDA, EBITDAre and Adjusted EBITDAre: (9)

Net income

$

40,074

$

117,099

$

274,643

$

294,594

Add (Less):

Interest expense

52,375

49,308

151,742

145,589

Income tax expense

467

707

1,266

1,949

Depreciation and amortization

103,160

101,007

301,721

300,308

EBITDA

196,076

268,121

729,372

742,440

Less:

Gain on sale of real estate (5)

—

—

(159,535

)

—

EBITDAre

196,076

268,121

569,837

742,440

Add (Less):

General and administrative expense paid in common shares (10)

1,068

1,008

2,369

2,278

Loss on early extinguishment of debt (7)

8,451

—

8,451

160

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

3,950

(43,453

)

43,761

(89,348

)

Adjusted EBITDAre

$

209,545

$

225,676

$

624,418

$

655,530

See Notes on pages 9 and 10

  1. As of September 30, 2019, SVC owned 328 hotels; 326 of these hotels were managed by hotel operating companies and two hotels were leased to hotel operating companies. As of September 30, 2019, SVC also owned 946 net lease properties. SVC’s condensed consolidated statements of income include hotel operating revenues and expenses of managed hotels and rental income and other operating expenses from its leased hotels and net lease properties. Certain of SVC's managed hotels had net operating results that were, in the aggregate, $19,631 and $9,216 less than the minimum returns due to SVC for the three months ended September 30, 2019 and 2018, respectively, and $54,112 and $31,030 less than the minimum returns due to SVC for the nine months ended September 30, 2019 and 2018, respectively. When managers of these hotels are required to fund the shortfalls under the terms of SVC’s management agreements or their guarantees, SVC reflects such fundings (including security deposit applications) in its condensed consolidated statements of income as a reduction of hotel operating expenses. The reduction to hotel operating expenses was $3,630 and $299 for the three months ended September 30, 2019 and 2018, respectively, and $17,166 and $2,377 for the nine months ended September 30, 2019 and 2018, respectively. When SVC reduces the amounts of the security deposit it holds for any of its operating agreements for payment deficiencies, it does not result in additional cash flows to SVC of the deficiency amounts, but reduces the refunds due to the respective tenants or managers who have provided SVC with these deposits upon expiration of the applicable operating agreement. The security deposits are non-interest bearing and are not held in escrow. SVC had shortfalls at certain of its managed hotel portfolios not funded by the managers of these hotels under the terms of its management agreements of $17,758 and $9,818 for the three months ended September 30, 2019 and 2018, respectively, and $41,555 and $28,653 for the nine months ended September 30, 2019 and 2018, respectively, which represent the unguaranteed portions of SVC's minimum returns from its Sonesta and Wyndham agreements. Certain of SVC’s managed hotel portfolios had net operating results that were, in the aggregate, $9,076 and $21,321 more than the minimum returns due to SVC for the three months ended September 30, 2019 and 2018, respectively, and $16,966 and $47,901 more than the minimum returns due to SVC for the nine months ended September 30, 2019 and 2018, respectively. Certain of SVC's guarantees and its security deposits may be replenished by a share of future cash flows from the applicable hotel operations in excess of the minimum returns due to SVC pursuant to the terms of the applicable agreements. When SVC's guarantees and security deposits are replenished by cash flows from hotel operations, SVC reflects such replenishments in its condensed consolidated statements of income as an increase to hotel operating expenses. SVC had $3,631 and $5,204 of guaranty and security deposit replenishments for the three months ended September 30, 2019 and 2018, respectively, and $3,910 and $14,299 of guaranty and security deposit replenishments for the nine months ended September 30, 2019 and 2018, respectively.
  2. SVC reduced rental income by $3,046 and $7,368 in the three and nine months ended September 30, 2019, respectively, and increased rental income by $3,136 and $9,359 for the three and nine months ended September 30, 2018, respectively, to record scheduled rent changes under certain of SVC’s leases, the deferred rent obligations under SVC’s leases with TA and the estimated future payments to SVC under its leases with TA for the cost of removing underground storage tanks on a straight line basis.
  3. Various percentages of total sales at certain of SVC’s hotels are escrowed as reserves for future renovations or refurbishment, or FF&E reserve escrows. SVC owns all the FF&E reserve escrows for its hotels. SVC reports deposits by its tenants into the escrow accounts under its hotel leases as FF&E reserve income. SVC does not report the amounts which are escrowed as FF&E reserves for its managed hotels as FF&E reserve income.
  4. Incentive fees under SVC’s business management agreement with The RMR Group LLC are payable after the end of each calendar year, are calculated based on common share total return, as defined, and are included in general and administrative expense in SVC’s condensed consolidated statements of income. In calculating net income in accordance with GAAP, SVC recognizes estimated business management incentive fee expense, if any, in the first, second and third quarters. Although SVC recognizes this expense, if any, in the first, second and third quarters for purposes of calculating net income, SVC does not include these amounts in the calculation of Normalized FFO or Adjusted EBITDAre until the fourth quarter, which is when the business management incentive fee expense amount for the year, if any, is determined. No estimated business management incentive fee expense was recorded for the three and nine months ended September 30, 2019 or 2018.
  5. SVC recorded a $159,535 gain on sale of real estate during the three months ended March 31, 2019 in connection with the sales of 20 travel centers.
  6. Unrealized gains and (losses) on equity securities, net represent the adjustment required to adjust the carrying value of SVC's investments in RMR Inc. and TA common shares to their fair value. SVC sold its shares in RMR Inc. on July 1, 2019.
  7. SVC recorded a loss of $8,451 on early extinguishment of debt in the three months ended September 30, 2019 related to the termination of a term loan commitment SVC arranged in connection with the SMTA transaction. SVC also recorded a loss of $160 on early extinguishment of debt in the three months ended June 30, 2018 in connection with amending its revolving credit facility and term loan.
  8. SVC calculates funds from operations, or FFO, and Normalized FFO as shown above. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, or Nareit, which is net income, calculated in accordance with GAAP, excluding any gain or loss on sale of properties and loss on impairment of real estate assets, if any, plus real estate depreciation and amortization, less any unrealized gains and losses on equity securities, as well as certain other adjustments currently not applicable to SVC. In calculating Normalized FFO, SVC adjusts for the item shown above and includes business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of SVC’s core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year. FFO and Normalized FFO are among the factors considered by SVC’s Board of Trustees when determining the amount of distributions to its shareholders. Other factors include, but are not limited to, requirements to maintain SVC’s qualification for taxation as a REIT, limitations in its credit agreement and public debt covenants, the availability to SVC of debt and equity capital, SVC's distribution rate as a percentage of the trading price of its common shares, or dividend yield, and the dividend yield of other REITs, SVC’s expectation of its future capital requirements and operating performance, and SVC’s expected needs for and availability of cash to pay its obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than SVC does.
  9. SVC calculates earnings before interest, taxes, depreciation and amortization, or EBITDA, EBITDA for real estate, or EBITDAre, and Adjusted EBITDAre as shown above. EBITDAre is calculated on the basis defined by Nareit which is EBITDA, excluding gains and losses on the sale of real estate, loss on impairment of real estate assets, if any, as well as certain other adjustments currently not applicable to SVC. In calculating Adjusted EBITDAre, SVC adjusts for the items shown above and includes business management incentive fees only in the fourth quarter versus the quarter when they are recognized as an expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of SVC’s core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year. Other real estate companies and REITs may calculate EBITDA, EBITDAre and Adjusted EBITDAre differently than SVC does.
  10. Amounts represent the equity compensation for SVC’s trustees, its officers and certain other employees of SVC’s manager.

SERVICE PROPERTIES TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(Unaudited)

September 30,

December 31,

2019

2018

ASSETS

Real estate properties:

Land

$

2,062,776

$

1,626,239

Buildings, improvements and equipment

9,237,760

7,896,734

Total real estate properties, gross

11,300,536

9,522,973

Accumulated depreciation

(3,086,684

)

(2,973,384

)

Total real estate properties, net

8,213,852

6,549,589

Acquired real estate leases and other intangibles

392,673

105,749

Assets held for sale

604,989

144,008

Cash and cash equivalents

16,990

25,966

Restricted cash

53,519

50,037

Due from related persons

72,587

91,212

Other assets, net

160,893

210,518

Total assets

$

9,515,503

$

7,177,079

LIABILITIES AND SHAREHOLDERS’ EQUITY

Unsecured revolving credit facility

$

790,000

$

177,000

Unsecured term loan, net

397,740

397,292

Senior unsecured notes, net

5,284,933

3,598,295

Security deposits

122,763

132,816

Accounts payable and other liabilities

292,161

211,332

Due to related persons

18,920

62,913

Total liabilities

6,906,517

4,579,648

Commitments and contingencies

Shareholders’ equity:

Common shares of beneficial interest, $.01 par value; 200,000,000 shares authorized; 164,565,303 and 164,441,709 shares issued and outstanding, respectively

1,646

1,644

Additional paid in capital

4,547,055

4,545,481

Cumulative other comprehensive loss

(175

)

(266

)

Cumulative net income available for common shareholders

3,506,538

3,231,895

Cumulative common distributions

(5,446,078

)

(5,181,323

)

Total shareholders’ equity

2,608,986

2,597,431

Total liabilities and shareholders’ equity

$

9,515,503

$

7,177,079

Warning Concerning Forward-Looking Statements

This press release contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever SVC uses words such as "believe", "expect", "anticipate", "intend", "plan", "estimate", "will", "may" and negatives or derivatives of these or similar expressions, SVC is making forward-looking statements. These forward-looking statements are based upon SVC's present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Actual results may differ materially from those contained in or implied by SVC's forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond SVC's control. For example:

The information contained in SVC's filings with the SEC, including under the caption "Risk Factors" in SVC's periodic reports, or incorporated therein, identifies other important factors that could cause differences from SVC's forward-looking statements. SVC's filings with the SEC are available on the SEC's website at www.sec.gov.

You should not place undue reliance upon forward-looking statements.

Except as required by law, SVC does not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.

A Maryland Real Estate Investment Trust with transferable shares of beneficial interest listed on the Nasdaq.
No shareholder, Trustee or officer is personally liable for any act or obligation of the Trust.

Kristin Brown, Director, Investor Relations

(617) 796-8232

Source: Service Properties Trust

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