Good morning, and welcome to the Service Properties Trust Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. I would now like to turn the conference call over to Stephen Colbert, Director of Investor Relations. Please go ahead.

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 written consent of SEC. I would 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, November 7, 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 or the SEC's 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 these non-GAAP financial measures to net income as well as components to calculate AFFO are available in our supplemental operating and financial data package which can be found on our website. And with that, I'll turn the call over to Todd.

Thank you, Stephen, and good morning. SVC's solid third quarter results reflect moderate top-line improvement in our hotel portfolio. As year-over-year, comparable RevPAR increased 0.8%, and comparable hotel EBITDA was generally flat, despite displacement from 12 active renovations during the quarter impacting performance. Top-line performance was led by Sonesta with an 11.9% gain in group revenue and a 17.6% gain in contract revenue, mitigating some of the softening demand we are experiencing at our leisure-oriented hotels. Our full-service portfolio continues to outperform our other service levels, driven by improvement at our urban hotels, as full-service RevPAR increased 2.5% year-over-year, and EBITDA increased by $2.4 million. RevPAR at our select-service portfolio declined 0.2% year-over-year, with occupancy gains of 0.8 percentage points, while RevPAR at our portfolio of extended-stay hotels decreased 1.3%. Moving to hotels under renovation, RevPAR at our select-service hotels increased 2.7%, and RevPAR at our extended-stay portfolio increased 0.7%, as 53 of our extended-stay hotels reported a positive index compared to 2022. There has been a notable shift in segmentation as Q3 transient revenues as a percentage of total hotel revenues declined from 78.1% to 75.4% from the previous year's quarter, while group increased from 15.5% to 17.2%, and contract revenues increased from 5.4% to 5.9%. The largest decrease in transient occurred in the full-service portfolio due to market-driven declines in San Francisco, Chicago, and New Orleans. Group revenues were led by our full-service segment, with gains at our Royal Sonesta Cambridge, Royal Sonesta Minneapolis, Sonesta Denver, and Crown Plaza Atlanta as a result of strong corporate group, as well as increased city-wide events. Our Sonesta full-service portfolio led the increase in contract-related business with new airline crew activity and increased rates for existing accounts at properties in Redondo Beach, San Jose, and Nashville. All of our hotel properties remain focused on steering bookings to their respective websites and direct sales channels to lower commissions, and OTA revenues as a percentage of total revenues decreased from 30.8% to 29.4% year-over-year. Business travel continues to trend positively as corporate negotiated revenue increased by 1.3% year-over-year, and SVC's portfolio is now at 76.1% of 2019 levels, from last quarter's index of 70.8%. The recovery has been led by small and mid-market accounts, while the larger national accounts have been slower to return. The gap between weekend and weekday occupancy is narrowing, and Sonesta's weekend occupancy outpaced weekday by 4.9 percentage points in September, down from a 5.8 percentage point gap in September 2022. Our largest operator, Sonesta, remains focused on increasing its brand awareness through its advertising and media campaigns, and the build-out of its loyalty program. Revenue from Sonesta's TravelPass program as a percentage of total revenue increased from 22.5% in Q3 2022 to 25.9% in Q3 2023, led by room nights, which increased by 15.1%, with ADR increasing 1.4%. Group pace improved across all our operators, led by Sonesta, which is 32.5% ahead of last year. Gains are widespread, with 85% of our full-service hotels reporting positive group pace, led by the Royal Sonesta in San Francisco, St. Louis, Houston, Washington, D.C., and the Sonesta in Nashville. Hotel operating expenses across our portfolio remain elevated and continue to pressure margins. Insurance premiums increased by $1.6 million, or 15% year-over-year, and an increase we expect will continue into Q4. On the labor front, our hotels are relying less on contract labor, shifting more labor in-house, which has resulted in contract labor per occupied room decreasing in each of the last four quarters. However, wages for in-house employees are increasing, and the portfolio experienced a 4% increase in total wages plus benefits on a cost per occupied room basis over the previous year's quarter. Turning to our net lease portfolio, which represents 45% of SVC's portfolio by investment, as of September 30, 2023, our 761 service-oriented retail net lease properties were 95.8% leased, with a weighted average lease term of 9.1 years. Our lease maturities are well-laddered with only 8% of our net lease minimum rents expiring prior to the end of 2026. The aggregate coverage of our net lease portfolio's minimum rents was 2.72 times on a trailing 12-month basis as of September 30, 2023. The decline sequentially from 2.94 times is largely driven by increased rents in our TA leases as a result of our amendments in May, and softer EBITDA reported by TA for Q3 2023. Importantly, TA is our largest tenant in the portfolio, and the rent payments are guaranteed by an investment-grade-rated subsidiary of BP. Rent coverage for our other retail net lease tenants improved to 3.68 times in Q3, up from 3.58 times in Q2 2023. Transaction activity during the quarter was relatively muted with no acquisitions and limited net lease dispositions. We continue to evaluate select acquisition opportunities, specifically full-service hotels in target markets, but remain disciplined in these volatile capital markets as we carefully consider how we allocate capital. While Brian will provide more detail on the balance sheet, I'd like to emphasize the strong position SVC is in to refinance our upcoming debt maturities during 2024 and 2025. Our hotel portfolio continues to demonstrate improved financial and operational performance, and our net lease portfolio provides dependable cash flows with 68% of annual minimum rents coming from an investment-grade-rated tenant BP, with over $1 billion of total liquidity and a large pool of highly valuable unencumbered assets, including all our travel centers leased to TA. We plan to be proactive in determining the most efficient and cost-effective solutions to address these maturities in the near future. I will now turn the call over to Brian to discuss our financial results in more detail.

Thank you, Todd, and good morning. Starting with our consolidated financial results for the third quarter of 2023, normalized FFO was $92.1 million or $0.56 per share versus $0.54 per share in the prior year quarter. Adjusted EBITDAre increased 1% year-over-year to $175.3 million. Earnings this quarter, as compared to the prior year quarter, benefited from $0.03 per share of additional interest income earned on our cash balances, and $0.02 per share related to an income tax benefit recorded, partially offset by a $0.03 per share decline in hotel results. Rental income increased by $3.5 million this quarter compared to the prior year, largely as a result of the full-quarter impact of our amended TA leases that were effective in May 2023. We are near the performance of our hotel portfolio for our 219 comparable hotels this quarter. RevPAR increased by 80 basis points, gross operating profit margin percentage declined by 160 basis points to 31.3%, and gross operating profits increased by $2.2 million from the prior year period. Below the GLP line, costs at our comparable hotels decreased $1.4 million from the prior year, driven by a reduction in real estate taxes offset by increased property insurance expense. Our 221 hotels generated hotel EBITDA of $75.5 million, a 1.6% decline from the prior year. By service level, hotel EBITDA year-over-year declined $2.3 million for our 111 extended stay hotels, and declined $900,000 for our 61 select service hotels, partially offset by a $2 million increase from our 48 full-service hotels. Turning to our expectations for Q4, preliminary October 2023 RevPAR was $96.62, and we're currently projecting full-quarter Q4 RevPAR of $76 to $79 with hotel EBITDA in the $45 to $49 million range. Please note the expected decline in hotel EBITDA sequentially is largely due to the seasonal patterns our hotel portfolio has historically seen as demand softens, typically beginning mid-November, and continues into the early winter months. Regarding our income tax provision, we recorded a tax benefit of $2.2 million in the third quarter of 2023. We expect this benefit to reverse in the fourth quarter and reaffirm our projection of full-year tax expense of $1.5 million. Turning to the balance sheet, we currently have $5.8 billion of fixed-rate debt outstanding with a weighted average interest rate of 5.2%. Our next debt maturity is $350 million of senior notes maturing in March 2024, followed by $825 million of senior notes maturing in October 2024. We're evaluating various options to address these maturities in the coming months, and we'll have to mitigate the impact of higher interest rates. Our real estate portfolio includes over $8.5 billion of unencumbered assets based on gross book value, including all our travel centers leased to TA, as well as a large diverse hotel portfolio we could look to for possible strategies to manage our debt maturities and the current rate environment. We currently have $432 million of cash and $650 million of undrawn credit facility capacity for total liquidity of over $1 billion. Turning to investing activity, during the third quarter, we had no acquisitions and sold two net lease properties for a total price of $3.7 million. We made $65 million of total capital improvements at our properties during the third quarter, and we expect to make capital expenditures of $65 to $75 million in the fourth quarter of 2023. We'll provide guidance on our plan in 2024 spend on our fourth-quarter earnings call. In October, we announced our regular quarterly common dividend of $0.20 per share which we believe is well covered, representing a 44% normalized FFO annualized payout ratio on the trailing 12 months ended September 30, 2023. That concludes our prepared remarks. We're ready to open the line for questions.

We will now start the question-and-answer session. The first question is from Bryan Maher with B. Riley Securities. Please proceed.

Great. Thank you. Good morning. Maybe sticking with CapEx for a minute since you just touched upon that, Brian. Can you give us a little color as to why it was slow getting off the ground in the first half of 2023? And the number you just threw out for the fourth quarter, I think $65 million to $75 million. Do you suspect that that's kind of a peak type of number? I mean, I know you said you'll give us color on 2024 in a couple of months, but certainly I wouldn't expect the run rate to stay at that level.

Good morning, Bryan. Thank you for the question. Yes, I mean, there were some delays in getting started on some of these projects, whether it be scoping, planning, or trying to avoid disruption. Yes, we've talked for the last couple of quarters about our high portfolio. That's been slow out of the game, but that's now fully underway. I do expect Q1, given how many highs are currently under renovation, to be elevated from a CapEx standpoint. We're also kicking off a bunch of renovations at various Sonesta hotels across multiple segments. Yes, so originally in 2023, we had guided $200 to $250 million of CapEx as sort of a preview, I think it's going to be in that range for 2024, as we do have a multi-year renovation plan going on. It'll be a little choppy quarter-to-quarter, because again, we like to obviously plan things to avoid as much disruption as we can, especially during the peak summer months. So there could be some bookend effect Q1 versus Q4.

Okay. Thanks for that. And suffice it to say, I would suspect that your acquisition appetite will be somewhat muted until you address the 2024s unless it's something that's just too good to turn down. Would that be a correct process?

Good morning, Bryan. That's an accurate statement. Our priority remains addressing our upcoming debt maturities. That being said, we continue to evaluate acquisition opportunities similar to what we bought in June with the Nautilus. But at the current time, we have nothing under purchase and sale agreement. We're underwriting a couple of transactions, but that said, it's unlikely we buy anything the rest of this calendar year. And as you know, we've bought one asset in the past three years and sold over a hundred hotels for a billion dollars in proceeds. So we have been net sellers, but we'll continue to optimistically evaluate transactions. But again, the priority is the upcoming maturities.

Okay. Just another couple of quick ones, and I'll turn it over to somebody else. Brian, when you look at the TA portfolio as a potential security for a fairly meaningful debt refinance. Can you give us any broad stroke thoughts on what the interest rate might be on something like that, given its high security with the BP leases?

It's a great question. And it's something we're studying very closely. There are a couple of different ways you could do it, whether it be property level debt, some sort of secured bond or some other bank debt that uses the portfolio as collateral. Some of our potential paths we have to look at where our bonds are trading and looking at relative spreads, and there's all sorts of different permutations we could look at. I would just say that the far end of the goalpost is where our unsecured debt bonds are trading, which is in the 10% range. We've done secured financing this year as low as 7%. Obviously, rates have moved since the first quarter of 2023. So we're somewhere in that ballpark between those goalposts is my best guess today.

Okay. Just lastly, if insurance rates continue to get ridiculously higher, given that you have so many unencumbered assets, do you ever get to the point where you just think about self-insuring?

No, I don't think that that's really an option for us at this point.

Okay. Thanks. That's all for me.

The next question comes from Tyler Batory with Oppenheimer. Please go ahead.

Good morning. This is Jonathan on for Tyler. Thanks for taking my questions. First one from me. Can you provide some additional color on October RevPAR and the Q4 guidance and understanding seasonality as a factor, but are you expecting more of the same demand trends in the fourth quarter, but with strong groups and kind of a slowing leisure environment?

Yes, it's a great question. Thank you. October is one of the stronger months in our hotel portfolio and continues sort of the summer trend before things start tapering off. A couple of the seasonal patterns with demand changes and sort of tempering of activity that we saw in the second half of Q3. I think that's a reasonable explanation for why our projection might be a little lower than what we achieved last year. So those same trends are continuing with leisure and different segmentations of group versus transient and that sort of thing.

Okay, great. Appreciate the color there. And then on the group business helpful commentary and the prepared remarks on where group is now, but can you remind us what percentage of your historical total mix is typically group? And then, looking ahead, any thoughts on the booking pace in 2024 and kind of a near-term sustainability of group strength that we've seen?

The group is probably where it is today is probably a little lower than it has been historically, but certainly, there has been a sizable shift in segmentation from where we saw in last year's quarter, which isn't surprising just given what we're seeing overall in the industry with just overall leisure transient decreasing. But yes, group pace going forward to 2024, we're seeing strong pace there as well. We're well ahead of 2022. We're not back. Most of our operators, specifically Sonesta, are not back to 2019 levels, but you're seeing a lot more booking happening in the quarter for the quarter. So those booking windows are changing a little bit.

Okay. And then last one for me, if I could, in terms of the Sonesta brand, can you talk a little bit about how it's resonating with consumers? How it's competing in the marketplace, what you're seeing in terms of RevPAR? And any uptick in the loyalty program usage there?

Sure, Jonathan. Now, that's a good question. Something we monitor very closely. Sonesta has been very focused on their advertising campaigns and their media campaigns to really get the brand name out there. We're seeing the metrics we track on the loyalty program in terms of the number of actual members in the loyalty program, but also percentage revenues that are booked through the loyalty program continue to increase year-over-year. They're not at the levels of some of the competing brands that are sometimes closer to 50% of total revenues booked through the loyalty program, so there is still a lot of room to grow there, but we are seeing, to answer your question, we are seeing it resonate more with consumers, the Sonesta brand. In terms of indexing, you need to look at it by service level. There are certain service levels and brands that Sonesta competes very effectively in. For example, our Royal Sonesta branded hotels are at 93% of 2019, our Sonesta hotels and resorts, which are other full-service hotels, are 92%, and our Sonesta Simply Suites are 89% of 2019. The area we've touched on on prior calls too is the Sonesta Select portfolio, which is very reliant on business travel, so it's a little bit of a market issue, but also just with business travel overall in this industry not returning to 2019 levels, but we acknowledge that it's also a shift in the brand to Sonesta Select, which has caused some of the lag in recovery there.

It's a small percentage of the portfolio.

The Sonesta Select was $8 million out of the total $75 million of EBITDA for the quarter, but again, something we're very focused on. We've sold some of the lower-performing Sonesta Select hotels in the past, but again, something we're very focused on improving.

Thank you very much. That's all for me.

Thanks, Jon.

The next question comes from Chris Crispo with HSBC. Please go ahead.

So, I see there's a lot of information in the presentation regarding the hotel portfolio, including geography-wise, market, and so on. Wondering if you could share the breakup like business versus leisure, both in terms of hotel portfolio and revenue, that would be great?

Sure. So to clarify, you're looking for the mix between business versus leisure?

Yes.

Sure. Historically, our portfolio has been very concentrated in more business relative to leisure. We've been anywhere from 75% to 80% of our demand has been from business. And obviously, that's been lagged in the recovery relative to leisure. Leisure was the area that really recovered and saw the double-digit RevPAR growth in 2021-2022. You're starting to see that shift now. You're starting to see some declines in leisure-related RevPAR and travel overall. There's been more outbound international travel than there has been inbound. So you are seeing the business travel in our portfolio pick up year-over-year, still not back to 2019 levels. Through what we've sold and acquired over the past few years, you're seeing that the shift more towards leisure, but we're still well above 50% in terms of business relative to leisure. But think over the next few years, you may see a shift at our portfolio more towards leisure relative to business.

My next question is, it would be great if you could share some color on the Sonesta franchising strategy and also the format which is having the most success or is the biggest focus for our franchise efforts. Additionally, it would be great if you could share an update on the Sonesta direct booking, that is, which is not through an OTA platform, because in 2022, it has increased to 24%, which is up from 18% in 2021. So any thoughts there, any recent color would be great?

Great. I think I got that all. So starting with the franchising effort, that's something the Sonesta franchising team is very focused on and where we expect the majority of the growth to occur at Sonesta. There is a lot of momentum in franchising hotels for Sonesta across all the different Sonesta brands, as well as the legacy Red Lion brands. It's a very competitive industry right now. There's not a lot of new construction happening, so a lot of it is conversions from other brands, but there's a lot of momentum there. Sonesta will typically put out a press release when they open a new franchise hotel as well, so that's something that is out there for the public. The brands, one of the benefits of Sonesta is they have a large family of brands all the way from the Red Lion economy hotels, all the way to upper upscale Royal Sonesta hotels, so they really have the ability to offer every brand out there. The brands that we own in our portfolio, they're very focused on, including the Sonesta Select, Sonesta, Extended Stay, Suites, as well as the Simply Suites. They also recently launched a new brand called Sonesta Essential, which is a Select Service hotel with a lighter F&B component that they've had a lot of success with, and that was one of the reasons they launched that brand is because they were getting feedback from a lot of their franchises that that's what they wanted to see. So there's been a lot of momentum there. Again, SVC owns 34% of the equity in Sonesta, so we're very interested in seeing them grow that brand and grow the franchising business. It helps not only with the value of that 34% for us, but just overall helps the brand recognition and the brand awareness across the portfolio, and there is a lot of room to grow, not just in the U.S., but internationally as well. In terms of the direct bookings and OTA, I'm not sure I followed the statistics you were quoting, but Sonesta's percentage of revenues that were booked through OTAs declined from 30% to 29% year-over-year for the quarter, so it did decrease. Some of that - a lot of that was due to lower ADRs and rates charged at some of our leisure-oriented hotels, so actual room nights were constant or may have increased even a little bit. OTAs, obviously, there's high commissions that you're paying. Anytime you use OTAs, you always prefer direct booking; you always prefer customers going to your website and booking there. But at the same time, OTAs can help that fill occupancy at our select-service hotels, especially mid-week occupancy. They're also helping fill occupancy at some of our extended-stay hotels, and you can sometimes get higher rates than you would at the longer-term extended stay when you're booking through OTAs for transient night revenues. So they can help as well, but for the most part, again, revenues declined year-over-year as a percentage of OTA, and direct bookings through the Sonesta website have generally stayed flat to slightly increased.

Great, thank you so much. Is it okay if I can squeeze in a couple more questions or else I'll join the queue?

Of course.

Perfect. Thank you so much. So this is again related to Sonesta. Is it possible for you to discuss the number of Sonesta TravelPass members we have? And any color you might provide regarding differences in terms of length of day or other details. Additionally, when do you expect the Red Lion family of hotels, Hello Reward Loyalty programs? Do we expect it to be unified into one program or not?

So Sonesta is a private company, so we can't share specific data on what you're asking, but in terms of the Red Lion brands, Sonesta is, as you know, Sonesta purchased Red Lion probably two years ago, so they are far along in the process of integrating those two companies that they have essentially been integrating, but you still have two different companies that have come together. So the idea long-term is to have one loyalty program, one app, one website, but right now, essentially, those teams are working together and the integration has occurred on both, specifically, kind of merging the management and franchise companies together.

Thank you so much. Thanks a lot.

Thank you everyone for joining today's call. We appreciate your continued interest in SVC and hope to see many of you next week in Los Angeles for the NAREIT Conference. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.