Good morning, and welcome to the Service Properties Trust Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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.

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 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, February 29, 2024. 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 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 fourth quarter results reflect themes we are witnessing across the lodging industry as demand has moderated and high operating costs are impacting profits. While we expect market softness to continue during the first half of 2024, we are optimistic that the back half of the year should improve due to macroeconomic factors and improved business and inbound international travel. We are using this time to invest capital into our hotels, which we expect will lead to improved performance and an attractive return on investment. Now on to our results. During the quarter, we experienced a moderate top-line decline in our hotel portfolio as year-over-year comparable ADR growth was offset by reduced occupancy leading to a RevPAR decline of 2.2% and reduced hotel EBITDA, largely due to disruption from 23 active renovations during the quarter. Excluding the hotels experiencing renovation impacts, RevPAR was flat, decreasing by 30 basis points from the previous year quarter, while total revenues increased by $7.1 million, led by F&B sales. We expect the pace of renovations to remain elevated during 2024. Our portfolio of full-service hotels gained 40 basis points of RevPAR over the previous year quarter, led by gains in our group and contract segments, which were up 6.2% and 10.2% year-over-year, respectively. Strong group business was driven by corporate demand at our hotels in Cambridge, Las Vegas, and San Francisco, while contract revenues fueled sizable ADR increases at our Sonesta branded hotels in Redondo Beach, San Juan, and Kauai. The notable $7.1 million of increased revenues mentioned earlier was mostly the result from banquet and catering as well as expanded hours at our F&B outlets in our three downtown Chicago Royal Sonesta properties. Our portfolio of select service hotels experienced the most disruption during the quarter, leading to a RevPAR decline of 5.8% year-over-year as 18 of our 61 hotels were under renovation. Our Sonesta Select portfolio grew RevPAR by 1.3%, much of which was driven by airline contract revenues in the Atlanta, Phoenix, and Los Angeles markets. Our extended stay portfolio experienced a 2.8% decline in RevPAR year-over-year when excluding three hotels under renovation. This segment has seen reduced occupancy from non-repeat long-term extended stay business for medical-related and project-based accounts, while shorter term stays with higher ADRs have increased. The results in this segment were largely market dependent, with positive RevPAR relative to 2022 at our extended stay hotels in Boston, San Francisco, and Sunnyvale, offset by declines in San Diego, Reno, Dallas, and Atlanta. Segmentation in our portfolio shifted away from transient, which represented 72.5% of total revenues in Q4 due to a continued softening in leisure demand, while group mix increased 1.3% year-over-year to 18.1% of revenues and contract mix increased 80 basis points to 7.3%. 2024 full year group pace is up $19 million or 22.5% over the same time last year, with strong growth across all our operators. OTA revenue as a percentage of total revenues decreased from 27.6% to 25.9% year-over-year during the quarter, and our operators continue to focus efforts on driving bookings to their websites to lessen the dependency on third-party channels and charge commissions. Sonesta remains focused on building its brand through spending on advertising, marketing, and IT initiatives. Travel Pass continues to see increased consumer adoption, evidenced by the mix of room nights in Sonesta full-service hotels, increasing by 16.5% year-over-year. Heightened operating expenses are impacting margins. While our operators have lessened their reliance on contract labor by filling open positions, below the GOP line expenses have increased, notably real estate taxes up $2.5 million from Q4 2022 and insurance costs of $2.4 million from increased premiums as well as deductibles paid on a higher number of claims. We expect near-term disruption in our portfolio as renovations are completed during the upcoming quarters. However, we are already starting to see the benefits of these renovations at some of our recently renovated hotels with substantial RevPAR increases, and we expect upcoming renovation hotels to also benefit from these much-needed improvements. Turning to our net lease portfolio, which represents 45% of SVC's portfolio by investment as of December 31, 2023. Our 752 service-oriented retail net lease properties were 97.1% leased with a weighted average lease term of 8.8 years. Our lease maturities are well-laddered, and only 2.1% of our net lease minimum rents expire prior to the end of 2024. The aggregate coverage of our net lease portfolio's minimum rents was 2.46 times on a trailing 12-month basis as of December 31, 2023. The decline sequentially is largely driven by softer EBITDAre reported by TA for Q4 2023. Notably, the increase in fuel margins that TA benefited from post-pandemic due to increased trucking activity has returned to more normalized levels, consistent with levels immediately preceding the pandemic. These properties remain some of our most stable investments as rent payments are guaranteed by an investment grade-rated subsidiary of BP. Rent coverage for our other net retail net lease tenants was stable at 3.7 times. Transaction activity during the quarter consisted of no acquisitions and nine net lease dispositions for an aggregate sales price of $8.8 million. As we have discussed previously, we continually evaluate opportunities to optimize our portfolio, specifically trimming our lodging portfolio of lower-performing hotels that have been a headwind to overall EBITDA. After careful analysis, we have begun to market 22 Sonesta hotels totaling 2,832 keys for disposition, including 9 Sonesta ES Suites, 5 Simply suites, 7 Sonesta Selects, and 1 full-service Sonesta Hotel. These hotels have a net book value of $162 million and in aggregate reported negative EBITDA of $4.7 million during 2023. In addition, each of these hotels were slated for renovation in future years, which should reduce our overall CapEx spend. We expect that aggregate RevPAR and hotel EBITDA margins for the remaining hotel portfolio will improve with the removal of the subset of hotels. We also have one other hotel under contract to sell for $3.3 million that is part of our Radisson agreement. To wrap up my comments before turning it over to Brian, we are confident that the hotel portfolio will see improved financial and operational performance as renovation capital is invested and after the expected dispositions of the 22 hotels that I discussed. In addition, our net lease portfolio provides consistent, dependable cash flows with 68% of annual minimum rents coming from an investment grade-rated tenant in BP. With over $750 million of total liquidity and a large pool of highly valuable unencumbered assets, our balance sheet is well positioned with no debt maturities until 2025.

Thanks, Todd, and good morning. Starting with our consolidated financial results for the fourth quarter of 2023, normalized FFO was $50 million or $0.30 per share versus $0.44 per share in the prior year quarter. Adjusted EBITDAre decreased 6.2% year-over-year to $141.2 million. Our results this quarter as compared to the prior year were impacted by higher interest expense, a decline in hotel EBITDA, and low rental income recognized. Rental income decreased by $4.1 million this quarter compared to the prior year, largely as a result of our percentage rents recognized last year under our historical lease terms with TA, partially offset by increased minimum rental income recognized under the revised terms of our leases with TA following the BP transaction last May. Turning to the performance of our hotel portfolio. For our 219 comparable hotels this quarter, RevPAR decreased by 2.2%. Gross operating profit margin percentage declined by 210 basis points to 26.3%, and gross operating profit decreased by $6.4 million from the prior year period. Below the GOP line costs at our comparable hotels increased by $4.9 million from the prior year, driven primarily by increased property insurance and real estate tax expense. Our 221 hotels generated hotel EBITDA of $43.6 million, a 19.3% decline from the prior year and below our guidance range of $45 million to $49 million, driven by higher expenses and renovation disruption. By service level, hotel EBITDA year-over-year declined by $6.1 million for our 49 full-service hotels, $3.1 million for our 61 select service hotels, and $2.8 million for our 111 extended stay hotels. Turning to our expectations for Q1. We're currently projecting full quarter Q1 RevPAR of $77 to $80 and hotel EBITDA in the $28 million to $31 million range. We will continue to see softer seasonal results through the remainder of the winter months before activity picks up in the spring. Our portfolio will also see continued disruption in 2024 at hotels we have under renovation. Turning to the balance sheet. During the fourth quarter, we successfully executed on a new 8-year $1 billion senior secured notes offering at 8.625% and repaid all $1.2 billion of unsecured notes that were scheduled to mature in 2024. Interest expense is projected to be $91.5 million for the first quarter of 2024 following these financings. We currently have $5.6 billion of fixed rate debt outstanding with a weighted average interest rate of 5.94%. Our next debt maturity is $350 million of senior notes maturing in March 2025. We currently have $100 million of cash and our $650 million revolving credit facility is undrawn for total liquidity of $750 million. Turning to investing activity. During the fourth quarter, we sold nine net lease properties for a total price of $8.8 million. We made $106 million of total capital improvements at our properties during the fourth quarter, and we expect to make capital expenditures of $250 million to $275 million in 2024 as we continue to ramp up our renovation program within the hotel portfolio. Of this capital spend, we expect $80 million to $100 million of maintenance-type capital with the rest going towards renovation capital. We expect 36 hotels across all of our service levels to be under renovation throughout 2024. In January, we announced our regular quarterly common dividend of $0.20 per share, which we believe is well covered, representing a 48% normalized FFO payout ratio for the year ended 2023. That concludes our prepared remarks. We're ready to open the line for questions.

We will now begin the question-and-answer session. Our first question comes from Bryan Maher with B. Riley FBR. Please go ahead.

Thank you and good morning. Just a few for me. On the hotel renovations, can you try to quantify for us what you think that that's going to do to hotel margins and/or RevPAR throughout the year? And then maybe drill down a little bit on the non-maintenance CapEx spend. What type of level of activity is going to go on at those 36 hotels? And does any of that include the Nautilus that you bought last year in South Beach?

Good morning, Bryan, I’ll start. Thank you for the question. As far as quantifying the disruption and potential activity, it's going to be a little choppy. In Q4, we had 23 hotels under renovation, and we saw a significant reduction in RevPAR for the hotels in the 20% range and EBITDA pretty much eroded for that hotel portfolio set. As we look forward, we're going to have hotels coming out of renovation where you get a nice lift and the expected improvement of the position of the hotel and RevPAR index and so forth. So we're going to have some ups and downs. Net-net, we're projecting RevPAR. It won't be as drastic as the 20% RevPAR decline for the 23 subset. So overall, we're projecting about a 1% to 2% disruptive displacement in RevPAR for the full year. So again, we're going to have stuff going down, stuff coming back; there will be some offsetting going on. So it won't be as material in our view today for the year that as far as what we're spending, we've got the 17 Hyatts that were in full swing in Q4, and those are expected to wrap up in early Q2. And that's everything from guest rooms and public space and some exterior work. And the same is going to be done for the renovation capital in Sonesta portfolio. We've got a couple of full-service hotels. Our Hilton Head property, for example, we're doing all the rooms off season in the winter months here; now we're going to do the public space at the end of the year when the summer season is over. And we have a full slate of select service and extended stay hotels that we're doing the same thing. We're going through the rooms, the public areas, and some of the side work, and so forth. So it's a pretty comprehensive program.

The maintenance capital we discussed does not include much from the Nautilus. Most of the Nautilus is expected to be finished in 2025, so it does not factor in any maintenance or renovations related to that.

Okay. Two more. I mean you made some comments about TA, and I get it, the year-over-year stuff, but you talked about the GAAP margins getting back to pre-pandemic levels from the elevated that we saw over the last couple of years. I just want to clarify that given the lease structure you have with BP, none of that is really relevant to you and what you get rent-wise. It may just impact what the coverage is. But with BP as a credit, it's kind of like who cares, right? Exactly right, Bryan. We're illustrating that we report coverage for our entire portfolio, and it's a significant factor in that calculation; but you're absolutely correct. We feel secure knowing we have the credit backing us in those lease payments.

Okay. And then lastly, and I'll hop back in the queue. We don't talk much about your net lease assets outside of TA, but there's been a lot in the press regarding retail and retail demand seems to be strong for real estate. And I know that you've been selling a few assets, kind of smallest non-core properties. Can you just give us a little bit of color on how many more sales there are to go, kind of what you're selling? And when you do go to re-lease those properties, what kind of rent roll-ups are you seeing?

There are many good points raised. We are experiencing similar trends in retail, with increased demand, particularly in the investment sales market. Over the past few years, our portfolio has focused primarily on selling vacant properties, as we've not been acquiring new ones. We believe we will soon start selling some more stable assets as the capital markets and buyer activity are becoming a bit more stable, even though they are still somewhat volatile. We have mostly sold off the vacant properties we identified as issues when we acquired SMTA in 2019, leaving about 20 vacant properties remaining. There are a few more that may become available as well. Our occupancy rate is currently about 97% in terms of the number of properties. Regarding rent roll-ups, we have generally maintained or increased rents. However, there are situations, such as with movie theaters, where re-leasing can lead to reduced rents due to previously high rental rates per square foot and significant tenant improvements included in those rents. Additionally, some long-term sale leasebacks from the previous owner have rental rates above market, resulting in some rent roll-outs. Overall, if you review our history over the past few years, we have been averaging around 2% rental growth annually for that portfolio.

Okay. Thank you very much.

Sure.

Thanks, good morning. Assuming the 22 Sonesta are sold, what would your 2019 pro forma RevPAR and hotel EBITDA margins be?

Sure. I can pull that up for you. So as I mentioned in the prepared remarks, our EBITDA was actually negative for those 22 hotels. It was about negative $4.7 million. So if you take out those hotels for the year, EBITDA margin would be 18.3% and RevPAR would be $92.18 just for the Sonesta’s.

Yeah. The sale hotels in '19 generated about $90 million in hotel EBITDA.

In 2019, the 22 Sonestas generated $90 million in EBITDA, is that what you said?

Yeah, some of them were under different flags and pre-pandemic. That was the full year hotel EBITDA.

Okay. Is there anything happening internally at Sonesta that makes you confident that you might exceed the prior peak EBITDA margins after the renovation program, aside from the potential gains from the property dispositions?

Sure. That's a good question. One of the reasons we are selling some of these hotels is that we believe they won't reach those margin levels again. However, Sonesta is focused on increasing brand awareness and enhancing loyalty programs. They are reinvesting all the management and franchise fees, as well as cash flow from their owned hotels, especially those in New York, back into the business. We're seeing positive developments in the number of loyalty members and the revenue percentage booked through the loyalty program. They are also investing in their revamped website, mobile app, and customer relationship management system, with plenty of room for growth. While we haven't seen consistent performance across all our hotels yet, I believe that will change once the renovations are finished. Additionally, they have been successfully building their national sales platform, leading to an increase in group business. Much of this growth comes from sales and distribution channels rather than just online bookings. To answer your question, we still expect to return to those margin levels. The renovations at the Sonesta hotels should have an immediate positive impact. Many of the Royal Sonesta and full-service hotels are performing well and surpassing market competition in some instances. As we've discussed previously, we're examining the entire portfolio and assessing the return on any investments we make in renovations. We are projecting several years out for expected operating cash flows and incorporating not only renovation costs but also maintenance expenses. If we don't anticipate a return on additional capital or believe we can compete with market margins, that's why certain hotels end up on the sale list.

Okay. I may have missed this. What is the total capital spend for the three-year program, including return on investment and maintenance, assuming the Sonesta's are out?

We didn't provide the multiyear figure, Dori. However, I anticipate that for the next two or three years, we will maintain these elevated levels. As I noted in my prepared remarks, this year it will be $250 million to $275 million. We will continue to assess and ensure that, as Todd mentioned, the investment is justified. We will provide updates as we move forward, adding hotels to the list and advancing projects.

All right. Thank you.

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

This is Jonathan in for Tyler. I have a question regarding the Capital Expenditures. Can you clarify how much of that might carry over from last year? Also, could you provide some insight into the timing throughout the year? I expect it will mainly be concentrated in the first half.

Yeah, it's a great question. I think I would say probably $25 million to $40 million is probably deferred from 2023 and as far as how the allocation by quarter will go, it's a little hard to predict. But I think you're right, it's Q1 and Q4 bookending the year is where we'll see the most activity as we try to plan these renovations around the peak seasons for us, which, generally speaking, starts in early spring and runs through early November.

Okay. Very good. And thank you for the color. And then switching gears to maybe more recent demand trends for the hotel portfolio. Todd, I believe you maybe noted some market softness in the first half of the year. Any additional color on that and any pockets of weakness or slowing that are worth calling out? Anything out there that potentially gives you pause as you look out?

Sure. It's mostly related to leisure travel, but we're also seeing a slowdown in business travel. Business travel still is probably in our portfolio, at least around 70% to 80% of where it was in 2019. In the previous quarters, we have continued to see that tick up, and that's really slowed down to flatten out. A lot of our resort hotels, we've seen declines year-over-year in RevPAR, which isn't surprising given the large increases that we saw back in '21 and '22 for those hotels specifically. But yeah, the softness is mostly in leisure and business. We have a lot more exposure to business. And again, another factor in how we identified the hotels we wanted to sell, most of those are business-oriented hotels.

Okay. Excellent. Then maybe last one for me. Can you maybe provide some additional color on per-occupied room expenses and where labor expense has trended as a blend and your general expectations for expense inflation this year?

Sure. Regarding room expenses, labor is by far the largest cost. Most open positions have now been filled across our portfolio, which has reduced our reliance on contract labor. This is positive and gives us better negotiation power over wages and salaries. However, labor costs are still increasing due to significant year-over-year wage hikes, particularly for housekeeping, front desk, and food and beverage positions. While the rate of increase may have slowed slightly, it remains above historical averages. Apart from taxes and insurance, labor costs were the biggest factor affecting margins in the last quarter.

Okay, great. I appreciate all the color. That’s all for me.

Thank you.

Next question is a follow-up from Bryan Maher with B. Riley FBR. Please go ahead.

Thanks, again. Just a quick follow-up on your asset sales. Can you give us a little bit of thoughts on the timing of those, how they play out through the year? Kind of what you're thinking on pricing relative to book value? And who are the buyers of these assets? Are they more locals? Just a little color would be helpful.

Sure. Let me start by mentioning that we're in the process of selling one Radisson Hotel as part of our agreement, which is under contract for $3.3 million and is expected to close in about 40 days. This hotel was an outlier within the portfolio, as it was the only one generating negative EBITDA; both we and Radisson agreed it should be sold. We are removing it from the management agreement, but the owner’s priority and guarantees will remain intact. Regarding the larger portion, the 22 hotels are currently on the market, and we haven’t called for first-round offers yet, which we anticipate will happen towards the end of March or early April. I expect that these will attract multiple buyers, likely ranging from five to eight, purchasing individual properties or small groups of three to five hotels. In terms of timing, I believe we might start seeing some closings in the second quarter, with the majority occurring in the third quarter. The buyers are likely the same ones that participated back in 2021 and 2022, as we are marketing these hotels with encumbered brands. We expect buyers to enter long-term franchise agreements with Sonesta, similar to what took place previously. There has been a lot of interest so far, which is not surprising given that we are working with a group of previous buyers. The transactions happening currently involve either very high-end hotels or those at lower price points, particularly select service and extended stay hotels, showing a continued interest. Regarding pricing relative to book value, there are several factors to consider. The market remains volatile, and these hotels have had negative EBITDA over the past year, meaning we won't be applying a typical in-place cap rate, but rather assessing it as a basis play. Another factor is how much capital expenditure the buyer plans to factor into their overall cost and basis. While we may not reach full book value, I don't anticipate that we will fall too far short. It's important to note that we haven’t received any offers yet, and the market is still unpredictable. However, given our expectations and valuations, I would estimate we might be slightly below book value, but not significantly so.

Okay, thank you. That’s very helpful.

Sure.

This concludes our question-and-answer session. I would like to turn the conference back over to Todd Hargreaves, President and Chief Investment Officer for any closing remarks.

Thank you, everyone, for joining today's call. And we appreciate your continued interest in SVC.

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