Good morning, and welcome to the Service Properties Trust First Quarter 2024 Earnings Conference Call. Please note, this event is being recorded.

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, May 8, 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 financial reporting package, which can be found on our website. And finally, we are providing guidance on this call, including hotel EBITDA. We are not providing a reconciliation of this non-GAAP measure as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. With that, I'll turn the call over to Todd.

Thank you, Stephen, and good morning. Our first quarter results are indicative of typical seasonality patterns in our lodging portfolio as well as the stability of our net lease portfolio. Our full-service hotels experienced top-line growth through increased group demand, while our select service hotels were impacted by softening transient travel and renovation activity. Our focus remains on improving the performance and quality of our portfolio through the disposition of non-core hotels and capital projects to put our operators in the best position for long-term success. Beginning with the hotel portfolio for the quarter, comparable RevPAR declined 3.5% year-over-year. When excluding the 2023 active renovations, ADR declined 0.7% and occupancy declined 0.2%, leading to a RevPAR decline of 1.1%. The renovation hotels, which include our Hyatt Place portfolio, Sonesta Hilton Head and others, experienced approximately $3.9 million of displacement during the quarter. Cost pressures led to a hotel EBITDA margin decline of 290 basis points over the prior year quarter for our 218 comparable hotels as wages, property taxes, and insurance increases more than offset our operators' improved reliance on contract labor. Full-service was our top-performing segment during the quarter where we gained 80 basis points of RevPAR over the previous year quarter, led by increases in group and contract sales. Full-service group performance was led by our Royal Sonesta hotels in San Juan, San Francisco and Kauai, while the increase in contract revenues was led by our Sonesta hotels in Redondo Beach and Denver. F&B revenue gains occurred across our full-service hotels as well, led by our Royal Sonesta in St. Louis and Kauai. Our portfolio of select service hotels continued to see the most disruption during the quarter as 18 of our 61 hotels were under renovation, including our 17 Hyatt Place hotels, which began renovations in 2023. Overall, select service RevPAR declined by 13.2% due to these disruptions and decreased year-over-year income from our 5 select service hotels located in the Phoenix area that benefited from the 2023 Super Bowl. Our extended stay portfolio experienced a 4.6% decline in RevPAR year-over-year. Consistent with the trend from previous quarters, our longer-term extended stay occupancy stays of 7 plus nights has been declining due to the loss of non-repeat project-based room nights. While Sonesta pivoted to shorter-term stays for these hotels to fill occupancy, the increased room nights were not enough to offset the reduced rates. Group pace is up $15 million or 12.3% over the same time last year due to increases in room nights and ADR in both the Sonesta and Radisson portfolios. The most notable gains were related to corporate groups at the Royal Sonesta Cambridge and at our Sonesta Chicago hotels where the Democratic National Convention will be held in August. Combined revenues from our business travel for our operators declined slightly year-over-year due to the ongoing renovations in our Hyatt portfolio and the shift in the Easter holiday from April last year to March this year, while business travel increased in our Sonesta portfolio from key corporate accounts at our select service hotels. OTA revenue as a percentage of total revenues declined from 25.6% to 24.8% year-over-year during the quarter and our operators continue to concentrate efforts on driving bookings through their websites to lessen the dependency on third-party channels that charge commissions. Sonesta remains focused on building its brand through numerous initiatives and recently merged its Travel Pass Rewards program with the legacy Red Lion Loyalty Program, doubling its overall size. During the quarter, 25.9% of our Sonesta full-service hotel revenues came from loyalty program members, up 3.5 percentage points from 2023. Other ongoing Sonesta initiatives include a focus on driving ancillary revenues at the hotel, building out the sales organization, and investing in technology. Turning to our net lease portfolio, which represents 44% of SVC's portfolio by investment. As of March 31, 2024, our 749 service-oriented retail net lease properties were 97.3% leased with a weighted average lease term of 8.7 years. Our lease maturities are well-laddered, and only 1.3% 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 2.37x on a trailing 12-month basis as of March 31, 2024. The decline sequentially is largely driven by softer EBITDA reported by TA for Q1 2024. Transaction activity during the quarter was limited to 3 net lease dispositions and 1 hotel disposition in suburban Minneapolis for an aggregate sales price of $6.2 million. We continue to market 22 Sonesta hotels with a book value of $160 million. The sale process is well underway, and we are working with potential buyers to negotiate terms. In conclusion, we are optimistic that our hotel portfolio will see meaningful operational improvements as the result of our renovation program, as hotels benefit from much-needed refreshes over the coming quarters. Additionally, the performance of our net lease portfolio remains steady and is anchored by an investment-grade rated tenant in BP. With more than $700 million of liquidity and no debt maturities in 2024, we are well-positioned to implement our strategic plan. I will now turn the call over to Brian to discuss our financial results in more detail.

Thanks, Todd, and good morning. Starting with our consolidated financial results for the first quarter of 2024. Normalized FFO was $21.1 million or $0.13 per share versus $0.23 per share in the prior year quarter. Adjusted EBITDAre declined 1% year-over-year to $115.5 million. Financial results this quarter as compared to the prior year quarter were impacted by higher interest expense and a decline in hotel EBITDA. Rental income increased by $5.6 million this quarter compared to the prior year due to higher rental income recognized under our TA leases as a result of the BP transaction last May. Turning to the performance of our hotel portfolio for our 218 comparable hotels this quarter, RevPAR decreased by 3.5%, gross operating profit margin percentage declined by 200 basis points to 23.3%, and gross operating profit decreased by $6.5 million from the prior year period. Below the GOP line costs at our comparable hotels increased $2.8 million from the prior year, driven primarily by increased insurance expense. Our 220 hotels generated hotel EBITDA of $28.9 million, a decline from the prior year, but in line with our guidance range provided last quarter. By service level, hotel EBITDA year-over-year increased $676,000 for our full-service hotels, declined $5.6 million for our 61 select service hotels and $3.4 million for our 111 extended stay hotels. Turning to our expectations for Q2. We're currently projecting a full quarter Q2 RevPAR of $95 to $99 and hotel EBITDA in the $80 million to $85 million range. Turning to the balance sheet. We currently have $5.6 billion of fixed rate debt outstanding with a weighted average interest rate of 5.9%. Our next debt maturity is $350 million of unsecured senior notes maturing in March 2025. We currently have $80 million of cash and our $650 million revolving credit facility remains undrawn for a total liquidity of over $700 million. Turning to our investing activity during the first quarter, we sold 1 hotel and 3 net lease properties for an aggregate sales price of $6.2 million. We made $69 million of total capital improvements at our properties during the first quarter. We currently expect full year capital expenditures of $300 million to $325 million, up from our previous guidance range of $250 million to $275 million. We currently expect maintenance-type capital to be $100 million of the total spend this year. Our capital program is focused on ensuring the best guest experiences, upgrades to brand standards, and positioning the hotels to improve their respective market share. To date, we have completed renovations at 9 Sonesta hotels, and we're pleased with the post-renovation returns we're seeing thus far. We expect 22 hotels across all service levels to be under renovation in the second quarter and expect to have completed major renovations at 33 hotels during the calendar year including 5 full-service hotels, 18 select service hotels and 10 extended stay hotels. Finally, in April, we announced our regular quarterly common dividend of $0.20 per share, which we believe is well covered, representing a 51% normalized FFO payout ratio for trailing 12 months ended March 31, 2024. That concludes our prepared remarks. We're ready to open the line for questions.

Our first question is from Bryan Maher with B. Riley Securities.

Maybe just sticking with the CapEx for a minute. Your $50 million increase, I think I did that math right. Can you talk about why and what that $50 million is going to be allocated to?

Bryan, thanks for the question. Yes. A lot of it is the pace of projects. And as we plan the rest of the year, each quarter, we decide which projects we think we should move forward with, which ones make sense from a timing standpoint to limit disruption. We also have a combination of major renovations at certain hotels as well as more routine items that we want to get in this year to continue to improve the positioning of the hotel. So it's a combination of a couple of things, but it's more so just the pace of projects. It has moved a little quicker than it has in past quarters. So it's more of a planning thing than anything. This is a multiyear program that we've now started at the end of last year, and it will continue for a couple of years.

Would you consider some or all of that $50 million a pull forward from what you would have spent in 2025?

Some of it, yes. Yes.

Okay. And when we think about the Hyatt renovation disruption, can you talk about when you think that is fully wound down? And maybe give us some idea as to how much you're spending per key on those renovations and how deep they are?

Sure. I can take that one, Bryan. So the Hyatt, we started those late last year. I would say we're through the majority of those or we should be getting through the majority of those shortly. I would expect most of that to wrap up this quarter and have those back online fully. So I think we should start to see the benefit of that starting in the second quarter, but really fully hopefully in the third quarter. The total cost is right around $90 million, which Brian is calculating the per key cost now.

Yes. Per key, it's around $40,000.

Yes. And it's rooms, common areas, facades. It's a pretty intensive renovation. Those hotels had not been renovated in a while. So we expect to see a pretty significant pickup once those renovations are complete.

Okay. And maybe kind of the same dialogue on Sonesta, kind of how much more what you're spending per key. I think you mentioned in your prepared comments that you're selling 22 hotels, book value, $162 million. I mean what does that sales due to your kind of future CapEx spend that you had been planning for?

Yes. From a Sonesta standpoint, it depends on the chain scale and the brand. Simply Suites at the lower end is $30,000 to $35,000 per key and could be upwards of $50,000 a key for some of the renovations that we're doing. We've got very small service hotels that are in the plan for this year, including our Hilton Head property and some of the airport hotels. But as we look at different chain scales and different needs when the last refresh happens.

Yes. And that should take off probably another $150 million instead of total that we otherwise would have had to spend at these hotels.

And just 2 more for me. What kind of uplift are you looking for in RevPAR roughly speaking, from the Hyatt renovations and the Sonesta renovations, if you can break them out. I don't know what the best way to break it out is, but clearly, you've thought about what your RevPAR uplift would be. Can you share with us what you're thinking there?

Yes. I mean I think RevPAR index is one metric. I mean, we're very focused on bottom line EBITDA, and we expect high single-digit returns on a lot of the money we're deploying for renovation capital. We're not going to get that same lift from more routine stuff that is just maintenance-type capital, but there are various ROI projects built into our program and the amount of money we're putting in, we expect a significant lift that will high single-digit EBITDA returns over the longer term post-renovation periods. We finished 9 Sonestas this quarter, not a lot of anecdotal evidence yet as some of these, they are only a couple of months post-renovation, but some other ones that have been finished for close to a year, if you look at the periods prior to when we started the renovations to ramp-up period afterwards, we're seeing those returns that we had forecasted.

The next question is from Dori Kesten with Wells Fargo.

I appreciate the guidance on Q2 RevPAR and hotel EBITDA. I'm curious about your outlook for the second half of the year. I know that other companies have mentioned a stronger performance in the second half compared to the first, but I'm uncertain whether you believe the SVC portfolio will see similar participation due to limited group exposure and challenges related to renovations.

Yes, it's a great question, Dori. Thank you. I think our trends will mirror patterns that we've had in previous years. We expect Q2 to be a stronger period, obviously, than Q1. We think Q3 will be in line with Q2 before it starts tapering off. There is a lot of noise in our portfolio given the renovation activity we've highlighted. So when we do see ramp-up from certain hotels and picking up different business and market share, that could be weighed down by some of the other hotels that we're moving into renovation.

Okay. And as you wrap up negotiations on the 22 Sonestas, I'm wondering what did you learn from the marketing process and the negotiation process so far? And just based on level of interest, would you expect there to be a round 2 of asset sales? Or would you consider yourself done for the year after these 22?

Sure, Dori. To clarify, we have gone through several rounds of bidding for the hotels and have identified buyers for most of them. We are currently in negotiations for contracts. This will not be a portfolio sale or likely involve just 2 or 3 buyers; instead, we expect to have more than 10 buyers for these 22 hotels, which will help us maximize proceeds. The process has gone as anticipated, with considerable interest from many smaller, local operators. As you may remember, these hotels are primarily experiencing negative EBITDA and require capital expenditure, so local operators are focused on turning them around. We received significant interest, and even amidst decreased transaction activity, lower-priced hotels are still trading well since buyers can enter at a favorable basis. This aligns with our expectations, and there were many repeat buyers from the sale of the 68 hotels a couple of years ago. I don't believe we learned anything new in this process. Interest remains strong among groups looking to buy these hotels and enter franchise agreements with Sonesta, which is encouraging. Regarding the possibility of selling more hotels, we want to complete the current sales first, but there could be other hotels to consider as we continue to evaluate their performance. However, we have not identified any additional hotels at this time.

Okay. And then my last one is just on trends. You talked about the normalization of trends and that it makes sense, your rent coverage is coming in post-pandemic, but for context, what level of rent coverage would make you consider the trends less of a normalization and more worrisome? And to be clear, I don't think you're there. I'm just wondering like what your line is.

It remains to be seen. We agreed with that commentary back in 2017, 2018, and 2019. The coverage for those assets was probably closer to 18 or 19 times. After we emerged from the pandemic, trucking and e-commerce activities increased significantly, leading to higher diesel volumes and margins than we had previously experienced. This drove coverage up. Over the past several quarters, we've seen coverage return to more normalized levels. We currently have limited insight into the performance of these sites due to the lease amendment. However, we are closely monitoring what BP says publicly. We have very little concern given the investment-grade credit backing these properties and leases, along with the underlying value of the real estate. While I don't have a specific number that would raise concerns, we are still far from that point.

The next question is from Tyler Batory with Oppenheimer.

A follow-up question on the guidance for the second quarter. It looks like RevPAR at the midpoint, flat year-over-year $80 million to $85 million of hotel EBITDA, your margins still down year-over-year. Is there a way to think about the renovation disruption that's in those numbers? And then talk a little bit more about what needed to happen maybe outside or even including renovation disruption. I mean what needs to happen for you to really see some margin improvement and margin growth?

Thank you for the question, Tyler. I'll begin, and Todd can add if he has anything to contribute. Regarding disruption in the second quarter, we anticipate more of the same. However, we expect a slight boost from the Hyatt properties coming out of renovation. All 17 hotels will be reopening throughout the quarter, which should provide some lift to offset the disruption we are experiencing, especially during this strong seasonal period. We are working to minimize the number of rooms impacted by our service interruptions. It can be challenging to quantify the impact fully because once a project starts, the pace of progress and the number of rooms taken offline can fluctuate. Overall, to drive margins, we believe the key issue is occupancy. We need to generate higher demand at our hotels, and we are pursuing this through various initiatives, including our capital expenditure program. Our other operators are also focused on boosting demand through marketing promotions and other projects aimed at increasing business.

Yes, I'll add to that. We are very pleased with the performance of our full-service portfolio, particularly the Royal Sonesta, which experienced a growth of over 6% in RevPAR year-over-year. This increase was largely driven by group business, but our urban hotels also saw growth due to higher citywide demand. We are optimistic about the full-service side of our operations. While it’s challenging to compare our select service portfolio due to significant disruptions during the quarter, we are concentrating on our extended stay segment. Our goal is for our operators to refocus on attracting Tier 4 extended stay guests, who typically stay for over 7 nights, sometimes extending from 30 to 60 nights. During the weaker quarters, these types of occupancy are crucial for our hotels, and we expect to see a return of long-term project-based business. Our operators, especially at Sonesta, are very committed to this strategy.

Okay. Great. So in terms of the Sonesta brand, I think you cited 30% of stays in the quarter were loyalty members, a little bit lower than some of the other brands that are out there, obviously, this loyalty program is still pretty new. So just talk a little bit more about the adoption of the loyalty program. And more broadly, just kind of an update on how Sonesta is resonating in the marketplace for travelers.

Right. The number was about 26% for the full-service hotels. It's a little bit lower on the focused-service hotels. But we are seeing increases there. I think the full-service, we saw a 300 basis point increase year-over-year. So we are really seeing the adoption, especially on the Sonesta and Royal Sonesta hotels. But as you know, especially on the select service side, it's so much of business-oriented hotels, you see it with some of the other brands is really driven by loyalty members. So that's really where we need to continue to see a pickup. But it's certainly a positive that you're seeing it on the full-service side, an increase of that much in terms of bookings through the loyalty program. So Sonesta still at this size is a relatively newer, younger company. So we're seeing things move in the right direction, and we are seeing that brand adoption in some of the numbers.

Okay. Great. And then last question for me. Obviously, no debt maturity this year. At what point do you start to think more about the 2025? And what sort of options might be on the table for those? And as you sit today, can you rank order kind of what looks most attractive to you in terms of handling those maturities?

Tyler, it's a great question. We continue to monitor the debt markets, and we are going to continue to be proactive on our debt maturities. As we've demonstrated, we've got multiple options using SVC's portfolio, but our real preference is unsecured corporate debt. So that's something we're going to take a hard look at in the near term to stay ahead of our maturity wall, but we do have multiple options out there.

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

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

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