Service Properties Trust (SVC) June 3, 2026 Capital Markets Day Transcript

Good morning.

Thanks for joining us. I'm Jack Armstrong. I cover Service Properties Trust at Wells Fargo, and this morning I'm joined with Chris Spolato, President and CEO, and Brian Donnelly, Treasurer and CFO. I think Brian and Chris are going to start with some opening remarks, and then we'll jump right into Q&A.

Yeah, well, thank you for having us, and Jack, thanks for hosting the panel. So I think, you know, kind of big picture for those that aren't familiar with SVC, you know, the company has been largely in a transition mode over the last several years, but collectively the portfolio consists of net lease and lodging. About 70% of our business from an NOI standpoint comes from the net lease side of the portfolio, which is a pretty big change from where we were over the last several years. and really you know I would say even more near term you know we've been you know principally focused on several addition initiatives primarily to kind of help improve our overall balance sheet and the outlook for the story as we look at improving performance across the hotel portfolio in addition to kind of other opportunistic endeavors with respect to the net lease portfolio and continuing to kind of procure better names and opportunities to again you know serve that you know for that particular side of the business to serve as a catalyst for the overall growth as we continue to position ourselves more towards net lease and so as you may have seen whether it's in our presentations or different press releases you know we've done about a billion six in capital markets activity over the last year and a half through the form of different financings we did a large equity raise in the last month again all in preparation to kind of really position this you know company to be kind of more on the front end of opportunistic growth which is going to be heavily driven by our hotel portfolio in consideration of a broader kind of strategy as we continue to to pare that down and again shift more towards net lease and so you know we're excited about where we're at today you know just given the work we've done we feel good you know about kind of year to date where we've seen performance on the portfolio we'll be talking about that a little bit today. We provide a full year guidance in 2026 for the first time. And so, you know, I think there's a kind of a lot of steps and a lot of things and actions we're taking that are very supportive of kind of the narrative and where we're going with the story. So.

Can you talk a little bit about how both your lodging and net lease portfolios compare to your peers in terms of quality, geographic exposure, chain scales?

Yeah, I mean, I think broadly speaking if you bifurcate the two uh that we'll start with the net lease portfolio i mean the net lease you know consists of a mix of you know tenants across the spectrum you know we our largest tenant uh is with travel centers of america you know that represents close to 70 of our abr and there's kind of a story with respect over the last you know 15 plus years as we've entered that space and kind of tran continued to transition that portfolio over time but absent of that you know the lion's share of our portfolio kind of resides within qsr casual dining and other you know kind of opportunistic type endeavors with retail and something that we've continued to kind of grow more specifically over the last year and a half outside of the travel centers and so i think when you look at the netly side of the business i mean it's on you know sure footing with respect to good rent coverage long-term waltz and things consistent with what we would expect as we continue to grow that portfolio going forward on the lodging side you know that's been the biggest transition for the portfolio uh you know last year we sold you know close to a billion dollars worth of hotels primarily on the focus service level and so what's that what that has really done is transition the portfolio you know heavily tilted towards full service uh and that's a function of you know kind of resort type destinations leisure uh urban settings and then kind of a much smaller footprint across our suburban portfolio and that that's kind of a a step one in the strategy we also have roughly 15 properties uh that we're selling this year as kind of a can you know a continuum of that endeavor uh to kind of pare back hotels where we think we don't have the right opportunity to kind of grow performance and continuing to position the portfolio to kind of be in better markets and in a better setting and so uh we expect a lot of those transactions to come to fruition later on this year and again that's something that we'll talk about in more detail yeah can we just jump right in there and in terms of what you expect to sell for the rest of this year and then how you're thinking about future hotel sales once you get this next block done yeah i think i think you know just as a little bit of color so with respect to the hotel portfolio you know we've got 93 hotels you know when you look at kind of the overall performance of the hotels these hotels are operating kind of in the mid teens margins and I think by by any standard you know I think the view is is that you know given the quality locations and type of these hotels you know the overall margin for the portfolio should be north of 20% so as we think about you know kind of the bogey and where performance needs to be that's that's that's kind of the benchmark number that we're thinking about and and there's going to be varying you know opportunities to get there you know one is the dispositions that we have in the market today you know these dispositions are assets you know there's there's half about half of them are focused service the other half is full service but collectively they produce negative EBITDA drag of close to 13 million dollars and so you know this is kind of addition by subtraction selling those hotels getting proceeds in the neighborhood of 130 million dollars is an opportunity for us to improve the overall performance of the hotel hotel portfolio and use proceeds to continue to deliver and help with our overall kind of EBITDA growth as well and so where we stand today in that process is you know we've awarded 14 of the 15 hotels you know and are under in various stage of the contracts half of them are under purchase and sale agreement the other half are kind of going through the process to get there and in most cases deposits are hard on the front end with respect to those purchase and sale agreements I think from a timing standpoint we would expect that the closing and the transactions would occur you know I think commencing as early as Q3 and into Q4 with the goal of being out of all 15 of those hotels by year-end and sticking with the lodging side of the business what have you been seeing 2q to date in terms of performance by chain scale and across service levels yeah i mean in general uh we've seen solid

rev par growth um you know we we printed q1 earnings with you know six six and a half percent rep par growth and you know that's trending through april uh may is is also you know meeting our expectations with that growth pattern some of it's based on comps uh you know based on renovation of we had under hotels we had under renovation last year so some easy comps but also just strong q1 uh some good citywides on the west coast whether it be you know from the super bowl with some of the you know jp morgan conference and things of that nature in california um yeah so we're seeing some strong trends it's still tbd as far as you know the world cup impact which i'm sure is on your question list which is upcoming and we've got 40 of our keys or you know we have 40 of our keys in host cities across the country so we're seeing good demand you know it's booking windows are still short, but we're still seeing solid trends as far as how we've been pacing and accelerating above the industry over the last, you know, four months plus.

To your point, pretty strong repart growth in Q1, but you had margins that were still in the single digits. So what's the game plan to improving margin, and how should we be thinking about that for the balance of the year?

Yeah, I mean, there's a lot of initiatives underway to improve margin. again you know that margin drag is also encumbered by the hotels we're selling so we've got negative EBITDA you know coming out of those and so that that you know by nature will just improve margins but more specifically there's a couple things you know we have you know four operators our largest operator is Sonesta hotels which represents about you know six or seventy percent of the portfolio on that side of the business there's a new executive leadership team that started in april and so we're looking forward to kind of the work that they plan to do to help drive performance at the hotels that they manage uh and not indifferent from kind of our other relationships with ihg radisson and the hyatt kind of similar endeavors underway uh with our asset management team and working with the operators directly you know i think the thing you know for us over the last couple years you know we've we've been investing heavily in the portfolio you know to the tune of about 750 million dollars over the last three years and so you know specifically for our portfolio there's just been a lot of impairment into performance just given you know kind of the heavily weighted construction as we can implement new brand standards and just do you know kind of regular way routine capex and so that that in itself has been kind of a negative driver for performance while those hotels have largely been out of service and that's not indifferent from where we were in q1 taking on some larger renovations across the portfolio and kind of the general impact that that's having on overall margins but look you know the the biggest you know catalysts for performance improvement you know from an expense side are going to be on the labor side you know we've got opportunities with an insurance labor represents the lion's share of the expense and so we're working closely with our operators at creative ways to kind of help reduce labor costs and you know there's kind of varying different aspects and how we might be able to achieve and what we can do to ensure that that comes to fruition you know the other big thing for us you know outside of just kind of routine regular way occupancy growth and other initiatives is you know our revenue mix is heavily tilted towards the OTAs and you know kind of with that you know particular segment of revenue it's a very expensive acquisitions cost and so you know we're spending a lot more time focused with our operators on finding ways to convert a lot of that business to brand.com and other initiatives which is you know that'll help with the overall flow through of margin and in addition just you know there's a lot of initiatives underway with kind of the global sales teams and driving additional performance and bookings through group and transient or group and contract business things that are underway I think that's become more evident you know over the you know first four months of the year for the information we provided with kind of an outsized amount of business coming from that side and some of that is supported just by having newly renovated hotels it's allowed us to you know kind of get back into you know booking events you know kind of more long dated now that we have those hotels uh you know kind of in the inventory to do so so those are a handful of the initiatives we're focused on the drive margin yeah obviously a lot of moving pieces there you know as we're thinking about the timeline over the next couple of years you know you if you look go to trailing 12 you've got a 15 plus point margin spread to your select service peers in the public markets how quickly can we expect you to capture on some of that game it's going to be incremental i mean i think you know we've given guidance and we've talked about you know a couple hundred basis points of margin improvement you know that guidance doesn't include the sales of the hotels you know that'll have an immediate impact and it'll be more staggered over the year um you know look we're laser focused on it uh you know to give a time frame i'd like to think that you know as we enter 2027 we'll see more material incremental benefits uh especially as you know a lot of hotels that had been under renovation and and aren't necessarily up to performance with where they should be because of the ramp i think that that's just going to be a catalyst that's kind of more of a hockey stick approach than just more traditional way improvement of the business. And so I think we should start seeing kind of more incremental growth as we get into 2027, just given we've had a material amount of moving pieces going through 2025 and even early 2026, which has just created a lot of noise in the portfolio. And so having that cleaned up will make a meaningful difference.

As you mentioned, you know, we're nearing the end of your multi-year CapEx program.

Can you talk a little bit about the cash on cash returns that you're seeing from that spend and then as we end the program what's a good stabilized capex run rate sure i mean i think you know chris noted earlier that we've spent a significant amount of capital at various hotels to the tune of 750 million over the last few years we've substantially reduced our capex spend as we've gotten through a lot of major larger box renovations full full on you know public space guest rooms different different capital initiatives you know this year we're projected to spend you 120 to 140 million of capital which is down from you know close to 300 million yeah so some of the returns that we're seeing and some of the the results we're seeing at various projects have you know have been at different ends of the scale you know we've had some good results in hotels you know such as our airport hotels in miami you know we did a full service renovation at our white plains new york hotel not too far from here you know simply suites in jersey and you know They've produced pretty good returns outside of our expectations in double-digit return on actual investment when you look at EBITDA, pre-renovation, post-renovation. But we've also seen slower growth in some of the other projects, so it's been mixed. So it's not always just to say pin a number on it. Our high-place portfolio, we did full renovations to brand standard for that portfolio to the tune of $90 million, and growth's still lagging our expectations. So there's still work to do on hitting our target investment returns on some of that CapEx. You know, some of it's defensive in nature, but, you know, to maybe get market share, be able to grow rate. You know, this year we have a significant project in Miami going on. Our South Beach Hotel, the Nautilus, run by Sonesta, is a big deal for us. You know, that hotel, you know, we're going to put roughly $40 to $50 million into it to reposition it. And, you know, again, we expect outsized returns. we'll be able to command a much larger rate uh there's a lot of activity in that market and we're we're excited about that that's going to be completed by the fall you know so from a capex run rate standpoint you know the guide for this year is 120 to 140 million dollars you know we expect for in the next couple of years that to continue to be in that range you know 100 120 could have been flow a little bit and you know we've bifurcated in our in our materials you know 80 to 90 million of that's maintenance capex and the rest would be discretionary renovations as we look to continue to improve the portfolio the quality of the portfolio and continue to drive results as we're thinking about the the lodging business strategically do you see svc as a long

term lodging owner you know five ten years from now do you want to still be in the lodging business or is the goal to dispose of all of your retained hotels yeah i mean i think long term the goal is us to continue to pare back on the hotel portfolio i mean i think it's it's definitely a multi-year journey um you know and with a lot of kind of the execution on the broader business plans that we took on you know over the last four months uh i think that's kind of continued to be the message and you know you know given what we did last year and what we're doing this year is kind of a big jump start and a catalyst in support of that but no i mean i think look we recognize the value proposition of you know the goal to re-rate the company as a net lease company we understand kind of the strong demand that comes with that re-rating and the multiple applied to that business we have a solid footing with the portfolio on the net lease side and so we feel good around kind of what that can bear long term and i think with the hotel side i mean the story for the company is really around you know you've got a solid footing with the net lease side we've got a clean balance sheet just given the work that we've done with the kind of I think a well laddered maturity schedule allowing us to really focus on driving performance for the hotels and the goal is is that as we continue to drive performance for the hotels position those to be you know in a scenario where there's kind of the right capital markets environment and the right valuation just given kind of the work that and kind of the growth we would expect coming out of that to then divest accordingly and again it's a multi-year journey but nonetheless you You know, I think that, you know, investors today will benefit from the, you know, the outsized EBITDA upside that would come from that portfolio, just kind of bridging the gap to, you know, where the benchmarks are in addition to the stability of the cash flow that comes from the net lease side of the business.

Switching over to the net lease side of the house, can you talk a little bit about your tenant watch list right now and how your credit losses have trended versus your expectations when you set the guide at the start of the year?

So, you know, as Chris outlined at the beginning of the conversation, you know, Travel Centers of America is our largest tenant, the lion's share of the portfolio. It's backed by pay credit with British Petroleum. The rest of the portfolio is more granular in nature with, you know, a lot of franchisees of different brands across the spectrum of what we refer to as necessity-based retail, e-commerce resistant properties, you know, in the QSR space, auto repairs and the like. credit losses have been pretty steady for this portfolio we acquired the non-ta assets in 2019 and you know during covet it was all about rent deferrals there wasn't really any sort of pressure on credit losses and you know as the the dust settled after all that you know we've seen you know 25 50 basis points of credit losses you know tenants either you have no restructure or you You know, bankruptcies here and there for small franchisees throughout the country. Q1, we had a little bit of a hit with a couple of master lease tenants that went bankrupt. And, you know, we took, you know, $3 to $4 million of charges in the first quarter. And, you know, it still remains to be seen. You know, those are strong performing properties. And there might be some recoveries throughout the year on some of that.

But the credit losses have been pretty immaterial overall to the whole, you know, the $380 plus million of rents we have annually. it's again we're talking about less than half a half a point can you talk a little bit about why you shifted to net neutral at least acquisitions and what we would need to see in terms of improvement on the balance sheet or to leverage before you might turn those back on yeah i mean i think kind of broadly speaking coming into the year you know we recognize that you know our focus is to de-lever and we want to kind of be smart around where we allocate our capital and so you know kind of rolling into a capital recycling kind of neutral growth strategy we felt like was the right kind of outcome and support of that you know we do feel you know it's there's a lot of benefits to continue to refresh that net lease portfolio grow it incrementally we've seen a lot of success over the year we have an ABS instrument you know within that portfolio where we just did a follow-on earlier this year and kind of seen the success and kind of where you know where the rates trend on that instrument and that's something that i think we could we feel like we can continue to use long term and so you know this year you know we're like i said you know we're kind of acquiring 25 million all through the form of capital recycling you know that could flex right if we find other opportunities in the portfolio to reposition out of certain brands or opportunities we would do so and kind of reinvest an additional net lease to kind of keep it neutral and then i think as we monitor leverage i mean some of that going to be a little bit more organic right as we grow even in the hotel portfolio that's going to naturally organically reduce leverage and I think as we start to kind of see our leverage targets come in the seven handle and things of that nature I think that'll give us more comfort to be more inquisitive or consider other alternatives outside of the work we're doing in the lodging portfolio more broadly and even if you have net neutral net lease acquisitions right now how are you thinking about reshaping the portfolio and are you happy with the amount of your portfolio that's exposed to travel centers is that something you want to lower over time i think gradually you know we would want to lower it over time i mean i we have a lot of conviction in and kind of the uh the ta portfolio more specifically and just kind of the business uh there's a lot of benefits uh that we see coming i mean for our particular leases with ta as brian noted they're backed by bt bp so we have ig credit backing the leases and so obviously we feel good about the stability you know that's a company that continues to invest in travel centers we're just a portion of their portfolio more broadly and there's a lot of initiatives underway in supporting kind of the continued improvement and growth of that portfolio and i think kind of more broadly speaking around travel centers a lot of these locations if not all of them are just irreplaceable it can be very hard to continue to develop and build new travel centers and so entrance into the space are you know obviously in the form of M&A versus adding new supplies so I think that gives us a good positioning and kind of a defense mechanism for continuing to to own those long term but you know I don't think we'll spend our time growing in travel centers I mean it's a good base and good credit but I think you know the goal would be to kind of grow the portfolio outside of travel centers more specifically I think as we move forward and certainly reducing exposure from that 70 percent today to something less i think would be advantageous again with a solid footing you know coming from the travel centers itself obviously we're a long ways out from the those leases coming due but can you walk us through how you think about those negotiations and then maybe what the latest you're hearing from bp yeah i mean i think big picture just you know for everyone's benefit we have five master leases uh with the travel centers uh each of those leases are well balance by geography and number of properties um you know bp it's kind of the same guarantee uh and kind of an ig across all five of those and there are five ten-year renewal options in support of those and so those renewal options can be exercised from the tenant or from bp you know give or take two years out from expiration so kind of normal runway you know that would be kind of normal course uh and i think what's important is those are you know by master lease all or nothing renewals and so you know the timing of that we're seven years out we have a lot of time uh you know we just completed that transaction in 2023 so i think you know for us it's continuing to monitor you know bp and their investment in the business and how they want to kind of continue to grow even though performance i mean we've seen uh kind of the coverage come down over the last couple years some you know just being that i think that transaction occurred at the peak which is great but at the same time that coverage has come down i think more just from the ingestion of the portfolio into their ecosystem and kind of them as an organization continuing to try to work through the broader business plan and strategy going forward and so we spend i think a reasonable amount of time talking to bp they just brought on a new executive leadership team at the end of last year uh kind of industry experts and kind of in support of the overall growth you know they've kind of you know talked about kind of a one to two year plan as they think about you know kind of how they're going to continue to execute on varying strategy support of the travel centers and so i think that the short answer is you know one it could be a scenario where you know they want to wait towards the renewal right but i think in practicality which is not indifferent from other large tenants across our portfolio we have a seat at the table we're having active dialogue i think you know we want to be constructive and so you know we'll kind of wait and see and be there to have that dialogue with them and help inform their business plan and i think that'll give us more inroads into the timing of you know when they think it's prudent to you know to exercise that renewal option but all conversations today you know are supportive of them being committed to travel service can we spend a little time talking about the balance sheet and how you're thinking about addressing the maturities you have over the next couple of years sure yeah we've done a lot of work in the last couple of quarters you know we of course talked about the equity offering we did and you know some of the refinancing we've done to clear out debt maturities you know our

all our unsecured notes through 2026 were redeemed in the last few months um you know so as we as we look ahead our next maturity is our zero coupon notes that we issued last fall they were two year notes they mature in september of 2027 and behind that we have another 400 million dollars of unsecured notes so that's our that's our focus in the near term um you know the zeros are backed by one of our travel center pools so there's very strong collateral which gives us some flexibility you know couple that with you know the amount of work we've done to you know reduce our interest expense we've reduced interest expense by 60 million dollars annually based on the refinancing we did with the net lease portfolio as well as the equity deal with just retiring debt extinguishing debt um you know so as we look ahead you know we have to balance you know the fact that the zero coupons which are not as common as around the industry uh the fact that you know we took the accreted value and essentially prepaid that interest so retiring those early versus waiting too long to refi and market risk you know that's something we're actively discussing and we'll look to you know as we get closer to uh 2027 uh and then you know whether or not we you know apply proceeds from dispositions to deliver further and chip away at some of that stuff as part of our active dialogue as a team um you know as part of our business strategy so you know the 15 sales that we have in flight plus you know potentially others that you know we may consider bringing to market uh will be part of the holistic strategy to address those debt maturities you provided a bridge in your most recent deck to free cash flow how should we be thinking about what the highest and best use of that free cash flow is and how much flexibility do you have before you need to turn the dividend back on sure you know it's it's been a it's been a highlight for us in our in our story you know i mentioned earlier the cap x spend has been clearly outsized and again reinvesting into our properties has been it was been a key focus the last few years to put us in a good position operationally but from a cash flow story we've gone from you know you know burning you know close to you know 200 million dollars plus to you know on a normalized basis 50 to 75 million dollars of free cash flow before discretionary capex so it's it's you know for us as i just mentioned we're focused on debt maturities and our leverage profile there's no tax issues regarding the dividend that would force us to raise the dividend yeah so we're going to be mindful around use of cash flow and for the next few quarters it's all about strategy around the balance sheet and the debt debt maturities we've talked about but you know the board will talk about the dividend ongoing as it always does and you know whether or not you know we'll see that next year or not can you talk a little bit about the feedback you received following the equity raise

and maybe an update if you have one on your search for a new board member yeah I mean I think that the you know the feedback has been very supportive I mean I think that's a testament of just the success of the equity raise and kind of, you know, having that come to fruition. I think, look, the genesis for that equity raise was largely driven by the fact that, you know, we have strong fundamentals across the portfolio. And we're really kind of, you know, looking at, you know, our overall covenants for the balance sheet, which kind of remained tight and not necessarily giving us kind of the runway we felt like was necessary to kind of help improve the overall portfolio. and extract the value that we feel confident with. And I think in addition to that, I think the overall stock price at the time kind of had a cap on it, just kind of knowing that we had a chunky maturity wall with our debt. Again, a hotel portfolio that continued to need some level of CapEx in addition to time to kind of continue to improve that. And so the combination of, you know, being able to do a successful equity offering and kind of, you know, provide that breathing room was welcomed. And so, you know, we have a lot of dialogue with our investors, legacy investors and new investors, and everyone is supported and excited about the story. And so I guess what was the second part of your question?

The search for a new board member.

The search for a new board member is ongoing. I think, as Jack is referring to, you know, with the equity offering, we announced that we would also add a new independent board director. And so that process is ongoing.

As we're coming up on time here, what's the one thing that you think public markets are getting wrong about SVC?

Yeah, I mean, look, we spent a lot of time over the last year and even more so several months just given a lot of the initiatives out there kind of really kind of articulating the story. I think that, look, I think what is important in our view for everyone to kind of understand is, one, the hotel portfolio itself. I think one of the challenges that we hear and kind of do the best we can to dialogue is that, you know, given the level of transactions we've done in our hotel portfolio over the last year plus, selling hotels at, you know, give or take $60,000 a key, I think that there's an assumption that that is kind of the portfolio that we own and kind of overall evaluation and now And it's our job to kind of get out there and kind of continue to highlight that what we're left with today Even the retained portfolio after the sales This year is a highly, you know, kind of a highly sought-out collective of hotels both resort destinations kind of leisure travel and other kind of hotels in solid markets, and I think we've talked about owning hotels in Miami, South Beach, Kauai, San Juan, Cambridge, several airport destinations, and so I think it's really kind of our job to make sure kind of the investment world understands the quality of the portfolio, because that's a catalyst for driving overall value improvement over the near term and I think you know as you've seen in our prints we're outpacing the market when we think about rev par growth and kind of some of the other catalysts and so that's a testament to the portfolio and the work we've done and I think continuing to kind of tell that narrative and supported by having good prints each quarter is all part of kind of the messaging that we need to continue to highlight really helpful

stuff thanks for making the time for us all right thank you