Service Properties Trust(SVC) - 2019 Q3 - Quarterly Report

PART I Financial Information Item 1. Financial Statements The company's balance sheet expanded significantly due to real estate acquisitions financed by debt, while net income declined year-over-year Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total real estate properties, net | $8,213,852 | $6,549,589 | | Assets held for sale | $604,989 | $144,008 | | Total assets | $9,515,503 | $7,177,079 | | Unsecured revolving credit facility | $790,000 | $177,000 | | Senior unsecured notes, net | $5,284,933 | $3,598,295 | | Total liabilities | $6,906,517 | $4,579,648 | | Total shareholders' equity | $2,608,986 | $2,597,431 | - The significant increase in total assets and liabilities is primarily due to the acquisition of real estate properties, financed through increased borrowings[9] Condensed Consolidated Statements of Comprehensive Income Statement of Comprehensive Income Highlights (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Total revenues | $1,735,242 | $1,743,737 | | Total expenses | $1,419,057 | $1,394,645 | | Gain on sale of real estate | $159,535 | $0 | | Unrealized (losses) gains on equity securities, net | ($43,761) | $89,348 | | Net income | $274,643 | $294,594 | | Net income per common share (diluted) | $1.67 | $1.79 | - Net income decreased to $274.6 million for the nine-month period, driven by unrealized losses on equity securities that offset a large gain on real estate sales[12] Condensed Consolidated Statements of Cash Flows Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $432,530 | $403,404 | | Net cash used in investing activities | ($2,457,485) | ($277,857) | | Net cash provided by (used in) financing activities | $2,019,461 | ($137,550) | - A $2.46 billion cash outflow from investing activities for property acquisitions was funded by a $2.02 billion cash inflow from financing activities, mainly new debt[18] Notes to Condensed Consolidated Financial Statements - The company adopted a new lease standard, recording right-of-use assets and lease liabilities of $77.0 million[24][26] - Significant acquisitions included the $2.48 billion SMTA Transaction for 767 net lease properties and two hotels for approximately $174 million[55][56][57] - The company sold 20 travel centers for $308.2 million, resulting in a gain of $159.5 million[59] - The company issued $1.7 billion in senior unsecured notes to fund the SMTA Transaction, incurring an $8.5 million loss on early debt extinguishment[49][50] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the impact of the transformative SMTA acquisition, financed by new debt, on financial results and portfolio performance Overview and Portfolio Performance - The company completed a $2.48 billion acquisition of a 767-property net lease portfolio, significantly expanding its retail holdings[147] - As of September 30, 2019, the company owned 328 hotels and 946 service-oriented retail properties[146][155] Hotel Performance vs. Prior Year | Period | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | :--- | | Q3 (322 Comparable Hotels) | RevPAR | $98.78 | - | -0.3% | | | ADR | $126.80 | - | -1.6% | | | Occupancy | 77.9% | - | +1.0 p.p. | | Nine Months (320 Comparable Hotels) | RevPAR | $94.52 | - | -1.9% | | | ADR | $127.39 | - | -0.7% | | | Occupancy | 74.2% | - | -0.9 p.p. | Results of Operations Q3 2019 vs Q3 2018 Financial Comparison (in thousands) | Metric | Q3 2019 | Q3 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $599,772 | $603,153 | (0.6%) | | Hotel Operating Revenues | $525,290 | $520,618 | 0.9% | | Rental Income | $73,619 | $81,322 | (9.5%) | | Net Income | $40,074 | $117,099 | (65.8%) | | Net Income per Share | $0.24 | $0.71 | (66.2%) | - The sharp decrease in Q3 2019 net income was primarily due to unrealized losses on equity securities and a loss on early debt extinguishment[157] Nine Months 2019 vs 2018 Financial Comparison (in thousands) | Metric | Nine Months 2019 | Nine Months 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $1,735,242 | $1,743,737 | (0.5%) | | Gain on sale of real estate | $159,535 | $0 | N/A | | Net Income | $274,643 | $294,594 | (6.8%) | | Net Income per Share | $1.67 | $1.79 | (6.7%) | - For the first nine months, net income decreased despite a $159.5 million gain on real estate sales, due to unrealized losses and higher interest expense[175] Liquidity and Capital Resources - Principal funding sources are property returns and credit facility borrowings, which management believes are sufficient for the next year[201] - The company plans to sell approximately $300,000 of hotels to reduce leverage and is exiting its relationship with Wyndham[197][219] - The company funded $123.2 million for capital improvements to its hotels during the first nine months of 2019[206] - As of November 7, 2019, the company had $700 million outstanding and $300 million available under its $1 billion revolving credit facility[46] Non-GAAP Financial Measures FFO and Normalized FFO Reconciliation (in thousands, except per share) | Metric | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $40,074 | $117,099 | $274,643 | $294,594 | | FFO | $147,184 | $174,653 | $460,590 | $505,554 | | Normalized FFO | $155,635 | $174,653 | $469,041 | $505,714 | | FFO per share | $0.90 | $1.06 | $2.80 | $3.08 | | Normalized FFO per share | $0.95 | $1.06 | $2.85 | $3.08 | - Normalized FFO for Q3 2019 was $155.6 million, or $0.95 per share, down from $174.7 million, or $1.06 per share, in the prior year[282] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility affecting its $1.19 billion in floating-rate debt - As of September 30, 2019, the company had $5.35 billion in fixed-rate senior notes, whose fair value is sensitive to interest rate changes[287] - The company had $1.19 billion in floating-rate debt; a 1% increase in interest rates would increase annual interest expense by approximately $11.9 million[289][290][291] - The company acknowledges the expected phase-out of LIBOR and anticipates amending its credit agreements to use an alternative benchmark rate[294] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[296] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are likely to affect, internal controls[297] PART II Other Information Item 1A. Risk Factors The company faces new risks from the SMTA acquisition, including integration challenges, increased debt, and potential dividend unsustainability - The SMTA Transaction has introduced new risks, including integration difficulties and the possibility it may not be accretive to Normalized FFO per share[313][314] - The company incurred significant additional indebtedness to fund the acquisition, increasing financial vulnerability and leading to negative rating agency actions[317][318] - There is a risk the company may not achieve its plan to sell approximately $800 million of assets to reduce debt levels[317] - The company cautions it may not be able to continue paying distributions at its current rate due to increased debt and other business risks[320] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 29,334 common shares to satisfy tax withholding obligations related to vested employee share awards Issuer Purchases of Equity Securities (Q3 2019) | Month | Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2019 | 5,041 | $25.20 | | September 2019 | 24,293 | $25.64 | | Total | 29,334 | $25.56 | Item 6. Exhibits This section lists key legal documents filed with the report, including debt indentures and amended lease agreements - Key exhibits filed include supplemental indentures for the new notes issued in September 2019[324] - The filing includes multiple amended and restated lease and guaranty agreements with TravelCenters of America Inc[324] - An amendment to the management agreement with InterContinental Hotels Group and an updated pooling agreement with Sonesta were also filed[324]