Service Properties Trust(SVC) - 2023 Q1 - Quarterly Report

PART I Financial Information Item 1. Financial Statements Presents unaudited condensed consolidated financial statements for Q1 2023, covering balance sheets, income, equity, and cash flows Condensed Consolidated Balance Sheets Total assets were $7.48 billion as of March 31, 2023, with debt refinancing impacting senior unsecured and mortgage notes Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total real estate properties, net | $6,516,378 | $6,590,736 | | Cash and cash equivalents | $180,616 | $38,369 | | Total assets | $7,482,166 | $7,488,191 | | Senior unsecured notes, net | $5,158,504 | $5,655,530 | | Mortgage notes payable, net | $551,789 | $— | | Total liabilities | $6,100,261 | $6,099,399 | | Total shareholders' equity | $1,381,905 | $1,388,792 | Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a $26.0 million net income in Q1 2023, a significant turnaround from a $119.8 million net loss in Q1 2022 Statement of Comprehensive Income (Loss) Summary (in thousands, except per share data) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total revenues | $429,209 | $393,764 | | Hotel operating revenues | $334,796 | $297,406 | | Rental income | $94,413 | $96,358 | | Total expenses | $415,308 | $415,391 | | Gain on sale of real estate, net | $41,898 | $5,548 | | Unrealized gains (losses) on equity securities, net | $49,430 | $(10,260) | | Net income (loss) | $25,950 | $(119,822) | | Net loss per common share (basic and diluted) | $0.16 | $(0.73) | Condensed Consolidated Statements of Cash Flows Operating cash flow turned positive at $12.4 million in Q1 2023, with investing and financing activities providing significant cash Cash Flow Summary (in thousands) | Activity | For the Three Months Ended March 31, 2023 | For the Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $12,373 | $(11,983) | | Net cash provided by investing activities | $114,252 | $38,870 | | Net cash provided by (used in) financing activities | $23,791 | $(1,733) | | Increase in cash and cash equivalents and restricted cash | $150,416 | $25,154 | Notes to Condensed Consolidated Financial Statements Detailed notes cover portfolio, property dispositions, management agreements, TA-BP merger, and $610.2 million debt refinancing - As of March 31, 2023, the company owned 220 hotels and 765 net lease properties[15] - During Q1 2023, the company sold 18 hotel properties for an aggregate sales price of $157.2 million, resulting in a gain of $41.9 million[26][27] - In relation to the pending acquisition of its largest tenant, TA, by BP, the company has agreed to amend its lease agreements, which will result in aggregate annual minimum rent of $254 million with 2% annual increases. TA will also prepay $188 million of rent at the merger's closing[50][51] - In February 2023, a subsidiary issued $610.2 million in net lease mortgage notes. In March 2023, the company used proceeds to redeem all of its $500 million 4.50% senior notes due in 2023[68][70] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial improvements, driven by hotel recovery and asset sales, with RevPAR up 22.0%, covering operations and liquidity Overview Overview of the portfolio (220 hotels, 765 net lease properties) highlights strong Q1 2023 hotel performance and macroeconomic headwinds Comparable Hotel Performance (Q1 2023 vs. Q1 2022) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Occupancy | 57.7% | 53.9% | 3.8 pts | | ADR | $138.73 | $121.77 | +13.9% | | RevPAR | $80.05 | $65.63 | +22.0% | - The net lease portfolio was 97.4% occupied as of March 31, 2023, with a weighted average lease term of 9.4 years[105] Results of Operations Detailed comparison of Q1 2023 operating results shows net income driven by $37.4 million higher hotel revenues and asset sale gains - Hotel operating revenues increased by $37.4 million (12.6%) year-over-year, primarily due to higher occupancies and average rates[109][110] - The company recorded a $41.9 million net gain on the sale of 18 hotels in Q1 2023, compared to a $5.5 million gain in Q1 2022[118] - Unrealized gains on equity securities (TA common stock) were $49.4 million in Q1 2023, a significant reversal from a $10.3 million loss in Q1 2022[119] Liquidity and Capital Resources Liquidity details include $610.2 million mortgage note issuance, $500 million senior note redemption, and $200 million planned capital improvements - Net cash from operating activities improved to $12.4 million in Q1 2023 from a use of $12.0 million in Q1 2022, driven by higher hotel returns and lower interest expense[127] - The company expects to fund $200 million for capital improvements to certain hotels during the last nine months of 2023 using cash on hand[129] - As of March 31, 2023, the company had no borrowings outstanding under its $800 million revolving credit facility, which matures on July 15, 2023[134][135] - The company was in compliance with all debt covenants as of March 31, 2023, with key ratios such as Total Debt / Adjusted Total Assets at 54.8% (vs. 60% maximum)[145][146] Non-GAAP Financial Measures Reconciliation of GAAP net income to non-GAAP FFO and Normalized FFO, showing $37.1 million Normalized FFO for Q1 2023 Reconciliation of Net Income to FFO and Normalized FFO (in thousands, except per share) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net income (loss) | $25,950 | $(119,822) | | FFO | $35,894 | $(4,831) | | Normalized FFO | $37,146 | $(3,409) | | Net income (loss) per share | $0.16 | $(0.73) | | FFO per share | $0.22 | $(0.03) | | Normalized FFO per share | $0.23 | $(0.02) | Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses market risk, primarily interest rate risk, with $5.8 billion fixed-rate debt and upcoming LIBOR transition to SOFR - At March 31, 2023, the company had $5.81 billion of fixed-rate debt. A hypothetical 1% increase in interest rates would decrease the fair value of this debt by approximately $157.2 million[186] - The company had no outstanding balance on its floating-rate revolving credit facility, which matures on July 15, 2023[188] - The company is preparing for the phase-out of LIBOR by June 30, 2023, and anticipates its replacement with an alternative index such as SOFR for future financing[193] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2023, with no material changes - Based on an evaluation as of March 31, 2023, the company's management concluded that its disclosure controls and procedures are effective[194] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[195] PART II Other Information Item 1A. Risk Factors No material changes to risk factors were reported from those previously disclosed in the 2022 Annual Report - There have been no material changes to risk factors from those previously disclosed in the 2022 Annual Report[205] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company purchased 4,971 common shares at a $9.28 weighted average price for tax withholding obligations Issuer Purchases of Equity Securities (Q1 2023) | Calendar Month | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2023 | 1,199 | $7.15 | | March 2023 | 3,772 | $9.96 | | Total | 4,971 | $9.28 | Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, debt indentures, and officer certifications - The filing includes a list of exhibits, such as the Amended and Restated Declaration of Trust, various debt indentures, and officer certifications (Rule 13a-14(a) and Section 1350)[208][209]