Service Properties Trust(SVC) - 2020 Q4 - Annual Report

Part I Item 1. Business SVC, a REIT owning 310 hotels and 799 retail properties, faced severe COVID-19 impacts, leading to hotel portfolio transitions to Sonesta and liquidity preservation measures - As of December 31, 2020, SVC owned 310 hotels with 49,014 rooms and 799 service-oriented retail properties with over 13.4 million square feet[26] - The COVID-19 pandemic severely impacted SVC's lodging and service retail properties, causing significant declines in hotel occupancy, revenues, and profitability[31] - Due to payment failures from operators amidst the pandemic, SVC terminated its agreements with IHG and Marriott, transitioning a large number of hotels to be managed by Sonesta[34] Hotel Performance Impact from COVID-19 | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Average Occupancy (310 hotels) | 42.0% | 73.0% | Hotel and Net Lease Portfolios As of year-end 2020, SVC's portfolio included 310 hotels with a $7.0 billion investment and 799 net lease properties valued at $5.2 billion, with TA as a major tenant Portfolio Summary (as of Dec 31, 2020) | Portfolio | Number of Properties | Investment (in billions) | | :--- | :--- | :--- | | Hotels | 310 | $7.0 | | Net Lease | 799 | $5.2 | - The hotel portfolio is geographically diverse, located in 39 states, Washington D.C., Canada, and Puerto Rico, with brands ranging from Luxury (Royal Sonesta) to Midscale (Simply Suites)[43][46] - The net lease portfolio was 98.7% occupied with a weighted average lease term of 10.9 years. TravelCenters of America and Petro Stopping Centers are the top two brands by investment, totaling over $3.3 billion[48][50] Investment, Operating, and Financing Policies SVC's strategy to increase cash flows through acquisitions and leverage is restricted by COVID-19 impacts and credit agreement covenants, necessitating asset sales and dividend reductions while maintaining REIT status - SVC's growth strategy involves acquiring additional properties, but this is currently restricted under its credit agreement[62] - In 2020, the company sold 18 hotels for $85.8 million and 21 net lease properties for $88.4 million as part of its capital recycling and leverage management strategy[72] - The company secured a waiver of all existing financial covenants under its credit agreement through July 15, 2022, but pledged equity interests and first mortgage liens on 74 properties as security[77] - SVC expects its ratio of income available for debt service to debt service could fall below the 1.5x requirement under its public debt covenants as of Q1 2021, which would prevent it from incurring additional debt[77] Material United States Federal Income Tax Considerations This section details the complex U.S. federal income tax rules for SVC as a REIT, covering requirements for maintaining REIT status, distribution rules, and tax implications for shareholders - SVC has elected to be taxed as a REIT and believes it has operated in a manner to maintain this qualification, which generally exempts it from federal income tax on distributed income[104][105] - To maintain REIT status, SVC must annually satisfy two gross income tests (75% and 95% from real estate-related sources) and several asset tests at the end of each quarter[129][140] - SVC must distribute at least 90% of its annual REIT taxable income to shareholders to maintain its tax status[155] - The company's ownership of approximately 34% of Sonesta and its leasing of hotels to its Taxable REIT Subsidiaries (TRSs) are structured to comply with complex REIT rules, particularly regarding 'eligible independent contractors' and 'rents from real property'[148][151][153] Item 1A. Risk Factors SVC faces significant risks from the COVID-19 pandemic, high operator concentration, depleted security deposits, substantial debt with restrictive covenants, and potential conflicts of interest with related parties - The COVID-19 pandemic is the primary risk, having materially and adversely impacted business, financial results, and liquidity, with continued negative effects expected[214][217] - There is a high concentration of properties operated by Sonesta (256 of 310 hotels expected) and TA (179 of 182 travel centers), making SVC's results highly dependent on their performance[230][233] - Most security deposits and guarantees from former hotel operators (IHG, Marriott, Hyatt) have been exhausted due to the pandemic, increasing the volatility of future earnings[236] - The company has substantial debt ($6.3 billion at year-end) and is subject to restrictive covenants. It may need additional waivers to avoid default and is limited in its ability to pay distributions, make investments, and incur new debt[238][243] - Potential conflicts of interest exist due to the company's relationship with its external manager, RMR LLC, and other related parties like Sonesta and TA, which share common management and ownership[293][304] Item 2. Properties As of December 31, 2020, SVC owned 1,109 geographically diverse properties (310 hotels, 799 net lease) with a total undepreciated carrying value of approximately $11.2 billion Property Portfolio Summary (as of Dec 31, 2020) | Property Type | Number of Properties | Undepreciated Carrying Value (in billions) | Depreciated Carrying Value (in billions) | | :--- | :--- | :--- | :--- | | Hotels | 310 | $6.6 | $4.6 | | Net Lease | 799 | $5.2 | $3.3 | | Total | 1,109 | $11.2 | $7.9 | - The property portfolio is geographically diverse, with assets in 47 states, Washington D.C., Canada, and Puerto Rico[353] - A total of 31 properties (14 hotels and 17 net lease) are on land partially or entirely leased from third parties under ground leases[355][356] Item 3. Legal Proceedings SVC initiated arbitration against Marriott International Inc. regarding the termination of their management agreement, disputing the termination's efficacy, payment classifications, and seeking repayment of advances - SVC initiated arbitration against Marriott and its subsidiaries following the termination of their management agreement for 122 hotels[359] - The dispute involves Marriott challenging the termination's efficacy and asserting that SVC must refund approximately $19.1 million in minimum return advances[359] - SVC is also seeking repayment from Marriott for certain working capital advances made under the former agreement[359] Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities SVC common shares trade on Nasdaq, with a reduced quarterly cash distribution rate of $0.01 per share, subject to Board discretion and credit agreement limitations - The company's common shares trade on Nasdaq under the symbol SVC[362] - The current quarterly cash distribution rate is $0.01 per common share, significantly reduced in response to the pandemic's impact[363] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The MD&A highlights the severe COVID-19 impact on SVC's financials, with revenues falling to $1.27 billion and a net loss of $311.4 million in 2020, leading to operational changes and liquidity management efforts Financial Performance Summary (2020 vs. 2019) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenues | $1,265.3M | $2,316.1M | | Net Income (Loss) | ($311.4M) | $259.8M | | Net Income (Loss) per Share | ($1.89) | $1.58 | | Normalized FFO | $202.0M | $620.7M | | Normalized FFO per Share | $1.23 | $3.78 | - The decrease in revenue was primarily driven by a $1.11 billion (56.0%) drop in hotel operating revenues due to lower occupancy and ADR from the COVID-19 pandemic[383][384] - The company took significant steps to preserve liquidity, including reducing its quarterly dividend to $0.01/share, raising $1.2 billion in new senior notes, and borrowing the remaining capacity under its revolving credit facility in January 2021[368][415] - As of December 31, 2020, the net lease portfolio generated rent coverage of 2.14x and was 98.7% occupied[413][472] Item 7A. Quantitative and Qualitative Disclosures About Market Risk SVC's primary market risk is interest rate exposure, with $6.2 billion in fixed-rate debt and $78.4 million in floating-rate debt, the latter sensitive to LIBOR changes and its upcoming phase-out Debt Structure (as of Dec 31, 2020) | Debt Type | Principal Balance | | :--- | :--- | | Fixed Rate Senior Notes | $6,200,000,000 | | Floating Rate Revolving Credit Facility | $78,424,000 | - A hypothetical 1% increase in interest rates would increase annual interest expense on the outstanding floating rate debt by approximately $0.8 million[511] - The company is monitoring the planned phase-out of LIBOR, which is the basis for its floating rate debt, and expects its credit agreement to be amended to use an alternative reference rate[514] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, a finding affirmed by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period[518] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2020[521] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Accounting Fees Information for Items 10 through 14, covering governance, compensation, ownership, related transactions, and accounting fees, is incorporated by reference from the 2021 Proxy Statement - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive Proxy Statement to be filed within 120 days of the fiscal year-end[527][528][531][532][533] - As of December 31, 2020, there were 2,029,893 common shares available for issuance under the company's 2012 Equity Compensation Plan[530] Part IV Item 15. Exhibits, Financial Statement Schedules This section provides the index to consolidated financial statements, schedules, and a comprehensive list of exhibits, including auditor reports and detailed notes - This section includes the audited consolidated financial statements for the three years ended December 31, 2020, and the accompanying notes[535] - The independent registered public accounting firm for the 2020 audit was Deloitte & Touche LLP, who also audited the company's internal control over financial reporting[550][551] - A comprehensive list of exhibits is provided, including governing documents, debt indentures, management agreements, and certifications[540]