Service Properties Trust(US:SVC)2022-08-04 20:42markdown [PART I Financial Information](index=3&type=section&id=PART%20I%20Financial%20Information) [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for Q2 2022, showing a decrease in total assets and a shift from net loss to net income driven by improved hotel operations [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet as of June 30, 2022, reflects a decrease in total assets and liabilities, primarily due to property sales and debt repayments Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Total real estate properties, net** | $6,799,641 | $6,943,974 | | **Assets held for sale** | $68,034 | $515,518 | | **Cash and cash equivalents** | $635,204 | $944,043 | | **Total assets** | **$8,331,559** | **$9,153,315** | | **Revolving credit facility** | $800,000 | $1,000,000 | | **Senior unsecured notes, net** | $5,649,650 | $6,143,022 | | **Total liabilities** | **$6,886,687** | **$7,598,009** | | **Total shareholders' equity** | **$1,444,872** | **$1,555,306** | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) The company reported net income of $11.4 million for Q2 2022, a significant improvement from a net loss in the prior year, driven by increased hotel operating revenues Income Statement Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | **Total revenues** | $515,777 | $375,936 | | Hotel operating revenues | $418,984 | $280,135 | | **Total expenses** | $445,349 | $389,766 | | **Net income (loss)** | **$11,350** | **($91,110)** | | **Net income (loss) per share** | **$0.07** | **($0.55)** | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash flow from operations turned positive, investing activities provided significant cash from property sales, while financing activities primarily used cash for debt repayment Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $59,297 | ($21,206) | | Net cash provided by (used in) investing activities | $399,338 | ($65,218) | | Net cash (used in) provided by financing activities | ($705,948) | $911,593 | | **(Decrease) increase in cash** | **($247,313)** | **$825,169** | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes detail the company's organization, accounting policies, and financial activities, including COVID-19 impacts, property dispositions, and credit facility amendments - As of June 30, 2022, the company owned **247 hotels** and **775 net lease properties**. All hotels are operated by third-party managers, including Sonesta (**205 hotels**) and Hyatt (**17 hotels**)[18](index=18&type=chunk)[19](index=19&type=chunk) - During the first six months of 2022, the company sold **69 properties** (**56 hotels** and **13 net lease properties**) for an aggregate sales price of **$500.9 million**, resulting in a net gain of **$44.4 million**[31](index=31&type=chunk)[32](index=32&type=chunk) - On January 7, 2022, management agreements with Sonesta were amended and restated, establishing terms for **194 'Retained Hotels'** through 2037 and separate terms for **67 'Sale Hotels'** through the end of 2022 or until sold[38](index=38&type=chunk)[39](index=39&type=chunk) - In April 2022, the company amended its credit agreement, repaying **$200 million**, reducing the facility size to **$800 million**, and extending the maturity to January 15, 2023. In June 2022, the company redeemed **$500 million** of its **5.00%** senior notes due 2022[72](index=72&type=chunk)[74](index=74&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the hotel portfolio's recovery, key financing activities, property disposition strategy, and outlook on liquidity and debt covenants [Overview and Outlook](index=24&type=section&id=Overview%20and%20Outlook) The hotel portfolio shows significant recovery, but macroeconomic risks persist, with strategic actions including credit facility amendments and property dispositions - While hotel occupancy has recovered significantly since March 2020, management expects the recovery for business transient and group travel to be gradual and inconsistent, with the overall industry recovery being a multi-year process[113](index=113&type=chunk) - During the first half of 2022, the company sold **56 hotels** for **$487.9 million** and **13 net lease properties** for **$13.1 million**. An additional **20 hotels** are being marketed for sale[123](index=123&type=chunk) Comparable Hotel Performance (244 Hotels) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change | | :--- | :--- | :--- | :--- | | Occupancy | 66.7% | 55.4% | 11.3 pts | | ADR | $137.57 | $105.54 | +30.3% | | RevPAR | $91.76 | $58.47 | +56.9% | [Results of Operations](index=26&type=section&id=Results%20of%20Operations) Total revenues increased significantly in Q2 2022, driven by hotel operating revenue growth, leading to net income compared to a prior-year net loss - The increase in Q2 2022 hotel operating revenues was primarily due to higher occupancies and average rates (**$153.4M**), partially offset by the impact of hotel sales since April 1, 2021 (**$14.5M**)[125](index=125&type=chunk) - Q2 2022 hotel operating expenses increased by **$82.0 million**, mainly from higher controllable costs due to increased occupancy (**$44.3M**) and increased wages and benefits (**$38.4M**)[127](index=127&type=chunk) - A net gain on sale of real estate of **$38.9 million** was recorded in Q2 2022 from the sale of **51 hotels** and **11 net lease properties**, compared to a **$10.8 million** gain in Q2 2021[134](index=134&type=chunk) [Liquidity and Capital Resources](index=30&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains sufficient liquidity for the next twelve months, supported by operating cash flows, with cash primarily used for capital improvements and debt repayment - Principal sources of funds are owner's priority returns from hotels, rents from the net lease portfolio, and borrowings. The company believes it has sufficient liquidity for the next twelve months[161](index=161&type=chunk) - During the six months ended June 30, 2022, the company funded **$45.7 million** for capital improvements to its hotels and expects to fund an additional **$100 million** in the second half of 2022[164](index=164&type=chunk) - The company declared and paid two quarterly distributions of **$0.01 per share**, totaling **$3.3 million**, during the first six months of 2022[168](index=168&type=chunk) [Debt Covenants](index=35&type=section&id=Debt%20Covenants) As of June 30, 2022, the company was in compliance with all debt covenants, reinstating its ability to incur additional debt, albeit with limited margin Senior Notes Indenture Covenant Compliance (as of June 30, 2022) | Covenant | Actual Results | Requirement | | :--- | :--- | :--- | | Total debt / adjusted total assets | 57.9% | Maximum of 60% | | Secured debt / adjusted total assets | 7.1% | Maximum of 40% | | Consolidated income available for debt service / debt service | 1.59x | Minimum of 1.50x | | Total unencumbered assets / unsecured debt | 169.2% | Minimum 150% | [Portfolio Operating Statistics](index=36&type=section&id=Portfolio%20Operating%20Statistics) The hotel portfolio showed strong Q2 2022 growth in RevPAR, while the net lease portfolio remained stable with high occupancy and a long weighted average lease term Comparable Hotel Performance by Service Level (Q2 2022 vs Q2 2021) | Service Level | RevPAR Change | | :--- | :--- | | Full Service | +83.5% | | Select Service | +53.8% | | Extended Stay | +31.9% | | **Total/Average** | **+56.9%** | - The net lease portfolio was **98.8%** occupied as of June 30, 2022, with a weighted average lease term of **10.0 years**. The portfolio generated rent coverage of **2.80x**[194](index=194&type=chunk)[196](index=196&type=chunk) - TravelCenters of America is the largest tenant, representing **64.9%** of investment and **66.1%** of annualized minimum rent from the net lease portfolio[199](index=199&type=chunk) [Non-GAAP Financial Measures](index=42&type=section&id=Non-GAAP%20Financial%20Measures) The company provides reconciliations for non-GAAP measures FFO and Normalized FFO, both showing significant increases in Q2 2022 compared to the prior year FFO and Normalized FFO Reconciliation (in thousands, except per share) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net income (loss) | $11,350 | ($91,110) | | FFO | $87,031 | $19,151 | | Normalized FFO | $89,158 | $25,840 | | FFO per share | $0.53 | $0.12 | | Normalized FFO per share | $0.54 | $0.16 | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=44&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate changes, affecting its fixed-rate debt fair value and floating-rate debt interest expense, with LIBOR phase-out being monitored - As of June 30, 2022, the company had **$5.7 billion** in fixed-rate senior notes. A hypothetical **1%** change in interest rates would change the fair value of this debt by approximately **$161.7 million**[221](index=221&type=chunk) - The company had **$800 million** in floating-rate debt outstanding. A **1%** increase in interest rates would increase annual interest expense by **$8.0 million**, or **$0.05 per share**[223](index=223&type=chunk)[224](index=224&type=chunk) - The company is monitoring the phase-out of LIBOR, which is expected to be completed for pre-existing contracts by June 30, 2023, and anticipates its credit agreement will be amended to provide for a replacement interest rate[226](index=226&type=chunk) [Item 4. Controls and Procedures](index=46&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting - Based on an evaluation as of the end of the period, the company's management concluded that its disclosure controls and procedures are effective[228](index=228&type=chunk) - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[229](index=229&type=chunk) [PART II Other Information](index=49&type=section&id=PART%20II%20Other%20Information) [Item 1A. Risk Factors](index=49&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were reported from those previously disclosed in the 2021 Annual Report - There have been no material changes to risk factors from those previously disclosed in the company's 2021 Annual Report[246](index=246&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=49&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company purchased 478 common shares during Q2 2022 to satisfy tax withholding obligations for a former employee's vested share awards Issuer Purchases of Equity Securities | Calendar Month | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2022 | 478 | $7.94 | [Item 6. Exhibits](index=50&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including corporate governance documents, senior notes indentures, and SEC-required certifications - The exhibits include certifications by the President and CFO under Rule 13a-14(a) and Section 1350, as well as XBRL data files[249](index=249&type=chunk)