Service Properties Trust(SVC) - 2022 Q3 - Quarterly Report

Part I. Financial Information (unaudited) Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of comprehensive income (loss), statements of shareholders' equity, and statements of cash flows, along with detailed notes providing context on the company's financial position, performance, and cash movements for the periods ended September 30, 2022 Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets from $9,153,315 thousand at December 31, 2021, to $7,632,713 thousand at September 30, 2022, primarily driven by a significant reduction in cash and cash equivalents and assets held for sale, alongside a decrease in total liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------------- | :----------- | :----------- | :--------- | | Total Assets | $7,632,713 | $9,153,315 | -16.6% | | Cash and Cash Equivalents | $67,246 | $944,043 | -92.9% | | Revolving Credit Facility | $95,000 | $1,000,000 | -90.5% | | Total Liabilities | $6,180,795 | $7,598,009 | -18.7% | | Total Shareholders' Equity | $1,451,918 | $1,555,306 | -6.6% | - Total assets decreased by 16.6% from $9,153,315 thousand at December 31, 2021, to $7,632,713 thousand at September 30, 2022[8] - Cash and cash equivalents saw a significant reduction from $944,043 thousand to $67,246 thousand[8] Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a significant turnaround from a net loss of $59,714 thousand in Q3 2021 to a net income of $7,500 thousand in Q3 2022, driven by increased hotel operating revenues and reduced interest expenses, with the nine-month net loss decreasing substantially Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (%) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (%) | | :----------------------- | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | Hotel Operating Revenues | $400,453 | $338,375 | 18.3% | $1,116,843 | $787,463 | 41.8% | | Total Revenues | $498,251 | $437,099 | 14.0% | $1,407,792 | $1,074,205 | 31.1% | | Interest Expense | $(81,740) | $(92,458) | -11.6% | $(263,904) | $(273,227) | -3.4% | | Net Income (Loss) | $7,500 | $(59,714) | 112.6% | $(100,972) | $(345,814) | -70.8% | | Net Income (Loss) per Share | $0.05 | $(0.36) | 113.9% | $(0.61) | $(2.10) | N/A | - Net income (loss) improved significantly from a loss of $(59,714) thousand in Q3 2021 to an income of $7,500 thousand in Q3 2022[9] - For the nine months ended September 30, 2022, the net loss decreased by 70.8% to $(100,972) thousand from $(345,814) thousand in the prior year[9] Condensed Consolidated Statements of Shareholders' Equity Total shareholders' equity decreased from $1,555,306 thousand at December 31, 2021, to $1,451,918 thousand at September 30, 2022, primarily due to net losses and common distributions, partially offset by common share grants and equity in unrealized gains of investees Condensed Consolidated Statements of Shareholders' Equity Highlights (in thousands) | Metric | Dec 31, 2021 | Sep 30, 2022 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Total Shareholders' Equity | $1,555,306 | $1,451,918 | $(103,388) | | Cumulative Net Income Available for Common Shareholders | $2,635,660 | $2,534,688 | $(100,972) | | Cumulative Common Distributions | $(5,635,342) | $(5,640,295) | $(4,953) | - Total shareholders' equity decreased by $103,388 thousand from December 31, 2021, to September 30, 2022[10] - Cumulative net income available for common shareholders decreased by $100,972 thousand during the nine months ended September 30, 2022[10] Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, net cash provided by operating activities significantly increased, investing activities shifted to a net provision of cash due to real estate dispositions, and financing activities resulted in a substantial net cash outflow due to debt repayments Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | | :------------------------------- | :-------------------------- | :-------------------------- | :----- | | Net Cash Provided by Operating Activities | $147,114 | $1,002 | $146,112 | | Net Cash Provided by (Used in) Investing Activities | $396,980 | $(87,352) | $484,332 | | Net Cash (Used in) Provided by Financing Activities | $(1,413,375) | $909,083 | $(2,322,458) | | Cash and Cash Equivalents and Restricted Cash at End of Period | $78,137 | $914,189 | $(836,052) | - Net cash provided by operating activities increased significantly to $147,114 thousand for the nine months ended September 30, 2022, compared to $1,002 thousand in the prior year[16] - Investing activities shifted from a net cash use of $(87,352) thousand in 2021 to a net cash provision of $396,980 thousand in 2022, primarily due to $517,956 thousand net proceeds from real estate sales[16] - Financing activities resulted in a net cash outflow of $(1,413,375) thousand in 2022, a substantial change from the $909,083 thousand inflow in 2021, mainly due to debt repayments[16] Notes to Condensed Consolidated Financial Statements The notes provide detailed disclosures on the company's organization, accounting policies, financial performance, and significant transactions, including property acquisitions and dispositions, debt management, and related party agreements, offering crucial context to the condensed financial statements Note 1. Organization and Basis of Presentation Service Properties Trust (SVC) is a REIT organized in Maryland, investing in hotels and service-focused retail net lease properties, owning 242 hotels managed by five companies and 769 net lease properties with 178 tenants, including TravelCenters of America Inc. (TA) as its largest tenant - Service Properties Trust is a REIT that invests in hotels and service-focused retail net lease properties[18] - As of September 30, 2022, the company owned 242 hotels managed by Sonesta (200), Hyatt (17), Radisson (8), Marriott (16), and IHG (1)[19] - The company also owned 769 net lease properties with 178 tenants, with TravelCenters of America Inc. (TA) being the largest tenant, leasing 179 travel centers[19] Note 2. Revenue Recognition Hotel operating revenues are recognized when services are provided, while rental income from operating leases is recognized on a straight-line basis over the lease term, with adjustments for collectability assessments and recognition of percentage rent when contingencies are met - Hotel operating revenues, primarily from room and food and beverage sales, are recognized when goods and services are provided[23] - Rental income from operating leases is recognized on a straight-line basis over the lease term, with adjustments for scheduled rent changes and deferred rent obligations[25] - Percentage rent is recognized when all contingencies are met and the rent is earned, with $2,279 thousand recorded for Q3 2022 and $3,421 thousand for 9M 2022[26] Note 3. Weighted Average Common Shares Basic earnings per common share are calculated under the two-class method, and diluted earnings per share use the more dilutive of the two-class method or the treasury stock method, with unvested share awards considered unless antidilutive - Basic earnings per common share are calculated under the two-class method[27] - Diluted earnings per share are calculated using the more dilutive of the two-class method or the treasury stock method[27] - Unvested share awards are considered in diluted EPS calculations unless their inclusion would be antidilutive[27] Note 4. Real Estate Properties As of September 30, 2022, the company owned 242 hotels and 769 net lease properties with an aggregate undepreciated carrying value of $9,715,649 thousand, having acquired one land property and sold 80 properties for a net gain of $44,235 thousand during the nine months ended September 30, 2022 - As of September 30, 2022, the company owned 242 hotels (40,563 rooms) and 769 service-oriented retail properties (13,412,371 sq ft), with an aggregate undepreciated carrying value of $9,715,649 thousand[28] - During the nine months ended September 30, 2022, the company sold 80 properties (61 hotels and 19 net lease properties) for an aggregate sales price of $531,737 thousand, resulting in a net gain on sale of real estate of $44,235 thousand[31][33] - As of November 1, 2022, the company had agreements to sell 20 additional hotels (16 Marriott and 4 Sonesta branded) for an aggregate sales price of $162,470 thousand, with sales expected to complete by the end of Q1 2023[35] Note 5. Management Agreements and Leases The company's 242 hotels are managed under six operating agreements, with Sonesta managing 200 hotels under an amended agreement effective January 1, 2022, which includes a pooling agreement for retained hotels and a reduced owner's priority return for sold hotels, while the net lease portfolio consists of 769 properties, with TA being the largest tenant, and rental income is subject to straight-line adjustments and collectability assessments - The Sonesta management agreement, amended effective January 1, 2022, covers 200 hotels, with 194 'Retained Hotels' having a term expiring January 31, 2037, and an initial annual owner's priority return of $325,200 thousand[37][38][39] - The company's net lease portfolio comprises 769 properties with 178 tenants, generating annual minimum rents of $372,601 thousand and having a weighted average remaining lease term of 8.8 years[53] - TravelCenters of America (TA) is the largest tenant, leasing 179 travel centers with annual minimum rents of $246,110 thousand, and had a remaining deferred rent obligation of $8,807 thousand as of September 30, 2022[55] Note 6. Other Investments The company holds an approximately 34% equity interest in Sonesta, accounted for under the equity method, with a carrying value of $113,168 thousand as of September 30, 2022, and also owns approximately 8.0% of TA's common stock, reported at fair value, with a carrying value of $63,896 thousand, recognizing unrealized gains - The company owns approximately 34% of Sonesta's common stock, accounted for under the equity method, with a carrying value of $113,168 thousand as of September 30, 2022[63][64] - Income recognized from the investment in Sonesta was $2,866 thousand for Q3 2022 and $4,472 thousand for 9M 2022[64] - The company owns approximately 8.0% of TA's common stock, reported at fair value, with a carrying value of $63,896 thousand as of September 30, 2022, and recognized unrealized gains of $23,056 thousand for Q3 2022[67] Note 7. Indebtedness As of September 30, 2022, the company's principal debt included $95,000 thousand outstanding under its $800,000 thousand revolving credit facility (maturing July 15, 2023) and $5,700,000 thousand in senior unsecured notes, with the credit facility amended in April and October 2022, and $500,000 thousand of senior notes due 2022 redeemed in June 2022 - Principal debt obligations as of September 30, 2022, included $95,000 thousand outstanding under an $800,000 thousand revolving credit facility and $5,700,000 thousand in senior unsecured notes[68] - The revolving credit facility's maturity date was extended to July 15, 2023, through amendments in April and October 2022, which also reduced the facility size and modified financial covenants[71][72][74][78] - The company redeemed $500,000 thousand of 5.00% senior notes due 2022 in June 2022, resulting in a $791 thousand loss on early extinguishment of debt for the nine months ended September 30, 2022[75][152] Note 8. Shareholders' Equity The company declared and paid regular quarterly distributions of $0.01 per common share for the nine months ended September 30, 2022, totaling $4,953 thousand, and also awarded 384,500 common shares to officers and RMR employees while purchasing 68,849 common shares to satisfy tax withholding obligations - During the nine months ended September 30, 2022, the company declared and paid regular quarterly distributions of $0.01 per common share, totaling $4,953 thousand[77] - A quarterly distribution of $0.20 per share ($33,091 thousand) was declared on October 13, 2022, payable in November 2022[77] - The company awarded 384,500 common shares to officers and RMR employees and purchased 68,849 common shares to satisfy tax withholding obligations during the nine months ended September 30, 2022[81][82] Note 9. Business and Property Management Agreements with RMR The company has no employees and relies on RMR for all management services under a business management agreement and a property management agreement, with business management fees decreasing due to lower market capitalization, while property management and construction supervision fees increased - The company has no employees and receives all personnel and services from RMR under business and property management agreements[83] - Net business management fees payable to RMR decreased by 23.3% to $8,272 thousand for Q3 2022 and by 13.8% to $27,455 thousand for 9M 2022, primarily due to a decrease in market capitalization[84][132][146] - Property management and construction supervision fees payable to RMR increased by 17.6% to $1,628 thousand for Q3 2022 and by 38.5% to $4,526 thousand for 9M 2022[86] Note 10. Related Person Transactions The company has significant related party transactions with TA, Sonesta, and RMR, all of which share common management or ownership interests, including Adam D. Portnoy, who is a controlling shareholder of RMR Inc. and Sonesta, and a managing trustee of the company - The company has historical and continuing transactions with TA, Sonesta, RMR, and The RMR Group, Inc. (RMR Inc.), with shared trustees, directors, or officers[90] - Adam D. Portnoy, the Chair of the Board of Trustees, is the controlling shareholder of RMR Inc. and Sonesta, and also serves as a managing director of TA[90][92][93] - The company leases 179 travel centers to TA and owns approximately 8.0% of TA's common stock, and owns approximately 34% of Sonesta, which manages 200 of its hotels[92][93] Note 11. Income Taxes As a REIT, the company is generally exempt from federal income tax, but its wholly-owned TRSs are subject to federal, state, and foreign income taxes, with income tax expenses for the three and nine months ended September 30, 2022, primarily from state and foreign taxes - As a REIT, the company is generally not subject to federal and most state income taxation on its operating income[96] - Wholly-owned taxable REIT subsidiaries (TRSs) file separate consolidated tax returns and are subject to federal, state, and foreign income taxes[96] - Income tax expense for Q3 2022 was $390 thousand (including $318 thousand state and $72 thousand foreign tax expense), and for 9M 2022 was $1,558 thousand (including $1,153 thousand state and $405 thousand foreign tax expense)[97][98] Note 12. Segment Information The company operates in two reportable segments: hotel investments and net lease investments, with hotel investments generating $1,116,843 thousand in revenues and a net income of $50,425 thousand, while net lease investments generated $290,949 thousand in revenues and a net income of $142,805 thousand for the nine months ended September 30, 2022 - The company aggregates its hotels and net lease portfolio into two reportable segments: hotel investments and net lease investments[101] Segment Performance Highlights (in thousands) | Segment | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | | :--------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Hotel Investments | | | | | | Revenues | $1,116,843 | $787,463 | $400,453 | $338,375 | | Net Income (Loss) | $50,425 | $(148,724) | $25,358 | $(12,923) | | Net Lease Investments | | | | | | Revenues | $290,949 | $286,742 | $97,798 | $98,724 | | Net Income (Loss) | $142,805 | $102,859 | $48,300 | $36,283 | | Consolidated Net Income (Loss) | $(100,972) | $(345,814) | $7,500 | $(59,714) | - Hotel investments generated $1,116,843 thousand in revenues and $50,425 thousand in net income for the nine months ended September 30, 2022[102] Note 13. Fair Value of Assets and Liabilities The company's investment in TA common stock is measured at fair value using Level 1 inputs, while assets held for sale are measured at fair value less costs to sell using Level 2 inputs, and the fair values of senior unsecured notes are estimated using Level 2 inputs, showing a significant difference from their carrying values due to market conditions - The investment in TA common stock ($63,896 thousand as of Sep 30, 2022) is a recurring fair value measurement asset, categorized as Level 1 (quoted prices in active markets)[108] - Assets of properties held for sale ($20,553 thousand as of Sep 30, 2022) are non-recurring fair value measurement assets, categorized as Level 2 (significant observable inputs like offers from third parties)[108] Senior Unsecured Notes Fair Value vs. Carrying Value (in thousands, as of Sep 30, 2022) | Senior Unsecured Notes | Carrying Value | Fair Value | | :--------------------- | :------------- | :--------- | | Total Financial Liabilities | $5,652,587 | $4,683,620 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an in-depth analysis of the company's financial performance, liquidity, and capital resources, highlighting the recovery in hotel operations, significant debt repayments, and ongoing property dispositions, while also addressing macroeconomic challenges like inflation and rising interest rates Overview The company, a REIT owning 1,011 properties, experienced significant recovery in hotel occupancy post-COVID-19 but faces uncertainty from a potential economic recession, rising interest rates, and inflation, actively managing liquidity through debt repayments and property dispositions, while also amending management agreements with Sonesta - As of September 30, 2022, the company owned 1,011 properties across 46 states, the District of Columbia, Canada, and Puerto Rico[112] - Hotel occupancy has recovered significantly from the COVID-19 pandemic, but uncertainty remains regarding the return to pre-pandemic levels, especially for business transient and group segments[113] - The company repaid $200,000 thousand of its revolving credit facility and redeemed $500,000 thousand of senior notes due 2022, with cash and cash equivalents of $114,000 thousand as of November 1, 2022[115] - During the nine months ended September 30, 2022, the company sold 61 hotels and 19 net lease properties for an aggregate sales price of $531,737 thousand[116] Results of Operations The company experienced a significant improvement in net income for Q3 2022 and a reduced net loss for 9M 2022 compared to the prior year, primarily driven by substantial increases in hotel operating revenues and lower interest expenses, partially offset by asset impairment losses and changes in unrealized gains on equity securities Three Months Ended September 30, 2022 compared to the Three Months Ended September 30, 2021 For the three months ended September 30, 2022, the company reported a net income of $7,500 thousand, a significant improvement from a net loss of $(59,714) thousand in the prior year, primarily due to an 18.3% increase in hotel operating revenues and an 11.6% decrease in interest expense - Net income (loss) improved by $67,214 thousand, from a loss of $(59,714) thousand in Q3 2021 to an income of $7,500 thousand in Q3 2022[125] - Hotel operating revenues increased by 18.3% ($62,078 thousand) to $400,453 thousand, driven by higher occupancies and average rates[125][126] - Interest expense decreased by 11.6% ($10,718 thousand) to $(81,740) thousand, primarily due to lower average outstanding borrowings[125][136] Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021 For the nine months ended September 30, 2022, the net loss decreased by 70.8% to $(100,972) thousand from $(345,814) thousand in the prior year, primarily due to a 41.8% increase in hotel operating revenues and a 304.6% increase in gain on sale of real estate, partially offset by increased asset impairment losses - Net loss decreased by $244,842 thousand (70.8%) to $(100,972) thousand for the nine months ended September 30, 2022[139] - Hotel operating revenues increased by 41.8% ($329,380 thousand) to $1,116,843 thousand, driven by higher occupancies and average rates[139][140] - Gain on sale of real estate, net, increased by 304.6% ($33,301 thousand) to $44,235 thousand, due to the sale of 61 hotels and 19 net lease properties[139][149] Liquidity and Capital Resources The company's liquidity is primarily derived from hotel owner's priority returns, net lease rents, and its revolving credit facility, actively managing its debt and capital through significant repayments and asset dispositions, while also funding capital improvements and distributions, but faces potential challenges from economic conditions and upcoming debt maturities Our Managers and Tenants The company's hotel managers and net lease tenants continue to face adverse effects from the COVID-19 pandemic, potentially impacting their ability to pay returns and rents, while the Sonesta management agreement was amended, and the net lease portfolio maintained a strong coverage ratio of 2.88x as of September 30, 2022 - The COVID-19 pandemic continues to materially and adversely affect the lodging and service industries, potentially impacting hotel managers' and tenants' ability to pay returns and rents[154] - The Sonesta management agreement was amended effective January 1, 2022, with terms for 'Retained Hotels' expiring in 2037 and 'Sale Hotels' having an extended term until sold[156][159] - Net lease coverage (EBITDAR divided by annual minimum rent) was 2.88x as of September 30, 2022, an increase from 2.37x in the prior year[159] Our Operating Liquidity and Capital Resources The company's primary sources of operating funds are owner's priority returns, net lease rents, and its revolving credit facility, with net cash provided by operating activities significantly increasing to $147,114 thousand for the nine months ended September 30, 2022, while investing activities shifted to a net cash provision due to real estate dispositions - Principal sources of funds include owner's priority returns from hotels, rents from the net lease portfolio, and borrowings under the revolving credit facility[160] - Net cash provided by operating activities increased to $147,114 thousand for the nine months ended September 30, 2022, compared to $1,002 thousand in the prior year[161] - Net cash provided by investing activities was $396,980 thousand for the nine months ended September 30, 2022, a significant change from net cash used of $(87,352) thousand in the prior year, primarily due to increased real estate dispositions[161] Our Investment and Financing Liquidity and Capital Resources The company funded $68,502 thousand in hotel capital improvements and $5,450 thousand in net lease capital improvements during the nine months ended September 30, 2022, completed significant asset sales and debt repayments, and amended its revolving credit facility, with future debt maturities totaling $5,700,000 thousand, including $500,000 thousand due in 2023 - The company funded $68,502 thousand for hotel capital improvements and $5,450 thousand for net lease property capital improvements during the nine months ended September 30, 2022[163][165] - Asset sales during the nine months ended September 30, 2022, generated $531,737 thousand, with proceeds expected to be used for general business purposes, including debt repayment[166] Term Debt Maturities (in thousands, as of Sep 30, 2022) | Year | Maturity | | :--- | :------- | | 2023 | $500,000 | | 2024 | $1,175,000 | | 2025 | $1,150,000 | | 2026 | $800,000 | | 2027 | $850,000 | | 2028 | $400,000 | | 2029 | $425,000 | | 2030 | $400,000 | | Total | $5,700,000 | - The revolving credit facility was amended in April and October 2022, extending its maturity to July 15, 2023, and modifying financial covenants and liquidity requirements[171] Debt Covenants The company's debt obligations are subject to financial covenants that restrict debt incurrence and require maintenance of specific financial ratios, and as of September 30, 2022, the company believes it was in compliance with all covenants, though the margin for the consolidated income available for debt service ratio was relatively small, limiting additional debt capacity - The company believes it was in compliance with all covenants under its indentures and credit agreement as of September 30, 2022[180] Senior Notes Indenture Covenants (as of Sep 30, 2022) | Covenant | Actual Results | Requirement | | :------------------------------------------------- | :------------- | :---------- | | Total debt / adjusted total assets | 53.8% | Maximum of 60% | | Secured debt / adjusted total assets | 0.9% | Maximum of 40% | | Consolidated income available for debt service / debt service | 1.72x | Minimum of 1.50x | | Total unencumbered assets / unsecured debt | 161.0% | Minimum 150% | - The company's ability to incur additional debt is limited due to the relatively small margin by which it satisfied the minimum required consolidated income available for debt service to debt service ratio[181] Supplemental Guarantor Information The company's 7.50% senior notes due 2025 and 5.50% senior notes due 2027 are fully and unconditionally guaranteed by most subsidiaries, making them effectively and structurally subordinated to secured debt and liabilities of non-guarantor subsidiaries, with the combined guarantor entities reporting a net loss of $(218,538) thousand for the nine months ended September 30, 2022 - The company's $800,000 thousand of 7.50% unsecured senior notes due 2025 and $450,000 thousand of 5.50% unsecured senior notes due 2027 are fully and unconditionally guaranteed by most subsidiaries[184] - These guaranteed notes are effectively subordinated to secured indebtedness and structurally subordinated to all indebtedness and liabilities of non-guarantor subsidiaries[184][186] Summarized Financial Information for Company and Subsidiary Guarantors (in thousands, 9 Months Ended Sep 30, 2022) | Metric | Amount | | :------- | :------- | | Revenues | $1,304,524 | | Expenses | $1,523,062 | | Net Loss | $(218,538) | Management Agreements, Leases and Operating Statistics This section details the operating performance of the company's hotel and net lease portfolios, showing significant improvements in hotel RevPAR, ADR, and occupancy, alongside strong net lease occupancy and positive rent growth on renewals and new leases Hotel Portfolio The company's hotel portfolio showed significant performance improvements for the nine months ended September 30, 2022, with comparable hotels experiencing a 10.8 percentage point increase in occupancy to 62.0%, a 23.8% rise in ADR to $133.41, and a 49.9% increase in RevPAR to $82.71 Comparable Hotel Performance (9 Months Ended Sep 30) | Metric | 2022 | 2021 | Change | | :-------- | :----- | :----- | :----- | | Occupancy | 62.0% | 51.2% | 10.8 pts | | ADR | $133.41 | $107.79 | 23.8% | | RevPAR | $82.71 | $55.19 | 49.9% | - All hotels owned as of September 30, 2022, reported a 10.7 percentage point increase in occupancy to 61.9%, a 24.5% increase in ADR to $134.19, and a 50.5% increase in RevPAR to $83.06 for the nine months ended September 30, 2022, compared to the prior year[194] - Comparable hotels' RevPAR for Q3 2022 increased by 29.6% to $92.29, with occupancy at 65.9% (up 6.6 pts) and ADR at $140.05 (up 16.6%)[122] Net Lease Portfolio As of September 30, 2022, the net lease portfolio was 98.1% occupied, with lease renewals for 142,071 square feet seeing average rents increase by 3.47%, while new leases for 140,492 square feet achieved average rents 21.2% higher than prior rents, and Travel Centers remain the largest industry segment - As of September 30, 2022, the net lease properties were 98.1% occupied, with 21 properties available for lease[196] - During the nine months ended September 30, 2022, lease renewals for 142,071 square feet resulted in weighted average rents 3.47% higher than prior rents[196] - New leases for 140,492 square feet achieved weighted average rents 21.2% higher than prior rents[196] Net Lease Portfolio Lease Expirations by Annualized Minimum Rent (as of Sep 30, 2022) | Year | Annualized Minimum Rent Expiring (in thousands) | Percent of Total Annualized Minimum Rent Expiring | | :--- | :---------------------------------------------- | :------------------------------------------------ | | 2022 | $1,721 | 0.5% | | 2023 | $1,904 | 0.5% | | 2024 | $11,177 | 3.0% | | 2025 | $8,950 | 2.4% | | 2026 | $12,187 | 3.3% | | 2027 | $14,231 | 3.8% | | 2028 | $9,369 | 2.5% | | 2029 | $48,482 | 13.0% | | 2030 | $4,182 | 1.1% | | 2031 | $48,869 | 13.1% | | 2032 | $53,442 | 14.4% | | 2033 | $53,178 | 14.3% | | 2034 | $3,785 | 1.0% | | 2035 | $80,283 | 21.6% | | 2036 | $7,809 | 2.1% | | 2037 | $154 | 0.0% | | 2038 | $1,184 | 0.3% | | 2039 | $3,214 | 0.9% | | 2040 | $2,406 | 0.6% | | 2041 | $2,291 | 0.6% | | 2042 | $155 | 0.0% | | 2045 | $3,628 | 1.0% | | Total | $372,601 | 100.0% | Related Person Transactions The company maintains ongoing relationships and transactions with RMR, RMR Inc., TA, and Sonesta, as well as other affiliated entities, which are detailed in the financial statements and other SEC filings - The company has historical and continuing transactions with RMR, RMR Inc., TA, Sonesta, and others related to them[213] - Further information on these relationships and transactions is provided in Notes 4, 5, 9, and 10 to the condensed consolidated financial statements and the 2021 Annual Report[213] Critical Accounting Estimates The preparation of financial statements involves significant estimates and assumptions, including consolidation of VIEs, purchase price allocations, useful lives of fixed assets, lease classification, and impairment assessments, with no significant changes to these critical accounting estimates since December 31, 2021 - Significant estimates in the condensed consolidated financial statements include consolidation of variable interest entities (VIEs), purchase price allocations, useful lives of fixed assets, classification of leases, and assessment of carrying values and impairment of real estate intangible assets and equity investments[214] - There have been no significant changes in the company's critical accounting estimates since the year ended December 31, 2021[215] Non-GAAP Financial Measures The company presents Funds From Operations (FFO) and Normalized FFO as non-GAAP measures to supplement GAAP net income (loss), providing insights into operating performance and facilitating comparisons with other REITs by excluding certain non-cash and non-recurring items Funds From Operations and Normalized Funds From Operations FFO and Normalized FFO are presented as supplemental measures of operating performance, with FFO at $170,597 thousand ($1.04 per share) and Normalized FFO at $174,207 thousand ($1.06 per share) for the nine months ended September 30, 2022, showing significant improvements compared to the prior year - FFO is calculated as net income (loss) excluding gain/loss on property sales and asset impairment, plus real estate depreciation/amortization, less unrealized gains/losses on equity securities, and adjustments for investee FFO[217] - Normalized FFO further adjusts FFO for transaction-related costs and loss on early extinguishment of debt[217] FFO and Normalized FFO Highlights (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income (Loss) | $7,500 | $(59,714) | $(100,972) | $(345,814) | | FFO | $88,397 | $40,376 | $170,597 | $(2,929) | | Normalized FFO | $88,458 | $43,781 | $174,207 | $27,624 | | FFO per common share | $0.54 | $0.25 | $1.04 | $(0.02) | | Normalized FFO per common share | $0.54 | $0.27 | $1.06 | $0.17 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk, primarily from its fixed-rate senior notes and floating-rate revolving credit facility, managing this risk by monitoring financing alternatives, but rising interest rates could increase interest costs and decrease the fair value of fixed-rate debt, while the LIBOR phase-out may lead to changes in floating-rate interest calculations Fixed Rate Debt As of September 30, 2022, the company had $5,700,000 thousand in fixed-rate senior notes, where changes in market interest rates do not affect interest obligations but impact the fair value of this debt; a one percentage point increase in rates would decrease fair value by approximately $161,681 thousand and increase refinancing costs by $57,000 thousand annually - As of September 30, 2022, the company had $5,700,000 thousand in outstanding fixed-rate senior notes across 12 issues[224] - A hypothetical one percentage point increase in interest rates would increase annual interest cost by approximately $57,000 thousand if these notes were refinanced[224] - A hypothetical immediate one percentage point change in interest rates would change the fair value of fixed-rate debt obligations by approximately $161,681 thousand[224] Floating Rate Debt As of September 30, 2022, the company had $95,000 thousand outstanding under its revolving credit facility, which is floating-rate debt maturing on July 15, 2023, where a one percentage point increase in interest rates would increase annual interest expense by $950 thousand for the current outstanding amount, or $8,000 thousand if the facility were fully drawn - As of September 30, 2022, the company's floating-rate debt consisted of $95,000 thousand outstanding under its revolving credit facility, which matures on July 15, 2023[226] Impact of 1% Interest Rate Increase on Floating Rate Debt (in thousands, except per share) | Scenario | Outstanding Debt | Total Interest Expense Per Year (Current Rate) | Total Interest Expense Per Year (1% Increase) | Annual Per Share Impact (1% Increase) | | :---------------------- | :--------------- | :------------------------------------------- | :-------------------------------------------- | :------------------------------------ | | Current Outstanding | $95,000 | $4,997 | $5,947 | $0.01 | | Fully Drawn ($800,000 facility) | $800,000 | $42,080 | $50,080 | $0.05 | - A one percentage point increase in interest rates would increase annual floating-rate interest expense by $950 thousand for the currently outstanding amount, or $8,000 thousand if the revolving credit facility were fully drawn[227][228] LIBOR Phase Out LIBOR is being phased out by June 30, 2023, and the company expects to transition to an alternative interest rate index, likely SOFR, for its revolving credit facility, which may result in changes to, and potentially increased, interest amounts - LIBOR is expected to be phased out for pre-existing contracts by June 30, 2023[230] - The company expects the determination of interest under its revolving credit facility to be revised to an alternative interest rate index, likely the Secured Overnight Financing Rate (SOFR)[230] - Any alternative interest rate index that replaces LIBOR may result in changes to the amount of interest the company is required to pay, potentially leading to increased interest amounts[230] Item 4. Controls and Procedures Management, under the supervision of Managing Trustees and senior officers, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2022, and concluded they were effective, with no material changes to internal control over financial reporting occurring during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[232] - There have been no material changes in the company's internal control over financial reporting during the quarter ended September 30, 2022[233] Warning Concerning Forward-Looking Statements This section provides a comprehensive warning that the report contains forward-looking statements based on current expectations, which are not guaranteed to occur and are subject to known and unknown risks, uncertainties, and other factors, including economic conditions, competition, regulatory compliance, and related party transactions, which could cause actual results to differ materially - The report contains forward-looking statements based on present intent, beliefs, or expectations, which are not guaranteed to occur[235] - Actual results may differ materially due to known and unknown risks, uncertainties, and other factors beyond the company's control[238] - Key risks include economic conditions (interest rates, inflation, recession), competition, regulatory compliance, REIT qualification, acts of terrorism/pandemics, and conflicts of interest with related parties[238][239][241] Statement Concerning Limited Liability The company's Amended and Restated Declaration of Trust limits personal liability for its trustees, officers, shareholders, employees, and agents, directing all claims and obligations solely to the assets of Service Properties Trust - The Amended and Restated Declaration of Trust provides that no trustee, officer, shareholder, employee, or agent shall be held to any personal liability for company obligations[247] - All persons dealing with Service Properties Trust must look only to the assets of Service Properties Trust for the payment of any sum or performance of any obligation[247] Part II. Other Information Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2021 Annual Report - No material changes to risk factors from those previously disclosed in the 2021 Annual Report[248] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended September 30, 2022, the company purchased 68,371 common shares at an average price of $6.71 per share to satisfy tax withholding obligations for officers and employees related to vesting share awards - The company purchased 68,371 common shares during the quarter ended September 30, 2022[249] - The average price paid per share was $6.71[249] - These purchases were made to satisfy tax withholding and payment obligations of officers and RMR employees in connection with the vesting of common share awards[249] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, indentures for senior notes, management agreements, certifications, and XBRL-related documents - The exhibits include organizational documents (Declaration of Trust, Bylaws), various Indentures and Supplemental Indentures for senior notes, and the Sixth Amendment to the Amended and Restated Credit Agreement[250][251] - Also included are certifications (Rule 13a-14(a) and Section 1350) and XBRL Taxonomy Extension documents[252] Signatures The report is duly signed on behalf of Service Properties Trust by Todd W. Hargreaves, President and Chief Investment Officer, and Brian E. Donley, Chief Financial Officer and Treasurer, on November 3, 2022 - The report is signed by Todd W. Hargreaves, President and Chief Investment Officer[256] - The report is also signed by Brian E. Donley, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)[256] - The signing date for the report is November 3, 2022[256]