Service Properties Trust Announces First Quarter 2020 Results

First Quarter Net Loss of $0.20 Per Common Share

First Quarter Normalized FFO of $0.75 Per Common Share

Amends $1.4 Billion Credit Agreement

NEWTON, Mass.–(BUSINESS WIRE)–Service Properties Trust (Nasdaq: SVC) today announced its financial results for the quarter ended March 31, 2020:

John Murray, President and Chief Executive Officer of SVC, made the following statement:

“While the travel industry and certain service retail businesses, particularly theaters, fitness centers and casual dining restaurants, are experiencing unprecedented challenges due to the COVID-19 pandemic, we entered this crisis in a solid financial position. We continue to believe SVC has the ability to withstand the current economic downturn because of our strong balance sheet, liquidity and agreements with our hotel operators and net lease tenants.

In response to the COVID-19 pandemic, we have taken significant and difficult steps to preserve capital until economic conditions improve. These included reducing our quarterly dividend and deferring non-essential capital spending. We have no debt maturities until 2021 and $500 million of availability under our revolving credit facility, which we amended in May 2020 to obtain waivers from compliance with certain financial covenants through March 2021.

Our earnings for the first two and a half months of the first quarter met our expectations, but the impact of the COVID-19 pandemic during the last two weeks of the quarter was acute and continues. We remain committed to working closely with our hotel operators to identify ways to optimally reduce operating costs. We are also working with our net lease tenants, especially those whose businesses are temporarily closed due to government mandates or guidelines, by generally considering requests for rent relief and we have agreed to rent deferrals which will be payable beginning in September 2020 in 12 equal monthly installments in order to help them withstand the crisis. As of May 7, 2020 we have agreed to defer an aggregate of $8.6 million of second quarter 2020 rent for tenants representing approximately 6.4% of our annual minimum returns and rents.

We are a large, diverse, well-capitalized REIT and we believe we are well positioned to manage through this crisis.”

Results for the Quarter Ended March 31, 2020 and Recent Activities:

• Net Income (loss):Net loss for the quarter ended March 31, 2020 was $33.7 million, or $0.20 per diluted common share, compared to net income of $225.8 million, or $1.37 per diluted common share, for the quarter ended March 31, 2019. Net loss for the quarter ended March 31, 2020 includes a $6.9 million, or $0.04 per diluted common share, net loss on the sale of real estate, $5.0 million, or $0.03 per diluted common share, of unrealized loss on equity securities and a $16.7 million, or $0.10 per diluted common share, loss on asset impairment. Net income for the quarter ended March 31, 2019 includes a $159.5 million, or $0.97 per diluted common share, gain on sale of real estate and $21.0 million, or $0.13 per diluted common share, of net unrealized gains on equity securities. The weighted average number of diluted common shares outstanding was 164.4 million and 164.3 million for the quarters ended March 31, 2020 and 2019, respectively.

• Adjusted EBITDAre: Adjusted EBITDAre for the quarter ended March 31, 2020 compared to the same period in 2019 declined 0.4% to $195.1 million.

• Normalized FFO:Normalized FFO for the quarter ended March 31, 2020 were $123.1 million, or $0.75 per diluted common share, compared to Normalized FFO of $144.6 million, or $0.88 per diluted common share, for the quarter ended March 31, 2019.

Hotel Portfolio Update:

Hotel occupancies have continued to decrease dramatically industry-wide since mid-March 2020. For the 28 days ended May 2, 2020, occupancy for SVC’s hotels was 23.3%.

Since March 31, 2020, SVC has closed 19 hotels and most of its other hotels are operating with limited staffing due to significant occupancy declines resulting from various forms of stay-at-home restrictions being enforced throughout the U.S. due to the COVID-19 pandemic. Despite overall weak demand, SVC’s suburban extended stay hotels and select service hotels have so far performed better than its urban full-service hotels. SVC also expects its diverse portfolio of suburban extended stay and select service hotels may recover more quickly than its urban full-service hotels when stay-at-home orders are lifted.

As the demand for lodging deteriorates, SVC continues to work with its operators to mitigate the impact on its hotel operations. Efforts to reduce operating expenses include, but are not limited to staffing reductions and furloughs, utility consumption reductions, purchasing reductions and eliminations, service contract reductions and eliminations, food services and exercise facilities closures and the reduction or elimination of certain marketing expenditures. SVC has also agreed to suspend contributions to its FF&E reserves under certain of its operating agreements.

During April 2020, SVC advanced an aggregate of $70.7 million of working capital to certain of its hotel operators to cover projected operating losses. SVC advanced $37.0 million to InterContinental Hotels Group, plc (NYSE: IHG), or IHG, $30.0 million to Marriott International, Inc. (Nasdaq: MAR), or Marriott, $2.4 million to Wyndham Hotels & Resorts, Inc (NYSE: WH). or Wyndham, and $1.3 million to Hyatt Hotels Corporation (NYSE: H), or Hyatt. To date in May 2020, Sonesta has requested $7.4 million and Hyatt has requested an additional $1.3 million of working capital advances. Under certain of SVC’s hotel agreements, working capital advances are reimbursable to SVC from a share of future cash flow from the applicable hotel operations in excess of the minimum returns due to SVC and certain fees to the manager, if any.

As of March 31, 2020, SVC had $129.5 million of security deposits and guarantees available to cover shortfalls in hotel cash flows available to pay the minimum returns and rents due to SVC from certain hotel operators. Based on current estimates, SVC projects that it will exhaust all of the security deposits and most of the guarantees its hotel operators have provided by as early as the second quarter of 2020.

Net Lease Portfolio Update:

TravelCenters of America Inc. (Nasdaq: TA), or TA, which as of March 31, 2020 represented 25.5% of SVC’s minimum rents and returns, is current on all of its lease payments due to SVC. As an essential business supporting the country’s truckers and our nation’s supply chain, all of SVC’s travel centers are open and operating, although these properties have also experienced negative impacts from the pandemic, including closing most of the full service restaurants at SVC owned travel centers.

SVC has collected 45% of April rents from its other net lease tenants. SVC has entered into rent deferral agreements with 84 net lease retail tenants with leases requiring an aggregate of $62.0 million of annual minimum rents. Generally these rent deferrals are for one to three months of rent and will be payable, in most cases, in 12 equal monthly installments beginning in September 2020. In aggregate, SVC has deferred $8.6 million of rent from its net lease tenants to date.

Financing Activities:

On March 30, 2020, SVC announced a $0.01 per common share dividend to be paid to its shareholders of record on April 21, 2020 and distributed on or about May 21, 2020.

On May 8, 2020, SVC amended the credit agreement governing its $1 billion unsecured revolving credit facility and $400 million unsecured term loan. The amendment provides for a waiver of certain of the financial covenants under its credit agreement through March 31, 2021, during which, subject to certain conditions, SVC will continue to have access to undrawn amounts under the credit facility. In return for temporary covenant relief and continued access to undrawn amounts under its credit facility, SVC agreed to the following temporary changes to its credit facility through March 31, 2020:

• The interest rate premium over LIBOR under SVC’s revolving credit facility and term loan will be increased by 50 basis points;
• Pledges of equity interests of subsidiaries owning properties with up to $3.2 billion of unencumbered gross asset value as of March 31, 2020;
• Required to maintain minimum unrestricted liquidity of $125 million (unrestricted cash or undrawn availability under its $1 billion revolving credit facility);
• Certain additional covenants, including additional restrictions on SVC’s ability to incur indebtedness (with exceptions for borrowings under its revolving credit facility and certain other categories of secured and unsecured indebtedness), and to acquire real property or make other investments (with exceptions for, among other things, certain categories of capital expenditures and costs, and certain share purchases);
• Distributions on SVC’s common shares will be limited to amounts required to maintain its qualification for taxation as a real estate investment trust, or REIT, and to avoid the payment of certain income and excise taxes, and to pay a cash dividend of $.01 per common share per quarter; and
• SVC will generally be required to apply the net cash proceeds from the disposition of assets, capital markets transactions, debt refinancings or COVID-19 government stimulus programs to the repayment of outstanding loans under the credit agreement.

Recent Investment Activities:

During the quarter ended March 31, 2020, SVC sold six net lease properties with an aggregate of 292,276 square feet in five states for an aggregate sales price of $8.0 million, excluding closing costs.

During the quarter ended March 31, 2020, SVC acquired a portfolio of three net lease properties with approximately 6,696 square feet in two states with leases requiring an aggregate of $0.4 million of annual minimum rent for an aggregate purchase price of $7.0 million, excluding acquisition related costs.

SVC has entered agreements to sell seven net lease properties with an aggregate of 821,068 square feet in six states with leases requiring an aggregate of $5.4 million of annual minimum rents for an aggregate sales price of $59.5 million, excluding closing costs. SVC expects these sales to be completed by the third quarter of 2020.

SVC was previously marketing for sale 20 Wyndham branded hotels with an aggregate net carrying value of $110.5 million and 33 Marriott hotels with an aggregate net carrying value of $221.1 million and was in the process of launching a marketing effort related to its 39 Sonesta ES Suites hotels with an aggregate net carrying value of $461.3 million. SVC currently expects transactions related to any of these hotels will be delayed until later in 2020 or 2021 as a result of current market conditions due to the COVID-19 pandemic and these transactions may be delayed beyond 2021 or may not occur.

During the quarter ended March 31, 2020, SVC funded $38.4 million of capital improvements to certain of its properties. Pursuant to the terms of its management and lease agreements with its managers and tenants, some of these capital improvements resulted in increases in SVC’s contractual annual minimum returns and rents of $2.5 million.

Sonesta Agreements:

On February 27, 2020, SVC entered into a transaction agreement with Sonesta Holdco Corporation and its subsidiaries, or Sonesta, pursuant to which SVC and Sonesta modified their existing business arrangements, as follows:

• SVC amended and restated its then existing management agreements with Sonesta for each of its hotels managed by Sonesta, which are referred to collectively as the Sonesta agreement, and the existing pooling agreement with Sonesta, which combines the management agreements with Sonesta for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to SVC, as further described below;
• SVC and Sonesta agreed to sell, rebrand or repurpose all 39 SVC owned extended stay hotels managed by Sonesta with an aggregate carrying value of $461.3 million, which currently require aggregate annual minimum returns of $48.2 million. As the hotels are sold, rebranded or repurposed, the management agreement for the applicable hotel(s) will terminate without SVC being required to pay Sonesta a termination fee and SVC’s annual minimum returns due from Sonesta will decrease by the applicable amount allocated to each hotel;
• Sonesta will continue to manage 14 full-service hotels owned by SVC and the annual minimum returns due for these hotels will be reduced from $99.0 million to $69.0 million;
• Sonesta issued SVC a number of its shares of common stock representing approximately 34% of its outstanding shares of common stock (post-issuance);
• SVC and Sonesta modified the Sonesta agreement and pooling agreement so that up to 5% of the hotel gross revenues of each of the 14 full-service hotels managed by Sonesta will be escrowed for future capital expenditures as “FF&E reserves,” subject to available cash flow after payment of the annual minimum returns due to SVC under the Sonesta agreement;
• SVC and Sonesta modified the Sonesta agreement and pooling agreement so that (1) the termination rights under those agreements for its 14 full-service hotels managed by Sonesta are generally limited to performance and for “cause,” casualty and condemnation events, (2) a portfolio wide performance test now applies for determining whether the management agreement for any of SVC’s full-service hotels managed by Sonesta may be terminated for performance reasons, and (3) the provisions included in SVC’s historical pooling agreement that allowed either SVC or Sonesta to require the marketing for sale of non-economic hotels were removed; and
• SVC and Sonesta extended the initial expiration dates of the management agreements for SVC’s full-service hotels managed by Sonesta located in Chicago, IL and Irvine, CA to January 2037 to align with the initial expiration date for SVC’s other hotels managed by Sonesta.

Except as described above, the economic terms of SVC’s agreements with Sonesta are consistent with their historical agreements.

Hotel Portfolio:

As of March 31, 2020, SVC had six operating agreements with six hotel operating companies for 329 hotels with 51,358 rooms, which represented 61% of SVC’s total annual minimum returns and rents.

• Hotel RevPAR (comparable hotels): For the quarter ended March 31, 2020 compared to the same period in 2019 for SVC’s 321 comparable hotels: average daily rate, or ADR, decreased 4.6% to $121.02; occupancy decreased 10.5% percentage points to 56.9%; and revenue per available room, or RevPAR, decreased 19.5% to $68.86.

• Hotel RevPAR (all hotels):For the quarter ended March 31, 2020 compared to the same period in 2019 for SVC’s 329 hotels that were owned as of March 31, 2020: ADR decreased 5.4% to $123.06; occupancy decreased 11.3 percentage points to 56.1%; and RevPAR decreased 21.2% to $69.04.

• Hotel Coverage of Minimum Returns and Rents: For the quarter ended March 31, 2020, the aggregate coverage of SVC’s minimum returns or rents decreased to 0.20x from 0.70x for the quarter ended March 31, 2019.

Hotel Managers and Tenants:

• IHG Agreement: As of March 31, 2020, 103 of SVC’s hotels were operated by subsidiaries of IHG under one agreement requiring annual minimum returns and rents to SVC of $216.6 million as of March 31, 2020 (approximately $54.1 million per quarter). During the three months ended March 31, 2020, SVC realized returns and rents under its IHG agreement of $54.1 million. SVC’s IHG agreement is partially secured by a security deposit. During the three months ended March 31, 2020, SVC reduced the available security deposit by $33.7 million to cover shortfalls in hotel cash flows available to pay the minimum returns and rents due to SVC during the period. As of March 31, 2020, the available IHG security deposit which SVC held to pay future payment shortfalls was $42.1 million.

• Marriott Agreement: As of March 31, 2020, 122 of SVC’s hotels were operated by subsidiaries of Marriott. SVC’s Marriott agreement requires for annual minimum returns to SVC of $190.6 million as of March 31, 2020 (approximately $47.7 million per quarter). During the three months ended March 31, 2020, SVC realized returns of $47.6 million. SVC’s agreement is partially secured by a security deposit and a limited guaranty from Marriott. During the three months ended March 31, 2020, SVC reduced the available security deposit by $28.7 million to cover shortfalls in hotel cash flows available to pay the minimum returns due to SVC during the period. As of March 31, 2020, the available Marriott security deposit which SVC held to pay future payment shortfalls was $4.8 million and the balance of the guaranty was $30.0 million.

• Sonesta Agreement: As of March 31, 2020, 53 of SVC’s hotels were operated under the Sonesta agreement requiring annual minimum returns of $118.9 million as of March 31, 2020 (approximately $29.7 million per quarter). During the three months ended March 31, 2020, SVC’s hotels under its Sonesta agreement generated an operating cash flow deficit of $8.1 million. Because there is no guarantee or security deposit for this agreement, the minimum returns SVC receives under this agreement are limited to available hotel cash flows, if any, after payment of hotel operating expenses including management and related fees.

• Wyndham Agreement: As of March 31, 2020, 20 of SVC’s hotels were operated under a management agreement with subsidiaries of Wyndham. As previously announced, SVC is exiting its relationship with Wyndham and expects to sell all 20 hotels managed by Wyndham. The management agreement will expire on September 30, 2020 unless sooner terminated by SVC with respect to any hotels that are sold. Under the agreement, payment by Wyndham is limited to available cash flows after payment of operating expenses. Wyndham is not entitled to any management fees for the remainder of the agreement. During the three months ended March 31, 2020, SVC’s hotels under its Wyndham agreement generated an operating cash flow deficit of $1.1 million.

• Other Hotel Agreements: As of March 31, 2020, SVC’s remaining 31 hotels were managed under two agreements: one management agreement with a subsidiary of Hyatt, for 22 hotels requiring annual minimum returns of $22.0 million (approximately $5.5 million per quarter); and one management agreement with a subsidiary of Radisson Hospitality, Inc., or Radisson, for nine hotels, requiring annual minimum returns of $20.4 million (approximately $5.1 million per quarter); minimum returns due to SVC are partially guaranteed under the Hyatt and Radisson agreements.

Net Lease Portfolio:

As of March 31, 2020, SVC owned 813 net lease service-oriented retail properties with an aggregate of 14.5 million square feet requiring aggregate annual minimum rent of $379.5 million which represented 39% of SVC’s total annual minimum returns and rents. The portfolio was 98% leased by 187 tenants operating under 128 brands in 22 distinct industries with a weighted (by annual minimum rent) average lease term of 11.1 years. As of the quarter ended March 31, 2020, the aggregate coverage of SVC’s net lease portfolio’s minimum rent was 2.28x. TA is SVC’s largest tenant. As of March 31, 2020, SVC leased to TA a total of 179 travel centers under five leases that expire between 2029 and 2035 and require aggregate annual minimum rents of $246.1 million.

Leasing and Occupancy:

During the quarter ended March 31, 2020, SVC entered lease renewals for an aggregate of 59,694 rentable square feet at weighted (by rentable square feet) average rents that were 14.8% below prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 5.1 years. There were no leasing concessions or capital commitments for these leases.

Conference Call:

At 10:00 a.m. Eastern Time this morning, John Murray, Chief Executive Officer, Brian Donley, Chief Financial Officer, and Todd Hargreaves, Vice President, will host a conference call to discuss SVC’s first quarter 2020 financial results. The conference call telephone number is (877) 329-3720. Participants calling from outside the United States and Canada should dial (412) 317-5434. No pass code is necessary to access the call from either number. Participants should dial in about 15 minutes prior to the scheduled start of the call. A replay of the conference call will be available through Sunday, May 17, 2020. To access the replay, dial (412) 317-0088. The replay pass code is 10141397.

A live audio webcast of the conference call will also be available in a listen-only mode on SVC’s website, www.svcreit.com. Participants wanting to access the webcast should visit SVC’s website about five minutes before the call. The archived webcast will be available for replay on SVC’s website for about one week after the call. The transcription, recording and retransmission in any way of SVC’s first quarter conference call is strictly prohibited without the prior written consent of SVC.

Supplemental Data:

A copy of SVC’s First Quarter 2020 Supplemental Operating and Financial Data is available for download at SVC’s website, www.svcreit.com. SVC’s website is not incorporated as part of this press release.

Service Properties Trust is a REIT which owns a diverse portfolio of hotels and net lease service and necessity-based retail properties across the United States and in Puerto Rico and Canada with 148 distinct brands across 23 industries. SVC’s properties are primarily operated under long-term management or lease agreements. SVC is managed by the operating subsidiary of The RMR Group Inc. (Nasdaq: RMR), or RMR Inc., an alternative asset management company that is headquartered in Newton, Massachusetts.

Non-GAAP Financial Measures and Certain Definitions:

SVC presents certain “non-GAAP financial measures” within the meaning of applicable Securities and Exchange Commission, or SEC, rules, including earnings before interest, taxes, depreciation and amortization, or EBITDA, EBITDA for real estate, or EBITDAre, Adjusted EBITDAre, funds from operations, or FFO, and Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income as indicators of SVC’s operating performance or as measures of SVC’s liquidity. These measures should be considered in conjunction with net income as presented in SVC’s condensed consolidated statements of income. SVC considers these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income. SVC believes these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of SVC’s operating performance between periods and with other REITs.

Contacts

Kristin Brown, Director, Investor Relations

(617) 796-8232

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