Market Overview

Service Properties Trust Announces Third Quarter 2019 Results

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Third Quarter Net Income of $0.24 Per Common Share

Third Quarter Normalized FFO of $0.95 Per Common Share

Completed Acquisition of Net Lease Portfolio of Service-Oriented Retail Properties for $2.4 Billion

Sold or Entered Agreements to Sell 128 Properties for $500 Million

Service Properties Trust (NASDAQ:SVC) (formerly known as Hospitality Properties Trust) today announced its financial results for the quarter and nine months ended September 30, 2019:

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

2019

 

2018

 

2019

 

2018

 

($ in thousands, except per share and RevPAR data)

Net income

$

40,074

 

 

$

117,099

 

 

$

274,643

 

 

$

294,594

 

Net income per common share

$

0.24

 

 

$

0.71

 

 

$

1.67

 

 

$

1.79

 

Adjusted EBITDAre (1)

$

209,545

 

 

$

225,676

 

 

$

624,418

 

 

$

655,530

 

Normalized FFO (1)

$

155,635

 

 

$

174,653

 

 

$

469,041

 

 

$

505,714

 

Normalized FFO per common share (1)

$

0.95

 

 

$

1.06

 

 

$

2.85

 

 

$

3.08

 

  1. Additional information and reconciliations of net income determined in accordance with U.S. generally accepted accounting principles, or GAAP, to certain non-GAAP measures including EBITDA, EBITDAre, Adjusted EBITDAre, FFO and Normalized FFO, for the three and nine months ended September 30, 2019 and 2018 appear later in this press release.

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

"As previously announced, during the third quarter we completed our acquisition of a high-quality net lease portfolio of 767 service-oriented retail properties for $2.4 billion in cash consideration plus $82.1 million of prepayment penalties to extinguish mortgage debt on the portfolio. We believe this transaction provides us with increased scale, a more secure financial profile and greater diversity in tenant base, property type and geography. We have also made significant progress on our previously announced disposition plan. We sold two net lease properties for $63 million and entered an agreement to sell 126 additional net lease properties for $438 million.

"In the third quarter, comparable hotel RevPAR declined 0.3% compared to the prior year period due in part to occupancy decreases from 13 hotels under renovation, six of which were relatively higher revenue contributing full service hotels that impacted our IHG, Sonesta and Radisson Hotel Group portfolios. For hotels not impacted by renovations, comparable RevPAR increased by 0.9%."

Results for the Three and Nine Months Ended September 30, 2019 and Recent Activities:

  • Net Income: Net income for the quarter ended September 30, 2019 was $40.1 million, or $0.24 per diluted common share, compared to net income of $117.1 million, or $0.71 per diluted common share, for the quarter ended September 30, 2018. Net income for the quarter ended September 30, 2019 includes an $8.5 million, or $0.05 per diluted common share, loss on early extinguishment of debt and $4.0 million, or $0.02 per diluted common share, of unrealized losses on equity securities. Net income for the quarter ended September 30, 2018 includes $43.5 million, or $0.26 per diluted common share, of net unrealized gains on equity securities. The weighted average number of diluted common shares outstanding was 164.3 million for each of the quarters ended September 30, 2019 and 2018.



    Net income for the nine months ended September 30, 2019 was $274.6 million, or $1.67 per diluted common share, compared to net income of $294.6 million, or $1.79 per diluted common share, for the nine months ended September 30, 2018. Net income for the nine months ended September 30, 2019 includes a $159.5 million, or $0.97 per diluted common share, gain on sale of real estate, $43.8 million, or $0.27 per diluted common share, of net unrealized losses on equity securities and an $8.5 million, or $0.05 per diluted common share, loss on early extinguishment of debt. Net income for the nine months ended September 30, 2018 includes $89.3 million, or $0.54 per diluted common share, of net unrealized gains on equity securities. The weighted average number of diluted common shares outstanding was 164.3 million and 164.2 million for the nine months ended September 30, 2019 and 2018, respectively.
  • Adjusted EBITDAre: Adjusted EBITDAre for the quarter ended September 30, 2019 compared to the same period in 2018 decreased 7.1% to $209.5 million.



    Adjusted EBITDAre for the nine months ended September 30, 2019 compared to the same period in 2018 decreased 4.7% to $624.4 million.
  • Normalized FFO:Normalized FFO for the quarter ended September 30, 2019 were $155.6 million, or $0.95 per diluted common share, compared to Normalized FFO of $174.7 million, or $1.06 per diluted common share, for the quarter ended September 30, 2018.



    Normalized FFO for the nine months ended September 30, 2019 were $469.0 million, or $2.85 per diluted common share, compared to Normalized FFO of $505.7 million, or $3.08 per diluted common share, for the nine months ended September 30, 2018.

Recent Acquisition, Disposition and Investment Activities: As previously announced, in July 2019, SVC sold all 2,503,777 of its class A common shares of The RMR Group Inc., or RMR Inc., in an underwritten public offering at a price to the public of $40.00 per common share. SVC received net proceeds of $93.6 million from this sale, after deducting underwriting discounts, commissions and other costs, that it used to repay debt.

As previously announced, in September 2019, SVC completed its acquisition of a net lease portfolio of service-oriented retail properties from Spirit MTA REIT (NYSE:SMTA) for $2.4 billion in cash, excluding transaction costs, or the SMTA Transaction. In addition to the $2.4 billion purchase price, SVC paid $82.1 million of prepayment penalties related to SMTA's extinguishment of mortgage debt on the portfolio. SVC funded the SMTA Transaction with net proceeds from its recently completed $1.7 billion principal amount of unsecured senior notes offerings described below and by drawing on its revolving credit facility.

In October 2019, SVC acquired the 261 room Kimpton Palomar Hotel in Chicago, IL for a purchase price of $55.0 million, excluding acquisition related costs. SVC added this Kimpton® branded hotel to its management agreement with InterContinental Hotels Group, plc (LON: IHG; NYSE: IHG (ADRs)), or IHG.

Also, in October 2019, SVC sold two net lease properties it acquired in the SMTA Transaction with an aggregate of 242,189 square feet with leases requiring annual minimum rents of $4.5 million, for aggregate net proceeds of $63.3 million, excluding closing costs.

In addition, in October 2019, SVC entered into an agreement to sell 126 net lease properties it acquired in the SMTA Transaction with approximately 2.4 million square feet in 26 states with leases requiring an aggregate of $34.3 million of annual minimum rents for an aggregate sales price of $438.0 million, excluding closing costs. SVC expects this sale to be completed prior to December 31, 2019.

Financing Activities: As previously announced, in September 2019, SVC issued $825.0 million principal amount of 4.35% unsecured senior notes due 2024, $450.0 million principal amount of 4.75% unsecured senior notes due 2026 and $425.0 million principal amount of 4.95% unsecured senior notes due 2029 in underwritten public offerings. The aggregate net proceeds from these offerings of $1.68 billion after underwriting discounts and other offering expenses were used to finance, in part, the SMTA Transaction.

In connection with the completion of these offerings, SVC terminated the unused commitments previously announced available to SVC under its previously announced $2.0 billion senior unsecured term loan facility and record an $8.5 million loss on extinguishment of debt during the three months ended September 30, 2019.

Hotel Portfolio:

As of September 30, 2019, SVC had eight operating agreements with six hotel operating companies for 328 hotels with 51,086 rooms, which represented 59% of SVC's total annual minimum returns and rents.

  • Hotel RevPAR (comparable hotels): For the quarter ended September 30, 2019 compared to the same period in 2018 for SVC's 322 comparable hotels: average daily rate, or ADR, decreased 1.6% to $126.80; occupancy increased 1.0 percentage point to 77.9%; and revenue per available room, or RevPAR, decreased 0.3% to $98.78.



    For the nine months ended September 30, 2019 compared to the same period in 2018 for SVC's 320 comparable hotels: ADR decreased 0.7% to $127.39; occupancy decreased 0.9 percentage points to 74.2%; and RevPAR decreased 1.9% to $94.52.
  • Hotel RevPAR (all hotels):For the quarter ended September 30, 2019 compared to the same period in 2018 for SVC's 328 hotels that were owned as of September 30, 2019: ADR decreased 2.2% to $127.82; occupancy was unchanged at 77.0%; and RevPAR decreased 2.2% to $98.42.



    For the nine months ended September 30, 2019 compared to the same period in 2018 for SVC's 328 hotels that were owned as of September 30, 2019: ADR decreased 0.9% to $129.91; occupancy decreased 1.2 percentage points to 73.9%; and RevPAR decreased 2.5% to $96.00.
  • Hotel Coverage of Minimum Returns and Rents: For the quarter ended September 30, 2019, the aggregate coverage of SVC's minimum returns or rents decreased to 0.90x from 1.07x for the quarter ended September 30, 2018.



    For the nine months ended September 30, 2019, the aggregate coverage ratio of SVC's minimum returns or rents decreased to 0.90x from 1.04x for the nine months ended September 30, 2018.

Hotel Managers and Tenants:

  • Marriott Agreements: As of September 30, 2019, 122 of SVC's hotels were operated by subsidiaries of Marriott International, Inc. (NASDAQ:MAR), or Marriott, under three agreements. SVC's Marriott No. 1 agreement includes 53 hotels and provides for annual minimum return payments to SVC of $71.7 million as of September 30, 2019 (approximately $17.9 million per quarter). During the three months ended September 30, 2019, SVC realized returns under its Marriott No. 1 agreement of $19.9 million, of which $2.0 million represents SVC's share of hotel cash flows in excess of the minimum returns due to SVC for the period. Because there is no guarantee or security deposit fo
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