Service Properties Trust Announces Actions to Improve Liquidity and Reduce Leverage

Rhea-AI Summary

Service Properties Trust (SVC) has announced significant actions to improve liquidity and reduce leverage. The company's Board of Trustees has reduced the quarterly cash distribution on common shares from $0.20 to $0.01 per share, resulting in annual savings of $127 million. Additionally, SVC plans to sell 114 focused service hotels managed by Sonesta International Hotels in 2025, with an aggregate net carrying value of $850.0 million.

The sale is expected to generate savings of approximately $725 million in capital expenditures over a six-year period. After the disposition, Sonesta will continue to manage 59 hotels owned by SVC, including 39 full service, 14 extended stay, and 6 select service properties. These actions are intended to increase liquidity, enhance financial flexibility, reduce leverage, and improve portfolio performance for SVC's hotel portfolio in the long term.

Positive

• Annual savings of $127 million from dividend reduction
• Planned sale of 114 hotels expected to generate significant liquidity
• Anticipated savings of $725 million in capital expenditures over six years
• Focus on higher-performing full service and select hotels
• Improved liquidity and financial flexibility

Negative

• Significant reduction in quarterly dividend from $0.20 to $0.01 per share
• Slow recovery of hotel portfolio
• Deteriorating leverage metrics
• Substantial reduction in Sonesta-managed properties from 187 to 59 hotels

Insights

Financial Analyst

This announcement represents a significant shift in SVC's strategy, aimed at improving its financial position. The reduction of the quarterly distribution from $0.20 to $0.01 per share will result in annual savings of $127 million, substantially increasing liquidity. This move, while potentially disappointing for income-focused investors, is a prudent step given the slow recovery of the hotel portfolio and ongoing capital improvement needs.

The planned sale of 114 focused service hotels managed by Sonesta is another strategic move. With a net carrying value of $850 million, this divestment is expected to generate significant proceeds for debt repayment. Moreover, it will save an estimated $725 million in forecasted capital expenditures over six years. This restructuring will concentrate SVC's portfolio on higher-performing assets, potentially improving overall portfolio performance and operational efficiency.

These actions demonstrate management's commitment to deleveraging and strengthening the balance sheet. While short-term pain for shareholders is likely, these moves could position SVC for improved long-term financial health and operational performance. Investors should closely monitor the execution of these plans and their impact on SVC's financial metrics in the coming quarters.

Real Estate Investment Trust (REIT) Specialist

SVC's strategic decisions reflect the challenges faced by the hospitality REIT sector. The drastic dividend cut to $0.04 per share annually is a clear indication of the ongoing pressures in the hotel market. While this may impact SVC's appeal to income-focused REIT investors, it's a necessary step to maintain REIT status while preserving capital.

The planned divestiture of 114 focused service hotels is a significant portfolio reshaping. Post-sale, SVC will retain a more concentrated portfolio of 59 hotels, primarily full-service properties. This shift towards higher-quality assets could improve the overall portfolio metrics and potentially lead to better valuations in the long term.

It's important to note that SVC will maintain its 34% ownership in Sonesta, preserving a strategic relationship with its manager. This continued alignment of interests could be beneficial as SVC navigates the recovery phase in the hospitality sector.

These moves signal a transition towards a leaner, more focused REIT structure. Investors should assess how these changes impact SVC's FFO (Funds From Operations), a key metric for REITs and its ability to generate stable cash flows in the future.

Reduces Quarterly Distribution to $0.01 Per Share; $127 Million in Annual Savings Will Increase Liquidity

114 Sonesta Managed Focused Service Hotels Expected to be Sold in 2025; SVC Expects to Use Net Sales Proceeds to Repay Debt

Actions are Expected to Reduce Capital Expenditures and Leverage, Improve Portfolio Performance and Better Position SVC’s Hotel Portfolio for the Long Term

NEWTON, Mass.--(BUSINESS WIRE)-- Service Properties Trust (Nasdaq: SVC) today announced that SVC’s Board of Trustees has reduced SVC’s regular quarterly cash distribution on its common shares from $0.20 per common share ($0.80 per share per year) to $0.01 per common share ($0.04 per share per year). The dividend reduction will result in $127 million of annual savings.

SVC also today announced that it has plans to sell 114 focused service hotels managed by Sonesta International Hotels Corporation, or collectively with its parent and subsidiaries, Sonesta, with an aggregate of 14,925 keys and an aggregate net carrying value of $850.0 million. SVC expects to sell these hotels in 2025 and use the net sales proceeds to repay debt. Additionally, SVC expects the sales of these hotels will result in savings of approximately $725 million in capital expenditures, which was forecasted to be spent on these hotels over a six-year period.

SVC currently owns 187 hotels that are managed by Sonesta under five brands, including 14 hotels that SVC is currently in the process of selling and the 114 being announced for sale today. Upon completion of the disposition plan in 2025, SVC expects that Sonesta will continue to manage 39 full service hotels, 14 extended stay hotels and 6 select service hotels owned by SVC. SVC will continue to own 34% of Sonesta.

Todd Hargreaves, President and Chief Investment Officer of SVC, made the following statement:

“Given the slow recovery of our hotel portfolio in combination with our hotel capital improvement and renovation program and our deteriorating leverage metrics, we believe it is prudent to reduce the distribution to increase SVC’s liquidity and enhance our financial flexibility. The reduction in the distribution from the previous level will preserve approximately $127 million of SVC’s liquidity annually. We are also planning to sell 114 hotels to generate additional liquidity and concentrate the Sonesta portfolio on full service hotels and certain higher performing focused service hotels. We expect these sales will also result in reduced capital expenditure and leverage, improve portfolio performance and better position SVC’s hotel portfolio for the long term.”

The hotels Sonesta will continue to manage are:

Service Level		Number of Hotels		Number of Keys		Number of States1		Net Carrying Value (in millions)
Full Service		39		12,868		21		$2,257.3
Extended Stay		14		2,102		7		$157.7
Select Service		6		873		3		$47.0
Total		59		15,843		25		$2,462.0
1 Includes two hotels in Toronto, Ontario, one hotel in Puerto Rico and one hotel in Washington, D.C.

The hotels being sold are:

Brand		Number of Hotels		Number of Keys		Number of States		Net Carrying Value (in millions)
Sonesta Select		31		4,564		14		$241.7
Sonesta ES Suites		44		5,611		22		$427.4
Sonesta Simply Suites		39		4,750		23		$180.9
Total		114		14,925		28		$850.0

The cash distribution will be paid to SVC’s common shareholders of record as of the close of business on October 28, 2024, and distributed on or about November 14, 2024. SVC currently expects that its distribution to its common shareholders in 2024 will be at least equal to the minimum amounts required for SVC to remain a real estate investment trust, or REIT, for federal tax purposes.

SVC plans to discuss today’s announcements further during its third quarter 2024 conference call scheduled for Thursday, November 7, 2024.

About Service Properties Trust

Service Properties Trust (Nasdaq: SVC) is a real estate investment trust, or REIT, with over $11 billion invested in two asset categories: hotels and service-focused retail net lease properties. As of June 30, 2024, SVC owned 220 hotels with over 37,000 guest rooms throughout the United States and in Puerto Rico and Canada, the majority of which are extended stay and select service. As of June 30, 2024, SVC also owned 749 retail service-focused net lease properties totaling over 13.3 million square feet throughout the United States. SVC is managed by The RMR Group (Nasdaq: RMR), a leading U.S. alternative asset management company with over $41 billion in assets under management as of June 30, 2024, and more than 35 years of institutional experience in buying, selling, financing and operating commercial real estate. SVC is headquartered in Newton, MA. For more information, visit www.svcreit.com.

WARNING CONCERNING FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon SVC’s present intent, beliefs and expectations, but these statements and the implications of these statements are not guaranteed to occur and may not occur for various reasons, some of which are beyond SVC’s control. For example:

• In this press release, SVC states that it is reducing its regular quarterly distribution to increase its liquidity and enhance financial flexibility. However, SVC’s Board of Trustees considers many factors when setting or resetting SVC’s distribution rate, including SVC’s historical and projected income, normalized funds from operations, cash available for distribution, the then current and expected needs and availability of cash to pay SVC’s obligations and fund its investments, distributions which may be required to be paid to maintain SVC’s qualification for taxation as a REIT and other factors deemed relevant by SVC’s Board of Trustees. Accordingly, future distributions to SVC’s shareholders may be increased or decreased and SVC cannot be sure as to the rate at which future distributions will be paid.
• In this press release, SVC states that it plans to sell 114 Sonesta managed hotels in 2025 in order to generate liquidity, concentrate the Sonesta portfolio on full service hotels and certain higher performing focused service hotels, reduce capital expenditure and leverage, improve portfolio performance and better position SVC’s hotel portfolio for the long term. SVC also states that it plans to use the net sales proceeds of these sale transactions for the repayment of debt. However, SVC may not succeed in selling properties and any sales may be delayed or may not occur or, if sales do occur, the proceeds from the sales of such properties may not be sufficient to allow SVC to reduce its leverage.

You should not place undue reliance upon forward-looking statements.

Except as required by law, SVC does not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.

A Maryland Real Estate Investment Trust with transferable shares of beneficial interest listed on the Nasdaq.

No shareholder, Trustee or officer is personally liable for any act or obligation of the Trust.

View source version on businesswire.com: https://www.businesswire.com/news/home/20241015799982/en/

Kevin Barry, Senior Director, Investor Relations

(617) 796-8232

Source: Service Properties Trust

FAQ

What is the new quarterly distribution for Service Properties Trust (SVC) shareholders?

Service Properties Trust (SVC) has reduced its quarterly cash distribution to $0.01 per common share, down from the previous $0.20 per share.

How many hotels does Service Properties Trust (SVC) plan to sell in 2025?

SVC plans to sell 114 focused service hotels managed by Sonesta International Hotels in 2025.

What is the expected annual savings from SVC's dividend reduction?

The dividend reduction is expected to result in annual savings of $127 million for Service Properties Trust (SVC).

How will Service Properties Trust (SVC) use the proceeds from the hotel sales?

SVC expects to use the net sales proceeds from the hotel dispositions to repay debt.

What is the aggregate net carrying value of the hotels SVC plans to sell?

The 114 hotels that Service Properties Trust (SVC) plans to sell have an aggregate net carrying value of $850.0 million.