NEWTON, Mass.--(BUSINESS WIRE)--Service Properties Trust (Nasdaq: SVC) today announced its financial results for the quarter and nine months ended September 30, 2020:

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

“Our financial results during the third quarter reflect the impact of the COVID-19 pandemic on the economy generally and the hospitality industry specifically. The failure of IHG and Marriott to pay our minimum returns led us to terminate these hotel management agreements and move towards rebranding the hotels to Sonesta brands and management. We believe the rebranding will benefit SVC by creating more flexibility with respect to capital investments, possible repurposing hotels to other uses, or sales. SVC also benefits from its 34% ownership of Sonesta.

“Our hotel portfolio’s performance continues to exhibit gradual improvement. All but two of our hotels are now open and occupancies have steadily increased to 45.8% in September from a low of 21.0% in April. Our extended stay portfolio has continued to outperform our other hotel types during the third quarter of 2020, with occupancy of 62.1%, versus 32.6% for select service hotels and 26.0% for full service hotels.

“Rent collections from our retail net lease tenants also trended upward to 89.3% for September from a low of 45.9% for April, as businesses that were temporarily closed due to government mandates or guidelines have largely reopened. As of October 31, 2020, we had agreed to defer an aggregate of $13.4 million of rent for tenants representing approximately 1% of our annual minimum returns and rents. Our travel centers have benefited from healthy trucking activity and TA remains current on all rent obligations.

“We also continue to take proactive steps to maintain liquidity and preserve capital. We have repaid most of our 2021 debt maturities and secured continued availability under our $1 billion revolving credit facility by recently extending our existing covenant waivers through the second quarter of 2022.”

Results for the Three and Nine Months Ended September 30, 2020 and Recent Activities:

• Net Income (loss):Net loss for the quarter ended September 30, 2020 was $102.6 million, or $0.62 per diluted common share, compared to net income of $40.1 million, or $0.24 per diluted common share, for the quarter ended September 30, 2019. Net loss for the quarter ended September 30, 2020 includes a $10.2 million, or $0.06 per diluted common share, loss on asset impairment and $5.6 million, or $0.03 per diluted common share, of net unrealized gains on equity securities. Net income for the quarter ended September 30, 2019 includes a $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 net unrealized losses on equity securities. The weighted average number of diluted common shares outstanding was 164.4 million and 164.3 million for the quarters ended September 30, 2020 and 2019, respectively.
• Net loss for the nine months ended September 30, 2020 was $173.6 million, or $1.06 per diluted common share, compared to net income of $274.6 million, or $1.67 per diluted common share, for the nine months ended September 30, 2019. Net loss for the nine months ended September 30, 2020 includes a $55.5 million, or $0.34 per diluted common share, loss on asset impairment, a $46.7 million, or $0.28 per diluted common share, gain on insurance settlement, net of tax, a $9.7 million, or $0.06 per diluted common share, net loss on the sale of real estate, a $7.0 million, or $0.04 per diluted common share, loss on extinguishment of debt and $4.4 million, or $0.03 per diluted common share, of unrealized losses on equity securities. 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 a $8.5 million, or $0.05 per diluted common share, loss on early extinguishment of debt. The weighted average number of diluted common shares outstanding was 164.4 million and 164.3 million for the nine months ended September 30, 2020 and 2019, respectively.
• Normalized FFO: Normalized FFO for the quarter ended September 30, 2020 were $23.2 million, or $0.14 per diluted common share, compared to Normalized FFO of $155.6 million, or $0.95 per diluted common share, for the quarter ended September 30, 2019.
  Normalized FFO for the nine months ended September 30, 2020 were $224.4 million, or $1.37 per diluted common share, compared to Normalized FFO of $469.0 million, or $2.85 per diluted common share, for the nine months ended September 30, 2019.
• Adjusted EBITDAre:Adjusted EBITDA re for the quarter ended September 30, 2020 compared to the same period in 2019 decreased 50.6% to $103.6 million.
  Adjusted EBITDAre for the nine months ended September 30, 2020 compared to the same period in 2019 decreased 27.8% to $450.9 million.

Financing Activities:

As previously announced, on November 5, 2020, SVC and its lenders amended the credit agreement governing its $1.0 billion revolving credit facility and $400.0 million term loan. The key terms of the amended credit agreement include:

• All existing financial covenants have been waived through the end of the agreement term, or July 15, 2022, or the New Waiver Period;
• SVC repaid its $400.0 million term loan on November 5, 2020, using undrawn amounts under its revolving credit facility;
• SVC has pledged certain additional equity interests of subsidiaries owning properties. Following the closing of the amendment, SVC will provide first mortgage liens on 74 properties owned by the pledging subsidiaries with an undepreciated book value of $1.8 billion as of September 30, 2020 to secure its obligations under the credit agreement;
• SVC has the ability to fund up to $250.0 million of capital expenditures per year and up to $50.0 million of certain other investments per year as defined in the credit agreement;
• The interest rate premium over LIBOR under SVC’s revolving credit facility increased by 30 basis points;
• Certain covenants and restrictions on distributions to common shareholders, share repurchases, incurring indebtedness, and acquiring real property (in each case subject to various exceptions), and the minimum liquidity requirement of $125.0 million will remain in place during the New Waiver Period; and
• SVC is generally required to apply the net cash proceeds from the disposition of assets, capital markets transactions, and debt refinancings to the repayment of outstanding loans under the credit agreement, and then to other debt maturities.

On October 15, 2020, SVC announced a $0.01 per common share dividend to be paid to its shareholders of record on October 26, 2020 and distributed on or about November 19, 2020.

Recent Investment Activities:

During the quarter ended September 30, 2020, SVC sold five net lease properties with an aggregate of 46,415 square feet in five states for an aggregate sales price of $5.9 million, excluding closing costs. In October and November 2020, SVC sold three net lease properties with 82,623 square feet in three states for an aggregate sales price of $4.9 million.

SVC has entered agreements to sell 39 hotels (24 Marriott International, Inc. (Nasdaq: MAR), or Marriott, branded hotels with 2,989 rooms in 10 states and 15 Wyndham Hotels & Resorts (Nasdaq: WYN), or Wyndham, branded hotels with 1,642 rooms in 10 states) with an aggregate carrying value of $181.3 million for an aggregate sales price of $218.0 million. SVC expects these sales to be completed in the fourth quarter of 2020 and first quarter of 2021. SVC has also entered an agreement to sell one net lease property with 3,000 square feet with a net carrying value of $0.8 million for a sale price of $0.8 million, excluding closing costs. SVC expects this sale to be completed in the fourth quarter of 2020. The sales of these hotels and the net lease property are subject to various contingencies and may be delayed or may not occur. SVC expects to use the net sales proceeds from these asset sales to repay outstanding indebtedness.

During the quarter ended September 30, 2020, SVC funded $29.9 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 totaling $2.4 million.

SVC’s hotel occupancy was 40.3% in July 2020, 43.5% in August 2020 and 45.8% in September 2020. For the 28 days ended October 31, 2020, occupancy for SVC’s 329 hotels was 46.6%.

As of November 6, 2020, SVC has reopened 17 of the 19 hotels that it had closed as a result of the COVID-19 pandemic. SVC’s 183 extended stay hotels continued to outperform its other hotel types during the quarter ended September 30, 2020, with occupancy of 62.1% versus 32.6% for its 95 select service hotels and 26.0% for its 51 full service hotels. With the economy generally continuing to slowly reopen, SVC expects its diverse portfolio of suburban extended stay and select service hotels to continue to outpace its urban full-service hotels.

Hotel Managers:

• IHG Agreement: As of September 30, 2020, 103 of SVC’s hotels were operated by InterContinental Hotels Group plc, or IHG, under one agreement requiring annual minimum returns and rents to SVC of $216.6 million as of September 30, 2020 (approximately $54.1 million per quarter). During the three months ended September 30, 2020, SVC realized returns and rents of $9.7 million under its IHG agreement. During July 2020, SVC applied the remaining $9.0 million of security deposit securing IHG’s obligation under the agreement. As previously announced, SVC sent notices of default and termination for failure to pay minimum returns and rents due to SVC of $36.8 million for the third quarter of 2020 and that it expects to transfer the branding and management of 102 of the 103 hotels to a subsidiary of Sonesta Holdco Corporation, or Sonesta, on December 1, 2020.
• Marriott Agreement: As of September 30, 2020, 122 of SVC’s hotels were operated by Marriott under one agreement requiring annual minimum returns to SVC of $194.6 million as of September 30, 2020 (approximately $48.7 million per quarter). During the three months ended September 30, 2020, SVC realized returns of $14.4 million under its Marriott agreement. SVC sent notices to Marriott terminating its agreement for its failure to cover cumulative shortfall between the payments SVC had received to date and 80% of the cumulative priority returns due to SVC. The cumulative payment shortfall as of September 30, 2020 was $24.0 million. The effective date of the termination is January 31, 2021 and SVC currently plans to transfer to Sonesta the branding and management of the 98 of the122 hotels to the extent they are not sold.
• Sonesta Agreement: As of September 30, 2020, 56 of SVC’s hotels were operated by Sonesta under management agreements requiring annual minimum returns to SVC of $124.8 million as of September 30, 2020 (approximately $31.2 million per quarter). During the three months ended September 30, 2020, SVC’s hotels under the Sonesta agreement generated operating losses of $6.2 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 fees.
• Wyndham Agreement: As of September 30, 2020, 17 of SVC’s hotels were operated under a management agreement with Wyndham. In September 2020, SVC amended the management agreement with Wyndham so that it will continue as the manager of these Wyndham branded hotels for a limited period. Under the amended terms of this agreement, SVC agreed to pay Wyndham a management fee of 7% of hotel revenues, subject to certain minimums. In September 2020, SVC rebranded three hotels previously managed by Wyndham to Sonesta brands and on October 1, 2020 one additional hotel previously managed by Wyndham was rebranded to Sonesta. SVC expects to sell 15 Wyndham branded hotels in the fourth quarter of 2020. During the three months ended September 30, 2020, SVC’s hotels under the Wyndham agreement generated operating losses of $4.4 million.
• Other Hotel Agreements: As of September 30, 2020, SVC’s remaining 31 hotels were managed under two agreements: one management agreement with Hyatt Hotels Corporation (NYSE: H), or Hyatt, for 22 hotels requiring annual minimum returns of $22.0 million (approximately $5.5 million per quarter); and one management agreement with 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. Based on current estimates, SVC projects that it may exhaust the remainder of the guarantee from Hyatt during the fourth quarter of 2020.

During the quarter ended September 30, 2020, SVC advanced $6.8 million to Sonesta and $3.9 million to Wyndham of working capital to cover projected operating losses.

Net Lease Portfolio:

As of September 30, 2020, SVC owned 804 net lease service-oriented retail properties with an aggregate of 13.7 million square feet requiring aggregate annual minimum rent of $369.8 million, which represented 38.5% of SVC’s total annual minimum returns and rents. The portfolio was 98% leased by 183 tenants operating under 129 brands in 22 distinct industries with a weighted (by annual minimum rent) average lease term of 11.0 years. As of the quarter ended September 30, 2020, the aggregate coverage of SVC’s net lease portfolio’s minimum rent was 2.12x. TravelCenters of America Inc. (Nasdaq: TA), or TA, is SVC’s largest tenant. As of September 30, 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, or 25.6% of SVC’s minimum rents and returns. TA is current on all of its lease payments due to SVC.

During the quarter ended September 30, 2020, SVC collected 87.2% of rents from its other net lease tenants. During the quarter ended September 30, 2020, SVC recorded reserves for uncollectible revenues of $2.4 million for certain of its net lease tenants. In October 2020, SVC collected 87.4% of rents from its other net lease tenants. As of November 6, 2020, SVC has entered into rent deferral agreements with 51 net lease retail tenants with leases requiring an aggregate of $53.4 million of annual minimum rents. Generally, these rent deferrals are for one to four months of rent and were payable, in most cases, in 12 to 24 equal monthly installments beginning in September 2020. In aggregate, SVC has deferred $13.4 million of rents from its net lease tenants to date.

Leasing and Occupancy:

During the quarter ended September 30, 2020, SVC entered lease renewals for an aggregate of 496,756 rentable square feet at weighted (by rentable square feet) average rents that were 11.6% below prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 13.6 years and leasing concessions and capital commitments were $4.9 million, or $9.86 per square foot. Also during the quarter ended September 30, 2020, SVC entered into new leases for an aggregate of 2,535 rentable square feet at weighted (by rentable square feet) average rents that were 34.7% above prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was nine years and leasing concessions and capital commitments were $0.2 million, or $74.64 per square foot.

Supplemental Data:

A copy of SVC’s Third 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 real estate investment trust, or 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 149 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, Hotel 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 (loss) as indicators of SVC’s operating performance or as measures of SVC’s liquidity. These measures should be considered in conjunction with net income (loss) 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 (loss). 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.

Please see the pages attached hereto for a more detailed statement of SVC’s operating results and financial condition and for an explanation of SVC’s calculation of FFO and Normalized FFO, EBITDA, Hotel EBITDA, EBITDAre and Adjusted EBITDAre and a reconciliation of those amounts to amounts determined in accordance with GAAP.

Occupancy: Occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels. Occupancy is an important measure of the utilization rate and demand of SVC’s hotels.

Average Daily Rate, or ADR, represents rooms revenue divided by total number of room nights sold in a given period. ADR provides useful insight on pricing at SVC’s hotels and is a measure widely used in the hotel industry.

Revenue per Available Room, or RevPAR, represents rooms revenue divided by the total number of room nights available to guests for a given period. RevPAR is an industry metric correlated to occupancy and ADR and helps measure performance over comparable periods.

Hotel EBITDA is calculated as hotel operating revenues less hotel operating expenses of all managed and leased hotels, prior to any adjustments required for presentation in our condensed consolidated statements of income in accordance with GAAP. SVC believes Hotel EBITDA provides useful information to management and investors as a key measure of the profitability of its hotel operations.

Hotel EBITDA Margin is the percentage of Hotel EBITDA of hotel operating revenues.

Comparable Hotels Data: SVC presents RevPAR, ADR, and occupancy for the periods presented on a comparable basis to facilitate comparisons between periods. SVC generally defines comparable hotels as those that were owned by it and were open and operating for the entire periods being compared. For the three months ended September 30, 2020 and 2019, SVC excluded 15 hotels from its comparable results. Three of these hotels were not owned for the entire periods and 12 suspended operations during part of the periods presented. For the nine months ended September 30, 2020 and 2019, SVC excluded 25 hotels from its comparable results. Three of these hotels were not owned for the entire periods, four were closed for major renovations and 18 suspended operations during part of the periods presented.

Rent Coverage:

SVC defines net lease coverage as earnings before interest, taxes, depreciation, amortization and rent, or EBITDAR, divided by the annual minimum rent due to SVC weighted by the minimum rent of the property to total minimum rents of the net lease portfolio. EBITDAR amounts used to determine rent coverage are generally for the latest twelve-month period reported based on the most recent operating information, if any, furnished by the tenant. Operating statements furnished by the tenant often are unaudited and, in certain cases, may not have been prepared in accordance with GAAP and are not independently verified by SVC. Tenants that do not report operating information are excluded from the coverage calculations. Coverage amounts include data for certain properties for periods prior to when SVC acquired them. In instances where SVC does not have financial information for the most recent quarter from its tenants, it has calculated an implied EBITDAR for the third quarter using industry benchmark data to more accurately reflect the impact of COVID-19 on its tenants’ operations. SVC believes using only financial information from the earlier periods could be misleading as it would not reflect the negative impact those tenants experienced as a result of the COVID-19 pandemic. As a result, SVC believes using this industry benchmark data provides a more accurate estimated representation of recent operating results and coverage for those tenants.