Good day and welcome to the Service Properties Trust Third Quarter 2021 Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Kristin Brown. Please, go ahead.

Thank you. Good morning. Joining me on today’s call are John Murray, President; Brian Donley, Chief Financial Officer and Todd Hargreaves, Chief Investment Officer. Today’s call includes a presentation by management, followed by a question-and-answer session with analysts. Please note that the recording, retransmission and transcription of today’s conference call is prohibited without the prior written consent of SVC. I would like to point out that today’s conference call 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 on SVC’s present beliefs and expectations as of today, November 5, 2021. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made on today’s conference call, other than through filings with the Securities and Exchange Commission, or SEC. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations, or normalized FFO and adjusted EBITDAre. Reconciliations of normalized FFO and adjusted EBITDAre to net income, as well as components to calculate AFFO are available in our supplemental package found in the Investor Relations section of the Company’s website. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Form 10-Q on filed with the SEC and in our supplemental, operating and financial data found on our website at www.svcreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statement. And with that, I will turn the call over to John.

Thank you, Kristin and good morning. Last night we reported third quarter normalized FFO of $0.27 per share, and adjusted EBITDAre of $137.3 million, an increase of 16% from the second quarter and 33% from the prior year quarter. Our results reflect improving revenues in our hotel portfolio, driven by elevated leisure demand, coupled with slowly-rebuilding business transients demand, as well as steady high rent collections, at our net least service-oriented retail properties. Our hotel EBITDA has been positive on a monthly basis since April and increased 71% versus the second quarter. We recorded our strongest month year-to-date in July with the COVID Delta variant slowed momentum in late August and early September, dampening demand. The fortress spike in COVID cases in various markets resulted in some canceled room nights, and in some urban centers, delayed employee returned to office timing. Despite these headwinds, our operating performance improved from the prior quarter. For our 283 comparable hotels, average occupancy increased 2.9 percentage points to 60.9%, average daily rate increased 12.5% to $111.18 and RevPAR increased 18.2% to $67.71 on a sequential basis from the second quarter. Comparable hotel RevPAR was 30% below 2019 levels for the third quarter and improvement from 46% below 2019 levels in the second quarter. Our extended stay hotels continue to maintain strong occupancy premiums relative to the industry and compared to our non-extended stay hotels. Our 160 extended stay hotels reported occupancy of 75.3% during the quarter, compared with occupancies of 48.9% and 50.2% respectively, for our 93 select service and 51 full service hotels. Our extended stay hotel RevPAR was 20% below 2019 levels third quarter and improved to only 13% below 2019 levels in September. We expect this gap to narrow further as Sonesta continues to manage extended stay mix to shorter stays…

Thanks, John. We continue to make progress in our hotel disposition initiatives to raise capital and reposition SVC’s Sonesta portfolio through the sale of 68 hotels which had a net carrying value of $579 million as of September 30, 2021 across the Sonesta, Sonesta ES Suites, simply suites and Sonesta Select brands. We launched our formal marketing effort in August and have recently received first round offers. We are pleased with the initial pricing and interest level received and we believe the timing of the sale was favorable given the considerable amount of institutional capital, starting hotel investments, coupled with the low interest rate environment driving cap rates downward. Generally interested investors or groups to plan to acquire the hotels and in turn to long-term franchise agreement with Sonesta, so we have also received offers from groups that intend to rebrand the hotels or convert to an alternate use. We expect to select buyers to enter purchase and sale agreements in Q4 2021, and a close in Q1 2022. Post sale we believe we will have improved the overall quality of the portfolio from a financial physical and market perspective. In terms of other transaction activity during the third quarter, we saw two net lease properties totaling 6.6000 rentable square feet for an aggregate sale price of $700,000. In October 2021, we sold one additional net leased property with 7000 rentable square feet for $915,000. We have also entered into agreements to sell four net lease properties totaling 14,600 square feet with an aggregate carrying value of $1.8 million, for an aggregate sales price of $2.3 million. We currently expect these sales to be completed by the end of the fourth quarter of 2021. As with previous quarters our net lease sales of properties have become vacant or once we…

Thanks, Todd. Starting with our consolidated financial results for the third quarter of 2021, normalized FFO was $43.8 million or $0.27 per share, a $21 million increase over the prior quarter, and a sequential increase of almost $18 million over the second quarter of 2021. Adjusted EBITDAre was $137.3 million for the third quarter, a $33.7 million increase over the prior year quarter, and an $18.7 million or 15.8% sequential increase over last quarter. The major drivers impacting normalized FFO this quarter included the results from our hotel portfolio, which generated $51.1 million of hotel EBITDA for the third quarter of 2021, compared to negative $6.3 million of hotel EBITDA in the prior year quarter. Guaranteed payments and security deposit utilization that supported our hotel returns under our historical agreements, declined $13.5 million negatively impacted year-over-year comparisons. Rental income from our leased properties for the third quarter of 2021 increased $1.9 million for the year year-over-year primarily as a result of reducing our reserves for uncollectable rats, partially offset by a decline in non-cash straight-line rent adjustments, related to at least restructurings and the sale of certain net leased properties since July of 2020. Interest expense increased $11.9 million over the prior year quarter as a result of our Q4 2020 senior notes issuance and our revolver draw in January, 2021. G&A expense increased $1.9 million in the current year quarter, primarily as a result of increased business management fees due to RMR as a result of an increase in our market capitalization, when compared to prior target period. We account for our investment in Sonesta under the equity method of accounting and include our share of Sonesta’s results in our earnings. Our sheriffs Sonesta’s normalized FFO recognized from our 34% ownership interest was $2.8 million, an increase of $5…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bryan Maher with B. Riley. Please go ahead.

Sure, good morning, thank you. a couple of quick questions for me. We noticed that the Sonesta Select hotels, the 63 had fairly weak occupancy down around 42%. I know that you are selling a chunk of those properties or with the disposition plan, how much of an impact are the assets being held for sale, impacting RevPAR and occupancy across the portfolio. I’m assuming that those hotels that are being sold, management and the employees at those properties know they are being sold, is that correct?

Yes, that is correct, Brian. I think that the real issue - there may be some impact on what you described that there may be a negative impact on the hotels that are being marketed for sale. But I think really, the main impact for the select hotels is that, they were designed from a location perspective to cater to business travelers. Many of them are in business park type locations, where they are still getting business from leisure travel on weekends, from sports teams and other smart business. But they are not - nobody’s waking up and taking some of these locations for at week’s vacation, they are business traveler hotel. And business travel hasn’t come back sufficiently to get the occupancies up. And we knew that that would be an issue when we converted the hotels to Sonesta, and we have been working on initiatives to try to get that occupancy up. And we were lucky I guess that we were able to do the rebranding during the pandemic and get some systems in place to be ready to capture that business travel when it returns, but it really hasn’t come back in force yet. And so I think that is really the reason why the Sonesta Select hotel’s occupancy levels are not where you might expect.

And we have noticed when we have been out on the road, some Sonesta have converted to the Sonesta brand, and still have some temporary signage up there. Is that because those assets are being held for sale, and you don’t really know if they are going to be Sonesta’s long-term, or as you because there is delay and getting signage, permanent signage to put on those properties?

It is more of a latter, getting the signage delivered. Getting the signs manufactured and delivered has been a little bit more of an issue with supply chain concerns and worker concerns. And so, it has really have been more about - and also in some markets, there have been sort of an elongated process with the local municipalities needs to get the approvals for the new signs. There is a lot more restrictions today about blending in with the community, how bright the lights are, if there is - may impact for a lot of the conversion, but for instance, our lighting there is restricted because the turtles on the beach, so there is a lot of things that impact signage that caused us to have a slowdown in some locations.

You don’t want to mess with those turtles.

Brian, I will add. I think you asked this as well. Off the top 68 hotels we are selling, 19 are Select. And those 19 hotels had a Q3 RevPAR of $40 compared to $48 for the total. So again, we are selling not the Select, we are selling the lower performers.

Got it. And just one more for me, and then I will hop back into the queue. I think you mentioned that, at last quarterly call that, I think that there is $579 million carrying costs on the 68 hotels for sale, and you felt pretty confident that you would be able to get nicely above that. Now that you have seen the first round offers, are you still comfortable with that statement?

Yes. Brian, it is Todd. I think, based on the first round of offers we received and we have only received offers only for, just to clarify, we have received offers for the 65 select service and extended stay hotels, that we are selling, as well as one full service, we are still waiting on offers for the other two. But, I would say, generally, we would expect to get at or around that net carrying value in total.

Okay. Thank you.

Next question comes from Dori Kesten with Wells Fargo. Please go ahead.

Thanks, good morning. This is a little bit different way of asking Brian’s question. But can you walk through what RevPAR and EBITDA for key differences between the 68 hotels and the remainder of the portfolio, back on 2019 results?

For 2019?

Yes.

Yes. So for 2019, for the 68 hotels we are selling, we were at 74 RevPAR versus the hotels remaining portfolio, or just Sonesta versus 111 and EBITDA was, again, this is - I’m giving you a quarter numbers Dori, was $11 million, $11.5 million for the 68 exit hotels. And then for the Sonesta less the exit we were at about 106 million.

Sorry, you said 11 million versus 106 million.

Right.

Okay. And that was for 2019 like the whole year.

That was Q3 annually.

Yes. The full-year number for 68 Dori this is Brian, was around $31 billion in hotel EBITDA.

Okay. $31 million and the remainder is what on an annual.

I’m sorry. Say that again, Dori.

So, the 68 was 31 million, what was the remainder on an annual?

Yes. That was the whole portfolio, of our 304 hotels, we were at 500 million in 2019. So this was a very small percentage of the overall portfolio.

Another way to look at it to Dori is, as you have noted at 2017 to 2019 for the just normalized things, for the entire portfolio, the sale portfolio is about 10% of overall EBITDA and it is over 20% of the rooms and hotels.

Okay. And can you talk about the difference in the cost structure with the hotels now under Sonesta as a manager versus Marriott and InterContinental. Just trying to think through what the margin upside that may exist versus 2019 beyond just with the industry niche to be type of hotel?

That is a good question, but the answer is more than its still evolving. There are some fields that Marriott charged against our hotels that Sonesta doesn’t charge, that mostly on an individual basis, sort of ankle biters, but together, they are probably a couple of percent of revenue. The OTA charges, because of Marriott, significant size and volume of transactions that their hotel guests run through the OTAs, their commission levels are somewhere in the $0.13 to $0.14 or 13% or 14%. Sonestas were slightly above or I guess, technically still are slightly above 20%. Contracts are in process of being executed that will reduce that to the sort of 17% or $0.70 range. So still not as low as much larger top three or four hotel companies, but a significant decline in those costs for Sonesta. And then otherwise, because of their increased size from the transitions we completed over the last nine-months or so. And because of the Red Lion acquisition, they are in process of renegotiating a lot of contracts, whether it is for trash collection for supplies, towels, food and beverage, a lot of their procurement costs have come in substantially - a lot of their service contracts for things like elevators. So Sonesta’s cost structure is changing quite a bit. And it is not really static. So it is hard to compare. I think it is fair to say that because of Marriott size and stability, their costs are a little bit lower on some of those contracts than Sonesta’s are today.

Okay. Thank you.

Next question comes from Jim Sullivan with BTIG. Please go ahead.

Thank you. John, I’m curious, there was a comment that was made in the prepared remarks that offers were being received for the portfolio of assets for sale, both unencumbered basis and an unencumbered basis. And this obviously, this sale will perhaps provide a good example for us, if we are aware of the difference that the encumbrances make in terms of the terminal cap rate. One of your peers on the call today or their call this morning, talked about a 50 basis point difference if you are selling an asset, unencumbered versus encumbered. Obviously, in the case of service properties, you own a significant chunk of Sonesta. So you would be retaining the fees, or a share of them. So what if you could help us understand the calculus. Presumably selling it unencumbered. You would demand a higher price. But because you would lose your share of the fee revenue, there would be - it wouldn’t be - it is something that has to take into account. I wonder if we could help us understand the calculus as you think about it. If you are going to sell the assets encumbered, how much of a difference in the cap rate would you accept to kind of put you in the same position as selling them unencumbered at a lower cap rate?

Thanks, Jim that is a good question. It is a complicated answer. First of all, strategically, it is in our interest because of our ownership of Sonesta to continue to see Sonesta do well, and there has been a lot of news about their significant growth over the last year. And so it has to turn around and so 60 plus hotels unencumbered would sort of deflate that story and that momentum that they have and so we have been careful about how we do that. And so when we evaluate the offers that we get on these hotels, we look at both the purchase price, we look at our estimate of the royalty revenue that Sonesta regenerate if they stayed encumbered less a cost factor and then our percentage ownership of Sonesta to try to estimate the value to SVC of keeping them uncovered. And we also, Sonesta has been in discussions with a number of these potential buyers regarding possible transitions or new developments of hotels as part of this process and to the extent that buyers are committing to additional hotels. We have got a lesser factor because it is further out and less predictable, but we are considering that too in our analysis. So there is definitely a formula that we are applying. The other thing to remember is that some of, for instance, some of the extended stay hotels that are being sold our exterior corridor format which is not brand standard any longer at Marriott. And so the offers coming in for those hotels on encumbered basis are significantly higher than the offers coming in unencumbered. And so there is just a lot of different factors that are impacting where pricing is coming in. So we do have a number of hotels that are getting better pricing keeping it as a Sonesta than letting it go unencumbered. So that makes it hard for me to give you a specific percentage. But generally speaking, if the hotels are easily rebranded to a Hilton or Marriott brand, there will be probably somewhere around the 50 to 75 basis point higher pricing difference between encumbered and unencumbered.

Okay. That is helpful. And secondly, back at the time a year ago, when you were having your ultimately failed negotiations with Marriott. You commented a few times that the Marriott strengths in terms of putting heads in beds was really with the business traveler, because of their corporate rate arrangements and relationships and so forth, or at least that was always the perception. We are now at a point in time where the leisure traveler has come back and been pretty strong, but the business travel hasn’t, but we are hearing in this quarter, a lot of positive commentary about business transient back, and business group coming back, and the market getting excited about this January 4th day, that is kind of a pivot point for next year for the business travel. And I just wondered, do you have a sense that, as that business traveler comes back, the Sonesta brands are not going to be able to keep pace in terms of the gains in the market versus the bigger established brand like Marriott, or do you think that are you growing in confidence that Sonesta can be competitive to achieve the same kind of growth?

I mean I think we are confident that Sonesta is going to compete well. The companies like Marriott and Hilton and IHG, they are much bigger with much larger reward programs and they are great hotel companies and they will always be tough to compete against. But, I think Sonesta is putting programs in place to attract business travelers and I think that, their salespeople are aggressive and they get out and press the flesh and pound the pavement and continue to develop relationships, because that is what it takes, if you are a smaller hotel company to be competitive. And I think our experience not in every case, but in a lot of cases was that some of the sales people in some of the hotels managed by the bigger operators have develop a little bit of a complacency, because of the rewards program was so strong, they just thought, the stick it was turned on and as the flow of guests would show up regardless of how hard they worked at sales and Sonesta doesn’t have the benefit of just waiting for the flow. They are out there, generating the flow. And so, I think because of that - because I think they are working harder they are ultimately going to be very competitive. And we still have 16 hotels that Marriott is managing for us and they are not improving at a faster rate or dramatically surpassing the Sonesta branded hotels that are similar to here. So we feel pretty good about how the Sonesta brands can stack up.

Okay, that is great. Thanks John.

The next question is a follow-up from Bryan Maher with B. Riley. Please go ahead.

Thanks. John, can you give us an update on the franchising opportunity with Sonesta, I know that when you brought in Red Lion, the goal was the thought process was it would help ramp that process. Can you tell us where you are in that stage and when we might see that rollout in a meaningful way?

Just to be clear, we are not in a space - but we do, as a fair question, because we do on the third of Sonesta. The beginning of October, Sonesta filed their franchise disclosure documents for the Sonesta Simply Suites, Sonesta ER Suites, Sonesta Select and Sonesta Hotel. And so the timing of that was good, it was right before the start of the Phoenix Lodging Conference. And so they were able to officially start selling franchises at that time and I think that at the same time, we had launched the sale process for the 68 hotels. So, I think that the initial feedback has been much stronger than even we had expected all four. But a lot of where the rubber meets the road is going to come from Sonesta finalizing all of their brand standards from both an operational and capital perspective, which is at a very advanced stage also. And so, I think Sonesta in a good position. I think that what we are hearing is that one of the big attractions to Sonesta as a franchise organization is the fact that they do have 34% ownership by SVC. And most of the big hotel franchise companies today are asset light, and don’t have to eat their own cooking. They can take decide that the 48-inch televisions that you have bought last week need to be 52-inch televisions this week. And they don’t have to buy any more televisions. Just their franchise have to do it. But Sonesta changes from 48-inch TVs to 52-inch TVs, SVC has to go out and buy tens of thousands of TVs. So it is not going to be a willy-nilly decision to jam the extra 4-inch TV down the franchisees pro as it might be. Obviously I’m overstating the brands, all the brands before full about their standards. But there are a number of franchisees who feel like the big brands are a lot less thoughtful than owners, when it comes to what those brand standards are, how quickly they need to be rolled out. And so I think that knowing that whatever Sonesta comes up with from a brand standard that SVC has to live with it as well has been a big attraction to franchisees and is really helping that program getting good jumpstart.

And just last for me on the net lease portfolio, it seems like you have been selectively pruning some assets there. Is there a common denominator among what it is you are selling, any thoughts, current thoughts on the movie theater component there with what has been going on in that industry?

Yes, Brian, so as you can see, they are mostly smaller assets and typically, our strategy there is if something is going to become vacant, or is vacant, and we don’t think we can release it, we try to sell it. And that is typically how we can optimize price in that space. So that is most of what we are selling, we haven’t been selling anything that we view as core. In terms of the movie theaters, when we first bought this portfolio, we had said that we are unlikely to grow that portfolio and you may see yourself in movie theaters. I think we have done - all of our theaters are now current on rent. I think it is not the right time to sell to movie theaters. I don’t think you are going to, on a lot of our other net waves, like our quick service restaurants and some other industries. You are seeing a lot of cap rate compression, I think movie theaters, fitness centers are still wider. I don’t think it is the right time to sell, but when the market recovers and specific to those sectors, you may see us sell those, I just don’t think it is the right time now. But you know, the movie theater industry is coming back and we are seeing that in our theaters as well. And again, they are all current on their rents. We still have some deferrals outstanding, but we are not concerned. We don’t have any major concerns today about our theatres, but you may see us sell those next year or the year after.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to John Murray for any closing remarks.

Thank you everyone for joining us today and we look forward to speaking with some of you at Virtual NaREIT next week or maybe even our teleconference.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.