Good morning. Welcome to Service Properties Trust First Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded. I now would like to turn the conference over to Kristin Brown, Director of Investor Relations. Please go ahead.

Good morning. Joining me on today's call are Todd Hargreaves, President and Chief Finance -- Investment Officer, and Brian Donley, Treasurer and Chief Financial Officer. Today's call includes the 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 security laws. These forward-looking statements are based on SVC's present beliefs and expectations as of today, May 5th, 2022. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in 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 these non-GAAP financial measures to net income, as well as components to calculate AFFO are available on our -- 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 file with the SEC and in our supplemental operating and financial data found on our website. Investors are cautioned not to place undue reliance upon any forward-looking statements. And with that, I'll turn the call over to you, Todd.

Thank you, Kristin, and good morning. Our first quarter results reflect sequential monthly improvement throughout the period as comparable RevPAR increased from 63% of 2019 levels in an Omicron impacted month of January to 74% of 2019 in March, resulting in Q1 2022 RevPAR that was 69% of the same quarter in 2019. The improvement has continued into the second quarter with preliminary April RevPAR of $83 equal to approximately 82% of April 2019 levels. Room rates are beginning to approach 2019 figures with ADR improving from 83% of 2019 in January to 95% of 2019 in April. Notably, our full-service portfolio ADR has also returned to 95% of 2019 Q1 levels, highlighted by two of our best performers, Sonesta Hilton Head, and Sonesta Miami Airport, achieving rates of 144% and 135%, respectively, of 2019 Q1 ADR, along with other leisure and urban hotels in markets such as Fort Lauderdale, San Juan, Scottsdale, and New Orleans; each outperform in Q1 2019 ADR by more than 110%. We have also seen considerable occupancy increases at some of our full-service urban hotels. The Royal Sonesta Toronto increased occupancy from 26% in January to 76% in April. And the Royal Sonesta Austin improved occupancy from 35% in January to 82% in April. The recovery of SVC suburban select-service in urban full-service hotels, which have historically generated approximately 75% to 80% of their revenues from business related travel or meetings, continues to lag our airport reserve location but that gap should continue -- that gap should close more workplaces reopen and employees returning to the office. While [Indiscernible] 2019, group pace of SVC is hotel operators is considerably above 221 levels in both room nights and revenues, specifically Sonesta, with pace increases of 37 to 38 comparable full-service hotels. Sonesta is beginning to realize…

Thanks, Todd and good morning. Starting with our consolidated financial results for the first quarter of 2022, normalized FFO was negative $3.4 million or $0.02 per share, a $38.6 million increase over the prior-year quarter. Adjusted EBITDAre was $90.1 million for the first quarter and $41.4 million increase over the prior-year quarter. Although the first quarter is typically a seasonally weak quarter for our hotel portfolio and was compounded by the effect of the pandemic at the start of the year, these results exceeded our expectations from where we were projecting in February. Demand accelerated in late February and has continued through today. The major drivers impacting normalized FFO over the prior-year quarter include the results from our hotel portfolio, which generated $5.2 million in hotel EBITDA for the first quarter of 2022 compared to losses of $38.2 million in the prior-year quarter. Guaranteed payments that supported our hotel returns under our historical agreements declined $10.4 million negatively impacting year-over-year comparisons. Net operating income from our leased properties for the first quarter of 2022 increased $5.3 million over the prior-year quarter. Primarily as a result of a decrease in reserves for uncollectable rents for certain tenants. Interest expense increased $3 million over the prior-year quarter as a result of our revolver draw in January 2021. G&A expense decreased $675,000 or 5% to $12 million in the current year quarter, primarily as a result of lower legal and other professional service costs and lower business management fees due to RMR. We expect G&A to increase to approximately $13 million in the second quarter, largely driven by annual non-cash stock grants to our trustees. Lastly, our share of normalized FFO recognized from our 34% ownership interest in Sonesta increased $1.8 million or $0.01 per share over the prior-year quarter. Turning to our…

Yes. Thank you. As mentioned, we will now begin the question-and-answer session [Operator Instructions] If you're using a speaker phone, please pick up your handset before pressing the keys [Operator Instructions]. At this time, we'll pause momentarily to assemble the roster. And the first question comes from Bryan Maher with B. Riley.

Good morning, Todd and Brian. And Todd, congratulations on the promotion there recently. Can you talk a little bit about the expense side of the equation on the hotels? Where are you most concerned? Where is the most pressure coming from? I suspect labor is high up there, but can you talk also about maybe taxes, utility, supply chain issues? And Brian, I think you mentioned that margins were 2% in the first quarter, expected to be 19% to 22% in the second quarter. How sustainable are those increases in -- I guess the concern is, we stay back from there after we get through these seasonally strong second, third quarters. So can you give us some color on that? Thank you.

Sure. Thanks Bryan, for the question. I'll start the Bryan can weigh in. But you're right on the expense side. Labor is certainly one that we're tracking closely and we're seeing wage increases across all positions, front office, housekeeping, servers. We saw about a $3 hourly rate increase year-over-year, and there's a lot higher increases in the hospitality industry relative to retail as well. We're -- our operators are increasing their recruitment efforts. They are offering referral bonuses, looking at other things to retain employees, but there has been an impact. I mean, there has been more out of order rooms due to housekeeping shortages. There's certainly a reliance on more expensive contract labor as well, while unemployment overall is down. So is the workforce participation rate we're seeing -- we're continuing to see hotel workers leave for other industries. They're working -- going to work for Amazon or Uber or other -- just going out of the industry overall. But we're also seeing expense increases -- like you point out on the insurance side, as well as on the utility side. Real estate taxes were actually saving some money as we're going back and our operations are going back and challenging some valuation. So we're seeing some decreases in real estate taxes. But overall, there's certain -- certainly inflationary pressures on a lot of the expenses. As far as your question on the margins, Bryan, I think what I mentioned, Q2 was a range of 19% to 22%. I would think in Q3, there's some incremental improvement there. And seasonally in Q4 there'd be some pullback but nothing like we saw in Q1. I expect a more modest pullback as we go through the curve of the seasons.

Okay. And then on the Sonesta, we did notice that Sonesta purchase of -- I think it was four New York City hotels and you mentioned the $25 million capital commitment. The $21 million later this year -- is that further contribution to the purchase of those hotels or is that going to some type of capex needed at those properties?

Bryan, I'll take that one. That was more of a liquidity thing for SVC. SVC in Sonesta and their other shareholder agreed, based on liquidity constraints at SVC, to defer our contribution until we get more of the sale proceeds behind us. So all in, SVC's 34% contribution would be the combined amounts.

Yeah. I'll just add in, too. That 34% that -- is the equity portion of the deal and there is some renovations taking place at one of the hotels, but that will cover -- [Indiscernible] the purchase price as well as any additional capex. So that should be it after the additional contribution.

Do they have to clear that with you first? I would suspect as being a 34% shareholder that you're going along with that?

Yes. We had to provide consent.

Okay. And then just kind of shifting gears to RevPAR. Now that you've converted the Sonesta, the IHG and Marriott properties to the Sonesta flag, I think I don't know if it was a quarter or two or three ago, there were some optimism that you could get RevPAR back up to a comparable Marriott and InterCon level. I don't think most of the buy-side that I speak to, thought that that was realistic, but thought that kind of puts and takes of being Sonesta and more flexibility, slightly lower fees, etc, made it worthwhile, but now that you've had these for several quarters, what are your thoughts on the ability to push RevPAR and Sonesta, mainly the select service extended stay stuff closer to those bigger brands that they were before?

Yeah Bryan, that's a good question, something we're looking at very closely as well and monitoring. I think it depends -- and you noted it with the Select specifically, which is a new brand for Sonesta. Earnings were relatively newer brands to the others, but we're seeing a lot more success in market share on rate and occupancy at some of the leisure hotels, some of the airport hotels. There is certainly more room to make up on the select service side. So that's something Brian and I are working closely with our asset management in Sonesta to really create measurable goals for that, and we are seeing them start to close the gap on those. As an example, in December, the Sonesta Select, if you take out the exit, were at 73% occupancy and [Indiscernible], and we set a goal for them to try to get to 80% by the end of the quarter, and they did. They got to 79%. So I think that's something we're going to do, and we're going to continue to monitor. We realized there's a gap to close to market, especially on Sonesta Select. The other area where we have more of a gap to close is on the Sonesta -- Royal Sonesta for urban hotels. But I think a lot of that is the compe -- the comparison has -- is more heavily weighted to leisure hotels. So

far our service hotels have, at least on the [Indiscernible] side, have more, more full-service urban hotels. So I think as return to office and more business travel comes back relative to leisure, I think you'll see us close that gap. But the focus for us right now is on the selects, specifically. But we are performing cogniable on a lot of the other service levels. That answer your question, Brian?

Yeah. Sorry, you guys had out there for second. Last for me and maybe this is in the fair question, but I am going to ask it anyways, having covered the company for almost 25 years. You've evolved from hotels only to then TravelCenters to now net lease and I get a lot of calls, would you ever part with your travel enters which are easily probably worth $3.5 billion if you need to raise capital. Can you maybe prioritize how you think of the importance of hotels versus TravelCenters versus net lease and again it's kind of unfair because Ts and net lease performed very well during the pandemic relative to hotels, but hotels were -- how the company was formed. Maybe your answers, we love all of our children in the same, but can you give us thoughts on the prioritization within the firm.

Sure, Bryan. I'll take a crack at that. As you point out, especially during the pandemic given the cyclicality of the lodging industry, that our net lease, both TA and not TA, really has helped us during the pandemic, especially recently. TA didn't miss a beat at all. Our net lease -- we had some challenges with our movie theaters and fitness centers but those quickly recovered as well. I'm not sure how to answer the prioritization. I think, and maybe you've asked us on previous calls but where do you see the allocation of assets going forward -- the mix and I think we'll -- I think we see hotels being anywhere long term from 50% to 60% of the portfolio, which they're right in the middle of that today. It's going to depend. Right now, our focus is on getting through the asset sales and managing our liquidity, but ideally, we'll be in a position where we can be acquisitive again. And a lot of that's going to depend on the relative value of acquisitions. I think that's one of the benefits of having the diversification is sometimes it's going to be more in favor to buy hotels, sometimes it's going to be more in favor to buy net lease. So it gives us some flexibility there as well, but long term, I kind of -- I don't know if that answers your question on prioritization or not, but long term I think we'll still be above that 50% level on the lodging side and then the remainder will be the net lease in the travel centers.

Again, that's helpful. Maybe we can kick it around more at NaREIT, but thank you for your comments.

Sure. No problem.

Thank you. And the next question comes from Dory Heston with Wells Fargo.

Thanks, good morning. When you think to your capex spend over the next few years of about $200 million annually should we expect operating headwinds in the first year, kind of neutral in the second and tailwinds by the third?

Yeah. I would say that we try to mitigate disruption on any renovation projects and a lot of these projects go through the planning phases during peak seasons and they're measured in phase by floor to limit disruptions. So I think it'll be spread out Dory. It's a good question and the exact timing is difficult to predict because a lot of these projects are taking longer to get off the ground based on just market factors and supply chain issues and obviously rising costs as we might change scope, if prices continue to rise. But typically, capex is more weighted towards the back end of the year, given our seasonally weak periods, our Q4 and early Q1.

Okay. And is there any plan within that now that Sonesta owns the James brand to rebrand any of your city center hotels with that brand?

Yes. Sonesta is evaluating the portfolio now, but I think you could see that I think some of our hotels in Chicago and Washington DC -- some of the former Kimptons, for example, I think would be a good fit for that, but that evaluation is happening now, Dory.

And then after the $500 million notes mature mid-August -- their pay downs, and I think you said in Q3 you should exceed your minimum covenant. Is that when you would expect to pay down the [Indiscernible] balance or would you expect to hold onto the cash for some time longer?

That's a great question and there's still some things to play out as far as the '23 notes that come due in June. And that's one of the things sort of tied neck and neck with the revolver and how we structured that last amendment. We have to make sure we have adequate liquidity to take out the June '23 notes. But our expectation is by the end of the year -- by the end of the calendar year, we'll be able to commence with normal refinancing activities and take out either the revolver and -- both the revolver and the senior notes. So yes, we want to get back to being able to use the revolver as it's intended and not sit on cash. But I think late '22 or early '23 is the best to guess in timing.

Okay. My last question is kind of back to Brian. It's about the margins. I think at prior peaks you were in the mid-20s range, maybe 25% margins. And I understand what these asset sales coming up. It should be slightly higher. When you compare that to your peers, whether it's collector full-service, they're materially lower, and I'm just trying to get -- I'm trying to get a sense of the age of the hotels, location, management. What is -- what do you attribute most of those lower levels and what can you do to be, I guess, higher 20s, low 30s if possible?

That's something we [Indiscernible] as well, Dory. We're -- especially on the [Indiscernible] side of things where they are improving relative to the market, especially in terms of GOP margin. Our operators are looking at expense management strategies. One thing Sonesta has been able to do through their increased scale, not just on the managed side, but on the franchise side, they've been successful in renegotiating the OTA commissions. They're looking at some of the -- with rising costs of food and commodities they are looking at different ways to maximize their menu options and reduce costs that way. They have cost reduction initiatives in place to really try to help drive those margins up, but again, it's a fair point and something we're monitoring.

Okay.

If you noticed that the Sonesta Select brand, it's a little under a year since that was launched and we really want to be able to see business travel back and more for us before we can sort of form any conclusions but we do expect the margins again, Q1, I think it's an anomaly and it will get closer to that 20% range as we roll through going forward.

Good, thank you,

Thank you. And this concludes the question-and-answer session. I'd like to turn the call over to Todd Hargreaves for any closing comments.

Great. Thank you everyone for joining and we look forward to seeing many of you at our Investor Day later in Chicago this month.

Thank you. The conference is now concluded. Thank you for attending today's presentation, may now disconnect your lines.