Good morning, and welcome to the Service Properties Trust First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Stephen Colbert, Director of Investor Relations. Please go ahead.

Good morning. Joining me on today's call are Todd Hargreaves, President and Chief Investment Officer; and Brian Donley, Treasurer and Chief Financial 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, May 8, 2024. 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 filings with the SEC, which can be accessed from our website at svcreit.com or the SEC's website. 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. 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 in our financial reporting package, which can be found on our website. And finally, we are providing guidance on this call, including hotel EBITDA. We are not providing a reconciliation of this non-GAAP measure as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. With that, I'll turn the call over to Todd.

Thank you, Stephen, and good morning. Our first quarter results are indicative of typical seasonality patterns in our lodging portfolio as well as the stability of our net lease portfolio. Our full-service hotels experienced top line growth through increased group demand, while our select service hotels were impacted by softening transient travel and renovation activity. Our focus remains on improving the performance and quality of our portfolio through the disposition of non-core hotels and capital projects to put our operators in the best position for long-term success. Beginning with the hotel portfolio for the quarter, comparable RevPAR declined 3.5% year-over-year. When excluding the '23 active renovations, ADR declined 0.7% and occupancy declined 0.2%, leading to a RevPAR decline of 1.1%. The renovation hotels, which include our Hyatt Place portfolio, Sonesta Hilton Head and others, experienced approximately $3.9 million of displacement during the quarter. Cost pressures led to a hotel EBITDA margin decline of 290 basis points over the prior year quarter for our 218 comparable hotels as wages, property taxes, and insurance increases more than offset our operators' improved reliance on contract labor. Full-service was our top performing segment during the quarter where we gained 80 basis points of RevPAR over the previous year quarter, led by increases in group and contract sales. Full-service group performance was led by our Royal Sonesta hotels in San Juan, San Francisco and Kauai, while the increase in contract revenues was led by our Sonesta hotels in Redondo Beach and Denver. F&B revenue gains occurred across our full-service hotels as well, led by our Royal Sonesta in St. Louis and Kauai. Our portfolio of select service hotels continued to see the most disruption during the quarter as 18 of our 61 hotels were under renovation, including our 17 Hyatt Place hotels, which began renovations…

Thanks, Todd, and good morning. Starting with our consolidated financial results for the first quarter of 2024. Normalized FFO was $21.1 million or $0.13 per share versus $0.23 per share in the prior year quarter. Adjusted EBITDAre declined 1% year-over-year to $115.5 million. Financial results this quarter as compared to the prior year quarter were impacted by higher interest expense and a decline in hotel EBITDA. Rental income increased by $5.6 million this quarter compared to the prior year due to higher rental income recognized under our TA leases as a result of the BP transaction last May. Turning to the performance of our hotel portfolio for our 218 comparable hotels this quarter, RevPAR decreased by 3.5%, gross operating profit margin percentage declined by 200 basis points to 23.3%, and gross operating profit decreased by $6.5 million from the prior year period. Below the GOP line costs at our comparable hotels increased $2.8 million from the prior year, driven primarily by increased insurance expense. Our 220 hotels generated hotel EBITDA of $28.9 million, a decline from the prior year, but in line with our guidance range provided last quarter. By service level, hotel EBITDA year-over-year increased $676,000 for our full-service hotels, declined $5.6 million for our 61 select service hotels and $3.4 million for our 111 extended stay hotels. Turning to our expectations for Q2. We're currently projecting a full quarter Q2 RevPAR of $95 to $99 and hotel EBITDA in the $80 million to $85 million range. Turning to the balance sheet. We currently have $5.6 billion of fixed rate debt outstanding with a weighted average interest rate of 5.9%. Our next debt maturity is $350 million of unsecured senior notes maturing in March 2025. We currently have $80 million of cash and our $650 million revolving credit facility…

[Operator Instructions] Our first question is from Bryan Maher with B. Riley Securities.

Maybe just sticking with the CapEx for a minute. Your $50 million increase, I think I did that math right. Can you talk about why and what that $50 million is going to be allocated to?

Bryan, thanks for the question. Yes. A lot of it is the pace of projects. And as we plan the rest of the year, each quarter, we decide which projects we think we should move forward with, which ones make sense from a timing standpoint to limit disruption. We also have a combination of major renovations at certain hotels as well as more routine stuff that we want to get in this year to continue to improve the position of the hotel. So it's a combination of a couple of things, but it's more so just the pace of projects. It has moved a little quicker than it has in past quarters. So it's more of a planning thing than anything. This is a multiyear program that we're -- we've now started at the end of last year, and it will continue for a couple of years.

Would you consider some or all of that $50 million a pull forward from what you would have spent in 2025?

Some of it, yes. Yes.

Okay. And when we think about the Hyatt renovation disruption, can you talk about when you think that, that is fully wound down? And maybe give us some idea as to how much you're spending per key on those renovations and kind of how deep they are?

Sure. I can take that one, Bryan. So the Hyatt, we started those late last year. I would say we're through the majority of those or we should be getting through the majority of those shortly. I would expect most of that to wrap up this quarter and have those back online fully. So I think we should start to see the benefit of that starting in the second quarter, but really fully hopefully in the third quarter. The total cost is -- for those renovations is right around $90 million, which Brian is calculating the per key cost now.

Yes. Per key, it's around $40,000.

Yes. And it's rooms, common areas, facades. It's pretty -- it's a pretty intensive renovation. Those hotels had not been renovated in a while. So we expect to see a pretty significant pickup once those renovations are complete.

Okay. And maybe kind of the same dialogue on Sonesta, kind of how much more what you're spending per key. I think you mentioned in your prepared comments that you're selling 22 hotels, book value, [ $162 million ]. I mean what does that sales due to your kind of future CapEx spend that you had been planning for?

Yes. From a Sonesta standpoint, it depends on the chain scale and the brand, Simply Suites at the lower end is $30,000 to $35,000 per key and could be upwards of $50,000 a key for some of the [indiscernible] that we're doing. We've got very small service hotels that are in the plan for this year, including our Hilton Head property and some of the airport hotels. But as we look at different chain scales and different needs, when the last refresh happens.

Yes. And that should take off probably another $150 million instead of total that we otherwise would have had to spend at these hotels.

And just 2 more for me. What kind of uplift are you looking for in RevPAR roughly speaking, from the Hyatt renovations and the Sonesta renovations, if you can break them out. I don't know what the best way to break it out is, but clearly, you've thought about what your RevPAR uplift would be. Can you share with us what you're thinking there?

Yes. I mean I think RevPAR index is 1 metric. I mean, we're very focused on bottom line EBITDA, and we expect high single-digit returns on a lot of the money we're deploying for -- we'll work on renovation capital. We're not going to get that same lift from more routine stuff that is just maintenance-type capital, but there are various ROI projects built into our program and the amount of money we're putting in, we expect a significant lift that will high single-digit EBITDA returns over the longer term post renovation periods. We finished 9 Sonestas this quarter, not a lot of anecdotal evidence yet as some of these, they are only a couple of months post renovation, but some other ones that have been finished for close to a year, if you look at the periods prior to when -- before we started the renovations to ramp up period afterwards, we're seeing those returns that we had forecasted.

The next question is from Dori Kesten with Wells Fargo.

I appreciate the Q2 RevPAR and hotel EBITDA guide. I was wondering what you're thinking now for the back half of the year? I know peers have highlighted a strong second half versus first, but I just -- I'm not sure if you feel the SVC portfolio would participate as much given limited group exposure and the renovation headwinds.

Yes, it's a great question, Dori. Thank you. I think our trends will mirror patterns that we've had in previous years. We expect Q2 to be a stronger period, obviously, than Q1. We think Q3 will be in line with Q2 before it starts [ trailing ] off. There is a lot of noise in our portfolio given the renovation activity we've highlighted. So when we do see ramp-up from certain hotels and picking up different business and market share, that could be weighed down by some of the other hotels that we're moving into renovation.

Okay. And as you wrap up negotiations on the 22 Sonestas, I'm wondering what did you learn from the marketing process and the negotiation process so far? And just based on level of interest, would you expect there to be a round 2 of asset sales? Or would you consider yourself done for the year after these 22?

Sure, Dori. The marketing process -- so just to clarify, where we have gone through multiple rounds of bidding on the hotels. We're -- we've identified buyers for the majority of those hotels. And so we are, as you point out, negotiating contracts. It's not going to be a portfolio sale. It's not going to be to 2 or 3 buyers, there's going to be likely more than 10 buyers for these 22 hotels, and we're likely to maximize proceeds that way. I think the process has gone somewhat as expected in terms of interest level from a lot of smaller operators for these types of hotels, a lot of local operators. If you recall, these hotels today are losing -- they're negative EBITDA for the most part. They need CapEx. So local operators are coming in and really focusing on turning around some of these hotels. The -- we did get a lot of interest. And I think the types of hotels that are trading even with transaction activity down, are these types of hotels kind of the lower price point hotels where buyers can come in at a good basis. So again, it was similar to what we expected. There was a lot of repeat buyers from the time we sold the 68 hotels a couple of years ago as well. So I'm not sure we necessarily learned anything further. I think there continues to be interest in these hotels or continues to be interest in groups buying these hotels and entering into franchise agreements with Sonesta, which was a positive to see as well. To answer your question on more hotels, I think we want to get through these first, but there could be other hotels in the system. I think it's just going to be a continuing evaluation of the performance of the hotels. And so there could be other hotels, but we haven't identified any yet.

Okay. And then my last one is just on tucking trends. You talked about the normalization of trends and that, therefore, it makes sense, your rent coverage is coming in post pandemic, but for context, like what level of rent coverage would make you consider the trends less of a normalization and more worrisome. And to be clear, I don't think you're there. I'm just wondering like what your line [indiscernible].

Right. It remains to be seen. It's a good -- it's -- the commentary is -- we agreed with that commentary back in 2017, '18, '19. The coverage for those assets was probably closer to [ 18 ] or [ 19x. ] And then once we came out of the -- or once the pandemic hit, trucking activity picked up significantly, e-commerce activity picked up significantly, and you saw diesel volumes and more importantly margins get to levels that we hadn't seen before. And that really drove coverage up. I think what you've seen over the past several -- past 3 or 4 quarters, does that really get back down to more what we view as normalized levels. We don't have nearly as much insight now given the [ lease amendment ] to the performance of these sites. But we're following what BP says publicly. We have very little concern given the investment-grade credit backing these properties and leases and just the underlying value of the real estate. But I don't have necessarily a number where, I would say, I would start to be concerned, but we're far away from that number.

The next question is from Tyler Batory with Oppenheimer.

A follow-up question on the guidance for the second quarter. It looks like RevPAR at the midpoint, flat year-over-year $80 million to $85 million of hotel EBITDA, your margins still down year-over-year. Is there a way to think about the renovation disruption that's in those numbers? And then talk a little bit more about what needed to happen maybe outside or even including renovation disruption. I mean what needs to happen for you to really see some margin improvement and margin growth?

Tyler, thanks for the question. I'll start, and Todd, if you want to add anything. But as far as disruption goes in Q2, it's going to be more of the same. I think it will have a little bit more of a lift side of the thing portfolio from the Hyatt coming out of renovation. All 17 of those hotels are going to be coming out throughout the quarter. So we're going to start to see some lift from that. So it's sort of going to negate some of the disruption we're seeing where these are some of our stronger seasonal periods. We're going to try to limit rooms that are on our server. So it's tough to fully quantify and once you start a project and get into it, how fast it moves, how many rooms you take out can vary. But the bigger overall question, how to drive margin, we believe it's an occupancy issue. We need to drive more demand in our hotels. We're doing that through various initiatives, including the CapEx program. So that's our operators -- our other operators are also very focused on driving demand through different initiatives and marketing promotions and other projects they're working on to drive business.

Yes. I'll just add to that. I mean we saw -- we are very pleased with how the full-service portfolio did, especially the Royal Sonesta that grew over 6% in RevPAR year-over-year, really driven by group business, but also our urban hotels really were increased as well, just driven by increased citywide demand. So I think we're really optimistic with what we're seeing on the full-service side of things. We touched on a couple of things in the prepared comments, but especially on the -- it's tough to get a good comp on the select service portfolio because so many were out of -- were disrupted during the quarter. But in terms of the extended stay, I think our focus really is on having our operators really get back to getting that true Tier 4 extended stay business of more than 7 nights. In some cases, you can get 30, 60 nights -- 30 to 60 nights and especially in the seasonally weak quarters, you really rely on that occupancy for those types of hotels, but ideally, we see some of that more longer-term project-based business come back online. I think that's something our operators, especially Sonesta is very focused on.

Okay. Okay. Great. So in terms of the Sonesta brand, I think you cited 30% of stays in the quarter were loyalty members, a little bit lower than some of the other brands that are out there, obviously, this loyalty program is still pretty new. So just talk a little bit more about kind of the adoption of the loyalty program. And more broadly, just kind of an update on how Sonesta is resonating in the marketplace for travelers.

Right. The -- and the number was about 26%, I believe, for the full-service hotels. It's a little bit lower on the focused-service hotels. But we are seeing increases there. I think the full-service, we saw a 300 basis point increase year-over-year. So we are really seeing the adoption, especially on the Sonesta and Royal Sonesta hotels. But as you know, especially on the select service side, it's so much of business-oriented hotels, you see it with some of the other brands is really driven by loyalty members. So that's really where we need to continue to see pickup. But it's certainly a positive that you're seeing it on the full service side, an increase of that much in terms of bookings through the loyalty program. So Sonesta still at this size is a relatively newer, younger company. So we're seeing things move in the right direction, and we are seeing that brand adoption in some of the numbers.

Okay. Great. And then last question for me. Obviously, no debt maturity this year. At what point do you start to think more about the 2025? And what sort of options might be on the table for those? And as you sit today, can you rank order kind of what looks most attractive to you in terms of handling those maturities?

Tyler, it's a great question. We continue to monitor the debt markets, and we are going to be -- continue to be proactive on our debt maturities. As we've demonstrated, we've got multiple options using SVC's portfolio, but our real preference is unsecured corporate debt. So that's something we're going to take a hard look at in the near term to stay ahead of our maturity wall, but we do have multiple options out there.

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

Thank you, everyone, for joining today's call. We appreciate your continued interest in SVC. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.