Service Properties Trust Highlights Strong Growth Amid Challenges

Service Properties Trust ((SVC)) has held its Q4 earnings call. Read on for the main highlights of the call.

Service Properties Trust’s recent earnings call presented a balanced outlook, highlighting strong revenue growth and successful asset sales as significant achievements. Despite these positive developments, challenges such as declining adjusted hotel EBITDA and rising interest expenses were noted. The positive aspects, including robust growth in the select service portfolio and strategic asset sales, provide a strong narrative, while the lowlights underscore areas needing improvement.

Strong Hotel Revenue Growth

Service Properties Trust reported its strongest hotel revenue growth in nearly two years, with comparable hotel RevPAR increasing by 4.2% year over year. This growth outpaced the industry by 60 basis points, showcasing the company’s competitive edge in the market.

Successful Asset Sales and Strong Buyer Interest

The company is actively marketing the sale of 114 Sonesta hotels, attracting a deep and well-capitalized buyer pool. This has resulted in more than fifty sub-portfolio bids, with expected net sales proceeds of at least $1 billion, reflecting strong buyer interest and confidence in the company’s assets.

Exceptional Select Service Portfolio Growth

The select service portfolio experienced a remarkable RevPAR growth of 9.6% year over year. This was driven by increased occupancy in the Hyatt Place and Sonesta Select portfolios, highlighting the strength and appeal of these brands.

Stable Net Lease Portfolio Performance

The net lease portfolio maintained a high lease rate of 97.6%, with a weighted average lease term of eight years. This stability generated consistent cash flows with annual minimum rents of $381 million, underscoring the portfolio’s resilience.

Growth in Retained Hotel Portfolio

The retained hotel portfolio saw a RevPAR increase of 6.3% to approximately $101, along with a 10% year-over-year increase in adjusted hotel EBITDA to $30.6 million, indicating solid performance and growth potential.

Decline in Adjusted Hotel EBITDA

Adjusted hotel EBITDA declined by 2.4% year over year, impacted by renovation activities and increased expenses, including labor and real estate taxes. This highlights the financial pressures the company faces amidst its growth initiatives.

Increase in Interest Expenses

The company experienced a $9.4 million increase in interest expenses, coupled with an $8.4 million decline in interest income. These factors negatively impacted the financial results, presenting a challenge for the company moving forward.

Lower Margins Due to Renovations

The gross operating profit margin percentage declined by 160 basis points to 25.3%, with the gross operating profit remaining flat compared to the prior year. This was primarily due to disruptions from renovation activities, affecting overall profitability.

Forward-Looking Guidance

During the earnings call, Service Properties Trust provided guidance on several financial metrics and strategic initiatives. The company anticipates a 4.2% year-over-year increase in comparable hotel RevPAR, with a more substantial 6.8% rise excluding hotels under renovation. The sale of 114 Sonesta hotels is expected to generate at least $1 billion in proceeds, aiding in leverage reduction. For Q1 2025, the company projects RevPAR between $82 and $84 and adjusted hotel EBITDA between $20 million and $24 million. Capital expenditures for 2025 are expected to be around $250 million, focusing on renovations and maintenance, with a priority on addressing 2026 debt maturities and expanding the net lease portfolio.

In conclusion, Service Properties Trust’s earnings call highlighted a balanced outlook with strong revenue growth and successful asset sales. While challenges such as declining adjusted hotel EBITDA and increased interest expenses were noted, the company’s strategic initiatives and robust portfolio growth provide a positive narrative. The forward-looking guidance suggests continued focus on asset sales, leverage reduction, and portfolio expansion, positioning the company for future success.