Jack Armstrong

Jack Armstrong from Wells Fargo inquired about the RevPAR trends observed in the first quarter to date and sought clarification on the broader range of Service Properties Trust's RevPAR growth guidance compared to peers. He also asked about the strategic shift behind the reduced net lease acquisition guidance for 2026, the assumptions for expense growth components like labor and insurance, and the anticipated impact of Sonesta's new management team on SVC's 2026 guidance.

Answer

Brian Donley, Treasurer and Chief Financial Officer, stated that Q1 RevPAR is tracking in line or exceeding projections, attributing the guidance range to portfolio volatility, disruption, displacement, and citywide events. Chris Bilotto, President and Chief Executive Officer, explained the net lease acquisition strategy shift as part of a holistic capital deployment review, aiming for net-zero acquisitions funded by sales. Mr. Donley detailed expense growth expectations, including 4% top-line, 6% bottom-line, and 3-3.5% base labor wage increases with pressure on benefits, leading to flat margins. Mr. Bilotto noted that the 2026 guidance does not include benefits from Sonesta's new management, viewing their leadership as incrementally positive, while Mr. Donley added that Sonesta's earnings share is not projected for significant growth.

Jack Armstrong inquired about the potential impact of the new management team at Sonesta on Service Properties Trust and whether any benefits from this change were incorporated into the 2026 guidance.

Answer

Chris Bilotto, President and CEO, stated that the 2026 guidance is based on budgeted hotel performance and current forecasts, not including benefits from the new Sonesta management. He views the new team as a positive, expecting incremental benefits from their experience. Brian Donley, Treasurer and CFO, added that they are not projecting much growth from SVC's 34% share of Sonesta's earnings in the guidance.

Jack Armstrong of Wells Fargo questioned the rationale for fully drawing the credit facility, the potential use of a zero-coupon bond, the plan for 2027 debt maturities, the profile of future hotel sales, expected returns on renovations, and the nature of changes to the Sonesta management agreement.

Answer

CFO & Treasurer Brian Donley explained the credit facility was drawn proactively to preserve liquidity before potentially falling below the debt covenant threshold, and confirmed a zero-coupon bond is an option being evaluated. President & CEO Christopher Bilotto noted that 2026 asset sales would target the 2027 maturities. Donley stated renovation return expectations range from 8-10% to over 20% for larger projects. Bilotto clarified that changes to the Sonesta agreement are structural (moving from a pooled to individual hotel basis) to align incentives with the new strategy, not economic, as current terms are considered market.

Jackson Armstrong questioned the specific reasons for the shift in the hotel disposition timeline, the risk level of the CapEx program given potential tariffs, the confidence in pursuing net lease acquisitions in the current environment, and the details behind the impairment charge on 16 hotels.

Answer

President and CEO Christopher Bilotto stated the disposition timeline shift is a function of the complexity and phased nature of a large portfolio sale, not broader market concerns. He also noted that net lease acquisitions are attractive due to favorable pricing and their role in improving the overall portfolio composition. CFO Brian Donley explained that the 2025 CapEx plan is largely locked in, while future plans will mitigate tariff risks through sourcing and scope adjustments. Donley clarified the impairment was on a specific pool of 15 hotels, and that in aggregate, the company expects to recognize a gain on the sale of the full 114-hotel portfolio.

Jack Armstrong inquired about the total RevPAR drag in 2025 from Liberation Day and the government shutdown, and how much of that impact is expected to recover as a benefit in 2026. He also asked for a breakdown of the fixed and variable expense components contributing to the 3% full-year expense guidance.

Answer

CFO Liz Perkins explained that government room nights were down about 12% and negotiated business down 5-6% for the full year 2025, estimating a potential one-point occupancy return. She detailed that variable expenses are projected to be just under 3% (2.7%) and fixed expenses just under 5% (4.5%) at the midpoint of the 2026 guidance.

Jack Armstrong with Wells Fargo inquired about the total RevPAR drag in 2025 from Liberation Day and the government shutdown, and the expected benefit in 2026. He also asked for a breakdown of fixed and variable expense building blocks for the 3% full-year expense guidance.

Answer

CFO Liz Perkins explained that government room nights were down about 12% and negotiated business down 5-6% for the full year, estimating about a point in occupancy could return. She detailed variable expenses at just under 3% (2.7%) and fixed expenses at just under 5% (4.5%) at the midpoint of guidance.

Jack Armstrong asked if weaker RevPAR in the upscale segment indicates pressure on the middle-income consumer and a lack of a trade-down effect. He also requested a comparison of current full-time employee and contract labor levels to pre-pandemic, assessing the company's operational flexibility.

Answer

CFO Liz Perkins attributed recent performance more to market-specific disruptions like weather and holiday shifts rather than a specific consumer or chain-scale issue. She noted that full-time employee levels are just shy of pre-pandemic levels and contract labor, while down significantly, remains about 200 basis points above 2019 levels. She affirmed the company's operational model provides significant flexibility to adapt to demand shifts.

Jack Armstrong from Wells Fargo questioned why RLJ is not accelerating its ROI-focused CapEx programs, such as conversions and property upgrades, given its strong cash position and the attractive returns these projects have generated.

Answer

CEO Leslie Hale responded that the company is maintaining its established cadence of approximately two conversions per year and is actively integrating ROI projects into its standard renovation cycles. COO Tom Bardenett provided specific examples of successful ROI initiatives, such as beverage-centric F&B concepts and parking optimization, which helped drive a 1.5% increase in non-room revenue during the quarter.

Jack Armstrong of Wells Fargo asked if the company's size is a hurdle for investors and where future earnings growth will come from within the existing portfolio, including 2026 CapEx plans.

Answer

CEO Bryan Giglia asserted that recent investments in properties like Long Beach and Wailea are already driving growth. Future investments include meeting space renovations in San Diego and a rooms renovation in Orlando. He argued the company's concentrated size is an advantage, allowing for nimble capital recycling to create shareholder value.

Jack Armstrong from Wells Fargo asked for an update on consumer behavior, booking windows, the preliminary July RevPAR, and the company's view on the current transaction market for potential portfolio changes.

Answer

Chair & CEO Marcel Verbaas provided the July RevPAR figures (down slightly, but up 3% ex-Houston), attributing the results to softer leisure demand as expected. On transactions, Verbaas stated that external growth is not a priority due to the company's stock valuation, and while dispositions are possible for high-CapEx assets, no major portfolio reshaping is planned.

Jackson Armstrong from Wells Fargo asked about shifts in the group business mix, particularly regarding government and association segments, and sought clarity on the timeline and potential disruption of deferred capital projects, as well as the portion of the CapEx reduction attributable to the Fairmont Dallas sale.

Answer

President and COO Barry Bloom explained their portfolio has low government exposure and remains focused on strong corporate and association group business. Chair and CEO Marcel Verbaas stated deferred projects would likely move to 2026 pending ROI reevaluation, with minimal disruption expected due to scheduling in low-season periods. He also confirmed that over $10 million of the $25 million CapEx reduction was from avoiding planned work at the sold Fairmont Dallas.

Jack Armstrong of Wells Fargo asked about the strategy for transitioning Maui from promotional transient demand to more stable group business, questioning the timing and potential for a demand gap.

Answer

EVP & CFO Sourav Ghosh stated that they are actively pursuing group business for Maui, with 2026 pacing already looking very encouraging and close to pre-pandemic levels. He acknowledged the 9-12 month lead time for incentive groups but expressed confidence in a much stronger group performance in 2026, mitigating the risk of a demand gap as promotional activity normalizes.

Jack Armstrong of Wells Fargo asked about the strategy for Maui, specifically the plan and timing for transitioning from promotional transient demand to more stable group business.

Answer

EVP & CFO Sourav Ghosh clarified that the company is actively booking group business for Maui, with 2026 pacing already approaching pre-pandemic levels. He noted that incentive groups have a 9-12 month lead time, so while a full recovery will take time, they expect a significantly better group year in 2026. He projected 2025 Maui group room nights at 81,000, compared to a 2019 peak of around 100,000.

Jack Armstrong asked how administration policies have impacted labor supply and margins, and how tariff expectations have factored into full-year margin guidance.

Answer

President and CEO James Risoleo responded that the company has not seen any pressure on the labor supply front, crediting its primary managers, Marriott and Hyatt, as strong employers. Regarding tariffs, he stated there is currently no indication they will impact hotel-level margins, and the company is comfortable with its existing margin guidance.

Jackson Armstrong of Wells Fargo & Company asked about shifts in consumer behavior, such as booking windows and on-property spending, and inquired about the company's flexibility to cut costs, including current FTE levels.

Answer

CEO Jeff Donnelly observed that booking windows are shortening but on-property spend is strong, with F&B revenue at resorts growing in Q1. He confirmed FTE counts are down from pre-pandemic levels but stated they have contingency plans and a hiring freeze, though they are hesitant to cut service while rates are high.