Service Properties Trust - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 results were broadly in line with plan: total revenue was $435.2M, Adjusted EBITDAre was $115.8M, and Normalized FFO/share was $0.07; comparable hotel RevPAR rose 2.6% despite renovation disruption and softer demand late in the quarter.
• Versus S&P Global consensus, SVC posted a modest revenue beat (+1.0%) and a slight Primary EPS beat (−$0.48 actual vs −$0.52 est); S&P’s EBITDA “actual” was essentially in line (and sits below SVC’s Adjusted EBITDAre due to definitional differences). Expect limited estimate changes near-term [GetEstimates Q1 2025].
• Portfolio optimization advanced: four hotels and three net lease assets sold ($22.7M) with additional hotels under agreement; management reiterated plans to sell roughly $1.1B of hotels in 2025 to delever, with the deck citing 123 hotels and management discussing ~125 hotels on the call.
• Liquidity and balance sheet remain focal points: quarter-end liquidity was ~$680M; net lease occupancy stayed high (97.8%) with healthy rent coverage (2.07x), supporting cash flow resiliency during lodging renovations and macro softness.

What Went Well and What Went Wrong

• What Went Well

  • Comparable hotel RevPAR +2.6% YoY, outperforming the industry by ~40 bps; excluding eight hotels under renovation, RevPAR +3.7% YoY. Select service outperformed with strong Hyatt Place post-renovation traction (RevPAR +35% YoY at renovated hotels).
  • Net lease stability: 97.8% leased, 8-year WALT, and aggregate rent coverage at 2.07x; limited 2025 expirations (2.1% of minimum rents), reinforcing cash flow durability.
  • Progress on portfolio optimization: 4 hotels and 3 net lease assets sold ($22.7M) and 4 more hotels under agreement ($26.5M); management reiterated the $1.1B hotel sale program and highlighted strong buyer demand with 4 awarded buyers for the 114 Sonesta hotel pool.
  • Management quote: “SVC began the year with…a 2.6% increase in comparable hotel RevPAR…we…ended the quarter with over $680 million of liquidity. Our strategic focus remains on strengthening our balance sheet through asset sales and reinvesting in our hotels…” — CEO Chris Bilotto.

• What Went Wrong

  • GAAP profitability remained pressured: net loss widened to $(116.4)M; net loss/share of $(0.70), driven by higher interest expense and $37.1M of impairment on 16 hotels.
  • Hotel margins compressed: Adjusted Hotel EBITDA fell to $23.0M with a 6.9% margin; GOP margin for comparable hotels declined 330 bps YoY to 21.4%, reflecting renovation disruption and higher labor and utilities.
  • Demand softness emerged intra-quarter: RevPAR decelerated from >2.5% in January to ~0.5% in March; April prelim was down ~1% YoY; government and international segments, plus reduced airline crew business, weighed on trends.

Transcript

Operator (participant)

Good morning, and welcome to the Service Properties Trust first quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by a zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the call over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Kevin Barry (Senior Director of Investor Relations)

Good morning. Thank you for joining us today. With me on the call are Chris Bilotto, President and Chief Executive Officer; Jesse Abair, Vice President; and Brian Donley, Treasurer and Chief Financial Officer. In just a moment, they will provide details about our business and our performance for the first quarter of 2025, followed by a question-and-answer session with sell-side analysts. I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note 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 beliefs and expectations as of today, May 7, 2025, and actual results may differ materially from those that we project.

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. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from our website at svcreit.com or the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO, and adjusted EBITDA. A reconciliation of these non-GAAP figures to net income is available in SVC's earnings release presentation that we issued last night, which can be found on our website. Finally, we are providing guidance on this call, including adjusted hotel EBITDA.

We are not providing 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 will turn the call over to Chris.

Chris Bilotto (President and CEO)

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Last night, we reported first quarter earnings results that were in line with our expectations, highlighted by comparable RevPAR growth of 2.6% within our lodging portfolio, steady operating performance from our net lease retail properties, and growth in adjusted EBITDA RE year-over-year. Additionally, we advanced our strategic plans to optimize our portfolio by selling assets to deleverage our balance sheet and reinvest in growth opportunities. I will begin our discussion with an overview of our hotel portfolio performance during the quarter and an update on our investment activities. Then Jesse will discuss our net lease portfolio, and finally, Brian will review our financial results and guidance. At a macro level, we continue to monitor the broader economic activity, trade tariff policy, and shifts in overall consumer sentiment.

While performance within our lodging portfolio was in line with expectations, RevPAR softened as the quarter progressed, partially driven by a pullback in government and inbound international travel, as well as airlines reducing flight commitments and crew business. Conversely, positive post-renovation performance with certain hotels in our portfolio, favorable trends with our group revenue pace, and a stable outlook for our net lease retail portfolio remain bright spots as we continue through the year. In the meantime, we are proceeding with the priorities and objectives we set for the year and continue to monitor this evolving market backdrop while maintaining flexibility to adjust our operating plans and capital investments as necessary. As it relates to our disposition activities, we are currently tracking with our plans to sell 123 hotels during 2025, with estimated proceeds of $1.1 billion.

We plan to use these proceeds to strengthen SVC's balance sheet through debt repayments and strategies to improve the overall portfolio through certain triple-net lease acquisitions and capital spending on hotels. Turning to our hotel portfolio performance during the first quarter, overall, comparable hotel RevPAR grew 2.6% year-over-year, outpacing the industry by 40 basis points despite meaningful revenue displacement from renovation activity. Excluding eight hotels under renovation during the quarter, comparable RevPAR increased 3.7%, with transient and group revenues outperforming contract. RevPAR growth was supported by occupancy and ADR gains, lift from hotels under renovation last year, as well as citywide events. GOP and adjusted hotel EBITDA declined year-over-year, primarily due to active hotel renovations, increases in labor, and higher utility costs with a colder-than-average first quarter. By service level, our full-service hotels reported a 1.9% increase in RevPAR.

Excluding one hotel under renovation during the quarter, full-service portfolio RevPAR would have been 3.2% year-over-year. Strong growth in group was supported by elevated leisure demand at Royal Sonesta in both Kauai and San Juan, with the Royal Sonesta in New Orleans and DuPont, Washington, DC, driving demand from the Super Bowl and inauguration, respectively. Other notable improvements were driven by increased transient revenue from our IHG and Radisson hotels, with increased OTA and retail business, and from post-renovation lift at Sonesta White Plains. Our select service portfolio produced exceptional growth, with RevPAR up 10.6% year-over-year, mainly driven by occupancy growth in our Hyatt Place and Sonesta Select portfolios. Notably, RevPAR growth was driven by a 15% occupancy rise and 2.7% improvement in ADR at our recently renovated Hyatt Place hotels.

RevPAR growth at Sonesta Select hotels reflects the fourth consecutive quarter of year-over-year occupancy gains, specifically in Boca Raton, Camarillo, California, and Philadelphia. In our extended stay portfolio, RevPAR was essentially flat, as a modest increase in ADR was offset by a decline in occupancy. Renovation activity continues to have a more pronounced impact on our ES Suites portfolio performance, as six hotels were under renovation during the first quarter, compared to one hotel in the prior year period. To mitigate this disruption, Sonesta remains focused on driving short-term stays and additional room nights with transient discounts and targeted marketing through wholesale channels. Turning to investment activity, as we enter 2025, our focus remains on strengthening our balance sheet and portfolio through asset sales, reinvesting in our hotels with the highest opportunity for upside, and a gradual investment in net lease acquisitions.

Notable hotel completions will include the renovation of our Sonesta Los Angeles Airport and our Sonesta Hilton Head during the first half of 2025, and our Sonesta in Atlanta and Simply Suites in Burlington, Massachusetts, during the back half of the year. Forecasted displacement from ongoing renovations will be less significant in Q2 and Q3, with projected strong year-over-year performance gains with nine hotels completing renovations in early 2025. These gains are expected to mitigate renovation-related disruptions, with planned construction starting on four full-service hotels in Q4. During the first quarter, as part of the 22 portfolio set of hotels we launched for disposition in early 2024, we sold four of these hotels with 514 keys for a combined sales price of $19.6 million. We are under contract to sell the remaining four hotels within this portfolio, which includes 492 keys for a combined sales price of $26.5 million.

We anticipate these will close during the second quarter. Also, during the first quarter, we completed a robust marketing effort for the sale of 114 Sonesta hotels. These assets received strong buyer interest, reflecting a deep and well-capitalized buyer pool, concluding with over 30 bids under the Sonesta brand. The portfolio was awarded to four buyers and includes both new and existing Sonesta franchise relationships. Buyers are actively engaged, and following a customary diligence period, we anticipate the sales will be completed in phases over the next few quarters. In total, we plan to sell 125 hotels in 2025 for approximately $1.1 billion. The pricing implies an 18times multiple on hotel EBITDA of $60 million over the trailing 12 months. This valuation is well above SVC's multiple of approximately 11 times trailing 12 months adjusted EBITDA RE.

Turning to our triple-net lease assets, we are making meaningful progress with our capital recycling initiatives. As Jesse will elaborate, since the end of the quarter, we have acquired or are under agreements to acquire nine net lease retail properties for $33 million. We view this as a strategic growth initiative and plan to gradually expand our retail acquisition activity over time to capitalize on accretive opportunities in our pipeline. Upon completion of our hotel disposition program and noted retail acquisitions, we estimate that SVC's composition by investment will shift from 56% lodging assets and 44% net lease properties today to 54% triple-net lease and 46% lodging assets. Based on this allocation, we believe that investors will begin to re-rate shares of SVC based on a triple-net lease valuation basis as opposed to a lodging rate. In sum, we are off to a solid start in 2025.

While the current macroeconomic environment has created uncertainty, we believe our portfolio optimization initiatives, durable cash flows from our triple-net lease assets, and capital management initiatives will be significant drivers of long-term value creation. I will now turn it over to Jesse to discuss the net lease portfolio.

Jesse Abair (VP)

Thank you, Chris. The recent macro volatility underscores the benefits that our steady cash flow-generating net lease portfolio contributes to SVC. As of March 31st, we own 739 service-oriented retail net lease properties with annual minimum rents of $381 million. Our net lease assets were nearly 98% leased, with a weighted average lease term of eight years. Our tenant base consists of 175 tenants operating under 136 brands spanning 21 distinct industries, thereby mitigating our exposure to any one retail sector and offering opportunities to grow our existing relationships with a variety of different operators. Only 2.1% of our minimum rents are scheduled to expire in 2025, and approximately 3% in each of the following years through 2029. As of quarter end, the aggregate coverage of our net lease portfolio's minimum rents was 2.07x on a trailing 12-month basis, which was essentially flat on a sequential quarter basis.

Excluding our TA Travel Center properties, which are backed by BP's investment-grade credit, minimum rent coverage remained strong at 3.6x, down a tenth of a turn compared to the prior quarter. By design, the net lease portfolio, which largely provides non-discretionary goods and services to consumers, should continue to perform well even during challenging economic times. In fact, many of our tenants, such as our quick-service restaurants and grocery stores, typically benefit from the trade-down effect during periods of lower consumer confidence. Others, like our travel centers, have the flexibility to pass pricing pressures onto customers, particularly in the case of fuel costs. Just as our net lease portfolio weathered the pandemic-related disruption, we anticipate it will exhibit consistency even in the event of sustained volatility in the near term.

The essential businesses of our tenants, the strong credit backing our TA leases, and the portfolio's healthy coverage ratios bode well for ongoing resiliency irrespective of macroeconomic conditions. With respect to investments, as we signaled last quarter, we are underway on our strategy to prudently grow the net lease segment of our business in an effort to enhance the tenant and geographic diversity of the portfolio, increase weighted average lease term, and expand annual minimum rents. To that end, we recently acquired or entered agreements to acquire nine net lease properties for a total of $33 million. These transactions have a weighted average lease term of 16 years, average rent coverage of 3.0x, and average cash and GAAP cap rates of 7.3% and 8.4%, respectively. We are funding the acquisition of these properties with a combination of capital recycling and flexible financing.

During the quarter, we utilized the increased equity value within our net lease portfolio and closed on a $45 million variable funding note facility. This new financing, along with the asset-backed security financing we implemented in 2023, highlights our ability to use our net lease portfolio to obtain attractively priced financing options. Looking ahead, we see opportunities to further expand the portfolio through acquisitions with attractive lease economics and accretive yields. While our transaction volume will remain relatively modest in the near term, as Chris highlighted, we anticipate that our net lease portfolio will contribute more significantly to the overall SVC platform in the future. Before I pass it to Brian, I want to acknowledge the recent publication of the RMR Group's annual sustainability report, which provides a comprehensive overview of our manager's commitment to sustainability.

We will continue our ongoing efforts at SVC to advance these sustainability initiatives, which to date have resulted in tangible improvements to energy efficiency, operating costs, and tenant satisfaction. I will now turn the call over to Brian to discuss our financial results.

Brian Donley (Treasurer and CFO)

Thanks, Jesse. Good morning. Starting with our consolidated financial results for the first quarter of 2025, normalized FFO was $10.8 million or $0.07 per share versus $0.13 per share in the prior year quarter. Adjusted EBITDA RE increased slightly year-over-year to $115.8 million. Financial results this quarter, as compared to the prior year quarter, were impacted most by a $10.1 million increase in interest expense. For our 201 comparable hotels this quarter, RevPAR increased by 2.6%, and gross operating profit margin percentage declined by 330 basis points to 21.4%. Below the GOP line cost, our comparable hotels decreased $1.7 million or 3.4% from the prior year, driven primarily by lower property insurance premiums. Our hotel portfolio generated adjusted hotel EBITDA of $23 million, a decline of 20.5% from the prior year, but within our guidance range.

By service level, adjusted hotel EBITDA year over year decreased $4 million for our full-service hotels, increased $2.4 million for our select service hotels, and decreased $4.3 million for our extended stay hotels. The eight hotels that were under renovation during the quarter represented $3.8 million or 60% of the decline of adjusted hotel EBITDA year-over-year. The renovations at our 17 Hyatt Place hotels were completed in the first quarter of 2025, and we saw a 35% year-over-year improvement in RevPAR to $77, and adjusted hotel EBITDA increased $2.9 million year-over-year. Both our Hyatt and Radisson agreements include limited guarantees of performance thresholds that are now in full effect post-renovations. During Q1, our earnings benefited from a $2.9 million increase in guarantee utilization under these agreements to cover the shortfalls in hotel cash flows available to pay our owners' priority returns.

Throughout the remainder of 2025, we plan to sell 119 hotels with 15,912 keys. During the first quarter, these 119 hotels generated RevPAR of $65 and adjusted hotel EBITDA of $6.9 million, representing a decline of 30% year-over-year. The result of these exit hotels was impacted by one-time expenses and general disruption we expected from the marketing process. The 83 hotels we expect to retain generated RevPAR of $99 and adjusted hotel EBITDA of $17.7 million during the quarter, a decrease of $4.5 million or 20% year-over-year. Most of this decline year-over-year in the retained portfolio is related to renovation disruption, notably at our Sonesta LAX and Royal Sonesta in Cambridge, Massachusetts. Turning to our expectations for Q2, we are currently projecting second quarter RevPAR of $99-$102 and adjusted hotel EBITDA of $69-$74 million.

While we typically see a seasonal benefit to hotel operating results in the second quarter, we anticipate the headwinds in the travel and lodging industries to affect key segments like government and leisure. Additionally, the portfolio will be impacted by revenue displacement from ongoing hotel renovations. This guidance does not include the impact of any potential asset dispositions. Turning to the balance sheet, at quarter end, we had $5.8 billion of debt outstanding with a weighted average interest rate of 6.4%. Our next debt maturity is $350 million of senior unsecured notes maturing in February 2026. As of quarter end, we had $80 million of cash on hand and $50 million outstanding on our $650 million revolving credit facility. Turning to our capital expenditure activity, during the first quarter, we invested $46 million in capital improvements at our properties.

Notable projects this quarter included an HVAC project in one of the towers at our Royal Sonesta Boston, amounts to the extensive renovation of our Sonesta at LAX, and the public space renovation at our Sonesta Hilton Head Resort. For the full year, we continue to expect capital expenditures to be approximately $250 million. This includes $120-$140 million of maintenance capital, with the rest going towards renovation and redevelopment initiatives. We are monitoring the potential impact that tariffs may have on the cost of capital improvements, as well as potential delays and uncertainties in the supply chain that may impact the availability of materials. We are adapting our plans as necessary to mitigate these external pressures. That concludes our prepared remarks. We're ready to open the line for questions.

Operator (participant)

We will now begin the question and answer session.

To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Your first question today will come from Jonathan Jenkins with Oppenheimer & Company. Please go ahead.

Jonathan Jenkins (Equity Research Associate Director)

Good morning. Thank you for taking my questions. First one from me. I wanted to parse into the RevPAR trends in the quarter. I know there's lots of macroeconomic uncertainty out there, but Chris, you mentioned a slowdown over the quarter. Can you walk us through kind of the monthly progression and how the quarter came in relative to your initial expectations? Also, any thoughts or color on where April ended up?

Chris Bilotto (President and CEO)

Yeah, I think kind of more broadly, you know, I think overall RevPAR kind of came in kind of where expected. But as I think about the quarter specifically, you know, we started higher kind of in January at just over 2.5%, and that showed some deceleration going into March down to about half of a point. I think that's how I would think about the trajectory and the slowdown as far as overall RevPAR. I would say for, you know, April, you know, Brian's given some guidance on kind of where we expect that RevPAR guidance to be for the quarter. Softness in April is initially, or at least the preliminary numbers are showing about a decrease of 1% year-over-year. We expect there to be some ramp as the quarter progresses, you know, all things being equal.

Jonathan Jenkins (Equity Research Associate Director)

Yeah, that's very helpful. It might be difficult, but can you provide some color on how much international and government business your hotels have and what you're seeing more real-time from those two parts of demand? Maybe, you know, as a follow-up to the last question, your thoughts on how much of what you're seeing in April or saw in April and March is attributable to calendar shifts versus, you know, more of a structural slowdown in demand?

Chris Bilotto (President and CEO)

Yeah, I mean, the international travel kind of question is a little bit more tricky. I think, you know, I think the way we might think about it is if you think about kind of our broader full-service portfolio and more so kind of on the retained side, about 30% of our portfolio is located what we would call kind of the top 10 markets. I think from that standpoint, we have kind of a manageable amount of assets as it might be impacted by international travel. I think broadly speaking, we're seeing some pressure on contracts from kind of the slowdown in airline business or at least kind of the temporary pause in airline business. I think government specifically saw a modest decrease. I think the number was about $2.5 million in cancellations across the government contract business with just overall efficiency efforts.

I think more specifically, some of the bright spots are, I think, more akin to the fact that we're seeing strong group revenue pace. It's up about 6.5% over the same time last year, which is close to $9 million. We expect to kind of see some outsized ramp with respect to our renovation hotels as those continue to kick in and produce positive EBITDA throughout the quarters. You know, there's some take and give with some of the more broader kind of macroeconomic trends alongside just some of the initiatives that are specific to our portfolio that I think will provide kind of a healthy balance as we progress throughout the year.

Jonathan Jenkins (Equity Research Associate Director)

Okay, that's excellent color there. Then switching gears to the hotel dispositions, it sounds like they're progressing nicely. Can you help us think about your confidence level in completing the sales at the price point that you talked about this year? Any updated thoughts on maybe how that's progressing relative to initial expectations would be helpful.

Chris Bilotto (President and CEO)

Yeah, I mean, look, I think that, you know, we had a robust process, right, with respect to, you know, the selection and awarded buyers. We have a pretty deep bench with respect to the amount of offers, which I think gives us some confidence in managing expectations on pricing through a competitive process. You know, we're active in the diligence process. We have signed term sheets with, you know, four different buyers where we divided up the pool. We've done a lot of what I would call kind of early-stage diligence work with third-party reports and other things, which are actively being reviewed and updated as necessary. I think the process is progressing. I mean, you know, it's a very different process when you're selling, you know, a small subset of hotels, you know, one, two, five hotels versus larger portfolios such as we're doing.

I think we feel good about the trajectory and the pace we're at today. From a transaction standpoint, there's nothing to suggest that we won't transact as planned. I think the bigger change from, you know, kind of expectations is we expect the takedown of these portfolios to happen in phases just given the size. You know, that's going to kind of show transactions occurring over, you know, more than one quarter, for example, as we continue to, you know, wind down the disposition efforts specific to the 114 hotels.

Jonathan Jenkins (Equity Research Associate Director)

That's great to hear. As a follow-up on that, when we think about the two debt maturities coming in 2026, is the plan still to repay those with the asset sales?

Chris Bilotto (President and CEO)

That's correct. That plan has not changed.

Jonathan Jenkins (Equity Research Associate Director)

Okay, perfect. Maybe last one for me. Chris, you talked about the shift toward increased net lease exposure and the valuation change. At a high level, when you look out at SVC in five or ten years, do you think we'll continue to see this trend of decreasing hotel exposure and increasing net lease properties to a point where SVC at some point could entirely just be a net lease REIT, or do you think you'll always continue to have hotel exposure in some capacity in the future?

Chris Bilotto (President and CEO)

Yeah, I mean, the plan today is we'll continue to have hotel exposure. You know, that change, that's not a change that we're anticipating. I think, you know, given kind of the outsized view on kind of where the, you know, the opportunities reside specifically on the net lease side, we would expect the gap to widen over time with respect to kind of the investments specific to net lease relative to hotel. I don't want to lose sight of the fact that, you know, even with the hotels, we're retaining, you know, there's going to be continual opportunity to drive EBITDA. I think from kind of a net-net, we would expect to see performance progress on both sides just through kind of more organic growth on the net lease retail and then kind of the EBITDA piece on the hotel side.

I think more specifically, you know, we're going to often be looking at our portfolios across the board at optimization opportunities, and we'll evaluate those and present those, you know, as appropriate. I think given what we have today, we've got, you know, a lot of, you know, great things we're working on. I think working through those, selling these assets, advancing capital projects and other initiatives is really where our focus is going to be for 2025.

Jonathan Jenkins (Equity Research Associate Director)

Okay, that's great. I appreciate all the color from everyone today. Thank you very much. That's all for me.

Chris Bilotto (President and CEO)

Thank you.

Operator (participant)

Again, if you have a question, please press star and then one. Your next question today will come from Meredith Jensen with HSBC. Please go ahead.

Meredith Jensen (US Consumer Equity Research)

Thanks. A lot of great questions asked. Specifically, the last one was the biggest one for me. Maybe I could just ask another sort of piece to that, although your answer was fairly clear, was what might have caused sort of the pivot to have more enthusiasm to sort of build back up or reevaluate the net lease portfolio as being a greater strength? Is it that the hotel portfolio has been sort of harder to manage in the cost side of it, or is there anything in particular regarding the hotels and the pursuit of sort of a broader hotel portfolio that might have changed?

Chris Bilotto (President and CEO)

Look, I mean, I think generally speaking, you know, the hotel business, you know, is something that we continue to have conviction on. It is a kind of a more capital-intensive type business. Nonetheless, we do see pockets of opportunity for ROI and growth, and we've communicated what that looks like for how we're investing capital. You know, when you think about the net lease side, look, we've got a large portfolio on the net lease side where we haven't been in a position to execute on strategies for growth.

I think more specifically, being in a position where we can improve overall fundamentals around the portfolio through driving WALT, through driving kind of better brands and opportunities in the portfolio, I think our view is it's going to open other doors for the company with respect to how we think about financing opportunities, valuations, and other relative pieces. You know, continuing to bolster and strengthen that and take it in strides is just, you know, in our view, kind of a great opportunity to round out the portfolio on a go-forward basis.

Meredith Jensen (US Consumer Equity Research)

Thanks. How do you view sort of this discussion in terms of the value of your stake in Sonesta and sort of the relationship there?

Chris Bilotto (President and CEO)

Yeah, the 34%, Meredith, you know, Sonesta, as we're going through transitions with our hotel portfolio, they too are transitioning to more of a franchise platform and have done a lot of initiatives to improve that higher margin business at the operating company. So that's a big part of their growth strategy. So we believe that they'll be increasing value as time goes on as they continue to expand the footprint of Sonesta through that franchise platform. Again, it's a very high margin business, and you know, it'll flow through to us over time. You know, the equity stake and how we account for it, we do pick up our 34% of their earnings and their EBITDA in our numbers. You know, so the balance sheet, you know, reflects around $100 million of an investment, but we, you know, believe over time that'll grow.

Meredith Jensen (US Consumer Equity Research)

Okay, that's super helpful. Thank you. And just sort of clarification on two things discussed. On the hotels leaving the system, you know, we had sort of thought that it would be a pretty clean cut in sort of second quarter June sort of timeframe. How should we model the hotels leaving the system?

Chris Bilotto (President and CEO)

I think it's more appropriate to assume that Q2 and Q3 is where we'll start to kind of see the allocation of those leaving the system.

Meredith Jensen (US Consumer Equity Research)

Okay, thanks.

And.

Go for it.

Chris Bilotto (President and CEO)

Go ahead. Yeah, just a follow-up on that. Yeah, we're modeling it that they'll exit by the end of Q3 is the way we're doing it.

Meredith Jensen (US Consumer Equity Research)

Okay, thank you. You were speaking about international and group, and I heard the $2.5 million. What percentage of nights would group and international and sort of business transient and leisure transient be? When you speak about groups, what would the average size for group be?

Chris Bilotto (President and CEO)

Yeah, it's a tough, kind of a tough question in general. I think that, you know, I guess more specifically, you know, I guess we look at it from the lens of just the overall kind of net impact to group versus qualifying more specifically on the size of the group. As I mentioned, overall, that's kind of a net positive impact of close to 6.5% or about $9 million. You know, I think that's kind of more of a better proxy. Brian can elaborate a little bit more.

Brian Donley (Treasurer and CFO)

Yeah, I mean, most of our hotels, I mean, we don't have any large convention-sized hotels for the most part. We get a lot of smaller SMERF-type group business, especially on the weekends. Obviously, some of our urban hotels have larger groups, but generally speaking, they're medium to average size, you know, group business.

Meredith Jensen (US Consumer Equity Research)

The percentages of government, international, kind of the sort of pie?

Brian Donley (Treasurer and CFO)

Yeah, let us follow up with you on that. Yeah, we don't have that in front of us.

Meredith Jensen (US Consumer Equity Research)

Okay, great. Thank you so much.

Operator (participant)

Your next question today will come from Jack Armstrong with Wells Fargo. Please go ahead.

Jack Armstrong (Equity Research Associate)

Hey, good morning. Thanks for taking the question. I guess just circling back to the hotel dispositions, you know, prior expectations of closing on the majority of the dispositions by the end of Q2 to now kind of somewhere between Q2 and Q3. Can you walk us through specifically what happened there? You know, what drove that kind of shifting, right? Was it, you know, buyers taking a little bit more time with due diligence, the kind of general slowdown in transaction markets with all of the uncertainty entered in April? Just some color there on what drove the shift in timing would be helpful.

Chris Bilotto (President and CEO)

Yeah, I mean, really, it's just a function of the process and diligence when you're dealing with larger portfolios. I think it's not uncustomary to, you know, for these things to kind of tend to ebb and flow. I would say it's not specific to the broader market and any concern around risks that may have been introduced since, you know, awarding it to these buyers. It's really just a function of going through the process. Again, I think, you know, these being taken down in phases just kind of extends, you know, that timeline for overall execution and coming out of the system. Again, it's really just, you know, the size of the portfolio, the depth that goes into a transaction of this size.

Jack Armstrong (Equity Research Associate)

Okay, helpful. Helpful there. Just kind of jumping over to your CapEx program, you know, how de-risked is your CapEx spend for the year? You mentioned particularly programs in Q4. To the extent that tariffs remain in place and there's some pressure on FF&E and other goods you're getting from, you know, particularly China, you know, is there capacity, you think, to pull back on that program, defer it sometime to next year?

Chris Bilotto (President and CEO)

Yeah, a lot of the stuff we have in motion for the rest of the calendar year, we're, you know, for the most part, sort of locked in pricing and, you know, we're underway with a lot of projects. As we continue to scope out plans to begin projects in, you know, 2026, we're going to start talking about that's where we're looking at, you know, you know, where do we source our products from? You know, we're looking for, you know, our suppliers to help, you know, direct us where things might be, you know, not as impactful from a tariff standpoint. You know, we're going to look at our scope. You know, we'll reevaluate, you know, the overall cost and potential impact. There are different things we're going to do and continue to do to mitigate any sort of cost creep.

You know, we generally put in some sort of cost contingencies when we're planning our projects. But in general, you know, we're just, you know, monitoring the situation with tariffs in specific countries and where goods are coming from as everybody else is, and, you know, we'll react accordingly.

Jack Armstrong (Equity Research Associate)

Okay. On the net lease acquisitions, I guess what's given you the confidence to go out and be inquisitive in this environment? You know, the capital plan and exiting from the hotels, you kind of expect incremental capital to start to go into paying down debt. What's given you the confidence in this environment to go out and get those acquisitions done?

Chris Bilotto (President and CEO)

Yeah, I mean, there's a handful of things. I think kind of, you know, as we discussed, I think improving the overall composition of the portfolio is going to open up other opportunity for us kind of medium and long term with respect to, you know, portfolio composition, other financing initiatives. You know, we have an ABS instrument in place that benefits from certain KPIs and potential to kind of recast that at more creative yields. I think kind of just, you know, more broadly speaking, we're seeing an opportunity where, you know, we're able to kind of push pricing in certain opportunities with kind of a bid-ask spread of 30-50 basis points, which are going to continue to kind of create opportunity for us to buy at, we would think, what we believe to be attractive pricing.

You know, again, it's just, it's a small piece to kind of a broader strategy with respect to exits, capital investment, and other related items, but it's just healthy, more specifically, given we have some arbitrage there to kind of enhance the overall portfolio.

Jack Armstrong (Equity Research Associate)

Okay. And then in the quarter, you recognize an impairment on 16 hotels. Is it a fair read that, you know, of the hotels exiting the portfolio, there's only 16 that have moved to the stage in the disposition process where you're recognizing an impairment, or is that just the only impaired portion of a larger portfolio? And then as we're thinking about modeling on a go-forward basis, you know, is that level of impairment for 16 hotels, you know, roughly applicable to the size of the rest of the portfolio?

Chris Bilotto (President and CEO)

Short answer on the last part, no. To the point about which hotels were impaired this quarter, the 114 Sonesta hotels all were evaluated for indicators of impairment under generally accepted accounting principles. The way it broke down is, as Chris mentioned, there are four buyers of the 114 hotels, pools of hotels ranging from 15-45 hotels, I believe. The pool, the smallest of the pools of 15, the fair value of the sales price was below, which represents the fair market, was below the carrying cost. We did take a charge on those 15. The remaining 99 hotels, the sales price slash fair value all exceeded the book value. In aggregate, we expect to recognize a gain on sale of real estate when the dust settles on these 114.

Jack Armstrong (Equity Research Associate)

Okay. You don't anticipate, you know, during the process of due diligence that that impairment could go up?

Chris Bilotto (President and CEO)

Again, overall, we've been talking north of $1 billion for the portfolio and the carrying values in the $800 and something million range. So we expect a gain on sale of real estate when we close everything.

Jack Armstrong (Equity Research Associate)

Okay. Fantastic. Thanks so much for taking the questions.

Operator (participant)

Your next question today will come from John Massocca with B. Riley. Please go ahead.

John Massocca (Senior Research Analyst)

Good morning.

I'm sorry if I missed this. Just with regards to the net lease acquisitions, just kind of more broadly, you know, you have a couple metrics around it, but what were the actual properties themselves and what kind of type of properties?

Chris Bilotto (President and CEO)

The question is, is the actual assets we purchased or we're looking at the types of properties?

There's a bunch of purchases.

John Massocca (Senior Research Analyst)

Yeah

Chris Bilotto (President and CEO)

So for we purchased the two properties during the quarter. You know, one was a car wash and another one was a casual dining concept.

John Massocca (Senior Research Analyst)

Okay. And was that the entire, sorry if I misheard it, $33 million? Or is that assets that were closed?

Chris Bilotto (President and CEO)

No, so that was what was acquired. Then we have the pipeline of kind of what's under LOI. To kind of round out the $33 million number, we have some opportunities with the grocer, but the majority of those opportunities are in casual dining and QSR, and then one fitness concept we're looking at. That kind of rounds out the types of concept with, again, the larger component by number of properties being on the QSR and casual dining side.

John Massocca (Senior Research Analyst)

Okay. And then on the debt side, just kind of curious why the variable funding note, you know, is that something that could increase or you could do more of to continue acquiring on the net lease side? Or just kind of curious there.

Brian Donley (Treasurer and CFO)

Sure. Hey, John. You know, when we did the ABS security financing a couple of years ago, you know, we put that master trust in place. In addition, you know, as we looked at our financing alternatives more recently, you know, we took a look at what's in that portfolio that is secured by the master trust and realized, you know, the valuations have gone up. So we tapped the equity and we think in a cost-effective way. I think, you know, the sizing, you know, for now, I think is, you know, short of adding more properties. We do not expect to increase that particular instrument. You know, could we later if we add more properties into the security pool? Sure.

We felt good about, you know, the pricing on that as part of the broader strategy to tap that net lease portfolio to not only, you know, as a cost of capital for financing, but also as part of the strategy Chris outlined on the acquisition front.

John Massocca (Senior Research Analyst)

Is there room within the existing portfolio to add more, you know, assets that would allow you to kind of pull out more equity? Or is that kind of maxed out in terms of, you know, either what you want to put into the master trust today or what you can put into the master trust?

Brian Donley (Treasurer and CFO)

I mean, we can grow the master trust as much as we want. You know, if we do grow it and we put more into it, we could then utilize the additional equity, you know, from a financing standpoint. You know, as long as we're keeping the whole, the entirety of the portfolio in relationship to whatever debt we have within that master trust, sort of at the current levels from a loan-to-value standpoint and other metrics that, you know, we're trying to solve for as far as, you know, the financeability of the portfolio with, you know, geographic and industry and brand concentrations, the walls, the rent coverage, all that stuff goes into sort of our strategy regarding, you know, what we do add or what we might acquire overall to keep alignment with the existing portfolio.

Given the execution on these ABS notes we did, you know, we think it's a very efficient way to finance at a lower cost of capital than what we could see today, you know, doing a bond deal, for example.

John Massocca (Senior Research Analyst)

I mean, when you say like, I just kind of think within the existing portfolio, right? Like, I don't know if there's more LTV you can kind of essentially take out of the net lease versus like acquiring more things and finance it that way.

Brian Donley (Treasurer and CFO)

Yeah, the 315 properties that are in the master trust secured by ABS notes, we just took a fresh look and tapped what we believe is the extent of the equity we're going to look to pull out for now. We have another whole segment of net lease properties that are not financed or not encumbered that we could utilize in the future.

John Massocca (Senior Research Analyst)

Okay. And then just one quick one on the hotel side. You know, with the dispositions that are planned, particularly the 114 hotels, is the outlook still that those would continue to have the Sonesta flag on them? Or is there some, you know, wiggle room around that maybe with various tranches? Or, you know, just kind of curious if that's still what the outlook is today.

Chris Bilotto (President and CEO)

Yeah, that's the plan. The plan is that these will be with Sonesta franchise agreements.

John Massocca (Senior Research Analyst)

Okay. That's it for me. Thank you very much.

Operator (participant)

This will conclude our question and answer session. I would like to turn the conference back over to Chris Bilotto, President and Chief Executive Officer, for any closing remarks.

Chris Bilotto (President and CEO)

Thank you for joining our call today. We look forward to seeing many of you at the upcoming NAREIT conference in June. Please reach out to our investor relations team if you're interested in scheduling a meeting with SVC. Thank you.

Operator (participant)

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