Service Properties Trust - Earnings Call - Q2 2025

Executive Summary

• Revenue and EPS beat consensus: Q2 revenue of $503.436M vs $495.763M consensus (+1.5%); Primary EPS of -$0.106 vs -$0.205 consensus (beat by ~$0.10)*.
• Execution on transformation and deleveraging: 114 hotels under purchase and sale agreements totaling $920M (111 with non‑refundable deposits, no financing contingencies), with total 2025 hotel sale proceeds now expected at $966M; proceeds earmarked to redeem 2026 maturities and repay the revolver.
• Hotel operations mixed: All‑hotel RevPAR rose 0.4% YoY to $101.27, but Adjusted Hotel EBITDA declined 11.8% YoY to ~$73.1M due to labor inflation and renovation disruption; Q3 guide embeds seasonal sequential step‑down and industry softness.
• Liquidity/covenant update: Revolver fully drawn and ~$670M of cash on hand; DSCR incurrence covenant at 1.49x (below 1.50x), prompting early redemption of $350M notes due Feb‑2026 to improve metrics.

What Went Well and What Went Wrong

• What Went Well

  • Disposition program de‑risked: Due diligence complete with hard deposits for 111 of 114 Sonesta hotels ($900M), rolling closings expected Q3–Q4; total 2025 hotel sale proceeds expected at $966M.
  • Retained hotels outperformed: Retained 84 hotels posted RevPAR +1.5% YoY to $121; select renovated assets (Hyatt portfolio, White Plains, LAX) delivering double‑digit revenue growth.
  • Net lease stability and pipeline: Net lease portfolio 97.3% leased with 2.04x rent coverage; acquired/under agreement for 20 net lease properties YTD for ~$55M at ~7.4% avg cap and ~15‑year WALT.

• What Went Wrong

  • Profitability pressure at hotels: Adjusted Hotel EBITDA fell ~11.8% YoY to ~$73.1M; GOP margin -300 bps YoY to 30.2% on labor inflation and renovation displacement (~$2.4M headwind).
  • Industry softness: Management cited weaker leisure demand into August and lingering travel/lodging headwinds; Q3 guidance embeds sequential decline (RevPAR $98–$101; Adjusted Hotel EBITDA $54–$58M).
  • Tight covenant cushion: DSCR at 1.49x (below 1.50x threshold) triggered revolver draw to preserve liquidity and limits incurrence of additional debt pending improvement.

Transcript

Speaker 7

Good morning and welcome to the Service Properties Trust second quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 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 this event is being recorded. I would now like to turn the conference over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Speaker 4

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 second 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, August 6, 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 SEC, 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 RE. 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 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 will turn the call over to Chris.

Speaker 7

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Last night, we reported second quarter financial results that were in line with our expectations and continued to advance on many of our strategic priorities. I will begin today's call with an update on our business plans, including the recent progress of our hotel disposition program, and provide further highlights within our hotel and net lease portfolios during the quarter. Jesse will discuss in more detail our net lease portfolio and the acquisitions that we have made to build on our existing platform. Finally, Brian will review our financial results and quarterly guidance.

Starting with our current business plan, during the past quarter, we have made significant progress on previously announced hotel dispositions, advanced many of our hotel renovations as a catalyst to drive performance and improve the quality of our assets, and pursued selective net lease acquisitions and dispositions. These efforts are part of our ongoing strategic initiative to transform Service Properties Trust toward becoming a predominantly net lease REIT. Entering into 2025, we have continued to execute on our strategy of divesting select hotels while focusing our retained portfolio on primarily full-service, urban, and leisure-oriented properties that offer greater potential for EBITDA growth and enhance overall value. To date, we have sold eight hotels for proceeds of $46 million and continue to make meaningful progress on the previously communicated 114 Sonesta Hotel portfolio.

We removed from the marketing process one full-service hotel located in Atlanta as we continue to evaluate broader opportunities for the retained hotel portfolio. Regarding the 114 Sonesta Hotel sales, due diligence has been completed and non-refundable deposits have been received for 111 hotels with four unique buyers for a sales price of $900 million. We have entered into a purchase and sale agreement with diligence underway for the remaining three hotels with a sales price of $20 million. Closing on the hotels is expected to commence in Q3 and finish before year-end. Including the eight hotels we already sold this year, in 2025, we are on track to complete 122 hotel sales, totaling nearly 16,000 keys for gross proceeds of $966 million. This pricing implies a valuation of 18.4 times hotel EBITDA of $53 million over the trailing 12 months.

Turning to hotel performance during the second quarter, RevPAR increased 40 basis points year over year, outperforming the broader industry by 90 basis points and marking the third consecutive quarter of relative outperformance. SVC's growth was driven by gains in both occupancy and ADR, with group and contract segments outpacing transient business. Top-performing properties during the quarter are within our retained hotel portfolio and include our Royal Sonesta Kauai and Royal Sonesta San Juan, which benefited from strong leisure demand through OTA and wholesale channels. We also saw solid performance at our three downtown Chicago hotels and the Clift Royal Sonesta in San Francisco, supported by a rebounding citywide group business. Additionally, recently renovated hotels are consistently delivering double-digit revenue growth with notable strength across our Hyatt portfolio, Sonesta White Plains, and Sonesta LAX. Hotel-level EBITDA declined during the quarter, primarily due to elevated labor costs and broader inflationary pressures.

Additionally, displacement in hotels with active renovations contributed to $2.4 million of year-over-year negative EBITDA. However, we expect this to moderate in Q3 and fluctuate modestly thereafter as renovations advance. The 84 hotels we currently plan to retain delivered relatively solid performance, with RevPAR increasing 150 basis points year over year, driven by gains in both occupancy and ADR. Over the past several years, we have made substantial capital investments across our retained portfolio, enhancing many of our flagship properties and premier destinations such as Sonesta Hilton Head, Royal Sonesta Kauai, and Royal Sonesta San Juan. These capital enhancements are expected to drive ongoing EBITDA growth. Given our prior investments in the portfolio, coupled with the completion of our remaining hotel dispositions, this positions us to meaningfully lower capital spend, with 2026 guidance now set at $150 million.

Within our triple net lease segment, we are making steady progress with our capital recycling program and prioritizing creative opportunities within our pipeline. Since the beginning of the quarter, we have completed the sale of five net lease properties for a total of $15 million, and we are in the early stages of marketing six additional properties, which are expected to generate between $2.5 million and $3.5 million in total proceeds. Concurrently, we have acquired or entered into agreements to acquire 20 net lease retail properties for $55 million. As Jesse will discuss further, our net lease portfolio continues to provide stable and predictable cash flows with minimum capital requirements, and we view net lease real estate as a naturally defensive and less volatile asset class. In conclusion, the second quarter marked meaningful progress in SVC's ongoing strategic transformation.

Pro forma for our expected hotel sales, net lease assets are projected to account for over 70% of SVC's pro forma Q2 adjusted EBITDA RE, representing a meaningful shift in our asset composition and positioning SVC shares for a potential re-rating at more attractive net lease multiples. Looking ahead, we intend to maintain our capital recycling and deleveraging strategy into 2026, pursuing further hotel dispositions as property performance and overall market conditions continue to improve. I will now turn it over to Jesse to discuss the net lease portfolio.

Speaker 0

Thank you, Chris. The strategic shifts underway at Service Properties Trust will ultimately result in a portfolio that benefits from minimal CapEx needs, long-term leases with annual escalators that provide a bond-like risk-return profile, and cash flows that can be relied upon even in uncertain economic environments. The net lease market is deep, liquid, and highly fragmented, creating conditions that are conducive to scalable expansion if and when we choose to do so. Additionally, as we have demonstrated with mortgage financing, Service Properties Trust's net lease assets provide access to attractively priced financing options to support our growth. That growth will build off the existing backbone of net lease retail properties that we already own. Our portfolio is anchored by 175 TA travel centers backed by BP's investment-grade credit.

As a reminder, Service Properties Trust's current leases with TA have eight years of remaining term and include 50 years of extension options. While the rent coverage for the TA assets has experienced degradation over the past few quarters, this decline has begun to level off as freight demand normalizes coming off its COVID-era peak. Moreover, we are seeing investments in real estate from BP in the form of EV charging stations and other initiatives that are intended to drive revenue from non-fuel offerings at these locations. The overall net lease portfolio consists of 742 service-oriented retail net lease properties with annual minimum rents of $387 million. These assets were more than 97% leased, with a weighted average lease term of 7.6 years. We have 174 tenants operating under 136 brands, spanning 21 distinct industries.

The diversity and breadth of the portfolio provides opportunity for organic growth as we continue to source modest transactions with both new and existing operators. Our lease expiration schedule remains well-laddered, with 1.7% of our minimum rents scheduled to expire through the remainder of 2025 and 3% expiring in 2026. Our asset management platform has been actively engaged with our existing tenants as well as potential new tenants, resulting in over 350,000 square feet of leasing during the second quarter that averaged 12 years of term and a 5.7% roll-up in cash rents. As of quarter end, the aggregate coverage of our net lease portfolio's minimum rents was 2.04 times on a trailing 12-month basis, remaining essentially unchanged from the prior quarter. Excluding the BP-backed TA leases, rent coverage remains strong at 3.7 times.

With respect to investments, we remain committed to growing and optimizing the portfolio in a manner that enhances tenant and geographic diversity, increases weighted average lease term, and expands annual minimum rents. Our investment thesis focuses on properties in e-commerce-resistant, necessity-based sectors that have proven resilient across cycles. This includes quick service and casual dining restaurants, grocery stores, auto services, and other daily needs providers. Since ramping up our acquisitions platform in the second half of 2024, we have developed a robust pipeline, resulting in the acquisition of 14 net lease properties year to date for a total of $44 million. These transactions have a weighted average lease term of 15 years, average rent coverage of 2.5 times, and an average cap rate of 7.4%.

We are also under agreement to acquire six additional properties in Q3 for a total of $10.3 million, with similar economic terms as the closed transactions. As Service Properties Trust migrates to a predominantly net lease REIT, our asset management and acquisition teams are actively curating the net lease portfolio and fostering new relationships with retail operators. These efforts, coupled with the strong foundation we have already established in this space, will put us in position to efficiently grow this side of the business going forward. I'll now turn the call over to Brian to discuss our financial results.

Speaker 3

Thanks, Jesse. Good morning. Starting with our consolidated financial results for the second quarter of 2025, normalized FFO was $57.6 million or $0.35 per share versus $0.45 per share in the prior year quarter. Adjusted EBITDA RE decreased $7.7 million year over year to $163.8 million. Overall financial results this quarter, as compared to the prior year quarter, were primarily impacted by an $8.8 million increase in interest expense and lower hotel returns. For our 200 comparable hotels this quarter, RevPAR increased by 40 basis points and gross operating profit margin percentage declined by 300 basis points to 30.2%. Below the GOP line, costs at our comparable hotels decreased less than 1% from the prior year, driven by lower property insurance premiums. Our hotel portfolio generated adjusted hotel EBITDA of $73 million, a decline of 11.3% from the prior year, but towards the high end of our guidance range.

The four hotels that were under renovation during the quarter represented $2.4 million, or 24% of the decline in adjusted hotel EBITDA year over year. The 116 Sonesta exit hotels, including two that sold in July, generated RevPAR of $75, a decline of 1.8%, and adjusted hotel EBITDA of $19.9 million, a decline of 12% year over year. The 84 hotels we expect to retain generated RevPAR of $121, an increase of 1.5% year over year, and adjusted hotel EBITDA of $53.5 million during the quarter, a decrease of $7 million, or 11.7% year over year. Most of the decline year over year in the retained portfolio is related to elevated labor costs, repairs and maintenance expenses, and renovation disruptions. Turning to our expectations for Q3, we're currently projecting third quarter RevPAR of $98 to $101 and adjusted hotel EBITDA in the $54 to $58 million range.

This guidance considers a sequential decline due to seasonality in the third quarter, as well as recent headwinds in the travel and lodging industries. Guidance does not include the impact of completing any of the 114 Sonesta hotel dispositions expected to close later in Q3 and Q4. Turning to the balance sheet, the key objective for our hotel disposition program is to address our debt maturities and improve our credit metrics. 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 our earnings release, our 1.5 times debt service coverage covenant was below the minimum requirement at 1.49 times. This prohibits us from incurring additional debt to our backing compliance on a pro forma basis.

In July, we fully drew down our $650 million credit facility as a precautionary measure to preserve our liquidity in anticipation of potentially not meeting the minimum level of debt service coverage. As of today, we have approximately $670 million of cash on hand. Yesterday, we announced the early redemption of the $350 million of 5.25% unsecured senior notes due in February at par plus accrued interest. The redemption will be funded with cash on hand in early September. The $920 million of expected proceeds from the sale of the 114 hotels will be used to repay the $450 million of senior unsecured notes maturing in October of 2026 and amounts outstanding on our revolving credit facility. We currently expect closing of the asset sales and the repayment of outstanding debt will have a positive impact to our financial covenants.

We're also currently evaluating different strategies to improve our credit metrics and our covenant measures, including considering additional asset sales, operational improvements at our hotels, and potential financing opportunities. Turning to our capital expenditure activity, during the second quarter, we invested $39 million in capital improvements at our properties. Notable activity this quarter included projects at the Royal Sonesta Cambridge and the Sonesta Hilton Head Resort. For the full year, we continue to expect capital expenditures to be approximately $250 million, including $120 million to $140 million of maintenance capital, with the rest going towards renovation and redevelopment initiatives. Looking ahead to next year, we expect full-year CapEx in 2026 to be approximately $150 million. Of the $150 million, we expect $64 million related to discretionary renovation capital, with the balance going to recurring maintenance capital.

We expect, with the reduction in CapEx spending, the repayment of debt, operating improvements expected from our completed hotel renovations, SVC's cash flows will improve significantly as we move into next year. That concludes our prepared remarks. We're ready to open the line for questions.

Speaker 7

Thank you. 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 speaker phone, 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. Our first question will come from Tyler Batory with Oppenheimer. Please go ahead.

Good morning. Thanks for taking my questions. First one for me on the guidance for the hotel portfolio. I understand on the EBITDA line, there's some seasonality there sequentially from Q2, but can you expand a little bit more on some of the renovation disruption in Q3 and then talk too about the commentary you mentioned just in general headwinds in travel and lodging, please?

Speaker 2

Sure, I'll start. Tyler, good morning and thank you for the question. We've definitely seen some softness in Q3, especially in the August timeframe. We typically see a seasonal drop-off in activity in leisure travel as we get into early fall. Some of our forward-looking numbers and some of the group pace are starting to improve as we get into Q4, but we definitely see some weakness in Q3. Things have been softer and trends have been continuing. As we pace looking year over year, it's very comparable to what we saw in Q2 year over year, some declines year over year.

Okay, perfect. The CapEx commentary you gave for 2026, appreciate that, the $150 million number. The remainder of that, that's discretionary, the $86 million. Is that still a little bit elevated compared to what you might think is more normal, and just kind of how would you think about a maintenance CapEx run rate long-term for the portfolio?

Yeah, I think, you know, as we look at 2026, it's a significant reduction from what we've been spending the last few years, the pace of our discretionary numbers. Just to clarify, $64 million, yes, will be discretionary of the $150 million, with the rest going to renovations. Our overall CapEx spend, you know, I think if you benchmark that to our current portfolio, it's closer to 15% of revenues. I think as we move forward, industry norms are probably closer to 10% to 12% of total revenues, and that's where we think we want to be longer term. For 2026, we still have some significant projects we're doing, including our repositioning of the South Beach Hotel and some other larger projects. The pace of our renovations and just the scale of how much we're deploying will continue to trend down.

Speaker 6

Yeah, I think bigger picture, there'll be less active hotels under renovation in any given year, albeit we're talking about the $150 million in totality. I think the other complement to that is less disruption in the business. We should see just EBITDA generally be more moderated in future years because we have less renovations underway at any given time.

Okay, excellent. Just a point of clarification on the asset sales. I think last quarter, we're talking about a billion one of gross proceeds. Now the number's $966 million. I just want to be clear on the delta between those numbers and what's changed.

Yeah, it's twofold. One of the bigger pieces is we pulled a full-service hotel from the marketing efforts, a hotel we have in Atlanta. That's a performing hotel. I think generally speaking, we weren't necessarily happy with what we were seeing as far as pricing goes, so retaining that hotel seemed to be more prudent, at least currently. The balance, kind of the lesser amount, was more around the conclusion of diligence. As I mentioned in the prepared remarks, where we're at now with the lion's share, the $900 million of asset sales, is diligence is complete, deposits are hard, and we're on the other side to closing. Anything related to any pricing changes is no longer in play. That's kind of the other gap with respect to that number.

Okay, very helpful. Last one for me, you know, the net lease side of things, making a lot of progress on that strategy in terms of the transaction activity. Talk a little bit more about the pipeline for deals. I understand part of this is capital recycling, but is there a point where maybe the acquisitions could be significantly larger than the dispositions? Just really trying to get a sense of expectations. I know you probably can't give specific guidance on this, but just trying to get a sense of maybe rough run rate or maybe some guidepost on how much in terms of dollars you'd like to allocate towards acquisitions, whether it's the next couple of quarters or the next couple of years, and just trying to get a sense of how that could evolve looking ahead.

Yeah, I think generally speaking, and we talked about this on the onset of this endeavor, is that we wanted to do kind of modest acquisitions on the net lease side. There's a range of strategies. We've been net sellers over the years, more specifically in that segment. As you're familiar with, we have an attractive kind of balance sheet mechanism with the ABS, the mortgage financing. As part of that, it's a good opportunity for the company, medium-term favorable pricing. Refreshing that accordingly with the right assets is part of the driver with respect to some of these acquisitions. Again, just overall portfolio enhancements. What we like about it today, absent of just the types of assets we're buying and how we're growing the portfolio, is we're able to do it partially with asset sales.

We're getting kind of the true benefit of the capital recycling aspect of the growth. You look at Q2 where we started transacting just under $30 million. We're at $14 million to date through Q3, and Jesse alluded to another $10 million. That's probably a fair run rate for the time being. This is not a scenario where we expect to do some sort of outsized growth currently, but we'll look to opportunities to grow and find proceeds through sales and other initiatives to help balance that. I think your question around the types of assets, where we've been transacting today has been more weighted towards casual dining and quick service restaurants. There's been some automotive in there with respect to car washes and similar type uses.

We expect that to continue to diversify as we look at certain medical type opportunities and things around some Dollar General to a smaller scale and some other similar type uses are things we're targeting. I think net net for us, part of that allocation will be tied to how we can use it as a creative financing tool, given some parameters around what that type of portfolio you can assemble for that.

Okay, very good detail. Thank you. That's all for me.

Speaker 7

Again, if you have a question, please press star, then one. Our next question will come from John Masica with B. Riley Securities. Please go ahead.

Good morning. Maybe kind of building on Tyler Batory's question, is the kind of outlook that if you wanted to get more aggressive on the net lease investments, that's something that maybe happens post-closing of some of these strategic hotel dispositions? Just trying to think about when that, from a timing perspective, when that kind of net lease acquisition machine could really start ramping into gear.

Speaker 6

Yeah, I think that's probably fair. It's going to be steady state based on the run rate I just alluded to. As we get further into next year and see how performance continues across the portfolio, we don't want to shift the focus around the deleveraging component that we're focused on. Certainly, there are other variables we want to be mindful of. Look, coming out of the sales this year, thinking about select sales next year, looking at opportunities to grow EBITDA through the retained portfolio and narrow that margin gap, those are all net positives, less capital, as we alluded to, bringing that number down by $100 million year over year.

I think as we work our way through that in the beginning of the year, we'll be in a better position to assess the opportunity to further ratchet up on anything related to more sales or, excuse me, more acquisitions outside of the run rate we just talked about.

Okay. As I think about the $900 million of hotel sales that are maybe more advanced, what is left to do there between now and closing? Given due diligence is done, deposits are hard, are there any variables or factors that could derail those transactions? I guess what's left to do from either your perspective or the buyer's perspective to get those across the line? Is it just literally a matter of we have dates that, for their reasons, for our reasons, whatever it may be, it's going to close between 3Q and 4Q?

It's the latter. I mean, look, it's four unique buyers. We're on the other side in the sense that there's no more or no contingencies related to these sales. This is kind of common course whereby, following conclusion of diligence, you then have a pace to close. Given the size of the portfolio with each of the buyers, it's a rolling close, so there'll be incremental takedowns between now and the end of the year. I think, look, I think kind of where we stand today, I would say upwards of maybe 20% of those proceeds could be realized in Q3 with the balance in Q4. Again, there are ultimately hard outside dates tied to those, so that's where we get comfortable with kind of the 2025 execution.

Okay. Understanding that they have an obligation and it wouldn't get them out of their deposit, these are, without commenting too much, I'm sure you can't give too much detail, but these are kind of strong counterparties and there isn't any finance needs on their end that are to fulfilling this deal or these deals?

There's no contingency, you know, and the deposits are hard at this stage. I would just echo that our experience in selling assets is this is just normal course, and there's nothing to, in our view, that would suggest that the transactions won't close as planned.

Okay. Appreciate that. In terms of the incurrence covenant on the debt service coverage ratio, how far off are you from kind of meeting that? I guess, is there like a timeline or a series of actions you think, understanding that there's some variability in the performance of the portfolio, but how quickly do you think you could get back in kind of compliance with that covenant and be able to be a more active participant in the debt markets if need be?

Speaker 2

Sure, John. It's a great question. At Q1, we were right at the threshold at $1.50 times, and the numbers we reported yesterday were at 1.49 times. Depending on which side of the ratio you're talking about, it's $4 million of EBITDA, $3 million of interest. We did announce, to get to the $1.50, the redemption of the February 2026 notes. On a pro forma basis, removing that interest gives us some temporary relief on that. We did draw the revolver, so there are variables on how that ratio will work as we get into Q3. When we get to the Q3 filing, we'll have to see where our earnings are at. We're not happy at the levels.

Even if we are passing the covenant, we would need to get more cushion there to not have to worry about an incurrence test, to, as you said, participate in capital market transactions. There are things we could do, and further asset sales, operational improvements that are going to give us cushion. We're going to continue to think strategically about it.

One last one on the hotel dispositions. Is pricing, and apologies if I missed this earlier in the call or in the prepared material, but is pricing what you were kind of anticipating, say, at the 1Q call?

Speaker 6

Yeah, barring kind of what I mentioned earlier, there were some slight adjustments. I think the bigger price, I mean, we're very pleased with the pricing. You look at that $900 million at just shy of a 16 multiple. I think that is indicative of the strong participation in those assets and the pricing we're able to achieve accordingly.

Okay, that's it for me. Thank you very much.

Speaker 7

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

Hey, good morning. Thanks for checking the question. Just kind of picking back up on the debt side there. Can you walk us through the decision to fully draw the credit facility? In terms of kind of other ways that you could look to address the debt situation, would you consider issuing a zero coupon bond that would lower your cash interest and get you back into compliance with the debt covenant so you could refinance existing maturities?

Speaker 2

Sure, Jack, thank you for that. As we were getting close to the end of Q2 and looking where our May actuals and year-to-date actuals were trending on the hotel portfolio, we had anticipated our Q2 filing might put us right below that threshold, which is why we drew the revolver to protect liquidity. Because if, on a pro forma basis, you're below the $150 times, it's an incurrence test. You can't draw on the revolver if you're under that level. We did that proactively to make sure we have access to that liquidity, which is important for us. The timing of the asset sales being later in the year and having the $350 million due all played into that decision.

We'll continue to evaluate whether or not we hold cash, repay the revolver, and when we repay off the next tranche of notes that are due later in October of 2026. In regard to your other question, the zero coupon idea is certainly something on the table. We have a lot of exploratory conversations with stakeholders, bankers, and things of that nature. That's something that can, yes, provide relief to this covenant and significant relief given the zero coupon structure. Those are the kind of things we will evaluate going forward.

Okay. As we're thinking about the 2027 maturities, when should we expect you to start addressing those maturities? Is that a kind of early 2026 event as you start to consider some additional hotel sales, or do you think you'll try and do a refinance instead of waiting for additional sales proceeds?

Speaker 6

I think as Brian alluded to, we're thinking about kind of multiple levers that would ultimately benefit the company. Certainly, the structure around additional hotel sales in 2026 will be used to delever, and specifically around the 2027s, given with the current dispositions and the payoff Brian alluded to of the early part of the 2026s, that's going to be covered through those proceeds. Again, looking out to 2027 in asset sales and just being mindful of different opportunities as we continue to stay close to those 2027s, being the next tranche for us to address.

Okay. Can you characterize what are the next hotels that you'd look to take out of the portfolio just from kind of a chain scale, location, and brand perspective?

Yeah, I think it's a little preliminary. I don't want to kind of lose sight of the focus on what we're closing on. You know, it's probably a combination of different chain scales. There's a scenario where there's some full-service on the table. We talked about the one we pulled from Atlanta. There are others that may be lower performing in certain markets that we would consider. That's something we're really starting to kind of get our arms around now and then be in a position where we can time it accordingly. We've got a little runway to do that. We'll have more detail to share on future calls, but it's something, you know, again, we're assembling, which would kind of, I think, be considered across the chain scale.

Okay. Can you provide us with some updated return expectations on the hotel renovation program just from a cash-on-cash perspective and help us frame what the lift will look like in 2026 and 2027 in terms of how it breaks out between occupancy and rate?

Speaker 2

Sure. The way we've been looking at some of these projects, there's different tiers of what we expect from the money we're deploying. Obviously, put aside the recurring maintenance stuff, but the renovations and redevelopment initiatives, there can be a wide range of expectations in how we perform some of those projects, whether it's normal course recycling/renovation programs in the 8% to 10% range as far as lift expectations and RGI improvements. We have some larger scale projects like at the South Beach Hotel I mentioned where we expect returns in the 20+% range and other projects. That can be a wide range. The lifts can take 6, 12, 18 months to be realized on a pro forma basis as hotels stabilize and get reintroduced to the market. We're seeing a lot of good early signs from some of the bigger boxes that we've completed in recent months.

We're going to continue to be thoughtful around how we deploy capital. That goes into part of the strategy to selectively pick renovations and how we're deploying CapEx.

Okay. You mentioned in the deck some changes coming to the management agreement with Sonesta. Can you explain what those will look like and to the extent that they're just changes to structure and not in terms of the actual agreement with Sonesta? Why are you not pushing for a more favorable contract with them, just given how much of a headwind to margins Sonesta management has been?

Speaker 6

Yeah, look, I think that the overall terms for the agreement are on market. You know, really, a lot of the strategy around kind of reference to the management agreement is predicated on the fact that this is currently a pooled agreement. As we think about the sales that are underway currently and those that will likely happen in future years, I think a change to the structure so we can have and forego the pooled agreement and align incentives more specifically to performance-based initiatives is all part of the expectation with any changes to the management agreement. I think economically, we don't anticipate any impact. It's more just to right-size and align with where we're going with the strategy and, again, on market terms.

Okay, that's it for me. Thanks so much.

Speaker 7

This concludes 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.

Speaker 6

Thank you for joining today's call. We look forward to keeping you updated on our ongoing strategic initiatives to transform the company, strengthen our balance sheet, and enhance overall performance. Please reach out to Investor Relations if you're interested in scheduling a meeting with SVC. That concludes our call.

Speaker 7

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