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SP

Service Properties Trust (SVC)·Q2 2025 Earnings Summary

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 .

Financial Results

MetricQ2 2024Q1 2025Q2 2025
Total Revenues ($USD Millions)$512.948 $435.179 $503.436
Net Loss per Share (GAAP)-$0.45 -$0.70 -$0.23
Normalized FFO per Share$0.45 $0.07 $0.35
Adjusted EBITDAre ($USD Millions)$171.524 $115.821 $163.776
Hotel RevPAR (All Hotels, $)$100.85 $83.52 $101.27
Adjusted Hotel EBITDA ($USD Millions)$82.417 $22.971 $73.073

Actual vs S&P Global consensus (Q2 2025)

MetricConsensusActualSurprise
Revenue ($USD)$495,762,670*$503,436,000 +$7,673,330 (+1.5%)*
Primary EPS-$0.2050*-$0.1056*+$0.0994*

Values marked with * retrieved from S&P Global.

Segment snapshot (Q2 2025)

SegmentRevenuesProfitability/UtilizationOther
HotelsHotel operating revenues: $404.405M Adjusted Hotel EBITDA: $73.073M; All‑hotel RevPAR: $101.27 Retained hotels RevPAR: $121.30; Exit hotels RevPAR: $74.94
Net LeaseRental income: $99.031M Occupancy: 97.3% Portfolio rent coverage: 2.04x; TA coverage ~1.31x

Key operating/financial KPIs

KPIQ2 2025
Debt Outstanding (Principal)$5.826B; Wtd Avg Interest 6.375%
DSCR (Incurrence covenant)1.49x (vs 1.50x min)
Liquidity ActionsRevolver fully drawn; cash on hand ~ $670M as of Aug 5
Dividend$0.01/share (declared July 10; paid Aug 14)
CapExQ2: $39.235M; FY25 guide ~$250M; FY26 guide ~$150M (incl. $64M discretionary)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Hotel RevPARQ3 2025—$98–$101 New
Adjusted Hotel EBITDAQ3 2025—$54M–$58M New
CapExFY 2025~$250M (Q1 call) ~$250M (reiterated) Maintained
CapExFY 2026—~$150M (incl. ~$64M discretionary) New
Hotel Sale ProceedsFY 2025~$1.1B (125 hotels) ~$966M (122 hotels) Lowered
Senior Notes (5.25% 2026)N/A (action)—Redeem $350M early in Sep 2025 using cash on hand New

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q2 2025)Trend
Portfolio transformation to majority net leaseQ1: Plan to sell ~125 hotels for ~$1.1B; expect valuation rerate toward net lease 114 hotels under P&S for $920M (111 with hard deposits); net lease >70% of pro forma Q2 Adjusted EBITDAre Advancing; de‑risked closings
Renovation program and disruptionQ1: 8 hotels under renovation; displacement a key headwind ~$2.4M EBITDA headwind from renovation displacement; expected to moderate from Q3 Nearing inflection as projects complete
Macro/travel softnessQ1: Pullback in government/inbound international; airlines cutting crew business Softer leisure in August; Q3 embedded sequential decline Soft near‑term demand
Deleveraging and liquidityQ1: Address 2026 maturities with asset sales; ended Q1 with $680M liquidity Revolver fully drawn; DSCR 1.49x; early redemption of Feb‑2026 notes Proactive actions; tight covenant cushion
TA net lease healthQ1: Portfolio rent coverage ~2.07x; TA backed by BP Portfolio coverage 2.04x; TA coverage degradation leveling off; BP investing in EV charging/non‑fuel Stable ex‑TA; TA stabilizing

Note: No Q4 2024 call transcript was available in our document set.

Management Commentary

  • “These efforts are part of our ongoing strategic initiative to transform SVC toward becoming a predominantly net lease REIT.”
  • “Pro forma for our expected hotel sales, net lease assets are projected to account for over 70% of SVC's pro forma Q2 adjusted EBITDAre.”
  • “Normalized FFO was $57.6 million or $0.35 per share... Adjusted EBITDAre decreased $7.7 million YoY... primarily impacted by an $8.8 million increase in interest expense and lower hotel returns.”
  • “As of our earnings release, our 1.5 times debt service coverage covenant was below the minimum requirement at 1.49 times... we fully drew down our $650 million credit facility... [and] announced the early redemption of the $350 million... notes due in February [2026].”
  • “For the full year, we continue to expect capital expenditures to be approximately $250 million... Looking ahead to next year, we expect full year CapEx in 2026 to be approximately $150 million, of which $64 million is discretionary renovation capital.”

Q&A Highlights

  • Near‑term demand: Management sees softness into Q3, especially August; group pace improves into Q4 .
  • CapEx path: 2026 CapEx down to ~$150M; longer‑term maintenance CapEx target 10–12% of revenues vs ~15% currently, as renovation intensity normalizes .
  • Dispositions cadence/valuation: 114‑hotel portfolio to close in tranches through Q4; buyers are strong, deposits hard, no financing contingencies; implied multiple just under ~16x (CEO) .
  • Covenant remediation toolkit: Early redemption of Feb‑2026 notes, asset sales, operational improvements, potential alternative financings (incl. zero‑coupon concept under evaluation) .
  • Net lease acquisitions: Intent to keep pace modest near‑term (~$25–$40M per quarter), focused on QSR, casual dining, auto services, with selective diversification (some medical, dollar stores) .

Estimates Context

  • Q2 2025 performance vs S&P Global consensus: Revenue beat by 1.5% ($503.436M vs $495.763M); Primary EPS beat by ~$0.10 (-$0.106 vs -$0.205). Low estimate count (Rev: 3; EPS: 2) suggests limited coverage and potential for estimate volatility into Q3.
    Values marked with * retrieved from S&P Global.

Key Takeaways for Investors

  • Disposition execution is the critical catalyst: Hard deposits and staged closings of the 114‑hotel portfolio underpin deleveraging and should improve covenant cushion upon cash application to 2026 maturities and the revolver .
  • Earnings quality transitioning: With net lease slated to exceed 70% of pro forma Adjusted EBITDAre, the mix shift could support multiple rerating toward net lease peers if execution continues .
  • Hotel profitability headwinds likely transitory: Labor inflation persists, but renovation disruption should ease; watch Q4 group pace and renovated asset performance for inflection .
  • Near‑term setup cautious: Q3 guide embeds seasonal and industry softness; risk skew tied to travel demand (leisure/government/airline crew), implying potential negative estimate revisions near‑term if softness persists .
  • Balance sheet actions ongoing: Early redemption of Feb‑2026 notes and sale proceeds deployment should strengthen credit metrics; monitor DSCR trajectory and any additional asset sales/financings to address 2027 maturities .
  • Net lease pipeline accretive: Modest, diversified acquisitions at ~7–8% caps with long WALTs and >2x coverage can compound cash flows without heavy CapEx, supporting stability through cycles .

Sources

  • Q2 2025 earnings call transcript (Aug 6, 2025)
  • 8‑K and Q2 2025 supplemental (Aug 5, 2025): Key Financial Data, hotel metrics, debt/covenants, liquidity, dispositions
  • Q1 2025 materials (May 6–7, 2025) for trend context
  • Dividend press release (July 10, 2025)