Service Properties Trust Common Stock 2026 Q2 Earnings Call

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 2026, 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 6th, 2026. 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. This call may contain non-GAAP financial measures, including Normalized Funds From Operations or Normalized FFO, and Adjusted EBITDAre. 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. We will be providing guidance on this call, including estimated 2026 Normalized FFO, hotel EBITDA, Net Operating Income or NOI, and Adjusted EBITDAre.

We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. I will now turn the call over to Chris.

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. I will begin to conclude with a review of our financial results, balance sheet, and outlook. Last night, we reported second quarter results that reflect continued momentum advancing SVC strategic priorities and strengthening the company's financial profile. Our net lease portfolio delivered steady NOI growth, providing a highly predictable cash flow stream that anchors our portfolio. Within our hotel segment, RevPAR outperformed the industry benchmark for the seventh consecutive quarter. Overall, Normalized FFO per share of $0.43 was in line with consensus expectations, and we are maintaining our full year earnings guidance. Starting with our strategic priorities. We remain focused on enhancing our net lease portfolio, improving the cash flows and operating performance of our retained hotel portfolio, and further enhancing our balance sheet through disciplined capital allocation.

Since the beginning of the second quarter, we have sold 20 properties for approximately $32 million, including 19 net lease assets and one hotel. A portion of these proceeds, combined with over $540 million of net proceeds from SVC's successful equity offering in April, was used to redeem $550 million of unsecured debt, reducing our leverage profile and decreasing annual interest expense while providing the company with enhanced flexibility to focus on operational execution and cash flow growth. Turning to hotel performance. Our retained hotel portfolio, excluding the 15 sales hotels, delivered another quarter of improved operating results. RevPAR increased 6.6% year-over-year with balanced growth in occupancy and ADR and relative strength in full service and upper upscale hotels.

RevPAR growth was partially offset by expected displacement related to our active redevelopment and renovation projects, most notably the Nautilus South Beach. Excluding the Nautilus short-term disruption, underlying RevPAR growth across the balance of the portfolio was meaningfully stronger at 9%, reinforcing our confidence in the improved fundamentals in our portfolio. The portfolio continued to benefit from completed renovations, a 22% lift in contract segment revenue, as well as rate-driven demand related to World Cup in select host cities. Importantly, this positive momentum has carried into the third quarter with preliminary July RevPAR for our retained hotel portfolio of 7.1% year-over-year. Retained hotel EBITDA increased 4.2% this quarter, with notable strengths at the Sonesta properties in Hilton Head and Miami Airport, as well as Radisson in Salt Lake City.

To put this performance into context, our retained hotel portfolio generated a quarterly adjusted hotel EBITDA margin of approximately 19.4%. By comparison, the 15 hotels we are exiting operated at a negative EBITDA margin over that same period. This gap is the core economic logic behind our capital recycling strategy. Rather than continuing to dedicate capital and management attention to a cohort of assets with structurally negative returns, we are redirecting those resources towards a retained portfolio that is already demonstrating a clear trajectory of margin improvement. Building on this, we see significant additional opportunities for improved profitability across our retained hotel portfolio. Our asset management group continues to work with our operators on several opportunities to expand hotel EBITDA margins, both at Sonesta and our other operators. These efforts are initially centered on three primary pillars.

The first pillar relates to revenue optimization, targeting customer acquisition costs by driving more business to the direct and most profitable channels like brand.com, therefore reducing reliance on higher cost OTAs. This also includes a continued focus on driving contract and group base, along with ancillary revenue streams such as food and beverage and parking. Second, in support of improved labor efficiency, our operators are implementing a leaner and more dynamic labor model to better align staffing with demand and reduce reliance on costly contract labor. Within the quarter, we're already seeing the benefits of this with Sonesta, Radisson, and IHG all improving labor productivity year-over-year. The third pillar relates to capitalizing on operating leverage with anticipated savings from benefits plans, property insurance, and diligent controls over energy and utility costs.

As our renovated hotels stabilize and occupancy grows, this will provide enhanced pricing power and position the properties to capture additional event-driven demand, which in turn will absorb fixed costs more effectively, ultimately driving profitability. While early in the process, initial benefits are starting to materialize, including seeing the positive trend with labor productivity, a recent 20% reduction in property insurance cost across the portfolio, the noted 22% lift from contract revenue, largely from new airline crew business, and the adoption of certain technologies and processes that will drive margin improvement. As these initiatives progress, we provide further updates on targeted revenue and expense benefits.

Beyond these initiatives, SVC is positioned to capture meaningful performance upside from the elimination of approximately $15 million of negative EBITDA drag from our exit hotels, the gradual burn-off of displacement and corresponding performance growth from our hotel renovations, most notably the ongoing redevelopment of the Nautilus in Miami Beach. While these benefits will be realized over time, they provide a roadmap for improvement in hotel EBITDA and cash flow generation, complementing our top-line initiatives focused on driving market share across the portfolio. Turning to our hotel dispositions. We remain on track to sell the previously disclosed 15 hotels, which included the sale of a 133-key hotel in July for $18.4 million. To date, we are under a purchase and sale agreement or letter of intent with 13 hotels and are marketing one hotel.

We expect the majority of the remaining dispositions to be mostly completed over the balance of 2026, with proceeds continuing to support debt reduction and to further improve our financial flexibility. As part of this process, we also intend to bring to market our remaining IHG-managed full-service hotel, a 495-key property located in the Atlanta perimeter submarket. As some may recall, we removed this asset from the marketing process last year while we evaluated varying strategies with the in-place agreement and capital outlook. This followed a comprehensive hold versus sell analysis undertaken as the hotel's management agreement approached its scheduled expiration. While the property has performed well operationally, we believe a sale represents the more attractive path to unlocking value for shareholders, relative to continuing to own and reinvest in the asset. We expect marketing to commence in Q3 and look forward to providing future updates.

Before I conclude, I would also like to briefly touch on corporate governance. As we previously announced, our board continues to actively evaluate candidates for an additional independent trustee. The search remains focused on identifying an individual with meaningful hospitality industry experience who can further complement the board's experience and support SVC's ongoing strategic evolution. Looking ahead, our priorities remain clear. Translate the operating momentum in our retained portfolio into sustained margin and cash flow improvement while completing the exit of our non-core hotels to further strengthen SVC's financial profile. With a stronger balance sheet and the initiatives we have underway to further enhance performance, we believe SVC is well-positioned to unlock value across the portfolio to drive long-term shareholder returns. I will now turn it over to Jesse to discuss the net lease portfolio in more detail.

Thank you. Good morning. Our net lease assets continue to serve as a dependable source of cash flow for SVC, with minimal capital requirements, long-duration leases, and a diversified tenant base. The portfolio exhibited strong performance in the second quarter, led by meaningful NOI growth, sustained leasing momentum, and continued improvement in the performance of our travel centers. Highlights from the quarter include an increase of 2.2% in cash basis NOI quarter-over-quarter as a result of contributions from recent acquisitions, contractual rent growth from our existing leases, and a reduction in our credit reserves. Occupancy was unchanged for the prior quarter at 96.6%, although we expect to see incremental growth in occupancy throughout the remainder of the year, given the current state of our leasing pipeline and our asset management team's dedicated efforts to efficiently dispose of vacant properties and cycle in new brands.