Service Properties Trust Q2 2026 Earnings Call Transcript

Service Properties Trust (NASDAQ: SVC ) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call. This content is powered APIs. 43, aligned with expectations, and maintained full-year earnings guidance.

The company focused on strategic priorities, including enhancing its net lease portfolio, improving hotel portfolio cash flows, and reducing leverage by redeeming $550 million in unsecured debt. 6% year-over-year, driven by renovations and strategic initiatives, with anticipated continued improvement in the third quarter. Service Properties Trust is executing a capital recycling strategy, selling 20 properties for approximately $32 million to focus on high-performing assets and reduce negative EBITDA drag. 2% increase in cash-basis NOI and strong tenant credit quality, with a focus on transitioning towards a more net lease-oriented business model.

The company raised $542 million from an equity offering and redeemed senior unsecured notes, resulting in significant interest expense savings and a strengthened balance sheet. Future outlook includes further dispositions of non-core hotels, enhancing hotel EBITDA and cash flow, and leveraging strategic initiatives to drive long-term shareholder returns. Full Transcript OPERATOR Good day and welcome to the Service Properties Trust second quarter 2026 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 your telephone keypad. To withdraw your question, please press star then two.

Please note this event is being recorded. I would now like to hand the call over to Kevin Berry, Senior Director of Investor Relations. Please go ahead. Kevin Berry, 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 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 6, 2026, 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. 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 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. Lastly, 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. Chris Bilotto, President and Chief Executive Officer Thank you, Kevin. Good morning everyone, and thank you for joining the call today.

I will begin today's call with an update on our strategic priorities and highlights from our hotel portfolio performance during the second quarter. Jesse will then discuss our net lease business and Brian will 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's 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, and within our hotel segment, RevPAR outperformed the industry benchmark for the seventh consecutive quarter. 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.

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 cities.

1% year over year. 2% this quarter, with notable strengths at the Sonesta properties in Hilton Head and Miami Airport as well as Radisson in Salt Lake City. 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 toward 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. 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 property 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 the positive trend with labor productivity, a recent 20% reduction in property insurance costs 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 will 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. 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 and drive long-term shareholder returns. I will now turn it over to Jesse to discuss the Net Lease Portfolio in more detail. Jesse Abair (Vice President) Thank you and good morning. Our net lease assets continue to serve as a dependable source of cash flow for Service Properties Trust 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. 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. 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, optimizing our portfolio and developing new operator relationships will be an ongoing focus for our team as we continue to transition SVC toward the net lease side of the business. 09 times on a trailing twelve-month basis. 34 times. This is the second straight quarter of coverage growth for TA and represents a 12% increase since the fourth quarter of last year.

For the balance of the portfolio, rent coverage again came in north of three and a half times as tenant credit quality and operating performance remained stable. On the leasing front, our asset management team executed deals totaling 210,000 square feet with a weighted average lease term of roughly seven years. 8% rolling through the end of 2027, our near-term expiration schedule remains very manageable and our asset management team has been proactively engaging with tenants that have upcoming expirations to negotiate renewals. Turning to capital recycling, we continue to execute our measured growth strategy on the acquisition side.

Year to date we've invested approximately $9 million across four properties operating in the QSR and automotive services industries. 8% respectively, and carried weighted average lease terms of approximately 15 years. 2 million, which we expect to close in the third quarter. These transactions, funded through capital recycling, put us well ahead of schedule for our target of $25 million of annual acquisition activity.

Since the beginning of the year, we have sold 21 properties for $15 million and we expect a similar level of dispositions during the second half of 2026. The net lease portfolio now consists of 745 properties with annualized base rent of nearly $400 million and a tenant roster that includes 185 businesses operating under more than 140 brands across a diverse range of industries, led by travel centers, quick service restaurants, fitness centers and grocery stores. More than 95% of our annualized base rent is derived from leases that contain contractual rent increases or percentage rent provisions, providing embedded NOI growth and inflation protection over time.

As we work to reposition SVC toward a more net lease-oriented company, our focus will be on enhancing portfolio quality, maintaining strong occupancy and credit metrics, extending WALT and generating durable cash flow growth. We believe our disciplined asset management and capital allocation strategies will ensure Service Properties Trust's measured transition to a primarily net lease platform. And with that, I'll turn the call over to Brian to discuss our financial results. Brian Donley, Chief Financial Officer and Treasurer Thank you, Jesse and good morning.

As we previously announced, SVC effected a 1-for-5 reverse share split in early July and all share information in our earnings report and 10-Q have been retroactively adjusted. Additionally, given SVC's recent equity issuance, comparing per-share data to prior periods is not meaningful. 5% compared to the prior-year quarter. 3 million increase in NOI from the net lease portfolio.

5%. 7%. 5 million from the prior year, driven primarily by higher insurance costs.