Service Properties Trust (NASDAQ:SVC) Q1 2026 Earnings Call Transcript

Service Properties Trust (NASDAQ:SVC) Q1 2026 Earnings Call Transcript May 7, 2026

Operator: Good morning, and welcome to the Service Properties Trust First Quarter 2026 Earnings Conference Call. There will be an opportunity to ask questions. Please note 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: Good morning. Thank you for joining us today. With me on the call are Christopher J. Bilotto, President and Chief Executive Officer; Jesse Abair, Vice President; and Brian E. 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 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.

Forward-looking statements are based on Service Properties Trust’s beliefs and expectations as of today, 05/07/2026, 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. 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, adjusted EBITDAre, and hotel EBITDA.

A reconciliation of these non-GAAP figures to net income is available in Service Properties Trust’s earnings release and 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 Christopher J. Bilotto.

Christopher J. Bilotto: Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Last night, we reported first quarter 2026 results which reflect measurable progress advancing Service Properties Trust’s strategic initiatives. We materially strengthened our financial position with roughly $1.5 billion in capital markets activity, enhancing our overall leverage profile and debt maturity schedule. We continue to advance our capital recycling program and remain focused on active asset management across both our hotel and net lease properties. These initiatives serve as a catalyst toward driving performance for the company and improving cash flow. I will begin today’s call with an update on our strategic priorities, followed by highlights from our hotel portfolio performance during the first quarter.

Jesse will then discuss our net lease business, and Brian will conclude with a review of our financial results, balance sheet, and financial outlook. Since the start of the year, we executed a capital plan that significantly strengthened our balance sheet and strategic positioning. In March, we closed $745 million of accretive ABS financing secured in part by 34 of our travel centers leased to TA, reinforcing the attractiveness of these assets. In April, we completed a $575 million underwritten equity offering that was intentionally sized to delever and improve our credit metrics. Importantly, RMR Group, our manager, invested $50 million alongside shareholders, underscoring strong alignment and confidence in our strategy. Taken together, along with cash on hand, we retired $1.6 billion of debt resulting in annualized cash interest savings of $59 million.

We enter the remainder of 2026 with a stronger financial foundation and greater flexibility to execute our repositioning strategy and operational plans within our hotel portfolio, focused on driving EBITDA improvement and value creation. Turning to hotel performance. During the first quarter, RevPAR across our 93 hotels increased 6.7% year-over-year, primarily driven by broad-based occupancy gains across all service levels, with notable strength in the full service segment. Hotel EBITDA across the portfolio decreased 9.2% year-over-year to $18.4 million, though this reduction was partially impacted by a $2.4 million decrease tied to the 15 properties currently being marketed for sale. As a reminder, our full-year guidance contemplates the expected losses related to these marketed hotels.

More importantly, the underlying performance of our 78-hotel retained portfolio was even stronger. Excluding the assets marketed for sale, RevPAR grew 7.5% year-over-year. Hotel EBITDA increased 2.1% to $26.2 million. This was achieved despite the known revenue displacement from our ongoing redevelopment of the Nautilus in South Beach. This outperformance is driven by our strategic concentration in higher STR chain scales, our footprint in premier resort destinations, including Kauai, San Juan, and Hilton Head, and the uplift we are seeing from completed renovations. Our focus remains squarely on capturing the margin flow we believe this portfolio is capable of generating as it ramps up over the next few years. Following several years of significant capital investment to reposition these assets, Service Properties Trust is well positioned to drive revenue uplift and outsized EBITDA growth.

Over the last four years, approximately half of our retained hotels completed or are currently undergoing major renovations. To ensure we capture the performance improvement and margin flow-through anticipated over the coming years, our asset managers are actively engaging with our operators to refine operational synergies and streamline property-level execution. While we acknowledge the broader macro headwinds, including geopolitical uncertainty, elevated fuel costs, and lagging international and government travel, we remain confident that this active asset management approach will uncover varying opportunities to improve efficiencies and deliver stronger results. Turning to hotel dispositions. During the quarter, we advanced our capital recycling initiatives, selling a 133-key focused service hotel for $7.1 million, and progressed the marketing of 15 Sonesta-managed hotels totaling approximately 3 thousand keys.

We removed one Sonesta Select property from the process to reassess its positioning; however, we retain an active and engaged roster of buyers for the remaining properties. Across the broader marketed hotels, pricing has come in softer than our initial outlook. This dynamic only reinforces our strategic commitment to exit these hotels and reallocate capital. Buyer demand for the eight focused service properties was strong, resulting in nearly 30 bids from more than a dozen unique buyers. Pricing was generally consistent with the average per-key valuation we achieved on open service hotels over the past year. Specific to these eight hotels, we have signed letters of intent with buyers for total proceeds of approximately $61.2 million, which we intend to use to repay debt.

For the seven full service hotels, bids for this operationally challenged sub-portfolio have fallen below initial targets. Despite this, we are prioritizing the exit of these properties, with six of the seven hotels awarded to buyers for expected proceeds of $55.3 million. We anticipate an update on the final property in the coming quarter, which we expect will increase our total proceeds. From a strategic standpoint, holding these assets is not aligned with our long-term goals. Together, these marketed hotels represented $7.8 million of losses in the first quarter while carrying material future capital requirements. Exiting them now, regardless of the softer pricing environment, eliminates a significant drag on our earnings and preserves capital.

More importantly, it allows us to pivot our full attention and resources toward our retained core portfolio, driving growth in markets and properties where we have the greatest opportunity for margin expansion. In summary, Service Properties Trust’s portfolio transformation is well underway, supported by our recently improved capital structure and the operational upside within our hotel assets. We are focused on our initiatives supporting Service Properties Trust’s continued shift to an increasingly net lease-oriented portfolio. Ultimately, we believe this combination of selling assets and operational improvement will drive durable cash flow and create attractive long-term value for our shareholders. I will now turn it over to Jesse.

Jesse Abair: Thanks, Chris, and good morning. At quarter end, Service Properties Trust’s net lease portfolio contained 701 properties across 42 states with annual base rents of $392 million. The portfolio was approximately 97% leased with a weighted average lease term of 7.3 years. We have 185 tenants operating under 140 brands across 21 distinct industries. The aggregate coverage of our net lease portfolio’s minimum rents was 2.01x on a trailing twelve-month basis as of 03/31/2026, up slightly from last quarter. The improvement was driven in part by our [inaudible] 1.24x, up from 1.2x in Q4. During the quarter, our asset management team executed 20 leases totaling 219 thousand square feet, averaging over six years of term, with a cash rent roll-off of 8.5%.

Looking ahead, portfolio lease expirations remain well laddered, with less than 5% of annualized rents expiring through 2027. NOI from our net lease portfolio declined $2.2 million year-over-year, primarily driven by credit loss reserves recorded for certain leases and related operational expenditures, which was partially offset by a $2 million positive impact from our acquisition activity. As we enter 2026, we shifted to a more measured pace of net lease acquisitions, targeting approximately $25 million of annual volume funded through capital recycling. Since the beginning of the year, we invested in four properties totaling $9 million, which were primarily funded with the proceeds from 13 net lease dispositions. Consistent with our investment focus on resilient necessity-based brands with limited e-commerce exposure, our acquisitions this quarter included quick service restaurants and an automotive services retailer.

The transactions had a weighted average lease term of over fifteen years, average rent coverage of 3.8x, an average going-in cash cap rate of 7.9%, and an average GAAP cap rate of 8.8%. As we move through the year, we will continue to actively look for ways to recycle capital by leveraging our new and established brand relationships while pursuing growth opportunities in the form of sale-leasebacks and off-market deals. Our proactive asset management efforts and disciplined capital recycling strategy should allow the net lease portfolio to continue to function as a stable foundation for Service Properties Trust as it implements its broader transformation. And with that, I will turn the call over to Brian to discuss our financial results.

Brian E. Donley: Thank you, Jesse, and good morning. Starting with our consolidated financial results for the first quarter of 2026, normalized FFO was $7.4 million, or $0.04 per share, down $0.03 per share compared to the prior-year quarter. Normalized FFO this quarter as compared to the prior-year quarter was primarily impacted by a $7.2 million, or $0.04 per share, decline in hotel results. Our hotel disposition activity accounted for $5.3 million of the decline, and $1.9 million was a result of the performance of the 15 hotels we are selling, partially offset by earnings growth in our 78 retained hotels as of quarter end. NOI from our net lease portfolio declined $2.2 million, or $0.01 per share, over the prior year on credit losses recorded during the quarter.

Interest expense declined by $5 million, or $0.03 per share, in the period as a result of our capital markets activity. Turning to our hotel portfolio performance, for our 93 comparable hotels this quarter, RevPAR increased by 6.7%, and gross operating profit margin percentage declined by 70 basis points to 20.4%. Below the GOP line, costs at our comparable hotels increased by $5.4 million from the prior year, driven by higher insurance expenses. Our comparable hotel portfolio generated adjusted hotel EBITDA of $18.4 million during the quarter, a decline of $1.9 million, or 9%, from the prior year. The 15 Sonesta exit hotels we are currently marketing for sale generated RevPAR of $49, a decline of 3%, and produced losses of $7.8 million for the quarter, a decline of $2.4 million year-over-year.

The 78 hotels in our retained portfolio generated RevPAR of $113, an increase of 7.5% year-over-year, and adjusted hotel EBITDA of $26.2 million during the quarter, an increase of 2% year-over-year. Hotel EBITDA declined $3.8 million for the seven hotels under renovation, including our South Beach hotel. The 86 hotels not under renovation increased EBITDA by $1.5 million, or 8%, over the prior year. Turning to the balance sheet. We have been active in the capital markets and took steps to further strengthen our balance sheet, improve our debt maturity ladder, and our cash flows. During the first quarter, we repaid $300 million of our February 2027 4.95% unsecured senior notes with cash raised from asset sales. We completed our second ABS offering for $745 million at a blended interest rate of 5.96%, with a maturity of March 2031.

We securitized 158 net lease assets, including 34 travel centers, demonstrating the value of these assets and their attractiveness to investors. We used the proceeds from this offering to fully redeem all $700 million of our 8.38% senior unsecured guaranteed notes due June 2029, resulting in an annual cash interest savings of approximately $14 million. We also raised net proceeds of $542.3 million from our recent equity offering and redeemed all $450 million of our outstanding 5.5% senior guaranteed unsecured notes due 2027 and the remaining $100 million of outstanding 4.95% senior unsecured notes due in February 2027, resulting in additional annual cash savings of $29.7 million. Following these capital market transactions, we currently have $4.7 billion of debt outstanding with a weighted average interest rate of 5.65%.

We have no unsecured debt maturities until 2028, and our 2027 and 2028 secured debt maturities have substantial refinance optionality supported by strong net lease collateral. Further, Service Properties Trust was recognized last week by Moody’s, which upgraded its corporate family rating, underscoring clear progress we are making in strengthening our financial profile. Turning to our capital expenditure activity. During the first quarter, we invested $21.5 million in capital improvements. First-quarter activity was largely driven by the renovation of the Nautilus in Miami, as well as projects at the Royal Sonesta properties in Boston, Washington, D.C., and Austin, Texas. Turning to our annual guidance. We are reaffirming our full-year outlook for hotel EBITDA, net lease NOI, and consolidated adjusted EBITDAre.

First-quarter normalized FFO results were in line with our expectations and reflect the anticipated seasonality of our hotel portfolio and the planned renovation displacement embedded in our initial guidance. We are increasing our normalized FFO range as a result of our debt repayments to $124 million to $144 million, or $0.24 to $0.27 per share. The per-share amounts assume a weighted average share count of 526 million shares. This full-year guidance assumes midpoint interest expense of $360 million and G&A expense of $40 million. This guidance does not reflect the impact of completing any of the 15 Sonesta hotel dispositions and continues to assume $25 million of capital recycling in our net lease portfolio. We continue to expect total CapEx for the year of $121.14 billion.

To conclude, our first-quarter results demonstrate continued momentum repositioning Service Properties Trust and strengthening the company’s cash flows, supported by our strategic capital market transactions. As we move forward, we remain focused on growing EBITDA and further optimizing Service Properties Trust’s portfolio to drive sustained value for our shareholders. That concludes our prepared remarks. We are ready to open the line for questions.

Q&A Session

Operator: We will now open the call for questions. The first question today comes from Jack Armstrong with Wells Fargo. Please go ahead.

Jack Armstrong: Hey, good morning. Thanks for taking the question. First one for me on the net lease operating expenses, up roughly $2 million both sequentially and year-over-year, which by our math drove the majority of the miss versus our estimates. Can you talk a little bit about the moving pieces there and how we should be thinking about the run rate for the rest of the year? And then just on rent coverage in the rest of the portfolio, can you talk a little bit about what drove the expansion in coverage for the TA portfolio? How you expect that to develop over the remainder of the year? And then also walk us through any changes on your tenant watch list. We noticed you have got a couple that are well below 1x coverage, with both down significantly from Q4.

And then jumping over to the hospitality side of things, pretty strong RevPAR in the quarter and even stronger in the retained portfolio, but margins are still down 10 basis points. Can you talk about what happened there on the expense side and any expectations you may have for improvement over the course of the year? And then kind of with that in mind, what is giving you confidence in the unchanged hotel EBITDA annual guidance there with booking trends into the rest of Q2? And last one for me, just at the corporate level. Could you maybe provide an update on the change you are planning to make to the board as well as the new leadership at Sonesta and how you expect both of those to impact your strategy as we go to the back half of the year?

And then also, if you are considering waiving your bylaw limiting individual holders to 5%?

Jesse Abair: Sure, Jack. This is Jesse. I will take the first part. As I mentioned, we booked about $2 million in credit losses. A portion of that was expenditures related to those assets, and the bulk of that was property taxes. We have two franchisees that filed for bankruptcy, so we are essentially covering the property taxes in the meantime. On a go-forward rate, in our opinion this is a one-time hit. With respect to these assets, they are all really good performers for us. The expectation would be that they would ultimately come out of bankruptcy and get transitioned either to new franchisees or back to corporate and get back to a rent and OpEx paying state. With respect to TA coverage, our perception of that is twofold.

TA has historically benefited from pricing volatility, which we are seeing as a function of some of the geopolitical situation in the Middle East. Typically there is a lag between wholesale and retail pricing, and so TA has been able to take advantage of that. That, coupled with what we saw from freight operators nationally—which was an increase in freight demand as some regulatory changes removed excess capacity from the roads—helped freight pricing. Industrial demand was up, in part due to data center construction and related activities. Some of that is likely transitory, related to the Middle East situation. Some of that from the freight demand side is hopefully going to be more persistent. Either way, there is an opportunity there for that to provide something of a bridge as TA, with new leadership, advances its business improvement plan and, hopefully, implements more structural changes to drive EBITDA growth going forward.

On the tenant watch list, we have a small exposure to drugstores and movie theaters; we are watching those. The bulk of the near-term issue relates to the two franchisees I mentioned earlier. Other than that, performance has been pretty consistent across the portfolio.

Brian E. Donley: Good morning, Jack. This is Brian. On hotel margins, one of the big impacts we had this quarter was rising insurance costs. We had premium increases on the liability side that hurt margins, and there were some deductibles that were recorded for different incidents across the portfolio. Some of those recur here and there, but the premiums were the bigger driver. Labor was not an outsized impact; overall labor costs were up about 3% year-over-year. We are continuing to work closely with our operators on staffing models. As we move forward, Q1 is typically seasonally weaker. As we go into the stronger summer season, we should drive more margin through the portfolio. Expense management and labor modeling are at the forefront to improve flow-through.

Regarding confidence in the unchanged hotel EBITDA annual guidance and booking trends, a lot of the things that impacted Q1 were already factored into our guidance range. There is still more to play out in the broader economy and from citywide events, including the World Cup and things of that nature, where nobody has perfect visibility on the total impact. We feel like trends are pretty good into the spring and early summer. Our RevPAR growth into April was comparable to what we saw in Q1, so those patterns have continued. We have not seen signs of slowdown, and there is still more to play out as the summer rolls through across our portfolio. We are going to continue to see uplift from hotels where renovations were completed last year; we are still building back group and contract business at those hotels that were displaced last year, and we see more opportunities there as the year progresses.

Christopher J. Bilotto: On the corporate items, with respect to the board, as communicated in our public announcements, we are working toward bringing on a new board member with lodging experience, and that process continues to advance. Nothing to report today, but we believe this will be constructive for the company and governance. Regarding Sonesta’s new leadership, the new management team came on board effective in April. We are just over thirty days into that, and the team is off to a strong start identifying and unpacking changes at HoldCo and how those will inform hotel performance. We feel optimistic about the initiatives we are collectively discussing, including revenue mix—driving more group and contract business—and deploying new tools across operators, such as using AI for better lead generation and competitive set insights.

On expenses and margins, we are reevaluating property-level offerings and how that impacts labor, including contract labor, which we anticipate will continue to decline. There is also an effort to expand the global sales team to better leverage our renovation program and stronger market positioning to drive group and contract business. Lastly, we are continuing to build out the loyalty program to increase direct business through brand.com and reduce more expensive OTA acquisition costs. On the 5% ownership limit, if you look at the April equity offering, we provided waivers to certain groups that own more than 5%. We are not changing the policy formally, as it is in place to protect certain tax attributes of the company as a REIT, but we evaluate waivers on a case-by-case basis.

Operator: Your next question comes from Tyler Batory with Oppenheimer. Please go ahead.

Tyler Batory: Hey, good morning. Thanks for taking my questions. A couple from me here. First, I wanted to follow up on the asset sales on the hotel side of things—the 15 you have in the market right now. Any help on the timeline for those? And then the seven full service hotels—could you give us some more guideposts on potential pricing for those assets? And I am also curious why performance at those properties has been so challenged. And then post-equity raise, where are you in terms of your covenants? And just talk about some of the additional flexibility that you have post doing that equity transaction. Lastly, on the 2027 senior secured notes—there is an extension option—just talk about the conditions that allow you to extend that, and should we assume that gets pushed to 2028?

Christopher J. Bilotto: On timing, other than one hotel, we have identified or signed term sheets with buyers. There is a range of processes: more than half the portfolio deposits will go hard with no real diligence and a roughly 90-day period to close; the balance will follow a more traditional diligence period and then close. We have discussed these sales transacting in the back half of the year, and that remains the right bogey. We may take down incremental pieces over Q3 and Q4 rather than all at year-end. On performance, we are selling these hotels because of our conviction around reallocating capital and the markets where these assets sit, along with the capital they would need. The performance decrease reflects where they sit in certain markets and is not inconsistent with broader trends in those markets.

There is also some disruption as you go through a sale process. All of this reinforces our conviction to exit and reduce cash drag for the company. On pricing, the seven full service hotels have received bids below initial targets; six of the seven are awarded for expected proceeds of $55.3 million, and we anticipate an update on the final property in the coming quarter.

Brian E. Donley: As of Q1, post equity raise we paid down the $550 million of 2027 notes, which provided significant cushion on both our leverage and interest coverage covenants. Debt-to-assets on the 60% test improved from 59% to 53%, and interest coverage was at 1.75x. We were strategic in sizing the equity to navigate maturities and provide flexibility to refinance future debt within covenant limits. Regarding the zero-coupon notes, we have options: we can use asset sale proceeds to pay down some of the balance, and those notes are also backed by one of the travel center leases, which provides increased flexibility. For the 2027 senior secured notes, we do have a one-year extension option; it becomes a cash-pay instrument during the extension with a step-up scale over the extension period. It is more likely we will refinance those out rather than extend, but it is too early to be definitive given the September 2027 timing.

Operator: Your next question comes from John Massocca with B. Riley Securities. Please go ahead.

John Massocca: Good morning. Maybe sticking with Tyler’s line of questioning, as you think about the proceeds from upcoming hotel sales, would those have to be used towards paying down the zero coupon, or when you talk about using asset sale proceeds to pay down the zero coupon, would it be assets that are currently collateralizing that piece of debt? And then, of the pool of full service assets you are looking to sell this year, how much of the original estimate you put out is impacted by the one asset you pulled from the selling bucket versus a decline in market pricing? And on the select service assets you are selling, are those under contract right now, and what is timing? Is pricing going as expected? Switching over to the net lease portfolio, how should we think about the near-term impact of the tenant credit issues on the financials over the next couple of quarters as the bankruptcy process plays out?

Was anything in 1Q particularly one-time in nature that could bounce back immediately, or is the normalization tied to retenanting? Given the nature of the bankruptcy declaration, would you expect some of the metrics to bounce back as soon as 2Q?

Brian E. Donley: On the zero-coupon notes, it is not required that proceeds from hotel sales be used to pay them down. We will be thoughtful. Those notes were issued at a discount and effectively amortize; paying them off early would extinguish that discount. We also have a small variable funding note of $45 million that matures in early 2027 that we could pay down. We could sit on cash and address closer to maturity based on market conditions and strategy, so there is flexibility. Regarding full service sale proceeds, the combined awarded bids we discussed are about $116 million. The removal of the one asset was approximately $5 million. There is one large full service asset still in the market that is not in the $55.3 million number, and we expect pricing on that in the near term, which would increase total proceeds.

Christopher J. Bilotto: On the select service assets, everything has been awarded or is under LOI. Most of those would close on an earliest path over roughly a 90-day period. A fair bogey is mid–Q3 on the early end, and we will see how each process plays out. Pricing on those also came in light, but generally consistent with the per-key valuations we saw last year.

Jesse Abair: On the tenant credit items, these are two franchisees we had been engaged with for some time, so we knew it was likely to hit; it just happened to occur this quarter. We do not view this as thematic. We expect the bankruptcy processes to play out and result in outcomes such as transitions to new franchisees or back to corporate, which would improve the credit profile. We expect to get back to rent-paying status, and there is potential for some recovery of back rent and OpEx, though that remains to be seen. This is largely a timing function. The assets involved are solid and happen to be in our QSR space, which otherwise is performing well. The timing of a bounce-back will depend on the proceedings; it could be Q2 or Q3, but within that general timeframe.

Brian E. Donley: On your final question regarding the apparent delta between about $17 million of interest expense savings implied by the equity raise and about $14 million of uplift on normalized FFO in guidance, the difference is really the net lease credit losses we just discussed. We are trending toward the lower end of net lease guidance, which offsets some of that interest benefit.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Christopher J. Bilotto, President and Chief Executive Officer, for any closing remarks.

Christopher J. Bilotto: Thank you for joining our call today. We look forward to seeing many of you at upcoming industry conferences, including NAREIT in June.

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