Good morning, and welcome to the Service Properties Trust Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Stephen Colbert, Director of Investor Relations. Please go ahead, sir.

Good morning. Joining me on today's call are Todd Hargreaves, President and Chief Investment Officer; and Brian Donley, Treasurer and Chief Financial Officer. . Today's call includes a presentation by management, followed by a question-and-answer session with analysts. Please note that the recording, retransmission and transcription of today's conference call is prohibited without the prior written consent of SEC. I would like to point out 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 present beliefs and expectations as of today, August 8, 2023. Actual results may differ materially from those projected in these forward-looking statements. 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 secreit.com or the SEC's website. 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. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO and adjusted EBITDAre. Reconciliations of these non-GAAP financial measures to net income as well as components to calculate AFFO are available in our supplemental operating and financial data package which can be found on our website. With that, I'll turn the call over to Todd.

Thank you, Stephen, and good morning. SVC second quarter results reflect the continued improvement in our hotel portfolio as year-over-year comparable RevPAR gains outpaced the industry for the sixth consecutive quarter driven by increases in both ADR and occupancy. Portfolio RevPAR for our 219 comparable hotels increased 2.8% with ADR increasing 2.4% and occupancy increasing by 30 basis points. While leisure demand has softened in markets like Miami, Scottsdale, Fort Lauderdale and Hilton Head, SVC's portfolio benefited due to our higher relative exposure to urban markets and reliance on business travel. We reported year-over-year RevPAR gains in our select service and full service portfolios of 3.8% and 3.6%, respectively, resulting from the recovery of urban markets, specifically on the East Coast and Midwest, and improving trends in business transient, group and contract business. Revenues at our 48 comparable full-service hotels increased by $19.7 million from the previous year quarter with Sonesta posting a record quarter for ADR for [indiscernible] full-service hotels, driven by sizable year-over-year increases in group corporate negotiated and contract of 25%, 16% and 11%, respectively. The largest increases in business travel were in Los Angeles, Boston and Washington, D.C. and the increase in contract related business was largely driven by our hotels in Redondo Beach and Fort Lauderdale. The negative impacts from reduced leisure demand was mostly experienced in our hotels in Kauai, Hilton Head, New Orleans and Florida. Our portfolio of 61 select service hotels reported revenues that were $3.1 million greater than the previous year quarter. The revenue gains were driven by group business, which was up 35% or $2.3 million. Excluding 4 properties under renovation, RevPAR to portfolio of 40 Sonesta select hotels increased 7% year-over-year and RevPAR in our portfolio of 17 Hyatt Place hotels increased 3.6%. Lastly, our portfolio of extended-stay hotels…

Thank you, Todd, and good morning. Starting with our consolidated financial results for the second quarter of 2023. Normalized FFO was $95.1 million or $0.58 per share versus $0.54 per share in the prior year quarter, an increase of over 7%. Adjusted EBITDAre increased 1.9% year-over-year to $185.3 million. The increase in normalized FFO this quarter was driven by lower interest expense increased rental income and improved hotel results, partially offset by our provision for income taxes. The decline in interest expense is largely the result of repaying amounts outstanding on our revolving credit facility and senior notes that were maturing last year. . Regarding our income tax provision, we recorded a tax benefit of $3.8 million in the first quarter of 2023. This quarter, we recorded a tax expense of $5.2 million or $0.03 per share. The swing sequentially is a result of the seasonal ramp-up of our hotel portfolio. We're projecting a full year tax expense of $1.5 million. Most of our tax provision relates to certain state income taxes as well as our foreign operations. Rental income increased by $2.7 million this quarter compared to the prior year, largely as a result of the TA transaction closing mid-quarter. We recognized $3.5 billion of percentage rent during the quarter under the legacy TA lease terms. As a reminder, the new lease structure is a 10-year term, it calls a fixed annual 2% increases with no percentage rent component. TA also prepaid $188 million of rent, and we will receive $25 million of rent credits annually in return. Annual cash rents for the first year of our TA leases is $254 million of fixed rent, less the $25 million prepayment credit. We will recognize $271 million of annualized rental income in our earnings over the 10-year lease term which…

[Operator Instructions]. Our first question here will come from Bryan Maher with B. Riley Securities.

Maybe starting with a big picture question on leisure travels softening and yours is not the first company who've heard of that. How much of that do you think is related to maybe revenge travel, exhaustion post-COVID? And how much of it do you think might be related to maybe some consumer belt tightening or pushback versus the rates that the industry has been pushing?

Yes. We're certainly seeing the softening of leisure travel in our portfolio. I think the good news with our portfolio is we do have more relative exposure to urban hotels and hotels that are more focused on business travel. But I think our overall year-over-year RevPAR growth, especially in full service, would have been even higher if it wasn't for the hotels that was more focused on leisure. . I think it's a combination. I think it's a lot of the reasons that you pointed out. It is the revenge travel component that we saw in 2021 and 2022. I think just right now, people have less money to spend on discretionary travel. Interest rates are up. People are spending more on car payments and other things. I think we're also seeing it -- from what we're seeing at least and most of our hotels are domestic, but I think you're also seeing a lot more outbound international travel. I think the strength of the dollar is kind of leading to that as well. I think most travel restrictions have been lifted. So you're seeing more people travel to Europe for, in some cases, Asia rather than going to our hotels in Hilton Head or for Lauderdale or New Orleans or Scottsdale, for example. So I think it's a mix of revenge travel, the belt tightening as well as more outbound international travel.

Okay. And then shifting to your liquidity and your capital availability and the maturities. And I know you addressed this in your prepared comments. But when we think about your liquidity over $1 billion and then the recent purchase of the Nautilus for $165 million, and I think that there's a couple of air pockets maybe in some gateway or leisure markets where you might want to have a Nautilus type situation. How should we think about deploying some of that capital should we think about maybe another 1 or 2 of those type of assets, but not 4 or 5 in order to not want to stretch your liquidity position in front of next year, where is your head on that?

Sure. Yes, it's a good question and something we're certainly discussing here every day with -- we are looking at potential acquisitions, but we obviously have other uses of that cash, whether it's CapEx into the hotels or kind of these debt maturities that are coming up in 2024, 2025. And I think that Nautilus was a very unique opportunity in a market that we thought we were underexposed in a critical gateway market for a hotel company of our size to have something in. But we looked at -- we looked very hard at 10 to 15 hotels in different areas of Miami, most in South Beach, but also Brickell and Coral Gables and Coconut Grove. And there -- it's challenging to find an opportunity that kind of worked for SVC, given our cost of capital, given our yield hurdles. The Nautilus was something we think we could get in there, do a renovation, reposition that hotel and get an outsized yield, especially for that specific area of South Beach got in at -- we think is a very good basis. But Frankly, we're not seeing a lot of opportunities like that. We didn't see a lot of other opportunities like that in South Beach. We're also looking, like we've talked about before in Southern California, other destination type markets. And especially with the hotel recovery, I think a lot of -- we're not seeing a lot distressed sales. I think a lot of owners are looking at their portfolio and saying, we've made it through the worst of it. I don't want to sell something for $0.70 or $0.80 on the dollar, financing markets are tough. So it's -- we're being very aggressive in looking at opportunities. But we're not finding a lot of things that make sense. And we're not going to force it. Again, we have other needs for that capital. So back to your initial question, it's certainly not going to be 4 or 5, it's either -- it could very well be that the Nautilus is the only property acquisition SVC makes in 2023. So I think it's either 0 or 1 or 2 most likely.

Okay. And just last for me, on the net lease portfolio ex the TAs. Do you plan on doing continued selective pruning there? And specifically, as it relates to the movie theaters, I think you have 18 or so, $160 million investment, given that movies are in the press these days in a fairly big way, is there any bid on those types of assets at this time?

Sure. Yes. We haven't really necessarily been pruning that portfolio. I think we're more or less selling assets that may have become vacant or assets that we don't think we're going to have success releasing, which is common for these type of granular assets. A lot of times the best exit is going to be through disposition to a developer. For example, yes. So on the movie theater side, we've done 8 AMCs, we've done to 5 Regals and then for B&B and 1 Marcus theater. Yes. I mean movies are coming back. Box office revenues are getting back to 2019 levels. So I think the theaters that are doing well, and we have a number of those in our portfolio. I think you're starting to see those come back and those may be strong long-term holds for us. I don't think it's the right time to sell. I don't think you're going to get anything better than a on any movie theater today. Maybe it's in an excellent location, you could. But we haven't taken any to market, and we don't really plan to. But maybe in a couple of years, it will be the right time to dispose of some of those assets.

Our next question will come from Dori Kesten with Wells Fargo. .

On your reduced expectations for CapEx this year, can you walk through the reason for that? And if your expectation is the cost will be pushed to '24?

I'll take that one. Some of it's just timing. We had originally projected up to $250 million for the year. Some of the projects are the slower to get started, particularly with our Hyatt portfolio -- Hyatt Place portfolio. We're still in the planning phase, ordering [indiscernible], that sort of thing, but the renovations will kick in later this year. So some of it is just going to be a spillover to 2024, but it's not -- we haven't really changed our plan as far as the number of hotels we plan to deploy capital into. It's just a matter of timing at this point.

Okay. And then I guess, based on internal expectations for '24 taxable income versus 23%, would you expect to need to increase your quarterly dividend?

That's a good question. I don't believe we would be force to under REIT rules and have any sort of required distribution at SVC, and I'm sure a lot of other lodging REITs have built up some NOLs from what we've seen in the last few years that we could offset taxable income on -- so my short answer is no. But the dividend today is very well covered. It's something we talk about all the time. And if we continue to see improvement in the hotel portfolio, that's a conversation we get as far as whether or not we move the dividend.

Okay. Where are your NOLs today?

We have various NOLs at the hotel/taxable REIT subsidiary level as well as the corporate level, call it, around $500 million today.

Okay. And then any key takeaways from your first few months partnering with BP? And do you have a sense of how much capital they'll be investing in these assets over the next few years? .

Yes. I mean I think at this point, BP is really just like any other tenant. It's no longer sort of a related party connection as we had in the prior periods with -- you're having a share of PA and being an affiliate of RMR. Beyond what their public statements were when they announced the deal, we don't really have much of visibility into what they've deployed to date, but they did say they're going to invest upwards of $200 million per year in this portfolio as they have various initiatives. They're looking to do whether it be for ESG purposes and others.

[Operator Instructions]. Our next question will come from Tyler Batory with Oppenheimer.

First question for me. In terms of the Sonesta brand, can you talk a little bit about how it's resonating with consumers, how it's competing in the marketplace, what you're seeing in terms of RevPAR index and any uptick in the loyalty program usage as well.

Sure. Yes, the Sonesta brand continues to make improvement I think it is different depending on the service level. If you look at our Royal Sonesta branded hotels, if you look at our Simply Suites Hotel, which is Total, which is a mid-scale extended-stay brand, that's launched during the pandemic. Both of those are competing at the high end with their peers -- with those brands. The select service hotels to the Sonesta Select. We've talked about this on previous calls, that continues to be the area where they're lagging the competition the most. . Those are the hotels that are very reliant on that midweek business traveler. But like you point out, Tyler, that those hotels are also very dependent on more than any other service level in terms of rewards points and guests using rewards points to travel to those hotels. So we're seeing the right signs in the right trend business, it is gradual but they are -- the loyalty program revenues through the Travel Pass continues to increase. It went up from 19.8% to close to 22% year-over-year. But if you look at some of the brands that are leaders in that space, some of them are as close as 50%. So there's still a lot of room to go there. But Sonesta continues to -- we continue to see results from their advertising and brand awareness campaigns. We continue to see more traffic coming in through brand.com. We think there the hotels that they own in New York, the new hotel that we just purchased in Miami will only lead to more kind of brand recognition for Sonesta. So still a lot of room to go, but they're heading in the right direction.

Okay. How about on EBITDA margin for the hotel portfolio? I mean I think the guidance implies low 20s for Q3. You called out some of the items impacting that. Just kind of based on seasonality and based on the timing of some of those items, I mean, is it reasonable to expect margin to decelerate in Q4 versus Q3? And then also remind us where EBITDA margin roughly was for this portfolio on a comparable basis pre-COVID.

Sure, Tyler. I'll take that one. It is reasonable to expect the fourth quarter will soften and margins will decline. The fourth quarter starts off pretty strong October through mid-November and then you see the seasonal drop off as we get into the holiday season. So we do expect bottom line hotel EBITDA margins, call it, the high teens at this point for Q4, which for the average for the year, will put us in that high teens, low 20 range. As far as the portfolio pre-COVID, we were sort of in that mid-20s -- high 20% range.

Okay. A couple of follow-ups on the capital allocation topic and you're talking about acquisitions on the hotel side of things. Todd, what are you seeing in terms of net lease transactions? Is that something that might makes sense. Is there anything interesting out there maybe from a portfolio perspective that you could look to grow your net lease exposure?

Sure. Yes. We continue to -- yes, I know we focused on the hotels and the previous question from Brian. But we're looking just as hard as net use acquisitions as well. I think we're seeing a similar challenge in terms of finding a yield that really makes sense for SVC. I mean there's some assets, some portfolios out there that could work, given our cost of capital. But frankly, they're just not the quality, both from a real estate and tenant quality that we're looking for. We are starting to see cap rates continue to move out slowly. So there could be some opportunities out there. But just like on the hotel side, we don't feel the need to force it. But we continue to look at net lease properties. And eventually, we're going to be back in a period where we're going to be more acquisitive, and we want to grow that portfolio long term. So we just don't know if right now is the right time to do it.

Okay. And then last question for me. In terms of options on the table for the 2024, where are market rates right now secured or unsecured debt? And if you did utilize the travel center assets, what sort of pricing improvement could you see versus the transaction you get earlier this year?

Sure. It's a great question. It's top of mind for us as we look to take out those maturities in the coming quarters. If you look at where our public bonds are trading today, be in the 9% to 10% range, which is obviously very expensive debt. We did the ABS that lease transaction in Q1 at an effective debt yield of right at 7%. If we want to utilize TA assets, would probably be in that ballpark. We look prove to BP's credit on those net leases, it's going to give us a lot of flexibility and value to be able to raise money utilizing those assets that we chose -- if we choose to go down that path. So we think there's easily 200-plus basis points difference between the public bonds and what we could do in the secured markets and really just comes down to what exactly we put together for the package if we're going to do a secured financing.

This concludes our question-and-answer session. I'd like to turn the call back over to Todd Hargreaves for any closing remarks.

Thank you, everyone, for joining today's call. We appreciate your continued interest in SVC.

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