Service Properties Trust (NASDAQ:SVC) reported stronger third-quarter hotel performance and positive rolling four-quarter cash available for distribution, while its board rejected an unsolicited $2 billion proposal for its hotel portfolio.
President and Chief Executive Officer Chris Bilotto said the company’s trustees, including all independent trustees, unanimously rejected the nonbinding proposal from TKO LLC because they believed it significantly undervalued the hotels. The company plans to continue reducing debt, improving hotel margins and gradually shifting its portfolio toward service-focused retail net lease properties.
Normalized funds from operations, or FFO, rose 29.3% from a year earlier to $43.8 million, or $0.34 per share. Adjusted EBITDAre was $133.5 million. Bilotto said both figures exceeded consensus estimates.
Chief Financial Officer and Treasurer Brian Donley said lower interest expense contributed to the FFO increase, partly offset by lower hotel EBITDA resulting from property sales. He cautioned that per-share comparisons with prior periods are not directly comparable because of an equity issuance earlier this year. The company also completed a one-for-five reverse share split in July.
Hotel Growth and Disposition Plans
At the company’s 77 retained hotels, revenue per available room, or RevPAR, rose 8.3% year over year to $128.38. Occupancy increased by 330 basis points, while average daily rates rose 3.4%.
Adjusted hotel EBITDA for those properties rose 16.2% to $41.1 million, and the corresponding margin expanded by 130 basis points to 15.4%. Bilotto attributed the margin improvement in part to labor efficiency and lower customer acquisition costs, offset by higher sales, marketing and utility expenses.
Renovation disruption at the James Nautilus in Miami Beach reduced third-quarter revenue by $4.1 million and hotel EBITDA by $1.8 million, Bilotto said. The hotel’s phased reopening is now concentrated later in the fourth quarter than previously anticipated.
Including a hotel sold in January, Service Properties Trust has sold 15 hotels this year for $123.8 million. The properties generated approximately $10.3 million of hotel EBITDA losses through September, before capital expenditures they would have required, Bilotto said. Since January 2024, the company has sold 142 hotels for approximately $1.1 billion.
The company has signed letters of intent to sell its two remaining exit hotels, and its guidance assumes both are owned through year-end. Bilotto said the sales would probably occur in the first part of 2027, but declined to predict whether additional hotel sales would follow over the next 12 to 24 months.
Margin Initiatives and Updated Outlook
Bilotto outlined a plan that management believes could generate approximately $96 million of potential operating upside at retained hotels over the next 12 to 24 months. He said incremental RevPAR growth based on CBRE’s industry forecast could add roughly $13 million, bringing the potential increase to about $109 million and the retained hotel EBITDA margin to approximately 20%.
The plan includes potential gains of $35 million from renovation lifts and recovery from disruption, $38 million from lower customer acquisition costs, $16 million from changes in revenue mix and $7 million from operating synergies. Bilotto said timing will depend partly on market conditions. He described the acquisition-cost initiative primarily as a strategy shift rather than a major new capital expense.
Service Properties Trust raised its RevPAR outlook for retained and exit hotels but lowered the high end of its total hotel EBITDA range. Management cited the delayed James Nautilus reopening and weaker-than-expected performance at exit hotels, including disruption associated with their sale process.
The updated full-year outlook includes:
- Adjusted hotel EBITDA: $124 million to $134 million for the 87 hotels owned at quarter-end, including projected losses from exit hotels.
- Net lease net operating income: $373 million to $379 million.
- Adjusted EBITDAre: $489 million to $498 million.
- Normalized FFO: $113 million to $128 million, or $1.07 to $1.22 per share.
- Capital expenditures: $115 million to $125 million, a reduction of $10 million at the midpoint.
Donley said the lower net lease NOI outlook reflected, among other factors, a slower pace of acquisitions, credit reserves and operating costs for vacant properties.
Net Lease Portfolio and Liquidity
Vice President Jesse Abair said net lease cash-basis NOI was $93.8 million in the quarter, up slightly from the prior quarter. Portfolio occupancy was 97%, and trailing 12-month aggregate rent coverage improved to 2.17 times.
TravelCenters of America accounted for nearly two-thirds of net lease revenue, with its leases backed by a corporate guarantee from parent BP, Abair said. Rent coverage at the travel centers improved to 1.44 times, marking a third consecutive quarterly increase.
The company reported more than $760 million of liquidity, including full availability under its $650 million revolving credit facility, which matures in June 2027. Donley said Service Properties Trust is discussing a potential extension or refinancing with lenders and expects an agreement by year-end.
Cash available for distribution was $32.1 million in the third quarter. Donley said the rolling four-quarter measure had turned positive and that management remained confident it would be positive for full-year 2026.
About Service Properties Trust (NASDAQ:SVC)
Service Properties Trust (NASDAQ:SVC) is a real estate investment trust that owns and invests in hospitality and service-oriented properties. The company’s portfolio has historically included hotels, extended-stay lodging properties and other real estate leased to businesses that provide essential or consumer-focused services.
Service Properties Trust generally leases its properties to hotel operators and other commercial tenants rather than managing most locations directly. Its hotel portfolio has included properties operated under a variety of well-known brands, while its service-focused properties have supported businesses such as healthcare, automotive and travel-related services.
The company’s properties are primarily located in the United States, with investments also having included select locations in Canada and Puerto Rico.
