The economy’s reopening and stabilization during the COVID-19 pandemic has led to steady revenue improvement for Service Properties Trust investments, including its hotel portfolio, President and CEO John Murray said.
During the hotel, travel center and retail-focused real estate investment trust’s second quarter earnings call, Murray said hotel earnings before interest, taxes, depreciation and amortization turned positive in April as it lapsed the disruption of rebranding more than 200 hotels in its portfolio to Sonesta.
Service Properties owns roughly one-third of the Sonesta brand, with the remaining stake held by The RMR Group, which externally manages Service Properties along with other REITs.
“Hotel fundamentals steadily improved each month from March through June despite headwinds created by industry-wide labor shortages and concerns over COVID variants,” he said.
Demand remains strongest at Service Propertes' leisure-oriented assets, such as its Sonesta hotels in Hilton Head, San Juan and Miami, where occupancy during the quarter surpassed 80%, Murray said. Summer travel has kept demand across the portfolio stronger on weekends than during the week, but there are signs of an early return to business travel.
“While the COVID-19 Delta variant presents the potential risks to recovery for business travel, we anticipate increased momentum after Labor Day when schools reopen in person, and more employees return to the office,” he said.
The company's 160 extended-stay hotels maintained double-digit premiums relative to the industry and compared to its non-extended-stay hotels, Murray said. The extended-stay hotels reported occupancy of 71.6% during the quarter, compared to 45.7% occupancy at the 93 select-service hotels and 46.4% at the 51 full-service hotels in the portfolio.
“Excluding the potential impacts of the Delta variant, we expect the second half of 2021 to show further progress toward recovery and stabilization,” Murray said.
Labor remains a challenge for the hotel industry as a whole and for Service Properties' portfolio, Murray said. Wage increases to attract and retain staff, expensive contract labor and lost revenue from out-of-order rooms that could not be cleaned have negatively affected results. However, cost per occupied room was 22% lower than it was in the second quarter of 2020 because of labor savings and relaxed brand standards.
Converted Hotels
Murray said he’s pleased with the performance of the hotels that Service Properties transitioned to Sonesta during the fourth quarter of 2020, including the 112 rebranded in December. RevPAR at the properties grew 58% to $55.67 during the second quarter, compared to $35.12 in the first quarter.
For the 88 hotels rebranded in February and March, RevPAR grew 83% to $61.64 in June, compared to $33.64 in March, he said.
“While hotel transitions are always disruptive, and it is difficult to build brand awareness during a pandemic, we believe the message of brand awareness is growing, and most of the transition disruption is behind them,” he said.
As hotel demand recovers and brand awareness has improved, Sonesta is realizing the benefits of its larger scale, he said. The increased portfolio size has allowed Sonesta to use cluster staffing in concentrated markets such as Atlanta, Dallas and Chicago to reduce labor costs. The brand company has also integrated systems to reduce technology expenses and lower per-transaction reservation costs through its own network and through online travel agencies.
The guarantee with Radisson Hotel Group to support Service Properties' minimal returns was exhausted during the second quarter, Murray said. Service Properties is negotiating with Radisson for a mutually agreeable path forward for some or all of the hotels under the brand and management agreement.
Asset Sales
Service Properties sold six hotels comprising 576 rooms for an aggregate price of $32 million during the second quarter, according to the company’s earnings release. The company is marketing 69 Sonesta-branded hotels across 27 states for sale — 46 extended-stay hotels with 5,404 keys, 19 select-service hotels with 2,461 keys and four full-service hotels with 1,098 keys.
The REIT has been working with brokers and plans to formally launch the offering processes in August, Todd Hargreaves, vice president and chief investment officer, said. The plan is to executive a majority of the sales by the end of the first quarter of 2022.
By the Numbers
Service Properties reported a net loss of $91.1 million during the second quarter compared to a net loss of $37.3 million in the second quarter of 2020, according to the earnings release.
Average occupancy for the REIT’s 283 comparable hotels was 57.9% during the second quarter while average daily rate reached $92.59, resulting in revenue per available room of $53.61.
Hotel operating revenue was $280.1 million during the quarter, up from $117.3 million in the second quarter of 2020. Hotel operating expenses grew from $46.9 million in the second quarter last year to $243.2 million in the second quarter this year.
Hotel EBITDA of comparable hotels reached $23.6 million, a 10.6% margin, during the second quarter.
As of press time, Service Properties' stock was trading at $11.91, up 8.3% year to date. The Nasdaq Composite Index was up 16.7% for the same time period.