Normal seasonality patterns have returned to Service Properties Trust’s hotel portfolio, and strong group business demand bolstered the company's full-service hotels.
However, the company's select-service hotels felt the pinch of ongoing renovations and the effects of softening transient travel, said President and Chief Investment Officer Todd Hargreaves on the company's first-quarter earnings call.
Hotel Performance
Comparable revenue per available room declined 3.5% year over year to $77.35 during the quarter, according to the company’s earnings release. When excluding the REIT’s 23 hotels undergoing active renovations, average daily rate dipped 0.7% and occupancy fell 0.2%, resulting in a RevPAR decrease of 1.1%, he said. The renovation of these hotels, which includes its Hyatt Place portfolio, Sonesta Hilton Head and others, resulted in about $3.9 billion in displacement during the quarter.
Cost pressures resulted in hotel earnings before interest, taxes, depreciation and amortization margin to drop 290 basis points compared to the previous quarter, he said.
Service Properties Trust’s full-service hotels were its top-performing segment during the quarter, gaining 80 basis points in RevPAR over the previous quarter thanks to increase in group and contract sales, Hargreaves said. Group performance in full-service hotels was led by the Royal Sonesta hotels in San Juan, Puerto Rico; San Francisco; and Kauai, Hawaii. The increase in contract revenue came from Sonesta hotels in Redondo Beach, California, and Denver.
The REIT also saw food-and-beverage revenue gains across its full-service hotels as well as its Royal Sonesta hotels in St. Louis, Missouri, and Kauai, he said.
The portfolio of select-service hotels continued to see the most disruption as 18 of its 61 hotels were under renovation, Hargreaves said. Seventeen of those started renovations in 2023. Overall, the select-service portfolio saw RevPAR drop 13.2% because of these disruptions. Hotels in the Phoenix area also faced challenging comparisons due to the city hosting the Super Bowl in 2023.
The extended-stay portfolio saw a 4.6% decrease in RevPAR in the quarter, consistent with the trend experienced in previous quarters, he said.
“Our longer-term extended-stay occupancy stays of seven-plus nights has been declining due to a loss of non-repeat project base room nights,” he said. “While Sonesta successfully pivoted to shorter-term stays at these hotels to fill occupancy, the increased room nights were not enough to offset the reduced rates.”
Group pace is up $15 million and 12.3% over the same time last year due to increases in room nights and ADR in both the Sonesta and Radisson portfolios, Hargreaves said. The most notable gains were related to corporate group demand at the Royal Sonesta Cambridge as well as its Sonesta hotels in Chicago where the Democratic National Convention will be held in August.
Portfolio Management
Transaction activity during the quarter was limited to three net lease dispositions and one hotel disposition; the Country Inn and Suites in suburban Minneapolis sold for $6.2 million. The REIT continues to market 22 Sonesta hotels with a book value of $160 million.
“The sales process is well underway,” he said, adding the company is negotiating terms with potential buyers.
The REIT invested $69 million of total capital improvements into its properties during the quarter, said Brian Donley, treasurer and chief financial officer. The company expects its full-year capital expenditures will range between $300 million and $325 million, up from previous guidance of $250 million to $275 million.
Service Properties Trust expects maintenance-type capital for the year to amount to $100 million, he said.
“To date, we've completed renovations at nine Sonesta hotels, and we're pleased with the post-renovation returns we’re seeing thus far.”
The company expects 22 hotels of all service levels will be under renovation during the second quarter, Donley said. It also projects the completion of major renovations at 33 hotels during the calendar year. That breaks down to five full-service hotels, 18 select-service hotels and 10 extended-stay hotels.
As of press time, Service Properties Trust's stock price was trading at $5.68, down 33.5% year to date. The Nasdaq Composite Index is up 8.6% for the same period.