Hotel and net-lease retail focused real estate investment trust Service Properties Trust continues to be a net seller for its hotel portfolio, announcing deals to sell 16 hotels for a combined $113.2 million after closing on the sale of two hotels in July for a combined $10.8 million.
During Service Properties' second-quarter earnings call, President and Chief Investment Officer Todd Hargreaves said the latest deals are a continuation of the company's ongoing sell-down of lower-performing properties with high capital improvement needs. He added there are four more properties Service Properties hopes to sell en route to a high overall quality for its hotel portfolio.
"Most of the hotels we're selling are negative [earnings] producing hotels," he said. "They're toward the lower end of hotel quality and market, I would say, in our portfolio."
Roughly 95% of the properties in the company's ongoing sell-off have been in the select-service and extended-stay segments as the REIT looks to shift its mix to focus on higher-quality, leisure driven properties that work well with Sonesta Hotels International brands, he said. Service Properties owns a third of Sonesta.
"We're not selling any of the Royal Sonesta-branded hotels," Hargreaves said. "We're trying to shift the mix more away from business, more towards leisure-oriented hotels that Sonesta has proven the ability to compete or outperform the market with."
The sell-off of lower-performing hotels will be augmented with higher capital-expenditure spending at the company's remaining 202 hotels.
Potential return on investment from CapEx is one of the top factors the company looks at when deciding what hotels to sell, Hargreaves said. He added more hotels could be put on the block next year based on how properties perform now and then.
Asked who the active sellers are in the market now, Hargreaves said for the properties the company is selling, buyers are looking at deals on a "stabilized return on cost basis."
"Right now, we're selling what we think we can get done," Hargreaves said. "That comes into the equation, as well."
Second-Quarter Results
Service Properties' hotels saw a marginal drop in revenue per available room year over year, falling 0.2% to $96.91. Executives attributed that drop to a 1.1% drop in average daily rate. The company saw an uptick in demand, though, with a 0.6-percentage-point increase in occupancy to 68.3%.
Hargreaves said the company's hotel portfolio was negatively affected by renovations. Service Properties spent $66.5 million in capital expenditures in the second quarter after spending $68.9 million in the first.
The REIT recorded $512.9 million in total revenues for the quarter, with $412.5 million of that attributed to hotels. The company posted a net loss of $73.9 million on the quarter with adjusted earnings before interest, taxes, depreciation and amortization for real estate of $171.5 million.
As of publication time, Service Properties' stock was trading at $4.83, a 43.4% year to date drop. The Nasdaq Composite was up 9.6% for the same period.