With both room rates and revenue per available room nearing pre-pandemic levels, Service Properties Trust’s hotel portfolio is closing in on a full recovery.
Speaking during the real estate investment trust’s first quarter earnings call, Service Properties President and Chief Investment Officer Todd Hargreaves said the company’s hotels saw sequential monthly improvement during the quarter. Comparable RevPAR grew from 63% of 2019 levels in January to 74% in March. Preliminary April RevPAR of $83 is roughly 82% of April 2019 levels.
Average daily rate for the entire portfolio has improved, increasing from 83% of 2019 levels in January to 95% in April. The company’s full-service hotel portfolio has also returned to 95% of first quarter 2019 levels as well. The two properties with the highest ADR compared to 2019 were the Sonesta Resort Hilton Head Island, at 144%, and the Sonesta Miami Airport, at 135%.
Its hotels in other leisure and urban hotel markets, such as Fort Lauderdale, Florida; San Juan, California; Scottsdale, Arizona; and New Orleans, Louisiana, each outperformed first quarter 2019 ADR by more than 110%, Hargreaves said.
The hotels have seen considerable occupancy increases at some of its full-service urban hotels as well, Hargreaves said. The Royal Sonesta in Toronto saw occupancy jump from 26% in January to 76% in April. The Royal Sonesta Austin grew occupancy from 35% in January to 82% in April.
The recovery of Service Properties’ suburban select-service and urban full-service hotels, which have historically generated approximately 75% to 80% of its revenues from business travelers and meetings, continue to lag its airport and resort locations, Hargreaves said.
“But that gap should continue to close as more workplaces reopen and employees return to the office,” he said.
While its group pace is trailing behind 2019, it's above 2021 levels for both room nights and revenue, specifically at its Sonesta-branded hotels, Hargreaves said.
“Sonesta is beginning to realize the benefits of its larger scale and increased national footprint to compete for more corporate business,” he said.
While the brand has key markets to further trade in to maximize its reach, most notably Miami and Los Angeles, Hargreaves said Sonesta has established a major presence in New York City with the purchase of four hotels totaling 918 rooms: the Benjamin Royal Sonesta New York, the Shelburne Sonesta New York, the Gardens Sonesta ES Suites New York and the Fifty Sonesta Select New York.
As part of the deal, Sonesta also acquired the intellectual property of lifestyle brand James Hotels, a brand Sonesta plans to scale across its national portfolio, he said.
Portfolio Management
Service Properties has closed on 22 hotels out of the 68 Sonesta-branded hotels it has intended to sell for a total of $238 million, Hargreaves said. That breaks down to five hotels sold during the quarter and another 16 sold between April 1 and May 4. It has 42 hotels under sale agreements for an aggregate price of $301 million.
The company continues to market four additional hotels for sale, one of which is under letter, he said. Pricing for the hotels remains in line with expectations executives outlined in the previous earnings call. The company expects to close on most of the sales over the remainder of the second quarter.
“While our initial timeline to sell these hotels has moved back as we work through negotiations, diligence and closing coordination with over 20 different buyers, our goal with these dispositions is to maximize value to SVC, which we believe we will accomplish through sales to this buyer mix of smaller portfolio,” he said.
Service Properties expects more than 70% of the hotels being sold will be encumbered by long-term Sonesta branding and distribution, he said. The sale of the other hotels will still benefit the REIT through its 34% ownership in Sonesta. The hotels will be rebranded or converted to alternative uses, such as workforce housing.
“This is an opportune time to be selling select-service and extended-stay hotels given investor demand in the market,” he said. “We're looking forward to optimizing the portfolio through the sale of many of our relative underperformers so that we can focus on what we view as our core strategic Sonesta-branded portfolio.”
By the Numbers
Service Properties reported a net loss of $119.8 million, an improvement from the net loss of $194.9 million the first quarter of 2021, according to the company’s earnings release. The REIT’s total revenue amounted to $393.7 million, up from $261.1 million a year ago.
The company’s earnings before interest, taxes, depreciation and amortization for real estate was $90.1 million, an increase from $48.7 million the previous year.
Service Properties spent $28.9 million on capital expenditures at certain hotels during the quarter. In April, the company funded a $25 million capital contribution to Sonesta related to its acquisition of the hotels in Manhattan.
As of May 3, the REIT had $916.1 million in cash and cash equivalents. It had negotiated with its lenders, amending an agreement governing its revolving credit facility to, among other things, extend its previous covenant waiver through Dec. 31, modify certain requirements now scheduled to resume in the third quarter, reduce the size of the facility to $800 million and allow for acquisitions of up to $300 million of real estate assets through the waiver period.
As of press time, Service Properties Trust stock was trading at $6.92, down 21.3% year to date. The NASDAQ Composite Index was down 21.3% for the same period.