Service Properties Trust: Form 10-Q for the period ended Sep 30, 2024

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2023 Annual Report.

Overview (dollars in thousands, except per share amounts and per room hotel data)

We are a REIT organized under the laws of the State of Maryland. As of September 30, 2024, we owned 959 properties in 46 states, the District of Columbia, Canada and Puerto Rico.

Consumer confidence, corporate travel and lodging demand will continue to be affected by economic and market conditions, inflationary pressures, including high interest rates, unemployment levels, work from home policies, use of technologies and broader economic trends. Increased labor costs and other price inflation may continue to negatively impact our hotel operations and the operations of our tenants. An economic recession or continued or intensified disruptions in the financial markets could adversely affect our financial condition, operations at our hotels, our tenants and their ability or willingness to renew our leases or pay rent to us, may restrict our ability to obtain new or replacement financing, would likely increase our cost of capital, and may cause the values of our properties to decline. We have also been implementing a significant renovation plan that has caused disruption at certain of our hotels.

On October 16, 2024, we announced our plan to sell 114 focused service hotels managed by Sonesta with an aggregate of 14,925 keys and a net carrying value of $850,000. We expect to sell these hotels in 2025 and use the net sales proceeds from these sales to repay debt. We expect that the sales of these hotels will result in savings of approximately $725,000 in capital expenditures, which was projected to be spent over a six year period. To further improve our liquidity beginning with the fourth quarter of 2024, we reduced our regular quarterly cash distribution on our common shares from $0.20 per common share to $0.01 per common share, which we expect to result in $127,000 of annual savings.

Management Agreements and Leases. At September 30, 2024, we owned 214 hotels operated under four agreements. We leased all of these hotels to our wholly owned TRSs that are managed by hotel operating companies as of that date. At September 30, 2024, we also owned 745 service-focused retail properties leased to 176 tenants subject to “triple net” leases, where the tenants are generally responsible for the payment of operating expenses and capital expenditures. Our condensed consolidated statements of comprehensive income (loss) include hotel operating revenues and hotel operating expenses of our managed hotels and rental income and net lease operating expenses from our net lease properties.

Hotel Portfolio. As of September 30, 2024, we owned 214 hotels. During the three and nine months ended September 30, 2024, the U.S. hotel industry generally realized increases in revenue per available room, or RevPAR, and average daily rate, or ADR, compared to the same periods in 2023. Our comparable hotels produced year over year declines in RevPAR, which we believe is partially a result of disruption and displacement at certain of our hotels undergoing renovation and decreased business activity in areas where some of our hotels are located. The following table provides a summary for all of our hotels with these revenue metrics for the periods presented, which we believe are key indicators of performance at our hotels.

Comparable Hotels Data. We present RevPAR, ADR and occupancy for the periods presented on a comparable basis to facilitate comparisons between periods. We define comparable hotels as those that were owned by us and were open and operating for the entirety of the periods being compared. For each of the three months ended September 30, 2024 and 2023, our comparable results exclude one hotel that suspended operations during the periods presented. For each of the nine months ended September 30, 2024 and 2023, our comparable results exclude two hotels. One of the hotels was not owned for the entirety of the periods presented and the other suspended operations during the periods presented. The following table provides a summary of these revenue metrics for the periods presented.

Net Lease Portfolio. As of September 30, 2024, we owned 745 service-focused retail net lease properties with an aggregate of 13,332,131 square feet leased to 176 tenants subject to “triple net” leases (where the tenants are responsible for payments of operating expenses and capital expenditures) requiring annual minimum rents of $380,034. Our net lease properties were 97.6% occupied as of September 30, 2024 with a weighted (by annual minimum rent) average lease term of 8.3 years, operating under 137 brands in 21 distinct industries. TA is our largest tenant and as of September 30, 2024, leased 175 of our travel centers under five master leases that expire in 2033 and require annual minimum rents of $259,080. In addition, TA receives an annual credit of $25,000 as a result of prepaid rent. BP Corporation North America Inc. guarantees payment under the TA leases, subject to a cap.

Additional details of our hotel operating agreements and our net lease agreements are set forth in Note 6 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Results of Operations (amounts in thousands, except per share data)

Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023

References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

Hotel operating revenues. The decrease in hotel operating revenues is primarily a result of our sale of certain hotels since July 1, 2023 ($2,982) and lower RevPAR at certain hotels during the 2024 period ($1,609). Additional operating statistics of our hotels are included in the tables beginning on page 36.

Rental income. The decrease in rental income is primarily a result of lower rental income recognized at certain of our net lease properties ($737) and the sale of certain net lease properties since July 1, 2023 ($326).

Hotel operating expenses. The increase in hotel operating expenses is primarily a result of increases in wages and benefits ($8,995) and other operating expenses in the 2024 period ($5,727), partially offset by our sales of certain hotels since July 1, 2023 ($3,939).

Net lease operating expenses. The decrease in net lease operating expenses is primarily the result of our sale of certain net lease properties since July 1, 2023 ($439), partially offset by increased operating expenses at certain net lease properties in the 2024 period ($428).

Depreciation and amortization - hotels. The decrease in depreciation and amortization - hotels is primarily a result of certain of our depreciable assets becoming fully depreciated since July 1, 2023 ($2,503) and our sale of certain hotels since July 1, 2023 ($1,102), partially offset by depreciation and amortization related to capital expenditures made since July 1, 2023 ($1,965).

Depreciation and amortization - net lease properties. The decrease in depreciation and amortization - net lease properties is primarily a result of certain of our depreciable assets becoming fully depreciated since July 1, 2023 ($3,611) and our sale of certain net lease properties since July 1, 2023 ($242).

General and administrative. The decrease in general and administrative costs is primarily due to a decrease in business management fees in the 2024 period ($876), partially offset by an increase in other professional fees ($499).

Transaction related costs. Transaction related costs for the 2023 period primarily consisted of costs related to hotel rebranding activity.

Loss on asset impairment, net. We recorded a $13,692 net loss on asset impairment during the 2024 period to reduce the carrying value of four hotels and two net lease properties to their estimated fair value or estimated fair value less costs to sell. We recorded a $512 net loss on asset impairment during the 2023 period to reduce the carrying value of three net lease properties to their estimated fair value less costs to sell.

Gain on sale of real estate, net. We recorded a $4,105 net gain on sale of real estate during the 2024 period in connection with the sale of six hotels and four net lease properties. We recorded a $123 net gain on sale of real estate during the 2023 period in connection with the sale of two net lease properties.

Interest income. The decrease in interest income is due to lower average cash balances invested during the 2024 period compared to the 2023 period.

Interest expense. The increase in interest expense is primarily due to higher weighted average interest rates during the 2024 period compared to the 2023 period.

Loss on early extinguishment of debt, net. We recorded a $133 loss on early extinguishment of debt, net in the 2024 period as a result of the redemption and purchase of certain senior notes in the 2024 period.

Income tax benefit. The decrease in income tax benefit is primarily due to decreases in state tax benefit ($1,723) and foreign tax benefit ($442) during the 2024 period due to changes in our annual tax provision.

Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of the earnings of Sonesta.

Net loss. Our net loss and net loss per common share (basic and diluted) each increased in the 2024 period compared to the 2023 period primarily due to the revenue and expense changes discussed above.

Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023

References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Hotel operating revenues. The increase in hotel operating revenues is primarily a result of a hotel acquisition in the 2023 period ($16,531), partially offset by lower RevPAR at certain of our hotels ($8,643) and our sale of certain hotels since January 1, 2023 ($2,880). Additional operating statistics of our hotels are included in the tables beginning on page 36.

Rental income. The increase in rental income is primarily a result of the amended TA leases that were effective starting in May 2023 ($8,107), partially offset by lower rental income recognized at certain net lease properties in the 2024 period ($1,825) and the sale of certain net lease properties since January 1, 2023 ($734).

Hotel operating expenses. The increase in hotel operating expenses is primarily a result of a hotel acquisition ($11,384) in the 2023 period and increases in wages and benefits ($15,441), property insurance ($4,706) and other operating expenses in the 2024 period ($4,274), partially offset by our sale of certain hotels since January 1, 2023 ($355).

Net lease operating expenses. The increase in net lease operating expenses is primarily the result of increased property management fees in the 2024 period ($1,737), partially offset by decreases in other operating expenses at certain net lease properties ($235) and our sale of certain net lease properties since January 1, 2023 ($109).

Depreciation and amortization - hotels. The increase in depreciation and amortization - hotels is primarily a result of depreciation and amortization related to capital expenditures made since January 1, 2023 and our acquisition of a hotel in June

2023 ($10,201), partially offset by certain of our depreciable assets becoming fully depreciated since January 1, 2023 ($7,076) and the sale of certain hotels since January 1, 2023 ($1,124).

Depreciation and amortization - net lease properties. The decrease in depreciation and amortization -net lease properties is primarily a result of our sale of certain net lease properties since January 1, 2023 ($7,090) and certain of our depreciable assets becoming fully depreciated since January 1, 2023 ($6,233).

General and administrative. The decrease in general and administrative costs in the 2024 period is primarily due to decreases in business management fees ($2,351) and other professional fees ($170).

Transaction related costs. Transaction related costs for the 2023 period primarily consisted of costs related to hotel rebranding activity, the demolition of certain vacant properties and potential acquisitions.

Loss on asset impairment, net. We recorded a $51,030 net loss on asset impairment during the 2024 period to reduce the carrying value of ten hotels and eight net lease properties to their estimated fair value or estimated fair value less costs to sell. We recorded a $9,517 net loss on asset impairment during the 2023 period to reduce the carrying value of 16 net lease properties to their estimated fair value less costs to sell.

Gain on sale of real estate, net. We recorded a $1,110 net gain on sale of real estate during the 2024 period in connection with the sale of seven hotels and seven net lease properties. We recorded a $41,959 net gain on sale of real estate during the 2023 period in connection with the sale of 18 hotels and four net lease properties.

Gain on equity securities, net. Gain on equity securities, net represents the adjustment to the carrying value of our former investment in shares of TA common stock to its fair value.

Interest income. The decrease in interest income is due to lower average cash balances invested during the 2024 period compared to the 2023 period.

Interest expense. The increase in interest expense is primarily due to higher weighted average interest rates during the 2024 period compared to the 2023 period.

Loss on early extinguishment of debt, net. We recorded a $16,181 loss on early extinguishment of debt, net in the 2024 period as a result of the redemption and purchase of certain senior notes in the 2024 period. We recorded a $282 loss on early extinguishment of debt, net in connection with our redemption of certain senior unsecured notes and the write off of certain deferred financing costs relating to the amendment of our revolving credit facility in the 2023 period.

Income tax (expense) benefit. The increase in income tax expense is primarily due to increases in our state income tax expense ($1,845) and foreign sourced income tax expense ($384) during the 2024 period.

Equity in losses of an investee. Equity in losses of an investee represents our proportionate share of the losses of Sonesta.

Net (loss) income. Our net (loss) income and net (loss) income per common share (basic and diluted) each decreased in the 2024 period compared to the 2023 period primarily due to the revenue and expense changes discussed above.

Liquidity and Capital Resources (dollars in thousands, except per share amounts)

Our Managers and Tenants

As of September 30, 2024, all 214 of our hotels were managed by four hotel operating companies. Our 745 service-focused retail net lease properties were leased to 176 tenants as of September 30, 2024. The costs of operating and maintaining our properties are generally paid by the hotel managers as agents for us or by our tenants for their own account. Our hotel managers and tenants derive their funding for property operating expenses and for returns and rents due to us generally from property operating revenues and, to the extent these parties themselves fund our owner’s priority returns and rents, from their separate resources. As of September 30, 2024, our hotel managers included Sonesta (189 hotels), Hyatt (17 hotels), Radisson (seven hotels) and IHG (one hotel). TA is our largest tenant (175 travel centers).

We recorded reserves for uncollectable amounts and reduced rental income by $515 and $1,557 for the three and nine months ended September 30, 2024, respectively, based on our assessment of the collectability of rents. We reduced reserves for uncollectible amounts and increased rental income by $1,041 for the three months ended September 30, 2023 and recorded reserves for uncollectable amounts and reduced rental income by $4,312 for the nine months ended September 30, 2023, based on our assessment of the collectability of rents. We had reserves for uncollectable rents of $4,872 and $3,436 as of September 30, 2024 and December 31, 2023, respectively, included in other assets, net in our condensed consolidated balance sheets.

We define net lease coverage as earnings before interest, taxes, depreciation, amortization and rent, or EBITDAR, divided by the annual minimum rent due to us weighted by the minimum rent of the property to total minimum rents of the net lease portfolio. Tenants with no minimum rent required under the lease are excluded. EBITDAR amounts used to determine rent coverage are generally for the latest twelve-month period, based on the most recent operating information, if any, furnished by our tenants. Operating statements furnished by our tenants often are unaudited and, in certain cases, may not have been prepared in accordance with GAAP and are not independently verified by us. In instances where we do not have tenant financial information, we calculate an implied coverage ratio for the period based on other tenants with available financial statements operating the same brand or within the same industry. As a result, we believe using this implied coverage metric provides a more reasonable estimated representation of recent operating results and the financial condition for those tenants. Our net lease properties generated coverage of 2.16x and 2.72x as of September 30, 2024 and 2023, respectively.

Our Operating Liquidity and Capital Resources

Our principal sources of funds to meet operating and capital expenses, debt service obligations and distributions to our shareholders are owner’s priority returns from our hotels, rents from our net lease portfolio and borrowings under our revolving credit facility. We receive owner’s priority returns and rents from our managers and tenants monthly. We may receive additional returns, percentage rents and our share of the operating profits of our managed hotels after payment of management fees and other deductions, if any, either monthly or quarterly, and these amounts are usually subject to annual reconciliations. We believe these sources of funds will be sufficient to meet our operating expenses and capital expenditures and pay debt service obligations and make distributions to our shareholders for the next twelve months and for the foreseeable future thereafter. However, as a result of economic conditions, including if the U.S. enters an economic recession, or otherwise, our managers and tenants may become unable or unwilling to pay owner’s priority returns and rents to us when due, and, as a result, our cash flows and net income would decline.

The following is a summary of our sources and uses of cash flows for the periods presented:

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The decrease in cash flow provided by operating activities in the 2024 period is primarily due to $188,000 of prepaid rent received from TA in the 2023 period, higher interest expense and lower hotel returns in the 2024 period. The change from cash flow provided by investing activities in the 2023 period to cash flow used in investing activities in the 2024 period is primarily due to proceeds from the sale of TA common shares and higher proceeds from the sale of real estate in the 2023 period and increased real estate improvements during the 2024 period. The increase in cash flow used in financing activities in the 2024 period is primarily due to higher net borrowings in the 2023 period.

We maintain our qualification for taxation as a REIT under the IRC by meeting certain requirements. We lease 214 hotels to our wholly owned TRSs that are managed by hotel operating companies. As a REIT, we do not expect to pay federal income taxes on the majority of our income; however, the income realized by our TRSs in excess of the rent they pay to us is subject to U.S. federal income tax at corporate income tax rates. In addition, the income we receive from our hotels in Canada and Puerto Rico is subject to taxes in those jurisdictions and we are subject to taxes in certain states where we have properties despite our qualification for taxation as a REIT.

Our Investment and Financing Liquidity and Capital Resources

Our hotel operating agreements generally provide that, if necessary, we may provide our managers with funding for capital improvements to our hotels in excess of amounts otherwise available in escrowed FF&E reserves or when no FF&E reserves are available. During the nine months ended September 30, 2024, we funded $208,820 for capital improvements in excess of FF&E reserves available to our hotels using cash on hand. We currently expect to fund $85,000 for capital improvements to certain hotels during the last three months of 2024 using cash on hand and borrowings under our revolving credit facility.

Various percentages of total sales at some of our hotels are escrowed as FF&E reserves to fund future capital improvements. We own all the FF&E escrows for our hotels. During the nine months ended September 30, 2024, certain of our hotel managers deposited $4,402 to these accounts and spent $4,609 from the FF&E reserve escrow accounts to renovate and refurbish our hotels. As of September 30, 2024, there was $5,475 on deposit in these escrow accounts, which was held directly by us and is reflected in our condensed consolidated balance sheets as restricted cash.

Our net lease portfolio leases do not require FF&E escrow deposits and tenants under these leases are generally required to maintain the leased properties, including structural and non-structural components. We may provide tenant improvement allowances to tenants in certain cases or may develop sites with the intent to lease them. During the nine months ended September 30, 2024, we funded $3,931 for capital improvements to our net lease properties. As of September 30, 2024, we had $1,889 of unspent leasing-related obligations related to certain of our net lease tenants.

During the nine months ended September 30, 2024, we sold seven hotels with an aggregate of 906 keys for an aggregate sales price of $48,215, excluding closing costs, and seven net lease properties with an aggregate of 86,937 square feet for an aggregate sales price of $6,532, excluding closing costs. From October 1, 2024 through November 4, 2024, we sold five hotels with an aggregate of 642 keys for an aggregate sales price of $32,200, excluding closing costs. As of November 4, 2024, we have entered into agreements to sell eight hotels with an aggregate of 985 keys for an aggregate sales price of $44,150, excluding closing costs, and one net lease property with 3,381 square feet for a sales price of $1,000, excluding closing costs. These pending sales are subject to conditions; accordingly, we cannot be sure that we will complete these sales, that these sales will not be delayed or that the terms will not change. We continue to market three hotels with an aggregate of 383 keys and nine net lease properties with an aggregate of 132,860 square feet for sale. We believe it is probable that the sales of these properties will be completed within one year. We expect to use the net sales proceeds from these sales for general business purposes.

In October 2024, we announced our plan to sell 114 focused service hotels managed by Sonesta, with an aggregate of 14,925 keys and an aggregate net carrying value of $850,000. We expect to sell these hotels in 2025 and use the net sales proceeds from these sales to repay debt. We expect that the sales of these hotels will result in savings of approximately $725,000 in capital expenditures, which was projected to be spent over a six year period. To further improve our liquidity beginning with the fourth quarter of 2024, we reduced our regular quarterly cash distribution on our common shares from $0.20 per common share to $0.01 per common share, which we expect to result in $127,000 of annual savings.

In March 2024, we made a $3,392 pro rata capital contribution to Sonesta to support its growth initiatives, including its franchising efforts, using cash on hand. We continue to maintain our 34% ownership in Sonesta after giving effect to this contribution.

During the nine months ended September 30, 2024, we declared and paid regular quarterly distributions to our common shareholders using cash on hand as follows:

On October 16, 2024, we declared a regular quarterly distribution to common shareholders of record as of October 28, 2024 of $0.01 per common share, or approximately $1,666. We expect to pay this distribution on or about November 14, 2024 using cash on hand.

In order to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a $650,000 secured revolving credit facility which is governed by a credit agreement. This revolving credit facility is available for general business purposes, including acquisitions. We can borrow, repay, and reborrow funds available under the revolving credit facility until maturity and no principal repayments are due until maturity. Availability of borrowings under our credit agreement is subject to ongoing minimum performance and market values of the collateral properties, satisfying certain financial covenants and other credit facility conditions. The maturity date of our revolving credit facility is June 29, 2027, and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to further extend the stated maturity date by two additional six-month periods.

Interest payable on drawings under our revolving credit facility is based on SOFR plus a margin ranging from 1.50% to 3.00% based on our leverage ratio, as defined in our credit agreement, which was 2.50% as of September 30, 2024. As collateral for all loans and other obligations under the facility, certain of our subsidiaries pledged all of their respective equity interests in certain of our direct and indirect property owning subsidiaries, and our pledged subsidiaries provided first mortgage liens on 70 properties, including 67 hotels and three net lease properties, with an aggregate undepreciated carrying value of $1,720,032 as of September 30, 2024. During the three months ended September 30, 2024, we sold two hotels that served as collateral under our revolving credit facility. In connection with the sales of these hotels, the hotels were released from the collateral pool in accordance with the terms of our revolving credit facility. We also pay unused commitment fees of 20 to 30 basis points per annum on the total amount of lending commitments under our revolving credit facility based on amounts outstanding. As of September 30, 2024 and 2023, the annual interest rate payable on borrowings under our revolving credit facility was 7.46% and 7.93%, respectively. We had no borrowings outstanding under our revolving credit facility as of September 30, 2024.

Availability under our revolving credit facility is partially based on the performance of the properties serving as collateral under the facility. Based on recent and near term expectations of performance of certain of the collateral properties, we and our lenders amended the credit facility in October 2024 to temporarily reduce the required collateral property debt yield from 12% to 8.5% from September 30, 2024 through December 31, 2024, and increase the required collateral property debt yield to 9.5% for the quarter ending March 31, 2025; 10% for the quarter ending June 30, 2025; 11% for the quarter ending September 30, 2025; and 12% for the quarter ending December 31, 2025 and thereafter. Subject to meeting these revised collateral property debt yield levels and meeting other conditions, we currently have full access to undrawn amounts under our revolving credit facility.

In June 2024, we issued $700,000 aggregate principal amount of the 2029 Notes and $500,000 aggregate principal amount of the 2032 Notes in underwritten public offerings. The aggregate net proceeds from these offerings were $1,162,077, after underwriting discounts and other offering expenses. These notes are fully and unconditionally guaranteed, on a joint and several basis and on a senior unsecured basis, by all of our subsidiaries, except for our foreign subsidiaries and certain other excluded subsidiaries. Such other excluded subsidiaries include, but are not limited to, subsidiaries whose equity has been pledged to secure borrowings under our credit agreement and our 8.625% senior secured notes due 2031 and subsidiaries whose assets secure our net lease mortgage notes. We used the net proceeds from the issuance of these notes and cash on hand to redeem all of our outstanding 7.50% senior unsecured notes due 2025 and purchase and satisfy and discharge all of our outstanding 4.50% senior unsecured notes due 2025.

Our debt maturities (other than our revolving credit facility) as of September 30, 2024 were as follows:

None of our senior note debt obligations require principal or sinking fund payments prior to their maturity dates. Our mortgage notes require monthly principal payments as described in Part I, Item 3 of this Quarterly Report on Form 10-Q.

We currently expect to use cash on hand, the cash flows from our operations, borrowings under our revolving credit facility, net proceeds from any asset sales and net proceeds of offerings of equity or the incurrence of debt to fund our operations, capital expenditures, investments, future debt maturities, distributions to our shareholders and other general business purposes.

When significant amounts are outstanding for an extended period of time under our revolving credit facility, or the maturities of our indebtedness approach, we currently expect to explore refinancing alternatives. Such alternatives may include incurring additional debt, issuing new equity securities and the sale of properties. We have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. We may also seek to participate in joint ventures or other arrangements that may provide us additional sources of financing. We may also assume mortgage debt on properties we may acquire or obtain mortgage financing on our existing properties.

While we believe we will generally have access to various types of financings, including debt or equity, to fund our future acquisitions and to pay our debts and other obligations, we cannot be sure that we will be able to complete any debt or equity offerings or other types of financings or that our cost of any future public or private financings will not increase.

Our ability to complete, and the costs associated with, future debt transactions depend primarily upon credit market conditions and our then perceived creditworthiness. We have no control over market conditions. Our credit ratings depend upon evaluations by credit rating agencies of our business practices and plans, including our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business activities in a manner which will afford us reasonable access to capital for investment and financing activities. However, as discussed elsewhere in this Quarterly Report on Form 10-Q, the impacts of the current, and possibly future, inflationary conditions, increasing or sustained high interest rates and a possible economic recession are uncertain and may have various negative consequences on us and our operations, including a decline in financing availability and increased costs for financing. Further, such conditions could also disrupt the capital markets generally and limit our access to financing from public sources or on favorable terms, particularly if the global financial markets experience significant disruptions.

Debt Covenants

Our debt obligations at September 30, 2024 consisted of $5,075,000 aggregate principal amounts of senior notes and $607,101 aggregate principal amounts of mortgage notes secured by 308 net lease retail properties. For further information regarding our indebtedness, see Note 8 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our publicly and privately issued senior notes are governed by our indentures and related supplements. These indentures and related supplements and our credit agreement contain covenants that generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, and require us to maintain various financial ratios. Our credit agreement, net lease mortgage notes, secured senior notes and unsecured senior notes, indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR ceasing to act as our business manager. As of September 30, 2024, we believe we were in compliance with all of the covenants under our indentures and their supplements, net lease mortgage notes and our credit agreement.

Senior Notes Indenture Covenants

The following table summarizes the results of the financial tests required by the indentures and related supplements for our senior secured and unsecured notes as of September 30, 2024:

As of September 30, 2024, adjusted total assets for covenant purposes as defined in our senior notes indentures were $10,584,590 and assets encumbered under our revolving credit facility, serving as collateral for our net lease mortgage notes or secured senior notes represented $3,517,899 of adjusted total assets, as defined in our senior notes indentures. Our unencumbered hotels, travel centers, other net lease properties and other corporate assets represent $4,445,611, $1,599,434, $844,808 and $176,838 of adjusted total assets, respectively.

The following table presents the calculation of adjusted total assets to total assets in accordance with GAAP:

Our ability to incur additional debt is subject to meeting the required covenant levels and subject to the provisions of our credit agreement and senior notes indentures.

Acceleration and Cross-Default

Our indentures and their supplements contain cross default provisions to any other debt of $50,000 or more. Similarly, our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $75,000 or more. Neither our indentures and their supplements nor our credit agreement contain provisions for acceleration which could be triggered by a change in our debt ratings.

Supplemental Guarantor Information

Our 5.50% senior notes due 2027, or the 2027 Notes, the 2029 Notes and the 2032 Notes are fully and unconditionally guaranteed, on a joint and several basis and on a senior unsecured basis, by all of our subsidiaries, except for certain excluded subsidiaries, including our foreign subsidiaries and our subsidiaries pledged under our credit agreement and our net lease mortgage notes. The notes and the guarantees will be effectively subordinated to all of our and the subsidiary guarantors’ secured indebtedness, respectively, to the extent of the value of the collateral securing such secured indebtedness, and will be structurally subordinated to all indebtedness and other liabilities and any preferred equity of any of our subsidiaries that do not guarantee the notes. Our remaining $2,425,000 of senior unsecured notes do not have the benefit of any guarantees.

A subsidiary guarantor’s guarantee of the 2027 Notes, the 2029 Notes and the 2032 Notes and all other obligations of such subsidiary guarantor under the indentures governing the notes will automatically terminate and such subsidiary guarantor will automatically be released from all of its obligations under such subsidiary guarantee and such indenture under certain circumstances, including on or after the date on which (a) the notes have received a rating equal to or higher than Baa2 (or the equivalent) by Moody’s Investor Services, or Moody’s, or BBB (or the equivalent) by Standard & Poor’s Ratings Services, or S&P, or if Moody’s or S&P ceases to rate the notes for reasons outside of our control, the equivalent investment grade rating from any other rating agency and (b) no default or event of default has occurred and is continuing under the indenture. Our non-guarantor subsidiaries are separate and distinct legal entities and will have no obligation, contingent or otherwise, to pay any amounts due on these notes or the guarantees, or to make any funds available therefor, whether by dividend, distribution, loan or other payments. The rights of holders of these notes to benefit from any of the assets of our non-guarantor subsidiaries are subject to the prior satisfaction of claims of those subsidiaries’ creditors and any preferred equity holders. As a result, these notes and the related guarantees will be effectively subordinated to all of our and the subsidiary guarantors’ secured indebtedness, respectively, to the extent of the value of the collateral securing such secured indebtedness, and will be structurally subordinated to all indebtedness and other liabilities of our subsidiaries that do not guarantee these notes, including guarantees of or pledges under other indebtedness of ours, payment obligations under lease agreements, trade payables and preferred equity.

The following table presents summarized financial information for us and the subsidiary guarantors, on a combined basis, after elimination of (i) intercompany transactions and balances among us and the subsidiary guarantors, and (ii) equity in earnings from, and any investments in, any of our non-guarantor subsidiaries:

(1) Real estate properties, net as of September 30, 2024 includes $155,782 of properties owned directly by us and not included in the assets of the subsidiary guarantors.

(2) Intercompany balances represent payables to non-guarantor subsidiaries.

Related Person Transactions

We have relationships and historical and continuing transactions with RMR, RMR Inc., TA and Sonesta and others related to them. For further information about these and other such relationships and related person transactions, see Notes 6, 10 and 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2023 Annual Report, our definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and our other filings with the Securities and Exchange Commission, or SEC. In addition, see the section captioned “Risk Factors” in our 2023 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions with related persons, including businesses to which RMR or its subsidiaries provide management services.

Critical Accounting Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include consolidation of VIEs, purchase price allocations, the determination of useful lives of fixed assets, classification of leases, and the assessment of the carrying values and impairment of real estate intangible assets and equity investments.

A discussion of our critical accounting estimates is included in our 2023 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2023.

Property and Operating Statistics (dollars in thousands, except hotel statistics)

As of September 30, 2024, we owned and managed a diverse portfolio of hotels and net lease properties across the United States and in Puerto Rico and Canada with 146 distinct brands across 22 industries.

Hotel Portfolio

The following tables summarize the operating statistics, including occupancy, ADR, and RevPAR reported to us by our hotel managers by hotel brand for the periods indicated. All operating data presented are based upon the operating results provided by our hotel managers for the indicated periods. We have not independently verified our managers’ operating data.

* We define comparable hotels as those that were owned by us and were open and operating for the entirety of the periods being compared. For each of the three months ended September 30, 2024 and 2023, our comparable results exclude one hotel that suspended operations during the periods presented. For each of the nine months ended September 30, 2024 and 2023, our comparable results exclude two hotels. One of the hotels was not owned for the entirety of the periods presented and the other suspended operations during the periods presented.

* Includes results of all hotels owned as of September 30, 2024. Excludes the results of hotels sold during the periods presented and includes data for one hotel for periods prior to when we acquired it.

Net Lease Portfolio

As of September 30, 2024, our net lease properties were 97.6% occupied and we had 18 properties available for lease. During the nine months ended September 30, 2024, we entered into lease renewals for 453,030 rentable square feet (44 properties) at weighted (by rentable square feet) average rents that were 5.2% below the prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 5.4 years. We also entered into new leases for 109,591 rentable square feet (four properties) at weighted (by rentable square feet) average rents that were 13.5% below the prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 18.4 years.

Generally, lease agreements with our net lease tenants require payment of minimum rent to us. Certain of these minimum rent payment amounts are secured by full or limited guarantees. Annualized minimum rent as used herein represents cash amounts and excludes adjustments, if any, necessary to record scheduled rent changes on a straight line basis or any expense reimbursement. Annualized minimum rent also excludes the impact of rents prepaid by TA.

As of September 30, 2024, our net lease tenants operated across 137 brands. The following table identifies the top ten brands based on annualized minimum rent:

(1) Represents the historical cost of our properties plus capital improvements funded by us less impairment write-downs, if any.

(2) See page 30 for our definition of coverage.

(3) Rent coverage information provided by tenant is for all 175 sites on a consolidated basis and is as of September 30, 2024.

(4) Consists of 127 distinct brands with an average investment of $3,034 per property and average annual minimum rent of $201 per property.

As of September 30, 2024, our top ten net lease tenants based on our annualized minimum rent are listed below:

(1) Represents the historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any.

(2) See page 30 for our definition of coverage.

(3) TA is our largest tenant. As of September 30, 2024, we leased 175 travel centers (131 under the TravelCenters of America brand and 44 under the Petro Stopping Centers brand) to a subsidiary of TA under five master leases that expire in 2033. TA has five renewal options for 10 years each for all of the travel centers under each lease. BP Corporation North America Inc. guarantees payments under each of the five master leases. The aggregate guaranty as of September 30, 2024 was approximately $3,037,475. Annualized minimum rent excludes the impact of rents prepaid by TA. Rent coverage was 1.48x, 1.49x, 1.54x, 1.60x and 1.25x for our TA leases no. 1, no. 2, no. 3, no. 4 and no. 5, respectively. Rent coverage is as of September 30, 2024.

(4) Consists of 166 tenants with an average investment of $2,742 and an average annual minimum rent of $180 per property.

As of September 30, 2024, our net lease tenants operated across 21 distinct industries within the service-focused retail sector of the U.S. economy.

(1) Represents the historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any.

(2) See page 30 for our definition of coverage.

(3) Rent coverage for TA is as of September 30, 2024.

(4) Consists of miscellaneous businesses with an average investment of $5,449 per property.

As of September 30, 2024, lease expirations at our net lease properties by year are as follows:

(1) The year of lease expiration is pursuant to contract terms.

As of September 30, 2024, shown below is the list of our top ten states where our net lease properties are located. No other state represents more than 3% of our net lease annualized minimum rents.

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Non-GAAP Financial Measures

We present certain “non-GAAP financial measures” within the meaning of the applicable SEC rules, including funds from operations, or FFO, and normalized funds from operations, or Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) as presented in our condensed consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss). We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs.

Funds From Operations and Normalized Funds From Operations

We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss), calculated in accordance with GAAP, excluding any gain or loss on sale of real estate and loss on impairment of real estate assets, if any, plus real estate depreciation and amortization, less any gains on equity securities, as well as adjustments to reflect our share of FFO attributable to an investee and certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the items shown below. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to satisfy our REIT distribution requirements, the availability to us of debt and equity capital, our distribution rate as a percentage of the trading price of our common shares, or dividend yield, and to the dividend yield of other REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do.

Our calculations of FFO and Normalized FFO for the three and nine months ended September 30, 2024 and 2023 and reconciliations of net income (loss), the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, to those amounts appear in the following table (amounts in thousands, except per share amounts):

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We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed since December 31, 2023. Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.

Fixed Rate Debt

At September 30, 2024, our outstanding fixed rate debt consisted of the following:

No principal repayments are due under our unsecured or secured senior notes until maturity. Our net lease mortgage notes require principal and interest payments through maturity pursuant to amortization schedules. Because these notes require interest at fixed rates, changes in market interest rates during the term of these debts will not affect our interest obligations. If these notes were refinanced at interest rates which are one percentage point higher than the rates shown above, our per annum interest cost would increase by approximately $56,821. Changes in market interest rates would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt while decreases in market interest rates increase the fair value of our fixed rate debt. In response to significant and prolonged increases in inflation, the U.S. Federal Reserve has raised interest rates multiple times since the beginning of 2022. Although the U.S. Federal Reserve has recently lowered interest rates and indicated that it may further lower interest rates in 2024, we cannot be sure that it will do so, and interest rates may remain at the current levels or increase. Based on the balances outstanding at September 30, 2024 and discounted cash flows analyses through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate one percentage point change in interest rates would change the fair value of those debt obligations by approximately $199,831.

Our fixed rate debt arrangements may allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the noteholder. Also, we have in the past repurchased and retired some of our outstanding debts and we may do so again in the future. These prepayment rights and our ability to repurchase and retire outstanding debt may afford us opportunities to mitigate the risks of refinancing our debts at their maturities at higher rates by refinancing prior to maturity.

Floating Rate Debt

At September 30, 2024, we had no amounts outstanding under our revolving credit facility. The maturity date of our revolving credit facility is June 29, 2027, and, subject to our meeting certain conditions, including our payment of an extension fee, we have an option to extend the stated maturity date of the facility by two six-month periods. No principal repayments are required under our revolving credit facility prior to maturity and repayments may be made and redrawn subject to conditions at any time without penalty.

Borrowings under our revolving credit facility are in U.S. dollars and require interest to be paid at a rate of SOFR plus premiums. Accordingly, we are vulnerable to changes in U.S. dollar based short term interest rates, specifically SOFR. In addition, upon renewal or refinancing of our revolving credit facility, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. Generally, a change in interest rates would not affect the value of this floating rate debt but would affect our operating results.

The following table presents the impact a one percentage point increase in interest rates would have on our annual floating rate interest expense at September 30, 2024 if we were fully drawn on our revolving credit facility:

(1) Based on SOFR plus a premium, which was 250 basis points per annum, at September 30, 2024.

(2) Based on diluted weighted average common shares outstanding for the nine months ended September 30, 2024.

The foregoing table shows the impact of an immediate change in floating interest rates as of September 30, 2024. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amounts under our revolving credit facility or other floating rate debt, if any. Although we have no present plans to do so, we may in the future enter into hedge arrangements from time to time to mitigate our exposure to changes in interest rates.

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our President and Chief Investment Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Managing Trustees, our President and Chief Investment Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Warning Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws that are subject to risks and uncertainties. These statements may include words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions. These forward-looking statements include, among others, statements about: economic and market conditions and their potential impacts on us, our hotel managers and our tenants; expectations regarding demand for corporate travel and lodging; the sufficiency of our liquidity; our liquidity needs, sources and expected uses; our capital expenditure plans and commitments; our property dispositions and expected use of proceeds; and the amount and timing of future distributions.

Forward-looking statements reflect our current expectations, are based on judgments and assumptions, are inherently uncertain and are subject to risks, uncertainties and other factors, which could cause our actual results, performance or achievements to differ materially from expected future results, performance or achievements expressed or implied in those forward-looking statements. Some of the risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:

• The ability of Sonesta to successfully operate the hotels it manages for us,
• Our ability and the ability of our managers and tenants to operate under unfavorable market and commercial real estate industry conditions due to, among other things, high interest rates, prolonged high inflation, labor market challenges, supply chain disruptions, volatility in the public equity and debt markets, pandemics, geopolitical instability and tensions, economic downturns or a possible recession or changes in real estate utilization,
• If and when business transient hotel business will return to historical levels and whether any improved hotel industry conditions will continue, increase or be sustained,
• Whether and the extent to which our managers and tenants will pay the contractual amounts of returns, rents or other obligations due to us,
• Competition within the commercial real estate, hotel, transportation and travel center and other industries in which our managers and tenants operate, particularly in those markets in which our properties are located,
• Our ability to sell properties at prices we target,
• Our ability to repay or refinance our debts as they mature or otherwise become due,
• Our ability to maintain sufficient liquidity, including the availability of borrowings under our revolving credit facility,
• Our ability to pay interest on and principal of our debt,
• Our ability to make cost-effective improvements to our properties that enhance their appeal to hotel guests and net lease tenants,
• Our ability to pay distributions to our shareholders and to increase or sustain the amount of such distributions,
• Our ability to acquire properties that realize our targeted returns,
• Our ability to raise or appropriately balance the use of debt or equity capital,
• Potential defaults under our management agreements and leases by our managers and tenants,
• Our ability to increase hotel room rates and rents at our net leased properties as our leases expire in excess of our operating expenses and to grow our business,
• Our ability to increase and maintain hotel room and net lease property occupancy at our properties,
• Our ability to engage and retain qualified managers and tenants for our hotels and net lease properties on satisfactory terms,
• Our ability to diversify our sources of rents and returns that improve the security of our cash flows,
• Our credit ratings,
• The ability of our manager, RMR, to successfully manage us,
• Actual and potential conflicts of interest with our related parties, including our Managing Trustees, Sonesta, RMR and others affiliated with them,
• Our ability to realize benefits from the scale, geographic diversity, strategic locations and variety of service levels of our hotels,
• Limitations imposed by, and our ability to satisfy, complex rules to maintain our qualification for taxation as a REIT for U.S. federal income tax purposes,
• Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters,
• Acts of terrorism, outbreaks of pandemics or other public health safety events or conditions, war or other hostilities, global climate change or other man-made or natural disasters beyond our control, and
• Other matters.

These risks, uncertainties and other factors are not exhaustive and should be read in conjunction with other cautionary statements that are included in our periodic filings. The information contained elsewhere in this Quarterly Report on Form 10-Q or in our other filings with the SEC, including under the caption “Risk Factors”, or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our filings with the SEC are available on the SEC’s website at www.sec.gov (http://www.sec.gov).

You should not place undue reliance upon our forward-looking statements.

Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.

Statement Concerning Limited Liability

The Amended and Restated Declaration of Trust establishing Service Properties Trust dated August 21, 1995, as amended and supplemented, as filed with the State Department of Assessments and Taxation of Maryland, provides that no trustee, officer, shareholder, employee or agent of Service Properties Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Service Properties Trust. All persons dealing with Service Properties Trust in any way shall look only to the assets of Service Properties Trust for the payment of any sum or the performance of any obligation.