All right, perfect. All right, good morning, everyone. We're going to get started with our next session. This is Tyler Batory with Oppenheimer. Really happy to be with the management team from Service Properties Trust, SVC. Chris and Brian are with us today. Got some questions prepared for them, but certainly want to encourage audience participation. If you do have questions at any point, just let me know and we'll get them answered. Glad to be up here. Good to see you guys. I think we probably have some folks in the audience that are familiar with the SVC story. I would imagine some folks that are a little bit newer to the story. Just to start off, just give us a quick summary of the SVC portfolio, talk about what makes you a little bit different than some of the other REITs that are out there.
Yeah, so again, thanks for being here. I think holistically, as you think about the company, we're predominantly a lodging and net lease portfolio. As you think about kind of how our portfolio is constructed, I think by way of assets, we have just over 200 hotels across the portfolio, which really focus on full service and focus service. Sorry, I'm getting the mic ask here. Full service and focus service with about 35,000 keys constructed within that portfolio. Then on the net lease side, we have just over 700 properties, predominantly concentrated in travel centers, just under 200, with the balance being traditional kind of necessity-based surface-focused retail properties. Really for us, the story has been about kind of a repositioning strategy for the company.
I think what I mean by that is we've been in the market looking at divesting of certain hotels, really shifting our focus more towards a net lease strategy. With kind of the retained portfolio on the hotel side, kind of with a lens more towards full service hotel operations across the portfolio. In addition, we've been looking at opportunities to expand on the net lease platform, which we'll talk a little bit about in the Q&A. Nonetheless, have really been spending a lot of time kind of culling the portfolio, looking for opportunities to monetize, looking at opportunities with respect to our balance sheet to really position the company to be in a, I guess, a growth place as we turn the corner with the year. That's where a lot of our time has been spent.
Okay. Let's dive into the hotel business a little bit first and talk a little bit about what you've been seeing so far this year from a RevPAR perspective, from a demand perspective, where there are areas of strength, areas of weakness, and just kind of give us a sense of what you're seeing in the marketplace.
Yeah, I think if you look at kind of the quarter, our RevPAR saw modest growth, just over 2.5%. I think with embedded in some of that, our displacement with renovations going on across the portfolio. We've had a pretty extensive renovation plan going into 2024 and even continuing in the first part of 2025. There is some ebb and flow that comes with that. I think generally speaking, we've seen some challenges on the margin side, I think more attributed to just increases in labor costs, certain one-time events, the displacement certainly being a portion of that. Navigating that has been something that we've been focused on. I think more broadly speaking, as you think about just the hotel industry, I mean, there have been some headwinds. We've talked a little bit about some pullback in RevPAR going into Q2.
We provided guidance around that more specifically. I think as we sit here today, that trend is kind of consistent with our guide on that front. I don't know that it's dissimilar from kind of broader feedback across the industry, but international travel is something where there's been some softness. As you think about our portfolio, I guess constructed against the top 10 markets, it represents a little less than 30% of our portfolio. While not immaterial, I think there are some opportunities outside of those markets for us. If you kind of strip it down even further, I would say the areas where we're seeing some pullback is in government spending. With respect to government contracts, we've seen some proceeds kind of get pulled coming out of Q1.
On the other side with Group, there's been some upside for us on the side of the business, projecting kind of north of 8% growth for the year. It is a little bit of take and give, but nonetheless, it's somewhat muted.
Okay. One of the key parts of your story is the transition that's going on within the hotel portfolio. You have a number of assets that are for sale right now. Talk a little bit more about how that process is going and give us a strategic sense of why you're selling the assets and what you're going to do with some of the proceeds.
Yeah, I think the strategic point kind of goes back to some of the introduction where we're really trying to kind of transition the portfolio to be more focused on net lease retail. I think the construct of that has been in place over the years. We bought a large portfolio in 2019. Really for us, just given market dynamics and other fundamentals, we just haven't had the opportunity to do a lot with that. Nonetheless, given where we are today, there are some strategic incentives and some other opportunities for us on that side of the portfolio, which we can talk about in more detail. As part of kind of that shift, we're also talking about the divestment of hotels. We have about 123 hotels in the market, primarily focused service. There are really kind of three different tranches.
A handful, a very small portion, are legacy sales that are just kind of being finalized this quarter. We've got a full-service hotel that we're in the market with. The bigger tranche that I think has been kind of the core of the conversation is specific to 114 focused service hotels that we began marketing kind of going into the end of last year. For us, we've gone through kind of a traditional marketing process. We saw a lot of activity. First round, we had 50 groups putting in offers on the portfolio. Fast forward, we've narrowed that down to four buyers for subset portfolios and are kind of in the throes of that process with respect to executing on those.
Okay. So once you complete the, I mean, so any sense too for timeline in terms of when these could be done and kind of thinking a little bit longer or farther out, any more sales that you might look at in the hotel portfolio?
Yeah. On the timeline front, I think as we will probably see the bigger portion of the transaction occur in Q3 and then some of that to trend into Q4. Really, kind of the rationale is like with any sale, you have got diligence period, you have got some closing timelines that come with that, and then even some staging on the takedown just given the size of the portfolio. There is going to be some movement in the timing, but we are targeting right now Q3 and Q4 being the process with respect to those close. I think with respect to future sales, I think right now this represents kind of the bulk of what we think for the hotel sales for the company. Look, we are always looking to be prudent within our business to look at opportunities, but I think that is kind of a conversation for a later day.
Getting through these transactions, understanding what we have on the other side, thinking more about the business and some of the opportunities, that'll be part of the conversation.
Okay. Once you complete these, there's going to be a lot of capital coming in the door. Just talk a little bit more in depth, what you do with that capital, best uses, and kind of how you're thinking about that too.
Yeah, for the use of proceeds, we have $800 million of senior notes maturing in 2026 in two separate maturities, $350 million in the spring, and then the balance, the $450 million in the fall of 2026. We expect to repay those bonds with the proceeds. The balance of the inflow that we're expecting will be used to either repay the revolver or we'll consider paying further dated bonds with these proceeds.
Once everything is done, I guess what's going to be left in the hotel portfolio? Just talk about those assets, kind of where they're located, the quality of those assets, the financial performance as well.
Yeah. At the end, I mean, once we get through the transactions, we'll be left with a portfolio of 83 hotels, predominantly full service. There'll be some other kind of focused service hotels embedded within that. It'll be across a handful of different brands as part of that. I think kind of big picture, look, we've done a lot of work across the portfolio by way of investment into the hotels. I think more specifically, kind of our full portfolio of the Hyatt hotels we renovated last year. We're really starting to kind of see the benefit of that lift coming into Q1. There's additional runway we would expect going into the balance of the year. Same with other hotels within our Radisson site portfolio, a very similar narrative. I think from where do we go with performance of hotel?
I mean, I think given kind of just broadly speaking where the trends are and then in our portfolio, more specifically around the work we're doing, displacement, hotels coming out of renovations, hotels going into renovation, we expect some of our kind of RevPAR and other metrics to be somewhat muted initially. Nonetheless, as we get through some of these tranches of investment, we think that there will be further benefit of upside, more specifically as we get into the middle of next year and beyond.
Just to really hit this point home because it is very transformational. I mean, is it an intellectual jump to assume that once all this heavy lifting is done, that what you're left with should probably be worth more than what you're selling and where things were before?
Absolutely. I mean, I think just generally speaking, when you think about the depth of the portfolio, the locations where we have, these are a combination of full-service resort hotels. These are in core markets, some in kind of really prime locations that are irreplaceable. Certainly from an overall valuation standpoint, we would expect there to be kind of a better position portfolio, not only for EBITDA growth, but just overall value contribution to the company.
Yeah. Okay. Switching gears to the travel center portion of the portfolio, I think a unique aspect of the company. Talk a little bit more about those assets, why you like those assets, and then talk a little bit about the relationship with BP too. I believe there's some noise going on with BP. Does that matter for you? Is that something that you're paying attention to?
Yeah. The travel center assets, we really consider our crown jewels of the portfolio. These are large sites along the Interstate Highway System. There are truck stops with their own little ecosystems with service for trucks, quick-serve restaurants, convenience stores. The volume of revenues coming through there are primarily fuel, diesel fuel and whatnot. The largest share of the profits come from the other services. They are very unique businesses in the retail space, if you will. That portfolio is five different tranches, five lease pools, master leases. If those who know the story, we had bought TA back in 2007. The operating company was spun out. We kept the real estate in a sale leaseback scenario. A few years ago, BP bought the operating company and did direct leasing with us, SVC. All the leases are now guaranteed by British Petroleum and A Credit.
We feel very good about those leases. They all expired. They were 10-year leases that expired in 2033. The recent news around BP in the headlines, there is an activist, some noise around activism at the corporate level. There have been rumors that, and this is not unique to this year, but over time, there have been rumors Shell might take over BP or other companies. There have been a lot of headlines with that company. The rent coverage at our sites, which is a key metric we disclose for all our retail tenants, rent coverage has been on the decline. When the company was sold, we were at all-time high fuel margins, levels we had never seen since our acquisition in 2007. There has been sort of a normalization and rationalization of that business. Freight demand is definitely down. Fuel margins are clearly down in the business.
We have comfort and we sleep well at night with those leases that we have a corporate guarantee from a strong credit. We'll continue to monitor it. We continue to dialogue with BP. They still have a long-term view as far as our understanding of those assets. Again, we feel like these assets are long-term plays, strong real estate, well beyond the lease terms that we have today.
Okay. Let's switch gears to the net lease side of things. I think first, just for background, talk about what you own right now on the net lease side of things, when you bought it, and kind of how net lease became part of the SVC portfolio.
Yeah. I mean, kind of the biggest impetus for kind of the integration to net lease is a portfolio or a company we bought in 2019, which was really our introduction to net lease outside of the travel centers. As referenced, we have just over 700 properties within that pool. This is really a consortium of QSRs, sit-down restaurants. We have wellness facilities, entertainment, etc. The biggest concentration really being around kind of QSR, grocers, and full-service restaurants. Really for us, again, we've been working over the years, looking at opportunities for that portfolio, have not been active on the acquisition front, just kind of given where the market dynamics were and other focuses with hotels and things we were doing. Nonetheless, puts us in kind of a good position today to really evaluate strategies around further growth within that portfolio.
Earlier this year, we kicked off a process where we were starting to kind of originate new acquisitions. Sitting here today, we've got about $40 million-$50 million kind of advanced in the pipeline or under contract with that endeavor. We would anticipate that that cadence will continue. I think for us specifically, part of it is an opportunity to participate in what we believe to be a strong growing sector. I think from a valuation standpoint, I think it's good for the business and provides consistent, steady cash flows. We're talking about yields going into these at about 7.5% with kind of growth at 1.5%-2% annually. On average, we're doing terms 12-15 years. Really kind of setting kind of a cadence and a narrative for the company on a go-forward basis.
I think the other thing that's important to note, and we can dig into this more specifically as we talk about the balance sheet, is we have a really interesting structure with a master trust specifically around retail. About half of our assets are within that master trust, which is a very flexible financing instrument for us to pull properties in and out of. With that, our very attractive rates that come with that. We view that as a real kind of catalyst for us as we think about future opportunities for financing or refinancing to kind of get the best rate exposure or the best cost of capital for the company.
Yeah. Let's unpack a little bit more of that commentary on the net lease side of things. In terms of the timing, why make this transition now versus a year ago or maybe thinking a couple of years into the future? Why does it seem like now is really the right time? Just put some guardrails, at least in the short term, a little bit more just on kind of the magnitude in terms of how much dollars you're thinking about potentially allocating towards this side of things.
Yeah. The net lease is just a function of kind of one piece of the story that we touched on, right? It really comes down to with the hotel sales, the why now, it's a couple of different things. I think on the hotel sales themselves, I think generally speaking, we feel like there's more conviction around a shift to the portfolio, again, more to the full-service model, just given where certain trends are around business travel and other logistics that we think will benefit us longer term being in the more full-service sector. I think equally important from a timing standpoint, there's been a lot of dry powder sitting on the sideline looking for larger portfolios to invest in. Kind of going to the market with a portfolio as we have was somewhat unique.
I think from a timing standpoint, it really allowed us to benefit from a deep kind of buyer pool. I think that's kind of showing in some of the pricing that we are getting on some of these hotels. Strategically, we feel like we're in a good position despite some of the capital markets, despite where cap rates are, just given the size and the quality of the portfolio, we're able to kind of get a real value push. In turn, I think as Brian alluded to, helping delever the company, which is kind of a big part of our business plan. Complementing that, going to the net lease side, it's more of a refresh of the portfolio, right? This isn't necessarily kind of an incremental push where we're going to come out of the gate and start spending an overmaterial amount of money.
At the same time, being in a position where we can refresh this portfolio both from legacy assets and new acquisitions and pushing some of the metrics to have a longer walk, better coverage, I think from both financing opportunities and just valuation of the organization, it really provides some synergies. We have the pipeline currently about $50 million today. We'll likely see that grow modestly. I think we'll determine after these dispositions, kind of sitting on the other side of the equation, to be really more thoughtful around how big do we want that pipeline to be or do we want this to be the run rate. There are still some moving pieces in how we want to think about it.
Just to kind of be mindful of the other opportunities, whether it's further delivering and using proceeds for other reasons. There's capital investment in these hotels, even with the retained portfolio. So we're being mindful of those options.
Yeah. A couple more follow-ups here on this topic. You mentioned the pipeline, $50 million. I guess any more you can give in terms of where the assets are located, what type of assets they are. Is it going to be kind of pretty similar to what you own right now or you may think about differentiating and diversifying a little bit more?
It's somewhat similar to what we own now. I just think when you look at kind of where our concentration is, I think kind of more broadly, that is in our view kind of the better part of the sector today. Continuing to add to that is something that we feel is favorable. What we're buying today in that pipeline is predominantly QSR, grocery, and car washes. Those really make up the bulk of at least those acquisitions. We see we have other opportunities, I guess, kind of making their way through the pipeline that are not dissimilar. We looked at some opportunities with some dollar stores for more of the credit side organizations and things of that nature. Generally speaking, it's kind of within kind of those four or five sectors.
I think just to note too, as we buy net lease retail and going back to some of the financing opportunities with that, there are guardrails around kind of like a master trust and what we can do with that and the allocation across the sectors that we're also working within the confines of to ensure we get the best outcome.
Yeah. Okay. How about the valuation side of things? Just to bring even more numbers into this, maybe where are cap rates for some of these? How do you think about deploying capital towards this channel versus kind of where your debt yields versus buying back stock and other avenues and other uses?
Sure. From a cap rate perspective, we're really looking at this net lease program from a perspective of future financing within the master trusts, which we believe would be accretive to the overall company. That execution we did a couple of years ago, the coupon is 5.6% today. That market's a little wider than that in this current market. Nonetheless, we think these deals would be accretive in that financing scenario. As we build critical mass and potentially tap that market down the road, we believe it'll be beneficial to the company. Part of the strategy of the hotel sales, back to the proceeds we're going to get in, whether or not we can repay or recapture some of the wider trade bonds beyond just the 2026s is part of the strategy as well. We're looking at this from all different lenses.
Yeah. Okay. Let's transition to the balance sheet and the debt side of things. Leave the mic over there. Probably the number one question or maybe number two question that I get from clients and investors is leverage. Talk a little bit about where the balance sheet is right now, where leverage is right now. I'm not sure if you have a longer-term leverage target or something ideally that you would like to get to into the future.
Sure. I think in the last year plus, we've been seeing the hotel portfolio decline year over year, which has pushed leverage up close to almost 10x debt to EBITDA. With the hotel sales that we have in flight, assuming everything closes and we have all the proceeds in and repay the 26s and some of the other debt to round out the number, we think we'll take a full turn off of leverage. Ideally, as we look forward to other strategies within the portfolio, whether it be EBITDA growth from the hotels or some other strategies we will look to deploy, we'd like to take another full turn off in the medium-term horizon is sort of our medium-term goal.
The shorter-term goal is to buy us some cushion on not only leverage, but also on the interest coverage, which is another key metric for us as we look forward to where we are today.
Okay. Then let's tie in the dividends too and kind of talk about where you are right now, where you were, and in your perspective, what might need to happen or what sort of scenario might be necessary for there to be a larger dividend payment in the future.
Yeah. I mean, I think we're paying a penny a quarter today, right? Part of that is just to kind of keep a dividend in place. That really kind of impacts favorably for the overall investor pool within the organization. Certainly, we're very mindful of the opportunity for dividending, but I think the timing of that is still kind of in flux, right? I think we have a program that we need to get through. I think getting on the other side of these dispositions, the deleveraging piece that we talked about, looking at where EBITDA is going to trend on the hotel portfolio because that is an outsized catalyst for growth for the organization.
I mean, we know and we can kind of easily underwrite net lease retail just given kind of the embedded rent increases, but EBITDA fluctuates much more greatly on the hotel side, specifically around a lot of these renovations we're doing. It is certainly not going to be a 2025 initiative. I think there will be discussion around whether we're in a position where it makes sense to think about sometime later in 2026 or thereafter, but not to kind of misguide the timing. We've got some work to do around getting through what's in front of us to really be in a position where we have better visibility into that.
Okay. We talked a lot about the transition in the hotel portfolio. One thing I do not think we really covered is just where CapEx is and CapEx savings. Just talk a little bit more about that aspect.
Sure. We've been deploying a significant amount of CapEx in our hotel portfolio. We spent $300 million in 2024 across a broad range of hotels, including our Hyatt Place portfolio as well as some Sonesta hotels. This year, we're projecting $250 million of spend overall, including maintenance CapEx, again, across mostly Sonesta portfolio. As we've talked about to various folks, the spend has been outsized. It's been a net cash outflow for the company, which is part of the decision on the dividend as well as leverage. As we look forward to properties that we've been prioritizing for significant projects, we finished up a couple of airport hotels in Miami, LAX, Hilton Head Resort just came off a big renovation.
We have several projects lined up for this year that we're excited about, including our South Beach hotel that we acquired a few years ago that we think will drive significant returns overall. Going forward, I think we've messaged that incrementally CapEx will continue to normalize as we get past mid-year 2026 and into 2027. Our maintenance capital will come down from where it is today. Hopefully, we'll get to a normalized run rate.
Okay. So thinking a little bit more longer term about the company, what does SVC look like three years from now? I mean, do you think you're going to really fully more pivot towards a net lease or hotel? And as investors, when we look at SVC, I mean, should we kind of still consider it more of a diversified REIT or do you want to be categorized as more of a net lease sort of a REIT or just how should we think about all that?
Yeah. I think kind of generally, I mean, if you looked at kind of our Q1 results and pro forma, the sales, more than 70% of our EBITDA is coming from net lease. I think by way of overall valuation, I think valuation could be skewed more towards the net lease side. Certainly, as an area where we're focused for growth, given the divestment in the hotels, I mean, again, the caveat to that is embedded EBITDA on the hotels. There is going to be some offset. I think for the medium term, we're going to continue to be a diversified company. I think for us, more specifically, while we're growing on the net lease side, we also recognize that there is a lot of value to be achieved through the hotel portfolio.
We want to kind of continue to work on that, drive performance, get the benefit of the capital we've already invested in, and kind of just kind of keep things fluid. There are no plans at this stage outside of the current hotel divestment to do more.
Okay. I know a lot of investors also like to put companies in a box, which, right or wrong, we don't need to go through that. I mean, would you consider SVC to be a little bit more of a transition story, a little bit more of a delevering story, more of a growth story, or just how do you really want people capital return story? How do you really want people to kind of think about your stock and really kind of get a sense of where you are in terms of some of those buckets?
It's a tough question. It's a little bit of everything, right? I mean, it is a transition story. By any means, if you look at our stock price, it's depressed, right? I think kind of more broadly speaking, getting through near-term maturities, deleveraging the company, I think is top of mind for a lot of different groups. I think groups understanding kind of the overall value of the portfolio is a big piece. I mean, when you kind of sum the parts, looking at where the retail and the travel centers are, they would show that there's some sort of misconception on what the value of the hotel portfolio is. Getting through the transaction side is going to kind of tease out comps, at least on the focus service side.
Inherently, being a full-service company on the hotel should show outsized valuations given the quality of those hotels. I think now it's a transition story, right? I think there's a transition story in our view with material upside on the equity, I mean, which would be the goal and kind of narrowing the gap between the discount to NAV. It's just kind of working through those steps to achieve that.
Okay. Perfect. We do very good with time. We have 10 seconds. We have 10 seconds left. I think it is a good place to wrap up. Appreciate everyone for joining us. Thank you as well.
Thank you.