Good morning, welcome to the Service Properties Trust Q1 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Stephen Colbert, Director of Investor Relations. Please go ahead.
Good morning. Joining me on today's call are Todd Hargreaves, President and Chief Investment Officer, and Brian Donley, Treasurer and Chief Financial Officer. Today's call includes a presentation by management, followed by a question and answer session with analysts. Please note that the recording, retransmission, and transcription of today's conference call is prohibited without the prior written consent of SVC. I'd like to point out that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SVC's present beliefs and expectations as of today, May 9, 2023. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC, which can be accessed from our website at svcreit.com or the SEC's website.
The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO and adjusted EBITDAre. Reconciliations of these non-GAAP financial measures to net income, as well as components to calculate AFFO, are available in our enhanced earnings release presentation, which can be found on our website. We believe this combined presentation will be helpful for analysts and investors to efficiently digest information about our company and financial results. Finally, on today's call, we will be discussing the previously announced terms of our agreement with BP that will be effective upon the completion of their acquisition of TravelCenters of America.
TCA's special shareholder meeting to vote on the transaction is scheduled for tomorrow, May tenth, and we will not be taking questions on that merger. With that, I'll turn the call over to Todd.
Thank you, Stephen. Good morning. Last night, SVC reported Q1 results, which reflect improvement in our hotel portfolio compared to the previous year quarter, a period that was significantly impacted by the Omicron variant and lagging recovery in our northern U.S. urban hotels. Led by the strong performance in Fort Lauderdale, Hilton Head, New Orleans, and Phoenix, comparable hotel RevPAR increased by 22% versus the prior year period, with ADR up 13.9% and occupancy increasing by 3.8 percentage points. This strong performance translated to a 251% increase in comparable hotel EBITDA over the same period last year.
Our operators were successful in continuing to close the performance gap to the market as SVC's portfolio RevPAR growth exceeded the industry by 5.3 percentage points, an indication that the initiatives of our primary operator, Sonesta, are leading to greater success and increased brand awareness. Our full-service portfolio grew RevPAR by 30.6% through increased group demand in business transient travel, specifically Miami, Boston, and Toronto, at events such as the JP Morgan Healthcare Conference in San Francisco and the NCAA Tournament in Salt Lake City, Utah. Our hotels located in urban markets saw the greatest year-over-year RevPAR increase at 38.9%, while the growth at our resort hotels was more moderate at 20%.
Our select service portfolio continued to show top line improvement as well, with RevPAR increasing 27.2% year-over-year, led by occupancy gains that were 3.2 times greater than industry. Revenues were driven by increased transient business, up 21.7% from both business travel and OTA, and group, up 58.1%, largely driven by Super Bowl demand in February at our Phoenix properties. In our extended stay portfolio, RevPAR increased 9% over the previous year quarter, led by our Sonesta Simply Suites portfolio, which outpaced industry mid-scale chain growth by 4.8%. Simply Suites, a relatively new brand launched during the pandemic, reported record ADR during the quarter and has quickly established itself as a preferred option for the mid-scale extended stay guests.
While inflationary factors continue to negatively impact margins, we are seeing signs of moderation, specifically on the labor front. Q1 contract labor expense per occupied room decreased by 6.6% from Q4 2022, and Sonesta was able to reduce its contract labor employee headcount by 19%. As we enter the higher demand periods of the year in Q2 and Q3, we expect to see an uptick in contract labor, although year-over-year comparison should improve. Our largest operator, Sonesta, remains our primary focus, and portfolio initiatives have led to quantifiable improvements, including the Stay More, Save More winter promotion, and Sonesta's internal lead referral program is seeing substantial improvement in both leads and conversion rates. Together, these two programs generated $69.3 million of revenues during the quarter.
Our hotels have benefited from more direct bookings on sonesta.com and less reliance on OTA channels, leading to a 3% point year-over-year decline in OTA revenues as a percentage of total room revenue. Turning to our net lease portfolio, which represents 46% of SVC's portfolio by gross assets. As of March 31, 2023, we own 765 service-oriented retail net lease properties, including our TravelCenters with 13.3 million sq ft. Our net leased assets were 97% leased by 179 tenants, with a weighted average lease term of 9.4 years and operating under 139 brands in 21 distinct industries as of quarter end.
Our aggregate net lease rents declined slightly in the quarter as a result of three AMC Theatres vacating and one Regal Cinema site surrendered as part of their previously announced bankruptcy. For AMC, we currently have 8 open locations, and for Regal, we are still working through lease negotiations on the remaining five theaters. The aggregate coverage of our net lease portfolio's minimum rents was 2.98 times on a trailing twelve-month basis as of March 31, 2023, an increase versus the same period last year. For TA, our largest tenant, site level coverage on a trailing twelve-month basis was 2.67 times, up from 2.29 times in the prior year period. We have 116,000 sq ft of leases expiring in the remainder of 2023 where the tenant will not renew.
These expirations represent $801,000 of annual revenue, or just 0.2% of our net lease rents, and we are evaluating various options for these known vacates, which include re-leasing, repurposing, and potential disposition. Finally, the shareholder vote on the pending acquisition of TA by BP is scheduled for tomorrow, May 10th. As we previously reported, upon completion, SVC will receive $379.3 million in upfront funds, increased rents compared to the current TA leases, and enhanced investment-grade credit quality for our core tenant. Before I turn it over to Brian, I want to acknowledge the recent publication of The RMR Group's annual sustainability report, which provides a comprehensive overview of our managers' commitment to long-term ESG goals.
We are deeply committed to enhancing SVC's corporate sustainability practices and continue to advance initiatives that will position the company to thrive over the long term. I will now turn the call over to Brian to discuss our financial results in more detail.
Thank you, Todd, and good morning. Starting with our consolidated financial results for the Q1 of 2023, normalized FFO was $37.1 million or $0.23 per share versus negative FFO of $0.02 per share in the prior year quarter. Adjusted EBITDAre was $116.8 million for this quarter, a 30% increase over the prior year. The major drivers impacting normalized FFO over the prior year quarter included the improving performance of our hotel portfolio, which generated an additional $25 point million of hotel EBITDA, or a 277% increase over the prior year quarter.
The repayment of amounts drawn on our revolving credit facility, which was fully drawn as of March 31, 2022, and the repayment of $500 million of senior notes in the Q2 of 2022 resulted in a $10.8 million decrease in interest expense. Rental income declined $1.9 million this quarter compared to the prior year as a result of unfavorable changes in our reserves from uncollectible rents, as well as the vacancy of four movie theaters, three AMCs and one Regal Cinemas. Turning to the performance of our hotel portfolio, for our 219 comparable hotels this quarter, RevPAR increased 22%.
Gross operating profit margin percentage increased by 373 basis points to 25.2%, gross operating profit increased by $27.8 million from the prior year period. Below the GOP line costs at our comparable hotels increased $2.4 million from the prior year, driven by higher base management fees as a result of our top line growth. Our consolidated portfolio of 220 hotels generated hotel EBITDA of $35 million. By service level, the increase was driven primarily by improvement in our 48 full service hotels, which generated $15.4 million of hotel EBITDA during the quarter, compared to losses of $1 million in the prior year quarter.
Our 111 extended stay hotels generated $14.5 million of hotel EBITDA during the quarter, a 36% increase over the prior year. Our 61 select service hotels improved, generating hotel EBITDA of $5.2 million in the Q1, compared to a small loss during the prior year period. These Q1 results of our hotels were in line with the estimates we communicated during our fourth quarter of 2022 earnings call. Looking ahead, preliminary April 2023 RevPAR was $96.21, and we are currently projecting full quarter Q2 RevPAR of $97-$103 and hotel EBITDA in the $93 million-$103 million range. Turning to the balance sheet.
In February, we successfully executed on a new five-year, $610.2 million secured financing with a 5.6% coupon and redeemed our $500 million of 4.5% senior notes that were originally scheduled to mature in June. We are pleased with this transaction and believe it highlights the flexibility that we have going forward to address future debt maturities. We currently have $5.8 billion of fixed rate debt outstanding with a weighted average interest rate of 5.75%. Our next debt maturity is $350 million of senior notes maturing in March 2024. As of March 31st, 2023, we had no amounts outstanding on our revolving credit facility, which matures in July.
We are well underway to recast the line and currently expect to complete the process by the end of the Q2. Turning to investing activity. During the Q1, we sold 18 hotels for a total price of $157.8 million. We made $22 million of capital improvements in our properties during the Q1. We currently expect full year 2023 capital expenditures of $200 million-$250 million. The spend will be weighted to the back half of the year as we continue to move forward with renovations of our Hyatt portfolio as well as several Sonesta hotels.
In April, we announced our regular quarterly common dividend of $0.20 per share, which we believe is well covered, representing a 46% normalized FFO annualized payout ratio on the trailing 12 months ended March 31st, 2023. Our cash position as of today is over $200 million, we expect the BP transaction will provide SVC $379.3 million of additional liquidity upon closing. That concludes our prepared remarks. We're ready to open the line up for questions.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Bryan Maher with B. Riley. Please go ahead.
Thank you. Good morning. A couple questions from me. When we think out to the 2024 and 2025 maturities, which are meaningful, how are you guys thinking about that today? I mean, between the cash you have and the cash you're about to get, you know, minus CapEx spend this year, you know, it's probably $500 million or so left over. Is there any thoughts, related to taking the enhanced, TA credit via BP and maybe, you know, securitizing some of those assets to get lower cost debt for the 2024 maturities?
Morning, Bryan. Thank you. It's a great question, and it's something that's, you know, on our short-term radar to address and start thinking about the maturities for next year. As I mentioned in the remarks, we have $350 million due in March and another $800 million in the fall of 2024. You know, the cash position we have today, plus the BP proceeds, you know, we think will put us on pretty good footing as we look to deal with those maturities in due course. To answer your specific question, yes, I think the TA transaction is gonna provide us significant flexibility with financing options as we look to do something in 2024.
You know, whether that be, you know, secured financing or some sort of bond offering, remains to be seen, and we'll think that through, as time passes here. You know, we believe that that transaction is gonna give us, you know, pretty good, credit to work down the coupon as you mentioned.
Do you have any initial thoughts as to what that savings might be with that enhanced credit? Is it, you know, maybe 50 bits over what you might have got before, give or take?
Yeah, it's tough to say exactly because it really it will depend on, you know, what market we go to and, you know, what the actual terms could be. You know, I think, you know, the credit compared to today versus having an A-minus tenant backing those leases, we believe will be significant, and would definitely be something that would be more cost effective than, you know, where our bonds are trading today.
Yeah, I think it gives us. Just to add, I think it just gives us another option for even, for when we want to address those maturities, you know, similar to how we did the ABS facility this year. You know, one of the reasons we went that route is because it was, you know, close to a 300 basis point savings versus doing our typical senior unsecured. It just gives us another option. It's hard to say exactly what the savings would be versus those other options, but it is another option.
Maybe shifting gears, to the growth side of the business. What are your current thoughts about, you know, all of this discussion about the back half of 2023 is gonna see full service gateway hotels where owners can't refinance it, and some of those assets coming to market? I mean, you know, clearly the, you know, higher end, you know, Royal Sonesta exposure to a variety of gateway markets could use enhancing. Is there thoughts to maybe pursue some transactions there? Kind of part two to the question, is there any thoughts of bringing the four properties that Sonesta and SVC acquired last year fully into the SVC portfolio?
Sure. I'll take the first one first. Yeah, it's certainly an interesting market right now. For higher end hotels, you know, I don't think it's necessarily something you gotta wait for the end of the year either. You know, we're closely evaluating a number of opportunities in markets that we think are strategic to our growth. We've talked about them on previous calls. Notably Miami and Los Angeles are two markets we think we're underexposed in. Even today, there's not a lot of transactions happening. I wouldn't say it's necessarily even transactions where sellers have to sell, but it's more, you know, maybe the fund is sunsetting or they don't wanna put in the capital to do a renovation.
There's certainly opportunities out there, and it's a good time to be a buyer, especially if you're able to take something down without putting secured property level debt on it. Lenders for hotels, for any property type right now are being extremely conservative. Interest rates are extremely high as well. Leverage levels are low, so that creates interesting opportunities for a group like us that has the ability to take something down without putting secured financing on it. You know, again, we're evaluating a couple of opportunities now, and we'll continue to do that throughout the year. You know, we're being opportunistic. I think, you know, we're seeing opportunities today that we didn't see 12 months ago. We didn't see back in 2019.
We may not see 12 months from now. We think there's potential opportunity to take advantage of that and like you say, grow into markets that we think we're underexposed in. The second part of your question, the short answer is no. There's no current discussion about bringing those four New York hotels into SVC's portfolio.
Okay. Then just last for me quickly on the Royal Sonesta hotel that'll be opening on 20 Mass Ave, I think sometime in the next couple of months. Is there any, you know, meaningful CapEx you're gonna need to spend to get the doors open on that property? I think you get a free rent period for some number of quarters. When do you actually start paying rent on that property, and is it a fixed rent, and what might that be?
Hey, Brian, just to clarify, that's not an SVC-owned property. OPI, Office Properties Income Trust, owns that. I don't know the exact terms. I think there's some sort of free rent period that they have. you know, that's a relationship between Sonesta and OPI.
Okay, no real financial impact to you guys at all other than that you own 34% of Sonesta.
That's right.
Okay. Thank you.
Thanks, Bryan.
As a reminder, if you would like to ask a question, please press star then one to be joined into the question queue. The next question comes from Tyler Batory with Oppenheimer. Please go ahead.
Hi, good morning, guys. This is Jonathan on for Tyler. Thanks for taking my questions. First one from me. Can you provide some color on more recent demand trends? Any pockets of weakness or slowing that are worth calling out, whether that's in, you know, urban or B2 or at Extended Stay properties? Just given some of the volatility that we've seen over the past few months, anything worth calling out there?
Sure. Hey, Jonathan. Yeah, I mean, just overall trends we're seeing, I mean, we're, you know, we're continuing to see strong year-over-year growth in pretty much all areas of the business. I think you're starting to see a softening more on the leisure resort or destination type hotels, which we have relative underexposure to. You know, we still saw a 20% increase year-over-year in RevPAR. You know, a lot of the stronger year-over-year growth has shifted more towards, you know, group and business travel markets. We're seeing an uptick certainly in group occupancy, as well as business transient revenues. You know, a couple of data points. You know, Sonesta's portfolio, for example, in terms of segmentation, in Q1 of last year, group represented about 17% of total revenues.
That's up to 28%. certainly seeing a significant shift there. you know, over the past few months, I wouldn't say there was any, you know, significant change in the trends we're seeing. We kind of expect to continue to see a softening on the leisure side of the business and a continued uptick in business transient group.
Okay, excellent. Thank you for the color on that. In a, in a similar vein, I'm curious your perspective on the financing markets right now, given, you know, the regional bank issues that have been going on since March. Has that caused any noticeable changes in the conversations you've had with your lenders?
That's a good question, and the short answer is no. You know, the regional banks and some of the banks in the news recently, you know, we don't have relationships with really any of those banks. We don't, you know, use them for cash investing. You know, none of them are in, you know, for example, SVC's revolver, we typically deal with the larger financial institutions, and that we think are on pretty good footing, so.
Okay, excellent. Last one for me, if I could. Now that you've worked through the planned asset dispositions, can you provide some color on how you're thinking about capital allocation throughout the year and, you know, the areas of priority on that front? Just maybe a quick reminder for us.
Sure. Yeah. I mean, there's, yeah, we are like you point out, we are now fully through the sale of the 68 Sonesta branded hotels, the 16 Marriott branded hotels. I think that was. We view that as a pretty good success given the volatility in the transaction markets, especially towards the end there. You know, there's no immediate plans to sell anything else. I think we've, you know, right-sized the portfolio and shifted it more towards a mix that we kinda view as long term. Doesn't mean we won't continue to evaluate the transaction market and evaluate our portfolio and, you know, there's a potential that we sell something down the road. Again, just to reiterate, there's no immediate plans or anything targeted.
I think if we did sell something, it would be more, you know, in terms of strategically capital, recycling capital into other areas or geographies that we wanna kinda shift the portfolio to. Again, nothing immediate.
Okay, great. Understood. Thank you for all the color. That's all for me.
Great. Thanks for the question.
This concludes our question and answer session. I'd like to turn the conference back over to Todd Hargreaves for any closing remarks.
Thank you, everyone, for joining today's call, and we appreciate your continued interest in SVC. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.