Please ensure Javascript is enabled for purposes of website accessibility

Service Properties Trust (SVC) Q1 2021 Earnings Call Transcript

By Motley Fool Transcribers - May 10, 2021 at 2:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

SVC earnings call for the period ending March 31, 2021.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Service Properties Trust (SVC 4.16%)
Q1 2021 Earnings Call
May 10, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Service Properties Trust First Quarter 2021 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Kristin Brown, Director, Investor Relations. Please go ahead.

Kristin Brown -- Director, Investor Relations

Good morning. Joining me on today's call are John Murray, President; Brian Donley, Chief Financial Officer; and Todd Hargreaves, Chief Investment 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 would 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 10, 2021. 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 other than through filings with the Securities and Exchange Commission or SEC. In addition, this call may contain non-GAAP financial measures including normalized funds from operations or normalized FFO and adjusted EBITDA reconciliations of normalized FFO and adjusted EBITDA, EBITDAre to net income, as well as components to calculate AFFO are available in our supplemental package found in the Investor Relations section of the Company's website. 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 Form 10-Q on file with the SEC and in our supplemental operating and financial data found on our website at www.svcreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And with that, I will turn the call over to John.

John G. Murray -- President and Chief Executive Officer

Thank you, Kristin, and good morning. Our first quarter operating results reflect the continuing impact of the pandemic on the economy and especially in hotels and certain service retail businesses. As you know, we transitioned the branding and management of over 200 hotels to Sonesta during the past two quarters. The disruption driven by these transitions coupled with normal seasonality and more restrictive government lockdowns through February had a negative impact on our hotel results, it weighed on our overall results for the quarter.

Despite current challenges, we are optimistic for a number of reasons. Lockdowns are easing in a growing number of states, more of the population is now vaccinated and airlines are increasing flights this summer. So, we see a light at the end of the tunnel for a return to a new normal. While we expect modest disruption to our second quarter results from recently transitioned hotels, we are encouraged by recent increases in demand and booking activity. Year-over-year comparisons look more favorable as occupancy levels exceeded prior year for the first time since the start of the pandemic in March. In particular leisure demand in drive to and resort markets has recovered meaningfully, with properties like our Royal Sonesta San Juan, Sonesta Hilton Head and Sonesta Fort Lauderdale are posting occupancies in excess of 80% in recent weeks.

Business transient demand increases are likely to be more gradual, not making a material contribution until 2022 and thereafter. In the near-term, at least, group meetings will likely allow for a combination of in-person and video attendance with proof of vaccination or negative COVID testing are requirement for attending. As suburban extended stay hotels continue to outperform our urban full service and business focus select services hotels, a trend we have seen throughout the pandemic. Our extended stay hotels continue to have a significant occupancy premium to non-extended stay hotels with our 165 extended stay hotels reporting occupancies of 54.5% during the quarter compared with occupancies of 31.2% and 28.7%, respectively, for our 94 select service and 51 full-service hotels.

We expect our diverse portfolio of suburban extended stay hotels will continue to outperform our own hotels until business travel recovers. Importantly, approximately 41% -- our approximate 40% weighting of rooms of extended stay hotels has positioned us well and helped to mitigate cash burn rates. The seasonally weak first quarter average occupancy for our comparable hotels was 40.1%. Average daily rate was $87.19 and RevPAR was $34.96, each roughly flat with the fourth quarter as a result of the initially negative impact of the ADA transitions for Marriott in February and March.

However, results have trended upward on a monthly basis since year-end with occupancy increasing to 46.6% in March and 51% in April compared to a low of 33.1% in December 2020. I think, it will be helpful to update you on Sonesta, the operator of the largest number of our hotels. First of all, it is important to keep in mind, Sonesta and its capabilities are far different and improved today than they were when we first announced, we would be taking back hotels last year. Back then, Sonesta was a small independent hotel company that managed 53 hotels with 9,600 rooms for us in the upscale extended stay and upscale and upper upscale full service segments. At that time Sonesta employed approximately 800 people and it's small corporate office was in Massachusetts.

Sonesta currently manages 256 hotels with over 41,000 rooms for us in the extended stay, select service and full service segments, which range from mid-scale to upper upscale hotels. In addition, Sonesta recently acquired Red Lion Hotels, which franchises approximately 900 hotels with over 100,000 rooms. Today, Sonesta is one of the largest hotel management companies in the U.S. and it is the eighth largest hotel brand and franchise company in America. Sonesta currently operates 15 different brands and has close to 1,300 hotels with over 140,000 rooms with the majority of them located in the U.S. With this massive increase in size, Sonesta has also upgraded its management team with several recent management additions that have significant hotel industry experience. Today, Sonesta employs approximately 6,200 people and maintains its corporate offices in three locations spread across the U,S. in Newton, Massachusetts, Orlando, Florida and Denver, Colorado.

Now I'll provide more specific color on the hotels that we transitioned to Sonesta in the fourth quarter of 2020, which included 112 hotels. Sonesta has now managed these hotels for a full quarter. And we are generally pleased with the progress to-date. Comparing the results of these hotels from March 2021 to results in October of 2020, the last stabilized month prior to the transitions RevPAR for 102 former IHG hotels is slightly above the October levels at $43.61 despite lingering transition challenges. For the 97 Marriott hotels, it's too soon to make relevant comparisons as most of those hotels were transferred in February and March, but early indications are showing the same trends we saw with the IHG transition.

While the transition of hotels to a new manager is always disruptive and it has been difficult to build Sonesta brand awareness during the pandemic, we believe the worst of the transition disruption is behind us and Sonesta brand awareness is starting to grow. Nevertheless, even before hotel industry demand fully recovers, Sonesta is starting to realize the benefits of its much larger scale. For example Sonesta's increased size is enabling it to significantly lower per transaction reservation costs through their own network as well as through the OTAs in the area of 15% to 20% savings versus last year.

In short, we believe that once the transition noise is fully behind us and hotel industry demand improves further, Sonesta will deliver solid results on both the top line and bottom line. In fact, we believe that this new larger Sonesta is positioned to perform as well as if not better than some of the larger more established hotel brand companies, especially in a post-COVID world with less business travel and more competition for every marginal customer. SVC is also well positioned to participate in any upside realized by the creation of Sonesta as a major hotel brand and franchise company through its 34% ownership in the business.

I also want to provide an update on our relationship with Hyatt. As you know, Hyatt sent SVC a termination letter in January, the effective date of which has been extended to May 22nd. We are attempting to negotiate a mutually agreeable path forward for some or all of these hotels under this management agreement. And we are reasonably optimistic about how this is going. If we are unable to reach an agreement, these 22 hotels will transition to Sonesta by the end of the second quarter. For all of our recently transitioned hotels, we have entered short-term management agreements with Sonesta through December 31, 2021, to allow for a thorough review of the highest and best use and renovation needs of each hotel.

Turning to our net lease assets, TravelCenters of America, which represents about 27% of our total portfolio based on investment has continued to perform well through the pandemic and remains current on its rent obligations to us. Property level coverage at our TA locations was 1.84 times this quarter. Rent collections from our net lease portfolio including TA were 93.1% during the first quarter and our service retail asset management team continues to work with our net lease tenants most affected by reopening in occupancy restrictions. Request for deferrals have slowed significantly and rent collections have stabilized. However, we continue to work with certain tenants in the hardest hit industries like movie theaters as they reopen in accordance with easing lockdown restrictions.

I believe we have past the worst of the COVID crisis. However, we continue to take steps to preserve capital and solidify our liquidity, including drawing down the remainder of our revolving credit facility in January. Maintaining a nominal dividend, deferring non-essential capital spending, working with our operators to control costs and completing select asset sales. Supported by steady cash flow from TA in our net lease portfolio, we are well capitalized with ample liquidity and well positioned with a diverse portfolio of assets to successfully navigate the gradual recovery of our hotel assets. We are confident that the early improving operating trends we're seeing in our hotel portfolio will continue to gain momentum as we finish out the second quarter and the balance of 2021.

With that, I'll turn the call over to Todd to discuss our net lease portfolio in further detail as well as our recent transaction activity.

Todd Hargreaves -- Vice President and Chief Investment Officer

Thanks, John. As of March 31, 2021, we own 798 net lease service oriented retail properties, including our TravelCenters. With 13.5 million square feet requiring annual minimum rents of $375.8 million, representing 42.5% of our overall portfolio based on investment, our net lease assets were 98.5% leased by 174 tenants with a weighted average lease term of 10.7 years and operating under 142 brands in 21 distinct industries at quarter end. The aggregate coverage of our net lease portfolios minimum rents was 2.19 times on a trailing 12-month basis as of March 31, 2021. Rent collections from our net lease tenants were stable at 93.1% for the first quarter, up from a low of 80.5% for April 2020 and anchored by our largest tenant, TravelCenters of America, which represents 27.2% of our portfolio based on investment. We collected 97.7% of April rents from our net lease tenants.

Since the beginning of the pandemic, we have provided rent assistance to 46 net lease tenants and deferred an aggregate of $12.1 million of rent net of previous deferrals granted and reclassified due to lease modifications or extensions. As of April 30, 2021 approximately $11 million of rent remains deferred. During the first quarter, we recorded reserves for uncollectible revenues of $4.8 million for certain of our net lease tenants primarily movie theater, fitness and restaurant leases. As a reminder, we recognized all changes in the collectability assessment for an operating lease as an adjustment to rental income.

Turning to our recent transaction activity, during the quarter ended March 31, 2021, we acquired a land parcel adjacent to a property we own in Nashville, Tennessee for a purchase price of $7.7 million, including acquisition-related costs and sold one net lease property with 2,800 rentable square feet for $400,000, excluding closing costs. In April 2021, we sold the leasehold interest in one hotel in Florida, with 146 rooms pursuant to a purchase option exercised by the ground lessor for $9.8 million, excluding closing costs and one net lease property in Colorado Springs with 32,000 rentable square feet for $1.2 million excluding closing costs.

We're also under agreement to sell five hotels with 430 rooms for an aggregate sales price of $22.3 million. We are currently leasing these hotels to the potential buyer at an 8% annual return of the purchase price, and we expect the sale to be completed this quarter. We continue to evaluate each of the recently transitioned as well as legacy Sonesta hotels to determine the long-term highest and best use of each asset. In the upcoming quarters, we may decide to market for sale or repurpose some of the hotels that we don't envision operating as a Sonesta branded hotel long-term. The decision to sell or repurpose could be the result of market overlap with other Sonesta hotels or otherwise as a mechanism for reducing leverage and improving the overall quality of our hotel portfolio through the disposition of capital intensive properties or hotels located in out of favor or declining geographic markets.

I will now turn the call over to Brian.

Brian Donley -- Treasurer and Chief Financial Officer

Thanks, Todd. Starting with our consolidated financial results for the first quarter of 2021, normalized FFO was negative $42 million or a loss of $0.26 per share and adjusted EBITDAre already was $48.7 million. Our hotel portfolio generated negative $38.2 million of adjusted hotel EBITDA for the first quarter of 2021 compared to $30.6 million of hotel EBITDA in the prior year quarter, and negative $26.1 million in the fourth quarter of 2020.

Guaranteed payments and security deposit utilization that supported our hotel returns under our historical agreements declined $60 million from the prior year quarter. Rental income from our lease properties declined $8.1 million year-over-year. $5 million of this decline relates to reserves for uncollectible rents and $3 million related to our net lease disposition activity. Interest expense increased $18.3 million over the prior year quarter as a result of our 2020 financing activities and our revolver draw this quarter. A $10.4 million decline in FF&E reserve income and a $1.4 million decline in G&A expense also impacted our overall results this quarter.

For our 304 comparable hotels this quarter RevPAR decreased 50.6%, gross operating profit margin percentage decreased by 21.7 percentage points to 2.6% and gross operating profit decreased by approximately $85 million from the prior year period. Below the GOP line costs, excluding hotel transition related costs at our comparable hotels declined $40 million from the prior year, primarily as a result of decreases in FF&E reserves, management fees, system and other costs that are tied to hotel revenues.

Our consolidated portfolio of 310 hotels generated operating losses of $58 million for the quarter, including $19.6 million of one-time rebranding related costs. $34 million of these operating losses were generated by our 51 full service hotels. Our full service urban hotels in key markets where logging activity remains depressed such as San Francisco, Chicago, Boston and DC continue to weigh on the portfolio.

Two of our full-service hotels remain closed due to the pandemic and local market conditions. $21 million of hotel operating losses were from our 94 select service hotels, driven largely by disruption related to rebrandings. $3.4 million of losses were from our 165 extended stay hotels. Excluding one-time rebranding costs, our 165 extended stay hotels generated hotel EBITDA of $4 million during the quarter.

49 select service, 36 extended stay and 3 full service hotels were rebranded during the first quarter. $19.6 million of transition related cost recognized during the quarter included $11.1 million incurred by Sonesta to move the hotels to their brand flags, and we also incurred an additional $8.5 million to Marriott for costs, the majority of which related to employee severance costs of the transition hotels. Excluding the $19.6 million of rebranding costs, adjusted hotel EBITDA for the 2021 first quarter was negative $38 million.

Hotels in states that have lifted or have less restrictions or where we have leisure destinations have continued to improve performance. In the month of March, our 36 hotels in Florida, Arizona, Louisiana, South Carolina and San Juan generated positive hotel EBITDA in the aggregate of $5 million. To contrast in Illinois, California, New Jersey and Massachusetts, our 77 hotels in those states generated operating losses of $8 million in March.

Overall, our 310 hotels generated negative hotel EBITDA of $9.8 million in March. 138 of our 310 hotels were cash flow positive in March and many others in their breakeven. As states continue to lift COVID restrictions, we believe performance will continue to strengthen in the coming months. Excluding the 203 hotels that changed flags in the last players in the last few quarters, 105 comparable hotels in the month of March were just below breakeven with occupancies of 51% and RevPAR of $49.76, which represents a 36% sequential increase in RevPAR compared to February 2021.

Our overall occupancy for the month of April was over 51%, an increase of about 10% compared to the 46.5% seen in March. Overall RevPAR was $48.38 for April, a 13% sequential increase compared to March of 2021.

Turning to liquidity, our overall cash burn in Q1 averaged approximately $16 million per month, based on our adjusted hotel EBITDA for the first quarter. We currently -expect our monthly cash burn to decrease in the second quarter before turning positive in the third quarter, given the improving fundamentals in the hotel industry and as the disruption from rebranding a significant number of hotel subsides. Based on our current outlook and expectation for stronger lodging activity in the back half of 2021, and stable rent collections from our triple-net lease portfolio, we continue to expect to be cash flow positive for the full year 2021 before any capital expenditures.

We funded $29 million of capital improvements during the first quarter, primarily for maintenance capital, rebranding costs and ongoing renovations at three full-service hotels. We expect to fund approximately $140 million of capital over the remainder of 2021 or a total of $169 million projected for the full year 2021. This projection represents a reduction of approximately $23 million of projected capital spend, I provided during our fourth quarter call. We continue to be prudent as we evaluate prioritize our capital spending as part of our liquidity management. Maintenance-related capital is projected to be approximately $60 million for the year, ongoing renovations at three full-service assets, including our Royal Sonesta and Qua [Phonetic] in Chicago and a full service Sonesta Irvine, California projected to be approximately $40 million.

Capital investments related to the transition of the management, branding of certain hotels to Sonesta is projected to be $40 million for the year. We funded the $25.4 million capital contribution to Sonesta during the first quarter related to its acquisition of Red Lion Hotels. SVC continues to maintain this 34% ownership of Sonesta after giving effect to this funding. To echo John's comments, we believe this acquisition by Sonesta will directly and indirectly benefit SVC. The significant scale Sonesta has achieved will provide cost savings that benefit SVC's hotels and increase the value of SVC's ownership interest in Sonesta.

Regarding our common dividend, we continue to expect to maintain the current quarterly distribution rate of $0.01 per share through mid-2022. At quarter-end, we had approximately $875 million of cash after fully drawing down our $1 billion credit facility as a precautionary measure to preserve our liquidity as we navigate not being in compliance with one of the financial covenants under our debt agreements. We currently believe we have adequate liquidity through 2022 and our net debt maturities in August of '22, and we believe we will continue to assess and explore all of our options to ensure we are well positioned until this pandemic is behind us and lodging fundamental stabilize.

Operator, that concludes our prepared remarks, we are ready to open up the line to questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question today will come from Bryan Maher with B Riley Securities. Please go ahead.

Bryan Maher -- B. Riley FBR, Inc. -- Analyst

Good morning, John, and Brian, and Todd. Couple of questions for me, first starting with liquidity, I think you just touched upon the $875 million in cash left from the draw down. When you think about the next two years, I think you just said, plenty of liquidity through 2022, how much of that is question? I mean, if you go cash flow positive in the third quarter, is the bulk of that $875 million just capex spending that you discussed, and then the rest is cushion at the year-end 2022?

Brian Donley -- Treasurer and Chief Financial Officer

Good morning, Bryan. Thank you for that question. Yeah, I think if we do nothing else, we think we have enough cash to cover the $500 million that becomes due in August of '22. We think we'll be able to cover the capex and start building cash from operations in the latter half of this year and into next year. So barring any other transactions that we might do or consider, we think we'll be able to ride right into 2023.

Bryan Maher -- B. Riley FBR, Inc. -- Analyst

Yeah. And when you look back at the last five or six months with the transitions, what has been the biggest challenges there? And do you foresee with a much bigger Sonesta, the opportunity to maybe convert some unhappy other brand owners to the Sonesta brand over the next couple of years?

John G. Murray -- President and Chief Executive Officer

Hey, Bryan, it's John, I'll take that one. I think, the biggest challenge is that there is a notice period when you decide you're going to transition hotels or terminate an operator and obviously neither Marriott nor IHG were happy about the fact that they were losing hundreds of hotels from their system. So they stop taking reservations for dates post planned transition day. So there is usually couple of months where guests could be making reservations were Marriott or IHG really weren't letting them. The prior operators call on those who have made reservations before that cut off happened and try to move them to other hotels. So besides GDS codes and things changing, the prior operators don't do you any favors leading up to the transition period.

And then from an operational perspective, you typically don't get detailed employee information until just a couple of weeks, maybe a few weeks before the transition date. And so you have to make sure they have all the information to make sure you have legally documented employees, you have to make sure they're appropriately trained in the new systems. And so that's time consuming and it's much more problematic when a percentage of your workforce is furloughed. And so you're reaching out to introduce yourself, not only to the existing employees but the furloughed employees.

And so those -- I think those were the biggest challenges, but we think that Sonesta has done a pretty amazing job of taking the bull by the horns and transitioning these hotels quickly and ripping off the band-aid and getting back to work. They have assessed their sales team and they've got a number of really great employees that they transitioned over from IHG and Marriott, in some cases they found in the sales area that because of the strength of the systems that Marriot and IHG both had that -- some of the salespeople that initially transitioned over we're not scrapping up to get out and battle with the business. They were used to the telephone ringing and the computer screen popping up new reservations without having to work that hard. And so, I think with the drop-off in business travel that Sonesta scrapping it and their new size is going to help them compete head on with the major brands.

In terms of their -- in terms of Sonesta's ability to franchise, I think that they're going to have a lot of opportunities to take on hotels from a number of the brands. I think that month in and month out you'll see that the three largest brands Marriott, Hilton and IHG have most of the new development rooms are going toward their brands and they've really taken over a lot of the street corners and shelf space, if you will, for hotels such that new owners contemplating a hotel probably are going to have a difficult time making the economics work for the amount of dollars they have to invest to be one of the 15th or 16th Marriott property in a market where they have the ability with Sonesta to have the focus of the brand and the support of the brand. I think that's something that's going to distinguish Sonesta from the bigger brands.

Our experience is that hotel owners who think that Marriott is working for them and not working for Marriott don't really understand what's going on at their hotels.

Bryan Maher -- B. Riley FBR, Inc. -- Analyst

Great. And just one more quick one from me, if I might, and then I'll hop back in the queue. Have you guys like kind of narrowed down with the cost per property is to convert from Marriott InterCon to a Sonesta, kind of the hard cost on signage? And then kind of a follow-up to that, I've noticed some signage at previously other branded properties that are now Sonesta kind of have a temporary sign over the physical sign that was there before. Should we expect those to kind of stay on their while you analyze whether the property will be kept as Sonesta or sold as opposed to kind of spending the hard money to replace that only for it to be kind of wasted dollars two or three quarters from now?

Brian Donley -- Treasurer and Chief Financial Officer

Thanks, Bryan. I'll take that one. To answer the latter part of that I think a lot of what you're seeing if you see a temporary signage is just the timeline it takes to get permitting and get those dollars out there to put the permanent signage up. So I don't think it's really the latter of whether or not we're going to keep it Sonesta at that point. I mean, obviously, we're evaluating the portfolio and we continue to look at every property and there could be changes there. But for the most part it's the permitting and how long it takes to get that out there.

But as far as the cost per hotel the transition, I think, I talked a little bit about the numbers in aggregate. But if you break it down, what we expensed at the hotel level, it averages about $120,000 per hotel from operations, whether it be procurement or getting revenue management systems and other legal costs for permitting and licensing and things of that nature, on average. The capital component is about 225,000 hotel, call it, and that's where you're talking about signage and IT hardware computer system things of that nature.

Bryan Maher -- B. Riley FBR, Inc. -- Analyst

Thank you.

Brian Donley -- Treasurer and Chief Financial Officer

Welcome.

Operator

And our next question will come from Jim Sullivan with BTIG. Please go ahead.

Jim Sullivan -- with -- Analyst

Thank you. I'd really like to follow on initially really on that same question about the operating expense cost to transition. In this quarter some $19 million of transition costs and Q4 $14 million of transition costs. So assuming that Hyatt -- that you continue with don't Hyatt transition, I guess, the first question is how much additional transition costs should we be assuming for the full year in addition to what you've just reported here in Q1 for transition costs, assuming no conversion of Hyatt?

Brian Donley -- Treasurer and Chief Financial Officer

Assuming no conversion of Hyatt, I think from a income statement standpoint, we've captured most of it, if not all of it to date. I don't think there'll be much of a bleed into the future quarters.

Jim Sullivan -- with -- Analyst

Okay. And then secondly, you provide a very helpful detail regarding the calculation of hotel EBITDA and adjusted hotel EBITDA providing good line item detail on the expenses, and then you deduct to get to the adjusted hotel EBITDA $19 million of transition-related costs. Just looking at kind of those line items on a consecutive quarter basis, the big increase as you move from Q4 to Q1 was on the other direct and indirect expenses, which rose about $11 million. Is that where the lion share of the transition costs are located?

Brian Donley -- Treasurer and Chief Financial Officer

Yes, that's correct. That's why we showed that as an add-back to strip out those one-time expenses. We don't think they're recurrent costs, so that's why we're adjusting them out. Yeah.

Jim Sullivan -- with -- Analyst

Okay. And then you had mentioned the employee severance in connection with the Marriott transition. So, I wonder if you could help us understand number one, when the hotels were branded Marriott and branded IHG, where the employees of the hotel subject to union contracts? Number one. Number 2, with the transition to Sonesta does -- do those union contracts continue or do they become non-union?

John G. Murray -- President and Chief Executive Officer

Yeah. So there are a handful, maybe a dozen hotels in our portfolio that are union hotels. Two of them are still closed. The other 10 are spread out around the country, but there is a concentration in the New York, New Jersey and Philadelphia markets, and if they -- and Chicago as well. If the hotel was union when it was managed by Marriott or IHG, then it has remained union when it's come over to Sonesta. In most cases the owner has to sign a recognition letter acknowledging the union and there are significant costs, a lot of which are pension related to try and to terminate those relationships.

Jim Sullivan -- with -- Analyst

I think that was cited in the prepared comments said about $8 million of the transition costs were for severance agreements. So, do those arise because of the employment agreement that Marriott has with the employees and does IHG or does Hyatt have a similar type of agreement with a similar type of expense, if you were to transition?

John G. Murray -- President and Chief Executive Officer

The -- a lot of the severance costs that we saw with Marriott related to employees that have been furloughed for a substantial period of time, and there are a lot of nuances to -- if you're not planning to bring furloughed employees back initially, if operations are still negatively affected by the pandemic. And so there is an uncertain period of time, additional time that those employees will be furloughed, the labor councils or employment council at Marriott and at IHG evaluated those and at Sonesta too. They all evaluated those conditions and made some determination as to which hotel employees needed to be terminated as opposed to try to transition them as for furloughed employees. And that's just the way it [Technical Issues] out.

Jim Sullivan -- with -- Analyst

Okay. And then just on one specific line item, management fees, on a sequential quarter basis, they more than doubled here in the first quarter from the fourth quarter. And I don't know if that had anything to do with the -- if any of the transition costs were on that line item or not or is that a result of the Sonesta transition agreement? And kind of going forward, should we assume that that kind of $5 million run rate is something that's likely to continue on this revenue base?

Brian Donley -- Treasurer and Chief Financial Officer

Yeah, Jim, that's directly correlated to the Sonesta contracts, the historical contracts and these contracts related to transition hotels are the same. So, full service hotels Sonesta earns a 3% management fee, for extended stay 5%. So, I mean, that's directly tied to revenues. So as revenue grow that fee will grow accordingly. So historical agreements, you might recall, under Marriott and IHG, those were junior expenses, meaning if there was sufficient cash flow to pay our returns than they could earn their profit fees, but in the Sonesta structure which is more in line with the market agreement, those fees are just part of operating costs.

Jim Sullivan -- with -- Analyst

Okay. And then that kind of leads to the final question, which is obviously you've given very helpful information on top line trends by month here, in terms of ADR, occupancy and RevPAR. Under the Sonesta agreements should we be assuming that as you -- as the portfolio recovers hopefully to the pre-pandemic revenue run rate, should we be assuming that the EBITDA margin -- the hotel EBITDA margin would be the same as what it was under Marriott-IHG management branding, or should we assume it would be higher or lower?

John G. Murray -- President and Chief Executive Officer

I mean, as Brian indicated the management fees will -- base management fees on the Sonesta will be an operating cost. So in that respect, there'll be added expense, or at least that's the way it looks up superficially, but the fact is that when the credit support ran out with IHG and Marriott, and we talked about possible ways forward with them before deciding to transition to Sonesta. Among the changes that both IHG and Marriott insisted upon was that, that their management fees would become senior as well. So I think it was that aspect -- that change to our P&L is something that was going to happen across the board really without regard to whether it's Sonesta managing or one of the other brands managing.

Jim Sullivan -- with -- Analyst

Okay, great. Thanks, John.

John G. Murray -- President and Chief Executive Officer

Yeah.

Operator

And this will conclude our question-and-answer session. I'd like to turn the conference back over to John Murray for any closing remarks.

John G. Murray -- President and Chief Executive Officer

Thank you very much for joining us today and we look forward to seeing some of you at the in-person and virtual hotel and real estate conferences that are coming up in the next couple of months. Thank you.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Kristin Brown -- Director, Investor Relations

John G. Murray -- President and Chief Executive Officer

Todd Hargreaves -- Vice President and Chief Investment Officer

Brian Donley -- Treasurer and Chief Financial Officer

Bryan Maher -- B. Riley FBR, Inc. -- Analyst

Jim Sullivan -- with -- Analyst

More SVC analysis

All earnings call transcripts

AlphaStreet Logo

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Service Properties Trust Stock Quote
Service Properties Trust
SVC
$8.14 (4.16%) $0.33

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
390%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.