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DATE
Wednesday, Aug. 6, 2025 at 2 p.m. ET
CALL PARTICIPANTS
President and Chief Executive Officer — Chris Bilotto
Treasurer and Chief Financial Officer — Brian Donley
Vice President — Jesse Abair
Senior Director of Investor Relations — Kevin Barry
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RISKS
Debt service coverage below covenant— Brian Donley reported, "our 1.5 times debt service coverage covenant was below the minimum requirement at 1.49 times," which prohibits incurring additional debt until compliance is restored.
Hotel-level EBITDA decline— Adjusted hotel EBITDA fell 11.3% year over year to $73 million in fiscal Q2 2025, due to higher labor costs, inflationary pressures, and renovation-related disruptions.
Guidance for softer Q3 hotel fundamentals— "We've definitely seen some softness in Q3, especially in the August timeframe. We typically see a seasonal drop-off in activity in leisure travel as we get into early fall," as stated by Brian Donley.
Disposition proceeds lower than prior estimates— Chris Bilotto confirmed that expected 2025 gross proceeds from hotel sales decreased from prior communication to $966 million, driven by one hotel being removed from the sales process and updates following due diligence.
TAKEAWAYS
Hotel asset disposition progress-- 122 hotels scheduled for sale in 2025 with expected gross proceeds of $966 million, including eight completed hotel sales year-to-date.
Sonesta portfolio transaction status-- Nonrefundable deposits were received for 111 hotels in the Sonesta portfolio at a $900 million sales price; the transaction relates to fiscal Q2 2025. Diligence is ongoing for three additional hotels valued at $20 million as of fiscal Q2 2025.
EBITDA valuation multiple-- The expected $966 million in 2025 sale proceeds reflects an 18.4x multiple on trailing twelve-month hotel-level EBITDA of $53 million (non-GAAP).
Q2 RevPAR performance-- RevPAR for comparable hotels rose 40 basis points year over year in fiscal Q2 2025, outpacing the industry by 90 basis points and marking three consecutive quarters of relative outperformance.
Retained hotel portfolio-- The 84 hotels expected to be retained delivered a 1.5% year-over-year RevPAR increase and $53.5 million in adjusted hotel EBITDA for fiscal Q2 2025, down 11.7% year over year, with declines tied to labor costs, repairs, and renovation disruption.
Net lease segment scale-- The 742 net lease properties generated annual minimum rents of $387 million, with over 97% leased, spanning 174 tenants, and 136 brands across 21 industries.
TA travel centers profile-- 175 TA travel centers in the portfolio are backed by BP's investment-grade credit, with current leases featuring eight years' remaining term and 50 years of extension options.
Net lease coverage-- Aggregate minimum rent coverage for the net lease portfolio was 2.04x on a trailing twelve-month basis as of fiscal Q2 2025; excluding BP-backed TA leases, coverage stood at 3.7x for the trailing twelve months ended fiscal Q2 2025.
Leasing activity-- Over 350,000 square feet leased in fiscal Q2 2025 averaged twelve-year terms and a 5.7% roll-off in cash rents.
Net lease acquisitions and dispositions-- Acquired 14 net lease properties for $44 million year-to-date in 2025; under agreement to acquire six more properties in fiscal Q3 2025 for $10.3 million; sold five net lease properties for $15 million in fiscal Q2 2025.
Normalized FFO and adjusted EBITDAre-- Normalized FFO (non-GAAP) was $57.6 million ($0.35 per share) for fiscal Q2 2025, compared to $0.45 per share in the prior-year quarter; adjusted EBITDAre (non-GAAP) declined by $7.7 million year over year to $163.8 million for fiscal Q2 2025.
Q3 guidance-- Projected fiscal Q3 2025 RevPAR guidance is $98 to $101, with adjusted hotel EBITDA of $54 million to $58 million (non-GAAP); these figures exclude the impact from closing the 114-hotel Sonesta disposition; guidance is for fiscal Q3 and Q4 2025 and does not include the impact of these hotel sales.
Capital expenditures-- Invested $39 million in capital improvements during fiscal Q2 2025; 2025 full-year expected capex is $250 million, with 2026 guidance lowered to $150 million ($64 million discretionary, remainder maintenance).
Debt and liquidity-- $5.8 billion of debt was outstanding at a 6.4% weighted average interest rate as of fiscal Q2 2025; next maturity is $350 million senior unsecured notes due February 2026; $670 million in cash was on hand as of Aug. 6, 2025, following the full draw of the $650 million credit facility in July.
Debt redemption and repayment plan-- Announced early redemption of $350 million 5.25% unsecured senior notes due February 2026; $920 million in expected proceeds from the sale of 114 hotels is projected to be used to repay the $450 million senior unsecured notes maturing in October 2026, and amounts outstanding on the revolving credit facility.
Portfolio transformation-- Upon completion of the expected hotel sales, management projects net lease assets will account for over 70% of pro forma fiscal Q2 2025 adjusted EBITDAre (non-GAAP).
SUMMARY
The earnings call detailed the execution ofService Properties Trust(SVC -10.35%)'s strategic hotel disposition program, with management confirming the imminent closure of 111 Sonesta hotels following receipt of nonrefundable deposits and completion of due diligence, providing $900 million in expected proceeds. Diligence is ongoing for three additional hotels valued at $20 million, with closings expected to commence in fiscal Q3 2025 and finish before year-end. Net lease operations remained resilient in fiscal Q2 2025, with more than 97% portfolio occupancy, a deepening tenant base, and stable rent coverage metrics (2.04x trailing twelve months). Management actively recycled capital through both modest acquisitions and select property sales. Financial results for fiscal Q2 2025 reflected a year-over-year drop in normalized funds from operations and hotel-level EBITDA, mainly due to higher labor costs and renovation-related impacts. Adjusted EBITDAre (non-GAAP) guidance for fiscal Q3 2025 incorporates seasonality but does not include the effect of the major pending asset sales. The company proactively secured liquidity by fully drawing its credit facility in July 2025 due to covenant shortfalls and has committed to early redemption of outstanding notes, supported by pending disposition proceeds from hotel sales expected to close in fiscal Q3 and Q4 2025. Management expressed confidence that these steps will restore compliance and improve leverage metrics. Full-year capital expenditures are projected at $250 million for 2025, with plans to reduce spending to $150 million in 2026 as property investments wind down.
Jesse Abair emphasized net lease strategy, stating the portfolio "benefits from minimal CapEx needs, long-term leases with annual escalators that provide a bond-like risk-return profile, and cash flows that can be relied upon even in uncertain economic environments."
Chris Bilotto stated, "Pro forma for our expected hotel sales, net lease assets are projected to account for over 70% of Service Properties Trust's pro forma Q2 2025 adjusted EBITDAre (non-GAAP)."
Brian Donley disclosed, "As of our earnings release, our 1.5 times debt service coverage covenant was below the minimum requirement at 1.49 times. This prohibits us from incurring additional debt until we are back in compliance on a pro forma basis."
Capital recycling remains the preferred approach for net lease acquisitions, with management indicating current run rates for acquisitions are expected to be "modest," and aligned with disposal proceeds.
Management noted anticipated "less disruption in the business" moving forward, as fewer hotels undergo renovation at any given time, and capital deployment is reduced.
INDUSTRY GLOSSARY
RevPAR: Revenue per Available Room — a key hotel industry metric calculated by multiplying a hotel’s average daily room rate by its occupancy rate, used to assess hotel performance.
ADR: Average Daily Rate — the average revenue earned from room rentals per occupied room in a specified time period.
Triple Net Lease (NNN): A lease structure where the tenant pays all property-related expenses, including real estate taxes, building insurance, and maintenance, in addition to rent.
Adjusted EBITDAre: Earnings Before Interest, Taxes, Depreciation, and Amortization for Real Estate — a non-GAAP financial metric tailored for REITs, representing recurring operating performance.
Normalized FFO: Normalized Funds from Operations — a non-GAAP REIT financial measure that adjusts FFO for non-recurring or one-time items to better reflect recurring cash flows.
TA: Refers to TravelCenters of America, a chain of travel centers primarily serving the trucking industry, whose leases in SVC’s portfolio are backed by BP’s credit.
Key: In hospitality, refers to a hotel room or guest unit; “16,000 keys” means 16,000 rooms.
Cash rent roll-off: The percentage decrease in cash rent compared with the prior contractual rent, commonly calculated upon lease renewal or re-leasing of space.
Full Conference Call Transcript
Operator: Good morning and welcome to the Service Properties Trust Second Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.
Kevin Barry: Good morning. Thank you for joining us today. With me on the call are Chris Bilotto, President and Chief Executive Officer, Jesse Abair, Vice President, and Brian Donley, Treasurer and Chief Financial Officer. Just a moment, they will provide details about our business and our performance for 2025, followed by a question and answer session with sell-side analysts. I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note 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 Service Properties Trust's beliefs and expectations as of today, 08/06/2025, and actual results may differ materially from those that we project. 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. 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. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO, and adjusted EBITDAre.
A reconciliation of these non-GAAP figures to net income is available in Service Properties Trust's earnings release presentation that we issued last night, which can be found on our website. Finally, we are providing guidance on this call, including adjusted hotel EBITDA. We are not providing a reconciliation of this non-GAAP measure as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. With that, I will turn the call over to Chris.
Chris Bilotto: Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Last night, we reported second-quarter financial results that were in line with our expectations and continued to advance on many of our strategic priorities. I will begin today's call with an update on our business plans, including the recent progress of our hotel disposition program and provide further highlights within our hotel and net lease portfolios during the quarter. Then, Jesse will discuss in more detail the net lease portfolio and the acquisitions that we have made to build on our existing platform. Finally, Brian will review our financial results and quarterly guidance.
Starting with our current business plan, during the past quarter, we have made significant progress on previously announced hotel dispositions, advanced many of our hotel renovations as catalysts to drive performance and improve the quality of our assets, and pursued selected net lease acquisitions and dispositions. These efforts are part of our ongoing strategic initiative to transform Service Properties Trust toward becoming a predominantly net lease REIT. Entering into 2025, we have continued to execute on our strategy of divesting select hotels while focusing our retained portfolio on primarily full-service, urban, and leisure-oriented properties. To date, we have sold eight hotels for proceeds of $46 million and continue to make meaningful progress on the previously communicated 114 Sonesta hotel portfolio.
We removed from the marketing process one full-service hotel located in Atlanta as we continue to evaluate broader opportunities for the retained hotel portfolio. Regarding the 114 Sonesta hotel sales, due diligence has been completed and nonrefundable deposits have been received for 111 hotels, with four unique buyers, for a sales price of $900 million. Additionally, we have entered into a purchase and sale agreement with diligence underway for the remaining three hotels with a sales price of $20 million. Closing on the hotels is expected to commence in Q3 and finish before year-end.
Including the eight hotels we already sold this year, in 2025, we are on track to complete 122 hotel sales totaling nearly 16,000 keys for gross proceeds of $966 million. This pricing implies a valuation of 18.4 times hotel EBITDA of $53 million over the trailing twelve months. Turning to hotel performance during the second quarter, RevPAR increased 40 basis points year over year, outperforming the broader industry by 90 basis points and marking the third consecutive quarter of relative outperformance. Service Properties Trust's growth was driven by gains in both occupancy and ADR, with group and contract segments outpacing transient business.
Top-performing properties during the quarter are within our retained hotel portfolio and include our Royal Sonestas Kauai and San Juan, which benefited from strong leisure demand through OTA and wholesale channels. We also saw solid performance at our three Downtown Chicago hotels and the Clift Royal Sonesta in San Francisco, supported by a rebound in citywide group business. Additionally, recently renovated hotels are consistently delivering double-digit revenue growth, with notable strength across our Hyatt portfolio, Sonesta White Plains, and Sonesta LAX. Hotel-level EBITDA declined during the quarter primarily due to elevated labor costs and broader inflationary pressures. Additionally, displacement in hotels with active renovation contributed to $2.4 million of year-over-year negative EBITDA.
However, we expect this to moderate in Q3 and fluctuate modestly thereafter as renovations advance. The 84 hotels currently planned to retain delivered relatively solid performance, with RevPAR increasing 150 basis points year over year, driven by gains in both occupancy and ADR. Over the past several years, we have made substantial capital investments across our retained portfolio, enhancing many of our flagship properties and premier destinations such as Hilton Head, Kauai, and San Juan. These capital enhancements are expected to drive ongoing EBITDA growth. Given our prior investments in the portfolio, coupled with the completion of our remaining hotel dispositions, this positions us to meaningfully lower capital spend with 2026 guidance now set at $150 million.
Within our triple net lease segment, we are making steady progress with our capital recycling program and prioritizing accretive opportunities within our pipeline. Since the beginning of the quarter, we have completed the sale of five net lease properties for a total of $15 million, and we are in the early stages of marketing six additional properties, which are expected to generate between $2.5 million to $3.5 million in total proceeds. Concurrently, as Jesse will discuss further, our net lease portfolio continues to provide stable and predictable cash flows with minimum capital requirements, and we have used net lease real estate as a naturally defensive and less volatile asset class.
In conclusion, the second quarter marked meaningful progress in Service Properties Trust's ongoing strategic transformation. Pro forma for our expected hotel sales, net lease assets are projected to account for over 70% of Service Properties Trust's pro forma Q2 adjusted EBITDAre, representing a meaningful shift in our asset composition and positioning Service Properties Trust shares for a potential rerating at more attractive net lease multiples. Looking ahead, we intend to maintain our capital recycling and deleveraging strategy into 2026, pursuing further hotel dispositions as property performance and overall market conditions continue to improve. I will now turn it over to Jesse to discuss the net lease portfolio.
Jesse Abair: Thank you, Chris. The strategic shift underway at Service Properties Trust will ultimately result in a portfolio that benefits from minimal CapEx needs, long-term leases with annual escalators that provide a bond-like risk-return profile, and cash flows that can be relied upon even in uncertain economic environments. The net lease market is deep, liquid, and highly fragmented, creating conditions that are conducive to scalable expansion if and when we choose to do so. Additionally, as we have demonstrated with mortgage financing, Service Properties Trust's net lease assets provide access to attractively priced financing options to support our growth. That growth will build up the existing back of net lease retail properties that we already own.
Our portfolio is anchored by 175 TA travel centers, backed by BP's investment-grade credit. As a reminder, Service Properties Trust's current leases with TA have eight years of remaining term and include fifty years of extension options. While the rent coverage for the TA assets has experienced degradation over the past few quarters, this decline has begun to level off as freight demand normalizes coming off its COVID-era peak. Moreover, we are seeing investments in real estate from BP, in the form of EV charging stations and other initiatives that are intended to drive revenue from non-fuel offerings at these locations.
The overall net lease portfolio consists of 742 service-oriented retail net lease properties with annual minimum rents of $387 million. These assets were more than 97% leased. We have 174 tenants operating under 136 brands spanning 21 distinct industries. The diversity and breadth of the portfolio provide opportunities for organic growth as we continue to source modest transactions with both new and existing operators. Our lease expiration schedule remains well-laddered, with 1.7% of our minimum rent scheduled to expire through the remainder of 2025 and 3% expiring in 2026.
Our asset management platform has been actively engaged with our existing tenants as well as potential new tenants, resulting in over 350,000 square feet of leasing during the second quarter that averaged twelve years of term and a 5.7% roll-off in cash rents. As of quarter-end, the aggregate coverage of our net lease portfolio's minimum rents was 2.04 times on a trailing twelve-month basis, remaining essentially unchanged from the prior quarter. Excluding the BP-backed TA leases, rent coverage remained strong at 3.7 times. With respect to investments, we remain committed to growing and optimizing the portfolio in a manner that enhances tenant and geographic diversity, increases weighted average lease term, and expands annual minimum rents.
Our investment thesis focuses on properties in e-commerce-resistant, necessity-based sectors that have proven resilient across cycles. This includes quick service and casual dining restaurants, grocery stores, auto services, and other daily needs providers. Since ramping up our acquisitions platform in 2024, we have developed a robust pipeline resulting in the acquisition of 14 net lease properties year-to-date for a total of $44 million. We are also under agreement to acquire six additional properties in Q3 for a total of $10.3 million with similar economic terms as the closed transactions. As Service Properties Trust migrates to a predominantly net lease REIT, our asset management and acquisition teams are actively curating the net lease portfolio.
Coupled with the strong foundation we have already established in this space, this will put us in a position to efficiently grow this side of the business going forward. I'll now turn the call over to Brian to discuss our financial results.
Brian Donley: Thanks, Jesse. Good morning. Starting with our consolidated financial results for 2025, normalized FFO was $57.6 million or $0.35 per share versus $0.45 per share in the prior year quarter. Adjusted EBITDAre decreased $7.7 million year over year to $163.8 million. Overall financial results this quarter as compared to the prior year quarter were primarily impacted by an $8.8 million increase in interest expense and lower hotel returns. For our 200 comparable hotels this quarter, RevPAR increased by 40 basis points, and gross operating profit margin percentage declined by 300 basis points to 30.2%. Below the 1% from the prior year, driven by lower property insurance premiums.
Our hotel portfolio generated adjusted hotel EBITDA of $73 million, a decline of 11.3% from the prior year but towards the high end of our guidance range. The four hotels that were under renovation during the quarter represented $2.4 million or 24% of the decline in adjusted hotel EBITDA year over year. The 116 Sonesta exit hotels, including two that sold in July, generated RevPAR of $75, a decline of 1.8%, and adjusted hotel EBITDA of $19.9 million, a decline of 12% year over year.
The 84 hotels we expect to retain generated RevPAR of $121, an increase of 1.5% year over year, and adjusted hotel EBITDA of $53.5 million during the quarter, a decrease of $7 million or 11.7% year over year. Most of the decline year over year in the retained portfolio is related to elevated labor costs, repairs and maintenance expenses, and renovation disruption. To our expectations for Q3, we're currently projecting third-quarter RevPAR of $98 to $101 and adjusted hotel EBITDA in the $54 million to $58 million range. This guidance considers a sequential decline due to seasonality in the third quarter as well as recent headwinds in the travel and lodging industries.
Guidance does not include the impact of completing any of the 114 Sonesta hotel dispositions expected to close later in Q3 and Q4. Turning to the balance sheet, a key objective for our hotel disposition program is to address our debt maturities and improve our credit metrics. At quarter-end, we had $5.8 billion of debt outstanding with a weighted average interest rate of 6.4%. Our next debt maturity is $350 million of senior unsecured notes maturing in February 2026. As of our earnings release, our 1.5 times debt service coverage covenant was below the minimum requirement at 1.49 times. This prohibits us from incurring additional debt until we are back in compliance on a pro forma basis.
In July, we fully drew down our $650 million credit facility as a precautionary measure to preserve our liquidity in anticipation of potentially not meeting the minimum level of debt service coverage. As of today, we have approximately $670 million of cash on hand. Yesterday, we announced the early redemption of the $350 million of 5.25% unsecured senior notes due in February at par plus accrued interest. The redemption will be funded with cash on hand in early September. The $920 million of expected proceeds from the sale of the 114 hotels will be used to repay the $450 million senior unsecured notes maturing in October '26 and amounts outstanding on our revolving credit facility.
We currently expect the closing of the asset sales and the repayment of outstanding debt will have a positive impact on our financial covenants. We're also currently evaluating different strategies to improve our credit metrics and our covenant measures, including considering additional asset sales, operational improvements at our hotels, and potential financing opportunities. Turning to our capital expenditure activity, during the second quarter, we invested $39 million in capital improvements at our properties. Notable activity this quarter included projects at the Royal Sonesta Cambridge and the Sonesta Hilton Head Resort.
For the full year, we continue to expect capital expenditures to be approximately $250 million, including $120 million to $140 million of maintenance capital, with the rest going towards renovation and redevelopment initiatives. Looking ahead to next year, we expect full-year CapEx in 2026 to be approximately $150 million. Of the $150 million, we expect $64 million to relate to discretionary renovation capital, with the balance going to recurring maintenance capital. We expect with the reduction in CapEx spending, the repayment of debt, and operating improvements expected from our completed hotel renovations, Service Properties Trust's cash flows will improve significantly as we move into next year. That concludes our prepared remarks. We're ready to open the line for questions.
Operator: Thank you. We will now begin the question and answer session. Our first question will come from Tyler Batory with Oppenheimer. Please go ahead.
Tyler Batory: Good morning. Thanks for taking my questions. First one for me on the guidance for the hotel portfolio. You know, I understand on the EBITDA line, there's some seasonality there sequentially from Q2. But can you expand a little bit more on some of the renovation disruption in Q3, and then talk to you about the commentary you mentioned, just in general headwinds in travel and lodging, please.
Brian Donley: Sure. I'll start, Tyler. Good morning, and thank you for the question. We've definitely seen some softness in Q3, especially in the August timeframe. We typically see a seasonal drop-off in activity in leisure travel as we get into early fall. Some of our forward-looking numbers and some of the group pace, you know, starting to improve as we get into Q4, but we definitely see some weakness in Q3. Things have been softer and trends have been continuing. So, you know, as we pace looking year over year, it's very comparable to what we saw Q2 year over year. So declines year over year.
Tyler Batory: Okay. Perfect. And then the CapEx commentary you gave for 2026, appreciate that, the $150 million number. The remainder of that, that's discretionary, the $86 million, you know, is that still a little bit elevated compared to what you might think is more normal? And just kind of how would you think about a maintenance CapEx run rate long term for the portfolio?
Brian Donley: Yeah. I think as we look at '26, it's a significant reduction from what we've been spending in the last few years. The pace of our discretionary numbers, and just to clarify, $64 million, yes, will be discretionary of the $150 million, with the rest going to renovations. Our overall CapEx spend, I think if you benchmark that to our current portfolio, it's closer to 15% of revenues. And I think as we move forward, industry norms are probably closer to 10% to 12% of total revenues, and, you know, that's where we think we want to be longer term.
But for '26, we still have some significant projects we're doing, including our repositioning of the South Beach Hotel and some other larger projects. But with the pace of our renovations and just the scale of how much we're deploying, it will continue to trend down. Yeah. And I think bigger picture, just you know, there'll be less active hotels under renovation in any given year, you know, albeit we're talking about the $150 million in totality. And so I think the other complement to that is less disruption in the business. And so we should see just EBITDA generally be more moderated in future years because we have fewer renovations underway at any given time.
Tyler Batory: Okay. Excellent. Point of clarification, on the asset sales, I think last quarter, you were talking about, you know, a billion one of gross proceeds. You know, now that number is $966 million. So I just want to be clear on just the delta between those numbers and what's changed.
Chris Bilotto: Yeah. It's twofold. So, you know, one of the bigger pieces is we pulled from the marketing efforts a hotel we have in Atlanta. That's a performing hotel. I think, generally speaking, you know, we weren't necessarily happy with what we were seeing as far as pricing goes. And so retaining that hotel seemed to be more prudent, at least currently. And then the balance, kind of the lesser amount, was more around the conclusion of diligence, as we mentioned in the prepared remarks, where we're at now with the lion's share, the $900 million of asset sales is diligence is complete, deposits are hard, and we're on the other side to closing.
And so anything related to any pricing changes is no longer in play. And so that's kind of the other gap with respect to that number.
Tyler Batory: Okay. Very helpful. Last one for me. The net lease side of things, making a lot of progress on that strategy in terms of transaction activity. Talk a little bit more about the pipeline for deals. You know, I understand part of this is capital recycling. But is there a point where maybe the acquisitions could be significantly larger than the dispositions? I'm just really trying to get a sense of, you know, expectations.
I know you probably can't give specific guidance on this, but trying to get a sense of maybe rough run rate or maybe some guideposts on, you know, how much in terms of dollars you'd like to allocate towards acquisitions, whether it's, you know, the next couple of quarters or the next couple of years. I'm just trying to get a sense of how that could evolve looking ahead.
Jesse Abair: Yeah. I think generally speaking, and we talked about this, you know, on the onset of this endeavor, is that we wanted to do kind of modest acquisitions on the net lease side. And there's a range of strategies. You know, we've been net sellers over the years, more specifically in that segment. You know, as you're familiar with, we have an attractive kind of balance sheet mechanism with the ABS, the mortgage financing. And as part of that, you know, it is a good opportunity for the company medium term, favorable pricing. And so refreshing that accordingly, with the right assets as part of the driver with respect to some of these acquisitions.
And then again, just overall portfolio enhancements. I mean, what we like about it today, absent of just the types of assets we're buying and how we're growing the portfolio, is we're able to do it partially with asset sales. And so, you know, we're getting kind of the true benefit of the capital recycling aspect of the growth. But, look, you look at kind of Q2 where we started transacting just under $30 million. You know, we're, you know, at 14 million to date through Q3, and Jesse alluded to another 10 million. And so, you know, that's probably a fair run rate for the time being.
This is not a scenario where we expect to do some sort of outsized growth, you know, currently, but we'll look to opportunities to grow and find proceeds through sales and other initiatives to kind of help balance that. And then I think your question around the types of assets where we've been transacting today has been more weighted towards casual dining and QSR. There's been some automotive in there with respect to car washes and similar type uses. And then we expect that to continue to diversify as we look at certain medical type opportunities, and things around, you know, some Dollar General to a smaller scale and some other similar type uses are things we're targeting.
But think kind of net-net for us, part of that allocation will be tied to how we can use it as a creative financing tool, given some parameters around what that type of portfolio you can assemble for that.
Tyler Batory: Okay. Very good detail. Thank you. That's all for me.
Operator: Our next question will come from John Massocca with B. Riley Securities. Please go ahead.
John Massocca: Good morning. Maybe kind of building on Tyler's question. Is the kind of outlook that if you wanted to get more on the net lease investments, that's something that maybe happens kind of post-closing of some of these strategic hotel dispositions? Just trying to think about when that, from a timing perspective, when that kind of net lease acquisition kind of machine could really start ramping into gear?
Jesse Abair: Yeah. I think that's probably fair. It's going to be steady state based on the run rate, you know, I just alluded to. And then as we get further, you know, kind of in the next year and kind of just see, you know, how performance continues across the portfolio. We don't want to kind of shift the focus around kind of the deleveraging component that we're focused on. And certainly, there are other variables we want to be mindful of. But look, you know, coming out of the sales this year, thinking about select sales next year, looking at opportunities to grow EBITDA through the portfolio and narrow that margin gap.
Those are all kind of net positives, less capital as we alluded to, bringing that number down by $100 million year over year. And I think as we kind of work our way through that at the beginning of the year, we'll be in a better position to assess, you know, kind of the opportunity to further ratchet up on anything related to more sales or, excuse me, more acquisitions outside of the run rate we just talked about.
John Massocca: Okay. And then as I think about the $900 million book hotel sales that are kind of maybe more advanced, what was kind of left to do there between now and closing, just given due diligence is done, deposits are hard. I mean, are there any kind of variables or factors that could derail those transactions? And I guess what's left to kind of do from either your perspective or the buyer's to kind of get those across the line? Or it's just literally a matter of having dates that, you know, for their reasons, for our reasons, whatever it may be, it's going to close between March and April.
Jesse Abair: It's the latter. I mean, you know, look, it's four unique buyers. We're on the other side in the sense that there's no more or no contingencies related to these sales. This is kind of common course whereby, you know, following the conclusion of diligence, you then have a pace to close given the size of the portfolio with each of the buyers. It's a rolling close, and so there'll be incremental take-downs between, you know, now and the end of the year. And I think, look, I think kind of where we stand today, with the balance in Q4. And again, there are ultimately hard dates tied to those.
And so, you know, that's where we get comfortable with kind of the 2025 execution.
John Massocca: Okay. And understanding, you know, that they have an obligation, it wouldn't get them out of deposits. But these are, you know, without commenting too much, I'm sure you can't give too much detail, but these are kind of strong counterparties and there isn't, you know, any finance needs on their end that are, you know, just to fulfilling this deal? These deals?
Jesse Abair: There's no contingency, you know, and so the deposits are hard at this stage, and I would just echo that. Our experience in selling assets is this is just normal course, and there's nothing to, in our view, that would suggest that the transactions won't close as planned.
John Massocca: Appreciate that. And then in terms of the insurance covenant on the debt service coverage ratio, how far off are you from kind of meeting that? And I guess, you know, is there, like, a timeline or a series of actions you think, I mean, understanding that there's some variability in the performance of the portfolio, but like how quickly do you think you could get back in kind of compliance with that covenant and be kind of, you know, able to be a more active participant in the debt markets if need be?
Brian Donley: Sure, John. It's a great question. Yeah. At Q1, we were right at the threshold of 1.50 times. And the numbers we reported yesterday were at 1.49 times. Depending on which side of the ratio you're talking about, it's $4 million of EBITDA, $3 million of interest. We did announce to get to the 1.50. We did announce the redemption of the February 26 notes. So on a pro forma basis, removing that interest, you know, gives us some temporary relief on that, but we, you know, we did draw the revolver.
So there are variables on how that ratio will work as we get into Q3 and when we get the Q3 filing, we'll have to see where our earnings are at. So we're, you know, we're not happy at the levels even if we are passing the covenant, we need to, you know, get more cushion there and not have to worry about an incurrence test to, as you said, participate in capital market transactions. But there are things we could do, further asset sales, operational improvements that are going to give us cushion. And we're going to continue to think strategically about that.
John Massocca: And then one last one on the hotel dispositions. Is pricing, and apologies if I missed this earlier in the call or in the prepared material, but is pricing what you were kind of anticipating, say, at the one Q, Paul?
Chris Bilotto: Yeah. I mean, I'll be a bar and kind of what I mentioned earlier. Right, there was some slight but I think the bigger, the bigger pry, I mean, we're very pleased with the pricing. You looked at kind of that $900 million at just shy of a kind of a six multiple, I think that it's indicative of, you know, just kind of the strong participation in those assets and the pricing we're able to achieve accordingly.
John Massocca: Okay. That's it for me. Thank you very much.
Operator: Our next question will come from Jack Armstrong with Wells Fargo. Please go ahead.
Jack Armstrong: Hey, good morning. Thanks for taking the question. Just kind of picking back up on the debt side there. Can you walk us through the decision to fully draw the credit facility in terms of kind of other ways that you could look to address the debt situation, would you consider issuing a zero coupon bond that would lower your cash interest and get you back into compliance with the debt covenant, you could refinance existing maturities?
Brian Donley: Sure. Jack, thank you for that. As we were getting close to the end of Q2, and looking where our May actuals and year-to-date actuals were on the hotel portfolio, we had anticipated our Q2 filing might put us right below that threshold, which is why we drew the revolver to protect liquidity because if on a pro forma basis, if you're below the 1.5 times, it's an occurrence test, so you can't draw on the revolver if you're under that level. So we did that proactively to make sure we have access to that liquidity, which is important for us.
The timing of the asset sales being later in the year and then having the $350 million due, you know, all played into that decision. So, you know, we'll continue to evaluate, you know, whether or not we hold cash, repay the revolver, and when we repay off the next tranche of notes that are due later in October 26. In regard to your other question, the zero coupon idea is certainly something on the table. We have a lot of exploratory conversations with stakeholders, bankers, and things of that nature, and that's something that can, yes, provide relief to this covenant, significant relief given the zero coupon structure.
So those are the kind of things we will evaluate going forward.
Jack Armstrong: Okay. And then as we're thinking about the 27 maturities, when should we expect you to start addressing those maturities? Is that a kind of early 2026 event as you start to some additional hotel sales? Or do you think you'll try and do a refinance instead of waiting for additional sales proceeds?
Brian Donley: Look, I think as Brian alluded to, you know, thinking about kind of multiple levers that would ultimately benefit the company. But certainly, the structure around additional hotel sales in '26 will be used to delever, and specifically around the twenty-seventh given, you know, with the current dispositions, and kind of the payoff Brian alluded to of the early part of the twenty-sixes. You know, that's going to be covered through those proceeds. So again, looking out to '27 in asset sales and, again, just being mindful of, you know, different opportunities as we continue to stay close to, you know, those twenty-seventh, you know, being kind of the next tranche for us to address.
Jack Armstrong: Okay. And can you characterize what are the next hotels that you'd look to take out of the portfolio just from kind of a chain scale location and brand perspective?
Brian Donley: Yeah. I think look. I think it's a little preliminary. I don't want to kind of lose sight of the focus on what we're closing on. But, you know, it's probably a combination of different And then there's others that may be lower performing certain markets that we would consider and that's something we're really starting to kind of get our arms around with now. And then be in a position we can time it accordingly. And so we've got a little runway it's something, you know, again, we're assembling, which would kind of think, be considered across the chain scale.
Jack Armstrong: Okay. And then on the hotel renovation program just from a cash on cash perspective? Kind of help us frame what the lift will look like in 2026 and 2027 in terms of how it breaks out between occupancy and rate?
Brian Donley: Sure. I mean, yeah. With the way we've been looking at some of these projects, you know, the different tiers of what we expect from the money we're deploying, obviously, put aside the recurring maintenance stuff. But the renovations and redevelopment initiatives, you know, there can be a wide range of expectations in how we pro forma some of those projects. Whether it's, you know, normal course, recycling slash renovation programs in the 8% to 10% range as far as lift expectations and RTI improvements. We have some larger scale projects like the South Beach Hotel I mentioned, where we expect returns in the 20% plus range and other projects. So there can be a wide range. Yeah.
But, you know, the lift, you know, can take, you know, six, twelve, eighteen months to be realized on a pro forma basis as hotels stabilize, get reintroduced to the market. Yes, but we're seeing a lot of good early signs from some of the bigger box that we have completed in recent months. And continue to be thoughtful around how we deploy capital and that goes into part of the strategy. To selectively pick renovations and how we're deploying CapEx.
Jack Armstrong: Okay. And then you mentioned in the deck some changes coming to the management agreement with Sonesta. Can you explain what those will look like? And to the extent that they're just changes to structure, and not in terms of the actual agreement with Sonesta, you know, why are you not pushing for a more favorable contract with them just given how much of a headwind to margins Sonesta Management has been?
Chris Bilotto: Yeah. Look, I think that the overall terms for the agreement are market and, you know, really a lot of the strategy around kind of reference to the management agreement is predicated on the fact that, you know, this is currently a full agreement. And as we think about the sales that are kind of underway currently and those that will likely happen in future years. I think it changed to the structure so we can have and forego the full agreement, and align incentives more specifically to kind of performance-based initiatives. Is all part of the expectation with any changes to the management agreement. And so again, I think economically, we don't anticipate any impact.
It's more just to kind of right-size and align with where we're going with the strategy and, again, on market terms.
Jack Armstrong: Okay. That's it for me. Thanks so much.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Chris Bilotto, President and Chief Executive Officer, for any closing remarks.
Chris Bilotto: Yes. Thank you for joining on today's call. We look forward to keeping you updated on our ongoing strategic initiative to transform the company, strengthen our balance sheet, and enhance overall performance. Please reach out to Investor Relations if you're interested in scheduling a meeting with Service Properties Trust. That concludes our call.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.