Service Properties Trust (NASDAQ:SVC) reported second-quarter results that management said reflected continued progress on its strategic priorities, including strengthening its balance sheet, improving hotel operations and shifting the portfolio toward net lease assets.
Normalized funds from operations totaled $55 million, or $0.43 per share, during the quarter. The company said the per-share result was in line with consensus expectations and reaffirmed its full-year 2026 outlook for normalized FFO of $124 million to $144 million, or $1.20 to $1.35 per share.
Hotel Revenue Gains Offset by Renovation Disruption
For its retained hotel portfolio, excluding 15 hotels designated for sale, SVC reported a 6.6% year-over-year increase in RevPAR during the second quarter. Growth was supported by occupancy and average daily rate gains, with particular strength among full-service and upper-upscale hotels.
Bilotto said RevPAR growth was partly offset by renovation-related disruption, especially at the Nautilus South Beach in Miami Beach. Excluding the Nautilus disruption, underlying RevPAR growth for the remaining portfolio was 9%, he said. Preliminary July RevPAR for retained hotels rose 7.1% from a year earlier.
Retained hotel adjusted EBITDA increased 4.2% year over year to $57 million. The portfolio generated an adjusted hotel EBITDA margin of about 19.4%, compared with negative EBITDA margins at the 15 hotels being sold, according to Bilotto.
“This gap is the core economic logic behind our capital recycling strategy,” Bilotto said, describing the company’s effort to redirect capital away from assets with negative returns and toward hotels with improving margins.
Chief Financial Officer Brian Donley said the company’s 93 comparable hotels generated adjusted hotel EBITDA of $55 million, roughly flat from the year-ago quarter, as higher insurance costs and renovation activity weighed on results. Gross operating profit margin declined 60 basis points to 28.7%.
The Nautilus redevelopment is expected to be completed around the end of October or in early November, with phased room and public-space completions. Bilotto said the property is expected to represent approximately $4.5 million of cash drag for the full year. Before its renovation, the hotel generated roughly $5 million to $6 million on an annual run-rate basis, and management expects performance to increase after the project is completed.
Margin Initiatives and Hotel Sales
SVC outlined several initiatives intended to improve hotel profitability, including increasing direct bookings through brand websites and loyalty programs, growing group and contract business, expanding ancillary revenue and improving labor productivity.
The company said contract-segment revenue increased 22%, largely due to new airline crew business. It also cited a 20% reduction in property insurance costs across the portfolio, effective July 1, and productivity improvements at Sonesta, Radisson and IHG-operated properties.
Bilotto said some benefits should emerge during the second half of 2026, while larger initiatives, including changes to benefit plans, are expected to have a greater impact in the first quarter of 2027. The company also expects to eliminate about $15 million of negative EBITDA drag over time through the sale of its exit hotels.
SVC remains on track to sell the previously identified 15 hotels. It sold a 133-key hotel in July for $18.4 million and said it had purchase-and-sale agreements or letters of intent for 13 hotels, while one property remained on the market. Management expects most remaining sales to close during the second half of 2026, although one could extend into early 2027.
The company also plans to market its remaining IHG-managed full-service hotel, a 495-key property in Atlanta’s Perimeter submarket, during the third quarter. Bilotto said the management agreement expires early next year, providing potential buyers flexibility regarding branding and future capital plans.
Net Lease Portfolio Produces NOI Growth
The net lease business produced a 2.2% sequential increase in cash-basis net operating income, driven by contributions from recent acquisitions, contractual rent increases and lower credit reserves. Occupancy remained at 96.6%.
Vice President Jesse Abair said aggregate portfolio rent coverage improved to 2.09 times on a trailing 12-month basis. TravelCenters of America rent coverage increased 10 basis points to 1.34 times, marking a second consecutive quarter of improvement and a 12% increase since the fourth quarter of 2025.
The company executed leases totaling 210,000 square feet during the quarter, with a weighted average lease term of approximately seven years. Only 1% of annualized base rent is scheduled to expire through year-end, with 3.8% expiring through the end of 2027.
- Year-to-date acquisitions totaled about $9 million across four quick-service restaurant and automotive-service properties.
- Those acquisitions carried weighted average cash and GAAP capitalization rates of 7.9% and 8.8%, respectively.
- SVC is under agreement to acquire five additional properties for $14.2 million, expected to close in the third quarter.
- The net lease portfolio includes 745 properties and nearly $400 million of annualized base rent.
Abair said more than 95% of annualized base rent comes from leases with contractual rent increases or percentage-rent provisions.
Equity Raise Used to Reduce Debt
SVC raised net proceeds of $542 million through an equity offering during the quarter and used proceeds, along with asset-sale proceeds, to redeem $550 million of unsecured notes due in 2027. The redemptions are expected to reduce annual cash interest expense by $30 million.
The company had $4.7 billion of debt outstanding at a weighted average interest rate of 5.66%, with no borrowings outstanding on its $650 million revolving credit facility. The revolver matures in June 2027 and includes a one-year extension option.
Donley said SVC expects to address a $45 million net lease mortgage note maturing in January with asset-sale proceeds. Its $580 million zero-coupon senior secured notes mature in September 2027 and are backed by travel-center lease pools. Management said it believes the collateral provides refinancing flexibility and indicated that a more traditional debt refinancing is likely following the equity raise.
Second-quarter capital improvements totaled $30.5 million, primarily for the Nautilus redevelopment and projects at Royal Sonesta hotels in Boston, New Orleans and Columbus. SVC maintained its expectation for total 2026 capital expenditures of $120 million to $140 million and said it expects positive cash flow available for distribution for the full year.
About Service Properties Trust (NASDAQ:SVC)
Service Properties Trust (NASDAQ: SVC) is a real estate investment trust (REIT) specializing in the acquisition, ownership and leasing of service-oriented properties, with a primary focus on the lodging sector. The company structures long-term, triple-net leases with established hotel operators under franchise agreements with leading global brands. By partnering with recognized hotel companies, Service Properties Trust seeks to generate a stable income stream through rent payments, while offering operators the capital and balance-sheet flexibility to grow their portfolios.
Since its formation in 2010, Service Properties Trust has grown its portfolio through strategic sale-leaseback transactions, targeted property acquisitions and selective dispositions.
