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Service Properties Offers Deep Value

Jun. 07, 2020 2:51 AM ETService Properties Trust (SVC)27 Comments


  • SVC has rebounded enormously in recent weeks.
  • However, the stock still offers strong value and the potential for a fairly swift reinstatement of the dividend.
  • For these reasons, SVC is a buy.

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There are perhaps two industries that stand out as having endured the greatest impact from the COVID-19 crisis; airlines and hotels. The airlines are starting to see green shoots, although traffic is still but a fraction of former levels. Hotels are struggling as well with many still closed, or operating at historically low occupancy rates. The latter is where we’ll focus today and specifically, on Service Properties Trust (NASDAQ:SVC), which has significant exposure via a large hotel property list.

Shares have exploded to the upside in recent days, nearly tripling in the past three weeks alone. That normally puts me off of a stock but SVC was so cheap heading into this rebound period, that it is still cheap for long-term holders today at $11, and I think it is worth a look.

Diversification is helping today, but leverage to improving hotel fundamentals will help tomorrow

To be fair SVC is not a pure-play hotel stock, and indeed, is pretty far from it.

Source: Investor presentation

The trust has 1,142 total properties in its vast portfolio, with the dollar value of those properties in the neighborhood of $12 billion, with $7 billion in hotels and the balance in retail net lease properties. About 60% of the portfolio is in hotels, with Travel Centers of America (TA) making up about a quarter on its own, and the balance in a variety of very small exposures to other industries.

Given this, two things are clear to me. First, the selloff was enormously overdone earlier this year as SVC was punished as though it was going to go out of business. This makes no sense given it gets ~40% of its revenue from tenants that were either operating as normal, or at least somewhat close to it.

Second, the fact that Travel

This article was written by

Josh Arnold profile picture

I've been covering financial markets for ten years, using a combination of technical and fundamental analysis to identify potential winners (and losers) early, particularly when it comes to growth stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SVC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (27)

Did many hours more of analysis after making a significant investment around the $6.70 mark. unfortunately I’m less confident than I was when I first purchased. My own belief is that if SVC cannot produce atleast 100mm Pre-Interest FFO per quarter, it Will not earn enough to cover interest + required capital advances to cover hotel operating losses, which are deep. My realization that this company effectively subsidizes its hotels when they are loses its money scares the heck out of me. Maybe I’m missing something, but the Q1 financials show a massive cash bleed of advancing cash to hotels, plus massive drawdowns on its only cash-flow source from hotels, the security deposits (by now all reduced to nothing). Q2 will obviously be ugly, but I’m now very concerned about Q3-4. If hotel tenants dont stop bleeding massive amounts of cash, SVC may become a going concern unless it sells assets, stock, or can refinance ifs debt at lower interest (doubt that, considering the recent 7.5% issuance). Someone needs to put out some real analysis on this company.
Any thoughts after earnings release? Normalized FFO was 78mm... domestic hotels make a slow but sure? recovery...

it was a bit comforting. However, I think Q3 is the real test and way more important. SVC sucked its security deposits dry during Q2 - now the cash needs to come from operations. Hotels may be operating but operating alone doesnt put much money in SVC’s pocket. For Q3, my main focus is (a) pre interest FFO (enough to cover 71m interest, capital advances and managers purchases???) and (b) the dollar amount of interest. Every penny that 71m increases by is a red flag.
I actually read the 10Q. Did anyone not notice that they are required to pay no more than 0.01 dividend thru June 2021Unless required to maintain REIT status, As per their debt covenants with lenders
Correction. They are actually limited to the minimum amount to maintain REIT status. Not necessarily 0.01
LuckyTMM profile picture
I'm not seeing the "deep value" other than recovery over time to previous levels where it bounced around between $23 and $33 for the past five years and now the dividend is paltry. There are better choices than this..
Not mentioning that it's externally managed by RMR shows the author doesnt know much about this company.....

01 Jul. 2020
I keep seeing this comment over and over about "RMR = stay away". But no one really elaborates on why. Why should I avoid SVC because they are externally managed by RMR? From what I've read SVC seems like a solid company.

Do your own due diligence, there is tons of info out on the corrupt RMR-managed companies.

Literally no public investor has made ANY money holding their garbage over the long run. If you did, it was luck due to market timing or trading or both.
Nat Stewart profile picture
I've made an emormous amount, thanks. Your viewpoint is obsolete.

Look at the creative an non-dilutive capital raises via joint ventures RMR has done at ILPT. RMR management, IMO has recognized and learned from errors (some of which are very misunderstood).

They have a signifigant opportunity to prove what they have learned and "prove" themselves with the handling of their new commercial mortgage REIT RMRM, which has yet to ramp up. Lets see that goes, for starters.
are their hotels close to city or near highway ? which reit has latter ?
Brad Thomas has written several articles on SVC (HPT) entitled as follows:
- When You're A Landlord And Tenant, Investors Lose
- What A Tangled Web We Weave
- How To Financially Engineer A Sucker Yield
- Could Hospitality Properties Trust Become Another Sucker Yield REIT?
- Where's The Trust In Hospitality Properties Trust?
Anthonyhai2003 profile picture
@Techbug Brad Thomas writes a lot of stuff, but not all his articles had been correct.
What do you make of the recent offer to repurchase its $350M of 4.25% notes?
proplko profile picture
Thanqs for a Article this is a very helpfull for our business..
ESP equity research profile picture
This is one of the REIT's I have owned for a while - just 1000 shares - but then when SVC went below $5 I started accumulating - now own 8000 shares - will hold until the SP goes back over $20...

08 Jun. 2020
Yes have had this stock for a year or so, and rode it all the way down (as did my other stocks).....but went in on much larger cap stock buying on the decline - what I could (or felt comfortable) at least. It was tough getting the dividend pulled but not surprising. SVC (HPT) has been around for over 20 years, and hoping it can get back to solid footing revenue and share-price-wise.
Anthonyhai2003 profile picture
Are investors supposed to hear news in regards to dividend, sometime this month or next? It's in the 12's pre-market now.....
They need to re increase the divy, ...
Maybe it will get back to the $8 level to fill the upward gap on the chart. Then it would be worth another shot. Too many stocks have run up way too fast. We need a breather inhere.
07 Jun. 2020
But, as I understand it, SVC is part of RMR, which is always a reason to tread carefully.
a HUGE reason to stay away
11 Jul. 2020
@joew3 Why is that? What will RMR do to the stock price?
gardner555 profile picture
@T-MACC self serving transactions at the expense of their managed reits.
Thanks very much for the article - there are precious few about SVC. I added to my position in SVC at 4.60 and am very glad I did. Yes, it has jumped in last few weeks but it was over-punished (like many other stocks) by Covid and represented a great bargain. I think it definitely has more room to run as the economy reopens and folks start to drive again and stay at hotels (it is almost summer after all - 'tis the travel season). Giddy up!
Thank you for the Article and the brief summary.
I’m a huge fan of this REIT too.
I got in at 5.50-6 based on the same facts that you outlined here.
Also got into PK and SABR
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