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Service Properties Trust: A Value Play For Long-Term Investors

Mar. 05, 2021 9:14 AM ETService Properties Trust (SVC)25 Comments


  • Service Properties Trust has seen a lot of pain as a result of the COVID-19 pandemic.
  • Even so, the company is holding up fairly well, and it should eventually recover.
  • A return to normalcy would imply a nice amount of upside for investors from current pricing, but that could take some time still.
  • Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

While many REITs may focus on one type of core asset to invest in, some are more diversified. One example of this is Service Properties Trust (NASDAQ:SVC). Service Properties, in a sense, is really two businesses in one. On the one hand, the firm generates the bulk of its revenue from the hotel properties in its portfolio. However, it also owns several hundred net-lease retail properties that tenants fill up. In the years leading up to its 2020 fiscal year, the business fared quite well. However, the COVID-19 pandemic really hurt it, and as a result, there might be an interesting opportunity here for long-term investors. While shares look to be priced toward the cheap end today, if business does return to what it was like in 2019, upside for investors could be quite attractive.

A look at Service Properties

As I mentioned already, Service Properties is kind of like two businesses rolled up into one. On the one hand, you have the 310 hotel properties that it owns and operates. Collectively, these hotels have 49,014 rooms and 13.46 million square feet of space. By investment, these hotels account for 57.4% of the company's portfolio. In addition, it owns 799 net lease retail properties. These comprise the remaining 42.6% of its portfolio by investment. At present, the company has assets located in 47 US states, plus Washington DC, Puerto Rico, and Ontario, Canada. However, 11% of its investments are concentrated in California. 9% are concentrated in Texas. And 6% are located in both Georgia and Illinois.

*Taken from Service Properties Trust

On the hotel side of the equation, 168 of the firm's properties are branded as Sonesta hotels. This works out to 15.1% of their properties, but to 37.1% of their value by investment. On the retail side, the company's largest tenant is TravelCenters of America. Properties under

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This article was written by

Daniel Jones profile picture

Daniel is an avid and active professional investor.

He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

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Comments (25)

SVC has been my "turkey" stock along with RDS-B since COVID hit. I'm not sure which one will recover faster, though i have a larger position in RDS-B so hoping it does - at least RDS-B is paying a decent dividend while waiting for recovery. One of the reasons I picked SVC is it had a long track-record; didn't matter. Still that's why one holds dozens (or more) of stocks.
@Daniel Jones and others.

Thoughts on the sideways movement of SVC for the last 2 months?

I still can't get a handle of their burn rate and cash on hand.

The annual report states "As of February 26, 2021, we had approximately $957.7 million of cash or cash equivalents. This statement may imply that we have sufficient working capital and liquidity to meet our obligations for the next twelve months."

But in the calls they stated they have $91M of cash on hand with a $10M a month burn rate. Their travel centers cover their debt servicing and corporate overhead.
FreeMkts profile picture
@GuyRien1 Top of my head - I think the $957.7M was including their LOC whereas the $91M may be actual cash, not potential borrowings.

Either way - travel activity has picked up and I don't think cash burn will be a problem much longer if it hasn't turned the corner already.
@FreeMkts If your right, then why hasn't the (forward thinking) market rewarded the stock price?

It seems odd that SVC is trading at 50% of pre-pandemic highs and others like PK, CLDT etc are trading close to pre-pandemic highs.

The only other hotel reits trading at 50% are those on the verge of BK (i.e. SOHO)

My strategy was to buy SVC on the dips, but I've stopped doing that as there are too many and I've already accumulated too much of the stock over the last 3 months.
FreeMkts profile picture
@GuyRien1 My strategy was to buy OOTM calls in case it spiked as market looked forward but not buy shares yet as it has a long ways to go before much improvement is reported. I am guessing 3Q is first meaningful uptick we see in performance from summer hotel utilization and significant dividend increase won't happen for 2021 unless they have fully year taxable income to distribute (not necessarily FFO). So far so good - loss on options is limited and I am getting an opportunity to buy at lower level as cash becomes available. This is a 12-18 month double - dividend reinstatement and business recovery should be old news by EOY 2022. Next six months is anyone's guess but odds look good on another shot to add shares around $11.
TA is our largest tenant. As of December 31, 2020, we leased 179 travel centers to TA under five leases that expire between 2029 and 2035; 134 of our travel
centers are operated under the TravelCenters of America , or TA , brand name and 45 are operated under the Petro Stopping Centers , or Petro , brand name. As of December 31, 2020, we have invested $2.3 billion in 134 TA branded properties with 3,720,693 square feet and $1.0 billion in 45 Petro branded properties with 1,470,004 square feet

Current market cap is less than their investment in just the 134 TA truck stops. Seems very cheap on a sum of the parts valuation
FreeMkts profile picture
@Billball70 Sum of parts discussion without considering EV instead of market cap is just irresponsible. $6B debt makes for a 3:1 debt to equity ratio - $8B enterprise value. 25% increase in EV to $10B doubles the market cap - that is where the opportunity lies.
@FreeMkts Very good point. Still learning. Thanks for pointing that out.
Found it interesting in the 10K that they now own 34% of Sonesta Hotels. That deal was struck in Feb 2020. I guess that's in addition to the 310 hotels they already own (Sonesta owns 83 hotels). Given that 43% of their portfolio is net lease (and it's 98.7% occupied per the 10K) this seems much lower risk that a pure-play hotel (which I think is also low risk given that COVID won't be around forever). This should get back to 7-8X FFO (that's about its average) by 2022 and that's a nice return annualized.
@Billball70 I don't think they own these additional Sonesta hotels. I recall they did not renew their agreement with Hilton Hyatt and Marriott so they rebranded then Sonesta hotels.
@Billball70 Thats why I sold out of PK which almost completely recovered despite bleeding cash and diluting shareholders. Not their fault, but they had no cash flow for a year and had to borrow. Whereas SVC's earnings call says their Net Lease portfolio covers their G&A, Overhead and Debt Service with zero hotel revenue (there will still be a slight loss due to hotel capex and other costs. They had almost no dilution, didn't sell equity at fire sale prices. So they could ride out another extended shutdown without massive dilution and destruction of equity, just basically treading water. Whereas other hotel REITs will require 2-3 years of blockbuster earnings to pay back the additional debt and are at risk of default if there's another shutdown (although unlikely).
@GuyRien1 Sonesta purchased Red Lion Hotels and added a bunch of non-SVC hotels. This is good for SVC as it increases operating leverage and makes them a larger and more competitive brand. Sonesta is only 1 year old so doesn't have much brand recognition but they now have 1200 hotels including many luxury and full service hotels so that helps.
FreeMkts profile picture
My #1 question is are they BK risk? Article doesn't cover their balance sheet at all - just revenue and various diversification levels of the portfolio. Having net lease retail (especially TA which didn't miss much as trucking was not highly impacted) seems like a big benefit relative to pure hotel plays that need to raise capital or go bankrupt right now. Not worried about hotel brands - demand will be through the roof for all lodging by the end of the summer. Decent probability they are record revenue Q3/Q4 this year.

Looks like they are out of the woods without diluting the stock or piling on debt - upside to $30 IMO (previous highs). People ignoring the capital raises to survive will be disappointed when their favored stocks do not sniff previous highs despite full recovery in profit levels.

5% yields on the bonds look pretty attractive too.
@FreeMkts See the SA article on their most recent earnings call including the comments. I wrote:

"@ESP equity research The challenge is deciphering the call on Monday particularly in terms of liquidity.
In various places they state:
"ample liquidity", but then 

"Turning to our balance sheet and liquidity; as of quarter end, debt was 51.8% of total gross assets and we had $91.5 million of cash including ... cash burn in Q4 averaged approximately $10 million per month"which to me indicates just 9 months of liquidity but then

"As of today, we have approximately $950 million of cash after fully drawing down our $1 billion credit facility "
but then

"We currently believe we have adequate liquidity through 2022""
FreeMkts profile picture
@GuyRien1 - thanks, $10M/month cash burn is reassuring and explains why the bonds trade close to par. They should be monthly FCF positive very soon is not already. Floor should be in, hard to imaging this dropping back below $10 and a clear path to $20.
@FreeMkts not sure. Read the call they say no dividend increase until 2022. I see people seeing this as deadmoney pit and selling.
The biggest challenge for SVC is the rebranding of their hotels to the Sonesta brand (which SVC owns 34% of).

As a long time business traveller I can note the following:

i) Gone are the days where there are corporate arrangements where you must only only stay at Hilton/Hyatt/Marriot hotels. Now most people book their own hotels so being a Sonesta brand isn't a major barrier.

ii) Most travelers now rely on TripAdvisor and other ratings sites to determine the quality of hotels, so long as SVC keeps up CAPEX and maintains the properties well they should be okay.

iii) In the short term the demand for *any* hotel will be so large I don't see them having an issue filling their rooms.
I think SVC ended their affiliations with the big-name hotel management companies (Intercontinental, Hyatt, Marriott) due to non-payment of some minimums in 2020. Without those affiliations, going forward, I believe SVC's hotels will suffer quite a bit.
@Feckless191 From the analysis it seems that a huge amount of suffering is already priced in. Still not enough?
@Feckless191 I disagree. I travel a lot and I turn to tripadvisor and Google reviews to determine if a hotel is good. I've stayed at bad Hiltons, Marriott's etc.

The hotels loyalty program benefits can now be bought by complimentary gifting them due to frequent flyer status.
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