2023-06-25 07:03:01 ET
Summary
- Service Properties Trust is a REIT with a hotel portfolio and a net lease portfolio, offering a high dividend yield of 9.69%.
- The company has a high leverage with a net debt to EBITDA ratio of 9x and significant debt maturing in the next couple of years, raising concerns about its ability to meet debt obligations.
- However, the high dividend might appeal to potential investors who are willing to take the risk.
Introduction
I have written about several hospitality REITs recently. Just this month alone, I have written about Hersha Hospitality Trust ( HT ) and Host Hotels & Resorts ( HST ). The focus of today's article, Service Properties Trust ( SVC ), is slightly different. While it is classified as a hotel & resort REIT on the Seeking Alpha website, it isn't solely a hospitality REIT. In this article, I will evaluate the company to see if I will be adding it to my portfolio.
The Business
Service Properties Trust is a REIT which generates its revenue from its 2 distinct portfolios. First, its hotel portfolio contributes revenue in the form of income from room bookings as well as food and beverage sales. Secondly, the company also derives rental income from the leased properties within its net lease portfolio.
As of May 2023, the company's hotel portfolio comprises 220 hotels with a total of over 37,000 rooms. A significant portion of its hotels are located in urban areas and high-density suburban regions, as well as near demand generators such as medical facilities or tourist attractions. This enables the hotels to benefit from increased footfall in these areas, driving higher occupancy rates and revenue. The hotel portfolio includes a diverse range of offerings, including full-service, select-service and extended stay hotels. This allows the company to cater to various market segments and capitalize on different types of demand.
The company's net lease portfolio comprises 765 properties spread across the country, with a weighted average lease term of 9.4 years. Based on the latest figures, the occupancy rate currently stands at 97.4%.
Notably, 96% of the leases within the portfolio include either contractual increases (94%) or percentage rent (2%). This ensures that the company's revenue does not remain stagnant, as it benefits from either pre-determined rent increases or additional rent based on a percentage of the tenant's sales. Moreover, the long lease terms offer stability and predictability to the company's income stream. When considering the tenant mix, travel centers form the bulk, accounting for 67% of the company's revenue.
Balance Sheet
At the end of Q1 2023, the company held approximately $195 million in cash and cash equivalents. The company also had access to an additional $800 million through a revolving credit facility, which is set to mature next month in July. However, it should be noted that the company has stated that it expects to enter into a new facility by the end of Q2, 2023, ensuring continued access to additional funds.
The company has a relatively high leverage, with a net debt to EBITDA ratio at 9x. This is seen by the company's debt load - the company has a fairly substantial debt load of $5.8 billion. Of this amount, a significant proportion, approximately 40% or $2.3 billion is due within the next 2 years, by the end of 2025. Given the relatively low liquidity available to the company compared to its significant debt, there is a likelihood that the company may need to consider selling some of its assets to generate the necessary cash flows to pay off its debt. While asset sales can help alleviate the financial pressures faced by the company, it will undoubtedly have an impact on the company's long-term growth prospects.
Dividend
Prior to the pandemic, the company had a history of gradually increasing its dividend. Right before the pandemic, the company was paying a quarterly dividend of $0.54/share. However, after the pandemic hit, the company virtually cut its dividend, paying only a nominal quarterly dividend of $0.01/share.
Recently, however, the company has taken steps to increase its dividend. In Q4 2022, the company raised its dividend to $0.20/share, and it has maintained this level since then. This upward adjustment shows a degree of confidence in the company's future performance. In assessing the sustainability of the company's dividends, it should be noted that there isn't much data to refer to, as the company only increased its dividends recently. In Q4 2022, the company had a dividend payout ratio of 45% (dividends of $0.20/share compared to a normalized funds from operations (FFO) of $0.44/share), while it was at 87% for Q1 2023 (dividends of $0.20/share compared to a normalized FFO of $0.23/share). For what it's worth, the normalized FFO for Q2 2022 and Q3 2022 came in at $0.54/share, which would have more than covered the quarterly dividend of $0.20/share.
Put together, all these figures suggest that the company's dividend should be fairly safe and that the company has not rushed into raising its dividends without adequate coverage. Based on the latest share price of $8.26 and an annualized dividend of $0.80/share, the company has a forward dividend yield of 9.69%. This is a high figure, and one which will undoubtedly be attractive to investors.
SVC Dividend History
Risks
Service Properties Trust has several risks which I consider significant. Firstly, the company carries a high level of leverage, with a net debt to EBITDA of 9x. This indicates that the company has a fairly high debt relative to its earnings. Additionally, the company also has a substantial amount of debt maturing in the next couple of years. Even if the company successfully extends its credit facility, the current level of liquidity does not seem sufficient to cover its debt obligations even until 2025. Hence, I do have concerns that the company may not be able to meet its debt obligations and will have to consider selling some of its assets.
Another risk comes from the company's net lease portfolio. A significant proportion of the company's properties are leased by a single tenant, TravelCenters of America. This concentration creates an over-reliance on a single tenant, which poses a risk to the company if TravelCenters of America were to ever face any difficulties or terminate its lease.
Conclusion
Service Properties Trust offers a high dividend, at close to 10%, which is very attractive. The company's dividend appears to be relatively safe given that it is amply covered by its normalized FFO. However, I have concerns over the company's balance sheet and whether the company will be able to meet its debt obligations without sacrificing its long-term prospects (i.e. without resorting to asset sales).
While I personally do not think that the high dividend is worth the risks stated above, I have a "Hold" rating on the company as I understand that some investors may see the appeal of the dividend. I will re-look at the company again in a few months to see if there are any new updates which change the situation for me. Some changes I would like to see would be the company focus on reducing its leverage as well as diversifying its tenant base, though it might take a while for such changes to take effect.
For further details see:
Service Properties Trust: High Dividend But Balance Sheet A Concern