2023-04-14 18:32:44 ET
Summary
- Hotel RevPAR continues to grow, with occupancy and room rates on the rise.
- Net lease portfolio gets a timely boost from the acquisition of TravelCenters by BP.
- We have a breakout in play on the intermediate technical chart. Double-digit FFO growth is expected going forward.
Intro
We wrote about Service Properties Trust ( SVC ) back in January of this year when we deemed the REIT a hold due to the significant overhead resistance on the technical chart as well as the meaningful leverage on the trust's balance sheet. In saying this, we were conscious of how Hotel EBITDA had been gaining traction and how the reinstatement of the REIT's high-paying dividend would bring more income-orientated investors back into the mix here. Therefore, we believed SVC's ascent would be gradual, but as we see below, things did not work out as envisioned.
We penned our January piece when shares of SVC were trading at roughly $8 a share. Given SVC's trends at the time, we expected a soft rally up to about the $9 level (Multi-year downcycle trend line) where we believed shares would then turn back down and consolidate somewhat. Everything changed however in mid-February when shares exploded on strong volume above that above-mentioned resistance level as a result of BP 's (BP) $1.3 billion purchase of TravelCenters (which resulted in leases getting amended). This means that shares have returned 24%+ since our January commentary, with the momentum of the BP deal resulting in shares taking out $11 a share by early March. Since then, we have come back down to successfully test support (what was once resistance), and given the sheer thrust of the up-move (noted by the strong RSI Weekly Readout), we see much stronger potential in SVC now compared to a mere 3 months ago. Here are some reasons which back up our bullish thesis.
The TravelCenters' induced rally was a result of how investors foresee how this deal over time will affect SVC for the better. Not only will SVC receive almost $380 million in upfront cash from the deal, but the market also weighed up how a financially stronger tenant (where agreed increases will be the norm) should positively affect SVC's earnings over time. The deal also means that BP will now become SVC's largest tenant in terms of funds received, which is a big plus (guaranteed leases) with respect to how the REIT manages its balance sheet going forward.
Strengthening Balance Sheet
Speaking of the balance sheet and SVC's leverage, SVC continues to double down on its cash-flow-producing assets and dispense with what is not producing. The REIT's total number of assets in fiscal 2022 fell by $1.67 billion, with $1.5 billion of these funds going towards the reduction of the debt load. This trend aided in the retirement of the mid-year 2023 maturities ($500 million) and the completion of a fresh multi-year secured financing deal. This means SVC's next debt maturity is not until March 2024 ($350 million of senior notes) which the BP cash ($379+ million) could easily cover if indeed management decides to take this course.
Therefore, taking SVC's net lease portfolio as a whole, we see that SVC's assets had a 98% occupancy rate (with an average lease duration of almost 10 years) at the end of the company's most recent fourth quarter. The TravelCenters deal will only increase the stability in this asset category which obviously, as mentioned, the market is beginning to price in.
Hotel Portfolio Continues To Make Gains
Then on the hotel side, RevPAR continues to increase due to better occupancy rates and better daily rates on average from the locations. 20% of the hotel portfolio was dispensed with in fiscal 2022 with a further eight hotels sold by the end of February this year. This means that the Sonesta hotels which have been earmarked for sale have predominately been sold now, with only 10 or so more Marriott locations identified for sale. Suffice it to say, the new look SVC which will be a smaller REIT before all is said and done and will have a better quality portfolio, less leverage and a well-covered dividend currently paying out an inflation-beating yield. In fact, given these trends, the REIT's bullish technicals, and the fact the forward-looking FFO numbers continue to impress, we maintain SVC is a BUY at its current price point.
Conclusion
To sum up, the continuing sound performance from SVC's hotel portfolio along with the ramifications of the TravelCenters deal in the net lease portfolio are bullish trends for Service Properties Trust. Furthermore, the technicals back up what is happening internally within the REIT. We look forward to continued coverage.
For further details see:
Service Properties Trust: Switching To Buy Mode