Service Properties Trust (Nasdaq: SVC) announced that due to the uncertainty from the rapidly evolving COVID-19 (coronavirus) pandemic on the U.S. economy generally and the lodging industry in particular, SVC is undertaking significant efforts to address the operating and financial impact of the current crisis. The decline in hotel occupancy caused by this pandemic has been dramatic and the duration and severity of its impact on the U.S. economy is unknown. COVID-19 protocols implemented by state and local governments have also impacted certain industries where some of SVC’s net lease tenants operate, such as casual dining establishments and movie theaters.
As a result of these conditions, in order to preserve cash and liquidity, SVC’s Board of Trustees has decided to reduce the Company’s regular quarterly cash distributions on its common shares for the first quarter to $0.01 per share. This distribution will be paid to SVC’s common shareholders of record as of the close of business on April 21, 2020 and distributed on or about May 21, 2020. SVC’s Board of Trustees will continue to monitor SVC’s financial performance and economic outlook as the year progresses to determine a prudent level for any subsequent regular quarterly distributions for 2020 or declare and pay any dividend required to be made for 2020 in accordance with tax law requirements for real estate investment trusts.
Depending upon the ultimate distribution requirement in 2020, if any, the reduction of the dividend could preserve up to $262 million of capital this year. SVC had also previously expected to fund approximately $150 million of capital expenditures in 2020. SVC now expects to defer approximately $100 million in capital projects to conserve cash and liquidity. In addition, SVC and its hotel operators have been implementing cost savings plans, including the closure of certain hotels, reduction of staffing levels and other measures. Nevertheless, SVC currently expects that it may experience fewer hotel closures relative to some of its peers because it owns 278 primarily suburban extended stay and select service hotels, which appear to be less negatively impacted by the COVID-19 crisis, and only 25 primarily urban luxury or upper upscale hotels, which appear to be the more negatively impacted.
As of December 31, 2019, SVC had aggregate security deposits and corporate guarantees in excess of $200 million and over $600 million of availability under its $1 billion credit facility, and it has no scheduled debt maturities until February 2021. SVC has significant liquidity and funds to meet its ongoing operating needs; however, if these unprecedented conditions continue for an extended period, the credit support that SVC has from its hotel operators and net lease tenants may be depleted and its liquidity reduced.
As previously announced, SVC has been marketing 20 Wyndham branded hotels and 33 Marriott branded hotels and was in the process of launching a marketing effort related to its 39 Sonesta ES Suites hotels. SVC had selected buyers for 16 of the Wyndham hotels and all of the Marriott hotels before COVID-19 began to materially negatively affect hotel operations. As a result of these circumstances, lending for hotel transactions has effectively ceased and accordingly we expect that these transactions will be delayed until later in 2020 or 2021 and these transactions may not occur. As a result, SVC’s planned reductions to its financial leverage resulting from hotel assets sales will also be delayed.
John Murray, President and Chief Executive Officer of Service Properties Trust, made the following statement:
“While the U.S. economy and the travel industry are facing great uncertainty, we believe SVC has the ability to withstand the current downturn because of its strong balance sheet, liquidity position and unique agreements with our hotel operators and net lease tenants. We believe we are taking all appropriate steps to preserve capital until we have visibility on the depth and duration of the crisis and economic activity starts to improve. In addition to the many cost saving steps we are pro-actively taking, we anticipate that our G&A expenses will be materially reduced because of the lower fees we will pay to our manager, The RMR Group LLC, as a result of the decline in our stock price since this crisis began.
We are also working closely with our operators to protect the health and safety of hotel employees and guests, as well as to identify all available alternatives to reduce operating costs and non-essential capital spending. It is our hope that if our nation takes the difficult steps necessary to slow the spread of COVID-19, the slowdown in travel may be comparatively short lived. SVC has navigated the challenges of the post 9/11 recession, the great recession of 2009/2010 and a myriad of natural disasters. In only one case did we suspend our dividend, and then only for three quarters. We are a large, diverse, well-capitalized REIT and we are confident that we will survive this crisis as well.”
Service Properties Trust is a real estate investment trust, or REIT, which owns a diverse portfolio of hotels and net lease service and necessity-based retail properties across the United States and in Puerto Rico and Canada with 151 distinct brands across 24 industries. SVC’s properties are operated under long term management or lease agreements. SVC is managed by the operating subsidiary of The RMR Group Inc. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, Massachusetts.
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