Service Properties Trust Stock

Good day, and welcome to the Service Properties Trust Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to hand the call over to Kevin Barry, Senior Director of Investor Relations.

Good morning. Thank you for joining us today. With me on the call are [ Chris Bellotto ], President and Chief Executive Officer, [ Jesse Hebert ], Vice President, and Brian Donley, Treasurer and Chief Financial Officer. In just a moment, they will provide details about our business and our performance for the second quarter of 2026, followed by a question-and-answer session with sell-side analysts. I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SVC's beliefs and expectations as of today, August 6, 2026, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call.

Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from our website at svcreit.com or the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. Of these non-GAAP figures, the net income is available in SVC's earnings release presentation that we issued last night, which can be found on our website. And lastly, we will be providing guidance on this call, including estimated 2026 normalized FFO, hotel EBITDA, net operating income or NOI, and adjusted EBITDAre. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. I will now turn the call over to [ Chris ].

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. I will begin today's call with an update on our strategic priorities and highlights from our hotel portfolio performance during the second quarter. [ Jesse ] will then discuss our net lease business, and Brian will conclude with a review of our financial results, balance sheet, and outlook. Last night, we reported second quarter results that reflect continued momentum, advancing SVC's strategic priorities, and strengthening the company's financial profile. Our net lease portfolio delivered steady NOI growth, providing a highly predictable cash flow stream that anchors our portfolio.

And within our hotel segment, RevPAR outperformed the industry benchmark for the seventh consecutive quarter. Overall, normalized FFO per share of $0.43 was in line with consensus expectations, and we are maintaining our full-year earnings guidance. Starting with our strategic priorities, we remain focused on enhancing our net lease portfolio, improving the cash flows and operating performance of our retained hotel portfolio, and further enhancing our balance sheet through disciplined capital allocation. Since the beginning of the second quarter, we have sold 20 properties for approximately $32 million, including 19 net lease assets and 1 hotel. A portion of these proceeds, combined with over $540 million of net proceeds from SVC's successful equity offering in April, was used to redeem $550 million of unsecured debt, reducing our leverage profile and decreasing annual interest expense, while providing the company with enhanced flexibility to focus on operational execution and cash flow growth.

Turning to hotel performance, our retained hotel portfolio, excluding the 15 sales hotels, delivered another quarter of improved operating results. RevPAR increased 6.6% year-over-year with balanced growth and occupancy in ADR and relative strength in full-service and upper-upscale hotels. RevPAR growth was partially offset by expected displacement related to our active redevelopment and renovation projects, most notably the Nautilus South Beach. Excluding the Nautilus short-term disruption, underlying RevPAR growth across the balance of the portfolio was meaningfully stronger at 9%, reinforcing our confidence in the improved fundamentals in our portfolio. The portfolio continued to benefit from completed renovations, a 22% lift in contract segment revenue, as well as rate-driven demand related to World Cup and select host cities.

Importantly, this positive momentum has carried into the third quarter with preliminary July RevPAR for our retained hotel portfolio of 7.1% year-over-year. Retained hotel EBITDA increased 4.2% this quarter, with notable strengths at the Sonesta properties in Hilton Head and Miami Airport, as well as Radisson in Salt Lake City. To put this performance into context, our retained hotel portfolio generated a quarterly adjusted hotel EBITDA margin of approximately 19.4%. By comparison, the 15 hotels we are exiting operated at a negative EBITDA margin over that same period.

This gap is the core economic logic behind our capital recycling strategy. Rather than continuing to dedicate capital and management attention to a cohort of assets with structurally negative returns, we are redirecting those resources toward a retained portfolio that is already demonstrating a clear trajectory of margin improvement. Building on this, we see significant additional opportunities for improved profitability across our retained hotel portfolio. Our asset management group continues to work with our operators on several opportunities to expand hotel EBITDA margins, both at Sonesta and our other operators. These efforts are initially centered on three primary pillars.

The first pillar relates to revenue optimization, targeting customer acquisition costs by driving more business to the direct and most profitable channels like brand.com, therefore reducing reliance on higher-cost OTAs. This also includes a continuous focus on driving contract and group base along with ancillary revenue streams such as food and beverage and parking. Second, in support of improved labor efficiency, our operators are implementing a leaner and more dynamic labor model to better align staffing with demand and reduce reliance on costly contract labor. Within the quarter, we're already seeing the benefits of this with Sonesta, Radisson, and IHG all improving labor productivity year-over-year.

The third pillar relates to capitalizing on operating leverage with anticipated savings from benefits plans, property insurance, and diligent controls over energy and utility costs. As our renovated hotels stabilize and occupancy grows, this will provide enhanced pricing power and position the property to capture additional event-driven demand, which in turn will absorb fixed costs more effectively, ultimately driving profitability. While early in the process, initial benefits are starting to materialize, including the positive trend with labor productivity, a recent 20% reduction in property insurance cost across the portfolio, the noted 22% lift from contract revenue, largely from new airline crew business, and the adoption of certain technologies and processes that will drive margin improvement. As these initiatives progress, we will provide further updates on targeted revenue and expense benefits.

Beyond these initiatives, SVC is positioned to capture meaningful performance upside from the elimination of approximately $15 million of negative EBITDA drag from our exit hotels. The gradual burn-off of displacement and corresponding performance growth from our hotel renovations, most notably the ongoing redevelopment of the Nautilus in Miami Beach. These benefits will be realized over time. They provide a roadmap for improvement in hotel EBITDA and cash flow generation, complementing our top-line initiatives focused on driving market share across the portfolio.

Turning to our hotel dispositions, we remain on track to sell the previously disclosed 15 hotels, which included the sale of a 133-key hotel in July for $18.4 million. To date, we are under a purchase and sale agreement or letter of intent with 13 hotels and are marketing 1 hotel. We expect the majority of the remaining dispositions to be mostly completed over the balance of 2026, with proceeds continuing to support debt reduction and to further improve our financial flexibility. As part of this process, we also intend to bring to market our remaining IHG-managed full-service hotel, a 495-key property located in the Atlanta perimeter submarket.

As some may recall, we removed this asset from the marketing process last year while we evaluated varying strategies with the in-place agreement and capital outlook. This followed a comprehensive hold-versus-sell analysis undertaken as the hotel's management agreement approached its scheduled expiration. While the property has performed well operationally, we believe a sale represents the more attractive path to unlocking value for shareholders relative to continuing to own and reinvest in the asset. We expect marketing to commence in Q3 and look forward to providing future updates.

Before I conclude, I would also like to briefly touch on corporate governance. As we previously announced, our board continues to actively evaluate candidates for an additional independent trustee. The search remains focused on identifying an individual with meaningful hospitality industry experience who can further complement the board's experience and support SVC's ongoing strategic evolution. Looking ahead, our priorities remain clear: translate the operating momentum in our retained portfolio into sustained margin and cash flow improvement while completing the exit of our non-core hotels to further strengthen SVC's financial profile. With a stronger balance sheet and the initiatives we have underway to further enhance performance, we believe SVC is well-positioned to unlock value across the portfolio to drive long-term shareholder returns. I will now turn it over to [ Jesse ] to discuss the net lease portfolio in more detail.

Thank you, and good morning. Our net lease assets continue to serve as a dependable source of cash flow for SVC, with minimal capital requirements, long-duration leases, and a diversified tenant base. The portfolio exhibited strong performance in the second quarter, led by meaningful NOI growth, sustained leasing momentum, and continued improvement in the performance of our travel services. Highlights from the quarter include an increase of 2.2% in cash basis NOI quarter-over-quarter as a result of contributions from recent acquisitions, contractual rent growth from our existing leases, and a reduction in our credit reserves.

Occupancy was unchanged from the prior quarter at 96.6%, although we expect to see incremental growth in occupancy throughout the remainder of the year, given the current state of our leasing pipeline and our asset management team's dedicated efforts to efficiently dispose of vacant properties and cycle in new brands. Optimizing our portfolio and developing new operator relationships will be an ongoing focus for our team as we continue to transition SVC toward the net lease side of the business. The aggregate rent coverage of our portfolio improved to 2.09x on a trailing 12-month basis. The improvement was driven primarily by our TA travel centers, where rent coverage increased 10 basis points to 1.34x.

This is the second straight quarter of coverage growth for TA and represents a 12% increase since the fourth quarter of last year. For the balance of the portfolio, rent coverage again came in north of 3.5x as tenant credit quality and operating performance remained stable. On the leasing front, our asset management team executed deals totaling 210,000 square feet with a weighted average lease term of roughly 7 years. With just 1% of annualized base rent scheduled to expire through year-end and 3.8% rolling through the end of 2027, our near-term expiration schedule remains very manageable, and our asset management team has been proactively engaging with tenants that have upcoming expirations to negotiate renewals.

Turning to capital recycling, we continue to execute our measured growth strategy. On the acquisition side, year-to-date, we've invested approximately $9 million across 4 properties operating in the QSR and automotive services industries. These acquisitions were completed at weighted average cash and GAAP cap rates of 7.9% and 8.8%, respectively, and carried weighted average lease terms of approximately 15 years. We are under agreement on another 5 properties, a mix of dollar stores and casual dining concepts, for a total of $14.2 million, which we expect to close in the third quarter. These transactions, funded through capital recycling, put us well ahead of schedule for our target of $25 million of annual acquisition activity.

Since the beginning of the year, we have sold 21 properties for $15 million, and we expect a similar level of dispositions during the second half of 2026. The net lease portfolio now consists of 745 properties with annualized base rent of nearly $400 million and a tenant roster that includes 185 businesses operating under more than 140 brands across a diverse range of industries led by travel centers, quick service restaurants, fitness centers, and grocery stores. More than 95% of our annualized base rent is derived from leases that contain contractual rent increases or percentage rent provisions, providing embedded NOI growth and inflation protection over time.

As we work to reposition SVC toward a more net lease-oriented company, our focus will be on enhancing portfolio quality, maintaining strong occupancy and credit metrics, extending WALT, and generating durable cash flow growth. We believe our disciplined asset management and capital allocation strategies will ensure SVC's measured transition to a primarily net lease platform. And with that, I'll turn the call over to Brian to discuss our financial results.

Thank you, [ Jesse ], and good morning. As we previously announced, SVC effected a 1-for-5 reverse share split in early July, and all share information on our earnings report and 10-Q have been retroactively adjusted. Additionally, given SVC's recent equity issuance, comparing per share data to prior periods is not meaningful. So, let's look at the earnings report. Starting with our consolidated financial results for the second quarter of 2026, normalized FFO was $55 million, down $2.6 million, or 4.5% compared to the prior year quarter. Normalized FFO this quarter, as compared to the prior quarter, was primarily impacted by a $20 million decline in hotel results, largely from our hotel disposition activity, partially offset by a $15 million decline in interest expense, a $2.3 million increase in performance from our retained hotels, and a $1.3 million increase in NOI from the net lease portfolio.

Turning to our hotel portfolio performance, for our 93 comparable hotels this quarter, RevPAR increased by 6.5%. Gross operating profit margin percentage declined by 60 basis points to 28.7%. Below the GOP line, costs at our comparable hotels increased by $3.5 million from the prior year, driven primarily by higher insurance costs. Our 93 comparable hotels generated adjusted hotel EBITDA of $55 million during the quarter, which was relatively flat compared to the prior year quarter. The 78 hotels in our retained portfolio generated RevPAR of $135, an increase of 6.6% year-over-year, and adjusted hotel EBITDA of $57 million during the quarter, representing an increase of 4.2% year-over-year.

Excluding the 3 hotels under renovation, hotel EBITDA increased $6.5 million, or 13.4%. The Sonesta exit hotels, which are sold or continuing to market for sale, produced losses of $1.9 million during this quarter, a decline in profitability of $2.2 million year-over-year. NOI from our net lease portfolio increased $1.3 million over the prior year as a result of our acquisition and leasing activity, partially offset by vacancies and credit losses. Turning to the balance sheet, we have been active in the capital markets and took steps to further strengthen our balance sheet, improve our debt maturity profile, and our cash flows.

During the quarter, we raised net proceeds of $542 million from our equity offering and redeemed all $450 million of our outstanding 5.5% senior guaranteed unsecured notes due 2027 and the remaining $100 million of outstanding 4.95% senior unsecured notes due 2027. This activity resulted in an additional annual cash interest savings of $30 million. We currently have $4.7 billion of debt outstanding with a weighted average interest rate of 5.66%. As of today, there are no amounts outstanding on our $650 million revolving credit facility. The credit facility matures in June 2027, and we have a 1-year extension option available to us. Our $580 million of zero-coupon senior secured notes mature in September of 2027, and they're supported by strong net lease collateral, which we believe provides refinancing optionality.

Turning to our capital expenditure activity, during the second quarter, we invested $30.5 million in capital improvements, which continue to be driven by the renovation of the Nautilus in Miami, as well as projects at the Royal Sonestas in Boston, New Orleans, and Columbus. Turning to our annual guidance, we are reaffirming our full-year hotel EBITDA, net lease NOI, and consolidated adjusted EBITDAre. We're maintaining our normalized FFO range of $124 million to $144 million, or $1.20 to $1.35 per share. The per share amounts assume a weighted average share count of 105 million shares. This full-year guidance assumes midpoint interest expense of $360 million and G&A expense of $40 million.

This guidance does not reflect the impact of completing the remaining Sonesta hotels planned for disposition, and it continues to assume $25 million of capital recycling on the net lease portfolio. We continue to expect total capex for the year of $120 million to $140 million. Cash flow available for distribution was $42.5 million for the quarter, and we continue to expect to generate positive CAD for the full year 2026. That concludes our prepared remarks. We're ready to open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Tyler Batory of Oppenheimer. Please go ahead.

Good morning. On the hotel portfolio first, and I'm really focused on the retained hotels, talk a bit more about the renovation activity that I believe was impacting margin in Q2. And you talked about a number of initiatives to improve the margin performance at the hotels. Just talk through a little bit in terms of the timeline on when some of those initiatives might start to show up in the performance of the margin side of things. And just remind us again where you'd like to go in terms of moving margin in the retained hotel portfolio.

Good morning, Tyler. This is Brian. I'll start and then [ Chris ] will jump in with some of the more forward-looking stuff. Yes, for the 3 hotels, we earmarked as under renovation. I mean, those hotels, I mean, the biggest one is obviously the South Beach property, which we've been talking about. But those hotels generated $1 million of revenue this quarter, but it was a $3.3 million decline year-over-year. One of the 3 is an exit property, so it's a little bit of noise on both fronts, but the Nautilus is projected to be completed by the end of October and early November with some phased completions with rooms and public space.

That's our biggest project for the year. It's got a lot of financial impacts on both the RevPAR top line and bottom line. And Q1, Q2 is the high season for Miami. So that was a particular drag in our results. But as we look forward to Q4, we should see a positive uplift from that property, amongst others. Some of the other properties under renovation or that recently completed renovation have also started ramping up. Sonesta Simply Suites in Las Vegas, for example. We're doing work in Cambridge, I mentioned, and New Orleans. So there's still a bit of noise and moving pieces.

Yes, I would just add in kind of to the back half of your question, with respect to kind of some of the initiatives. Look, it's iterative, right? This is a broader strategy kind of in line with what we've talked about coming into the year and over, even into Q1. I think some of the small wins, we've reduced our property insurance by 20% effective 7/1. So that's a fiscal year. And there's also some benefits that come with that with a reduced deductible. And so we would expect there to be kind of just less overall costs. Just the insurance premium alone is a couple of million dollars for the fiscal year. We're starting to kind of see the inflow of other types of ancillary revenue alongside contract business.

So those are all kind of near-term initiatives. I think the bigger piece is much more of the work being done with our operators. And so that's just a big piece of that. As you recall, there's a new management team that started there effective August 1st. And I think it goes without saying, giving them room and runway to really kind of dig in and unpack opportunities within the portfolio is something that they've been focused on. And many of these strategies are kind of tied to that. And so we would expect for more of that to flow through towards the end of the year and predominate like some of the bigger things like benefits in Q1 of next year.

And I think the idea is that we'll provide more specific numbers tied to these levers after we've given them the needed time to vet through that. So, potentially as early as this next Q3. The other thing I would highlight, which I think kind of goes without saying, is selling these assets, you get rid of negative $15 million of EBITDA drag. That's addition by subtraction. In our guidance, we have $12 million of displacement occurring with these renovations. And so getting that money back gets you to zero, let alone the uplift that's going to come when performance turns around. And so when you start to add up these numbers, they become very material. And I think all those will just kind of continue to fold in and ramp up specifically as we get into 2027.

Okay, great. And to follow up on the RevPAR side of things, we thought Q2 was really strong, which kept the full-year guidance range. So just talk about the outlook for the rest of the year. I'm not sure if the renovation activity or anything else is impacting that outlook. But curious if there's any extra conservatism in terms of what you're providing for the, or what's implied for the second half of the year.

Sure, Tyler, thank you. And I think from our standpoint, Q2 was definitely strong. We've seen our preliminary July results, which gives us some optimism going into the third quarter. But if you look at our portfolio and the seasonality of it, we do expect to slow down in the back half of August and then into Q4. It's just the way our portfolio trends and some of our geographies. But we feel comfortable with the guidance range as we sit here today. And there's a lot of different things and moving pieces in motion as we look to the back half of the year, as [ Chris ] outlined, and throw in some of the disposition activity and the potential timing, some of that could affect our numbers and hopefully to the upside.

Okay. And last question from me on the asset sales. Remind us of the timeline there. I think in the prepared remarks you said by the end of 2026, but any sort of execution risk in terms of getting those completed? And then a bigger picture question, just talk a little bit about the market overall for asset sales and help us think through any updated thoughts in terms of future assets that might be on the market for sale. I know you're now marketing that asset in Atlanta. I'm not sure if there's anything else in the portfolio that might make sense down the road here?

Yes. So I think first and foremost, with respect to the 15 properties that we've been active with, given where we are with those groups, again, mostly under contract, it's really kind of a Q3, Q4 execution. I would say of the quantum, which is just shy of $100 million, representing that bucket of under contract, maybe between $20 million and $30 million might transact in Q3 with the balance in Q4. There's 1 that we're marketing that might find its way into the early part of 2027. And then certainly I think with respect to the Atlanta perimeter, just given where we are in the process, I think it's fair to say that an early 2027 is a reasonable expectation, depending on where pricing comes in.

And so, to your broader question, look, our plan has been and continues to be to really dig into each hotel and figure out where we can optimize performance. And we've contemplated and communicated that that's a multi-year journey. I think what we're selling this year and then even the introduction of this hotel in Atlanta is a testament to how we think about, when the timing is right, we're ready to come to market. But I think, more importantly, I would set the expectation that driving performance to drive value is a big part of our business, and that's something that we will adhere to.

I think the last question you had about the broader market is it's mixed. I think for select-service hotels, I think we've continued to see some level of strength, just kind of given where that price point is. And then for more luxury hotels, there seems to be capital chasing those types of concepts. And then in between, depending on that price point, the $50 million to $100 million price point, it's a little bit softer. And so, it doesn't mean that there's not an ability to transact, but I think most of the transactions are coming from more stabilized hotels versus the journey where we're on is turning around performance to get us to that point.

Great. Very helpful. That's all from me. Thank you.

Our next question will come from [ Jack Armstrong ] of Wells Fargo. Please go ahead.

Good morning. Can you provide us with your updated thoughts on the ramp for the Nautilus, when you expect it to open, what the EBITDA drag is in the third and fourth quarters, and then where you expect the asset to stabilize and the pathway to get there?

Sure, Jack, good morning. The Nautilus project is underway today. We expect delivery by November, just ahead of where the season starts ramping up for that market. I think from a cash drag standpoint for the full year, it's around $4.5 million for that property. Yes, it's a significant swing. Our expectations going forward as it ramps up, we'll obviously get more color as we get into next year's guidance. But the property did around $5 million or $6 million before renovation on an annual run rate. We expect that to significantly increase going forward. Between that property and some of the others that are still ramping, we're optimistic we'll continue to see the right results.

A helpful color there. And then just can you touch on what percentage of your bookings were through the OTAs in Q2 and then maybe where that's been historically and then what the goal is there going forward out of some of the initiatives you talked about?

Yes, I mean, typically, the bookings across the OTA have kind of hovered in the high 20s. You know, where that bogey needs to be, I think, is still TBD. I mean, certainly we want that to come down closer to 20%. But I think there's a lot of work that needs to go in to do that. So between 20% and 25% is probably a healthy expectation in the medium term. And then again, I think that's going to come through the things that I referenced with respect to just changing some of the channels, allocating more resources through growing loyalty programs and driving business through loyalty programs. And I think as we bolster other areas within the business, whether it's group or contract business, let alone transient, that in itself will just truncate where that percentage comes from. But I think to answer your question, it's getting closer down to that 20% mark.

And then maybe one on the net lease side, can you give us your updated thoughts on credit losses in the back half of the year? Maybe provide an update on where the 2 franchisee bankruptcies stand and any changes to your tenant watch list at first look?

Yes, Jack, this is [ Jesse ]. I'll take that one. With respect to the 2 bankruptcies we announced, I think good news on both of those fronts. The Popeyes franchisee will be emerging from bankruptcy in Q3 to assign those assets back to corporate. So there'll be a credit bump there. All remaining economics of the existing master lease will stay the same. So they're already back to a rent-paying status. So probably net-net, that's a good story, a positive story.

And then with respect to the other franchisee, again, this is another QSR, we have a similar story. We expect all those to remain open and get assigned to corporate, so we'll see that credit bump as well. Still negotiating the deal terms with respect to exactly how it's going to play out in terms of the rent going forward.

I would say that the big story on the net lease side of things for us relates to the TA coverage piece, and this is now the second straight quarter we've seen a pretty meaningful bump. As best as we can tell, we think that's probably a function of a few things. We're seeing double-digit growth, both in terms of freight pricing as well as diesel margins, right? Those are two pretty big indicators of how that business is going to go.

The diesel margins may be a little more transitory and related to the Middle East conflict, but I think the thinking across the board in the freight industry is that that increase in demand is probably something that we expect to be persistent throughout 2026. So again, a really good indicator for that business. And maybe the third piece to that is we may be seeing some early fruits of the business improvement plan that BP has implemented with respect to those TA assets. They've now had several quarters of new management and the opportunity to execute on that plan. So multifactorial, certainly. But I think the big news in terms of how we think of the net lease portfolio is driven by the increased performance in TA.

Really helpful. That's it for me. Thanks.

The next question comes from [ Floris Van Deegem ] of Ladenburg Thalmann. Please go ahead.

Good morning. It's [ Floris ]. Can you walk us through your current thinking on addressing the remaining 2027 debt maturities, especially around the timing for that? Thanks.

Sure. From our standpoint, we've got $45 million in net lease mortgage notes. It's a variable funding note coming up in January. We expect to take that out with asset sale proceeds. I mentioned the revolver is up in June. We do have a 1-year extension option. So we're planning, thinking around that in the coming months what to do there. And then the zero-coupon senior secured notes mature in September of 2027.

Again, back half of this year, early next year is probably when we'll consider transacting depending on market conditions. Those notes are backed by two of our travel center lease pools, so very strong collateral. We think we have flexibility in refinancing those notes, and then whether or not we pay some of it down with asset proceeds remains to be seen depending on the quantum. But that's our shorter-term thinking as far as what's upcoming on the balance sheet.

The next question comes from John Massocca of B. Reilly. Please go ahead.

Good morning. Maybe sticking with the balance sheet question and the zero-coupon bonds in particular, I mean, do you think where you sit today after the equity raise, you're at a good enough position from a covenant perspective to refinance those with more kind of traditional secured debt, or would you still need to probably for covenant-related reasons go a more unique angle like you did with the last debt raising?

John, thanks for the question and good morning. Our current thinking is that it'll probably most likely be a regular way type debt instrument. The zero-coupon was sort of a temporary need from a covenant standpoint, as you outlined, pre-equity raise. I think we do, as we sit here today, and how those bonds have traded, I think we'll be in a pretty good position to be able to do that and absorb the cash interest that would be expected with such a refinancing. Again, those bonds in the market have traded very well. The collateral is very strong, and I think it set us up in a good spot.

Okay. And then on the hotel front, with the 2 assets that you're kind of marketing but don't have pricing agreed to or under contract on, are there kind of brackets for proceeds you're looking for? I know it might be a little bit specific given it's only 2 assets. I'm just kind of curious if there's a range of proceeds we might expect from those dispositions.

Yes, we'll provide more color as time progresses. I think where we stand, we want to let the process play out a little bit, let that guide overall expectations.

Okay. And then with the asset in Atlanta, you kind of previously marketed it. Was it the operational position of the property that made it attractive to take it back for sale? Or I mean, it seems like it did pretty well last quarter. Has there been any changes in overall performance that now might make it more attractive to buyers? I was kind of curious why that specific asset, why take that back into the market today?

Yes, last year when we took it to market, there was a couple different factors. One was just on unpacking a little bit more around the capital needs and the overall expectations with the brand. I think where we were seeing offers was a factor as part of that as we wanted to rethink it. As we sit here today, what's attractive about where we're at with that asset is that agreement expires at the beginning of next year. And so it provides optionality with the buyer pool, whether or not they want to purchase that with or without the brand. Again, just give general flexibility on execution of whatever business plan is associated with their capital needs. And so I think from a timing standpoint, and kind of timing the market relative to some of those timeframes, it's just, in our view, a much more attractive candidate for a buyer.

Okay. And then like bigger picture as we look into 2027, should we kind expect hotel sales to be one-offish in nature? I know it's early days, but any outlook for that versus maybe a more portfolio-driven or more structured disposition program next year?

It's early days, John. I think as I mentioned, the real focus is around performance improvement. That's a journey that we've talked about. We'll let that guide how we think about dispositions. And so, as we get through the year and more specifically into 2027, I think we'll have more color on what that could look like.

Okay. And then one last one on the hotel front, just a quick clarification. The 7.1% July RevPAR growth. Was that for the total portfolio or just the retained assets?

That was just the retained assets.

And then lastly, one on the net lease side, how should we think about lease expirations here over the remainder of the year? Is the outlook that those are strong candidates for renewal, or how are you kind of thinking about those assets specifically?

Yes, we don't have a ton of expirations in the back half of the year. We've got our arms around most of them. We expect to be renewing the vast majority of it. There may be 1 or 2 that go dark, but even that would be somewhat of a surprise for us. So I think we're in good shape for the balance of 2026, and now we're trying to get ahead of the 2027s as well at this point with the team.

Okay. That's it for me. Thank you very much.

This concludes our question-and-answer session. I'd like to turn the call over to [ Chris Bellotto ], President and Chief Executive Officer, for any closing remarks.

Thank you for joining today's call. Please reach out to our investor relations if you're interested in getting a meeting with SVC. That concludes our call.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.

Good morning, and welcome to the Service Properties Trust First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining us today. With me on the call are Chris Bilotto, President and Chief Executive Officer; Jesse Abair, Vice President; and Brian Donley, Treasurer and Chief Financial Officer. In just a moment, they will provide details about our business and our performance for the first quarter of 2026, followed by a question-and-answer session with sell-side analysts. I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company.

Also note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SVC's beliefs and expectations as of today, May 7, 2026, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call.

Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from our website at svcreit.com or the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO and adjusted EBITDAre. A reconciliation of these non-GAAP figures to net income is available in SVC's earnings release presentation that we issued last night, which can be found on our website.

Lastly, we will be providing guidance on this call, including estimated 2026 normalized FFO, hotel EBITDA, net operating income or NOI and adjusted EBITDAre. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. I will now turn the call over to Chris.

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Last night, we reported first quarter 2026 results, which reflects measurable progress advancing SVC's strategic initiatives. We materially strengthened our financial position with roughly $1.5 billion in capital markets activity, enhancing our overall leverage profile and debt maturity schedule. We continue to advance our capital recycling program and remain focused on active asset management across both our hotel and net lease properties. These initiatives serve as a catalyst toward driving performance for the company and improving cash flow. I will begin today's call with an update on our strategic priorities, followed by highlights from our hotel portfolio performance during the first quarter. Jesse will then discuss our net lease business, and Brian will conclude with a review of our financial results, balance sheet and financial outlook, starting with our strategic priorities.

Since the start of the year, we executed a capital plan that significantly strengthened our balance sheet and strategic positioning. In March, we closed $745 million of accretive ABS financing secured in part by 34 of our travel centers leased to TA, reinforcing the attractiveness of these assets. In April, we completed a $575 million underwritten equity offering that was intentionally sized to delever and improve our credit metrics. Importantly, RMR Group, our manager, invested $50 million alongside shareholders, underscoring strong alignment and confidence in our strategy.

Taken together, along with cash on hand, we retired $1.6 billion of debt, resulting in annualized cash interest savings of $59 million. We enter the remainder of 2026 with a stronger financial foundation and greater flexibility to execute our repositioning strategy and operational plans within our hotel portfolio focused on driving EBITDA improvement and value creation.

Turning to hotel performance. During the first quarter, RevPAR across our 93 hotels increased 6.7% year-over-year, primarily driven by broad-based occupancy gains across all service levels with notable strength in the full-service segment. Hotel EBITDA across the portfolio decreased 9.2% year-over-year to $18.4 million, though this reduction was partially impacted by a $2.4 million decrease tied to the 15 properties currently being marketed for sale. As a reminder, our full year guidance contemplates the expected losses related to these marketed hotels.

More importantly, the underlying performance of our 78 hotel retained portfolio was even stronger. Excluding the assets marketed for sale, RevPAR grew 7.5% year-over-year. Hotel EBITDA increased 2.1% to $26.2 million, and this was achieved despite the known revenue displacement from our ongoing redevelopment of the Nautilus and South Beach. This outperformance is driven by our strategic concentration and higher STR chain scales, our footprint in premier resort destinations, including Kauai, San Juan and Hilton Head and the uplift we are seeing from completed renovations.

Our focus remains squarely on capturing the margin flow we believe this portfolio is capable of generating as it ramps up over the next few years. Following several years of significant capital investment to reposition these assets, SVC is well positioned to drive revenue uplift and outsized EBITDA growth. Over the last 4 years, approximately half of our retained hotels completed or are currently undergoing major renovations.

To ensure we capture the performance improvements and margin flow-through anticipated over the coming years, our asset managers are actively engaging with our operators to refine operational synergies and streamline property level execution. While we acknowledge the broader macro headwinds, including geopolitical uncertainty, elevated fuel costs and lagging international and government travel, we remain confident that this active asset management approach will uncover varying opportunities to improve efficiencies and deliver stronger results.

Turning to hotel dispositions. During the quarter, we advanced our capital recycling initiatives, selling a 133 key focused service hotel for $7.1 million and progressed the marketing of 15 Sonesta managed hotels totaling approximately 3,000 keys. We removed one Sonesta Select property from the process to reassess its positioning, however, retain an active and engaged roster of buyers for the remaining properties.

Across the broader marketed hotels, pricing has come in softer than our initial outlook. This dynamic only reinforces our strategic commitment to exit these hotels and reallocate capital. Buyer demand for the eight focused service properties was strong, resulting in nearly 30 bids from more than a dozen unique buyers. Pricing was generally consistent with the average per key valuation we achieved on focused service hotels over the past year. Specific to these eight hotels, we have signed letters of intent with four buyers for total proceeds of approximately $61.2 million, which we intend to use to repay debt.

For the seven full-service hotels, bids for this operationally challenged subportfolio have fallen below initial targets. Despite this, we are prioritizing the exit of these properties with six of the seven hotels awarded to buyers for expected proceeds of $55.3 million.

We anticipate an update on the final property in the coming quarter, which will increase our total proceeds. From a strategic standpoint, all these assets is not aligned with our long-term goals. Together, these marketed hotels represented a $7.8 million of losses in the first quarter while carrying material future capital requirements. Exiting them now regardless of the softer pricing environment, eliminates a significant drag on our earnings and preserves capital. More importantly, it allows us to pivot our full attention and resources toward our retained core portfolio, driving growth in markets and properties where we have the greatest opportunity for margin expansion.

In summary, SVC's portfolio transformation is well underway. Supported by our recently improved capital structure and the operational upside within our hotel assets, we are focused on our initiatives supporting SVC's continued shift towards an increasingly net lease-oriented portfolio. Ultimately, we believe this combination of selling assets and operational improvement will drive durable cash flow and create attractive long-term value for our shareholders. I will now turn it over to Jesse.

Thanks, Chris, and good morning. At quarter end, SVC's net lease portfolio contained 761 properties across 42 states with annual base rents of $392 million. The portfolio was approximately 97% leased with a weighted average lease term of 7.3 years. We have 185 tenants operating under 140 brands across 21 distinct industries. The aggregate coverage of our net lease portfolio's minimum rents was 2.01x on a trailing 12-month basis as of March 31, 2026, up slightly from last quarter. The improvement was driven in part by our TA travel centers, which reported coverage of 1.24x, up from 1.2x in Q4.

During the quarter, our asset management team executed 20 leases totaling 219,000 square feet, averaging over 6 years of term and a cash rent roll-up of 8.5%. Looking ahead, portfolio lease expirations remain well laddered with less than 5% of annualized rents expiring through the end of 2027. NOI from our net lease portfolio declined $2.2 million year-over-year, primarily driven by credit loss reserves recorded for certain leases and related operational expenditures, which was partially offset by a $2 million positive impact from our acquisition activity. As we entered 2026, we shifted to a more measured pace of net lease acquisitions, targeting approximately $25 million of annual volume funded through capital recycling.

Since the beginning of the year, we've invested in four properties totaling $9 million, which were primarily funded with the proceeds from 13 net lease dispositions. Consistent with our investment focus on resilient necessity-based brands with limited e-commerce exposure, our acquisitions this quarter included quick service restaurants and an automotive services retailer. The transactions had a weighted average lease term of over 15 years, average rent coverage of 3.8x and an average going-in cash cap rate of 7.9% and an average GAAP cap rate of 8.8%. As we move through the year, we will continue to actively look for ways to recycle capital by leveraging our new and established brand relationships while pursuing growth opportunities in the form of sale leasebacks and off-market deals.

Our proactive asset management efforts and disciplined capital recycling strategy should allow the net lease portfolio to continue to function as a stable foundation for SVC as it implements its broader transformation.

And with that, I'll turn the call over to Brian to discuss our financial results.

Thank you, Jesse, and good morning. Starting with our consolidated financial results for the first quarter of 2026, normalized FFO was $7.4 million or $0.04 per share, down $0.03 per share compared to the prior year quarter. Normalized FFO this quarter as compared to the prior year quarter was primarily impacted by a $7.2 million or $0.04 per share decline in hotel results.

Our hotel disposition activity accounted for $5.3 million of the decline and $1.9 million was a result of the performance of the 15 hotels we are selling, partially offset by earnings growth in our 78 retained hotels as of quarter end. NOI from our net lease portfolio declined $2.2 million or $0.01 per share over the prior year on credit losses recorded during the quarter.

Interest expense declined by $5 million or $0.03 per share during the period as a result of our capital markets activity. Turning to our hotel portfolio performance. For our 93 comparable hotels this quarter, RevPAR increased by 6.7% and gross operating profit margin percentage declined by 70 basis points to 20.4%. Below the GOP line costs at our comparable hotels increased by $5.4 million from the prior year, driven by higher insurance expenses.

Our comparable hotel portfolio generated adjusted hotel EBITDA of $18.4 million during the quarter, a decline of $1.9 million or 9% from the prior year. The 15 Sonesta exit hotels we're currently marketing for sale generated RevPAR of $49, a decline of 3% and produced losses of $7.8 million for the quarter, a decline of $2.4 million year-over-year. The 78 hotels in our retained portfolio generated RevPAR of $113, an increase of 750 basis points year-over-year and adjusted hotel EBITDA of $26.2 million during the quarter, an increase of 2% year-over-year.

Hotel EBITDA declined $3.8 million for the seven hotels under renovation, including our South Beach Hotel. The 86 hotels not under renovation improved hotel EBITDA by $1.5 million or 8% over the prior year.

Turning to the balance sheet. We've been active in the capital markets and took steps to further strengthen our balance sheet, improve our debt maturity ladder and our cash flows. During the first quarter, we repaid $300 million of our February 2027 4.95% unsecured senior notes with cash raised from asset sales. We completed our second ABS offering for $745 million at a blended interest rate of 5.96% and a maturity of March 2031.

We securitized 158 net lease assets, including 34 travel centers, demonstrating the value of these assets and their attractiveness to investors. We used the proceeds from this offering to fully redeem all $700 million of our 8 375% senior unsecured guaranteed notes due June 2029, resulting in an annual cash interest savings of approximately $14 million. We also raised net proceeds of $542.3 million from our recent equity offering and redeemed all $450 million of our outstanding 5.5% senior guaranteed unsecured notes due 2027 and the remaining $100 million of outstanding 4.95% senior unsecured notes due in February 2027, resulting in additional annual cash savings of $29.7 million.

Following these capital market transactions, we currently have $4.7 billion of debt outstanding with a weighted average interest rate of 5.65%. We have no unsecured debt maturities until 2028, and our 2027 and 2028 secured debt maturities have substantial refinancing optionality supported by strong net lease collateral.

Further, SVC was recognized last week by Moody's, which upgraded its SVC corporate family rating, underscoring the clear progress we are making and strengthening our financial profile. Turning to our capital expenditure activity. During the first quarter, we invested $21.5 million in capital improvements. First quarter activity was largely driven by the renovation of the Nautilus in Miami as well as projects at the Royal Sonestas in Boston, Washington, D.C. and Austin, Texas.

Turning to our annual guidance. We are reaffirming our full year outlook for hotel EBITDA, net lease NOI and consolidated adjusted EBITDA. First quarter normalized FFO results were in line with our expectations and reflect the anticipated seasonality of our hotel portfolio and the planned renovation displacement embedded in our initial guidance. We are increasing our normalized FFO range as a result of our debt repayments to $124 million to $144 million or $0.24 to $0.27 per share.

The per share amount assumed a weighted average share count of 526 million shares. This full year guidance assumes midpoint interest expense of $360 million and G&A expense of $40 million. This guidance does not reflect the impact of completing any of the 15 Sonesta hotel dispositions and continues to assume $25 million of capital recycling in our net lease portfolio. We continue to expect total CapEx for the year of $120 million to $140 million.

To conclude, our first quarter results demonstrate continued momentum repositioning SVC and strengthening the company's cash flows, supported by our strategic capital market transactions. As we move forward, we remain focused on growing EBITDA and further optimizing SVC's portfolio to drive sustained value for our shareholders. That concludes our prepared remarks. We are ready to open the line for questions.

[Operator Instructions] And the first question today comes from Jack Armstrong with Wells Fargo.

First one for me on the net lease operating expenses, up roughly $2 million, both sequentially and year-over-year, which by our math, drove the majority of the miss versus our estimates. Can you talk a little bit about the moving pieces there and how we should be thinking about the run rate for the rest of the year?

Sure, Jack. This is Jesse. I'll take it. So as I mentioned, we booked about $2 million in credit losses. A portion of that was expenditures related to those assets and the bulk of that was property taxes. And what happened there really is we have two franchisees that filed for bankruptcy. So we're essentially covering the property taxes in the meantime. On a go-forward rate, this, in our opinion, is a onetime hit. And with respect to all these assets, they're all really good performers for us.

The expectation would be ultimately that they would come out of bankruptcy and get transitioned either to new franchisees or back to corporate and get back to kind of a rent and OpEx paying state.

Okay. And then just on rent coverage in the rest of the portfolio, can you talk a little bit about what drove the expansion in coverage for the TA portfolio? How you expect that to develop over the remainder of the year? And then also walk us through any changes on your tenant watch list. We noticed you've got a couple that are well below 1x coverage with both down significantly from Q4.

Yes. So with respect to TA, our perception of that is kind of twofold. On the one hand, TA has historically benefited from kind of pricing volatility, which certainly we're seeing as a function of the geopolitical situation in the Middle East. Typically, there's kind of a lag between wholesale and retail pricing and [ CTA ] has been able to take advantage of that. And that coupled with what we saw from our freight operators nationally, which was actually an increase in freight demand, a function of some regulatory changes that removed some excess capacity off the roads, which helped freight pricing.

And then industrial demand was up, I think, largely a function of data center construction and related activities. So on the TA side, I think the expectation will be some of that is likely transitory related to the Middle East situation. Some of that from the freight demand side is hopefully going to be more persistent. And in either event, there's an opportunity there for that to provide something of a bridge for us as TA and themselves with the new leadership kind of enact their business improvement plan and hopefully can put in some more structural changes to kind of drive EBITDA growth going forward.

On the tenant watch list, I mean, I would say that there are things -- we have a small exposure to drugstores and movie theaters. We're watching those. And then the bulk of it would be with respect to those two franchisees that I mentioned earlier. Other than that, it's been pretty consistent performance across the portfolio.

Okay. And then jumping over to the hospitality side of things, pretty strong RevPAR in the quarter and even stronger in the retained portfolio, but margins are still down 10 basis points. Can you talk about what happened there on the expense side and any expectations you may have for improvement over the course of the year?

Jack. This is Brian. One of the big impacts we had this quarter was rising insurance costs. We had some premium increases on the liability side that hurt margins. We had some deductibles that recorded for different incidents across the portfolio, which is more -- some of those recur here and there, but the premiums were the bigger driver.

Labor wasn't really an outsized impact. I think overall, labor costs were up 3% year-over-year. Still something we're trying to monitor closely and work with our operators on the staffing models of the hotels. So I think as we move forward, I mean, Q1 is typically seasonally weaker. Q2 as we go into the stronger summer season, hopefully drive more margin through the portfolio and expense, expense management and labor modeling is on the forefront to try to mitigate and improve our flow-through.

Okay. And then kind of with that in mind, what's giving you confidence in the unchanged hotel EBITDA annual guidance there with booking trends into the rest of Q2?

Yes. A lot of the things we talked about what impacted Q1, we have factored in our guidance range. There's still more to play out in the broader economy impacts from citywide events, including the World Cup and things of that nature that kind of -- we -- I don't think anybody has clear visibility on what the total impact is going to be. But we feel like there's pretty good trends continuing into the spring and early summer.

Our RevPAR growth into April was comparable to what we saw in Q1. So I think those patterns have continued. So we haven't seen any signs of sort of slowdown, and there's still some things to play out as the summer rolls through across our portfolio. And we're going to continue to see uplift from hotels that we completed last year. We're still building back group business and contract business from those hotels that were displaced last year, and there's still more opportunities hopefully ahead.

Really helpful. And last one for me, just at the corporate level. Could you maybe provide an update on the change you're planning to make to the Board as well as the new leadership at Sonesta and how you expect both of those to impact your strategy as we go into the back half of the year? And then also if you're considering waiving your bylaw limiting individual holders to 5%?

Yes. I guess I'll take it in a couple of parts. So with respect to the question on the Board, I think as communicated in kind of some of our public announcements, we will be working towards bringing on a new Board member, more specifically with lodging experience and kind of that process will continue to play out. So nothing to report with respect to that today, but it's something that continues to kind of advance.

And so we think that will be generally constructive and kind of a positive for kind of the company and governance accordingly. I think more specifically, Yes, on the Sonesta piece with respect to the new management team, as we talked about historically, you had a new management team that came on board effective in April. I mean we're just over 30 days into that now, and the team is off to a strong start, really kind of trying to identify and unpack changes at Holdco and then ultimately kind of how that will inform the hotel performance.

But look, I think, generally speaking, I mean, we feel pretty optimistic about a lot of the things that we're collectively talking about between our company and theirs and some of the changes they're making. I mean some of it is not new. We've continued to target kind of revenue mix being a top priority and how we drive additional business through group and contract -- some of that's going to be changes that they make on their end, and some of that's going to be deployment of new tools across all the operators such as utilizing AI for better lead generation or better competitive set insight.

So there's just a mix of fundamentals that we would expect to occur on that side of the business. But then I think more specifically for Sonesta, as we think about the expense load and margins, we're having a lot of dialogue about reevaluating the offerings across the properties and then kind of how that impacts the overall labor component, including contract labor, which we anticipate to see continued reductions.

One of the other things is with respect to kind of the global sales teams, there's an effort to expand that group to kind of provide more benefits for a lot of the work we've been doing on the renovations and kind of having being better positioned in the markets, and we think that will ultimately continue to drive group and contract business.

And then naturally, I think the last thing with respect to Sonesta is continuing to kind of give credence and time to the loyalty program and expanding that business. Certainly, with all of these operators, the benefit of the loyalty programs are kind of direct business through brand.com and other initiatives kind of reducing kind of more expensive acquisitions costs tied to the OTA.

Then your last question on the 5% for ownership stake in the shares. I think if you look closely at the offering, the equity offering we did in April, we did provide waivers to certain groups that own more than 5%. And it's not something we're going to change formally as it's put in place to protect certain tax attributes of the company as a REIT but it's something that we consider on a one-off basis.

[Operator Instructions] Your next question comes from Tyler Batory with Oppenheimer.

A couple for me here. And first, I wanted to follow up on the asset sales on the hotel side of things in that process, the 15 you have in the market right now. Any help on the time line for those? And then the seven full-service hotels, could you give us some more -- maybe some guideposts on potential pricing for those assets? And then I'm also just curious why the performance at those properties has been so challenged?

Yes. I think on the first question, look, given where we are, other than one hotel, we've kind of identified or have signed term sheets with buyers in support of that and kind of there's a range. Some are groups we've worked with historically and others are kind of new kind of relationships. And those -- the process varies. I would say more than half the portfolio deposits will go hard with no real diligence.

And then there's kind of on the low end, a 90-day period to close. And then kind of the balance is more traditional process whereby there's a diligence piece and then a period for close. And -- and we've talked about these sales transacting in the back half of the year, and I think that's still kind of the right bogey. And I think, hopefully, over time, maybe we'll take down incremental pieces of them over the course of Q3 and Q4 versus necessarily being all backloaded at the end of the year. And so that's how I would think about it from a respective timing.

And then I think for performance on the hotels, I mean, look, we're selling these hotels just because around conviction in the markets and the capital that is needed. And I think that the performance decrease is just a byproduct of where those sit in certain markets. And our performance is not inconsistent with the broader trends that are occurring in those markets. And then you're also going to have some level of disruption as you go through a sale process.

So again, all the reasons why we have more conviction on wanting to exit these and kind of reduce cash drag for the company.

Okay. Appreciate that. And then post equity raise, where are you in terms of your covenants? And just talk about some of the additional flexibility that you have post doing that equity transaction?

Sure. As of Q1, Tyler, we were able to pay down the debt with the equity offering, the $550 million of '27 notes, which gave us significant cushion on our -- both our leverage ratio and our interest coverage. So we took down debt to assets, the 60% test from 59% down to 53% and then the interest coverage was at 1.75x. So there's a good amount of cushion there. We were very strategic as far as the sizing of that equity offering to get us through the maturities, but also make sure we have enough operating flexibility within these covenants to refinance future debt maturities.

The way we're looking at the next debt maturity, which is the zero coupons, we'll have different options. We'll potentially pay down some of the balance with asset proceeds that Chris has talked about. And then those notes are also backed by one of the travel center leases giving us increased flexibility as far as what we might do with those, but the covenant shouldn't necessarily be an issue going forward in the near future.

Okay. And then last question for me, maybe a little bit of a clarification, too. In terms of the debt that you have upcoming, the 2027 senior secured notes. Obviously, there's an extension option there. Just talk about the conditions that allow you to extend that. And it sounds like the base case, we should just assume that, that's just going to get pushed to 2028?

Yes, that's to be determined. I mean we do have a 1-year option. It becomes a cash pay instrument at that point if we do, and it has an increasing scale of coupon, the longer those notes are up for that extension period. So I think the more likely scenarios we'll refi those out in some fashion. It's just a little early to talk about it given when September of '27.

And your next question comes from John Massocca with B. Riley Securities.

Maybe sticking with Tyler's line of questioning. If you think about the proceeds from upcoming hotel sales, would those have to be used towards paying down the zero coupon? Or is that -- when you talk about using asset sale proceeds to pay down the zero coupon, would it be assets that are currently collateralizing that piece of debt?

Yes. I mean I think we're going to be thoughtful around that. The way those zero coupons work, we took discounted proceeds and essentially are paying the interest over amortizing over time. So if we pay them off early, we're extinguishing that early. We're taking a hit on the discounted value. We have some options. We have a small variable funding note of $45 million. We could also pay off that matures in early '27. And then we could turn on the cash and wait for closer maturities and figure out where we're at from a strategic standpoint and what we do in the refinancing market. So there's some pieces to be determined as we move through these asset sales and what we do with the cash.

Yes, it's not required, John.

Yes.

So we have that flexibility.

Yes.

Okay. Then I guess, of the kind of pool of full-service assets you're looking to sell this year, how much of kind of the original estimate you put out was in the one asset that you pulled out of the selling bucket? Just kind of curious, right, you're going from $90 million to $110 million estimated at the end of last year to $55 million. And I'm just wondering how much of that is the removal of that one asset and how much of that is just a decline in the -- what you're seeing in the market for the remaining assets?

Yes. I think the combined awarded bid that we talked about was about $116 million. The removal of the one asset was, give or take, $5 million. And then we have another property where it's still in the market, and we're expecting pricing kind of in Q2 in the near term, which will be another catalyst to increase overall proceeds.

Okay. So there's still one additional asset that is not in that $55 million bucket.

Correct. There's one large full-service asset that's not in those numbers.

Okay. And then in terms of the extended stay and kind of select service assets you're selling, are those under contract right now? And I guess what is timing for those dispositions in your mind today?

Yes. Everything has been awarded or under LOI. And so most of those, I think the earliest they could close would be over a 90-day period. So I think kind of a good bogey is kind of mid to mid-Q3 is kind of a fair time line on the early end. And then we'll just kind of see how it plays out between now and then.

And just to clarify, is pricing on those kind of going as expected?

Yes. Pricing came in line on those as well. But I think, generally speaking, consistent with where we saw kind of the per key valuations for last year. So that's kind of where it stands.

Okay. And then switching over to the net lease portfolio. I guess how should we think about the near-term impact of the tenant credit issues on the financials like next couple of quarters as the bankruptcy process plays out? I mean, was there anything in 1Q that was particularly onetime in nature, either for accounting reasons or something else and could kind of bounce back immediately? Or when we talk about this not being typical run rate, is that more -- that will play out as the -- as you get those assets kind of re-tenanted and back to fully paying rent?

Yes. So these are two franchisees that we've been kind of in talks with and in front of for a while. So we knew this was going to hit. It just so happened that the bankruptcy filings happened this quarter. And so we don't think this is thematic in any real sense. But I think the way we anticipate playing this playing out is they'll go through the process. they'll negotiate some kind of outcome.

Like I said, these are all strong assets for us. So these assets themselves got wrapped up into much broader portfolio bankruptcies. So we expect that at the end of the day, we'll probably emerge with a better credit profile, either with respect to the new franchisee or going back to corporate. We'll get back to a rent paying status and there's even the potential for some recovery of back rent and back OpEx. But that remains to be seen. But again, the point here is just -- it's a timing function. We don't think this is anything that will be persistent on a go-forward basis.

And certainly nothing thematic in terms of the portfolio. I mean these are both -- just so happen to be in our QSR space, which actually otherwise is performing really well for us.

And I guess just given the nature of bankruptcy declaration, I mean, would you expect some of the metrics either on the operating expense side or the top line rent side to bounce back as soon as 2Q? Or is that something that needs to -- will bounce back once the bankruptcy process or a retenanting process kind of plays out?

Yes. I think it's just going to depend on the vagaries of those bankruptcy proceedings, which are a little bit -- can be inconsistent from a timing standpoint. It could be Q2, could be Q3, but somewhere within that time frame.

Okay. All right. And just maybe one last one. It seems like there was from the -- in guidance from the equity raise, there was about $17 million of interest expense savings, but only $14 million of kind of additional uplift on normalized FFO. Just curious what was kind of driving the delta there?

Yes, it really comes down to the net lease credit losses we just talked about, Jack, that's really the delta. I'm not going to try to say we're going to pick back up on that net lease piece. So we're turning towards the lower end of the net lease guidance, which offsets some of that interest expense, but that's really the driver.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto, President and Chief Executive Officer, for any closing remarks.

Thank you for joining our call today. We look forward to meeting and seeing many of you at the upcoming industry conferences, including NAREIT in June.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning, and welcome to the Service Properties Trust Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining us today. With me on the call are Chris Bilotto, President and Chief Executive Officer; Jesse Abair, Vice President; and Brian Donley, Treasurer and Chief Financial Officer. In just a moment, they will provide details about our business and our performance for the fourth quarter of 2025, followed by a question-and-answer session with sell-side analysts.

I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company.

Also note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SVC's beliefs and expectations as of today, February 26, 2026, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from our website at svcreit.com or the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements.

In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO and adjusted EBITDAre. A reconciliation of these non-GAAP figures to net income is available in SVC's earnings release presentation that we issued last night, which can be found on our website.

Lastly, we will be providing guidance on this call, including estimated 2026 normalized FFO, hotel EBITDA and adjusted EBITDAre. We are not providing reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all.

I will now turn the call over to Chris.

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Yesterday, we reported fourth quarter results that highlight our continued progress optimizing SVC's portfolio, strengthening our financial profile and repositioning the company for long-term growth and value creation. I will begin today's call with a brief update on our key strategic and financial initiatives and share operating highlights from our hotel portfolio. Jesse will provide an update on our net lease platform and recent acquisitions. Brian will then discuss our financial results and balance sheet, along with the introduction of annual guidance for 2026.

Starting with our strategic priorities. We had a productive quarter, completing previously announced hotel sales and taking action to reduce leverage and strengthen SVC's balance sheet. During the quarter, we sold 66 hotels totaling nearly 8,300 keys for $534 million. This activity increased our total dispositions for the year to 112 hotels, totaling approximately 14,600 keys for nearly $860 million. We used the proceeds and cash on hand to proactively redeem all $800 million of our 2026 debt maturities and $300 million of our February 2027 notes. Building on this momentum, in 2026, we remain focused on selling additional hotels and executing further strategies to improve SVC's cash flows, debt maturity profile and overall cost of capital.

Consistent with these objectives, in January, we sold the Simply Suites for $7.1 million with 133 keys and launched the remarketing of 9 focused service hotels that we initially brought to market in 2025. These hotels benefit from stable occupancy and positive cash flow, providing an opportunity to cater to a wider buyer pool, which is supported by the current interest level we are seeing with the marketing process.

Also in January, we initiated the marketing of 7 full-service Sonesta managed hotels with 2,010 keys with locations across the Southeast, Midwest and Pacific Northwest. Given their current cash drag, the sale of these 7 properties is expected to increase annual EBITDA by approximately $13 million and improve our leverage metrics. We believe these assets offer an attractive opportunity for investors seeking value-add lodging real estate with repositioning potential through targeted capital investment.

In terms of timing, our current plan is to formalize offers and select buyers over the next several months, and we are targeting staggered closing during the back half of 2026. We estimate total proceeds of $175 million to $200 million, which will be used for debt reduction. Complementing these efforts, earlier this week, we announced further actions to strengthen our debt maturity profile. We priced $745 million of new 5-year mortgage financing secured by our existing net lease master trust. To support this financing, SVC contributed to the Trust an additional 158 retail properties, which included legacy properties where we renewed tenants or re-tenanted the property, one of our travel center master leases and assets we acquired over the past year. In total, the contributed properties had an appraised value of approximately $1.1 billion. The transaction proceeds will be used to redeem all $700 million of our 8.375% notes due in 2029 at a significantly lower interest rate.

Based on the weighted average coupon of 5.96%, we expect this transaction to result in annual cash savings of approximately $14 million or $0.08 per share. With the completion of this new financing in 2026, we will continue to focus our efforts on improving performance within our hotel portfolio, along with capital preservation, which includes reduced net lease acquisition activity to roughly $25 million funded through sales of select net lease assets, along with a reduction to our overall capital spend across our hotel portfolio, which Brian will speak to momentarily.

Turning to hotel performance. During the fourth quarter, the U.S. lodging industry remained soft amid uneven demand trends with RevPAR declining 1.1% year-over-year. Performance continued to be bifurcated as the luxury and upper upscale segments were the only segments to post growth, supported by higher income leisure travelers and premium experiences.

The business transient segment remained muted, reflecting the impact of the prolonged government shutdown and value-conscious customers remain sensitive to broader macroeconomic conditions pressuring lower-tier segments. SVC's portfolio continued to deliver steady top line growth as RevPAR increased 70 basis points year-over-year, outpacing the broader industry by 180 basis points and representing the fifth consecutive quarter of outperformance.

We have invested significantly in hotel renovations in recent years, upgrading nearly half of our retained portfolio, and these assets are delivering stronger top line performance. We expect this momentum to continue as our renovated hotels capture market share. Excluding the hotels we are exiting, our remaining 77 hotels delivered relatively stronger fourth quarter performance with RevPAR up 170 basis points year-over-year, driven by occupancy gains of 140 basis points. Contract business, particularly airline-related demand, remained a key growth driver, partially offset by a decline in government bookings and softer transient revenues.

Hotel EBITDA declined year-over-year due to elevated labor costs and broader operating expense pressures. Additionally, the scale and timing of hotel dispositions during the quarter created temporary operational disruption that weighed on performance, which we view as largely transitional. As the volume and pace of dispositions conclude, we expect this disruption to taper, allowing performance to normalize.

Further complementing our efforts to support performance improvement across our hotels, Sonesta, which manages the majority of SVC's owned hotels and is 34% owned by SVC, recently announced the appointment of Keith Pierce and Jeff Leer as Co-CEOs effective April 1. We believe their leadership and experience will be instrumental in further optimizing Sonesta RevPAR market share performance while driving operational discipline and efficiencies across the SVC-owned portfolio.

Looking ahead to 2026, we are cautiously optimistic that lodging market conditions will improve and that demand will stabilize as the year progresses. More specifically, our hotel footprint is well positioned to benefit from large events throughout the year, including the World Cup, with 75 matches taking place in SVC markets, representing over 40% of our retained hotel rooms. Across our net lease portfolio, we are forecasting continued improvement with ongoing leasing, sales of noncore assets and benefits from the full year NOI contribution from our acquisitions in 2025.

I will now turn it over to Jesse to discuss the net lease portfolio in more detail.

Thank you, and good morning. As Chris mentioned, over the past year, we successfully executed our acquisition strategy aimed at growing annual base rent and improving the metrics of our net lease platform. Accounting for 3 closings subsequent to year-end, investments over the past year totaled $101 million, which were funded with a combination of cash on hand and proceeds from net lease dispositions. The acquisitions included a balanced mix of quick service and casual dining restaurants, automotive services, fitness and value retailers. In total, the acquisitions had a weighted average lease term of 14.3 years, average rent coverage of 2.7x and an average going-in cash cap rate of 7.5% and an average GAAP cap rate of 8.3%.

Moving forward, our disciplined investment criteria will remain unchanged with a focus on service-based brands that demonstrate resilience even in uncertain macro environments and remain largely insulated from e-commerce disruption. However, the pace of acquisitions will be mostly limited to capital recycling within our portfolio. For the full year 2026, we project total net lease deal volume of approximately $25 million. With the tenant roster augmented by our recent acquisitions, we will be actively looking for ways to leverage our new and established brand relationships for additional growth opportunities in the form of sale leasebacks and off-market deals.

With respect to our net lease results for the fourth quarter, at year-end, SVC's portfolio consisted of 760 properties across 42 states with annual base rents of $390 million. The portfolio was approximately 97% leased with a weighted average lease term of 7.4 years. We have over 180 tenants operating under 140 brands across 21 distinct industries.

Annualized base rent increased 2.4%, largely a function of our recent acquisition activity. Our asset management team had a particularly strong quarter, executing leases totaling 536,000 square feet, averaging over 9 years of term and a cash rent roll-up of 15%. Portfolio lease expirations remain well laddered with just over 5% of annualized rents expiring through the end of 2027.

Approximately 2/3 of our annual base rents are generated by our TA travel centers backed by BP's investment-grade credit profile. 34 of our travel center assets leased to TA served as collateral for our recent ABS financing. We are pleased with the strong investment-grade ratings and robust investor demand that these notes received, which we believe reflects confidence in the stability of cash flows from these assets for years to come.

And with that, I'll turn the call over to Brian to discuss our financial results.

Thanks, Jesse. Good morning. Starting with our consolidated financial results for the fourth quarter of 2025. Normalized FFO was $27.5 million or $0.17 per share, flat compared to the prior year quarter. Adjusted EBITDAre decreased $5 million year-over-year to $125.6 million. Overall, financial results this quarter as compared to the prior year quarter were primarily impacted by an $11.8 million or $0.07 per share decline in hotel EBITDA, partially offset by a $6 million or $0.04 per share onetime tax benefit related to our hotel in San Juan and $5 million or $0.03 per share related to our 34% share of Sonesta International's results.

For our 94 comparable hotels this quarter, RevPAR increased by 70 basis points and gross operating profit margin percentage declined by 370 basis points to 20.5%. Below the GOP line costs at our comparable hotels improved 1.5% from the prior year, driven by lower property taxes at certain hotels.

Our hotel portfolio generated adjusted hotel EBITDA of $21.3 million, a decline of 35% from the prior year as a result of elevated labor costs, higher hotel overhead costs and the impact of nonrepeat business interruption insurance recognized in the prior year. 77 hotels in our retained portfolio generated RevPAR of $106, an increase of 170 basis points year-over-year and adjusted hotel EBITDA of $25 million during the quarter, a decrease of $8 million year-over-year.

Turning to the balance sheet. We currently have $5.2 billion of debt outstanding with a weighted average interest rate of 5.95%. Using the proceeds from asset sales in January, we partially repaid $300 million of SVC's aggregate $400 million senior notes scheduled to mature in February 2027. On Monday, we announced our second securitization of net lease assets. This new 5-year financing totaled $745 million in principal at a weighted average coupon of 5.96% and a maturity of March 2031. SVC is contributing 158 net lease properties with a total appraised value of $1.1 billion. We're using the proceeds to fully redeem SVC's $700 million of 8.375% senior guaranteed unsecured notes with a June 2029 maturity to maximize cash flow savings and improve our debt covenants, specifically coverage of interest expense. This refinancing will result in annual cash interest savings of approximately $14 million or $0.08 per share.

Our next debt maturities consist of $100 million remaining of our 4.95% unsecured senior notes due February 2027, which we plan to address with proceeds from asset sales, followed by our $580 million 0 coupon notes due September 2027, which are secured by one of our TA leases and have a 1-year extension option.

Turning to our capital expenditure activity. During the fourth quarter, we invested $106 million in capital improvements, bringing our full year spend to $238 million. Fourth quarter CapEx included commencement of our redevelopment of the Nautilus in Miami, major projects at the Royal Sonesta in New Orleans and Cambridge, the Sonesta in Denver and ongoing renovations at the Sonesta ES Suites in Anaheim and the Simply Suites Las Vegas.

Turning to our financial outlook. We introduced full year 2026 guidance on our earnings presentation issued last night. For the full year 2026, we're currently projecting the following: for the 94 hotels owned as of year-end, we expect total RevPAR of $108 to $113 and hotel EBITDA of $124 million to $144 million; within our net lease portfolio, we expect net operating income of $380 million to $386 million; for our consolidated metrics, we're projecting adjusted EBITDA of $500 million to $520 million and normalized FFO per share of $0.65 to $0.77. This full year guidance assumes midpoint interest expense of $378 million with cash interest of $300 million and noncash amortization of interest of $78 million. We're also assuming G&A expense of $40 million and a weighted average share count of 169 million shares. This guidance does not reflect the impact of completing 17 Sonesta hotel dispositions, and it assumes $25 million of capital recycling in our net lease portfolio.

We expect total CapEx for the year of $120 million to $140 million. Collectively, our financial guidance projects SVC to generate free cash flow after CapEx in 2026. This marks an important milestone following 3 years of elevated capital investments to enhance our retained hotel portfolio.

To conclude, our fourth quarter results demonstrate continued momentum in repositioning SVC and strengthening the company's cash flows, supported by our capital market transactions and execution on asset sales. As we move forward, we remain focused on growing EBITDA and further optimizing SVC's portfolio to drive sustained value for our shareholders.

That concludes our prepared remarks. We are ready to open the line for questions.

[Operator Instructions] The first question comes from Jack Armstrong with Wells Fargo.

Can you share with us how RevPAR has trended in the first quarter to date? And what's driving the width of your RevPAR growth guidance? It's about 250 basis points wider than we've seen from your peers that have given guidance so far.

As far as what we're seeing so far in the early part of Q1, we're tracking in line, if not exceeding our projections for the full year guidance. We have January's actuals in the books, and we see RevPAR through the mid-February. So all is trending well so far.

As far as the range, given some of the volatility in our portfolio with disruption and displacement, we put the range in, which we think is appropriate for the activity in our hotels and some of the uplift in some of the citywide events and whether or not some of that activity pans out, could have an impact on either side of our guidance range and our midpoint.

Okay. Helpful there. And then on your net lease acquisition guidance, it's a meaningful step down from 2025 levels. Can you walk through the strategy shift there and how you're thinking about deploying capital in the net lease business now?

Yes. I think from kind of an overall strategy, I think more specifically, we're looking at just overall capital deployment holistically for the company, which includes decreasing capital spend at the hotels accordingly and then also kind of thinking about just our overall acquisition trajectory. And we've got the opportunity to kind of flex up or down as needed. But ultimately, the $25 million guidance will be supported by sales of net lease properties, so kind of net 0 in that standpoint. And we think that's kind of a healthy outlook just based on where our performance guidance is for 2026.

Okay. Great. And then could you provide some color on what your guidance assumes for expense growth at the midpoint and maybe break out some of the components like labor, insurance and anything else that we should be focused on?

Sure. Overall, to the midpoint, just top line is a little over 4% expectation on growth. The bottom line, we're seeing around 6% and a big part of that is labor. Base labor and wages is roughly 3% to 3.5%, but we're seeing increased pressure on the benefit side, which continues to hamper margins. The midpoint guidance assumes margins relatively flat if we hit those numbers.

Okay. And then do you have a sense of how any of the changes coming at Sonesta with the new management team may impact SVC? Is there any benefit included from that in your 2026 guidance?

No. The 2026 guidance is based on kind of budgeted forecasted hotel performance and kind of the things we've touched on. Certainly, with this management team coming in, I think there's a legacy track record of experience from each of them and kind of what they've done historically. And so I think net-net, we view it as a positive, and we embraced any opportunity for change to drive performance, and I think they'll do just that. So I think anything they bring to the table will be incrementally beneficial.

So I was going to say the 34% share of Sonesta's earnings, we're not projecting much growth there in the guidance.

The next question comes from Tyler Batory with Oppenheimer.

I want to start on the hotel portfolio and the guidance. And Brian, I think you had mentioned 4% top line growth. Just help us think about how much of your RevPAR in 2026 and the performance on an apples-to-apples basis versus 2025, you think is being driven by a higher quality portfolio, maybe progress on Sonesta brand recognition versus market factors and things like the World Cup, et cetera.

Yes. The guidance and the growth trajectory, the midpoint RevPAR is around $110, which is a 3% RevPAR growth, 4% on gross revenues. That is apples-to-apples. So again, we have higher RevPAR based on the weighting of full-service hotels. And a lot of the growth we're expecting is coming from lift from some of the low benchmarks we had in '25 because of renovations and displacement. We'll see some displacement still in 2026, and we've put that number out in our earnings presentation, and that's part of the Nautilus and some other bigger projects. But I think market factors, Chris mentioned the World Cup is America 250 and other citywide events that we should see some benefit from. So it's a little bit of everything there.

Okay. And then in terms of the margin outlook, you mentioned flat year-over-year, so low-teens, 12%. I guess any help -- I mean, how much displacement is still in that number? How much disruption is still in that margin number? And just any help thinking about a normalized EBITDA margin for the portfolio or kind of where you'd like to see EBITDA margin for the portfolio move over the medium-term?

Yes. In the '26 guidance, we've noted about $12 million in displacement from renovations. And so I think that -- it's going to vary year-to-year, right, depending on the renovations that we do specifically. And I think kind of generally speaking, we're doing some larger renovations, specifically with the Nautilus it will have an outsized impact to displacement. So I wouldn't view that as a run rate. I think it would be less than that, generally speaking, probably consistent with what we saw in 2025.

But again, as we think about capital deployment, it's another factor. We touched on the fact that we're being mindful of how we deploy capital. And so that's going to then dictate how we think about the types of renovations and which hotels we address. So it really will be on a case-by-case basis as we think about kind of the go-forward scenario.

Okay. Great. So a good segue to my next question just in terms of CapEx in '26 versus '25, meaningful step down there. Just remind us what's being planned for 2026? How much is the Nautilus? And then any reminders in terms of what you're thinking about a normalized CapEx for the hotel portfolio going forward?

Sure. The $120 million to $140 million is a big step for us. I think the pace of large significant renovations are winding down for us. We're going to be more spacing projects out. The Nautilus is definitely the biggest piece of this year. We had about $12 million of CapEx activity in Q4 of '25 related to the Nautilus, which is mostly exterior work. The rooms renovation is kicking off next month. And I think it's roughly $30 million, $35 million we're projecting in the first half of '26 related to that project alone. We're also -- the Cambridge Royal Sonesta, there's 2 towers in that hotel. We're doing one of those. There's a property -- one of our hotels down in D.C. as well as some other hotels scattered across the country that we're still doing renovations. But again, the pace and the volume and the size will continue to wind down. So that $120 million-ish is currently what we're thinking for next year and probably for future years as well at this stage.

Okay. So switching gears to the debt side of things and now that you've done the $745 million of securitized notes. I guess how much more room do you have in terms of whether it's just covenants or just overall capacity in terms of utilizing some of those assets to fund some of the debt maturities that are coming up in the next couple of years?

Yes. I mean that was a well-executed transaction for us. It did bring our secured debt to total asset capacity down -- well, the covenant went from 20-something percent to 33% out of a max of 40% under our covenant. So not a lot of headroom for a large transaction, but the way we're thinking about debt maturities the 0 coupons are already secured by assets. So we can refinance those with the existing collateral or in another manner. We have some unsecured notes that we need to clean up in early -- by early '27. And then our focus is largely on the unsecured notes due at the end of '27, which between asset sales and potential other transactions, we'll look to refinance those out.

Okay. And then last question for me, just to tie together all the commentary on the debt side of things and lots of moving pieces. I know you got asset sales and you made a lot of adjustments in terms of what you're doing with your cash. But just kind of level set what you have coming due 2027 and 2028 as well? And just like in an ideal scenario, how are you thinking about handling all of those maturities?

Sure. In my prepared remarks, we talked about the $100 million that's currently due in February, which the asset sales, we think we'll be able to use those proceeds to clean those up. I mentioned the 0 coupons is the next bigger maturity and there is an extension option. Those are backed by TA assets. We feel very good. We'll be able to either refinance those or extend those followed by the '27 -- the December '27, the asset sales that are in flight will knock out a piece of those. And then behind that is February '28 unsecured notes, which we're very focused on, whether it be asset sales, further asset sales or refinancing. It's a little early to talk about specifics on how exactly we're going to execute. But we feel confident given what we just did, it will give us some breathing room for covenant purposes and then just be able to evaluate our options in the market and potentially bring more properties for sale to help mitigate those maturities.

[Operator Instructions] The next question comes from John Massocca with B. Riley.

Maybe focusing on the hotel dispositions that you kind of have out there in 2026. Do those largely or entirely reflect the assets you called out in December as being marketed for sale and then also the assets that needed to be remarketed that kind of slipped out of the 2025 dispositions?

Yes, that's correct. So the 9 focused service that are part of the 16 we're in the market with are the carryover from 2025. So that -- those reflect the remarketing. And then the 7 full-service hotels, which we launched in January reflect those hotels that we articulated that we had identified to sell. And again, these are kind of the cash drag hotels more specifically as part of that endeavor. So yes, these 16 reflect those that we previously communicated.

Are the 9 kind of remarketed hotels, are those EBITDA positive? And if so, how much kind of offset would that be to what you've already stated in terms of the EBITDA drag from the 7 larger hotels you're marketing?

Yes, those are EBITDA positive. I mean they ended the full year with roughly $3 million in positive EBITDA for those 9. And net-net, if you look at 2025, the total drag would be about $10 million of what we would be saving.

Okay. And if you think about potential gross proceeds from those sales, I think if I took what they're originally being marketed for plus the range you're giving for the new hotel sales you're expecting in 2026, it would be somewhere kind of, I think, roughly like $190 million. Is that still kind of what you're seeing? Or has there been some change in pricing given some of these assets are being remarketed?

Yes. I mean we talked about $175 million to $200 million as a range. And I think, look, activity is strong. We've been out in the market since early January with these different portfolios, the 2 and there's good activity. Call for offers is going to start in the next couple of weeks and then it will be staggered. Just there's 3 different portfolios that we're marketing. So they'll come in staggered, and I think that will be indicative of within that range, where we think we're going to land on the higher, the lower the mid. So we'll have more to talk about. But again, the activity is there. We feel good about the execution. And again, we'll just have more to talk about in the next couple of months.

Okay. And then I guess, pro forma for those sales, do you still expect kind of run rate EBITDA mix to be around 70% net lease, 30% hotel at the end of 2026?

Yes, that's about right. Obviously, we'll get a lift from removing negative drag, but it's still right around that range.

Okay. And I mean, I guess, where does that roughly stand today just pro forma for all the transaction activity in 4Q?

Yes. I think it's not too far off from high-60s to low-30s to -- from an EBITDA mix.

Okay. Maybe switching gears to net lease. Post the transaction in February, I guess, how much in the way of non-hotel assets kind of remain that are unencumbered by debt, either in terms of like total property number or just kind of brackets around value?

Yes. I mean if there was something we thought we could have used in the debt transactions, we would have contributed more assets and taken more proceeds and done a little bit more. The properties that sit outside the securitization, there's roughly, call it, $27 million of rents. It's not a big portfolio. The weighted average lease term is under 5 years. There's work to do on leasing. There's movie theaters mixed in. So it's not -- I don't think we look at that part of -- the rest of that part of that portfolio is something that we're going to use for a financing necessarily unless, again, we're able to secure more lease term and growth on those assets. But for the most part, all 5 TA assets are now part of some sort of collateral package in our bonds or debt structure. The hotel portfolio is completely unencumbered. [indiscernible], the Hyatt portfolio that backs the revolver. So there is capacity on the hotel side. But again, I think the way we're thinking about our refinancings going forward, it's going to be a mix of potential bonds or guaranteed bonds or some other form of instruments.

And I would add, John, that on the retail properties that are remaining, we talked about raising proceeds through sales. Some of those hotels -- excuse me, those retail properties kind of fit within the remaining properties as far as some we'd be selling as well. So...

Okay. And then anything specific on the net lease side to call out? It's not a huge move quarter-over-quarter, but coverage did drop below 2x. I don't know if that's just the impact of lease escalators taking effect or if there was something you're seeing in a specific either individual tenant or tenant industry that maybe is driving a little bit of weakness quarter-over-quarter on coverage?

Yes, John, I would say the coverage drop is largely a function of TA coverage dropping 7 basis points quarter-over-quarter. If you take out the TA assets, coverage remains well north of 3.5, 3.6x. And then with respect to the TA piece, obviously, there's a lot of components that go into that business. But I would say, broadly speaking, we're seeing BP spending a lot of time and effort with that portfolio. Towards the end of last year, they brought on a new leadership team. They've implemented a business plan for TA, specifically aimed at increasing free cash flow through 2027. We continue to see them invest in these sites, particularly EV charging at scale.

So, I mean, our sense is that it's probably going to take a little bit of time for that coverage to get back up to where it was probably going back 1.5 years, 2 years ago. But in the meantime, as we know, those leases are backed by BP credit. And so we feel pretty good about that. And it's worth noting that there's just a lot of inherent value in those sites, right, the overall network, the sites themselves and the long-term fundamentals for trucking. So I think overall, we feel pretty comfortable with that sub portfolio.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto, President and Chief Executive Officer, for any closing remarks.

Thank you for joining today's call. We look forward to meeting with many of you at upcoming industry conferences this spring. Operator, that concludes our call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning, and welcome to the Service Properties Trust Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the call over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Thank you for joining us today. With me on the call are Chris Bilotto, President and Chief Executive Officer; Jesse Abair, Vice President; and Brian Donley, Treasurer and Chief Financial Officer. In just a moment, they will provide details about our business and our performance for the third quarter of 2025, followed by a question-and-answer session with sell-side analysts.

I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company.

Also note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SEC's beliefs and expectations as of today, November 6, 2025, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from our website at svcreit.com or the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements.

In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO and adjusted EBITDAre. A reconciliation of these non-GAAP figures to net income is available in SVC's earnings release presentation that we issued last night, which can be found on our website.

And finally, we are providing guidance on this call, including adjusted hotel EBITDA. We are not providing a reconciliation of this non-GAAP measure as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all.

With that, I will turn the call over to Chris.

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today.

Last night, we announced our third quarter earnings results, which reflect continued momentum on our strategic objectives. I will begin today's call with a brief update on our key initiatives and share operating highlights from both our hotel and net lease businesses. Jesse will provide further details on our net lease platform and recent acquisitions. Brian will then discuss our financial performance, balance sheet and quarterly guidance.

Starting with our strategic priorities. We had another productive quarter, completing previously announced hotel sales, advancing our capital recycling initiatives and taking decisive steps to strengthen SVC's balance sheet. Since our last earnings call, we have been active in the capital markets, raising over $850 million in proceeds, including $295 million from asset sales during the quarter, $67 million in asset sales in the months of October and November, and approximately $490 million from the issuance of our new zero-coupon bonds.

The proceeds were used to fully repay our revolving credit facility and retire all of our 2026 senior notes. Each of these steps further improved SVC's debt maturity profile, enhanced our financial flexibility and strengthened our covenant position.

Turning to current dispositions. Earlier this year, we committed to exiting 121 hotels totaling nearly 16,000 keys for gross proceeds of $959 million. We remain on track to complete the balance of these sales, including 6 hotels that sold in October for $66.5 million and 69 hotel sales expected to close in November and December for $567.5 million. Proceeds from these remaining sales will primarily be used to initiate the repayment of our February 2027 senior unsecured notes.

With respect to acquisitions, we continue to advance modest growth supporting our net lease portfolio, which Jesse will expand upon. This is intended to improve our net lease portfolio fundamentals, provide optionality with financing sources and support our business model transitioning toward a net lease company.

Turning to our hotel performance. At the macro level, the U.S. travel market continues to face headwinds with demand trends remaining uneven amid persistent economic uncertainty. Domestic leisure travel has declined to its lowest point in several years, reflecting heightened price sensitivity and a shift towards shorter booking windows. These behaviors suggest a more cautious consumer mindset in the current environment.

SVC's portfolio continues to deliver steady top line growth with RevPAR increasing 20 basis points year-over-year, outpacing the broader industry by 160 basis points and representing the fourth consecutive quarter of outperformance. This growth was primarily driven by occupancy gains, while ADR declined modestly. Excluding the hotels we are exiting, our remaining 84 hotels delivered stronger third quarter performance with RevPAR increasing 60 basis points year-over-year, driven by occupancy gains of 140 basis points.

Across the broader portfolio, contract business, particularly airline-related demand, remained a key growth driver and was partially offset by softer group demand and a decline in government bookings. Transient revenues were flat year-over-year, reflecting stable but subdued discretionary travel activity.

Hotel EBITDA declined compared to last year, primarily reflecting elevated labor costs, insurance deductibles and broader expense pressures. The scale and timing of hotel dispositions during the quarter introduced operational disruption that weighed on performance, which we view as largely transitional. As the disposition pipeline normalizes, we expect this shift will support stability and margin improvement as we move into 2026.

In recent years, we have also made significant capital investments to elevate the quality and performance of our hotels, having undergone major renovations at close to 45% of our retained hotel portfolio. We see positive indications of increasing performance, and we expect these renovated hotels to deliver incremental growth over the next year as they capture additional market share.

Within the retained hotel portfolio, approximately 15 hotels generated a combined EBITDA loss of over $20 million over the trailing 12 months. While several of these assets are in the midst of the performance ramp-ups following the noted renovations or undergoing operational turnarounds, others are identified candidates for disposition.

The reduction in cash drags combined with proceeds with these 2026 hotel sales serves as a meaningful catalyst for further deleveraging. These actions enhance our financial flexibility and support our long-term strategic objectives. We expect to provide additional detail on these disposition plans and future updates as execution progresses.

Turning to our triple net lease segment. Our portfolio continues to deliver steady performance, highlighted by rent growth over 2%, stable rent coverage and occupancy over 97%. The triple net lease market continues to demonstrate resilience and growth driven by supportive consumer behavior. Operators are capitalizing on consumer preferences for convenience, affordability and accessibility, driving continued demand for QSRs, express car washes and discount stores, industries in which SVC currently maintains or is increasing its exposure.

Following the balance sheet initiatives executed during the quarter, we believe SVC is well positioned to advance both its hotel and net lease strategies. These efforts are expected to support sustained cash flow growth and enhance long-term value creation for shareholders.

I will now turn it over to Jesse to discuss the net lease portfolio.

Thanks, Chris. In support of SVC's strategic shift toward the net lease space, during the quarter we continued to focus on portfolio growth and curation, driven largely by our acquisition platform. Although they will remain relatively modest in the near term, our acquisitions are intended to scale our net lease business, optimize portfolio composition and unlock value through accretive financing opportunities. Our investment thesis continues to revolve around necessity-based e-commerce-resistant retail assets that offer strong rent coverage and require minimal capital investment.

During the third quarter, we acquired 13 net lease properties for a total of $24.8 million. Accounting for closings subsequent to quarter end, year-to-date investments totaled $70.6 million. These deals have been funded with a combination of cash on hand and proceeds from net lease dispositions. Our 2025 transactions to date have a weighted average lease term of 14.2 years, average rent coverage of 2.6x and an average going-in cash cap rate of 7.4%. Consistent with our investment criteria, the acquisitions include a balanced mix of quick service and casual dining restaurants, automotive services, fitness and value retailers.

At quarter end, SVC's net lease portfolio consisted of 752 properties with annual minimum rents of $389 million. The portfolio was more than 97% leased with a weighted average lease term of 7.5 years. We have 178 tenants operating under 139 brands across 21 distinct industries.

Aggregate rent coverage was just over 2x for the trailing 12 months, unchanged compared to the prior quarter. From a credit quality perspective, 2/3 of our annual minimum rents come from TA Travel centers backed by investment-grade rated BP. Rent coverage at these assets was also stable compared to the prior quarter.

Annualized base rent increased 2.3% and NOI increased 50 basis points year-over-year, largely a function of our recent acquisition activity. Our asset management team executed 10 leases this quarter, totaling 187,000 square feet and averaging over 10 years of term.

Looking ahead, we have a robust pipeline of investment opportunities aimed at further enhancing portfolio metrics with respect to tenant and geographic diversity, weighted average lease term and coverage ratios. To that end, we are currently under agreement to acquire 5 additional properties totaling $25 million, which we expect to close in the fourth quarter.

Incremental disciplined growth will continue to be the focus for the net lease side of the business, generating reliable cash flows designed to endure throughout economic cycles.

And with that, I'll turn it over to Brian to discuss our financial results.

Thank you, Jesse, and good morning. Starting with our consolidated financial results for the third quarter of 2025, normalized FFO was $33.9 million or $0.20 per share versus $0.32 per share in the prior year quarter. Adjusted EBITDAre decreased $10 million year-over-year to $145 million.

Overall financial results this quarter as compared to the prior year quarter were primarily impacted by a $13.1 million decline in adjusted hotel EBITDA and an $8.7 million increase in interest expense.

For our 160 comparable hotels this quarter, RevPAR increased by 20 basis points, gross operating profit margin percentage declined by 330 basis points to 24.4%. Below the GOP line, costs at our comparable hotels increased 7.6% from the prior year, driven by insurance claims at certain hotels.

Our hotel portfolio generated adjusted hotel EBITDA of $44.3 million, a decline of 18.9% from the prior year as a result of softer demand and expense pressures. These results came in below the low end of our hotel EBITDA guidance range by $9.7 million, primarily due to a $6.6 million impact from hotels sold prior to September 30 and a $2.9 million impact from fire-related disruption at 2 full-service hotels.

The 76 Sonesta exit hotels not yet sold as of quarter end generated RevPAR of $72, a decline of 1%, and adjusted hotel EBITDA of $8.3 million, a decline of $3.2 million year-over-year. The 84 hotels in our retained portfolio generated RevPAR of $114, an increase of 60 basis points year-over-year, and adjusted hotel EBITDA of $36 million during the quarter, a decrease of $7 million year-over-year. Most of the decline year-over-year in the retained portfolio is related to elevated labor costs, repairs and insurance expenses.

Turning to our expectations for Q4. We are currently projecting fourth quarter RevPAR of $86 to $89 and adjusted hotel EBITDA in the $20 million to $25 million range. This guidance considers a sequential decline due to seasonality in the fourth quarter as well as recent headwinds in the travel and lodging industries. This guidance does not include the impact of completing any of the remaining 76 Sonesta hotel dispositions expected to close in Q4.

Turning to the balance sheet. We currently have $5.5 billion of debt outstanding with a weighted average interest rate of 5.9%. As discussed last quarter, we fully drew down on our $650 million revolving credit facility in July to protect liquidity as our 1.5x debt service coverage covenant was projected to be below the minimum requirement when we filed our second quarter earnings. Since then, we have taken several actions to strengthen SVC's balance sheet and improve our credit metrics.

Using the proceeds from asset sales and our new $580 million of zero-coupon senior secured notes, we have repaid all $700 million of senior notes that were scheduled to mature in 2026. I'm pleased to report we have also repaid all amounts outstanding on our $650 million revolving credit facility and are currently in compliance with all of our debt covenants.

We currently project interest expense for the fourth quarter will be approximately $102 million and includes approximately $84 million of cash interest expense and $18 million of noncash amortization of discounts and financing fees. Our next debt maturity is $400 million of 4.95% unsecured senior notes due February of 2027, which we currently expect to redeem from the proceeds of the remaining hotel asset sales we expect to close this quarter.

Turning to our capital expenditure activity. During the third quarter, we invested $47 million in capital improvements. Notable activity this quarter includes projects at our Sonesta Atlanta Airport hotel, preliminary project expenses for the Nautilus in South Beach and our Sonesta ES Suites in Anaheim.

As it relates to our capital spending, we are updating our full year 2025 guidance to reflect a shift in the pace of deployment and the timing of our planned renovation and brand transition at the Nautilus hotel. We originally planned to begin this project in the fourth quarter of this year, but we have deferred the project to commence during the first quarter of 2026 with completion expected next fall.

For the full year 2025, we are lowering our full year CapEx projection from $250 million to approximately $200 million. Last quarter, we provided initial 2026 CapEx guidance at $150 million for the year and expect the deferral of the Nautilus project will result in $20 million to $30 million of CapEx shifting to 2026.

In closing, our third quarter results reflect continued progress in transforming SVC and strengthening its financial position, highlighted by successful capital markets activity and strategic asset sales. Looking ahead, our focus remains on driving EBITDA growth and optimizing our portfolio to enhance long-term shareholder value.

That concludes our prepared remarks. We're ready to open the line for questions.

[Operator Instructions] Our first question comes from Jack Armstrong of Wells Fargo.

We're coming up on the halfway point in Q4 and there's still 69 hotels left to get done by year-end. How realistic is it that all these are going to close in time? Based on our prior conversations, the operators that are picking them up can only handle so much at a time from an operational perspective there. So curious your thoughts on the actual execution there.

Yes. Thanks for the question. This is Chris. I think as we've talked about historically, with respect to these sales, there was a phased negotiation or a rolling close with an outside date in December, meaning kind of the last close would occur across all the assets in December. And so I think the best way to look at it is right now, based on information we have, we're tracking to close 40% to 50% of the remaining balance in November. And then the rest will be in December, no later than the outside closing date. So everything planned for 2025.

Okay. And if they don't close by the closing date, kind of what's the procedure there? What should we expect?

Well, contractually, they're obligated to close. And so if for some reason, they don't close, then there's deposits and other remedies at risk. So again, I think that's -- at this stage, just given where we are and the work we've done, I think that I would view that as highly unlikely.

Okay. And then you took a $27 million impairment in the quarter. Can you talk about what that was in relation to and the likelihood of further impairments as we get through the rest of these sales?

Jack, this is Brian. That was more shifting of the purchase price allocations amongst the portfolios. I wouldn't read too much into it. Overall, we're still on track to produce a significant book gain on these sales. Most of it -- all of the rest of it will be a gain in the fourth quarter. Again, a lot of these contracts and the way the sales were phased in with the individual purchase prices and how those are allocated amongst the portfolio ended up resulting in that impairment. But it's -- again, I think it's more noise than anything.

Okay. And then last one for me. Rent coverage continues to decline in the travel center portfolio. Do you have an expectation of when or if that might improve? And at what level of coverage would you say it's concerning to you, acknowledging that it's guaranteed by BT?

Yes. Jack, this is Jesse. I'll take that. I mean, certainly we're seeing a couple of sequential quarters of degradation in the TA coverage. I think some of that is just kind of we're rolling off that kind of post-COVID high with respect to the freight demand driving a lot of their business. It does seem to be moderating that decline and kind of flattening out, particularly within the last couple of quarters.

So given the BT credit backing of those leases, I don't think we're particularly concerned at this point. We're in regular contact with TA. We continue to see them invest in the sites and continue to make them more competitive. So I think it's something we're watching, but I don't think anything above one, it doesn't drive us towards any particular degree of concern at this point.

[Operator Instructions] The next question comes from Tyler Batory of Oppenheimer.

A couple on the hotel portfolio first. And I'm just trying to evaluate the performance during Q3. I know lots of moving pieces with asset sales and whatnot. So just talk about how the EBITDA specifically came in versus your expectations internally. I know it was a little bit below the guidance, but I'm not sure perhaps how much of that was driven by asset sales and some of the other moving pieces you have going on right now.

Tyler, it's Brian. Thank you for the question. I think from the disposition standpoint, the timing of those sales and when they close was the biggest driver. When we provide the guidance and the guidance I provided today for the fourth quarter, doesn't assume asset sales because we can't always predict the exact timing and how much earnings will come off the plate. So about, just call it, $7 million, I think, is the number for sales from what we had guided for Q3.

There were some other onetime impacts in the quarter. We had a couple of insuranceable events, fires at a couple of properties in New Orleans. There was an electrical fire that caused significant disruption. We also had a fire on Silicon Valley, same story. It took -- the hotel was closed for days. And then there's just been general disruption from reopening and some other renovation disruption. Some softness in Cambridge, for example, was a big driver this quarter at our Royal Sonesta.

So there's different stories within the story. But I think to Chris' point in his remarks, there is definitely a softness in the industry and the travel industry in general. We continue to see cost pressures. So put all of that together is where we landed.

Okay. And then just to follow up that in terms of the guide for Q4, helpful to hear that that doesn't assume any asset sales. But when I just look at the sequential progression Q4 versus Q3, the seasonality is a little bit worse than normal. If I'm doing my math right, it implies about a high single-digit EBITDA margin there. Just talk a little bit about kind of what's going on in Q4 and just what you're seeing in terms of travel trends, costs, et cetera, moving into the fourth quarter that's informing that guide.

Yes. I mean I think at a very high level, from the travel trends, things have generally moderated quite a bit. Where we are seeing kind of some pockets are with respect to kind of the group pace. I think overall, we expect that to be up 3% for the year, give or take $5 million. And then we're also starting to kind of see some opportunities with contract business, more specifically at a lot of the renovated hotels. And so that's providing additional lift.

But I think we -- a lot of our business comes from the OTA market. That market too is getting a little bit more competitive, which is putting pressure on rates just given as travel demand has lessened more broadly, there's just a lot more brands exercising that market. So there's disruption on that front, let alone just kind of with the broader industry. And again, with the bright spots being progress we're seeing from the renovated hotels and then more specifically on group and contract business.

And then on the EBITDA side, Brian, I don't know if you want to add any more color there.

No. I mean I think it's really the combination of what we've been seeing in the last few quarters with continued cost pressures lower demands, the seasonality in Q4, we're also taking out our focused service hotels, which had much more of a smoother trend, if you will, across all 4 quarters. It's a little more steeper bell curve for our full-service hotels coming into Q4, and that's a typical pattern for our portfolio as we sell these hotels.

And then the impact of the rest of the dispositions, as we talked about, as Chris mentioned, that most of these properties are going to close in November and December. So how much EBITDA we retain versus leaving the system still remains to be determined based on timing. But there will be a similar impact to Q4's EBITDA removing hotels and raising those proceeds for us.

Okay. Great. And then moving on, could you talk a little bit more about some of the recent movements on the debt side, just the rationale behind doing the zero-coupon bonds. And I know it's a little while until you have upcoming maturities, but it's always something that people are focused on. So just kind of talk about how you're thinking about strategically handling those in the future.

Sure, Tyler. The zero-coupon bond, the primary goal there was to give us some headroom with our covenants, specifically the 1.5x interest coverage, the minimum coverage. So we get the benefit of having zero-coupon interest to that covenant. So we got an immediate lift. And we drew down the revolver in July to protect liquidity because if we're below that 1.5x, we can't use the revolver. It's an incurrence test, incurrence of debt, including borrowing from the line of credit.

So we had drawn down the line defensively in July. We started working through the strategies as we saw hotel EBITDA slipping further as the quarter moved on, executed on the zero-coupon transaction. We've repaid our '26 notes and we brought ourselves back in check. So those are the primary drivers. The zero-coupon bond basically gives us 2 years of runway on our debt maturities, our next debt maturity.

Once we complete the rest of these asset sales, we're paying off the early '27 notes that are coming due in February '27. So our next debt maturity will be those zero-coupons in September of 2027.

The next question comes from John Massocca of B. Riley Securities.

Maybe just a quick clarifying question on the guidance. Does that include the impact of host health sales closed quarter-to-date?

No. We just -- the projection is based on the portfolio as of September 30. So the few hotels shouldn't make a big difference, the ones we've closed so far, but it just assumes all 76 that haven't sold are still in those numbers.

Okay. And then as you think of kind of the pro rata impact of sales in 4Q and maybe even the final impact coming into 2026, is the overall amount of hotel EBITDA you expect to kind of lose in these sales still at the $53 million or so mark you laid out in August?

Roughly. I mean, yes, I mean, it's hard to predict what those would have done without the sales process impacting those properties. But generally speaking, around $50 million is the right number for the whole portfolio.

And then in terms of hotel sales, it sounds like everything is expected to be wrapped up by the end of this year. What's the outlook for potential further dispositions in 2026, particularly given you're not going to have debt repayment needs until '27? Could we expect another strategic process maybe as you look at the zero-coupon bonds? I know they're secured by net lease assets, but just kind of curious as to the opportunity set for more hotel dispositions. Could it be structural like it was this year? Or is it going to be more opportunistic going forward?

Yes. So the short answer is we are planning to continue with dispositions in 2026. As I mentioned kind of in my prepared remarks, we have a quantum of hotels that are negative EBITDA drags and these are on the full service side. And our initial plan is just to focus on a portion of those for launch of a sale earlier in the year. And we're going to kind of take a more incremental approach to kind of how we think about layering in the sales. I think it's important just to note, I mean, selling negative EBITDA hotels in itself takes time. And given kind of the overall backdrop of where the hotel kind of performance is going more kind of sector related, we just want to strike the right balance of timing to be focused on transactions.

So it will be very much incremental in next year, but with the caveat that we will be selling hotels. And our plan is to really provide more definitive information as we round out the year, likely with our NAREIT presentation update on kind of the hotels themselves, how much in proceeds we expect, how much negative EBITDA in the cases for the initial round, we expect to see come off the books when these transact and other details supporting that initiative.

Okay. I appreciate that detail. And then one last kind of one on the hotel front, purely the hotel front. The margin decline kind of quarter-over-quarter obviously, but even year-over-year, was that just driven by some of the fire disruption and insurance issues you talked about earlier on the call? Or were there other kind of factors going into that?

Yes, that's part of it. I think labor continues to be a big headline number for us and for every hotel company, frankly, continued growth in wages and benefit costs, market impacts, the availability of labor has a bigger outsized recurring impact to the portfolio and some of these other things. These insurance items were definitely an impact this quarter, but eventually, we'll get some business interruption proceeds, but that process takes a long time to offset. So there are other costs within the portfolio that continue to weigh on margins as revenues have been relatively flat.

Okay. And then on the CapEx guidance, I appreciate all the detail. It still feels like the 2025 CapEx guidance is calling for a pretty significant ramp in 4Q versus what you've done in the last 3 quarters. Is there something driving that, particularly now that the Nautilus renovations are going to move to 2026 purely?

Yes. There's a significant amount of stuff that we have in the pipeline at various hotels that will have an outsized impact, including one of our large Royal Sonestas in Cambridge. We're starting a renovation project there that will carry through into next year. Same thing down in New Orleans. The Nautilus, the biggest part and the actual swinging of hammers and doing the rooms and the public space will happen next year, but there's still a significant amount of dollars going out the door in fourth quarter by FF&E releases and that sort of thing as well as other maintenance type capital that we're working through across the portfolio.

So yes, it is outsized compared to the trend and -- but that's part of the rationale why we brought the guidance way down.

And diversely kind of on a 2-year stack, I think the way guidance kind of changed is calling for overall CapEx to decline. Is that just a product of hotel sales? Or is there something else going on there where you're thinking you need less CapEx spend?

Certainly, having less hotels, there will be less overall capital. But I think generally speaking, we have less kind of renovations planned during the year and just bringing down kind of the overall capital spend. So I think net-net, it's focused on just trying to kind of be more strategic about the deployment of capital going into the year. So this is -- Brian kind of alluded to the numbers going into 2026, and we'll continue to evaluate that with the goal that we can kind of see further reductions in out years as well.

Okay. And just to be clear, the CapEx spend guidance does take into account the asset sales, correct?

Correct. We're not projecting anything related to those sale of hotels.

No, no, I meant -- so I guess the number for 2026 includes assets that are planned to be sold. Or is that -- are you factoring in the fact you're going to sell these assets before you need to spend CapEx on them?

Yes, correct. Yes. So it's -- I guess we'll answer it in 2 parts. For the '25 dispositions and the capital guidance, that's all factored in. There's no capital with -- specifically tied to what we're selling at this stage, just given where we are in the process. The capital guide for 2026, it's going to have some capital for the hotels we're selling. I mean, by the time we transact on those hotels, we're going to have to continue to make sure we're taking care of any mission-critical work. So there's going to be some numbers in there. But as we dial into the timing of the sales, then we would kind of rightsize that number. But I wouldn't view that as kind of an outsized amount that would fall off given some of those initial sales.

Okay. And then maybe as we think about '26, bigger picture, is there a leverage target you kind of have in mind post some of these continued hotel dispositions?

Yes. I think with the completion of the 113 Sonesta sales, we've been quoting one full turn off of leverage when the dust settles, and that's still where we expect things to shake out. On the flip side, as you've seen in these numbers, EBITDA has eroded a little bit and really depends on where we come in next year, short of any other sales. So from a leverage target standpoint, we're going to -- when we get more specific as far as what we might sell in '26 in some of the full-service hotels and what the EBITDA impact is to the portfolio, we'll have more clarity on that. But at this time, the full turn of leverage from what we've done this year is sort of the benchmark in the short term.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto, President and Chief Executive Officer, for any closing remarks.

Thank you, everybody, for joining the call today. We look forward to seeing many of you at NAREIT in December. Please reach out to our Investor Relations team if you're interested in scheduling a meeting with SVC. That concludes our call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.