UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-11527

SERVICE PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

Maryland	04-3262075
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts, 02458-1634

(Address of Principal Executive Offices) (Zip Code)

617-964-8389

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of each Exchange on which Registered
Common Shares of Beneficial Interest	SVC	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of November 1, 2022: 165,453,327

SERVICE PROPERTIES TRUST

FORM 10-Q

September 30, 2022

INDEX

		Page
PART I	Financial Information (unaudited)
	Item 1. Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets — September 30, 2022 and December 31, 2021	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Nine Months Ended September 30, 2022 and 2021	4
	Condensed Consolidated Statements of Shareholders’ Equity — Three and Nine Months Ended September 30, 2022 and 2021	5
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2022 and 2021	7
	Notes to Condensed Consolidated Financial Statements	8
	Item 2.
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3.
	Quantitative and Qualitative Disclosures About Market Risk	44
	Item 4.
	Controls and Procedures	46
	Warning Concerning Forward-Looking Statements	46
	Statement Concerning Limited Liability	49
PART II	Other Information
	Item 1A.
	Risk Factors	50
	Item 2.
	Unregistered Sales of Equity Securities and Use of Proceeds	50
	Item 6.
	Exhibits	51
	Signatures	54

References in this Quarterly Report on Form 10-Q to the Company, SVC, we, us or our include Service Properties Trust and our consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

2

Part I Financial Information

Item 1. Financial Statements

SERVICE PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in thousands, except share data)

	September 30, 2022		December 31, 2021
ASSETS
Real estate properties:
Land	$	1,903,619	$	1,918,385
Buildings, improvements and equipment	7,669,058		8,307,248
Total real estate properties, gross	9,572,677		10,225,633
Accumulated depreciation	(2,929,193)		(3,281,659)
Total real estate properties, net	6,643,484		6,943,974
Acquired real estate leases and other intangibles, net	259,503		283,241
Assets held for sale	142,972		515,518
Cash and cash equivalents	67,246		944,043
Restricted cash	10,891		3,375
Equity method investments	113,168		62,687
Investment in equity securities	63,896		61,159
Due from related persons	58,292		48,168
Other assets, net	273,261		291,150
Total assets	$	7,632,713	$	9,153,315
LIABILITIES AND SHAREHOLDERS’ EQUITY
Revolving credit facility	$	95,000	$	1,000,000
Senior unsecured notes, net	5,652,590		6,143,022
Accounts payable and other liabilities	414,870		433,448
Due to related persons	18,335		21,539
Total liabilities	6,180,795		7,598,009
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $.01 par value; 200,000,000 shares authorized; 165,453,584 and 165,092,333, shares issued and outstanding, respectively	1,654		1,651
Additional paid in capital	4,554,358		4,552,558
Cumulative other comprehensive income	1,513		779
Cumulative net income available for common shareholders	2,534,688		2,635,660
Cumulative common distributions	(5,640,295)		(5,635,342)
Total shareholders’ equity	1,451,918		1,555,306
Total liabilities and shareholders’ equity	$	7,632,713	$	9,153,315

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

SERVICE PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(amounts in thousands, except per share data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues:
Hotel operating revenues	$	400,453	$	338,375	$	1,116,843	$	787,463
Rental income	97,798		98,724		290,949		286,742
Total revenues	498,251		437,099		1,407,792		1,074,205
Expenses:
Hotel operating expenses	318,266		285,233		933,803		723,769
Other operating expenses	3,511		4,437		9,162		11,758
Depreciation and amortization	101,514		124,163		306,147		370,208
General and administrative	11,293		14,231		35,743		40,840
Transaction related costs	—		3,149		1,920		28,934
Loss on asset impairment, net	1,172		—		9,720		2,110
Total expenses	435,756		431,213		1,296,495		1,177,619
Other operating income:
(Loss) gain on sale of real estate, net	(164)		94		44,235		10,934
Unrealized gains on equity securities, net	23,056		24,348		2,737		20,367
Interest income	1,442		203		2,735		485
Interest expense (including amortization of debt issuance costs and debt discounts and premiums of $4,595, $5,877, $15,529 and $15,123, respectively)	(81,740)		(92,458)		(263,904)		(273,227)
Loss on early extinguishment of debt	—		—		(791)		—
Income (loss) before income taxes and equity in earnings of an investee	5,089		(61,927)		(103,691)		(344,855)
Income tax (expense) benefit	(390)		55		(1,558)		(1,009)
Equity in earnings of an investee	2,801		2,158		4,277		50
Net income (loss)	7,500		(59,714)		(100,972)		(345,814)
Other comprehensive income:
Equity interest in investee’s unrealized gains	684		5		734		5
Other comprehensive income	684		5		734		5
Comprehensive income (loss)	$	8,184	$	(59,709)	$	(100,238)	$	(345,809)
Weighted average common shares outstanding (basic and diluted)	164,745		164,590		164,697		164,532
Net income (loss) per common share (basic and diluted)	$	0.05	$	(0.36)	$	(0.61)	$	(2.10)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

SERVICE PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share data)

	Common Shares					Additional Paid in Capital		Cumulative Net Income Available for Common Shareholders		Cumulative Other Comprehensive Income (Loss)
	Number of Shares	Common Shares		Cumulative Common Distributions
												Total
Balance at December 31, 2021	165,092,333	$	1,651	$	(5,635,342)	$	4,552,558	$	2,635,660	$	779	$	1,555,306
Net loss	—	—		—		—		(119,822)		—		(119,822)
Equity in unrealized gains of investees	—	—		—		—		—		4		4
Common share grants	—	—		—		462		—		—		462
Common share forfeitures	(800)	—		—		—		—		—		—
Distributions	—	—		(1,651)		—		—		—		(1,651)
Balance at March 31, 2022	165,091,533	$	1,651	$	(5,636,993)	$	4,553,020	$	2,515,838	$	783	$	1,434,299
Net income	—	—		—		—		11,350		—		11,350
Equity interest in investee’s unrealized gains	—	—		—		—		—		46		46
Common share grants	49,000	—		—		836		—		—		836
Common share repurchases and forfeitures	(2,078)	—		—		(8)		—		—		(8)
Distributions	—	—		(1,651)		—		—		—		(1,651)
Balance at June 30, 2022	165,138,455	$	1,651	$	(5,638,644)	$	4,553,848	$	2,527,188	$	829	$	1,444,872
Net income	—	—		—		—		7,500		—		7,500
Equity interest in investee’s unrealized gains	—	—		—		—		—		684		684
Common share grants	384,500	4		—		972		—		—		976
Common share repurchases and forfeitures	(69,371)	(1)		—		(462)		—		—		(463)
Distributions	—	—		(1,651)		—		—		—		(1,651)
Balance at September 30, 2022	165,453,584	$	1,654	$	(5,640,295)	$	4,554,358	$	2,534,688	$	1,513	$	1,451,918

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SERVICE PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share data)

	Common Shares					Additional Paid in Capital		Cumulative Net Income Available for Common Shareholders		Cumulative Other Comprehensive Income (Loss)
	Number of Shares	Common Shares		Cumulative Common Distributions
												Total
Balance at December 31, 2020	164,823,833	$	1,648	$	(5,628,746)	$	4,550,385	$	3,180,263	$	(760)	$	2,102,790
Net loss	—	—		—		—		(194,990)		—		(194,990)
Common share grants	—	—		—		380		—		—		380
Distributions to common shareholders	—	—		(1,648)		—		—		—		(1,648)
Balance at March 31, 2021	164,823,833	$	1,648	$	(5,630,394)	$	4,550,765	$	2,985,273	$	(760)	$	1,906,532
Net loss	—	—		—		—		(91,110)		—		(91,110)
Common share grants	49,000	1		—		1,066		—		—		1,067
Common share repurchases and forfeitures	(15,079)	—		—		(190)		—		—		(190)
Distributions	—	—		(1,648)		—		—		—		(1,648)
Balance at June 30, 2021	164,857,754	$	1,649	$	(5,632,042)	$	4,551,641	$	2,894,163	$	(760)	$	1,814,651
Net loss	—	—		—		—		(59,714)		—		(59,714)
Equity in unrealized gains of investees	—	—		—		—		—		5		5
Common share grants	291,700	2		—		1,046		—		—		1,048
Common share repurchases and forfeitures	(56,816)	—		—		(600)		—		—		(600)
Distributions	—	—		(1,648)		—		—		—		(1,648)
Balance at September 30, 2021	165,092,638	$	1,651	$	(5,633,690)	$	4,552,087	$	2,834,449	$	(755)	$	1,753,742

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

SERVICE PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)

	For the Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(100,972)	$	(345,814)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	306,147		370,208
Net amortization of debt issuance costs, discounts and premiums as interest	15,529		15,123
Straight-line rental income	5,530		3,087
Loss on early extinguishment of debt	791		—
Loss on asset impairment, net	9,720		2,110
Unrealized gains on equity securities, net	(2,737)		(20,367)
Equity in earnings of an investee	(4,277)		(50)
Gain on sale of real estate	(44,235)		(10,934)
Other non-cash income, net	(1,635)		(1,720)
Changes in assets and liabilities:
Due from related persons	(19,949)		(919)
Other assets	4,990		16,396
Accounts payable and other liabilities	(13,096)		(9,635)
Due to related persons	(8,692)		(16,483)
Net cash provided by operating activities	147,114		1,002
Cash flows from investing activities:
Real estate acquisitions and deposits	(2,765)		(7,649)
Real estate improvements	(68,790)		(64,340)
Hotel managers’ purchases with restricted cash	(3,951)		(23,692)
Net proceeds from sale of real estate	517,956		33,772
Investment in Sonesta	(45,470)		(25,443)
Net cash provided by (used in) investing activities	396,980		(87,352)
Cash flows from financing activities:
Repayment of senior unsecured notes	(500,000)		—
Borrowings under revolving credit facility	20,000		984,027
Repayments of revolving credit facility	(925,000)		(62,451)
Deferred financing costs	(2,959)		(6,762)
Repurchase of common shares	(463)		(787)
Distributions to common shareholders	(4,953)		(4,944)
Net cash (used in) provided by financing activities	(1,413,375)		909,083
(Decrease) increase in cash and cash equivalents and restricted cash	(869,281)		822,733
Cash and cash equivalents and restricted cash at beginning of period	947,418		91,456
Cash and cash equivalents and restricted cash at end of period	$	78,137	$	914,189
Supplemental disclosure of cash and cash equivalents and restricted cash:
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the condensed consolidated statements of cash flows:
Cash and cash equivalents	$	67,246	$	912,532
Restricted cash	10,891		1,657
Total cash and cash equivalents and restricted cash	$	78,137	$	914,189

	For the Nine Months Ended September 30,
	2022		2021
Supplemental cash flow information:
Cash paid for interest	$	269,461	$	273,221
Cash paid for income taxes	$	1,647	$	2,577
Non-cash investing activities:
Real estate improvements accrued, not paid	$	16,625	$	7,341

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

Note 1. Organization and Basis of Presentation

Service Properties Trust, or we, us or our, is a real estate investment trust, or REIT, organized on February 7,
1995 under the laws of the State of Maryland, which invests in hotels and service-focused retail net lease properties. At September 30, 2022, we owned, directly and through our subsidiaries, 242 hotels and 769 net lease properties.

At September 30, 2022, all 242 of our hotels were operated by subsidiaries of the following companies: Sonesta Holdco Corporation, or Sonesta (200 hotels), Hyatt Hotels Corporation, or Hyatt (17 hotels), Radisson Hospitality, Inc., or Radisson (eight hotels), Marriott International, Inc., or Marriott (16 hotels), and InterContinental Hotels Group, plc, or IHG (one hotel). At September 30, 2022, we owned 769 net lease properties with 178 tenants, including 179 travel centers leased to TravelCenters of America Inc., or TA, our largest tenant. Hereinafter, these companies are sometimes referred to as our managers and/or tenants, or collectively, operators.

Basis of Presentation

The accompanying condensed consolidated financial statements of us are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2021, or our 2021 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period, have been included. These condensed consolidated financial statements include our accounts and the accounts of our subsidiaries, all of which are 100% owned directly or indirectly by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include the allowance for credit losses, purchase price allocations, useful lives of fixed assets, impairment of real estate and related intangibles.

We have determined that each of our wholly owned taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification™. We have concluded that we must consolidate each of our wholly owned TRSs because we are the entity with the power to direct the activities that most significantly impact such VIEs’ performance and we have the obligation to absorb losses or the right to receive benefits from each VIE that could be significant to the VIE and are, therefore, the primary beneficiary of each VIE. The assets of our TRSs were $166,075 and $113,705 as of September 30, 2022 and December 31, 2021, respectively, and consist primarily of our TRSs’ investment in Sonesta’s common stock and amounts due from and working capital advances to certain of our hotel managers. The liabilities of our TRSs were $35,968 and $42,432 as of September 30, 2022 and December 31, 2021, respectively, and consist primarily of amounts payable to certain of our hotel managers. The assets of our TRSs are available to satisfy our TRSs’ obligations and we have guaranteed certain obligations of our TRSs.

Note 2. Revenue Recognition

We report hotel operating revenues for managed hotels in our condensed consolidated statements of comprehensive income (loss). We generally recognize hotel operating revenues, consisting primarily of room and food and beverage sales, when goods and services are provided.

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SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

We report rental income for leased properties in our condensed consolidated statements of comprehensive income (loss). We recognize rental income from operating leases on a straight line basis over the term of the lease agreements. We reduced rental income by $1,845 and $905 for the three months ended September 30, 2022 and 2021, respectively, and reduced rental income by $5,530 and $3,087 for the nine months ended September 30, 2022 and 2021, respectively, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight line basis. See Notes 5 and 10 for further information regarding our TA leases. Due from related persons includes $10,840 and $20,655 and other assets, net, includes $31,176 and $26,881 of straight line rent receivables at September 30, 2022 and December 31, 2021, respectively.

Certain of our lease agreements require additional percentage rent if gross revenues of our properties exceed certain thresholds defined in our lease agreements. We may determine percentage rent due to us under our leases monthly, quarterly or annually, depending on the specific lease terms, and recognize it when all contingencies are met and the rent is earned. We recorded percentage rent of $2,279 and $555 for the three months ended September 30, 2022 and 2021, respectively, and $3,421 and $944 for the nine months ended September 30, 2022 and 2021, respectively. We had deferred estimated percentage rent of $830 and $1,849 for the three months ended September 30, 2022 and 2021, respectively, and $6,168 and $4,827 for the nine months ended September 30, 2022 and 2021, respectively. See Note 5 for further information on this deferred estimated percentage rent.

Note 3. Weighted Average Common Shares

We calculate basic earnings per common share under the two class method. We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method. Unvested share awards, and the related impact on earnings, are considered when calculating diluted earnings per share. For the three and nine months ended September 30, 2022 and 2021, there were no dilutive common shares and certain unvested common shares were not included in the calculation of diluted earnings per share because to do so would have been antidilutive.

Note 4. Real Estate Properties

At September 30, 2022, we owned 242 hotels with an aggregate of 40,563 rooms or suites and 769 service-oriented retail properties with an aggregate of 13,412,371 square feet that are primarily subject to “triple net” leases, or net leases where the tenant is generally responsible for payment of operating expenses and capital expenditures of the property during the lease term. Our properties had an aggregate undepreciated carrying value of $9,715,649, including $142,972 related to properties classified as held for sale as of September 30, 2022.

We made capital expenditures at certain of our properties of $73,952 during the nine months ended September 30, 2022.

Acquisitions

During the three months ended September 30, 2022, we acquired the previously leased land at one of our hotels for a purchase price of $2,765, including acquisition related costs of $51. This acquisition was accounted for as an asset acquisition and the entire purchase price was allocated to land.

Dispositions

During the nine months ended September 30, 2022, we sold 80 properties for an aggregate sales price of $531,737, excluding closing costs, as presented in the table below. The sales of these properties do not represent significant dispositions nor do they represent a strategic shift. As a result, the results of the operations of these properties are included in continuing operations through the date of sale in our condensed consolidated statements of comprehensive income (loss).

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SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

Quarter Sold	Property Type	Number of Properties	Rooms or Suites/Square Feet	Gross Sales Price		Gain/ (Loss) on Sale
Properties sold during the nine months ended September 30, 2022
Q1 2022	Hotels	5	1,060	$	60,174	$	4,990
Q1 2022	Net Lease	2	6,960	5,350		558
Q2 2022	Hotels	51	6,119	427,694		39,878
Q2 2022	Net Lease	11	108,532	7,714		(1,027)
Q3 2022	Hotels	5	603	29,700		(186)
Q3 2022	Net Lease	6	14,056	1,105		22
		80	7,782 / 129,548	$	531,737	$	44,235

As of September 30, 2022, we had 22 hotels with 3,040 rooms and an aggregate carrying value of $133,239 classified as held for sale and three net lease properties with 8,575 square feet and an aggregate carrying value of $1,038 classified as held for sale.

From October 1, 2022 through November 1, 2022, we sold one hotel with 120 rooms and a carrying value of $4,514 for a sales price of $6,025. See Notes 5 and 13 for further information on these properties.

As of November 1, 2022, we have entered into agreements to sell 16 Marriott branded hotels and four Sonesta branded hotels with an aggregate of 2,701 rooms for an aggregate sales price of $162,470, excluding closing costs. These pending sales are subject to conditions; as a result, these sales may not occur, may be delayed or their terms may change. We continue to market one additional hotel with 219 rooms and three net lease properties with 8,575 square feet for sale. We expect the sale of a majority of these hotels to be completed by the end of the first quarter of 2023. See Notes 5 and 13 for further information on our property sales.

Note 5. Management Agreements and Leases

As of September 30, 2022, we owned 242 hotels which were included in six operating agreements and 769 service oriented retail properties net leased to 178 tenants. We do not operate any of our properties.

Hotel agreements

Sonesta agreement. As of September 30, 2022, Sonesta managed 40 of our full-service hotels, 111 of our extended stay hotels, and 49 of our select service hotels pursuant to management agreements for all of the hotels. The hotels Sonesta managed for us comprised approximately 47.7% of our total historical real estate investments.

On January 7, 2022, we and Sonesta amended and restated our management agreements effective January 1, 2022. We refer to our management agreements with Sonesta collectively as our Sonesta agreement. As of that date, we owned 261 hotels managed by Sonesta and we expected to sell 67 of those hotels, or the Sale Hotels. Among other things, the amendments to the agreements between us and Sonesta for 194 hotels we did not then expect to sell, or the Retained Hotels, are as follows:

•The term for the Retained Hotels expires on January 31, 2037 and includes two 15-year renewal options.

•All Retained Hotels are subject to a pooling agreement that combines the management agreements for the Retained Hotels for purposes of calculating gross revenues, hotel operating expenses, fees and distributions and the owner’s priority return due to us.

•The owner’s priority return for the Retained Hotels was initially set at $325,200 annually. We have the right to terminate Sonesta’s management of specific hotels that we own if minimum performance thresholds are not met starting in 2023.

•We will renovate the Retained Hotels to comply with agreed upon brand standards. As we advance such funding or fund other capital expenditures, the aggregate annual owner’s priority return due to us will increase by 6% of the amounts funded.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

•Trade area restrictions by hotel brand were added to define boundaries to protect our owned hotels in response to Sonesta increasing its franchising and third-party management activities.

For the Sale Hotels, the term was extended to December 31, 2022 (or, if earlier, until the applicable hotel has been sold) and the reserve established for the regular refurbishment of our hotels, or FF&E, reserve funding requirement was removed. The Sale Hotels are subject to a pooling agreement that combines the management agreements for the Sale Hotels for purposes of calculating gross revenues, hotel operating expenses, management and related fees and the owner’s priority return due to us. Our owner’s priority return will be reduced by the current owner’s priority return for a Sale Hotel once sold. We sold 61 of the Sale Hotels as of September 30, 2022 for an aggregate sales price of $517,568, excluding closing costs. We recognized a net gain of $44,682 and the total annual owner’s priority return was reduced by $73,851 in connection with these sales. As of September 30, 2022, the total annual owner’s priority return for the remaining six Sale Hotels we then owned was $11,819 as of that date. Subsequent to September 30, 2022, we sold an additional one Sale Hotel for an aggregate sales price of $6,025, excluding closing costs, and the total annual owner’s priority return was reduced by $902 in connection with this sale. As of November 1, 2022, we had agreements to sell an additional four Sale Hotels for an aggregate sales price of $25,170 and having a net book value of $22,996 and a total annual owner’s priority return of $5,408 as of September 30, 2022. These pending sales are subject to conditions; as a result, those sales may not occur, may be delayed or their terms may change. See Notes 6 and 10 for further information regarding our sales of hotels managed by Sonesta.

Our Sonesta agreement provides that we are paid an annual owner’s priority return if gross revenues of the hotels, after payment of hotel operating expenses and management and related fees (other than Sonesta’s incentive fee, if applicable), are sufficient to do so. The Sonesta agreement further provides that we are paid an additional return equal to 80% of the operating profits, as defined therein, after reimbursement of owner or manager advances and with respect to the Retained Hotels, FF&E reserve escrows and Sonesta’s incentive fee, if applicable. Our Sonesta hotels generated net operating cash flow of $67,765 and $40,728 for the three months ended September 30, 2022 and 2021, respectively, and net operating cash flow of $148,217 and $28,531 for the nine months ended September 30, 2022 and 2021, respectively.

Pursuant to our Sonesta agreement, we incurred management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third-party reservation transmission fees of $31,136 and $26,640 for the three months ended September 30, 2022 and 2021, respectively, and $87,615 and $59,962 for the nine months ended September 30, 2022 and 2021, respectively. These fees and costs are included in hotel operating expenses in our condensed consolidated statements of comprehensive income (loss). In addition, we incurred procurement and construction supervision fees payable to Sonesta of $284 and $184 for the three months ended September 30, 2022 and 2021, respectively, and $840 and $1,571 for the nine months ended September 30, 2022 and 2021, respectively, which amounts have been capitalized in our condensed consolidated balance sheets and are depreciated over the estimated useful lives of the related capital assets.

Our Sonesta agreement requires us to fund capital expenditures that we approve at the hotels. We incurred capital expenditures for hotels included in our Sonesta agreement in an aggregate amount of $56,297 and $76,035 during the nine months ended September 30, 2022 and 2021, respectively, which resulted in increases in our contractual annual owner’s priority returns of $3,378 and $6,083, respectively. We owed Sonesta $7,252 and $5,016 for capital expenditures and other reimbursements at September 30, 2022 and December 31, 2021, respectively. Sonesta owed us $21,213 and $4,592 in owner’s priority returns as of September 30, 2022 and December 31, 2021, respectively. Amounts due from Sonesta are included in due from related persons and amounts owed to Sonesta are included in due to related persons in our condensed consolidated balance sheets. All of the hotels operated under the Retained Hotels management agreements require that 5% of the hotel gross revenues be escrowed for future capital expenditures as FF&E reserves, subject to available cash flows after payment of the owner’s priority returns due to us. No FF&E escrow deposits were required during either of the three or nine months ended September 30, 2022 or 2021.

We are required to maintain working capital for each of our hotels managed by Sonesta and have advanced a fixed amount based on the number of rooms in each hotel to meet the cash needs for hotel operations. The sales of the hotels managed by Sonesta referenced above resulted in a return to us of working capital amounts we had previously advanced with respect to those hotels. As of September 30, 2022 and December 31, 2021, we had advanced $49,218 and $56,697, respectively, of initial working capital to Sonesta net of any working capital returned to us on termination of the applicable management agreements in connection with such sales. These amounts are included in other assets in our condensed consolidated balance sheets. Any remaining working capital would be returned to us upon termination in accordance with the terms of our Sonesta agreement.

See Notes 6 and 10 for further information regarding our relationship, agreements and transactions with Sonesta.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

Hyatt agreement. As of September 30, 2022, Hyatt managed 17 of our select service hotels pursuant to a portfolio management agreement that expires on March 31, 2031, or our Hyatt agreement, and provides that, as of September 30, 2022, we are to be paid an annual owner’s priority return of $12,776. Any returns we receive from Hyatt are currently limited to the hotels’ available cash flows, if any, after payment of operating expenses. Hyatt has provided us with a $30,000 limited guarantee for 75% of the aggregate annual owner's priority returns due to us that will become effective upon substantial completion of planned renovations of the hotels we currently expect to occur in 2023. We realized returns of $3,116 and $2,768 during the three months ended September 30, 2022 and 2021, respectively, and $9,504 and $6,634 for the nine months ended September 30, 2022 and 2021, respectively, under our Hyatt agreement. We incurred capital expenditures for certain hotels included in our Hyatt agreement of $12,611 during the nine months ended September 30, 2022, which resulted in an aggregate increase in our contractual annual owner’s priority returns of $757. We did not incur capital expenditures for any of the hotels included in our Hyatt agreement during the nine months ended September 30, 2021.

Radisson agreement. As of September 30, 2022, Radisson managed eight of our full service hotels pursuant to a portfolio management agreement that expires on July 31, 2031, or our Radisson agreement, and provides that we are to be paid an annual owner’s priority return of $10,200. Any returns we receive from Radisson are currently limited to the hotels’ available cash flows, if any, after payment of operating expenses. Radisson has provided us with a $22,000 limited guarantee for 75% of the aggregate annual owner's priority returns due to us that will become effective upon substantial completion of planned renovations of certain of the hotels we currently expect to occur in 2023. We realized returns of $2,873 and $1,822 during the three months ended September 30, 2022 and 2021, respectively, and $6,347 and $11,878 for the nine months ended September 30, 2022 and 2021, respectively, under our Radisson agreement. We incurred capital expenditures of $2,135 and $2,433 for the hotels included in our Radisson agreement for the three and nine months ended September 30, 2022, respectively. We did not incur capital expenditures for any of the hotels included in our Radisson agreement during the three or nine months ended September 30, 2021.

Marriott agreement. As of September 30, 2022, Marriott managed 16 of our hotels. We were previously in arbitration proceedings with Marriott regarding, among other things, the validity of the timing of the termination of the Marriott agreements in 2020, including an exit hotel agreement which, if not terminated, would have required us to sell the 16 hotels encumbered with a Marriott brand. We entered an agreement with Marriott regarding the 16 hotels currently managed by Marriott, pursuant to which we agreed to have these hotels remain Marriott branded until the arbitration was resolved. On January 18, 2022, the arbitration concluded. As of November 1, 2022, we have entered agreements to sell these 16 hotels for an aggregate sales price of $137,300, excluding closing costs. These pending sales are subject to conditions; as a result, these sales may not occur, may be delayed or their terms may change.

Our Marriott hotels generated net operating cash flow of $3,818 and $4,685 during the three months ended September 30, 2022 and 2021, respectively, and net operating cash flow of $7,411 and a net operating cash flow deficit of $7,895 during the nine months ended September 30, 2022 and 2021, respectively. Any returns we receive from Marriott are limited to the hotels’ available cash flows, if any, after payment of operating expenses. We did not incur capital expenditures for any of the hotels included in our Marriott agreement during the nine months ended September 30, 2022. We incurred capital expenditures of $7,319 for the hotels included in our Marriott agreement during the nine months ended September 30, 2021.

Other. Our management agreement with IHG for one hotel expires on January 31, 2026. Our IHG hotel generated net operating cash flow of $1,273 and $962 during the three months ended September 30, 2022 and 2021, respectively, and net operating cash flow of $2,610 and a cash flow deficit of $384 for the nine months ended September 30, 2022 and 2021, respectively. Any returns we receive from IHG are limited to the hotel’s available cash flows, if any, after payment of operating expenses.

Net lease portfolio

As of September 30, 2022, we owned 769 service-focused retail net lease properties with 13,412,371 square feet with leases requiring annual minimum rents of $372,601 with a weighted (by annual minimum rents) average remaining lease term of 8.8 years. The portfolio was 98.1% leased by 178 tenants operating under 136 brands in 21 distinct industries.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

TA leases. TA is our largest tenant, leasing 29.2% of our total historical real estate investments as of September 30, 2022. We lease to TA a total of 179 travel centers under five leases that expire between 2029 and 2035, subject to TA’s right to extend those leases, and require annual minimum rents of $246,110 as of September 30, 2022. In addition, TA is required to pay us previously deferred rent obligations in quarterly installments of $4,404 through January 31, 2023. TA paid $4,404 and $13,212 of deferred rent to us for each of the three and nine months ended September 30, 2022 and 2021, respectively. The remaining balance of previously deferred rents was $8,807 and $22,018 as of September 30, 2022 and December 31, 2021, respectively.

We recognized rental income from our TA leases of $64,011 and $62,116 for the three months ended September 30, 2022 and 2021, respectively, and $188,280 and $186,357 for the nine months ended September 30, 2022 and 2021, respectively. Rental income was reduced by $3,240 and $3,267 for the three months ended September 30, 2022 and 2021, respectively, and $9,825 and $9,789 for the nine months ended September 30, 2022 and 2021, respectively, to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight-line basis. As of September 30, 2022 and December 31, 2021, we had receivables for current rent amounts owed to us by TA and straight-line rent adjustments of $33,874 and $48,168, respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets.

Our TA leases require TA to pay us percentage rent based upon increases in certain sales. We recognize percentage rent due under our TA leases as rental income when all contingencies are met. We recognized percentage rent of $1,861 during the three and nine months ended September 30, 2022 under our TA leases. In addition, we had aggregate deferred percentage rent under our TA leases of $831 and $1,849 for the three months ended September 30, 2022 and 2021, respectively, and $6,168 and $4,827 for the nine months ended September 30, 2022 and 2021, respectively.

Our TA leases do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components. Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent equal to 8.5% of the amounts funded. We did not fund any capital improvements to our properties that we leased to TA during the three and nine months ended September 30, 2022 or 2021.

See Notes 6 and 10 for further information regarding our relationship with TA.

Our other net lease agreements generally provide for minimum rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight-line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We recognized rental income from our net lease properties (excluding TA) of $33,787 and $36,608 for the three months ended September 30, 2022 and 2021, respectively, which included $1,395 and $2,361, respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis, and $102,669 and $99,594 for the nine months ended September 30, 2022 and 2021, respectively, which included $4,296 and $6,702, respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis.

We continually review receivables related to rent, straight-line rent and property operating expense reimbursements and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The review includes an assessment of whether substantially all of the amounts due under a tenant’s lease are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as cash is received. We recognize all changes in the collectability assessment for an operating lease as an adjustment to rental income. We recorded reserves for uncollectable amounts of $352 for the three months ended September 30, 2022 and reduced our reserves for uncollectable amounts by $315 for the nine months ended September 30, 2022 based on our assessment of collectability and cash received from certain tenants. We reduced our reserves for uncollectable amounts by $5,373 for the three months ended September 30, 2021 and recorded reserves for uncollectable amounts of $588 for the nine months ended September 30, 2021 based on our assessment of collectability and cash received from certain tenants. We had reserves for uncollectable rents of $7,755 and $15,519 as of September 30, 2022 and December 31, 2021, respectively, included in other assets in our condensed consolidated balance sheets.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

Note 6. Other Investments

Equity method investment

As of September 30, 2022, we owned approximately 34% of Sonesta’s outstanding common stock. We account for our 34% non-controlling interest in Sonesta under the equity method of accounting.

As of September 30, 2022 and December 31, 2021, our investment in Sonesta had a carrying value of $113,168 and $62,687, respectively. The cost basis of our investment in Sonesta exceeded our proportionate share of Sonesta’s total stockholders’ equity book value on the date of acquisition of our initial equity interest in Sonesta, February 27, 2020, by an aggregate of $8,000. As required under GAAP, we are amortizing this difference to equity in earnings of an investee over 31 years, the weighted average remaining useful life of the real estate assets and intangible assets and liabilities owned by Sonesta as of the date of our acquisition. We recorded amortization of the basis difference of $65 in each of the three months ended September 30, 2022 and 2021 and $195 in each of the nine months ended September 30, 2022 and 2021. We recognized income of $2,866 and $2,158 related to our investment in Sonesta for the three months ended September 30, 2022 and 2021, respectively, and income of $4,472 and $50 for the nine months ended September 30, 2022 and 2021, respectively. These amounts are included in equity in earnings of an investee in our condensed consolidated statements of comprehensive income (loss).

We recorded a liability for the fair value of our initial investment in Sonesta, as no cash consideration was exchanged related to the modification of our management agreement with, and investment in, Sonesta. This liability for our investment in Sonesta is included in accounts payable and other liabilities in our condensed consolidated balance sheet and is being amortized on a straight-line basis through January 31, 2037, as a reduction to hotel operating expenses in our condensed consolidated statements of comprehensive income (loss). We reduced hotel operating expenses by $621 for each of the three months ended September 30, 2022 and 2021, respectively, and $1,863 for each of the nine months ended September 30, 2022 and 2021, respectively, for amortization of this liability. As of September 30, 2022 and December 31, 2021, the unamortized balance of this liability was $35,584 and $37,447, respectively.

In March 2021, we funded a $25,443 capital contribution to Sonesta related to its acquisition of Red Lion Hotels Corporation. During the nine months ended September 30, 2022, we funded an aggregate of $45,470 of capital contributions to Sonesta related to Sonesta’s acquisition of a portfolio of four hotels located in New York, NY using cash on hand. We continue to maintain our 34% ownership in Sonesta after giving effect to these fundings.

Investment in equity securities

As of both September 30, 2022 and December 31, 2021, we owned approximately 8.0% of TA’s outstanding shares of common stock, and reported this investment at fair value based on quoted market prices (Level 1 inputs). Our TA shares had a carrying value of $63,896 and $61,159 as of September 30, 2022 and December 31, 2021, respectively. Our historical cost basis for these shares was $24,418 as of both September 30, 2022 and December 31, 2021. We recorded unrealized gains of $23,056 and $24,348 for the three months ended September 30, 2022 and 2021, respectively, and unrealized gains of $2,737 and $20,367 for the nine months ended September 30, 2022 and 2021, respectively, to adjust the carrying value of our investment in shares of TA common stock to its fair value. See Notes 4, 5 and 10 for further information regarding our relationships, agreements and transactions with TA and Note 13 for further information regarding our investment in TA.

Note 7. Indebtedness

Our principal debt obligations at September 30, 2022 were: (1) $95,000 of outstanding borrowings under our $800,000 revolving credit facility; and (2) $5,700,000 aggregate outstanding principal amount of senior unsecured notes. Our revolving credit facility is governed by a credit agreement with a syndicate of institutional lenders.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

As of September 30, 2022, the maturity date of our revolving credit facility was January 15, 2023, and, subject to the payment of an extension fee and meeting certain other conditions, we had the option to extend the maturity date of the facility for one six-month period. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. We are required to pay interest on borrowings under our revolving credit facility at the rate of LIBOR plus a premium, which was 250 basis points per annum, subject to a LIBOR floor of 0.50%, as of September 30, 2022. We also pay a facility fee, which was 30 basis points per annum at September 30, 2022, on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon, among other things, changes to our credit ratings. As of September 30, 2022, the annual interest rate payable on borrowings under our revolving credit facility was 5.26%. The weighted average annual interest rate for borrowings under our revolving credit facility was 4.37% for the three months ended September 30, 2022, 3.36% for the nine months ended September 30, 2022 and 2.85% for both the three and nine months ended September 30, 2021.

We and our lenders amended the credit agreement governing our revolving credit facility, or our credit agreement, in 2020. Among other things, the amendment waived all of the then existing financial covenants through the end of the then existing agreement term, or July 15, 2022. As a result of the amendment, among other things:

•we pledged certain equity interests of subsidiaries owning properties and provided first mortgage liens on 74 properties owned by the pledged subsidiaries;

•we had the ability to fund up to $250,000 of capital expenditures per year and up to $50,000 of certain other investments per year as defined in the credit agreement;

•we agreed to certain covenants and restrictions on distributions to common shareholders, share repurchases, incurring indebtedness, and acquiring real property (in each case subject to various exceptions);

•we agreed to maintain minimum liquidity of $125,000;

•we were generally required to apply the net cash proceeds from the disposition of assets, capital markets transactions and debt refinancings to repay outstanding amounts under the credit agreement, and then to other debt maturities;

•in order to exercise the first six month extension option under the credit agreement, we would have needed to be in compliance with the financial covenants under the credit agreement calculated using pro forma projections as defined in the credit agreement for the quarter ending June 30, 2022, annualized, and have repaid or refinanced our $500,000 of 5.00% senior notes due in August 2022; and

•we were not able to utilize the feature in our credit agreement pursuant to which maximum aggregate borrowings may be increased to up to $2,300,000 on a combined basis in certain circumstances until we demonstrated compliance with certain covenants.

On April 14, 2022, we further amended our credit agreement and exercised our option to extend the maturity date of our revolving credit facility by six months to January 15, 2023. Pursuant to the amendment:

•we repaid $200,000 of the outstanding balance and reduced the size of the revolving credit facility from $1,000,000 to $800,000;

•we are permitted to acquire up to an aggregate of $300,000 of real property through the waiver period, which was extended pursuant to the amendment to December 31, 2022;

•certain of the financial covenants in our credit agreement will be tested and in full force and effect beginning with the quarter ending September 30, 2022 and were modified to lower the required fixed charge coverage ratio from 1.5x to 1.0x through December 31, 2022, increase the required leverage ratio limit from 60% to 70% and increase the minimum liquidity requirement from $