What changed in this filing

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Item 1. Financial Statements

2020-08-10 compared with 2020-05-11 · 319 added, 205 removed, 407 unchanged (56% of the section changed)

8 unchanged sentences

Total real estate properties, net

Acquired real estate leases and other intangibles

Acquired real estate leases and other intangibles, net

Assets held for sale

4 unchanged sentences

LIABILITIES AND SHAREHOLDERS’ EQUITY

Unsecured revolving credit facility

Unsecured term loan, net

Revolving credit facility

Term loan, net

Senior unsecured notes, net

2 unchanged sentences

Due to related persons

Dividend payable

Total liabilities

13 unchanged sentences

(dollars in thousands, except share data)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Hotel operating revenues

9 unchanged sentences

Gain (loss) on sale of real estate

Gain on insurance settlement

Dividend income

2 unchanged sentences

Interest expense (including amortization of debt issuance costs and debt discounts and premiums of $3,486, $2,570, $6,774 and $5,140, respectively)

Loss on early extinguishment of debt

Income (loss) before income taxes and equity in earnings (losses) of an investee

Income tax expense

Income tax (expense) benefit

Equity in earnings (losses) of an investee

6 unchanged sentences

Weighted average common shares outstanding (diluted)

Net income per common share (basic and diluted)

Net income (loss) per common share (basic and diluted)

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

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited) (in thousands, except share data)

Common Shares

8 unchanged sentences

Balance at March 31, 2020

Common share grants

Common share repurchases and forfeitures

Distributions

Balance at June 30, 2020

Balance at December 31, 2018

3 unchanged sentences

Balance at March 31, 2019

Equity interest in investee’s unrealized gains

Common share grants

Common share repurchases

Distributions

Balance at June 30, 2019

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

2 unchanged sentences

(in thousands)

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Cash flows from operating activities:

4 unchanged sentences

Straight-line rental income

Security deposits replenished (utilized)

Security deposits utilized

Loss on early extinguishment of debt

Loss on asset impairment

2 unchanged sentences

(Gain) loss on sale of real estate

Gain on insurance settlement

Deferred income taxes

Other non-cash (income) expense, net

8 unchanged sentences

Hotel managers’ purchases with restricted cash

Hotel manager’s deposit of insurance proceeds into restricted cash

Hotel manager’s deposit (withdrawal) of insurance proceeds into restricted cash

Net proceeds from sale of real estate

Investment in Sonesta

Distributions in excess of earnings from Affiliates Insurance Company

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Proceeds from issuance of senior unsecured notes, after discounts and premiums

Repurchase of senior unsecured notes

Borrowings under unsecured revolving credit facility

Repayments of unsecured revolving credit facility

Deferred financing costs

Repurchase of common shares

1 unchanged sentence

Net cash used in financing activities

Increase in cash and cash equivalents and restricted cash

Decrease in cash and cash equivalents and restricted cash

Cash and cash equivalents and restricted cash at beginning of period

30 unchanged sentences

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 $ 28,628 and $ 31,920 as of March 31, 2020 and December 31, 2019 , respectively, and consist primarily of amounts due from and working capital advances to certain of our hotel managers.

The liabilities of our TRSs were $ 152,227 and $ 138,708 as of March 31, 2020 and December 31, 2019 , respectively, and consist primarily of security deposits they hold and amounts payable to certain of our hotel managers.

The assets of our TRSs were $ 110,984 and $ 31,920 as of June 30, 2020 and December 31, 2019 , respectively, and consist primarily of amounts due from and working capital advances to certain of our hotel managers.

The liabilities of our TRSs were $ 108,721 and $ 138,708 as of June 30, 2020 and December 31, 2019 , respectively, and consist primarily of security deposits they hold and 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.

12 unchanged sentences

We recognize rental income from operating leases on a straight-line basis over the term of the lease agreements.

We reduced rental income by net $ 3,543 and $ 1,132 for the three months ended March 31, 2020 and 2019 , respectively, to record scheduled rent changes under certain of our retail leases, the deferred rent obligations payable to us under our leases with TravelCenters of America Inc., or 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.

We increased rental income by $ 875 for the three months ended June 30, 2020 , reduced rental income by $ 3,190 for the three months ended June 30, 2019 and reduced rental income by $ 2,669 and $ 4,322 for the six months ended June 30, 2020 and 2019 , respectively, to record scheduled rent changes under certain of our retail leases, the deferred rent obligations payable to us under our leases with TravelCenters of America Inc., or 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 6 and 10 for further information regarding our TA leases.

Due from related persons includes $ 43,710 and $ 47,057 at March 31, 2020 and December 31, 2019 , respectively, and other assets, net includes $ 3,859 and $ 4,054 of straight-line rent receivables at March 31, 2020 and December 31, 2019 , respectively.

Due from related persons includes $ 40,473 and $ 47,057 at June 30, 2020 and December 31, 2019 ,

SERVICE PROPERTIES TRUST

1 unchanged sentence

(dollars in thousands, except share data)

respectively, and other assets, net includes $ 7,765 and $ 4,054 of straight-line rent receivables at June 30, 2020 and December 31, 2019 , 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 had deferred estimated percentage rent of $ 725 and $ 1,069 for the three months ended March 31, 2020 and 2019 , respectively.

We own all the FF&E reserve escrows for our hotels.

We had deferred estimated percentage rent of $ 124 and $ 849 for the three and six months ended June 30, 2020 , respectively, and $ 958 and $ 2,027 for the three and six months ended June 30, 2019 , respectively.

We own all the escrowed reserves for future renovations or refurbishments, or FF&E reserve escrows, for our hotels.

We report deposits by our third-party tenants into the escrow accounts as FF&E reserve income.

We do not report the amounts which are escrowed as reserves established for the regular refurbishment of our hotels, or FF&E reserves, for our managed hotels as FF&E reserve income.

We do not report FF&E reserves for our managed hotels as FF&E reserve income.

Weighted Average Common Shares

The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share:

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(in thousands)

4 unchanged sentences

Real Estate Properties

At March 31, 2020 , we owned 329 hotels with 51,358 rooms or suites and 813 service-oriented retail properties with approximately 14.5 million 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 $ 11,501,576 , including $ 56,688 classified as held for sale as of March 31, 2020 .

During the three months ended March 31, 2020 , we funded $ 38,627 for improvements to certain of our properties which, pursuant to the terms of our management and lease agreements with our managers and tenants, resulted in increases in our contractual annual minimum returns and rents of $ 2,531 .

At June 30, 2020 , we owned 329 hotels with 51,404 rooms or suites and 809 service-oriented retail properties with approximately 13.7 million 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 $ 11,298,816 , including $ 152,367 classified as held for sale as of June 30, 2020 .

During the six months ended June 30, 2020 , we funded $ 78,500 for improvements to certain of our properties which, pursuant to the terms of our management and lease agreements with our managers and tenants, resulted in increases in our contractual annual minimum returns and rents of $ 5,657 .

As of June 30, 2020 , we substantially completed a comprehensive rebuilding project of our San Juan, PR hotel as a result of damage sustained during Hurricane Maria in 2017.

We recorded a $ 62,386 gain on insurance settlement during the three months ended June 30, 2020 for insurance proceeds received for this damage.

Under GAAP, we were required to increase the building basis of our San Juan hotel for the amount of the insurance proceeds.

See Note 6 for further information about our management and lease agreements and our fundings of improvements to certain of our properties.

We acquired a portfolio of three net lease properties during the three months ended March 31, 2020 .

We acquired a portfolio of three net lease properties during the six months ended June 30, 2020 .

We accounted for this transaction as an acquisition of assets.

5 unchanged sentences

Intangible Assets / Liabilities, net

On March 12, 2020 , we acquired three net lease properties with approximately 6,696 square feet in two states with leases requiring an aggregate of $ 387 of annual minimum rent for an aggregate purchase price of $ 7,071 , including acquisition related costs.

SERVICE PROPERTIES TRUST

1 unchanged sentence

(dollars in thousands, except share data)

We sold six net lease properties with an aggregate of 292,276 rentable square feet for aggregate proceeds of $ 8,010 , excluding closing costs, in six separate transactions during the three months ended March 31, 2020 .

We sold ten net lease properties with an aggregate of 1,101,996 rentable square feet for aggregate proceeds of $ 63,960 , excluding closing costs, in ten separate transactions during the six months ended June 30, 2020 .

The sales of these properties, as presented in the table below, do not represent significant dispositions individually or in the aggregate nor do they represent a strategic shift.

As a result, the results of operations of these properties are included in continuing operations through the date of sale in our condensed consolidated statements of income.

As a result of these sales, we recorded a net loss on sale of real estate of $ 6,911 during the three months ended March 31, 2020 .

As a result of these sales, we recorded a net loss on sale of real estate of $ 2,853 and $ 9,764 during the three and six months ended June 30, 2020 , respectively.

Number of Properties

6 unchanged sentences

Stillwater, OK

Pawtucket, RI

Destination XL Group, Inc.

Bellefontaine, OH

The HOM Furniture, Inc.

lease was scheduled to expire on April 30, 2020 and required annual minimum rent of $ 817 .

As of March 31, 2020 , six properties with 799,041 square feet with leases requiring annual minimum rent of $ 5,433 and an aggregate carrying value of $ 56,688 were classified as held for sale.

See Note 13 for further information on these properties.

We entered into agreements to sell seven properties with approximately 821,068 square feet in six states with leases requiring an aggregate sales price of $ 59,500 , excluding closing costs.

We expect these sales to be completed by the third quarter of 2020.

The Destination XL Group, Inc.

lease was scheduled to expire on January 31, 2026 and required an annual minimum rent of $ 5,221 .

In July 2020, we sold one net lease property with 2,935 square feet with a carrying value of $ 657 requiring an annual minimum rent of $ 49 for a sale price of $ 700 .

We have entered into agreements to sell nine hotels with 1,178 rooms in five states with an aggregate carrying value of $ 38,321 for an aggregate sales price of $ 48,750 .

We currently expect the sales of these hotels to be completed in the fourth quarter of 2020.

We have also entered into agreements to sell seven net lease properties with approximately 68,343 square feet in six states with an aggregate carrying value of $ 6,282 for an aggregate sales price of $ 6,875 .

The sales of these hotel and retail properties are subject to conditions, may not be completed, may be delayed or terms may change.

We currently expect the sales of these net lease properties to be completed in the third quarter of 2020.

As of June 30, 2020 ,we had 25 hotels with 3,333 rooms requiring aggregate annual minimum returns of $ 32,628 and an aggregate carrying value of $ 144,119 classified as held for sale and nine net lease properties with 103,408 square feet with leases requiring aggregate annual minimum rent of $ 789 and an aggregate carrying value of $ 8,248 classified as held for sale.

See Note 13 for further information on these properties.

We were previously marketing for sale 20 Wyndham Hotels & Resorts, Inc., or Wyndham, branded hotels with an aggregate net carrying value of $ 110,465 and 33 Marriott International, Inc., or Marriott hotels with an aggregate net carrying value of $ 221,129 and were in the process of launching a marketing effort related to our 39 Sonesta ES Suites hotels, managed by Sonesta Holdco Corporation and its subsidiaries, or Sonesta, with an aggregate net carrying value of $ 461,263 .

We currently expect the sales of these hotels will be delayed until later in 2020 or until 2021 as a result of current market conditions and these transactions may be delayed further or may not occur.

Management Agreements and Leases

As of March 31, 2020 , we owned 329 hotels which were included in six operating agreements and 813 service orientated retail properties net leased to 187 tenants.

As of June 30, 2020 , we owned 329 hotels which were included in six operating agreements and 809 service orientated retail properties net leased to 180 tenants.

We do not operate any of our properties.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

Hotel agreements

As of March 31, 2020 , 328 of our hotels were leased to our TRSs and managed by independent hotel operating companies and one hotel was leased to a third party.

As of March 31, 2020 , our hotel properties were managed by or leased to separate subsidiaries of InterContinental Hotels Group, plc, or IHG, Marriott, Sonesta, Hyatt Hotels Corporation, or Hyatt, Radisson Hospitality, Inc., or Radisson, and Wyndham, under six agreements.

As of June 30, 2020 , 328 of our hotels were leased to our TRSs and managed by independent hotel operating companies and one hotel was leased to a third party.

As of June 30, 2020 , our hotel properties were managed by or leased to separate subsidiaries of InterContinental Hotels Group, plc, or IHG, Marriott International, Inc., or Marriott, Sonesta Holdco Corporation, or Sonesta, Hyatt Hotels Corporation, or Hyatt, Radisson Hospitality, Inc., or Radisson, and Wyndham Hotels & Resorts, Inc., or Wyndham, under six agreements.

These hotel agreements have initial terms expiring between 2020 and 2037.

6 unchanged sentences

Some of our managers or tenants or their affiliates have provided deposits or guarantees to secure their obligations to pay us.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

IHG agreement.

Our management agreement with IHG for 103 hotels, or our IHG agreement, provides that, as of March 31, 2020 , we are to be paid annual minimum returns and rents of $ 216,551 .

We realized minimum returns and rents of $ 54,085 and $ 49,584 during the three months ended March 31, 2020 and 2019 , respectively, under this agreement.

Pursuant to our IHG agreement, IHG has provided us with a security deposit to cover minimum payment shortfalls, if any.

Under this agreement, IHG is required to maintain a minimum security deposit of $ 37,000 and this security deposit may be replenished and increased up to $ 100,000 from a share of future cash flows from the hotels in excess of our minimum returns and rents, working capital advances and certain management fees.

During the three months ended March 31, 2020 , we reduced the available security deposit by $ 33,654 to cover shortfalls in hotel cash flows available to pay the minimum returns and rents due to us for the period.

The available balance of this security deposit was $ 42,063 as of March 31, 2020 .

We funded $ 3,900 for capital improvements to certain of the hotels included in our IHG agreement during the three months ended March 31, 2020 , which resulted in increases in our contractual annual minimum returns of $ 312 .

We did no t fund any capital improvements for hotels included in our IHG agreement during the three months ended March 31, 2019 .

In April 2020, we funded $ 37,000 of working capital advances under our IHG agreement to cover projected operating losses at our hotels managed by IHG.

This working capital advance is reimbursable to us from a share of future cash flows from the hotel operations in excess of the minimum returns due to us, if any, pursuant to the terms of the IHG agreement.

Our IHG agreement requires 5 % of gross revenues from hotel operations be placed in escrow for hotel maintenance and periodic renovations, or an FF&E reserve.

As a result of current market conditions, effective March 1, 2020, we and IHG have agreed to suspend contributions to the FF&E reserve under our IHG agreement for the remainder of 2020.

Marriott agreement .

Our management agreement with Marriott for 122 hotels, or our Marriott agreement, provides that, as of March 31, 2020 , we are to be paid annual minimum returns of $ 190,603 .

We realized minimum returns of $ 47,648 and $ 45,235 during the three months ended March 31, 2020 and 2019 , respectively, under this agreement.

Pursuant to our Marriott agreement, Marriott has provided us with a security deposit to cover minimum return payment shortfalls, if any.

Under this agreement, this security deposit, if utilized, may be replenished and increased up to $ 64,700 from 60 % of the cash flows realized from operations of the 122 hotels after payment of the aggregate annual minimum returns, Marriott’s base management fees and working capital advances.

During the three months ended March 31, 2020 , we reduced the available security deposit by $ 28,655 to cover shortfalls in hotel cash flows available to pay the minimum returns due to us for the period.

The available balance of this security deposit was $ 4,790 as of March 31, 2020 .

Pursuant to our Marriott agreement, Marriott has also provided us with a limited guaranty which expires in 2026 for shortfalls of up to 85 % of our minimum returns, if and after the available security deposit has been depleted.

The available balance of the guaranty was $ 30,000 as of March 31, 2020 .

We funded $ 300 and $ 22,593 for capital improvements to certain of the hotels included in our Marriott agreement during the three months ended March 31, 2020 and 2019 , respectively, which resulted in increases in our contractual annual minimum returns of $ 30 and $ 2,169 , respectively.

We and Marriott identified 33 of the 122 hotels covered by our Marriott agreement that will be sold or rebranded, at which time we would retain the proceeds of any such sales and the aggregate annual minimum returns due to us would decrease by the amount allocated to the applicable hotel.

In April 2020, we funded $ 30,000 of working capital advances under our Marriott agreement to cover projected operating losses at our hotels managed by Marriott.

This working capital advance is reimbursable to us from a share of future cash flows from the hotel operations in excess of the minimum returns due to us and Marriott’s base management fees, if any, pursuant to the terms of our Marriott agreement.

Our Marriott agreement requires 5.5 % to 6.5 % of gross revenues from hotel operations be placed in an FF&E reserve.

As a result of current market conditions, we and Marriott have agreed to suspend contributions to the FF&E reserve under our Marriott agreement for six months effective March 1, 2020.

Our management agreement with IHG for 103 hotels, or the IHG agreement, provides that, as of June 30, 2020 , we are to be paid annual minimum returns and rents of $ 216,551 .

We realized minimum returns and rents of $ 54,138 and $ 51,617 during the three months ended June 30, 2020 and 2019 , respectively, and $ 108,223 and $ 101,201 during the six months ended June 30, 2020 and 2019 , respectively, under this agreement.

Pursuant to the IHG agreement, IHG has provided us with a security deposit to cover minimum payment shortfalls, if any.

On June 1, 2020, we entered into a letter agreement with respect to certain matters related to the IHG agreement, including providing that IHG would not be required to maintain a minimum security deposit through December 31, 2021.

During the six months ended June 30, 2020 , we reduced the available security deposit by $ 66,725 to cover shortfalls in hotel cash flows available to pay the minimum returns and rents due to us for the period.

The available balance of this security deposit was $ 8,992 as of June 30, 2020 .

In July 2020, we applied the remaining $ 8,992 of security deposit securing IHG’s obligations under the IHG agreement.

We did not receive any payments from IHG to cure shortfalls for the balance of the July minimum returns and rents of $ 8,395 due to us after applying the remaining security deposit or the August 2020 minimum returns and rents of $ 18,045 due to us.

In July 2020, we sent IHG a notice of default and termination, and in August 2020, we sent IHG an additional notice of default.

We are in discussions with IHG to see if there may be a mutually beneficial resolution.

Absent a cure of these defaults by IHG, or if no agreement is reached, we currently plan to transition management and branding of these 103 hotels to Sonesta.

The IHG agreement requires 5 % of gross revenues from hotel operations be placed in escrow for hotel maintenance and periodic renovations, or an FF&E reserve.

Pursuant to the letter agreement with IHG described above, during the period from March 1, 2020 through September 30, 2020, IHG is not required to deposit any amounts into its FF&E reserve with respect to certain of our hotels that it manages.

We funded $ 3,900 for capital improvements to certain of the hotels included in the IHG agreement during the six months ended June 30, 2020 , which resulted in increases in our contractual annual minimum returns of $ 312 .

We did no t fund any capital improvements for hotels included in the IHG agreement during the six months ended June 30, 2019 .

In April 2020, we funded $ 37,000 of working capital advances under the IHG agreement to cover projected operating losses at our hotels managed by IHG.

Working capital advances are reimbursable to us from a share of future cash flows from the hotel operations in excess of the minimum returns due to us, if any, pursuant to the terms of the IHG agreement.

SERVICE PROPERTIES TRUST

1 unchanged sentence

(dollars in thousands, except share data)

Marriott agreement .

Our management agreement with Marriott for 122 hotels, or the Marriott agreement, provides that, as of June 30, 2020 , we are to be paid annual minimum returns of $ 192,891 .

We realized minimum returns of $ 28,789 and $ 49,534 during the three months ended June 30, 2020 and 2019 , respectively, and $ 76,437 and $ 94,768 during the six months ended June 30, 2020 and 2019 , respectively, under this agreement.

Pursuant to the Marriott agreement, Marriott had provided us with a security deposit to cover minimum return payment shortfalls, if any.

Marriott also provided us with a $ 30,000 limited guaranty to cover payment shortfalls up to 85 % of our minimum returns after the available security deposit balance has been depleted.

During the six months ended June 30, 2020 , we fully utilized the remaining security deposit of $ 33,423 and exhausted the $ 30,000 limited guaranty to cover shortfalls in hotel cash flows available to pay the minimum returns due to us for the period.

This limited guaranty expired when it was exhausted.

We have the right to terminate the Marriott agreement after the security deposit and the guaranty have been depleted if Marriott fails to fund up to 80 % of the minimum returns due to us.

We funded $ 28,900 and $ 33,127 for capital improvements to certain of the hotels included in the Marriott agreement during the six months ended June 30, 2020 and 2019 , respectively, which resulted in increases in our contractual annual minimum returns of $ 2,318 and $ 3,127 , respectively.

We and Marriott have identified 33 of the 122 hotels covered by the Marriott agreement that will be sold or rebranded, at which time we will retain the proceeds of any such sales and the aggregate annual minimum returns due to us would decrease by the amount allocated to the applicable hotel.

As of June 30, 2020, 24 of these hotels with 2,989 rooms requiring annual minimum returns of $ 31,021 with an aggregate carrying value of $ 140,754 were classified as held for sale.

During the three and six months ended June 30, 2020 , we funded $ 30,000 of working capital advances under the Marriott agreement to cover projected operating losses at our hotels managed by Marriott.

These working capital advances are reimbursable to us from shares of future cash flows from the hotel operations in excess of the minimum returns due to us and Marriott’s base management fees, if any, pursuant to the terms of the Marriott agreement.

The Marriott agreement requires 5.5 % to 6.5 % of gross revenues from hotel operations be placed in an FF&E reserve.

As a result of current market conditions, we and Marriott have agreed to suspend contributions to the FF&E reserve under the Marriott agreement for the remainder of 2020.

Sonesta agreement.

As of March 31, 2020 , Sonesta managed 14 of our full-service hotels and 39 of our extended stay hotels pursuant to management agreements for each of the hotels, which we refer to collectively as our Sonesta agreement, and a pooling agreement, which combines those management agreements for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us.

As of June 30, 2020 , Sonesta managed 14 of our full-service hotels and 39 of our extended stay hotels pursuant to management agreements for each of the hotels, which we refer to collectively as our Sonesta agreement, and a related pooling agreement, which combines those management agreements for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us.

On February 27, 2020, we entered into a transaction agreement with Sonesta pursuant to which we and Sonesta restructured our existing business arrangements as follows:

We amended and restated our then existing Sonesta agreement, and our existing pooling agreement with Sonesta, which combines our management agreements with Sonesta for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us, as further described below;

We and Sonesta agreed to sell, rebrand or repurpose our 39 extended stay hotels currently managed by Sonesta with an aggregate carrying value of $ 461,263 and which currently require aggregate minimum returns of $ 48,239 .

We and Sonesta agreed to sell, rebrand or repurpose our 39 extended stay hotels currently managed by Sonesta, which as of June 30, 2020, had an aggregate carrying value of $ 461,263 and required aggregate minimum returns of $ 48,239 .

As the hotels are sold, rebranded or repurposed, the management agreement for the applicable hotel(s) will terminate without our being required to pay Sonesta a termination fee and our annual minimum returns due to us under our Sonesta agreement will decrease by the amount allocated to the applicable hotel(s);

Sonesta will continue to manage 14 of our full-service hotels that Sonesta currently manages and the annual minimum returns due for these hotels was reduced from $ 99,013 to $ 69,013 ;

Sonesta continues to manage 14 of our full-service hotels that Sonesta then managed and the annual minimum returns due for these hotels were reduced from $ 99,013 to $ 69,013 as of that date;

Sonesta issued to us a number of its shares of common stock representing approximately (but not more than) 34 % of its outstanding shares of common stock (post-issuance) and we entered into a stockholders agreement with Sonesta, Adam Portnoy and the other stockholder of Sonesta and a registration rights agreement with Sonesta;

We and Sonesta modified our Sonesta agreement and pooling agreement so that 5 % of the hotel gross revenues of each of our 14 full-service hotels managed by Sonesta will be escrowed for future capital expenditures as “FF&E reserves,” subject to available cash flows after payment of the annual minimum returns due to us under the Sonesta agreement;

We and Sonesta modified our Sonesta agreement and pooling agreement so that (1) our termination rights under those agreements for our 14 full-service hotels managed by Sonesta are generally limited to performance and for “cause,” casualty and condemnation events, (2) a portfolio wide performance test now applies for determining whether the management agreement for any of our full-service hotels managed by Sonesta may be terminated for performance reasons, and (3) the provisions included in our historical pooling agreement that allowed either us or Sonesta to require the marketing for sale of non-economic hotels were removed;

We and Sonesta extended the initial expiration date of the management agreements for our full-service hotels managed by Sonesta located in Chicago, IL and Irvine, CA to January 2037 to align with the initial expiration date for our other full-service hotels managed by Sonesta.

Except as described above, the economic terms of our amended and restated Sonesta agreement and amended and restated pooling agreement are consistent with the historical Sonesta agreement and pooling agreement.

We previously leased 48 vacation units to Wyndham Destinations, Inc.

WYND), at our full service hotel located in Chicago, IL, which Sonesta began managing in November 2019 and which had previously been managed by Wyndham.

Effective March 1, 2020, Sonesta commenced managing those units and those units were added to our Sonesta agreement for that Chicago hotel.

SERVICE PROPERTIES TRUST

1 unchanged sentence

(dollars in thousands, except share data)

We and Sonesta modified our then existing Sonesta agreement and pooling agreement so that 5 % of the hotel gross revenues of each of our 14 full-service hotels managed by Sonesta will be escrowed for future capital expenditures as FF&E reserves, subject to available cash flows after payment of the annual minimum returns due to us under the Sonesta agreement;

We and Sonesta modified our then existing Sonesta agreement and pooling agreement so that (1) our termination rights under those agreements for our 14 full-service hotels managed by Sonesta are generally limited to performance and for “cause,” casualty and condemnation events, (2) a portfolio wide performance test now applies for determining whether the management agreement for any of our full-service hotels managed by Sonesta may be terminated for performance reasons, and (3) the provisions included in our historical pooling agreement that allowed either us or Sonesta to require the marketing for sale of non-economic hotels were removed;

We and Sonesta extended the initial expiration date of the then existing management agreements for our full-service hotels managed by Sonesta located in Chicago, IL and Irvine, CA to January 2037 to align with the initial expiration date for our other full-service hotels managed by Sonesta.

We previously leased 48 vacation units to Wyndham Destinations, Inc.

WYND), or Destinations, at our full service hotel located in Chicago, IL, which Sonesta began managing in November 2019 and which had previously been managed by Wyndham.

Effective March 1, 2020, Sonesta commenced managing those units and those units were added to our Sonesta agreement for that Chicago hotel.

Our Sonesta agreement provides that we are paid a fixed annual minimum return equal to 8 % of our invested capital, as defined therein, 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.

Our fixed annual minimum return under our Sonesta agreement was $ 118,941 as of March 31, 2020 .

Our fixed annual minimum return under our Sonesta agreement was $ 119,779 as of June 30, 2020 .

Our Sonesta agreement further provides that we are paid an additional return based upon operating profits, as defined therein, after reimbursement of owner or manager advances, FF&E reserve escrows and Sonesta’s incentive fee, if applicable.

Our Sonesta hotels generated a net operating cash flow deficit of $ 8,146 and returns of $ 14,161 during the three months ended March 31, 2020 and 2019 , respectively.

Our Sonesta hotels generated a net operating cash flow deficit of $ 17,666 and returns of $ 28,005 during the three months ended June 30, 2020 and 2019 , respectively, and a net operating cash flow deficit of $ 25,814 and returns of $ 42,165 during the six months ended June 30, 2020 and 2019 , respectively, under our Sonesta agreement.

We do not have any security deposits or guarantees for our Sonesta hotels.

1 unchanged sentence

In addition to our minimum returns, the management agreement provides for payment of 80 % of hotel cash flows after payment of hotel operating expenses including certain management fees to Sonesta, our minimum return, working capital advances and any FF&E reserves.

In May 2020, Sonesta requested a $ 7,408 working capital advance under our Sonesta agreement to cover projected operating losses at our hotels managed by Sonesta.

This working capital advance will be reimbursable to us from a share of future cash flows from the hotel operations in excess of the minimum returns due to us, if any, pursuant to the terms of the Sonesta agreement.

We expect to fund this advance in May 2020.

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 $ 6,779 and $ 8,523 for the three months ended March 31, 2020 and 2019 , respectively.

In addition, we incurred procurement and construction supervision fees of $ 633 and $ 405 for the three months ended March 31, 2020 and 2019 , respectively, pursuant to our Sonesta agreement.

During the three months ended June 30, 2020, we funded $ 7,351 of working capital advances under our Sonesta agreement to cover projected operating losses at our hotels managed by Sonesta.

These working capital advances are reimbursable to us from a share of future cash flows from the hotel operations in excess of the minimum returns due to us, if any, pursuant to the terms of the Sonesta agreement.

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 $ 2,147 and $ 10,180 for the three months ended June 30, 2020 and 2019 , respectively, and $ 8,925 and $ 18,703 for the six months ended June 30, 2020 and 2019 , respectively.

In addition, we incurred procurement and construction supervision fees of $ 270 and $ 581 for the three months ended June 30, 2020 and 2019 , respectively, and $ 902 and $ 986 for the six months ended June 30, 2020 and 2019 , respectively, pursuant to our Sonesta agreement.

These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

Our Sonesta agreement does not require FF&E escrow deposits for our extended stay hotels managed by Sonesta and, prior to February 27, 2020, did not require FF&E escrow deposits for our full-service hotels managed by Sonesta, but does and did, as applicable, require us to fund capital expenditures that we approve or approved at our Sonesta hotels.

No FF&E escrow deposits were required during the three months ended March 31, 2020.

We funded $ 29,036 and $ 10,467 for renovations and other capital improvements to certain hotels included in our Sonesta agreement during the three months ended March 31, 2020 and 2019 , respectively, which resulted in increases in our contractual annual minimum returns of $ 2,141 and $ 484 , respectively.

We owed Sonesta $ 13,323 and $ 9,226 for capital expenditure and other reimbursements at March 31, 2020 and 2019 , respectively.

No FF&E escrow deposits were required during the three and six months ended June 30, 2020 .

We funded $ 40,088 and $ 34,306 for renovations and other capital improvements to certain hotels included in our Sonesta agreement during the six months ended June 30, 2020 and 2019 , respectively, which resulted in increases in our contractual annual minimum returns of $ 2,934 and $ 1,928 , respectively.

We owed Sonesta $ 7,154 and $ 15,537 for capital expenditure and other reimbursements at June 30, 2020 and December 31, 2019 , 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.

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We account for our 34 % non-controlling interest in Sonesta under the equity method of accounting.

As of March 31, 2020 , our investment in Sonesta had a carrying value of $ 46,481 .

As of June 30, 2020 , our investment in Sonesta had a carrying value of $ 44,378 .

This amount is included in other assets in our condensed consolidated balance sheets.

The cost basis of our investment in Sonesta exceeded our proportionate share of Sonesta’s total shareholders’ equity book value on the date of acquisition by an aggregate of $ 8,000 .

As required under GAAP, we were amortizing this difference to equity in earnings of an investee over the average remaining useful lives of the real estate assets and intangible assets and liabilities owned by Sonesta as of the date of our acquisition, February 27, 2020.

We recognized losses of $ 718 related to our investment in Sonesta for the three months ended March 31, 2020 .

This amount is presented as equity in earnings (losses) of an investee in our condensed consolidated statements of comprehensive income.

The cost basis of our investment in Sonesta exceeded our proportionate share of Sonesta’s total shareholders’ equity book value on the date of acquisition, 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 both the three and six months ended June 30, 2020 .

We recognized losses of $ 2,218 and $ 2,936 related to our investment in Sonesta for the three and six months ended June 30, 2020 , respectively.

These amounts are included in equity in earnings (losses) of an investee in our condensed consolidated statements of comprehensive income.

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.

We are amortizing this amount as described below.

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, the remaining term of the Sonesta agreement as a reduction to hotel operating expenses in our condensed consolidated statements of comprehensive income.

We reduced hotel operating expenses by $ 207 for the three months ended March 31, 2020 for amortization of this liability.

As of March 31, 2020 , the unamortized balance of this liability was $ 41,793 .

We reduced hotel operating expenses by $ 621 and $ 828 for the three and six months ended June 30, 2020 , respectively, for amortization of this liability.

As of June 30, 2020 , the unamortized balance of this liability was $ 41,172 .

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

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

Hyatt agreement .

Our management agreement with Hyatt for 22 hotels, or our Hyatt agreement, provides that, as of March 31, 2020 , we are to be paid an annual minimum return of $ 22,037 .

We realized minimum returns of $ 5,509 during each of the three months ended March 31, 2020 and 2019 , under this agreement.

Our management agreement with Hyatt for 22 hotels, or our Hyatt agreement, provides that, as of June 30, 2020 , we are to be paid an annual minimum return of $ 22,037 .

We realized minimum returns of $ 5,509 during each of the three months ended June 30, 2020 and 2019 and minimum returns of $ 11,019 during each of the six months ended June 30, 2020 and 2019 under this agreement.

Pursuant to our Hyatt agreement, Hyatt has provided us with a guaranty, which is limited to $ 50,000 .

During the three months ended March 31, 2020 , the hotels under this agreement generated cash flows that were less than the minimum returns due to us for the period, and Hyatt made $ 3,628 of guaranty payments to cover the shortfall.

The available balance of the guaranty was $ 16,026 as of March 31, 2020 .

During the six months ended June 30, 2020 , the hotels under this agreement generated cash flows that were less than the minimum returns due to us for the period, and Hyatt made $ 11,094 of guaranty payments to cover the shortfall.

The available balance of the guaranty was $ 8,561 as of June 30, 2020 .

In addition to our minimum returns, this management agreement provides for payment to us of 50 % of the hotels’ available cash flows after payment of operating expenses, funding required FF&E reserves, payment of our minimum return, our working capital advances and reimbursement to Hyatt of working capital and guaranty advances.

In April 2020, we funded $ 1,300 of working capital advances under our Hyatt agreement to cover projected operating losses at our hotels managed by Hyatt.

In May, 2020, Hyatt requested an additional $ 1,300 working capital advance.

We expect to fund this advance in May 2020.

Our Hyatt agreement requires 5 % of gross revenues from hotel operations be placed in an FF&E reserve.

As a result of current market conditions, effective March 1, 2020, we and Hyatt have agreed to suspend contributions to the FF&E reserve under our Hyatt agreement for the remainder of 2020.

During the three months ended June 30, 2020 , we funded $ 3,700 of working capital advances under our Hyatt agreement to cover projected operating losses at our hotels managed by Hyatt.

Our Hyatt agreement requires 5 % of gross revenues from hotel operations be placed in an FF&E reserve, subject to available cash flow.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

Radisson agreement.

Our management agreement with Radisson for nine hotels, or our Radisson agreement, provides that, as of March 31, 2020 , we are to be paid an annual minimum return of $ 20,442 .

We realized minimum returns of $ 5,111 and $ 4,831 during the three months ended March 31, 2020 and 2019 , respectively, under this agreement.

Our management agreement with Radisson for nine hotels, or our Radisson agreement, provides that, as of June 30, 2020 , we are to be paid annual minimum returns of $ 20,442 .

We realized minimum returns of $ 5,111 and $ 5,015 during the three months ended June 30, 2020 and 2019 , respectively, and minimum returns of $ 10,221 and $ 9,846 during the six months ended June 30, 2020 and 2019 , respectively, under this agreement.

Pursuant to our Radisson agreement, Radisson has provided us with a guaranty, which is limited to $ 47,523 .

During the three months ended March 31, 2020 , the hotels under this agreement generated cash flows that were less than the minimum returns due to us for the period, and Radisson made $ 4,569 of guaranty payments to cover the shortfall.

The available balance of the guaranty was $ 36,647 as of March 31, 2020 .

In addition to our minimum returns, our Radisson agreement provides for payment to us of 50 % of the hotels’ available cash flows after payment of operating expenses, funding the required FF&E reserve, payment of our minimum return, our working capital advances and reimbursement to Radisson of working capital and guaranty advances, if any.

During the six months ended June 30, 2020 , the hotels under this agreement generated cash flows that were less than the minimum returns due to us for the period and Radisson made $ 13,789 of guaranty payments to cover the shortfall.

The available balance of the guaranty was $ 27,426 as of June 30, 2020 .

In addition to our minimum returns, our Radisson agreement provides for payment to us of 50 % of the hotels’ available cash flows after payment of operating expenses, funding the required FF&E reserve, payment of our minimum returns, our working capital advances and reimbursement to Radisson of working capital and guaranty advances, if any.

Our Radisson agreement requires 5 % of gross revenues from hotel operations be placed in an FF&E reserve.

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Wyndham agreements .

Our management agreement with Wyndham for 20 hotels, or our Wyndham agreement expires on September 30, 2020 unless sooner terminated with respect to any hotels that are sold or rebranded.

Our management agreement with Wyndham for 20 hotels, or our Wyndham agreement expires on September 30, 2020 and we expect to transition management and branding of these hotels to Sonesta upon expiration of the agreement unless sooner terminated with respect to any hotels that are sold.

Wyndham is required to pay us all cash flows of the hotels after payment of hotel operating costs.

Wyndham is not entitled to any base management fees for the remainder of the agreement term.

Our Wyndham hotels generated a net operating cash flow deficit of $ 1,081 and returns of $ 5,907 during the three months ended March 31, 2020 and 2019 , respectively.

We funded $ 1,212 and $ 1,022 for capital improvements at certain of the hotels included in our Wyndham agreement during the three months ended March 31, 2020 and 2019 , respectively.

Our Wyndham hotels generated a net operating cash flow deficit of $ 2,667 and returns of $ 5,964 during the three months ended June 30, 2020 and 2019 , respectively, and a net operating cash flow deficit of $ 3,748 and returns of $ 11,873 during the six months ended June 30, 2020 and 2019 , respectively.

We funded $ 1,212 and $ 2,278 for capital improvements at certain of the hotels included in our Wyndham agreement during the six months ended June 30, 2020 and 2019 , respectively.

In April 2020, we funded $ 2,423 of working capital advances under our Wyndham agreement to cover projected operating losses at our hotels managed by Wyndham.

Net lease portfolio

As of March 31, 2020 , we owned 813 net lease service-oriented retail properties with 14.5 million square feet with leases requiring annual minimum rents of $ 379,503 with a weighted (by annual minimum rents) average remaining lease term of 11.1 years.

As of June 30, 2020 , we owned 809 net lease service-oriented retail properties with 13.7 million square feet with leases requiring annual minimum rents of $ 369,423 with a weighted (by annual minimum rents) average remaining lease term of 11.11 years .

The portfolio was 99 % leased by 180 tenants operating under 129 brands in 22 distinct industries.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

TA is our largest tenant.

As of March 31, 2020 , we leased to TA a total of 179 travel centers under five leases that expire between 2029 and 2035 and require annual minimum rents of $ 246,110 which represents approximately 25.5 % of our total annual minimum returns and rents as of March 31, 2020 .

As of June 30, 2020 , we leased to TA a total of 179 travel centers under five leases that expire between 2029 and 2035 and require annual minimum rents of $ 246,110 which represent approximately 25.6 % of our total annual minimum returns and rents as of June 30, 2020 .

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 of deferred rent to us for the three months ended March 31, 2020 .

The remaining balance of previously deferred rents was $ 52,843 as of March 31, 2020 .

We recognized rental income from TA of $ 61,528 and $ 63,075 for the three months ended March 31, 2020 and 2019 , respectively.

Rental income for the three months ended March 31, 2020 and 2019 includes $ 3,344 and $ 1,214 respectively, of adjustments 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 March 31, 2020 and December 31, 2019 , we had receivables for current rent amounts owed to us by TA and straight-line rent adjustments of $ 65,109 and $ 79,710 , respectively.

TA paid $ 4,404 and $ 8,808 of deferred rent to us for the three and six months ended June 30, 2020 , respectively.

The remaining balance of previously deferred rents was $ 48,440 as of June 30, 2020 .

We recognized rental income from TA of $ 61,528 and $ 62,680 for the three months ended June 30, 2020 and 2019 , respectively, and $ 123,055 and $ 125,756 for the six months ended June 30, 2020 and 2019 , respectively.

Rental income for the three months ended June 30, 2020 and 2019 includes $ 3,236 and $ 3,277 respectively, and for the six months ended June 30, 2020 and 2019 , includes $ 6,584 and $ 4,491 , respectively, of adjustments 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 June 30, 2020 and December 31, 2019 , we had receivables for current rent amounts owed to us by TA and straight-line rent adjustments of $ 60,999 and $ 68,653 , respectively.

These amounts are included in due from related persons in our condensed consolidated balance sheets.

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However, TA is required to maintain the leased travel centers, including structural and non-structural components.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

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 months ended March 31, 2020 or 2019 .

In addition to the rental income that we recognized during the three months ended March 31, 2020 and 2019 as described above, our TA leases require TA to pay us percentage rent based upon increases in certain sales.

We did not fund any capital improvements to our properties that we leased to TA during the six months ended June 30, 2020 or 2019 .

In addition to the rental income that we recognized during the three months ended June 30, 2020 and 2019 as described above, our TA leases require TA to pay us percentage rent based upon increases in certain sales.

We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met.

We had aggregate deferred percentage rent under our TA leases of $ 725 and $ 1,069 for the three months ended March 31, 2020 and 2019 , respectively.

We had aggregate deferred percentage rent under our TA leases of $ 124 and $ 958 for the three months ended June 30, 2020 and 2019 , respectively, and $ 849 and $ 2,027 for the six months ended June 30, 2020 and 2019 , respectively.

See Note 10 for further information regarding our relationship with TA.

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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 634 other net lease properties of $ 36,653 for the three months ended March 31, 2020 , which include $ 1,701 of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis.

We recognized rental income from our 630 other net lease properties of $ 32,386 and $ 69,039 for the three and six months ended June 30, 2020 , respectively, which include $ 4,099 and $ 5,800 , respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis.

As a result of the COVID-19 pandemic, some of our tenants have requested rent assistance.

During the three months ended June 30, 2020 , we collected 58.7 % of rents from our other net lease tenants ( 45.6 % in April 2020, 57.6 % in May 2020 and 74.6 % in June 2020).

In July 2020, we collected 80.0 % of rents due to us from our other net lease tenants.

We have entered into rent deferral agreements with 80 net lease retail tenants with leases requiring an aggregate of $ 59,288 of annual minimum rents.

Generally these rent deferrals are for one to three months of rent and will be payable by the tenants over a 12 month period beginning in September 2020.

We have deferred an aggregate of $ 8,584 of rent as of May 7, 2020 .

These amounts do not include tenants that have withdrawn previously approved deferral requests.

Generally these rent deferrals are for one to four months of rent and will be payable by the tenants over a 12 to 24 month period beginning in September 2020.

We have deferred an aggregate of $ 11,312 of rent as of August 6, 2020 .

We have elected to use the FASB relief package regarding the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic.

The FASB relief package provides entities with the option to account for lease concessions resulting from the COVID-19 pandemic outside of the existing lease modification guidance if the resulting cash flows from the modified lease are substantially the same as the original lease.

Because the deferred rents referenced above will be repaid over a 12 to 24 month period, the cash flows from the respective leases are substantially the same as before the rent deferrals.

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 or not 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 and do not record an allowance for uncollectible accounts.

We recorded reserves for uncollectible amounts against rental income of $ 4,995 and $ 5,905 for the three and six months ended June 30, 2020 , respectively.

We had reserves for uncollectible rents of $ 11,835 and $ 5,981 as of June 30, 2020 and December 31, 2019 , respectively, included in our condensed consolidated balance sheets.

Guarantees and security deposits generally.

When we reduce the amounts of the security deposits we hold for any of our operating agreements for payment deficiencies, it does not result in additional cash flows to us of the deficiency amounts, but reduces the refunds due to the respective tenants or managers who have provided us with these security deposits upon expiration of the applicable operating agreement.

When we reduce the amounts of the security deposits we hold for any of our operating agreements for payment deficiencies, it does not result in additional cash flows to us of the deficiency amounts, but reduces the refunds due to the respective tenants or managers that have provided us with these security deposits upon expiration of the applicable operating agreement.

The security deposits are non-interest bearing and are not held in escrow.

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(dollars in thousands, except share data)

Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $ 118,064 and $ 42,839 less than the minimum returns due to us for the three months ended March 31, 2020 and 2019 , respectively.

Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $ 196,107 and $ 4,853 less than the minimum returns due to us for the three months ended June 30, 2020 and 2019 , respectively, and $ 314,171 and $ 37,085 less than the minimum returns due to us for the six months ended June 30, 2020 and 2019 , respectively.

When managers of these hotels are required to fund the shortfalls under the terms of our management agreements or their guarantees, we reflect such fundings (including security deposit applications) in our condensed consolidated statements of comprehensive income as a reduction of hotel operating expenses.

We reduced hotel operating expenses by $ 75,927 and $ 22,465 for the three months ended March 31, 2020 and 2019 , respectively.

We had shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our management agreements of $ 47,755 and $ 20,676 for the three months ended March 31, 2020 and 2019 , respectively, which represent the unguaranteed portions of our minimum returns from our Sonesta and Wyndham agreements.

We reduced hotel operating expenses by $ 121,155 for the three months ended June 30, 2020 and $ 191,660 and $ 16,679 for the six months ended June 30, 2020 and 2019 , respectively.

There was no reduction to hotel operating expense for the three months ended June 30, 2019 .

We had shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our management agreements of $ 73,617 and $ 5,090 for the three months ended June 30, 2020 and 2019 , respectively, and $ 121,373 and $ 23,797 for the three months ended June 30, 2020 and 2019 , respectively, which represent the unguaranteed portions of our minimum returns from our Sonesta, Marriott and Wyndham agreements.

Certain of our guarantees and our security deposits may be replenished by a share of future cash flows from the applicable hotel operations in excess of the minimum returns due to us pursuant to the terms of the respective agreements.

When our guarantees and security deposits are replenished by cash flows from hotel operations, we reflect such replenishments in our condensed consolidated statements of comprehensive income as an increase to hotel operating expenses.

There were no guaranty or security deposit replenishments for the three months ended March 31, 2020 or 2019 .

Our principal debt obligations at March 31, 2020 were:

(1) $ 457,000 of outstanding borrowings under our $ 1,000,000 unsecured revolving credit facility;

(2) our $ 400,000 unsecured term loan;

We had $ 9,208 and $ 3,422 of guaranty and security deposit replenishments for the three and six months ended June 30, 2019 , respectively.

There were no guaranty or security deposit replenishments for the three or six months ended June 30, 2020 .

Our principal debt obligations at June 30, 2020 were:

(1) $ 33,127 of outstanding borrowings under our $ 1,000,000 revolving credit facility;

(2) our $ 400,000 term loan;

and (3) $ 5,800,000 aggregate outstanding principal amount of senior unsecured notes.

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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 120 basis points per annum as of March 31, 2020 .

We also pay a facility fee, which was 25 basis points per annum at March 31, 2020 , on the total amount of lending commitments under our revolving credit facility.

We are required to pay interest on borrowings under our revolving credit facility at the rate of LIBOR plus a premium, which was 205 basis points per annum, subject to a LIBOR floor of 0.50 % , as of June 30, 2020 .

We also pay a facility fee, which was 30 basis points per annum at June 30, 2020 , 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 changes to our credit ratings.

As of March 31, 2020 , the annual interest rate payable on borrowings under our revolving credit facility was 1.85 % .

The weighted average annual interest rate for borrowings under our revolving credit facility was 2.60 % and 3.41 % for three months ended March 31, 2020 and 2019 , respectively.

As of March 31, 2020 , we had $ 457,000 outstanding and $ 543,000 available under our revolving credit facility.

As of May 7, 2020 , we had $ 500,000 outstanding and $ 500,000 available to borrow under our revolving credit facility.

As of June 30, 2020 , the annual interest rate payable on borrowings under our revolving credit facility was 2.55 % .

The weighted average annual interest rate for borrowings under our revolving credit facility was 2.00 % and 2.30 % for the three and six months ended June 30, 2020 , respectively, and 3.40 % for both the three and six months ended June 30, 2019 .

As of June 30, 2020 , we had $ 33,127 outstanding and $ 966,873 available under our revolving credit facility.

As of August 6, 2020 , we had $ 32,089 outstanding and $ 967,911 available to borrow under our revolving credit facility, subject to the minimum liquidity requirements under our credit agreement described below.

Our $ 400,000 term loan, which matures on July 15, 2023 , is prepayable without penalty at any time.

We are required to pay interest on the amount outstanding under our term loan at the rate of LIBOR plus a premium, which was 135 basis points per annum as of March 31, 2020 .

We are required to pay interest on the amount outstanding under our term loan at the rate of LIBOR plus a premium, which was 225 basis points per annum, subject to a LIBOR floor of 0.50 % , as of June 30, 2020 .

The interest rate premium is subject to adjustment based on changes to our credit ratings.

As of March 31, 2020 , the annual interest rate for the amount outstanding under our term loan was 2.93 % .

The weighted average annual interest rate for borrowings under our term loan was 3.03 % and 3.60 % for the three months ended March 31, 2020 and 2019 , respectively.

As of June 30, 2020 , the annual interest rate for the amount outstanding under our term loan was 2.75 % .

The weighted average annual interest rate for borrowings under our term loan was 2.43 % and 2.73 % for the three and six months ended June 30, 2020 , respectively, and 3.58 % and 3.59 % for the three and six months ended June 30, 2019 , respectively.

Our credit agreement also includes a feature under which maximum aggregate borrowings may be increased to up to $ 2,300,000 on a combined basis in certain circumstances.

Our credit agreement and our unsecured senior notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager.

Our credit agreement and our unsecured senior notes indentures and their supplements also contain covenants, including those that restrict our ability to incur debts or to make distributions under certain circumstances and generally require us to maintain certain financial ratios.

We believe we were in compliance with the terms and conditions of our credit agreement and our unsecured senior notes indentures and their supplements at March 31, 2020 .

This feature may not be utilized during the Waiver Period (as defined below) and continuing until such time as we have demonstrated compliance with certain of our financial covenants as of June 30, 2021 pursuant to the terms of the amendment to the credit agreement governing our revolving credit facility and term loan described below.

SERVICE PROPERTIES TRUST

1 unchanged sentence

(dollars in thousands, except share data)

On May 8, 2020, we amended the credit agreement governing our $ 1,000,000 unsecured revolving credit facility and $ 400,000 unsecured term loan.

in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager.

Our credit agreement also currently restricts our ability to make certain investments.

We believe we were in compliance with the terms and conditions of our credit agreement, subject to the waiver described below, and our unsecured senior notes indentures and their supplements at June 30, 2020 .

On May 8, 2020, we amended the credit agreement governing our $ 1,000,000 revolving credit facility and $ 400,000 term loan.

The amendment provides a waiver of certain of the financial covenants under our credit agreement through March 31, 2021, or the Waiver Period, during which, subject to certain conditions, we will continue to have access to undrawn amounts under the credit facility.

During the Waiver Period, and continuing thereafter until such time as we have demonstrated compliance with certain of our financial covenants as of June 30, 2021:

we will be required to maintain unrestricted liquidity (unrestricted cash or undrawn availability under our $ 1,000,000 revolving credit facility) of not less than $ 125,000 ;

our interest rate premium over LIBOR under our revolving credit facility and term loan will be increased by 50 basis points;

our ability to pay distributions on our common shares will be limited to amounts required to maintain our qualification for taxation as a real estate investment trust, or REIT, and to avoid the payment of certain income and excise taxes, and to pay a cash dividend of $ 0.01 per common share per quarter;

we will be subject to certain additional covenants, including additional restrictions on our ability to incur indebtedness (with exceptions for borrowings under our revolving credit facility and certain other categories of secured and unsecured indebtedness), and to acquire real property or make other investments (with exceptions for, among other things, certain categories of capital expenditures and costs, and certain share purchases);

we will generally be required to apply the net cash proceeds from the disposition of assets, capital markets transactions, debt refinancings or COVID-19 government stimulus programs to the repayment of outstanding loans under the credit agreement.

We have provided equity pledges on certain of our property owning subsidiaries to secure our obligations under the credit agreement.

we are required to maintain unrestricted liquidity (unrestricted cash or undrawn availability under our $ 1,000,000 revolving credit facility) of not less than $ 125,000 ;

our interest rate premium over LIBOR under our revolving credit facility and term loan was increased by 50 basis points;

our ability to pay distributions on our common shares has been limited to amounts required to maintain our qualification for taxation as a real estate investment trust, or REIT, and to avoid the payment of certain income and excise taxes, and to pay a cash dividend of $ 0.01 per common share per quarter;

we are subject to certain additional covenants, including additional restrictions on our ability to incur indebtedness (with exceptions for borrowings under our revolving credit facility and certain other categories of secured and unsecured indebtedness), and to acquire real property or make other investments (with exceptions for, among other things, certain categories of capital expenditures and costs, and certain share purchases);

we are generally required to apply the net cash proceeds from the disposition of assets, capital markets transactions, debt refinancings or COVID-19 pandemic-related government stimulus programs to the repayment of outstanding loans under the credit agreement.

We have pledged our equity in certain of our property owning subsidiaries to secure our obligations under the credit agreement.

These subsidiaries owned properties with $ 876,715 of undepreciated book value as of June 30, 2020.

We will be required to pledge the equity of additional property owning subsidiaries in the event that the ratio of the outstanding amount of the loans and other credit extensions under the credit agreement to the undepreciated book value of real property owned by the pledged subsidiaries, or the Collateral Value Percentage, exceeds 50 % .

2 unchanged sentences

We have the right to substitute collateral and otherwise obtain the release of pledged subsidiaries in certain circumstances.

While the equity pledges remain in effect, we will remain subject to the restrictions on our ability to pay distributions on our common shares that are described above.

Shareholders' Equity

Distributions

On February 20, 2020 , we paid a regular quarterly distribution to our common shareholders of record on January 27, 2020 of $ 0.54 per share, or $ 88,863 .

On March 30, 2020 we declared a regular quarterly distribution to common shareholders of record on April 21, 2020 of $ 0.01 per share, or $ 1,646 .

We expect to pay this amount on or about May 21, 2020 .

On February 27, 2020 , in accordance with our Trustee compensation arrangements, we granted 3,000 of our common shares, valued at $ 18.64 per common share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day to each of our two new Trustees as part of their annual compensation.

While the equity pledges remain in effect, we will remain subject to the restrictions on our ability to make investments or pay distributions on our common shares that are described above.

SERVICE PROPERTIES TRUST

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(dollars in thousands, except share data)

On June 17, 2020 , we issued $ 800,000 principal amount of our 7.50 % unsecured senior notes due 2025 .

The aggregate net proceeds from this offering was $ 788,002 , after underwriting discounts and other offering expenses.

These notes are fully and unconditionally guaranteed by certain of our subsidiaries.

The subsidiaries in the guarantee pool may change from time to time as subsidiaries are allocated to or from the pledge pool for our credit agreement or for certain other reasons.

Each subsidiary guarantor’s guarantee will automatically terminate and each subsidiary guarantor will automatically be released from all of its obligations under its guarantee and the indenture under certain circumstances, including on or after the date on which (a) the notes have received a rating equal to or higher than Baa2 (or the equivalent) by Moody’s Investors Service, Inc., or Moody’s, or BBB (or the equivalent) by Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business, or Standard & Poor’s, or if Moody’s or Standard & Poor’s ceases to rate the notes for reasons outside of our control, the equivalent investment grade rating from any other rating agency and (b) no default or event of default has occurred and is continuing under the indenture governing the notes.

On June 17, 2020 , we repurchased $ 350,000 principal amount of our $ 400,000 of 4.25 % senior notes due 2021 at a total cost of $ 355,971 excluding accrued interest pursuant to a cash tender offer.

We recorded a loss of approximately $ 6,970 , net of discount and deferred financing costs, on extinguishment of debt during the three months ended June 30, 2020 .

We funded this purchase using borrowings under our revolving credit facility.

Shareholders' Equity

Distributions

On February 20, 2020 , we paid a regular quarterly distribution to our common shareholders of record on January 27, 2020 of $ 0.54 per share, or $ 88,863 .

On May 21, 2020 we paid a regular quarterly distribution to common shareholders of record on April 21, 2020 of $ 0.01 per share, or $ 1,646 .

On July 16, 2020 , we declared a regular quarterly distribution to common shareholders of record on July 27, 2020 of $ 0.01 per share, or $ 1,646 .

We expect to pay this amount on or about August 20, 2020 .

On February 27, 2020 , in accordance with our Trustee compensation arrangements, we awarded 3,000 of our common shares, valued at $ 18.64 per common share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day to each of our two new Trustees in connection with their election to our Board of Trustees.

On June 10, 2020 , in accordance with our Trustee compensation arrangements, we awarded 5,000 of our common shares, valued at $ 10.80 per common share, the closing price of our common shares on Nasdaq on that day to each of our seven Trustees as part of their annual compensation.

Share Repurchases

During the quarter ended March 31, 2020, we purchased an aggregate of 2,637 of our common shares valued at a weighted average price per common share of $ 16.36 , based on the closing price of our common shares on Nasdaq, on the date of repurchase, from certain former employees of RMR LLC, in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

During the quarter ended June 30, 2020, we purchased an aggregate of 3,808 of our common shares valued at a weighted average price per common share of $ 7.09 , based on the closing price of our common shares on Nasdaq, on the date of repurchase, from a certain former officer and employee of RMR LLC, in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

Business and Property Management Agreements with RMR LLC

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(1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to our property level operations of our net lease portfolio, excluding properties leased to TA, and the office building component of one of our hotels.

Pursuant to our business management agreement, we recognized net business management fees of $ 10,560 and $ 9,727 for the three months ended March 31, 2020 and 2019 , respectively.

Based on our common share total return, as defined in our business management agreement, as of each of March 31, 2020 and 2019 , no incentive fees are included in the net business management fees we recognized for the three months ended March 31, 2020 or 2019 .

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

Pursuant to our business management agreement, we recognized net business management fees of $ 8,411 and $ 9,661 for the three months ended June 30, 2020 and 2019 , respectively, and $ 18,971 and $ 19,388 for the six months ended June 30, 2020 and 2019 , respectively.

Based on our common share total return, as defined in our business management agreement, as of each of June 30, 2020 and 2019 , no incentive fees are included in the net business management fees we recognized for the three or six months ended June 30, 2020 or 2019 .

The actual amount of annual incentive fees for 2020 , if any, will be based on our common share total return, as defined in our business management agreement, for the three -year period ending December 31, 2020 , and will be payable in 2021 .

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We include business management fee amounts in general and administrative expenses in our condensed consolidated statements of comprehensive income.

Pursuant to our property management agreement with RMR LLC, we recognized property management and construction supervision fees of $ 1,020 and $ 11 for the three months ended March 31, 2020 and 2019 , respectively.

Pursuant to our property management agreement with RMR LLC, we recognized property management and construction supervision fees of $ 921 and $ 27 for the three months ended June 30, 2020 and 2019 , respectively, and $ 1,941 and $ 38 for the six months ended June 30, 2020 and 2019 , respectively.

These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated statements of comprehensive income.

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We are generally not responsible for payment of RMR LLC’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC employees assigned to work exclusively or partly at our net lease properties (excluding properties leased to TA) and the office building component of one of our hotels, our share of the wages, benefits and other related costs of RMR LLC's centralized accounting personnel, our share of RMR LLC’s costs for providing our internal audit function, and as otherwise agreed.

We reimbursed RMR LLC $ 127 and $ 200 for these expenses and costs for the three months ended March 31, 2020 and 2019 , respectively.

We reimbursed RMR LLC $ 139 and $ 142 for these expenses and costs for the three months ended June 30, 2020 and 2019 , respectively, and $ 266 and $ 342 for the six months ended June 30, 2020 and 2019 , respectively.

We included these amounts in other operating expenses and selling, general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income.

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Murray and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

TA is our largest tenant and property operator, leasing 26.6 % of our gross carrying value of real estate properties as of March 31, 2020 .

TA is our largest tenant and property operator, leasing 26.6 % of our gross carrying value of real estate properties as of June 30, 2020 .

We lease 179 of our travel centers to TA under the TA leases.

We are also TA’s largest shareholder;

as of March 31, 2020 , we owned 684,000 shares of TA common stock, representing approximately 8.2 % of TA’s outstanding shares of common stock.

As of June 30, 2020 , we owned 684,000 shares of TA common stock, representing approximately 8.2 % of TA’s outstanding shares of common stock.

RMR LLC provides management services to both us and TA, and Adam D.

Portnoy, also serves as the chair of the board of directors and as a managing director of TA and as of March 31, 2020 beneficially owned through RMR LLC 298,538 shares of TA common stock, representing approximately 3.6 % of TA’s outstanding shares of common stock.

Portnoy, also serves as the chair of the board of directors and as a managing director of TA and, as of June 30, 2020 , beneficially owned through RMR LLC 298,538 shares of TA common stock, representing approximately 3.6 % of TA’s outstanding shares of common stock.

See Note 6 for further information regarding our relationships, agreements and transactions with TA and Note 13 for further information regarding our investment in TA.

In July 2020, we purchased 500,797 shares of TA common stock at the public offering price of $ 14.00 per share for an aggregate purchase price of $ 7,011 in an underwritten public offering.

As a result of this purchase, we maintained our approximately 8.2 % ownership of TA’s outstanding common stock.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

Sonesta is a private company that is majority owned by Adam D.

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RMR LLC also provides certain services to Sonesta.

As of March 31, 2020 , we owned approximately 34 % of Sonesta which managed 53 of our hotels pursuant to our Sonesta agreement.

As of June 30, 2020 , we owned approximately 34 % of Sonesta which managed 53 of our hotels pursuant to our Sonesta agreement.

See Note 6 for further information regarding our relationships, agreements and transactions with Sonesta.

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we have instead purchased standalone property insurance coverage with unrelated third party insurance providers.

As of March 31, 2020 and December 31, 2019 , our investment in AIC had a carrying value of $ 298 .

These amounts are included in other noncurrent assets in our condensed consolidated balance sheets.

We did not record any income for the three months ended March 31, 2020 .

We recognized income of $ 404 related to our investment in AIC for the three months ended March 31, 2019 which amount is included in equity in earnings of an investee in our condensed consolidated statements of operations and comprehensive loss.

Our other comprehensive income (loss) attributable to common shareholders for the three months ended March 31, 2019 includes our proportionate share of unrealized gains and losses on securities held for sale, which were then owned by AIC, related to our investment in AIC.

As of June 30, 2020 and December 31, 2019 , our investment in AIC had a carrying value of $ 12 and $ 298 , respectively.

These amounts are included in other assets in our condensed consolidated balance sheets.

In June 2020, we received an additional liquidating distribution from AIC of $ 286 in connection with AIC’s dissolution.

We recognized income of $ 130 and $ 534 related to our investment in AIC for the three and six months ended June 30, 2019 , respectively, which amounts are included in equity in earnings of an investee in our condensed consolidated statements of operations and comprehensive loss.

Our other comprehensive income (loss) attributable to common shareholders for the three and six months ended June 30, 2019 includes our proportionate share of unrealized gains and losses on securities held for sale, which were then owned by AIC, related to our investment in AIC.

For further information about these and certain other such relationships and certain other related person transactions, refer to our 2019 Annual Report.

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Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our qualification for taxation as a REIT.

During the three months ended March 31, 2020 , we recognized income tax expense of $ 342 which includes $ 51 of foreign taxes and $ 291 of state taxes.

During the three months ended March 31, 2019 , we recognized income tax expense of $ 1,059 which includes $ 315 of foreign taxes and $ 744 of state taxes.

During the three months ended June 30, 2020 , we recognized income tax expense of $ 16,660 , which includes $ 451 of foreign taxes and $ 559 of state taxes.

We recorded a $ 15,650 deferred tax liability as a result of the book value to tax basis difference related to the accounting of an insurance settlement in the three months ended June 30, 2020 .

See Note 5 for further information regarding this insurance settlement.

During the six months ended June 30, 2020 , we recognized income tax expense of $ 17,002 which includes $ 502 of foreign taxes, $ 850 of state taxes and the $ 15,650 of deferred tax liability described above.

During the three months ended June 30, 2019 , we recognized income tax benefit of $ 260 which includes $ 97 of foreign tax and $ 163 of state tax benefits.

During the six months ended June 30, 2019 , we recognized income tax expense of $ 799 which includes $ 218 of foreign taxes and $ 581 of state taxes.

SERVICE PROPERTIES TRUST

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We aggregate our hotels and net lease portfolio into two reportable segments, hotel investments and net lease investments, based on their similar operating and economic characteristics.

For the Three Months Ended March 31, 2020

For the Three Months Ended June 30, 2020

Hotel operating revenues

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Total expenses

Gain (loss) on sale of real estate

Loss on sale of real estate

Gain on insurance settlement

Unrealized gain on equity securities

Interest income

Interest expense

Loss on early extinguishment of debt

Income (loss) before income taxes and equity in earnings of an investee

Income tax expense

Equity in losses of an investee

Net income (loss)

For the Six Months Ended June 30, 2020

Hotel operating revenues

Rental income

FF&E reserve income

Total revenues

Hotel operating expenses

Other operating expenses

Depreciation and amortization

General and administrative

Loss on asset impairment

Total expenses

Loss on sale of real estate

Gain on insurance settlement

Unrealized losses on equity securities

1 unchanged sentence

Interest expense

Loss on early extinguishment of debt

Income (loss) before income taxes and equity in earnings of an investee

2 unchanged sentences

Net income (loss)

As of March 31, 2020

As of June 30, 2020

SERVICE PROPERTIES TRUST

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(dollars in thousands, except share data)

For the Three Months Ended March 31, 2019

For the Three Months Ended June 30, 2019

Hotel operating revenues

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Total expenses

Dividend income

Unrealized loss on equity securities

Interest income

Interest expense

Income (loss) before income taxes and equity in earnings of an investee

Income tax benefit

Equity in earnings of an investee

Net income (loss)

For the Six Months Ended June 30, 2019

Hotel operating revenues

Rental income

FF&E reserve income

Total revenues

Hotel operating expenses

Other operating expenses

Depreciation and amortization

General and administrative

Total expenses

Gain on sale of real estate

Dividend income

Unrealized gains and losses on equity securities, net

Unrealized loss on equity securities

Interest income

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As of December 31, 2019

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

Fair Value of Assets and Liabilities

The table below presents certain of our assets and liabilities carried at fair value at March 31, 2020 , categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset or liability.

The table below presents certain of our assets and liabilities carried at fair value at June 30, 2020 , categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset or liability.

Fair Value at Reporting Date Using

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Significant Unobservable Inputs

March 31, 2020

June 30, 2020

Recurring Fair Value Measurement Assets:

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Assets of properties held for sale (2)

Assets of properties held and used (3)

Our 684,000 common shares of TA, which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs).

Our historical cost basis for these shares is $ 17,407 as of March 31, 2020 .

During the three months ended March 31, 2020 we recorded unrealized losses of $ 5,045 and during the three months ended March 31, 2019 , we recorded unrealized gains of $ 1,197 to adjust the carrying value of our investment in TA shares to its fair value.

As of March 31, 2020 , we owned six net lease properties located in five states classified as held for sale with an aggregate net carrying value of $ 56,688 .

These properties are recorded at their estimated fair value less costs to sell based on purchase agreements with third-parties (Level 2 inputs as defined in the fair value hierarchy under GAAP).

We recorded a $ 13,230 loss on asset impairment during the three months ended March 31, 2020 to reduce the carrying value of one of these properties to its estimated fair value less costs to sell.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

We recorded a $ 3,510 loss on asset impairment in the three months ended March 31, 2020 to reduce the carrying value of one net lease property to its estimated fair value of $ 368 based on discounted cash flow analyses (Level 3 inputs).

Our historical cost basis for these shares is $ 17,407 as of June 30, 2020 .

During the three months ended June 30, 2020 , we recorded unrealized gains of $ 3,848 , during the six months ended June 30, 2020 , we recorded unrealized losses of $ 1,198 and during the three and six months ended June 30, 2019 , we recorded unrealized losses of $ 1,676 and $ 479 , respectively, to adjust the carrying value of our investment in TA shares to its fair value.

As of June 30, 2020 , we owned 25 hotels and nine net lease properties located in eight states classified as held for sale with an aggregate net carrying value of $ 152,367 before adjusting for estimated costs of sale of $ 4,243 .

These properties are recorded at their estimated fair value less costs to sell based on the sales prices under purchase agreements with third-parties (Level 2 inputs as defined in the fair value hierarchy under GAAP).

We recorded a $ 28,514 loss on asset impairment during the three months ended June 30, 2020 to reduce the carrying value of 21 of these properties to its estimated fair value less costs to sell.

In addition to the investment securities included in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, revolving credit facility, term loan, senior notes and security deposits.

At March 31, 2020 and December 31, 2019 , the fair values of these additional financial instruments approximated their carrying values in our condensed consolidated balance sheets due to their short-term nature or floating interest rates, except as follows:

March 31, 2020

At June 30, 2020 and December 31, 2019 , the fair values of these additional financial instruments approximated their carrying values in our condensed consolidated balance sheets due to their short-term nature or floating interest rates, except as follows:

June 30, 2020

December 31, 2019

Carrying Value (1)

Senior Unsecured Notes, due 2021 at 4.25%

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Senior Unsecured Notes, due 2029 at 4.95%

Senior Unsecured Notes, due 2030 at 4.375%

Total financial liabilities

Carrying value includes unamortized discounts and premiums and issuance costs.

At March 31, 2020 and December 31, 2019 , we estimated the fair values of our senior notes using an average of the bid and ask price of our then outstanding issuances of senior notes (Level 2 inputs).

At June 30, 2020 and December 31, 2019 , we estimated the fair values of our senior notes using an average of the bid and ask price of our then outstanding issuances of senior notes (Level 2 inputs).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements