What changed in this filing

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Item 1. Financial Statements

2020-11-09 compared with 2020-08-10 · 348 added, 237 removed, 489 unchanged (54% of the section changed)

3 unchanged sentences

(dollars in thousands, except share data)

September 30,

2020 December 31,

Real estate properties:

Land $ 2,017,431 $ 2,066,602

Buildings, improvements and equipment 9,058,542 9,318,434

8 unchanged sentences

Other assets, net 259,037 154,069

Total assets $ 8,796,673 $ 9,033,967

LIABILITIES AND SHAREHOLDERS’ EQUITY

12 unchanged sentences

Additional paid in capital

4,549,466 4,547,529

Cumulative other comprehensive loss

Cumulative net income available for common shareholders

3,318,004 3,491,645

Cumulative common distributions

( 5,627,097 ) ( 5,534,942 )

Total shareholders’ equity 2,242,084 2,505,878

Total liabilities and shareholders’ equity

$ 8,796,673 $ 9,033,967

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

2 unchanged sentences

(dollars in thousands, except share data)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Hotel operating revenues $ 199,719 $ 525,290 $ 700,578 $ 1,521,368

14 unchanged sentences

Interest expense (including amortization of debt issuance costs and debt discounts and premiums of $ 3,877 , $ 2,689 , $ 10,651 and $ 7,829 , respectively)

( 80,532 ) ( 52,375 ) ( 223,679 ) ( 151,742 )

Loss on early extinguishment of debt — ( 8,451 ) ( 6,970 ) ( 8,451 )

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

( 101,569 ) 40,458 ( 152,630 ) 275,292

Income tax (expense) benefit 296 ( 467 ) ( 16,706 ) ( 1,266 )

8 unchanged sentences

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

$ ( 0.62 ) $ 0.24 $ ( 1.06 ) $ 1.67

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

2 unchanged sentences

(unaudited) (in thousands, except share data)

Common Shares

Common Shares Additional

Capital Cumulative

Available for

Shareholders Cumulative

Comprehensive

Income (Loss)

Shares Common

Shares Cumulative

Distributions

Balance at December 31, 2019 164,563,034 $ 1,646 $ ( 5,534,942 ) $ 4,547,529 $ 3,491,645 $ — $ 2,505,878

Net loss — — — — ( 33,650 ) — ( 33,650 )

Common share grants 6,000 — — 590 — — 590

2 unchanged sentences

Balance at March 31, 2020 164,566,397 $ 1,646 $ ( 5,625,451 ) $ 4,548,076 $ 3,457,995 $ — $ 2,382,266

Net loss — — — — ( 37,349 ) — ( 37,349 )

Common share grants 35,000 — — 831 — — 831

Common share repurchases and forfeitures ( 3,808 ) — — ( 27 ) — — ( 27 )

Distributions

Balance at June 30, 2020 164,597,589 $ 1,646 $ ( 5,625,451 ) $ 4,548,880 $ 3,420,646 $ — $ 2,345,721

Net income — — — — ( 102,642 ) — ( 102,642 )

Equity in unrealized gains of investees — — — — — 63 63

Common share grants 264,400 3 — 868 — — 871

Common share repurchases and forfeitures ( 38,156 ) ( 1 ) — ( 282 ) — — ( 283 )

Distributions — — ( 1,646 ) — — — ( 1,646 )

Balance at September 30, 2020 164,823,833 $ 1,648 $ ( 5,627,097 ) $ 4,549,466 $ 3,318,004 $ 63 $ 2,242,084

Common Shares Additional

Capital Cumulative

Available for

Shareholders Cumulative

Comprehensive

Income (Loss)

Shares Common

Shares Cumulative

Distributions

Balance at December 31, 2018 164,441,709 $ 1,644 $ ( 5,181,323 ) $ 4,545,481 $ 3,231,895 $ ( 266 ) $ 2,597,431

Net income — — — — 225,787 — 225,787

Equity interest in investee’s unrealized gains

— — — — — 66 66

Common share grants — — — 436 — — 436

1 unchanged sentence

Balance at March 31, 2019 164,441,709 $ 1,644 $ ( 5,268,477 ) $ 4,545,917 $ 3,457,682 $ ( 200 ) $ 2,736,566

Net income — — — — 8,782 — 8,782

Equity interest in investee’s unrealized gains

— — — — — 71 71

Common share grants 15,000 1 — 868 — — 869

2 unchanged sentences

Balance at June 30, 2019 164,454,537 $ 1,645 $ ( 5,357,275 ) $ 4,546,737 $ 3,466,464 $ ( 129 ) $ 2,657,442

Net income — — — — 40,074 — 40,074

Equity interest in investee’s unrealized gains

— — — — — ( 46 ) ( 46 )

Common share grants 140,100 1 — 1,067 — — 1,068

Common share repurchases ( 29,334 ) — — ( 749 ) — — ( 749 )

Distributions — — ( 88,803 ) — — — ( 88,803 )

Balance at September 30, 2019 164,565,303 $ 1,646 $ ( 5,446,078 ) $ 4,547,055 $ 3,506,538 $ ( 175 ) $ 2,608,986

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

2 unchanged sentences

(in thousands)

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Cash flows from operating activities:

15 unchanged sentences

Due from related persons 171 3,609

Other assets ( 45,844 ) ( 6,352 )

Accounts payable and other liabilities ( 15,585 ) 12,743

5 unchanged sentences

Hotel managers’ purchases with restricted cash ( 127,837 ) ( 143,692 )

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

Hotel manager’s deposit of insurance proceeds into restricted cash 34,238 14,325

Net proceeds from sale of real estate 67,811 308,200

Investment in Sonesta ( 5,314 ) —

Investment in TravelCenters of America ( 7,011 ) —

Distributions in excess of earnings from Affiliates Insurance Company 286 —

Net cash (used in) provided by investing activities

Net proceeds from sale of equity securities — 93,892

Net cash used in investing activities ( 99,520 ) ( 2,457,485 )

Cash flows from financing activities:

6 unchanged sentences

Distributions to common shareholders ( 92,155 ) ( 264,755 )

Net cash used in financing activities

Decrease in cash and cash equivalents and restricted cash

Net cash provided by financing activities 38,714 2,019,461

Increase (decrease) in cash and cash equivalents and restricted cash 4,718 ( 5,494 )

Cash and cash equivalents and restricted cash at beginning of period 81,259 76,003

14 unchanged sentences

(dollars in thousands, except share data)

Organization and Basis of Presentation

Service Properties Trust, or we, us or our, is a real estate investment trust, or REIT, organized on February 7, 1995 under the laws of the State of Maryland, which invests in hotels and net lease service oriented retail properties.

At September 30, 2020, we owned, directly and through subsidiaries, 329 hotels and 804 net lease properties.

At September 30, 2020, our 329 hotels were leased, managed or operated by subsidiaries of the following companies:

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.

We also owned, as of September 30, 2020, 804 net lease properties with 183 tenants, including 179 travel centers leased to TravelCenters of America Inc., or TA, our largest tenant.

Hereinafter these companies are sometimes referred to as managers and/or tenants or, collectively, operators.

Recent Events

The novel coronavirus, or COVID-19, global pandemic, along with federal, state and local government mandates have disrupted and are expected to continue to have a significant negative impact on our results of operations, financial position and cash flow.

In the United States, individuals are being encouraged to practice social distancing, are restricted from gathering in large groups, and in some areas, either have been or are subject to mandatory stay-at-home restrictions, which have restricted or prohibited large social gatherings, travel and non-essential activities outside of their homes.

As a result, the lodging industry and other industries in which our managers and tenants operate have been negatively affected.

Our result of operations and cash flows from our hotels are heavily dependent on our operators’ ability to generate returns to us and their willingness to fund shortfalls in our minimum returns from their own resources.

IHG has defaulted on its agreement with us and Marriott has not funded shortfalls in the payment of our minimum returns in accordance with its agreement with us.

We have provided notices of default and termination of our agreements with both IHG and Marriott and expect to transition the branding and management of the applicable hotels to Sonesta between December 2020 and January 2021.

We expect these transitions will result in further disruption to the operations of the transferred hotels and require additional capital expenditures.

As a result of the disruption caused by the COVID-19 pandemic, we have taken various measures to improve our liquidity and financial flexibility.

We reduced our quarterly cash dividend on our common shares to $ 0.01 per common share, reduced planned capital expenditures, worked closely with our hotel operators to significantly reduce our hotels' operating expenses, raised $ 788,222 of debt proceeds, repaid $ 350,000 of debt, which represented a substantial portion of our debt that was scheduled to mature in February 2021, sold assets for an aggregate sales price of $ 74,735 and we are under agreement to sell additional properties for an aggregate sales price of $ 218,800 .

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

Among other things, the amendment waived certain existing financial covenants through the end of the first quarter of 2021.

Based on the prolonged effect of the pandemic and our expectations of not being able to meet the financial covenants under our amended credit agreement, we entered into an additional amendment on November 5, 2020.

Among other things, the amendment waives all of the existing financial covenants through the end of the agreement term, or July 15, 2022, or the New Waiver Period.

Based on these amendments, the cash flows we receive from our net lease portfolio, the financing activities we have completed, and asset dispositions we have completed or expect to complete, we believe we will have sufficient liquidity to meet our obligations for at least the next twelve months.

See Notes 6 and 7 for additional information regarding the transactions and other actions described above.

Basis of Presentation

The accompanying condensed consolidated financial statements of Service Properties Trust and its subsidiaries, or SVC, we, our or us, are unaudited.

The accompanying condensed consolidated financial statements of us are unaudited.

Certain information and disclosures required by U.S.

4 unchanged sentences

These condensed consolidated financial statements include our accounts and the accounts of our subsidiaries, all of which are 100 % owned directly or indirectly by us.

All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.

All intercompany transactions and

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

balances with or among our consolidated subsidiaries have been eliminated.

Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year.

5 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 $ 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 were $ 92,818 and $ 31,920 as of September 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 $ 92,698 and $ 138,708 as of September 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 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.

We increased rental income by $ 2,370 for the three months ended September 30, 2020, reduced rental income by $ 3,046 for the three months ended September 30, 2019 and reduced rental income by $ 298 and $ 7,368 for the nine months ended September 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 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 $ 40,473 and $ 47,057 at June 30, 2020 and December 31, 2019 ,

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(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.

Due from related persons includes $ 37,223 and $ 47,057 at September 30, 2020 and December 31, 2019, respectively, and other assets, net includes $ 13,377 and $ 4,054 of straight-line rent receivables at September 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 $ 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 had deferred estimated percentage rent of $ 893 and $ 1,742 for the three and nine months ended September 30, 2020, respectively, and $ 1,020 and $ 3,047 for the three and nine months ended September 30, 2019, respectively.

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

1 unchanged sentence

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

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

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 June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

(in thousands)

4 unchanged sentences

Real Estate Properties

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.

At September 30, 2020, we owned 329 hotels with 51,404 rooms or suites and 804 service-oriented retail properties with approximately 13,682,478 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 $ 11,267,175 , including $ 191,202 classified as held for sale as of September 30, 2020.

During the nine months ended September 30, 2020, we funded $ 108,392 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 $ 8,047 .

During 2020, we 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 nine months ended September 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 six months ended June 30, 2020 .

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

We accounted for this transaction as an acquisition of assets.

Our allocation of the purchase price for this acquisition based on the estimated fair value of the acquired assets is presented in the table below.

Acquisition Date

Purchase Price

Building and Improvements

Furniture, Fixtures and Equipment

Intangible Assets / Liabilities, net

Acquisition Date Location Purchase Price Land Building and Improvements Furniture, Fixtures and Equipment Intangible Assets / Liabilities, net

3/12/2020 Various (1)

$ 7,071 $ 880 $ 5,363 $ — $ 828

(1) 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)

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.

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 .

We sold fifteen net lease properties with an aggregate of 1,148,411 rentable square feet for aggregate proceeds of $ 69,835 , excluding closing costs, in 15 separate transactions during the nine months ended September 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 $ 2,853 and $ 9,764 during the three and six months ended June 30, 2020 , respectively.

Number of Properties

Gross Sales Price

Gothenburg, NE

Rochester, MN

Ainsworth, NE

Eau Claire, MI

HOM Furniture, Inc.

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 .

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 .

As a result of these sales, we recorded a net gain on sale of real estate of $ 109 and a loss on sale of real estate of $ 9,655 during the three and nine months ended September 30, 2020, respectively.

Date of Sale Number of Properties Location Tenant Square Feet Gross Sales Price

1/28/2020 1 Gothenburg, NE Vacant 31,978 $ 585

2/6/2020 1 Rochester, MN Vacant 90,503 2,600

2/13/2020 1 Ainsworth, NE Vacant 32,901 775

2/14/2020 1 Dekalb, IL Vacant 5,052 1,050

3/2/2020 1 Eau Claire, MI HOM Furniture, Inc.

3/28/2020 1 Stillwater, OK Vacant 33,018 400

5/26/2020 1 Pawtucket, RI Vacant 22,027 1,610

5/28/2020 1 Canton, MA Destination XL Group, Inc.

755,992 51,000

5/28/2020 1 Phoenix, AZ Vacant 29,434 2,900

6/25/2020 1 Bellefontaine, OH Vacant 2,267 440

7/17/2020 1 Clinton, MD ADF Midatlantic LLC 2,935 700

8/20/2020 1 Lancaster, PA Chaac Pizza Northeast, LLC 3,014 775

8/26/2020 1 Baton Rouge, LA Vacant 2,334 750

8/26/2020 1 Winston Salem, NC Vacant 32,816 1,300

9/17/2020 1 Hillard, OH Vacant 5,316 2,350

1,148,411 $ 69,835

In October and November 2020, we sold three net lease properties with an aggregate of 82,623 square feet with an aggregate carrying value of $ 4,518 for a sale price of $ 4,900 .

We have entered into agreements to sell 39 hotels with 4,631 rooms in 18 states with an aggregate carrying value of $ 181,317 for an aggregate sales price of $ 218,000 .

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 .

We have also entered into an agreement to sell one net lease property with approximately 3,000 square feet with a carrying value of $ 778 for a sale price of $ 800 .

We currently expect the sale of this net lease property to be completed in the fourth quarter of 2020.

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.

As of September 30, 2020, we had 40 hotels with 4,794 rooms requiring aggregate annual minimum returns of $ 38,901 and an aggregate carrying value of $ 184,467 classified as held for sale and six net lease properties with 121,451 square feet with leases requiring aggregate annual minimum rent of $ 536 and an aggregate carrying value of $ 6,735 classified as held for sale.

See Note 13 for further information on these properties.

Management Agreements and Leases

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.

As of September 30, 2020, we owned 329 hotels which were included in six operating agreements and 804 service orientated retail properties net leased to 183 tenants.

We do not operate any of our properties.

3 unchanged sentences

Hotel 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.

As of September 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 September 30, 2020, our hotel properties were managed by or leased to IHG, Marriott, Sonesta, Hyatt, Radisson and Wyndham, under six agreements.

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

7 unchanged sentences

IHG agreement.

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.

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

Pursuant to the IHG agreement, IHG 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, 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 .

During the nine months ended September 30, 2020, we fully utilized the $ 75,717 security deposit we held to cover shortfalls in hotel cash flows available to pay the minimum returns due to us for the period.

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

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

In addition to our minimum return, this management agreement provides for an annual additional return payment to us of $ 12,067 from the hotels' available cash flows after payment of hotel operating expenses, funding of the required FF&E reserve, payment of our minimum return, working capital advances, payment of certain management fees and replenishment and expansion of the security deposit, if any.

In addition, the agreement provides for payment to us of 50 % of the hotels' available cash flows after payment to us of the annual additional return amount.

We funded $ 3,900 for capital improvements to certain of the hotels included in the IHG agreement during the nine months ended September 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 nine months ended September 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.

We realized minimum returns and rents of $ 9,654 and $ 51,853 during the three months ended September 30, 2020 and 2019, respectively, and $ 117,874 and $ 153,053 during the nine months ended September 30, 2020 and 2019, respectively, under this agreement.

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

We sent notices of default and termination to IHG for failure to pay minimum returns and rents due to us of $ 36,776 for the third quarter of 2020 and that we will transfer the branding and management of 102 of the 103 hotels to Sonesta on December 1, 2020.

SERVICE PROPERTIES TRUST

2 unchanged sentences

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.

Our management agreement with Marriott for 122 hotels, or the Marriott agreement, provides that, as of September 30, 2020, we are to be paid annual minimum returns of $ 194,613 .

Pursuant to the Marriott agreement, Marriott had 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, 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.

Marriott had 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 nine months ended September 30, 2020, we fully utilized the $ 33,423 security deposit we then held 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.

We funded $ 50,415 and $ 34,378 for capital improvements to certain of the hotels included in the Marriott agreement during the nine months ended September 30, 2020 and 2019, respectively, which resulted in increases in our contractual annual minimum returns of $ 4,039 and $ 3,252 , respectively.

We and Marriott 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 September 30, 2020, 24 of these hotels with 2,989 rooms requiring annual minimum returns of $ 31,359 with an aggregate carrying value of $ 140,798 are under agreement to be sold.

During the nine months ended September 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.

We realized minimum returns of $ 14,369 and $ 47,794 during the three months ended September 30, 2020 and 2019, respectively, and $ 91,076 and $ 142,562 during the nine months ended September 30, 2020 and 2019, respectively, under this agreement.

We sent notices to Marriott terminating our agreement for its failure to cover the $ 23,952 cumulative shortfall between the payments we have received to date and 80 % of the cumulative priority returns due to us for the nine months ended September 30, 2020.

The effective date of the termination is January 31, 2021 and we currently plan to transfer to Sonesta the branding and management of the 98 hotels to the extent not sold.

We also expect to transfer to Sonesta in December 2020 the branding and management of nine hotels we previously expected to sell.

Sonesta agreement.

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.

As of September 30, 2020, Sonesta managed 16 of our full-service hotels and 40 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 certain of 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 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 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;

• We and Sonesta had agreed to sell, rebrand or repurpose our 39 extended stay hotels then managed by Sonesta.

Based on current market conditions, we have decided not to pursue the sale of these 39 hotels at this time;

• The annual minimum returns due for the 14 full-service hotels that Sonesta continues to manage 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;

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

Between September 18, 2020 and October 1, 2020, Sonesta assumed management of four hotels previously managed by Wyndham.

We entered into management agreements with Sonesta with respect to these four hotels on terms substantially consistent with our other applicable management agreements with Sonesta in effect following the restructuring of our business arrangement with Sonesta on February 27, 2020, except that the management agreements are scheduled to terminate on December 31, 2021.

The management agreements for these hotels have not been added to our pooling agreement with Sonesta.

As noted above, our management agreements with IHG for 103 of our hotels are scheduled to terminate effective November 30, 2020, and our management agreements with Marriott for 122 of our hotels are scheduled to terminate effective January 31, 2021.

Management of 200 of these hotels, to the extent not previously sold, is expected to be assumed by Sonesta.

As we transition management of these hotels, we expect that we will enter management agreements with Sonesta on terms similar to those for four hotels formerly managed by Wyndham that were transitioned to Sonesta management between September 18, 2020 and October 1, 2020, as further described above.

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 $ 119,779 as of June 30, 2020 .

Our fixed annual minimum return under our Sonesta agreement was $ 124,795 as of September 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 $ 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.

Our Sonesta hotels generated net operating losses of $ 6,155 and returns of $ 15,629 during the three months ended September 30, 2020 and 2019, respectively, and net operating losses of $ 31,969 and returns of $ 57,794 during the nine months ended September 30, 2020 and 2019, respectively, under our Sonesta agreement.

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

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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.

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.

During the three and nine months ended September 30, 2020, we funded $ 6,836 and $ 14,187 , respectively, 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

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(dollars in thousands, except share data)

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 $ 3,831 and $ 9,313 for the three months ended September 30, 2020 and 2019, respectively, and $ 12,756 and $ 28,016 for the nine months ended September 30, 2020 and 2019, respectively.

In addition, we incurred procurement and construction supervision fees of $ 184 and $ 928 for the three months ended September 30, 2020 and 2019, respectively, and $ 1,087 and $ 1,914 for the nine months ended September 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.

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 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.

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

We funded $ 48,119 and $ 67,495 for renovations and other capital improvements to certain hotels included in our Sonesta agreement during the nine months ended September 30, 2020 and 2019, respectively, which resulted in increases in our contractual annual minimum returns of $ 3,622 and $ 4,140 , respectively.

We owed Sonesta $ 3,564 and $ 15,537 for capital expenditure and other reimbursements at September 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 June 30, 2020 , our investment in Sonesta had a carrying value of $ 44,378 .

As of September 30, 2020, our investment in Sonesta had a carrying value of $ 43,073 .

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

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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.

We recorded amortization of the basis difference of $ 65 and $ 151 in the three and nine months ended September 30, 2020, respectively.

We recognized losses of $ 1,369 and $ 4,305 related to our investment in Sonesta for the three and nine months ended September 30, 2020, respectively.

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

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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 $ 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 .

We reduced hotel operating expenses by $ 621 and $ 1,448 for the three and nine months ended September 30, 2020, respectively, for amortization of this liability.

As of September 30, 2020, the unamortized balance of this liability was $ 40,552 .

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

Hyatt 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.

Our management agreement with Hyatt for 22 hotels, or our Hyatt agreement, provides that, as of September 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 September 30, 2020 and 2019 and minimum returns of $ 16,528 during each of the nine months ended September 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 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 .

During the nine months ended September 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 $ 16,539 of guaranty payments to cover the shortfall.

The available balance of the guaranty was $ 3,116 as of September 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.

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

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(dollars in thousands, except share data)

During the nine months ended September 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.

Radisson 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.

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

We realized minimum returns of $ 5,111 and $ 5,099 during the three months ended September 30, 2020 and 2019, respectively, and minimum returns of $ 15,332 and $ 14,945 during the nine months ended September 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 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 .

During the nine months ended September 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 $ 21,729 of guaranty payments to cover the shortfall.

The available balance of the guaranty was $ 19,487 as of September 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.

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Wyndham agreements .

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 $ 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.

As of September 30, 2020, 17 of our hotels were operated under a management agreement with Wyndham.

In September 2020, we amended the management agreement with Wyndham so that it will continue as the manager of these Wyndham branded hotels for a limited period.

Under the amended terms of this agreement, we will pay Wyndham a management fee of 7 % of hotel revenues, subject to certain minimums.

In September 2020, we rebranded three hotels previously managed by Wyndham to Sonesta and on October 1, 2020, one additional hotel previously managed by Wyndham was rebranded to Sonesta.

We expect to sell 15 Wyndham branded hotels in the fourth quarter of 2020.

Our Wyndham hotels generated a net operating losses of $ 4,413 and returns of $ 5,944 during the three months ended September 30, 2020 and 2019, respectively, and a net operating losses of $ 8,160 and net operating losses of $ 17,780 during the nine months ended September 30, 2020 and 2019, respectively.

We funded $ 1,540 and $ 2,283 for capital improvements at certain of the hotels included in our Wyndham agreement during the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020 we have funded $ 6,316 of working capital advances under our Wyndham agreement to cover projected operating losses at our hotels managed by Wyndham.

Net lease portfolio

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 .

As of September 30, 2020, we owned 804 net lease service-oriented retail properties with 13.7 million square feet with leases requiring annual minimum rents of $ 369,803 with a weighted (by annual minimum rents) average remaining lease term of 11.0 years.

The portfolio was 98 % leased by 183 tenants operating under 129 brands in 22 distinct industries.

TA is our largest tenant.

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 .

As of September 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 represented approximately 25.6 % of our total annual minimum returns and rents as of September 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 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.

Our TA leases do not require FF&E escrow deposits.

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

TA paid $ 4,404 and $ 13,212 of deferred rent to us for the three and nine months ended September 30, 2020, respectively.

The remaining balance of previously deferred rents was $ 44,036 as of September 30, 2020.

SERVICE PROPERTIES TRUST

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(dollars in thousands, except share data)

We recognized rental income from TA of $ 61,528 and $ 62,537 for the three months ended September 30, 2020 and 2019, respectively, and $ 184,583 and $ 188,227 for the nine months ended September 30, 2020 and 2019, respectively.

Rental income for the three months ended September 30, 2020 and 2019 includes $ 3,250 and $ 3,390 respectively, and for the nine months ended September 30, 2020 and 2019, includes $ 9,834 and $ 7,880 , 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 September 30, 2020 and December 31, 2019, we had receivables for current rent amounts owed to us by TA and straight-line rent adjustments of $ 58,648 and $ 68,653 , respectively.

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

Our TA leases do not require FF&E escrow deposits.

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

Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent equal to 8.5 % of the amounts funded.

We did not fund any capital improvements to our properties that we leased to TA during the 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 did no t fund any capital improvements to our properties that we leased to TA during the nine months ended September 30, 2020 or 2019.

In addition to the rental income that we recognized during the three months ended September 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 $ 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.

We had aggregate deferred percentage rent under our TA leases of $ 893 and $ 1,020 for the three months ended September 30, 2020 and 2019, respectively, and $ 1,742 and $ 3,047 for the nine months ended September 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 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.

We recognized rental income from our 625 other net lease properties of $ 34,574 and $ 106,804 for the three and nine months ended September 30, 2020, respectively, which included $ 5,620 and $ 11,433 , respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis.

We recognized rental income of $ 5,485 for the three and nine months ended September 30, 2019, which included $ 258 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.

During the three months ended September 30, 2020, we collected 87.2 % of rents from our other net lease tenants.

In October 2020, we collected 87.4 % of rents due to us from our other net lease tenants.

We have entered into rent deferral agreements with 51 net lease retail tenants with leases requiring an aggregate of $ 53,413 of annual minimum rents.

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 .

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

We have deferred an aggregate of $ 13,437 of rent as of November 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.

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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.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

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.

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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.

We recorded reserves for uncollectible amounts against rental income of $ 2,369 and $ 7,689 for the three and nine months ended September 30, 2020, respectively.

We had reserves for uncollectible rents of $ 13,777 and $ 5,981 as of September 30, 2020 and December 31, 2019, respectively, included in other assets on our condensed consolidated balance sheets.

Guarantees and security deposits generally.

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Under these agreements, any amount of the security deposits which are applied to payment deficits may be replenished from a share of future cash flows from the applicable hotel operations pursuant to the terms of the applicable agreements.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

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 $ 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.

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:

We had $ 2,405 and $ 8,519 of guaranty and security deposit replenishments for the three and nine months ended September 30, 2019, respectively.

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

When managers of our hotels are required to fund the shortfalls of minimum rents 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 $ 30,474 and $ 2,404 for the three months ended September 30, 2020 and 2019, respectively, and $ 222,134 and $ 21,775 for the nine months ended September 30, 2020 and 2019, respectively.

Our principal debt obligations at September 30, 2020 were:

(1) $ 80,086 of outstanding borrowings under our $ 1,000,000 revolving credit facility;

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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 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.

We also pay a facility fee, which was 30 basis points per annum at September 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 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 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 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.

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.

As of September 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 2.55 % and 2.38 % for the three and nine months ended September 30, 2020, respectively, and 3.10 % and 3.34 % for the three and nine months ended September 30, 2019, respectively.

As of September 30, 2020, we had $ 80,086 outstanding and $ 919,914 available under our revolving credit facility.

As of November 6, 2020, we had $ 475,645 outstanding and $ 524,355 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 was scheduled to mature on July 15, 2023, was prepayable without penalty at any time.

We were 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 September 30, 2020.

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

As of September 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 2.75 % and 2.73 % for the three and nine months ended September 30, 2020, respectively, and 3.35 % and 3.51 % for the three and nine months ended September 30, 2019, respectively.

SERVICE PROPERTIES TRUST

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(dollars in thousands, except share data)

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 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.

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 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 ;

We and our lenders amended our credit agreement governing our $ 1,000,000 revolving credit facility and $ 400,000 term loan on May 8, 2020 and again on November 5, 2020.

The May 2020 amendment provided 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 continued to have access to undrawn amounts under the credit facility.

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

• we were 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 % .

These pledges are subject to release in full, (i) subject to the satisfaction of certain conditions, including, among other things, our having complied with the financial covenants under the credit agreement for two fiscal quarters following the end of the Waiver Period or (ii) in connection with our having issued at least $ 500,000 of unsecured notes with an initial term of five years , or a Qualified Note Issuance, provided that, among other conditions, the outstanding amount of the revolving facility does not exceed $ 750,000 and the term loan has been paid in full.

If, following a release of pledges in connection with Qualified Note Issuance, a request for a borrowing under the revolving facility would result in more than $ 750,000 outstanding under the revolving facility, we are required to deliver new equity pledges such that the Collateral Value Percentage is no more than 50 % .

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 make investments or pay distributions on our common shares that are described above.

• our ability to pay distributions on our common shares was limited to amounts required to maintain our qualification for taxation as a 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 were 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 were 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 pledged equity interests in certain of our property owning subsidiaries to secure our obligations under the credit agreement.

These subsidiaries owned properties with $ 1,028,155 of undepreciated book value as of September 30, 2020.

As a result of the November 5, 2020 amendment:

• all existing financial covenants have been waived through the New Waiver Period;

• we repaid our $ 400,000 term loan on November 5, 2020 using undrawn amounts under our revolving credit facility;

• we have pledged certain additional equity interests of subsidiaries owning properties.

Following the closing of the amendment, we will provide first mortgage liens on 74 properties owned by the pledging subsidiaries with an undepreciated book value of $ 1,837,392 as of September 30, 2020 to secure our obligations under the credit agreement;

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

• the interest rate premium over LIBOR under our revolving credit facility increased by 30 basis points;

• certain covenants and restrictions on distributions to common shareholders, share repurchases, incurring indebtedness, and acquiring real property (in each case subject to various exceptions), and the minimum liquidity requirement of $ 125,000 will remain in place during the New Waiver Period;

SERVICE PROPERTIES TRUST

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(dollars in thousands, except share data)

• we are generally required to apply the net cash proceeds from the disposition of assets, capital markets transactions and debt refinancings to the repayment of outstanding loans under the credit agreement, and then to other debt maturities.

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

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

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

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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 .

During the nine months ended September 30, 2020, we declared and paid regular quarterly distributions to common shareholders as follows:

Declaration Date Record Date Paid Date Dividend Per Common Share Total Distributions

January 16, 2020 January 27, 2020 February 20, 2020 $ 0.54 $ 88,863

March 30, 2020 April 21, 2020 May 21, 2020 0.01 1,646

July 16, 2020 July 27, 2020 August 20, 2020 0.01 1,646

$ 0.56 $ 92,155

On October 15, 2020, we declared a regular quarterly distribution to common shareholders of record on October 26, 2020 of $ 0.01 per share, or $ 1,646 .

We expect to pay this amount on or about November 19, 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.

On September 17, 2020, we awarded an aggregate of 264,400 of our common shares, valued at $ 8.44 per common share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other officers and employees of RMR LLC under our equity compensation plan.

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

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.

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 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.

On September 21, 2020, we purchased an aggregate of 38,156 of our common shares valued at a weighted average price per common share of $ 7.40 , based on the closing price of our common shares on Nasdaq, on the date of repurchase, from certain of our officers and certain current and former officers and employees 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.

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 .

Pursuant to our business management agreement, we recognized net business management fees of $ 8,641 and $ 9,919 for the three months ended September 30, 2020 and 2019, respectively, and $ 27,613 and $ 29,307 for the nine months ended September 30, 2020 and 2019, respectively.

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

Pursuant to our property management agreement with RMR LLC, we recognized property management and construction supervision fees of $ 781 and $ 163 for the three months ended September 30, 2020 and 2019, respectively, and $ 2,722 and $ 201 for the nine months ended September 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.

We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf.

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 $ 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 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 applicable 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 $ 258 and $ 136 for these expenses and costs for the three months ended September 30, 2020 and 2019, respectively, and $ 525 and $ 478 for the nine months ended September 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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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

Related Person Transactions

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

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 .

TA is our largest tenant and property operator, leasing 27.0 % of our gross carrying value of real estate properties as of September 30, 2020.

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

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.

As of September 30, 2020, we owned 1,184,797 shares of TA common stock, representing approximately 8.2 % of TA’s outstanding shares of common stock, which amount includes 500,797 shares of TA common stock that we purchased in an underwritten public equity offering in July 2020 at the public offering price of $ 14.00 per share.

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 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.

Portnoy, also serves as the chair of the board of directors and as a managing director of TA and, as of September 30, 2020, beneficially owned 655,505 shares of TA common stock (including through RMR LLC), representing approximately 4.6 % 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 June 30, 2020 , we owned approximately 34 % of Sonesta which managed 53 of our hotels pursuant to our Sonesta agreement.

As of September 30, 2020, we owned approximately 34 % of Sonesta which managed 56 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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See Note 9 for further information regarding our management agreements with RMR LLC.

See Note 8 for information relating to the annual share awards we made in September 2020 to our officers and certain other employees of RMR LLC and common shares we purchased from certain of our officers and certain current and former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares to them.

We include amounts recognized as expense for share awards to RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income.

Affiliates Insurance Company, or AIC .

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

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

SERVICE PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

As of September 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.

We recognized income of $ 83 and $ 617 related to our investment in AIC for the three and nine months ended September 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 nine months ended September 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 June 30, 2020 , we recognized income tax expense of $ 16,660 , which includes $ 451 of foreign taxes and $ 559 of state taxes.

During the three months ended September 30, 2020, we recognized income tax benefit of $ 296 , which includes $ 123 of foreign tax benefit and $ 173 of state tax benefit.

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.

During the nine months ended September 30, 2020, we recognized income tax expense of $ 16,706 which includes $ 379 of foreign taxes, $ 677 of state taxes and the $ 15,650 of deferred tax liability.

During the three months ended September 30, 2019, we recognized income tax expense of $ 467 which includes $ 229 of foreign tax and $ 238 of state tax benefits.

During the nine months ended September 30, 2019, we recognized income tax expense of $ 1,266 which includes $ 447 of foreign taxes and $ 819 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 June 30, 2020

For the Three Months Ended September 30, 2020

Hotels Net Lease Corporate Consolidated

Hotel operating revenues $ 199,719 $ — $ — $ 199,719

Rental income 674 96,102 — 96,776

FF&E reserve income

Total revenues 200,393 96,102 — 296,495

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Total expenses 239,580 71,378 12,295 323,253

Loss on sale of real estate

Gain on sale of real estate — 109 — 109

Gain on insurance settlement — — — —

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Interest expense — — ( 80,532 ) ( 80,532 )

Loss on early extinguishment of debt

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

Income tax expense

( 39,181 ) 24,833 ( 87,221 ) ( 101,569 )

Income tax benefit — — 296 296

Equity in losses of an investee — — ( 1,369 ) ( 1,369 )

Net income (loss) $ ( 39,181 ) $ 24,833 $ ( 88,294 ) $ ( 102,642 )

For the Six Months Ended June 30, 2020

For the Nine Months Ended September 30, 2020

Hotels Net Lease Corporate Consolidated

Hotel operating revenues $ 700,578 $ — $ — $ 700,578

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

50,895 60,221 ( 263,746 ) ( 152,630 )

Income tax expense — — ( 16,706 ) ( 16,706 )

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Net income (loss) $ 50,895 $ 60,221 $ ( 284,757 ) $ ( 173,641 )

As of June 30, 2020

As of September 30, 2020

Hotels Net Lease Corporate Consolidated

Total assets $ 4,900,990 $ 3,804,679 $ 91,004 $ 8,796,673

SERVICE PROPERTIES TRUST

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(dollars in thousands, except share data)

For the Three Months Ended June 30, 2019

For the Three Months Ended September 30, 2019

Hotels Net Lease Corporate Consolidated

Hotel operating revenues $ 525,290 $ — $ — $ 525,290

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Total expenses 445,193 37,569 12,464 495,226

Dividend income

Unrealized loss on equity securities — — ( 3,950 ) ( 3,950 )

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Interest expense — — ( 52,375 ) ( 52,375 )

Loss on early extinguishment of debt — — ( 8,451 ) ( 8,451 )

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

Income tax benefit

86,702 30,485 ( 76,729 ) 40,458

Income tax expense — — ( 467 ) ( 467 )

Equity in earnings of an investee — — 83 83

Net income (loss) $ 86,702 $ 30,485 $ ( 77,113 ) $ 40,074

For the Six Months Ended June 30, 2019

For the Nine Months Ended September 30, 2019

Hotels Net Lease Corporate Consolidated

Hotel operating revenues $ 1,521,368 $ — $ — $ 1,521,368

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Interest expense — — ( 151,742 ) ( 151,742 )

Loss on early extinguishment of debt

— — ( 8,451 ) ( 8,451 )

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

264,391 248,838 ( 237,937 ) 275,292

Income tax expense — — ( 1,266 ) ( 1,266 )

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As of December 31, 2019

Hotels Net Lease Corporate Consolidated

Total assets $ 4,866,549 $ 4,042,831 $ 124,587 $ 9,033,967

SERVICE PROPERTIES TRUST

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Fair Value of Assets and Liabilities

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.

The table below presents certain of our assets and liabilities carried at fair value at September 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

Carrying Value at

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

June 30, 2020

Carrying Value at Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs

Description September 30, 2020 (Level 1) (Level 2) (Level 3)

Recurring Fair Value Measurement Assets:

Investment in TA (1)

$ 23,151 $ 23,151 $ — $ —

Non-recurring Fair Value Measurement Assets:

Assets of properties held for sale (2)

$ 191,202 $ — $ 191,202 $ —

(1) Our 1,184,797 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 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 .

Our historical cost basis for these shares is $ 24,418 as of September 30, 2020.

We recorded unrealized gains of $ 5,606 and $ 4,909 during the three and nine months ended September 30, 2020, respectively, and recorded unrealized losses of $ 3,950 and $ 43,761 during the three and nine months ended September 30, 2019, respectively, to adjust the carrying value of our investment in TA shares to its fair value.

(2) As of September 30, 2020, we owned 40 hotels located in 18 states classified as held for sale with an aggregate net carrying value of $ 184,467 before adjusting for estimated costs of sale of $ 5,230 and six net lease properties with 121,451 square feet with a carrying value of $ 6,735 before adjusting for estimated costs of sale of $ 400 .

We recorded a $ 10,248 loss on asset impairment during the three months ended September 30, 2020 to reduce the carrying value of one hotel and two net lease properties to their estimated fair value less costs to sell.

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 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)

At September 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:

September 30, 2020 December 31, 2019

Carrying Value (1)

Fair Value Carrying Value (1)

Senior Unsecured Notes, due 2021 at 4.25 %

$ 49,932 $ 49,934 $ 398,379 $ 406,838

Senior Unsecured Notes, due 2022 at 5.00 %

497,729 497,950 496,821 526,500

Senior Unsecured Notes, due 2023 at 4.50 %

499,555 488,783 499,432 520,478

Senior Unsecured Notes, due 2024 at 4.65 %

348,599 327,483 348,295 364,277

Senior Unsecured Notes, due 2024 at 4.35 %

819,178 747,153 818,075 848,847

Senior Unsecured Notes, due 2025 at 4.50 %

346,946 318,150 346,431 361,783

Senior Unsecured Notes, due 2025 at 7.50 %

788,222 852,172 — —

Senior Unsecured Notes, due 2026 at 5.25 %

343,930 322,838 343,083 369,185

Senior Unsecured Notes, due 2026 at 4.75 %

446,363 401,198 445,905 464,315

Senior Unsecured Notes, due 2027 at 4.95 %

395,216 355,202 394,649 414,012

Senior Unsecured Notes, due 2028 at 3.95 %

391,621 334,704 390,759 393,940

Senior Unsecured Notes, due 2029 at 4.95 %

417,901 365,789 417,307 434,248

Senior Unsecured Notes, due 2030 at 4.375 %

389,372 333,210 388,522 394,788

Total financial liabilities $ 5,734,564 $ 5,394,566 $ 5,287,658 $ 5,499,211

(1) Carrying value includes unamortized discounts and premiums and issuance costs.

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).

At September 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