Service Properties Trust 10-Q

Item 1. Financial Statements SERVICE PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (dollars in thousands, except share data) September 30, 2020 December 31, 2019 ASSETS Real estate properties: Land $ 2,017,431 $ 2,066,602 Buildings, improvements and equipment 9,058,542 9,318,434 Total real estate properties, gross 11,075,973 11,385,036 Accumulated depreciation ( 3,212,594 ) ( 3,120,761 ) Total real estate properties, net 7,863,379 8,264,275 Acquired real estate leases and other intangibles, net 338,430 378,218 Assets held for sale 191,202 87,493 Cash and cash equivalents 47,847 27,633 Restricted cash 38,130 53,626 Due from related persons 58,648 68,653 Other assets, net 259,037 154,069 Total assets $ 8,796,673 $ 9,033,967 LIABILITIES AND SHAREHOLDERS’ EQUITY Revolving credit facility $ 80,086 $ 377,000 Term loan, net 397,523 397,889 Senior unsecured notes, net 5,734,565 5,287,658 Security deposits 284 109,403 Accounts payable and other liabilities 334,475 335,696 Due to related persons 7,656 20,443 Total liabilities 6,554,589 6,528,089 Commitments and contingencies Shareholders’ equity: Common shares of beneficial interest, $ .01 par value; 200,000,000 shares authorized; 164,823,833 and 164,563,034 shares issued and outstanding, respectively 1,648 1,646 Additional paid in capital 4,549,466 4,547,529 Cumulative other comprehensive loss 63 — 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. 3 Table of Contents SERVICE PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (dollars in thousands, except share data) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues: Hotel operating revenues $ 199,719 $ 525,290 $ 700,578 $ 1,521,368 Rental income 96,776 73,619 294,432 210,509 FF&E reserve income — 863 201 3,365 Total revenues 296,495 599,772 995,211 1,735,242 Expenses: Hotel operating expenses 174,801 377,895 492,906 1,076,011 Other operating expenses 3,705 1,707 11,029 4,419 Depreciation and amortization 122,204 103,160 377,557 301,721 General and administrative 12,295 12,464 37,621 36,906 Loss on asset impairment 10,248 — 55,502 — Total expenses 323,253 495,226 974,615 1,419,057 Gain (loss) on sale of real estate 109 — ( 9,655 ) 159,535 Gain on insurance settlement — — 62,386 — Dividend income — — — 1,752 Unrealized gains (losses) on equity securities, net 5,606 ( 3,950 ) 4,409 ( 43,761 ) Interest income 6 688 283 1,774 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 ) Equity in earnings (losses) of an investee ( 1,369 ) 83 ( 4,305 ) 617 Net income (loss) ( 102,642 ) 40,074 ( 173,641 ) 274,643 Other comprehensive income (loss): Equity interest in investee’s unrealized gains (losses) 63 ( 46 ) 63 91 Other comprehensive income (loss) 63 ( 46 ) 63 91 Comprehensive income (loss) $ ( 102,579 ) $ 40,028 $ ( 173,578 ) $ 274,734 Weighted average common shares outstanding (basic) 164,435 164,321 164,397 164,294 Weighted average common shares outstanding (diluted) 164,435 164,348 164,397 164,332 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. 4 Table of Contents SERVICE PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited) (in thousands, except share data) Common Shares Additional Paid in Capital Cumulative Net Income Available for Common Shareholders Cumulative Other Comprehensive Income (Loss) Number of Shares Common Shares Cumulative Common Distributions Total Balance at December 31, 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 Common share repurchases ( 2,637 ) — — ( 43 ) — — ( 43 ) Distributions — — ( 90,509 ) — — — ( 90,509 ) 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 ) 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 5 Table of Contents Common Shares Additional Paid in Capital Cumulative Net Income Available for Common Shareholders Cumulative Other Comprehensive Income (Loss) Number of Shares Common Shares Cumulative Common Distributions Total Balance at December 31, 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 Distributions — — ( 87,154 ) — — — ( 87,154 ) 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 Common share repurchases ( 2,172 ) — — ( 48 ) — — ( 48 ) Distributions — — ( 88,798 ) — — — ( 88,798 ) 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. 6 Table of Contents SERVICE PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Nine Months Ended September 30, 2020 2019 Cash flows from operating activities: Net income (loss) $ ( 173,641 ) $ 274,643 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 377,557 301,721 Amortization of debt issuance costs and debt discounts and premiums as interest 10,651 7,829 Straight-line rental income 298 7,368 Security deposits utilized ( 109,162 ) ( 10,052 ) Loss on early extinguishment of debt 6,970 8,451 Loss on asset impairment 55,502 — Unrealized (gains) and losses on equity securities, net ( 4,409 ) 43,761 Equity in (earnings) losses of an investee 4,305 ( 617 ) (Gain) loss on sale of real estate 9,655 ( 159,535 ) Gain on insurance settlement ( 62,386 ) — Deferred income taxes 15,650 — Other non-cash (income) expense, net ( 2,324 ) 109 Changes in assets and liabilities: Due from related persons 171 3,609 Other assets ( 45,844 ) ( 6,352 ) Accounts payable and other liabilities ( 15,585 ) 12,743 Due to related persons ( 1,884 ) ( 51,148 ) Net cash provided by operating activities 65,524 432,530 Cash flows from investing activities: Real estate acquisitions and deposits ( 7,090 ) ( 2,659,186 ) Real estate improvements ( 54,603 ) ( 71,024 ) Hotel managers’ purchases with restricted cash ( 127,837 ) ( 143,692 ) 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 proceeds from sale of equity securities — 93,892 Net cash used in investing activities ( 99,520 ) ( 2,457,485 ) Cash flows from financing activities: Proceeds from issuance of senior unsecured notes, after discounts and premiums 800,000 1,693,879 Repurchase of senior unsecured notes ( 355,971 ) — Borrowings under unsecured revolving credit facility 709,000 997,000 Repayments of unsecured revolving credit facility ( 1,005,914 ) ( 384,000 ) Deferred financing costs ( 15,900 ) ( 21,869 ) Repurchase of common shares ( 346 ) ( 794 ) Distributions to common shareholders ( 92,155 ) ( 264,755 ) 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 Cash and cash equivalents and restricted cash at end of period $ 85,977 $ 70,509 Supplemental disclosure of cash and cash equivalents and restricted cash: The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the condensed consolidated statements of cash flows: Cash and cash equivalents $ 47,847 $ 16,990 Restricted cash 38,130 53,519 Total cash and cash equivalents and restricted cash $ 85,977 $ 70,509 7 Table of Contents Supplemental cash flow information: Cash paid for interest $ 226,329 $ 171,418 Cash paid for income taxes 2,117 2,614 Non-cash investing activities: Investment in Sonesta $ 42,000 $ — The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Note 1. Organization and Basis of Presentation Service Properties Trust, or we, us or our, is a real estate investment trust, or REIT, organized on February 7, 1995 under the laws of the State of Maryland, which invests in hotels and 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 us are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019, or our 2019 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period, have been included. These condensed consolidated financial statements include our accounts and the accounts of our subsidiaries, all of which are 100 % owned directly or indirectly by us. All intercompany transactions and 9 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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. Reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets, impairment of real estate and the valuation of intangible assets. We have determined that each of our wholly owned taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification ™. We have concluded that we must consolidate each of our wholly owned TRSs because we are the entity with the power to direct the activities that most significantly impact such VIEs’ performance and we have the obligation to absorb losses or the right to receive benefits from each VIE that could be significant to the VIE and are, therefore, the primary beneficiary of each VIE. The assets of our TRSs were $ 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. Note 2. New Accounting Pronouncements On January 1, 2020, we adopted FASB Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Lease related receivables are governed by the lease accounting under GAAP and are not subject to ASU No. 2016-13. We adopted this standard using the modified retrospective approach. The implementation of this standard did not have a material impact in our condensed consolidated financial statements. Note 3. Revenue Recognition We report hotel operating revenues for managed hotels in our condensed consolidated statements of comprehensive income. We generally recognize hotel operating revenues, consisting primarily of room and food and beverage sales, when goods and services are provided. We report rental income for leased properties in our condensed consolidated statements of comprehensive income. We recognize rental income from operating leases on a straight-line basis over the term of the lease agreements. 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 $ 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 $ 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. We report deposits by our third-party tenants into the escrow accounts as FF&E reserve income. We do not report FF&E reserves for our managed hotels as FF&E reserve income. 10 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Note 4. 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 September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands) Weighted average common shares for basic earnings per share 164,435 164,321 164,397 164,294 Effect of dilutive securities: Unvested share awards — 27 — 38 Weighted average common shares for diluted earnings per share 164,435 164,348 164,397 164,332 Note 5. Real Estate Properties 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. Acquisitions 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 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. 11 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Dispositions 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 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. 98,824 2,600 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 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. 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. Note 6. Management Agreements and Leases 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. 12 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Hotel 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. Each of these agreements is for between nine and 122 of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties included in each agreement, and the renewal terms range between 15 to 60 years. Most of these agreements require the third party manager or tenant to: (1) make payments to us of minimum returns or minimum rents; (2) deposit a percentage of total hotel sales into FF&E reserves; and (3) for our managed hotels, make payments to our TRSs of additional returns to the extent of available cash flows after payment of operating expenses, funding of the FF&E reserves, payment of our minimum returns, payment of certain management fees, reimbursement of working capital advances and replenishment of security deposits or guarantees, as applicable. Some of our managers or tenants or their affiliates have provided deposits or guarantees to secure their obligations to pay us. IHG agreement. 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. 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. 13 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Marriott 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 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. 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. 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. 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 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 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; 14 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) • We and Sonesta modified our then existing Sonesta agreement and pooling agreement so that 5 % of the hotel gross revenues of each of our 14 full-service hotels managed by Sonesta will be escrowed for future capital expenditures as FF&E reserves, subject to available cash flows after payment of the annual minimum returns due to us under the Sonesta agreement; • We and Sonesta modified our then existing Sonesta agreement and pooling agreement so that (1) our termination rights under those agreements for our 14 full-service hotels managed by Sonesta are generally limited to performance and for “cause,” casualty and condemnation events, (2) a portfolio wide performance test now applies for determining whether the management agreement for any of our full-service hotels managed by Sonesta may be terminated for performance reasons, and (3) the provisions included in our historical pooling agreement that allowed either us or Sonesta to require the marketing for sale of non-economic hotels were removed; and • We and Sonesta extended the initial expiration date of the then existing management agreements for our full-service hotels managed by Sonesta located in Chicago, IL and Irvine, CA to January 2037 to align with the initial expiration date for our other full-service hotels managed by Sonesta. Except as described above, the economic terms of our amended and restated Sonesta agreement and amended and restated pooling agreement are consistent with the historical Sonesta agreement and pooling agreement. We previously leased 48 vacation units to Wyndham Destinations, Inc. (NYSE: WYND), or Destinations, at our full service hotel located in Chicago, IL, which Sonesta began managing in November 2019 and which had previously been managed by Wyndham. Effective March 1, 2020, Sonesta commenced managing those units and those units were added to our Sonesta agreement for that Chicago hotel. 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 $ 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 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. Accordingly, the returns we receive from our Sonesta hotels are limited to the hotels’ available cash flows, if any, after payment of operating expenses, including management and related fees. 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 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. 15 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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 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. Accounting for Investment in Sonesta: We account for our 34 % non-controlling interest in Sonesta under the equity method of accounting. 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. The cost basis of our investment in Sonesta exceeded our proportionate share of Sonesta’s total shareholders’ equity book value on the date of acquisition, February 27, 2020, by an aggregate of $ 8,000 . As required under GAAP, we are amortizing this difference to equity in earnings of an investee over 31 years, the weighted average remaining useful life of the real estate assets and intangible assets and liabilities owned by Sonesta as of the date of our acquisition. We recorded amortization of the basis difference of $ 65 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. We recorded a liability for the fair value of our initial investment in Sonesta, as no cash consideration was exchanged related to the modification of our management agreement with, and investment in, Sonesta. This liability for our investment in Sonesta is included in accounts payable and other liabilities in our condensed consolidated balance sheet and is being amortized on a straight-line basis through January 31, 2037, 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 $ 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 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 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. 16 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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. 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 Hyatt agreement. 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 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 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. Our Radisson agreement requires 5 % of gross revenues from hotel operations be placed in an FF&E reserve. As a result of current market conditions, effective April 1, 2020, we and Radisson have agreed to suspend contributions to the FF&E reserve under our Radisson agreement for the remainder of 2020. Wyndham agreements . 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 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 leases TA is our largest tenant. 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 $ 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. 17 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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 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 $ 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. Other net lease agreements Our net lease agreements generally provide for minimum rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight-line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We recognized rental income from our 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 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 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. The FASB relief package provides entities with the option to account for lease concessions resulting from the COVID-19 pandemic outside of the existing lease modification guidance if the resulting cash flows from the modified lease are substantially the same as the original lease. Because the deferred rents referenced above will be repaid over a 12 to 24 month period, the cash flows from the respective leases are substantially the same as before the rent deferrals. We continually review receivables related to rent, straight-line rent and property operating expense reimbursements and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The 18 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) review includes an assessment of whether or not substantially all of the amounts due under a tenant’s lease are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as cash is received. We recognize all changes in the collectability assessment for an operating lease as an adjustment to rental income and do not record an allowance for uncollectible accounts. We recorded reserves for uncollectible amounts against rental income of $ 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. When we reduce the amounts of the security deposits we hold for any of our operating agreements for payment deficiencies, it does not result in additional cash flows to us of the deficiency amounts, but reduces the refunds due to the respective tenants or managers that have provided us with these security deposits upon expiration of the applicable operating agreement. The security deposits are non-interest bearing and are not held in escrow. 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. 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 $ 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. Note 7. Indebtedness Our principal debt obligations at September 30, 2020 were: (1) $ 80,086 of outstanding borrowings under our $ 1,000,000 revolving credit facility; (2) our $ 400,000 term loan; and (3) $ 5,800,000 aggregate outstanding principal amount of senior unsecured notes. Our revolving credit facility and our term loan are governed by a credit agreement with a syndicate of institutional lenders. Our $ 1,000,000 revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is July 15, 2022, and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the maturity date of the facility for two additional six-month periods. 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 September 30, 2020. 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 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. 19 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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 September 30, 2020. 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 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; and • 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; and 20 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) • 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. The aggregate net proceeds from this offering was $ 788,222 , after underwriting discounts and other offering expenses. These notes are fully and unconditionally guaranteed by certain of our subsidiaries. The subsidiaries in the guarantee pool may change from time to time as subsidiaries are allocated to or from the pledge pool for our credit agreement or for certain other reasons. Each subsidiary guarantor’s guarantee will automatically terminate and each subsidiary guarantor will automatically be released from all of its obligations under its guarantee and the indenture under certain circumstances, including on or after the date on which (a) the notes have received a rating equal to or higher than Baa2 (or the equivalent) by Moody’s Investors Service, Inc., or Moody’s, or BBB (or the equivalent) by Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business, or Standard & Poor’s, or if Moody’s or Standard & Poor’s ceases to rate the notes for reasons outside of our control, the equivalent investment grade rating from any other rating agency and (b) no default or event of default has occurred and is continuing under the indenture governing the notes. On June 17, 2020, we repurchased $ 350,000 principal amount of our $ 400,000 of 4.25 % senior notes due 2021 at a total cost of $ 355,971 excluding accrued interest pursuant to a cash tender offer. We recorded a loss of approximately $ 6,970 , net of discount and deferred financing costs, on extinguishment of debt during the nine months ended September 30, 2020. We funded this purchase using borrowings under our revolving credit facility. Note 8. Shareholders' Equity Distributions 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. Share Awards 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. 21 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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 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. Note 9. Business and Property Management Agreements with RMR LLC We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to our property level operations of our net lease portfolio, excluding properties leased to TA, and the office building component of one of our hotels. Pursuant to our business management agreement, we recognized net business management fees of $ 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. We did not incur an incentive fee payable to RMR LLC for the year ended December 31, 2019. 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 $ 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 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. 22 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Note 10. Related Person Transactions We have relationships and historical and continuing transactions with TA, Sonesta, RMR LLC, The RMR Group Inc., or RMR Inc., and others affiliated with them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR LLC is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam D. Portnoy, as the sole trustee of ABP Trust, is the controlling shareholder of RMR Inc. and is a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. John G. Murray, our other Managing Trustee and President and Chief Executive Officer also serves as an officer and employee of RMR LLC. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these public companies. Other officers of RMR LLC, including Mr. Murray and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies. TA . 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 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 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. Sonesta. Sonesta is a private company that is majority owned by Adam D. Portnoy, one of our Managing Trustees who also serves as one of Sonesta’s directors, and a person related to him. One of Sonesta’s other directors is our other Managing Trustee, President and Chief Executive Officer and Sonesta’s other director serves as RMR LLC’s and RMR Inc.’s executive vice president, general counsel and secretary and as our Secretary. Sonesta’s chief executive officer and chief financial officer are officers of RMR LLC. Certain other officers and employees of Sonesta are former employees of RMR LLC. RMR LLC also provides certain services to Sonesta. 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. Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. 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 . Until its dissolution on February 13, 2020, we, ABP Trust, TA and four other companies to which RMR LLC provides management services owned AIC, an Indiana insurance company, in equal amounts. Certain of our Trustees and certain trustees or directors of the other AIC shareholders served on the board of directors of AIC until its dissolution. We and the other AIC shareholders historically participated in a combined property insurance program arranged and insured or reinsured in part by AIC. The policies under that program expired on June 30, 2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we have instead purchased standalone property insurance coverage with unrelated third party insurance providers. 23 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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 $ 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. Note 11. Income Taxes We have elected to be taxed as a REIT under the United States Internal Revenue Code of 1986, as amended, or the IRC, and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We are subject to income tax in Canada, Puerto Rico and certain states despite our qualification for taxation as a REIT. Further, we lease our managed hotels to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated tax return and are subject to federal, state and foreign income taxes. 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 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 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. 24 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Note 12. Segment Information 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 September 30, 2020 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 199,719 $ — $ — $ 199,719 Rental income 674 96,102 — 96,776 Total revenues 200,393 96,102 — 296,495 Expenses: Hotel operating expenses 174,801 — — 174,801 Other operating expenses — 3,705 — 3,705 Depreciation and amortization 64,517 57,687 — 122,204 General and administrative — — 12,295 12,295 Loss on asset impairment 262 9,986 — 10,248 Total expenses 239,580 71,378 12,295 323,253 Gain on sale of real estate — 109 — 109 Gain on insurance settlement — — — — Unrealized gain on equity securities — — 5,606 5,606 Interest income 6 — — 6 Interest expense — — ( 80,532 ) ( 80,532 ) Income (loss) before income taxes and equity in earnings of an investee ( 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 Nine Months Ended September 30, 2020 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 700,578 $ — $ — $ 700,578 Rental income 3,045 291,387 — 294,432 FF&E reserve income 201 — — 201 Total revenues 703,824 291,387 — 995,211 Expenses: Hotel operating expenses 492,906 — — 492,906 Other operating expenses — 11,029 — 11,029 Depreciation and amortization 199,955 177,602 — 377,557 General and administrative — — 37,621 37,621 Loss on asset impairment 22,622 32,880 — 55,502 Total expenses 715,483 221,511 37,621 974,615 Loss on sale of real estate — ( 9,655 ) — ( 9,655 ) Gain on insurance settlement 62,386 — — 62,386 Unrealized losses on equity securities — — 4,409 4,409 Interest income 168 — 115 283 Interest expense — — ( 223,679 ) ( 223,679 ) Loss on early extinguishment of debt — — ( 6,970 ) ( 6,970 ) 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 ) Equity in losses of an investee — — ( 4,305 ) ( 4,305 ) Net income (loss) $ 50,895 $ 60,221 $ ( 284,757 ) $ ( 173,641 ) As of September 30, 2020 Hotels Net Lease Corporate Consolidated Total assets $ 4,900,990 $ 3,804,679 $ 91,004 $ 8,796,673 25 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) For the Three Months Ended September 30, 2019 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 525,290 $ — $ — $ 525,290 Rental income 5,565 68,054 — 73,619 FF&E reserve income 863 — — 863 Total revenues 531,718 68,054 — 599,772 Expenses: Hotel operating expenses 377,895 — — 377,895 Other operating expenses 369 1,338 — 1,707 Depreciation and amortization 66,929 36,231 — 103,160 General and administrative — — 12,464 12,464 Total expenses 445,193 37,569 12,464 495,226 Unrealized loss on equity securities — — ( 3,950 ) ( 3,950 ) Interest income 177 — 511 688 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 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 Nine Months Ended September 30, 2019 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 1,521,368 $ — $ — $ 1,521,368 Rental income 16,700 193,809 — 210,509 FF&E reserve income 3,365 — — 3,365 Total revenues 1,541,433 193,809 — 1,735,242 Expenses: Hotel operating expenses 1,076,011 — — 1,076,011 Other operating expenses 1,101 3,318 — 4,419 Depreciation and amortization 200,533 101,188 — 301,721 General and administrative — — 36,906 36,906 Total expenses 1,277,645 104,506 36,906 1,419,057 Gain on sale of real estate — 159,535 — 159,535 Dividend income — — 1,752 1,752 Unrealized loss on equity securities — — ( 43,761 ) ( 43,761 ) Interest income 603 — 1,171 1,774 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 ) Equity in earnings of an investee — — 617 617 Net income (loss) $ 264,391 $ 248,838 $ ( 238,586 ) $ 274,643 As of December 31, 2019 Hotels Net Lease Corporate Consolidated Total assets $ 4,866,549 $ 4,042,831 $ 124,587 $ 9,033,967 26 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Note 13. Fair Value of Assets and Liabilities 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 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 $ 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). 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 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) Fair Value 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 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). 27 Table of Contents