Service Properties Trust 10-Q

Item 1. Financial Statements SERVICE PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (dollars in thousands, except share data) March 31, 2023 December 31, 2022 ASSETS Real estate properties: Land $ 1,902,587 $ 1,902,587 Buildings, improvements and equipment 7,637,054 7,658,282 Total real estate properties, gross 9,539,641 9,560,869 Accumulated depreciation ( 3,023,263 ) ( 2,970,133 ) Total real estate properties, net 6,516,378 6,590,736 Acquired real estate leases and other intangibles, net 241,985 252,357 Assets held for sale 1,452 121,905 Cash and cash equivalents 180,616 38,369 Restricted cash 15,220 7,051 Equity method investments 108,182 112,617 Investment in equity securities 102,485 53,055 Due from related persons 48,681 35,033 Other assets, net 267,167 277,068 Total assets $ 7,482,166 $ 7,488,191 LIABILITIES AND SHAREHOLDERS’ EQUITY Senior unsecured notes, net $ 5,158,504 $ 5,655,530 Mortgage notes payable, net 551,789 — Accounts payable and other liabilities 379,516 425,960 Due to related persons 10,452 17,909 Total liabilities 6,100,261 6,099,399 Commitments and contingencies Shareholders’ equity: Common shares of beneficial interest, $ .01 par value; 200,000,000 shares authorized; 165,445,995 and 165,452,566 , shares issued and outstanding, respectively 1,655 1,655 Additional paid in capital 4,555,328 4,554,861 Cumulative other comprehensive income 2,169 2,383 Cumulative net income available for common shareholders 2,529,229 2,503,279 Cumulative common distributions ( 5,706,476 ) ( 5,673,386 ) Total shareholders’ equity 1,381,905 1,388,792 Total liabilities and shareholders’ equity $ 7,482,166 $ 7,488,191 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 (LOSS) (Unaudited) (amounts in thousands, except per share data) Three Months Ended March 31, 2023 2022 Revenues: Hotel operating revenues $ 334,796 $ 297,406 Rental income 94,413 96,358 Total revenues 429,209 393,764 Expenses: Hotel operating expenses 299,566 290,343 Other operating expenses 3,905 2,269 Depreciation and amortization 100,039 104,113 General and administrative 10,911 11,989 Transaction related costs 887 1,177 Loss on asset impairment, net — 5,500 Total expenses 415,308 415,391 Other operating income: Gain on sale of real estate, net 41,898 5,548 Unrealized gains (losses) on equity securities, net 49,430 ( 10,260 ) Interest income 2,786 273 Interest expense (including amortization of debt issuance costs and debt discounts and premiums of $ 5,232 and $ 5,913 , respectively) ( 81,580 ) ( 92,344 ) Loss on early extinguishment of debt ( 44 ) — Income (loss) before income taxes and equity in earnings of an investee 26,391 ( 118,410 ) Income tax benefit (expense) 3,780 ( 695 ) Equity in losses of an investee ( 4,221 ) ( 717 ) Net income (loss) 25,950 ( 119,822 ) Other comprehensive income: Equity interest in investee’s unrealized (losses) gains ( 214 ) 4 Other comprehensive (loss) income ( 214 ) 4 Comprehensive income (loss) $ 25,736 $ ( 119,818 ) Weighted average common shares outstanding (basic and diluted) 164,867 164,667 Net loss per common share (basic and diluted) $ 0.16 $ ( 0.73 ) 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, 2022 165,452,566 $ 1,655 $ ( 5,673,386 ) $ 4,554,861 $ 2,503,279 $ 2,383 $ 1,388,792 Net income — — — — 25,950 — 25,950 Equity in unrealized losses of investees — — — — — ( 214 ) ( 214 ) Common share grants — — — 514 — — 514 Common share repurchases ( 4,971 ) — — ( 46 ) — — ( 46 ) Common share forfeitures ( 1,600 ) — — ( 1 ) ( 1 ) Distributions — — ( 33,090 ) — — — ( 33,090 ) Balance at March 31, 2023 165,445,995 $ 1,655 $ ( 5,706,476 ) $ 4,555,328 $ 2,529,229 $ 2,169 $ 1,381,905 Balance at December 31, 2021 165,092,333 $ 1,651 $ ( 5,635,342 ) $ 4,552,558 $ 2,635,660 $ 779 $ 1,555,306 Net loss — — — — ( 119,822 ) — ( 119,822 ) Equity in unrealized gains of investees — — — — — 4 4 Common share grants — — — 462 — — 462 Common share forfeitures ( 800 ) — — — — — — Distributions — — ( 1,651 ) — — — ( 1,651 ) Balance at March 31, 2022 165,091,533 $ 1,651 $ ( 5,636,993 ) $ 4,553,020 $ 2,515,838 $ 783 $ 1,434,299 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents SERVICE PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (dollars in thousands) For the Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income (loss) $ 25,950 $ ( 119,822 ) Adjustments to reconcile net income (loss) to cash used in operating activities: Depreciation and amortization 100,039 104,113 Net amortization of debt issuance costs, discounts and premiums as interest 5,232 5,913 Straight line rental income 2,448 1,973 Loss on early extinguishment of debt 44 — Loss on asset impairment, net — 5,500 Unrealized (gains) losses on equity securities, net ( 49,430 ) 10,260 Equity in losses of an investee 4,221 717 Gain on sale of real estate ( 41,898 ) ( 5,548 ) Other non-cash income, net ( 781 ) ( 836 ) Changes in assets and liabilities: Due from related persons ( 16,889 ) 395 Other assets 4,254 6,729 Accounts payable and other liabilities ( 18,492 ) ( 21,980 ) Due to related persons ( 2,325 ) 603 Net cash provided by (used in) operating activities 12,373 ( 11,983 ) Cash flows from investing activities: Real estate improvements ( 28,551 ) ( 26,561 ) Hotel managers’ purchases with restricted cash ( 1,558 ) ( 787 ) Net proceeds from sale of real estate 144,361 66,218 Net cash provided by investing activities 114,252 38,870 Cash flows from financing activities: Proceeds from mortgage notes payable, net of discounts 576,946 — Repayment of mortgage notes payable ( 163 ) — Repayment of senior unsecured notes ( 500,000 ) — Deferred financing costs ( 19,856 ) ( 82 ) Repurchase of common shares ( 46 ) — Distributions to common shareholders ( 33,090 ) ( 1,651 ) Net cash provided by (used in) financing activities 23,791 ( 1,733 ) Increase in cash and cash equivalents and restricted cash 150,416 25,154 Cash and cash equivalents and restricted cash at beginning of period 45,420 947,418 Cash and cash equivalents and restricted cash at end of period $ 195,836 $ 972,572 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 $ 180,616 $ 969,609 Restricted cash 15,220 2,963 Total cash and cash equivalents and restricted cash $ 195,836 $ 972,572 Supplemental cash flow information: Cash paid for interest $ 91,614 $ 102,164 Cash paid for income taxes $ 37 $ 581 Non-cash investing activities: Real estate improvements accrued, not paid $ 10,642 $ 7,901 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 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 service-focused retail net lease properties. At March 31, 2023, we owned, directly and through our subsidiaries, 220 hotels and 765 net lease properties. 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 condensed consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2022, or our 2022 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period, have been included. These condensed consolidated financial statements include our accounts and the accounts of our subsidiaries, all of which are 100 % owned directly or indirectly by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include the allowance for credit losses, purchase price allocations, useful lives of fixed assets, impairment of real estate and related intangibles. We have determined that each of our wholly owned taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification ™ . We have concluded that we must consolidate each of our wholly owned TRSs because we are the entity with the power to direct the activities that most significantly impact such VIEs’ performance and we have the obligation to absorb losses or the right to receive benefits from each VIE that could be significant to the VIE and are, therefore, the primary beneficiary of each VIE. The assets of our TRSs were 156,423 and $ 142,542 as of March 31, 2023 and December 31, 2022, respectively, and consist primarily of our TRSs’ investment in Sonesta Holdco Corporation’s common stock and amounts due from and working capital advances to certain of our hotel managers. The liabilities of our TRSs were 105,826 and $ 82,454 as of March 31, 2023 and December 31, 2022, respectively, and consist primarily of amounts payable to certain of our hotel managers. The assets of our TRSs are available to satisfy our TRSs’ obligations and we have guaranteed certain obligations of our TRSs. Note 2. Revenue Recognition We report hotel operating revenues for managed hotels in our condensed consolidated statements of comprehensive income (loss). We generally recognize hotel operating revenues, consisting primarily of room and food and beverage sales, when goods and services are provided. We report rental income for leased properties in our condensed consolidated statements of comprehensive income (loss). We recognize rental income from operating leases on a straight line basis over the term of the lease agreements. We reduced rental income by $ 2,448 and $ 1,973 for the three months ended March 31, 2023 and 2022, respectively, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TravelCenters of America Inc., or TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight line basis. See Notes 5 and 10 for further information regarding our TA leases. Due from related persons includes $ 4,281 and $ 7,522 and other assets, net, includes $ 33,040 and $ 32,247 of straight line rent receivables at March 31, 2023 and December 31, 2022, respectively. 7 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Certain of our lease agreements require additional percentage rent if gross revenues of our properties exceed certain thresholds defined in our lease agreements. We may determine percentage rent due to us under our leases monthly, quarterly or annually, depending on the specific lease terms, and recognize it when all contingencies are met and the rent is earned. We recorded percentage rent of $ 343 and $ 756 for the three months ended March 31, 2023 and 2022, respectively. We had deferred estimated percentage rent of $ 2,385 and $ 2,499 for the three months ended March 31, 2023 and 2022, respectively. See Note 5 for further information on this deferred estimated percentage rent. Note 3. Weighted Average Common Shares We calculate basic earnings per common share under the two class method. We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method. Unvested share awards, and the related impact on earnings, are considered when calculating diluted earnings per share. For the three months ended March 31, 2023 and 2022, there were no dilutive common shares and certain unvested common shares were not included in the calculation of diluted earnings per share because to do so would have been antidilutive. Note 4. Real Estate Properties At March 31, 2023, we owned 220 hotels with an aggregate of 37,527 rooms or suites and 765 service-oriented retail properties with an aggregate of 13,319,743 square feet that are primarily subject to “triple net” leases, or net leases where the tenant is generally responsible for payment of operating expenses and capital expenditures of the property during the lease term. Our properties had an aggregate undepreciated carrying value of $ 9,541,018 , including $ 1,377 related to properties classified as held for sale as of March 31, 2023. We made capital expenditures at certain of our properties of $ 22,278 during the three months ended March 31, 2023. Dispositions During the three months ended March 31, 2023, we sold 18 properties for an aggregate sales price of $ 157,230 , excluding closing costs, as presented in the table below. The sales of these properties do not represent significant dispositions, nor do they represent a strategic shift. As a result, the results of the operations of these properties are included in continuing operations through the date of sale in our condensed consolidated statements of comprehensive income (loss). Quarter Sold Property Type Number of Properties Rooms or Suites Gross Sales Price Gain on Sale Properties sold during the three months ended March 31, 2023 Q1 2023 Hotels 18 2,526 $ 157,230 $ 41,898 As of March 31, 2023, we had four net lease properties with 9,667 square feet and an aggregate carrying value of $ 1,377 classified as held for sale. From April 1, 2023 through May 5, 2023, we sold two net lease properties with 2,384 square feet and a carrying value of $ 648 for a sales price of $ 620 . We continue to market two net lease properties with 7,283 square feet for sale. See Note 5 for further information on our property sales. Note 5. Management Agreements and Leases As of March 31, 2023, we owned 220 hotels which were included in four operating agreements and 765 service oriented retail properties net leased to 179 tenants. We do not operate any of our properties. At March 31, 2023, all 220 of our hotels were operated by subsidiaries of the following companies: Sonesta Holdco Corporation, or Sonesta ( 194 hotels), Hyatt Hotels Corporation, or Hyatt ( 17 hotels), Radisson Hospitality, Inc., or Radisson ( eight hotels), and InterContinental Hotels Group, plc, or IHG ( one hotel). At March 31, 2023, we owned 765 net lease properties with 179 tenants, including 177 travel centers leased to TA, our largest tenant. Hereinafter, these companies are sometimes referred to as our managers and/or tenants, or collectively, operators. 8 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Hotel agreements Sonesta agreement. As of March 31, 2023, Sonesta managed 39 of our full-service hotels, 111 of our extended stay hotels and 44 of our select service hotels pursuant to management agreements for all of the hotels. The hotels Sonesta managed for us comprised approximately 48.4 % of our total historical real estate investments. We sold 65 Sonesta branded hotels during the calendar year ended December 31, 2022, and we sold an additional two Sonesta branded hotels during the three months ended March 31, 2023. See Note 4 for further information regarding our disposition activity. Our Sonesta agreement provides that we are paid an annual owner’s priority return if gross revenues of the hotels, after payment of hotel operating expenses and management and related fees (other than Sonesta’s incentive fee, if applicable), are sufficient to do so. The Sonesta agreement further provides that we are paid an additional return equal to 80 % of the operating profits, as defined therein, after reimbursement of owner or manager advances, reserve established for the regular refurbishment of our hotels, or FF&E reserve, escrows and Sonesta’s incentive fee, if applicable. We realized returns of $ 30,237 and $ 3,029 during the three months ended March 31, 2023 and 2022, respectively, under our Sonesta agreement. Pursuant to our Sonesta agreement, we incurred management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third-party reservation transmission fees of $ 26,136 and $ 23,797 for the three months ended March 31, 2023 and 2022, respectively. These fees and costs are included in hotel operating expenses in our condensed consolidated statements of comprehensive income (loss). In addition, we incurred procurement and construction supervision fees payable to Sonesta of $ 207 and $ 285 for the three months ended March 31, 2023 and 2022, respectively, which amounts have been capitalized in our condensed consolidated balance sheets and are depreciated over the estimated useful lives of the related capital assets. Our Sonesta agreement requires us to fund capital expenditures that we approve at the hotels. We incurred capital expenditures for hotels included in our Sonesta agreement in an aggregate amount of $ 17,643 and $ 19,067 during the three months ended March 31, 2023 and 2022, respectively, which resulted in increases in our contractual annual owner’s priority returns of $ 1,059 and $ 1,144 , respectively. Our annual priority return under our Sonesta agreement as of March 31, 2023 was $ 331,469 . We owed Sonesta $ 5,555 and $ 4,633 for capital expenditures and other reimbursements at March 31, 2023 and December 31, 2022, respectively. Sonesta owed us $ 21,403 and $ 2,975 in owner’s priority returns and other amounts as of March 31, 2023 and December 31, 2022, 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. Our agreement with Sonesta requires that 5 % of the hotel gross revenues be escrowed for future capital expenditures as FF&E reserves, subject to available cash flows after payment of the owner’s priority returns due to us. No FF&E escrow deposits were required during the three months ended March 31, 2023 or 2022. We are required to maintain working capital for each of our hotels managed by Sonesta and have advanced a fixed amount based on the number of rooms in each hotel to meet the cash needs for hotel operations. As of March 31, 2023 and December 31, 2022, we had advanced $ 47,990 and $ 48,580 , respectively, of initial working capital to Sonesta net of any working capital returned to us on termination of the applicable management agreements in connection with hotels we have sold. These amounts are included in other assets in our condensed consolidated balance sheets. Any remaining working capital would be returned to us upon termination in accordance with the terms of our Sonesta agreement. See Notes 6 and 10 for further information regarding our relationship, agreements and transactions with Sonesta. Hyatt agreement. As of March 31, 2023, Hyatt managed 17 of our select service hotels pursuant to a portfolio management agreement that expires on March 31, 2031, or our Hyatt agreement, and provides that, as of March 31, 2023, we are to be paid an annual owner’s priority return of $ 12,773 . Any returns we receive from Hyatt are currently limited to the hotels’ available cash flows, if any, after payment of operating expenses. Hyatt has provided us with a $ 30,000 limited guarantee for 75 % of the aggregate annual owner's priority returns due to us that will become effective upon substantial completion of planned renovations of the hotels which we currently expect to occur by the end of 2023. We realized returns of $ 2,323 and $ 1,863 during the three months ended March 31, 2023 and 2022, respectively, under our Hyatt agreement. We did not incur capital expenditures for any of the hotels included in our Hyatt agreement during the three months ended March 31, 2023. We incurred capital expenditures for certain hotels included in our Hyatt agreement of $ 10,843 during the three months ended March 31, 2022, which resulted in an aggregate increase in our contractual annual owner’s priority returns of $ 651 . 9 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Radisson agreement . As of March 31, 2023, Radisson managed eight of our full service hotels pursuant to a portfolio management agreement that expires on July 31, 2031, or our Radisson agreement, and provides that we are to be paid an annual owner’s priority return of $ 10,200 . Radisson has provided us with a $ 22,000 limited guarantee for 75 % of the aggregate annual owner's priority returns due to us that became effective on January 1, 2023, subject to adjustment for planned renovations of certain of the hotels we currently expect to occur by the end of 2023. We realized returns of $ 1,565 and $ 454 during the three months ended March 31, 2023 and 2022, respectively, under our Radisson agreement. During the three months ended March 31, 2023, the hotels under this agreement generated cash flows that were less than the guaranteed owner’s priority level due to us for the period, and we reduced hotel operating expenses by $ 335 to record the guaranteed amount of the shortfall due from Radisson. The available balance of the guaranty was $ 21,665 as of March 31, 2023. We incurred capital expenditures of $ 2,375 for the hotels included in our Radisson agreement for the three months ended March 31, 2023 which resulted in an aggregate increase in our contractual owner’s priority returns of $ 143 . We did no t incur capital expenditures for any of the hotels included in our Radisson agreement during the three months ended March 31, 2022. Marriott agreement . As of March 31, 2023, we have sold all 16 hotels previously managed by Marriott. We realized net operating losses of $ 2,762 and realized returns of $ 323 during the three months ended March 31, 2023 and 2022, respectively, under our Marriott agreement. We did not incur capital expenditures for any of the hotels included in our Marriott agreement during the three months ended March 31, 2023 or 2022. Other. Our management agreement with IHG for one hotel expires on January 31, 2026. We realized returns of $ 763 and $ 130 during the three months ended March 31, 2023 and 2022, respectively under our IHG agreement. Any returns we receive from IHG are limited to the hotel’s available cash flows, if any, after payment of operating expenses. Net lease portfolio As of March 31, 2023, we owned 765 service-oriented retail net lease properties with 13,319,743 square feet with leases requiring annual minimum rents of $ 369,756 with a weighted (by annual minimum rents) average remaining lease term of 9.4 years. The portfolio was 97.4 % leased by 179 tenants operating under 139 brands in 21 distinct industries. TA leases. TA is our largest tenant, leasing 30.0 % of our total historical real estate investments as of March 31, 2023. We lease to TA a total of 177 travel centers under five leases that expire between 2029 and 2035, subject to TA’s right to extend those leases, and require annual minimum rents of $ 246,110 as of March 31, 2023. In addition, TA was required to pay us previously deferred rent obligations in quarterly installments of $ 4,404 through January 31, 2023. TA paid us the final quarterly installment owed to us in January 2023. We recognized rental income from our TA leases of $ 62,141 and $ 62,038 for the three months ended March 31, 2023 and 2022, respectively. Rental income was reduced by $ 3,241 and $ 3,344 for the three months ended March 31, 2023 and 2022, respectively, to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight line basis. As of March 31, 2023 and December 31, 2022, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of $ 27,492 and $ 30,764 , respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets. Our TA leases require TA to pay us percentage rent based upon increases in certain sales. We recognize percentage rent due under our TA leases as rental income when all contingencies are met. We did not recognize any percentage rent during the three months ended March 31, 2023 or 2022 under our TA leases. We had aggregate deferred percentage rent under our TA leases of $ 2,385 and $ 2,391 for the three months ended March 31, 2023 and 2022, respectively. Our TA leases do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components. Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent equal to 8.5 % of the amounts funded. We did not fund any capital improvements to our properties that we leased to TA during either of the three months ended March 31, 2023 or 2022. 10 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) On February 15, 2023, we and certain of our subsidiaries entered into a consent and amendment agreement, or the Consent Agreement, with TA and its subsidiary, TA Operating LLC, or together, the TCA Parties, and BP Products North America Inc., or BP, pursuant to which we and our applicable subsidiaries: (1) consented to TA’s entering into an agreement and plan of merger, or the TA Merger Agreement, with BP and its merger subsidiary, pursuant to which BP will acquire TA in a merger transaction, or the TA Merger, for cash consideration of $ 86.00 per share of the outstanding shares of common stock, par value $ 0.001 per share, of TA, or the TA common shares, and to the consummation of the TA Merger and the other transactions contemplated by the TA Merger Agreement; (2) agreed to amend and restate our subsidiaries’ existing lease and guaranty agreements with the applicable TCA Parties, effective at the time of the TA Merger; and (3) agreed to sell to TA certain tradenames and trademarks associated with TA’s business that we or our applicable subsidiaries own at their current book value of $ 89,400 , effective at the time of the TA Merger. The TA Merger is subject to various customary conditions to closing, including the approval of TA stockholders owning a majority of the TA common shares outstanding, as well as regulatory approvals. The parties currently expect that the TA Merger will be completed during the second quarter of 2023. Pursuant to the amended and restated lease agreements to be entered into at the effective time of the TA Merger, or the A&R Leases, for 176 of our travel center properties, the aggregate annual minimum rent due to our applicable subsidiaries will be $ 254,000 , with annual 2 % increases throughout the initial term and any renewal terms of the A&R Leases, and there will be no percentage rent requirement. The A&R Leases will each have an initial term of 10 years, with five 10-year extension options, and TA will prepay $ 188,000 of rent under the A&R Leases at the effective time of the TA Merger and will receive monthly rent credits totaling $ 25,000 per year over the 10-year initial term of the A&R Leases. In addition, TA will have a right of first offer with respect to certain potential sales of travel center properties included in the A&R Leases. Pursuant to the amended and restated guaranty amendments to be entered into at the effective time of the TA Merger, or the A&R Guarantees, BP Corporation North America Inc. will guarantee payment under each of the A&R Leases. BP Corporation North America Inc.’s obligations under the A&R Guarantees will be limited by an initial aggregate cap of approximately $ 3,040,000 . For more information regarding our relationship with TA, including the TA Merger and related transactions, see Notes 6 and 10. Our other net lease agreements generally provide for minimum rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We recognized rental income from our net lease properties (excluding TA) of $ 32,272 and $ 34,320 for the three months ended March 31, 2023 and 2022, respectively, which included $ 793 and $ 1,371 , respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight line basis. We continually review receivables related to rent, straight line rent and property operating expense reimbursements and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The review includes an assessment of whether substantially all of the amounts due under a tenant’s lease are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as cash is received. We recognize all changes in the collectability assessment for an operating lease as an adjustment to rental income. We recorded reserves for uncollectable amounts of $ 3,540 for the three months ended March 31, 2023 and reduced our reserves for uncollectable amounts and increased rental income by $ 507 for the three months ended March 31, 2022 based on our assessment of the collectability of rents. We had reserves for uncollectable rents of $ 11,209 and $ 7,697 as of March 31, 2023 and December 31, 2022, respectively, included in other assets in our condensed consolidated balance sheets. 11 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Note 6. Other Investments Equity method investment As of both March 31, 2023 and December 31, 2022, we owned approximately 34 % of Sonesta’s outstanding common stock. We account for our 34 % non-controlling interest in Sonesta under the equity method of accounting. As of both March 31, 2023 and December 31, 2022, our investment in Sonesta had a carrying value of $ 108,182 and $ 112,617 , respectively. The cost basis of our investment in Sonesta exceeded our proportionate share of Sonesta’s total stockholders’ equity book value on the date of acquisition of our initial equity interest in Sonesta, February 27, 2020, by an aggregate of $ 8,000 . As required under GAAP, we are amortizing this difference to equity in earnings of an investee over 31 years, the weighted average remaining useful life of the real estate assets and intangible assets and liabilities owned by Sonesta as of the date of our acquisition. We recorded amortization of the basis difference of $ 65 in each of the three months ended March 31, 2023 and 2022. We recognized losses of $ 4,156 and $ 652 related to our investment in Sonesta for the three months ended March 31, 2023 and 2022, respectively. These amounts are included in equity in losses of an investee in our condensed consolidated statements of comprehensive income (loss). We recorded a liability for the fair value of our initial investment in Sonesta, as no cash consideration was exchanged related to the modification of our management agreement with, and investment in, Sonesta. This liability for our investment in Sonesta is included in accounts payable and other liabilities in our condensed consolidated balance sheet and is being amortized on a straight line basis through January 31, 2037, as a reduction to hotel operating expenses in our condensed consolidated statements of comprehensive income (loss). We reduced hotel operating expenses by $ 621 for each of the three months ended March 31, 2023 and 2022, respectively, for amortization of this liability. As of March 31, 2023 and December 31, 2022, the unamortized balance of this liability was $ 34,342 and $ 34,963 , respectively. In 2022, we funded an aggregate of $ 45,470 of capital contributions to Sonesta related to Sonesta’s acquisition of a portfolio of four hotels located in New York, New York. We continue to maintain our 34 % ownership in Sonesta after giving effect to this funding. Investment in equity securities As of both March 31, 2023 and December 31, 2022, we owned 1,184,797 shares of TA common stock, representing approximately 7.8 % of TA’s outstanding shares of common stock, and reported them at fair value based on quoted market prices (Level 1 inputs). Our TA shares had a carrying value of $ 102,485 and $ 53,055 as of March 31, 2023 and December 31, 2022, respectively. Our historical cost basis for these shares was $ 24,418 as of both March 31, 2023 and December 31, 2022. We recorded an unrealized gain of $ 49,430 and an unrealized loss of $ 10,260 for the three months ended March 31, 2023 and March 31, 2022, respectively, to adjust the carrying value of our investment in shares of TA common stock to its fair value. In connection with the TA Merger Agreement, we entered into a voting agreement, or the Voting Agreement, with BP, pursuant to which, among other things, we agreed to vote all of our TA common shares in favor of the TA Merger and against any alternative acquisition proposal, including any superior proposal, as defined. We also agreed not to sell or transfer our TA common shares while the Voting Agreement remains in effect. Our obligations under the Voting Agreement terminate upon the earliest to occur of the effective time of the TA Merger, the valid termination of the TA Merger Agreement or the effective date of a written agreement by us and BP to terminate the Voting Agreement. See Notes 5 and 10 for further information regarding our relationships, agreements and transactions with TA, including the TA Merger Agreement and related transactions, and Note 13 for further information regarding our investment in TA. Note 7. Indebtedness Our principal debt obligations at March 31, 2023 were: (1) $ 5,200,000 aggregate outstanding principal amount of senior unsecured notes; and (2) $ 610,037 aggregate outstanding principal amount of net lease mortgage notes. We had no amounts outstanding under our revolving credit facility as of March 31, 2023. 12 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Our revolving credit facility is governed by a credit agreement, or our credit agreement, with a syndicate of institutional lenders and has a maturity date of July 15, 2023. We can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. We are required to pay interest on borrowings under our revolving credit facility at the rate of LIBOR plus a premium, which was 250 basis points per annum, subject to a LIBOR floor of 0.50 %, as of March 31, 2023. We also pay a facility fee, which was 30 basis points per annum at March 31, 2023, on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon, among other things, changes to our credit ratings. As of March 31, 2023, the annual interest rate payable on borrowings under our revolving credit facility was 7.36 %. We had no borrowings outstanding under our revolving credit facility for the three months ended March 31, 2023. The weighted average annual interest rate for borrowings under our revolving credit facility was 2.85 % for the three months ended March 31, 2022. Our revolving credit facility is secured by 73 properties with an undepreciated book value of $ 1,560,880 as of March 31, 2023 to secure our obligations under the credit agreement. Our debt agreements 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, ceasing to act as our business manager. Our debt agreements also contain covenants, including those that restrict our ability to incur debts or to make distributions under certain circumstances and generally require us to maintain certain financial ratios. We believe we were in compliance with the terms and conditions of our debt agreements as of March 31, 2023. On February 10, 2023, our wholly owned, special purpose bankruptcy remote, indirect subsidiary, SVC ABS LLC, or the Issuer, issued $ 610,200 in aggregate principal amount of net lease mortgage notes. Net proceeds from this issuance were $ 550,564 after initial purchaser discounts and offering costs. The Issuer is a separate legal entity and is the sole owner of its assets and liabilities. The assets of the Issuer are not available to pay or otherwise satisfy obligations to the creditors of any owners or affiliates of the Issuer. The Class A notes and the Class B notes require monthly principal repayments at an annualized rate of 0.50 % and 0.25 % of the balance outstanding, respectively, and the Class C notes require interest payments only, with balloon payments due at maturity. The notes mature in February 2028 and may be redeemed without penalty 24 months prior to the scheduled maturity date beginning in February 2026. The notes are non-recourse and are secured by 308 net lease retail properties owned by the Issuer which require annual minimum rents of $ 65,381 and had a gross book value of $ 754,913 , as of March 31, 2023. Our net lease mortgage notes are summarized below: Note Class Principal Outstanding as of March 31, 2023 Coupon Rate Term (in years) Maturity Class A $ 304,873 5.15 % 5 February 2028 Class B 172,964 5.55 % 5 February 2028 Class C 132,200 6.70 % 5 February 2028 Total / weighted average $ 610,037 5.60 % On March 8, 2023, we redeemed at par all of our outstanding 4.50 % senior notes due in 2023 for a redemption price equal to the principal amount of $ 500,000 , plus accrued and unpaid interest. As a result of the redemption, we recorded a loss on early extinguishment of debt of $ 44 in the three months ended March 31, 2023, which represented the unamortized issuance costs related to these notes. 13 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Note 8. Shareholders' Equity Distributions During the three months ended March 31, 2023, 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 12, 2023 January 23, 2023 February 16, 2023 $ 0.20 $ 33,090 On April 13, 2023, we declared a regular quarterly distribution to common shareholders of record as of April 24, 2023 of $ 0.20 per share, or approximately $ 33,090 . We expect to pay this amount on or about May 18, 2023. Share Purchases During the three months ended March 31, 2023, we purchased an aggregate of 4,971 of our common shares valued at a weighted average price of $ 9.28 per share, from certain former officers and employees of RMR in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market values based upon the trading price of our common shares at the close of trading on the Nasdaq Stock Market LLC, or Nasdaq, on the purchase dates. Note 9. Business and Property Management Agreements with RMR We have no employees. The personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR 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, the office building component of one of our hotels and major renovation or repositioning activities at our hotels that we may request RMR to manage from time to time. We recognized net business management fees payable to RMR of $ 8,385 and $ 9,878 for the three months ended March 31, 2023 and 2022, respectively. Based on our common share total return, as defined in our business management agreement, as of each of March 31, 2023 and 2022, no incentive fees are included in the net business management fees we recognized for the three months ended March 31, 2023 or 2022. The actual amount of annual incentive fees for 2023, 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, 2023, and will be payable in January 2024. We did not incur an incentive fee payable to RMR for the year ended December 31, 2022. We include business management fee amounts in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). We recognized property management and construction supervision fees payable to RMR of $ 1,412 and $ 1,663 for the three months ended March 31, 2023 and 2022, respectively. Of those amounts, for the three months ended March 31, 2023 and 2022, $ 945 and $ 1,018 , respectively, of property management fees were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 467 and $ 645 , respectively, of construction and supervision fees were capitalized for the three months ended March 31, 2023 and 2022. The amounts capitalized are included in building, improvements and equipment in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets. We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR on our behalf. We are generally not responsible for payment of RMR’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR employees assigned to work exclusively or partly at our net lease properties, our share of the wages, benefits and other related costs of RMR's centralized accounting personnel, our share of RMR’s costs for providing our internal audit function, and as otherwise agreed. We reimbursed RMR $ 1,003 and $ 764 for these expenses and costs for the three months ended March 31, 2023 and 2022, 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 (loss). 14 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, The RMR Group, Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR is a majority owned operating subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., the chair of the board of directors, a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR. John G. Murray, our other Managing Trustee and our President and Chief Executive Officer until March 31, 2022, also serves as an officer and employee of RMR, and each of our other officers serves as an officer of RMR. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR or its subsidiaries provide management services. Adam Portnoy serves as chair of the boards and as a managing trustee or managing director of those companies. Other officers of RMR, including Mr. Murray and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies. TA . We lease 177 of our travel centers to TA under our TA leases. As of March 31, 2023, we owned approximately 7.8 % of TA’s outstanding shares of common stock. RMR provides management services to both us and TA, and Adam D. Portnoy also serves as the chair of the board of directors and as a managing director of TA and, as of March 31, 2023, beneficially owned 661,505 shares of TA common stock (including through RMR), representing approximately 4.4 % of TA’s outstanding shares of common stock. See Notes 5, 6 and 13 for further information regarding our relationships, agreements, transactions and investments with TA. Sonesta. Sonesta is a private company. Mr. Portnoy is the largest owner and controlling shareholder and a director of Sonesta. One of Sonesta’s other directors is our other Managing Trustee and former President and Chief Executive Officer, is Sonesta’s president and chief executive officer, and is an officer and employee of RMR. Sonesta’s other director serves as RMR’s and RMR Inc.’s executive vice president, general counsel and secretary, as a managing director of RMR Inc. and as our Secretary. RMR also provides certain services to Sonesta. As of March 31, 2023, we owned approximately 34 % of Sonesta and Sonesta managed 194 of our hotels. See Notes 4, 5 and 6 for further information regarding our relationships, agreements and transactions with Sonesta. Our Manager, RMR. We have two agreements with RMR to provide management services to us. See Note 9 for further information regarding our management agreements with RMR. In connection with the TA Merger Agreement, on February 15, 2023, RMR entered into a voting agreement with BP pursuant to which RMR agreed to vote all of its shares of TA common stock in favor of the TA Merger and against any alternative acquisition proposal, including any superior proposal, as defined in the TA Merger Agreement. For further information about these and certain other such relationships and certain other related person transactions, refer to our 2022 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 March 31, 2023, we recognized an income tax benefit of $ 3,780 , which includes $ 2,297 of state tax benefit and $ 1,483 of foreign tax benefit. During the three months ended March 31, 2022, we recognized an income tax expense of $ 695 , which includes $ 581 of state tax expense and $ 114 of foreign tax expense. 15 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 March 31, 2023 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 334,796 $ — $ — $ 334,796 Rental income — 94,413 — 94,413 Total revenues 334,796 94,413 — 429,209 Expenses: Hotel operating expenses 299,566 — — 299,566 Other operating expenses — 3,905 — 3,905 Depreciation and amortization 53,385 46,654 — 100,039 General and administrative — — 10,911 10,911 Transaction related costs — — 887 887 Total expenses 352,951 50,559 11,798 415,308 Gain on sale of real estate, net 41,898 — — 41,898 Unrealized gains on equity securities, net — — 49,430 49,430 Interest income 30 2 2,754 2,786 Interest expense — ( 6,322 ) ( 75,258 ) ( 81,580 ) Loss on early extinguishment of debt — — ( 44 ) ( 44 ) Income (loss) before income taxes and equity in earnings of an investee 23,773 37,534 ( 34,916 ) 26,391 Income tax benefit — — 3,780 3,780 Equity in losses of an investee — — ( 4,221 ) ( 4,221 ) Net income (loss) $ 23,773 $ 37,534 $ ( 35,357 ) $ 25,950 As of March 31, 2023 Hotels Net Lease Corporate Consolidated Total assets $ 3,833,782 $ 3,229,292 $ 419,092 $ 7,482,166 16 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) For the Three Months Ended March 31, 2022 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 297,406 $ — $ — $ 297,406 Rental income — 96,358 — 96,358 Total revenues 297,406 96,358 — 393,764 Expenses: Hotel operating expenses 290,343 — — 290,343 Other operating expenses — 2,269 — 2,269 Depreciation and amortization 56,162 47,951 — 104,113 General and administrative — — 11,989 11,989 Transaction related costs — — 1,177 1,177 Loss on asset impairment 5,568 ( 68 ) — 5,500 Total expenses 352,073 50,152 13,166 415,391 Gain on sale of real estate, net 4,990 558 — 5,548 Unrealized loss on equity securities, net — — ( 10,260 ) ( 10,260 ) Interest income — — 273 273 Interest expense — — ( 92,344 ) ( 92,344 ) Income (loss) before income taxes and equity in earnings of an investee ( 49,677 ) 46,764 ( 115,497 ) ( 118,410 ) Income tax expense — — ( 695 ) ( 695 ) Equity in losses of an investee — — ( 717 ) ( 717 ) Net income (loss) $ ( 49,677 ) $ 46,764 $ ( 116,909 ) $ ( 119,822 ) As of December 31, 2022 Hotels Net Lease Corporate Consolidated Total assets $ 3,882,701 $ 3,376,295 $ 229,195 $ 7,488,191 Note 13. Fair Value of Assets and Liabilities The table below presents certain of our assets carried at fair value at March 31, 2023, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset. Fair Value at Reporting Date Using Description Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Recurring Fair Value Measurement Assets: Investment in TA (1) $ 102,485 $ 102,485 $ — $ — (1) See Note 6 for further information regarding our investment in TA. In addition to the assets included in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, revolving credit facility, net lease mortgage notes payable and senior notes. At March 31, 2023 and December 31, 2022, 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: 17 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) March 31, 2023 December 31, 2022 Carrying Value (1) Fair Value Carrying Value (1) Fair Value Senior Unsecured Notes, due 2023 at 4.50 % $ — $ — $ 499,925 $ 491,345 Senior Unsecured Notes, due 2024 at 4.65 % 349,612 341,250 349,510 334,292 Senior Unsecured Notes, due 2024 at 4.35 % 822,855 789,121 822,487 749,983 Senior Unsecured Notes, due 2025 at 4.50 % 348,665 321,615 348,493 301,893 Senior Unsecured Notes, due 2025 at 7.50 % 794,257 789,400 793,673 762,344 Senior Unsecured Notes, due 2026 at 5.25 % 346,754 306,250 346,472 292,282 Senior Unsecured Notes, due 2026 at 4.75 % 447,889 375,597 447,736 354,128 Senior Unsecured Notes, due 2027 at 4.95 % 397,105 338,604 396,916 315,040 Senior Unsecured Notes, due 2027 at 5.50 % 444,786 402,057 444,505 387,522 Net Lease Mortgage Notes, due 2028 at 5.60 % 551,789 589,961 — — Senior Unsecured Notes, due 2028 at 3.95 % 394,493 312,148 394,206 283,996 Senior Unsecured Notes, due 2029 at 4.95 % 419,882 325,686 419,684 293,718 Senior Unsecured Notes, due 2030 at 4.375 % 392,206 298,476 391,923 264,280 Total financial liabilities $ 5,710,293 $ 5,190,165 $ 5,655,530 $ 4,830,823 (1) Carrying value includes unamortized discounts and premiums and issuance costs. At March 31, 2023 and December 31, 2022, we estimated the fair values of our senior notes using an average of the bid and ask price of our then outstanding issuances of senior notes (Level 2 inputs). At March 31, 2023, we estimated the fair value of our net lease mortgage notes using discounted cash flow analyses and current prevailing market rates as of the measurement date (Level 3 inputs). As Level 3 inputs are unobservable, our estimated value may differ materially from the actual fair value. 18 Table of Contents