Service Properties Trust 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2022 Annual Report. Overview (dollar amounts in thousands, except share amounts and per-room hotel data) We are a REIT organized under the laws of the State of Maryland. As of March 31, 2023, we owned 985 properties in 46 states, the District of Columbia, Canada and Puerto Rico. In response to inflationary pressures, the U.S. Federal Reserve has increased the federal funds rate multiple times since the beginning of 2022 and has signaled that further increases are likely to occur. These inflationary pressures and rising interest rates in the United States and globally have given rise to increasing concerns that the U.S. economy may soon enter an economic recession and they have caused disruptions in the financial markets. Consumer confidence, corporate travel and lodging demand will continue to be affected by economic and market conditions, unemployment levels, work from home policies, use of technologies and broader economic trends. Increased labor costs and other price inflation may continue to negatively impact our hotel operations and the operations of our tenants. An economic recession or continued or intensified disruptions in the financial markets could adversely affect our financial condition, operations at our hotels, our tenants, and their ability or willingness to renew our leases or pay rent to us, may restrict our ability to obtain new or replacement financing, would likely increase our cost of capital, and may cause the values of our properties and of our securities to decline. Management Agreements and Leases . At March 31, 2023, we owned 220 hotels operated under four agreements. We leased all of these hotels to our wholly owned TRSs that are managed by hotel operating companies as of that date. At March 31, 2023, we owned 765 service-oriented properties with 179 tenants subject to “triple net” leases, where the tenants are generally responsible for the payment of operating expenses and capital expenditures. Our condensed consolidated statements of comprehensive income (loss) include hotel operating revenues and hotel operating expenses of our managed hotels and rental income and other operating expenses from our net lease properties. Hotel Portfolio. As of March 31, 2023, we owned 220 hotels. In the three months ended March 31, 2023, the U.S. hotel industry generally realized increases in average daily rate, or ADR, revenue per available room, or RevPAR, and occupancy compared to the corresponding 2022 periods. The following table provides a summary for all our hotels of these revenue metrics for the periods presented, which we believe are key indicators of performance at our hotels. Three Months Ended March 31, 2023 2022 Change All Hotels No. of hotels 220 298 (78) No. of rooms or suites 37,527 47,285 (9,758) Occupancy 57.6 % 53.3 % 4.3 pts ADR $ 138.73 $ 115.24 20.4 % RevPAR $ 79.91 $ 61.42 30.1 % Comparable Hotels Data . We present RevPAR, ADR and occupancy for the periods presented on a comparable basis to facilitate comparisons between periods. We generally define comparable hotels as those that were owned by us and were open and operating for the entire periods being compared. For the three months ended March 31, 2023 and 2022, our comparable results exclude one hotel that had suspended operations during part of the periods presented. The following table provides a summary of these revenue metrics for the periods presented. 19 Table of Contents Three Months Ended March 31, 2023 2022 Change Comparable Hotels No. of hotels 219 219 — No. of rooms or suites 37,429 37,429 — Occupancy 57.7 % 53.9 % 3.8 pts ADR $ 138.73 $ 121.77 13.9 % RevPAR $ 80.05 $ 65.63 22.0 % Net Lease Portfolio . As of March 31, 2023, we owned 765 service-oriented retail properties with 13,319,743 square feet leased to 179 tenants subject to “triple net” leases (where the tenants are responsible for payments of operating expenses and capital expenditures) requiring annual minimum rent of $369,756. Our net lease portfolio was 97.4% occupied as of March 31, 2023 with a weighted (by annual minimum rent) lease term of 9.4 years, operating under 139 brands in 21 distinct industries. TA is our largest tenant. As of March 31, 2023, we leased 177 of our travel centers to TA under five leases that expire between 2029 and 2035 and require annual minimum rents of $246,110. As disclosed elsewhere in this Quarterly Report on Form 10-Q, in connection with the TA Merger, we entered into the Consent Agreement, pursuant to which, among other things, we agreed to amend and restate our existing TA lease and guaranty agreements, effective as of the time of the TA Merger. Additional details of our hotel operating agreements and our net lease agreements are set forth in Notes 5 and 10 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the tables and notes thereto below. 20 Table of Contents Results of Operations (dollar amounts in thousands, except share amounts) Three Months Ended March 31, 2023 compared to the Three Months Ended March 31, 2022 For the Three Months Ended March 31, Increase % Increase 2023 2022 (Decrease) (Decrease) Revenues: Hotel operating revenues $ 334,796 $ 297,406 $ 37,390 12.6 % Rental income 94,413 96,358 (1,945) (2.0) % Total revenues 429,209 393,764 35,445 9.0 % Expenses: Hotel operating expenses 299,566 290,343 9,223 3.2 % Other operating expenses 3,905 2,269 1,636 72.1 % Depreciation and amortization - hotels 53,385 56,162 (2,777) (4.9) % Depreciation and amortization - net lease properties 46,654 47,951 (1,297) (2.7) % Total depreciation and amortization 100,039 104,113 (4,074) (3.9) % General and administrative 10,911 11,989 (1,078) (9.0) % Transaction related costs 887 1,177 (290) (24.6) % Loss on asset impairment, net — 5,500 (5,500) (100.0) % Total expenses 415,308 415,391 (83) — % Other operating income: Gain on sale of real estate, net 41,898 5,548 36,350 n/m Unrealized gains (losses) on equity securities, net 49,430 (10,260) 59,690 n/m Interest income 2,786 273 2,513 n/m Interest expense (81,580) (92,344) 10,764 11.7 % Loss on early extinguishment of debt (44) — (44) n/m Income (loss) before income taxes and equity in losses of an investee 26,391 (118,410) 144,801 (122.3) % Income tax benefit (expense) 3,780 (695) 4,475 n/m Equity in losses of an investee (4,221) (717) (3,504) n/m Net income (loss) $ 25,950 $ (119,822) $ 145,772 121.7 % Weighted average shares outstanding (basic and diluted) 164,867 164,667 200 0.1 % Net income (loss) per common share (basic and diluted) $ 0.16 $ (0.73) $ 0.89 (121.9) % References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Hotel operating revenues. The increase in hotel operating revenues is primarily a result of higher occupancies and average rates at certain of our hotels in the 2023 period ($72,500), partially offset by the sale of certain hotels since January 1, 2022 ($35,110). Additional operating statistics of our hotels are included in the table on page 28. Rental income. The decrease in rental income is primarily a result of an increase in reserves for uncollectable amounts in the 2023 period. Hotel operating expenses. The increase in hotel operating expenses is primarily a result of an increase in occupancy at certain managed hotels resulting in an increase in wages and benefits ($28,664), an increase in rooms, food and beverage, marketing and sales expenses, management fees and other operating expenses ($16,892), partially offset by a decrease in real estate taxes and the sale of certain hotels since January 1, 2022 ($36,333). Other operating expenses. The increase in other operating expenses is primarily the result of higher operating expenses at certain net lease properties, partially offset by the sale of certain net lease properties since January 1, 2022. 21 Table of Contents Depreciation and amortization - hotels. The decrease in depreciation and amortization - hotels is primarily a result of the sale of certain hotels and certain of our depreciable assets becoming fully depreciated ($4,473), partially offset by depreciation and amortization related to capital additions since January 1, 2022 ($1,696). Depreciation and amortization - net lease properties. The decrease in depreciation and amortization - net lease properties is primarily a result of certain of our depreciable assets being fully depreciated ($1,362) and the sale of certain net lease properties since January 1, 2022 ($90), partially offset by depreciation and amortization related to capital additions since January 1, 2022 ($155). General and administrative. The decrease in general and administrative costs is primarily due to a decrease in business management fees ($1,494), partially offset by an increase in legal and accounting fees ($560). Transaction related cos ts. Transaction related costs for the three months ended March 31, 2023 primarily consisted of costs related to potential acquisitions. Transaction related costs for the three months ended March 31, 2022 are primarily expenses incurred related to our hotel rebranding activities. Loss on asset impairment, net. We recorded a $5,500 loss on asset impairment during the three months ended March 31, 2022 to reduce the carrying value of 25 hotels to their estimated fair value less costs to sell. Gain on sale of real estate, net. We recorded a $41,898 net gain on sale of real estate during the three months ended March 31, 2023 in connection with the sale of 18 hotels. We recorded a $5,548 net gain on sale of real estate during the three months ended March 31, 2022 in connection with the sale of five hotels and two net lease properties. Unrealized gains (losses) on equity securities, net. Unrealized gains (losses) on equity securities, net represents the adjustment required to adjust the carrying value of our investment in shares of TA common stock to its fair value as of March 31, 2023 and 2022. Interest income. The increase in interest income is primarily due to higher interest rates during the 2023 period. Interest expense. The decrease in interest expense is primarily due to lower average outstanding borrowings in the 2023 period. Loss on early extinguishment of debt. We recorded a loss on early extinguishment of debt in connection with our redemption of certain senior unsecured notes. Income tax benefit (expense). The change from income tax expense to an income tax benefit in 2023 is primarily due to a decrease in our state and foreign taxes in the 2023 period. Equity in losses of an investee. Equity in losses of an investee represents our proportionate share of the earnings of Sonesta. Net income. Our net income and net income per common share (basic and diluted) each increased in the 2023 period compared to the 2022 period primarily due to the revenue and expense changes discussed above. Liquidity and Capital Resources (dollar amounts in thousands, except share amounts) Our Managers and Tenants As of March 31, 2023, all 220 of our hotels were managed by four hotel operating companies. Our 765 net lease properties were leased to 179 tenants as of March 31, 2023. The costs of operating and maintaining our properties are generally paid by the hotel managers as agents for us or by our tenants for their own account. Our hotel managers and tenants derive their funding for property operating expenses and for returns and rents due to us generally from property operating revenues and, to the extent that these parties themselves fund our owner’s priority returns and rents, from their separate resources. As of March 31, 2023, our hotel managers included Sonesta (194 hotels), Hyatt (17 hotels), Radisson (eight hotels), and IHG (one hotel). TA is our largest tenant (177 travel centers). 22 Table of Contents We recorded reserves for uncollectable amounts of $3,540 for the three months ended March 31, 2023 and reduced our reserves for uncollectable amounts 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. We define net lease coverage as earnings before interest, taxes, depreciation, amortization and rent, or EBITDAR, divided by the annual minimum rent due to us weighted by the minimum rent of the property to total minimum rents of the net lease portfolio. EBITDAR amounts used to determine rent coverage are generally for the latest twelve month period, based on the most recent operating information, if any, furnished by the tenant. Operating statements furnished by the tenant often are unaudited and, in certain cases, may not have been prepared in accordance with GAAP and are not independently verified by us. In instances where we do not have tenant financial information, we calculate an implied coverage ratio for the period based on other tenants with available financial statements operating the same brand or within the same industry. As a result, we believe using this implied coverage metric provides a more reasonable estimated representation of recent operating results and financial condition for those tenants. Our net lease properties generated coverage of 2.98x and 2.67x as of March 31, 2023 and 2022, respectively. Our Operating Liquidity and Capital Resources Our principal sources of funds to meet operating and capital expenses, debt service obligations and distributions to our shareholders are owner’s priority returns from our hotels, rents from our net lease portfolio and borrowings under our revolving credit facility. We receive owner’s priority returns and rents from our managers and tenants monthly. We may receive additional returns, percentage rents and our share of the operating profits of our managed hotels after payment of management fees and other deductions, if any, either monthly or quarterly, and these amounts are usually subject to annual reconciliations. We believe that these sources of funds will be sufficient to meet our operating expenses and capital expenditures, pay debt service obligations and make distributions to our shareholders for the next twelve months and for the foreseeable future thereafter. However, as a result of economic conditions, including if the U.S. enters an economic recession, or otherwise, our managers and tenants may become unable or unwilling to pay owner’s priority returns and rents to us when due, and, as a result, our cash flows and net income would decline and we may need to reduce the amount of, or even eliminate, our distributions to common shareholders. Also, our revolving credit facility matures on July 15, 2023 and we have no remaining extension options. Although we currently expect to enter into a new facility prior to its maturity or obtain alternative financing, there can be no assurance we will be successful in doing so. The following is a summary of our sources and uses of cash flows for the periods presented (dollars in thousands): Three Months Ended March 31, 2023 2022 Cash and cash equivalents and restricted cash at the beginning of the period $ 45,420 $ 947,418 Net cash provided by (used in): Operating activities 12,373 (11,983) Investing activities 114,252 38,870 Financing activities 23,791 (1,733) Cash and cash equivalents and restricted cash at the end of the period $ 195,836 $ 972,572 The change in cash provided by operating activities for the 2023 period compared to the cash used in operating activities for the 2022 period is primarily due to higher returns earned from our hotel portfolio and lower interest expense in the 2023 period. The increase in cash flows provided by investing activities in the 2023 period compared to the 2022 period is primarily due to an increase in proceeds from the sale of real estate. The change from cash flows used in financing activities in the 2022 period to cash flows provided by financing activities for the 2023 period is primarily due to the issuance of net lease mortgage notes, partially offset by repayment of senior unsecured notes and an increase in distributions to common shareholders in the 2023 period. We maintain our qualification for taxation as a REIT under the IRC by meeting certain requirements. We lease 220 hotels to our wholly owned TRSs that are managed by hotel operating companies. As a REIT, we do not expect to pay federal income taxes on the majority of our income; however, the income realized by our TRSs in excess of the rent they pay to us is subject to U.S. federal income tax at corporate income tax rates. In addition, the income we receive from our hotels in Canada and Puerto Rico is subject to taxes in those jurisdictions and we are subject to taxes in certain states where we have properties despite our qualification for taxation as a REIT. 23 Table of Contents Our Investment and Financing Liquidity and Capital Resources Our hotel operating agreements generally provide that, if necessary, we may provide our managers and tenants with funding for capital improvements to our hotels in excess of amounts otherwise available in escrowed FF&E reserves or when no FF&E reserves are available. During the three months ended March 31, 2023, we funded $19,993 for capital improvements in excess of FF&E reserves available to our hotels. We currently expect to fund $200,000 for capital improvements to certain hotels during the last nine months of 2023 using cash on hand. Various percentages of total sales at some of our hotels are escrowed as FF&E reserves to fund future capital improvements. We own all the FF&E escrows for our hotels. During the three months ended March 31, 2023, certain of our hotel managers deposited $1,923 to these accounts and spent $1,558 from the FF&E reserve escrow accounts to renovate and refurbish our hotels. As of March 31, 2023, there was $7,479 on deposit in these escrow accounts, which was held directly by us and is reflected in our condensed consolidated balance sheets as restricted cash. Our net lease portfolio leases do not require FF&E escrow deposits. However, tenants under these leases are required to maintain the leased properties, including structural and non-structural components. Tenants under certain of our net lease portfolio leases, including TA, may request that we purchase qualifying capital improvements to the leased facilities in return for minimum rent increases or we may agree to provide allowances for tenant improvements upon execution of new leases or when renewing our existing leases. We did not fund any capital improvements to our properties that we leased to TA during the three months ended March 31, 2023. Tenants are not obligated to request and we are not obligated to purchase any such improvements. During the three months ended March 31, 2023, we funded $219 for capital improvements to our other net lease properties. As disclosed elsewhere in this Quarterly Report on Form 10-Q, in connection with the TA Merger we entered into the Consent Agreement, pursuant to which, among other things, we agreed to amend and restate our existing TA lease and guaranty agreements, effective as of the time of the TA Merger. As of March 31, 2023, we had $2,515 of unspent leasing-related obligations related to certain net lease tenants. During the three months ended March 31, 2023, we sold 18 hotels with 2,526 rooms for an aggregate sales price of $157,230, excluding closing costs. From April 1, 2023 through May 5, 2023, we sold two net lease properties with 2,384 square feet for an aggregate sales price of $620, excluding closing costs, and continue to market two additional net lease properties with 7,283 square feet for sale. We expect to use the proceeds from the asset sales for general business purposes, which may include the repayment of debt. During the three months ended March 31, 2023, we declared and paid regular quarterly distributions to common shareholders using cash on hand 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 $33,090. We expect to pay this amount on or about May 18, 2023. In order to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain an $800,000 revolving credit facility which is governed by our credit agreement. The maturity date of our revolving credit facility is July 15, 2023. We are required to pay interest at the rate of LIBOR plus a premium, which was 250 basis points per annum, subject to a LIBOR floor of 0.50% at March 31, 2023, on the amount outstanding under our revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 30 basis points per annum at March 31, 2023. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow, subject to meeting certain financial covenants, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of March 31, 2023, the annual interest rate payable on borrowings under our revolving credit facility was 7.36%. 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. As of March 31, 2023, we had no borrowings outstanding under our revolving credit facility. 24 Table of Contents Our term debt maturities (other than our revolving credit facility) as of March 31, 2023 were as follows: Type Year Maturity Senior unsecured notes 2024 $ 1,175,000 Senior unsecured notes 2025 1,150,000 Senior unsecured notes 2026 800,000 Senior unsecured notes 2027 850,000 Senior unsecured notes 2028 400,000 Net lease mortgage notes 2028 610,037 Senior unsecured notes 2029 425,000 Senior unsecured notes 2030 400,000 $ 5,810,037 None of our unsecured debt obligations require principal or sinking fund payments prior to their maturity dates. Our mortgage notes require monthly principal payments as described in Part I, Item 3 of this Quarterly Report on Form 10-Q. On February 10, 2023, the Issuer issued $610,200 in aggregate principal amount of net lease mortgage notes. The notes are non-recourse and secured by the assets of the Issuer, which includes 308 net lease properties with annual minimum rents of $65,381 and a gross book carrying value of $754,913 as of March 31, 2023. The net proceeds from this issuance were $550,564 after initial purchaser discounts and offering costs. We simultaneously announced the early redemption of our outstanding 4.50% Senior Notes due in 2023 at a redemption price equal to the principal amount of $500,000, plus accrued and unpaid interest to, but excluding the date of redemption. This redemption occurred March 8, 2023 using the proceeds from the net lease mortgage notes described. The net lease mortgage notes are summarized as follows: Note Class S&P Rating Principal Outstanding as of March 31, 2023 Coupon Rate Term Maturity Class A AAA $ 304,873 5.15% 5 years February 2028 Class B AA 172,964 5.55% 5 years February 2028 Class C A 132,200 6.70% 5 years February 2028 Total / weighted average $ 610,037 5.60% We currently expect to use cash on hand, the cash flows from our operations, borrowings under our revolving credit facility, net proceeds from any asset sales and net proceeds of offerings of equity or debt securities to fund our operations, capital expenditures, investments, future debt maturities, distributions to our shareholders and other general business purposes. When significant amounts are outstanding for an extended period of time under our revolving credit facility, or the maturities of our indebtedness approach, we currently expect to explore refinancing alternatives. Such alternatives may include incurring additional debt, issuing new equity securities and the sale of properties. We have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. We may also seek to participate in joint ventures or other arrangements that may provide us additional sources of financing. We may also assume mortgage debt on properties we may acquire or obtain mortgage financing on our existing properties. While we believe we will generally have access to various types of financings, including debt or equity, to fund our future acquisitions and to pay our debts and other obligations, we cannot be sure that we will be able to complete any debt or equity offerings or other types of financings or that our cost of any future public or private financings will not increase. 25 Table of Contents Our ability to complete, and the costs associated with, future debt transactions depends primarily upon credit market conditions and our then perceived creditworthiness. We have no control over market conditions. Our credit ratings depend upon evaluations by credit rating agencies of our business practices and plans, including our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business activities in a manner which will afford us reasonable access to capital for investment and financing activities. However, as discussed elsewhere in this Quarterly Report on Form 10-Q, the impacts of the current, and possibly future, inflationary conditions, increasing or sustained high interest rates and a possible recession are uncertain and may have various negative consequences on us and our operations, including a decline in financing availability and increased costs for financing. Further, such conditions could also disrupt the capital markets generally and limit our access to financing from public sources or on favorable terms, particularly if the global financial markets experience significant disruptions. Debt Covenants Our debt obligations at March 31, 2023 consisted of $5,200,000 of publicly issued term debt and $610,037 aggregate principal amounts of mortgage notes secured by 308 net lease properties. For further information regarding our indebtedness, see Note 7 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Our publicly issued term debt is governed by our indentures and related supplements. These indentures and related supplements and our credit agreement contain covenants that generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, and require us to maintain various financial ratios. Our credit agreement, net lease mortgage notes 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 RMR ceasing to act as our business manager. As of March 31, 2023, we believe we were in compliance with all of the covenants under our indentures and their supplements, net lease mortgage notes and our credit agreement. Senior Notes Indenture Covenants The following table summarizes the results of the financial tests required by the indentures and related supplements for our senior unsecured notes as of March 31, 2023: Actual Results Covenant Requirement Total debt / adjusted total assets 54.8% Maximum of 60% Secured debt / adjusted total assets 5.8% Maximum of 40% Consolidated income available for debt service / debt service 1.90x Minimum of 1.50x Total unencumbered assets / unsecured debt 157.1% Minimum 150% Our ability to incur additional debt is subject to meeting the required covenant levels and subject to the provisions of our credit agreement and senior notes indentures. Acceleration and Cross-Default Neither our indentures and their supplements nor our credit agreement contain provisions for acceleration, which could be triggered by a change in our debt ratings. However, under our credit agreement, our highest senior debt rating is used to determine the fees and interest rates we pay. Accordingly, if that debt rating is downgraded, our interest expense and related costs under our revolving credit facility would increase. Our public debt indentures and their supplements contain cross default provisions to any other debt of $20,000 or more ($50,000 or more in the case of our indenture entered into in February 2016 and its supplements). Similarly, our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $75,000 or more. 26 Table of Contents Supplemental Guarantor Information Our $800,000 of 7.50% unsecured senior notes due 2025, or the 2025 Notes, and our $450,000 of 5.50% unsecured senior notes due 2027, or the 2027 Notes, are fully and unconditionally guaranteed, on a joint and several basis and on a senior unsecured basis, by all of our subsidiaries, except for certain excluded subsidiaries, including our foreign subsidiaries and our subsidiaries pledged under our credit agreement. The notes and the guarantees will be effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness, respectively, to the extent of the value of the collateral securing such secured indebtedness, and will be structurally subordinated to all indebtedness and other liabilities and any preferred equity of any of our subsidiaries that do not guarantee the notes. Our remaining $3,950,000 of senior unsecured notes do not have the benefit of any guarantees. A subsidiary guarantor's guarantee of the 2025 Notes and 2027 Notes and all other obligations of such subsidiary guarantor under the indentures governing the notes will automatically terminate and such subsidiary guarantor will automatically be released from all of its obligations under such subsidiary guarantee and such 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 Investor Services, or Moody’s, or BBB (or the equivalent) by Standard & Poor’s Ratings Services, or S&P, or if Moody’s or S&P 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. Our non-guarantor subsidiaries are separate and distinct legal entities and will have no obligation, contingent or otherwise, to pay any amounts due on these notes or the guarantees, or to make any funds available therefor, whether by dividend, distribution, loan or other payments. The rights of holders of these notes to benefit from any of the assets of our non-guarantor subsidiaries are subject to the prior satisfaction of claims of those subsidiaries' creditors and any preferred equity holders. As a result, these notes and the related guarantees will be structurally subordinated to all indebtedness, guarantees and other liabilities of our subsidiaries that do not guarantee these notes, including guarantees of or pledges under other indebtedness of ours, payment obligations under lease agreements, trade payables and preferred equity. The following table presents summarized financial information for us and the subsidiary guarantors, on a combined basis after elimination of (i) intercompany transactions and balances among us and the subsidiary guarantors and (ii) equity in earnings from, and any investments in, any of our non-guarantor subsidiaries: As of March 31, 2023 As of December 31, 2022 Real estate properties, net (1) $ 4,610,288 $ 5,316,318 Intercompany balances (2) 756,902 580,684 Other assets, net 717,011 723,092 Indebtedness, net $ 5,158,504 $ 5,655,530 Other liabilities 349,498 366,936 Three Months Ended March 31, 2023 Revenues $ 373,850 Expenses 489,267 Net loss (115,417) (1) Real estate properties, net as of March 31, 2023 includes $189,891 of properties owned directly by us and not included in the assets of the subsidiary guarantors. (2) Intercompany balances represent receivables from non-guarantor subsidiaries. 27 Table of Contents Property and Operating Statistics (dollar amounts in thousands, except hotel statistics) As of March 31, 2023, we owned and managed a diverse portfolio of hotels and net lease properties across the United States and in Puerto Rico and Canada with 148 distinct brands across 22 industries. Hotel Portfolio The following tables summarize the operating statistics, including ADR, occupancy and RevPAR reported to us by our hotel managers by hotel brand for the periods indicated. All operating data presented are based upon the operating results provided by our hotel managers for the indicated periods. We have not independently verified our managers’ operating data. Comparable Hotels* No. of Rooms or Suites Occupancy ADR RevPAR Service Level No. of Hotels Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31, Brand 2023 2022 Change 2023 2022 Change 2023 2022 Change Sonesta Hotels & Resorts Full Service 22 7,149 56.9 % 51.9 % 5.0 pts $ 152.38 $ 144.09 5.8 % $ 86.70 $ 74.78 15.9 % Royal Sonesta Full Service 17 5,663 47.3 % 36.8 % 10.5 pts 238.96 210.61 13.5 % 113.03 77.50 45.8 % Radisson Hotel Full Service 5 1,149 65.4 % 57.5 % 7.9 pts 152.87 126.88 20.5 % 99.98 72.96 37.0 % Crowne Plaza Full Service 1 495 58.4 % 43.4 % 15.0 pts 139.80 121.33 15.2 % 81.64 52.66 55.0 % Country Inn and Suites Full Service 3 430 56.0 % 52.2 % 3.8 pts 123.16 107.10 15.0 % 68.97 55.91 23.4 % Full Service Total/Average 48 14,886 53.9 % 46.3 % 7.6 pts 180.26 160.71 12.2 % 97.16 74.41 30.6 % Sonesta Select Select Service 44 6,427 51.1 % 43.0 % 8.1 pts 118.88 108.16 9.9 % 60.75 46.51 30.6 % Hyatt Place Select Service 17 2,107 63.9 % 58.6 % 5.3 pts 124.44 113.09 10.0 % 79.52 66.27 20.0 % Select Service Total/Average 61 8,534 54.3 % 46.9 % 7.4 pts 120.50 109.69 9.9 % 65.43 51.44 27.2 % Sonesta ES Suites Extended Stay 60 7,643 63.5 % 65.9 % (2.4) pts 128.10 114.54 11.8 % 81.34 75.48 7.8 % Sonesta Simply Suites Extended Stay 50 6,366 64.4 % 66.1 % (1.7) pts 90.85 79.55 14.2 % 58.51 52.58 11.3 % Extended Stay Total/Average 110 14,009 63.9 % 66.0 % (2.1) pts 111.16 98.76 12.6 % 71.03 65.18 9.0 % Comparable Hotels Total/Average 219 37,429 57.7 % 53.9 % 3.8 pts $ 138.73 $ 121.77 13.9 % $ 80.05 $ 65.63 22.0 % * We generally define comparable hotels as those that were owned by us and were open and operating for the entire periods being compared. For the three months ended March 31, 2023 and 2022, our comparable results excluded one hotel that had suspended operations during part of the periods presented. All Hotels* No. of Rooms or Suites Occupancy ADR RevPAR Service Level No. of Hotels Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31, Brand 2023 2022 Change 2023 2022 Change 2023 2022 Change Sonesta Hotels & Resorts Full Service 22 7,149 56.9 % 51.9 % 5.0 pts $152.38 $144.09 5.8 % $ 86.70 $ 74.78 15.9 % Royal Sonesta Full Service 17 5,663 47.3 % 36.8 % 10.5 pts 238.96 210.61 13.5 % 113.03 77.50 45.8 % Radisson Hotel Full Service 5 1,149 65.4 % 57.5 % 7.9 pts 152.87 126.88 20.5 % 99.98 72.96 37.0 % Crowne Plaza Full Service 1 495 58.4 % 43.4 % 15.0 pts 139.80 121.33 15.2 % 81.64 52.66 55.0 % Country Inn and Suites Full Service 3 430 56.0 % 52.2 % 3.8 pts 123.16 107.10 15.0 % 68.97 55.91 23.4 % Full Service Total/Average 48 14,886 53.9 % 46.3 % 7.6 pts 180.26 160.71 12.2 % 97.16 74.41 30.6 % Sonesta Select Select Service 44 6,427 51.1 % 43.0 % 8.1 pts 118.88 108.16 9.9 % 60.75 46.51 30.6 % Hyatt Place Select Service 17 2,107 63.9 % 58.6 % 5.3 pts 124.44 113.09 10.0 % 79.52 66.27 20.0 % Select Service Total/Average 61 8,534 54.3 % 46.9 % 7.4 pts 120.50 109.69 9.9 % 65.43 51.44 27.2 % Simply ES Suites Extended Stay 60 7,643 63.5 % 65.9 % (2.4) pts 128.10 114.54 11.8 % 81.34 75.48 7.8 % Sonesta Simply Suites Extended Stay 51 6,464 63.7 % 65.1 % (1.4) pts 90.85 79.55 14.2 % 57.87 51.79 11.7 % Extended Stay Total/Average 111 14,107 63.6 % 65.5 % (1.9) pts 111.16 98.76 12.6 % 70.70 64.69 9.3 % All Hotels Total/Average 220 37,527 57.6 % 53.7 % 3.9 pts $138.73 $121.77 13.9 % $ 79.91 $ 65.39 22.2 % * Results of all hotels owned as of March 31, 2023. Excludes the results of hotels sold during the periods presented. Net Lease Portfolio As of March 31, 2023, our net lease properties were 97.4% occupied and we had 27 properties available for lease. During the three months ended March 31, 2023, we entered into lease renewals for 11,577 rentable square feet (two properties) at weighted (by rentable square feet) average rents that were 3.1% above the prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 5.1 years. We also entered into a new lease for 3,671 rentable square feet for rent that was 38.8% above the prior rent for the same space. The lease term for this lease was 10.2 years. 28 Table of Contents As of March 31, 2023, our net lease tenants operated across more than 139 brands. The following table identifies the top ten brands based on annualized minimum rent. Brand No. of Buildings Investment (1) Percent of Total Investment Annualized Minimum Rent (2) Percent of Total Annualized Minimum Rent Coverage (3) 1. TravelCenters of America 133 $ 2,289,189 44.8 % $ 169,067 45.7 % 2.81 x 2. Petro Stopping Centers 44 1,021,226 20.0 % 77,043 20.8 % 2.36 x 3. The Great Escape 14 98,242 1.9 % 7,711 2.1 % 7.19 x 4. Life Time Fitness 3 92,617 1.8 % 5,770 1.6 % 2.35 x 5. AMC Theatres 8 77,722 1.5 % 5,248 1.4 % 1.36 x 6. Buehler's Fresh Foods 5 76,469 1.5 % 5,657 1.5 % 3.48 x 7. Heartland Dental 59 61,120 1.2 % 4,629 1.3 % 4.09 x 8. Norms 10 53,673 1.1 % 3,693 1.0 % 2.07 x 9. Express Oil Change 23 49,724 1.0 % 3,717 1.0 % 4.32 x 10. Pizza Hut 40 45,285 0.9 % 3,401 0.9 % 1.94 x Other (4) 426 1,242,703 24.3 % 83,820 22.7 % 3.60 x Total 765 $ 5,107,970 100.0 % $ 369,756 100.0 % 2.98 x (1) Represents historical cost of our properties plus capital improvements funded by us less impairment write-downs, if any. (2) Each of the leases in our net lease portfolio provides for payment to us of minimum rent. Certain of these minimum payment amounts are secured by full or limited guarantees. Annualized minimum rent amounts represent cash rent amounts due to us and exclude adjustments, if any, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight line basis, or any reimbursement of expenses paid by us. (3) See page 23 for our definition of coverage. (4) Consists of 129 distinct brands with an average investment of $2,917 and average annual minimum rent of $197 per property. As of March 31, 2023, our top ten net lease tenants based on annualized minimum rent are listed below. Tenant Brand Affiliation No. of Buildings Investment (1) Percent of Total Investment Annualized Minimum Rent (2) Percent of Total Annualized Minimum Rent Coverage (3) 1. TravelCenters of America Inc. TravelCenters of America / Petro Stopping Centers 177 $ 3,310,415 64.8 % $ 246,110 66.6 % 2.67x (4) 2. Universal Pool Co., Inc. The Great Escape 14 98,242 1.9 % 7,711 2.1 % 7.19x 3. Healthy Way of Life II, LLC Life Time Fitness 3 92,617 1.8 % 5,770 1.6 % 2.35x 4. American Multi-Cinema, Inc. AMC Theatres 8 77,722 1.5 % 5,248 1.4 % 1.36x 5. Styx Acquisition, LLC Buehler's Fresh Foods 5 76,469 1.5 % 5,657 1.5 % 3.48x 6. Professional Resource Development, Inc. Heartland Dental 59 61,120 1.2 % 4,629 1.3 % 4.09x 7. Norms Restaurants, LLC Norms 10 53,673 1.1 % 3,693 1.0 % 2.07x 8. Express Oil Change, L.L.C. Express Oil Change 23 49,724 1.0 % 3,717 1.0 % 4.32x 9. Pilot Travel Centers LLC Flying J Travel Plaza 3 41,681 0.8 % 3,247 0.9 % 5.75x 10. Capitol Racquet Sports, Inc. Courthouse Athletic Club 4 39,688 0.8 % 1,878 0.5 % 1.35x Subtotal, top 10 306 3,901,351 76.4 % 287,660 77.9 % 2.84x 11. Other (5) Various 459 1,206,619 23.6 % 82,096 22.1 % 3.50x Total 765 $ 5,107,970 100.0 % $ 369,756 100.0 % 2.98x (1) Represents historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any. (2) Each of the leases in our net lease portfolio provides for payment to us of minimum rent. Certain of these minimum payment amounts are secured by full or limited guarantees. Annualized minimum rent amounts represent cash rent amounts due to us and exclude adjustments, if any, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight line basis, or any reimbursement of expenses paid by us. (3) See page 23 for our definition of coverage. 29 Table of Contents (4) TA is our largest tenant. We lease 177 travel centers (133 under the TravelCenters of America brand and 44 under the Petro Stopping Centers brand) to a subsidiary of TA under five master leases that expire in 2029, 2031, 2032, 2033 and 2035, respectively. TA has two renewal options for 15 years each for all of the travel centers. In addition to the payment of our minimum rent, the TA leases provide for payment to us of percentage rent based on increases in total non-fuel revenues over base levels (3.5% of non-fuel revenues above applicable base years). TA’s remaining deferred rent obligation of $4,404 was paid in January 2023. As disclosed elsewhere in this Quarterly Report on Form 10-Q, in connection with the TA Merger we entered into the Consent Agreement, pursuant to which, among other things, we agreed to amend and restate our existing TA lease and guaranty agreements, effective at the time of the TA Merger. (5) Consists of 169 tenants with an average investment of $2,629 and average annual minimum rent of $179 per property. As of March 31, 2023, our net lease tenants operated across 21 distinct industries within the service-oriented retail sector of the U.S. economy. Industry No. of Properties Investment (1) Percent of Total Investment Annualized Minimum Rent (2) Percent of Total Annualized Minimum Rent Coverage (3) Travel Centers 180 $ 3,352,096 65.6% $ 249,357 67.4 % 2.71 x Restaurants-Quick Service 214 290,901 5.7% 19,735 5.3 % 3.19 x Restaurants-Casual Dining 53 192,320 3.8% 11,940 3.2 % 2.43 x Health and Fitness 13 186,368 3.6% 11,011 3.0 % 1.95 x Movie Theaters 18 160,044 3.1% 11,696 3.2 % 1.48 x Grocery Stores 19 129,152 2.5% 9,223 2.5 % 4.05 x Home Goods and Leisure 20 120,702 2.4% 9,838 2.7 % 6.01 x Automotive Equipment & Services 64 107,054 2.1% 7,665 2.1 % 4.36 x Medical, Dental Office 70 102,494 2.0% 8,268 2.2 % 2.41 x Automotive Dealers 8 62,550 1.2% 4,956 1.3 % 5.73 x Entertainment 4 61,436 1.2% 4,319 1.2 % 3.12 x Educational Services 9 55,319 1.1% 4,451 1.2 % 1.79 x General Merchandise Stores 4 55,112 1.1% 3,874 1.0 % 2.86 x Building Materials 29 33,280 0.7% 2,829 0.8 % 7.39 x Car Washes 5 28,658 0.6% 2,170 0.6 % 3.45 x Miscellaneous Manufacturing 5 24,148 0.5% 1,691 0.5 % 18.01 x Drug Stores and Pharmacies 7 19,251 0.4% 1,258 0.3 % 0.59 x Sporting Goods 3 17,742 0.3% 1,090 0.3 % 5.15 x Legal Services 5 11,362 0.2% 1,054 0.3 % 1.89 x Dollar Stores 3 2,971 0.1% 189 0.1 % 2.69 x Other 5 27,245 0.5% 3,142 0.8 % 5.97 x Vacant 27 67,765 1.3% — — % — x Total 765 $ 5,107,970 100.0% $ 369,756 100.0% 2.98 x (1) Represents historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any. (2) Each of the leases in our net lease portfolio provides for payment to us of minimum rent, respectively. Certain of these minimum payment amounts are secured by full or limited guarantees. Annualized minimum rent amounts represent cash rent amounts due to us and exclude adjustments, if any, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight line basis, or any reimbursement of expenses paid by us. (3) See page 23 for our definition of coverage. 30 Table of Contents As of March 31, 2023, lease expirations at our net lease properties by year are as follows: Year (1) Square Feet Annualized Minimum Rent Expiring Percent of Total Annualized Minimum Rent Expiring Cumulative % of Total Minimum Rent Expiring 2023 209,044 $ 1,560 0.4% 0.4% 2024 769,082 9,902 2.7% 3.1% 2025 436,524 8,977 2.4% 5.5% 2026 1,050,697 11,669 3.2% 8.7% 2027 1,071,904 14,075 3.8% 12.5% 2028 566,378 9,793 2.6% 15.1% 2029 1,266,197 48,502 13.1% 28.2% 2030 138,590 4,175 1.1% 29.3% 2031 1,321,577 48,862 13.2% 42.5% 2032 1,267,177 53,793 14.6% 57.1% 2033 1,157,031 52,638 14.2% 71.3% 2034 144,247 3,817 1.0% 72.3% 2035 2,237,712 80,365 21.8% 94.1% 2036 558,374 8,095 2.2% 96.3% 2037 35,103 465 0.1% 96.4% 2038 66,700 1,184 0.3% 96.7% 2039 134,901 3,214 0.9% 97.6% 2040 115,142 2,406 0.7% 98.3% 2041 223,043 2,291 0.6% 98.9% 2042 — — 0.0% 98.9% 2043 141,134 280 0.1% 99.0% 2044 — — 0.0% 99.0% 2045 63,490 3,693 1.0% 100.0% Total 12,974,047 $ 369,756 100% (1) The year of lease expiration is pursuant to contract terms. As of March 31, 2023, shown below is the list of our top ten states where our net lease properties are located. No other state represents more than 3% of our net lease annual minimum rents. State Square Feet Annualized Minimum Rent Percent of Total Annualized Minimum Rent Texas 1,176,854 $ 32,538 8.8% Illinois 1,010,047 26,231 7.1% Ohio 1,302,273 26,146 7.1% California 399,045 24,351 6.6% Georgia 597,248 20,476 5.5% Arizona 476,651 16,575 4.5% Florida 529,040 16,142 4.4% Pennsylvania 543,959 15,758 4.3% Indiana 612,239 15,239 4.1% New Mexico 246,478 11,184 3.0% Other 6,425,909 165,116 44.6% Total 13,319,743 $ 369,756 100.0% 31 Table of Contents Related Person Transactions We have relationships and historical and continuing transactions with RMR, RMR Inc., TA and Sonesta and others related to them. For further information about these and other such relationships and related person transactions, see Notes 5, 6 and 10 to our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2022 Annual Report, our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and our other filings with the Securities and Exchange Commission, or SEC. In addition, see the section captioned “Risk Factors” in our 2022 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions with related persons, including businesses to which RMR or its subsidiaries provide management services. Critical Accounting Estimates The preparation of our condensed consolidated 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 the condensed consolidated financial statements include consolidation of VIEs, purchase price allocations, the determination of useful lives of fixed assets, classification of leases, and the assessment of the carrying values and impairment of real estate intangible assets and equity investments. A discussion of our critical accounting estimates is included in our 2022 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2022. Non-GAAP Financial Measures We present certain “non-GAAP financial measures” within the meaning of the applicable SEC rules, including funds from operations, or FFO, and normalized funds from operations, or Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) as presented in our condensed consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss). We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs. Funds From Operations and Normalized Funds From Operations We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss), calculated in accordance with GAAP, excluding any gain or loss on sale of properties and loss on impairment of real estate assets, if any, plus real estate depreciation and amortization, less any unrealized gains and losses on equity securities, as well as adjustments to reflect our share of FFO attributable to an investee and certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the items shown below. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to satisfy our REIT distribution requirements, the availability to us of debt and equity capital, our distribution rate as a percentage of the trading price of our common shares, or dividend yield, and to the dividend yield of other REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do. 32 Table of Contents Our calculations of FFO and Normalized FFO for the three months ended March 31, 2023 and 2022 and reconciliations of net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, to those amounts appear in the following table (amounts in thousands, except per share amounts). For the Three Months Ended March 31, 2023 2022 Net income (loss) $ 25,950 $ (119,822) Add (Less): Depreciation and amortization expense 100,039 104,113 Loss on asset impairment (1) — 5,500 Gain on sale of real estate, net (2) (41,898) (5,548) Unrealized (gains) losses on equity securities, net (3) (49,430) 10,260 Adjustments to reflect our share of FFO attributable to an investee (4) 1,233 666 FFO 35,894 (4,831) Add (less): Transaction related costs (5) 887 1,177 Loss on early extinguishment of debt (6) 44 — Adjustments to reflect our share of Normalized FFO attributable to an investee (4) 321 245 Normalized FFO $ 37,146 $ (3,409) Weighted average shares outstanding (basic and diluted) (7) 164,867 164,667 Basic and diluted per common share amounts: Net income (loss) $ 0.16 $ (0.73) FFO $ 0.22 $ (0.03) Normalized FFO $ 0.23 $ (0.02) Distributions declared per share $ 0.20 $ 0.01 (1) We recorded a loss on asset impairment of $5,500 during the three months ended March 31, 2022 to reduce the carrying value of 25 hotels to their estimated fair value less costs to sell. (2) We recorded a $41,898 net gain on sale of real estate during the three months ended March 31, 2023 in connection with the sale of 18 hotels. We recorded a $5,548 gain on sale of real estate during the three months ended March 31, 2022 in connection with the sale of five hotels and two net lease properties. (3) Unrealized gains on equity securities, net represents the adjustment required to adjust the carrying value of our investment in shares of TA common stock to its fair value. (4) Represents adjustments to reflect our proportionate share of FFO and normalized FFO related to our equity investment in Sonesta. (5) Transaction related costs for the three months ended March 31, 2023 of $887 primarily consisted of costs related to potential acquisitions. Transaction related costs for the three months ended March 31, 2022 of $1,177 primarily consisted of expenses incurred related to our hotel rebranding activities. (6) We recorded a $44 loss on extinguishment of debt during the three months ended March 31, 2023 related to the write off of deferred financing costs relating to our repayment of $500,000 of unsecured senior notes due in June 2023. (7) Represents weighted average common shares adjusted to reflect the potential dilution of unvested share awards, if any. 33 Table of Contents