Service Properties Trust 10-Q

Item 1. Financial Statements SERVICE PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (dollars in thousands, except share data) June 30, 2023 December 31, 2022 ASSETS Real estate properties: Land $ 1,975,339 $ 1,902,587 Buildings, improvements and equipment 7,705,657 7,658,282 Total real estate properties, gross 9,680,996 9,560,869 Accumulated depreciation ( 3,066,018 ) ( 2,970,133 ) Total real estate properties, net 6,614,978 6,590,736 Acquired real estate leases and other intangibles, net 145,597 252,357 Assets held for sale 14,080 121,905 Cash and cash equivalents 434,867 38,369 Restricted cash 15,758 7,051 Equity method investments 108,913 112,617 Investment in equity securities — 53,055 Due from related persons 30,017 35,033 Other assets, net 285,441 277,068 Total assets $ 7,649,651 $ 7,488,191 LIABILITIES AND SHAREHOLDERS’ EQUITY Senior unsecured notes, net $ 5,161,403 $ 5,655,530 Mortgage notes payable, net 554,058 — Accounts payable and other liabilities 584,522 425,960 Due to related persons 10,593 17,909 Total liabilities 6,310,576 6,099,399 Commitments and contingencies Shareholders’ equity: Common shares of beneficial interest, $ .01 par value; 200,000,000 shares authorized; 165,483,834 and 165,452,566 , shares issued and outstanding, respectively 1,655 1,655 Additional paid in capital 4,556,650 4,554,861 Cumulative other comprehensive income 2,384 2,383 Cumulative net income available for common shareholders 2,517,951 2,503,279 Cumulative common distributions ( 5,739,565 ) ( 5,673,386 ) Total shareholders’ equity 1,339,075 1,388,792 Total liabilities and shareholders’ equity $ 7,649,651 $ 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenues: Hotel operating revenues $ 404,327 $ 418,984 $ 739,123 $ 716,390 Rental income 99,452 96,793 193,865 193,151 Total revenues 503,779 515,777 932,988 909,541 Expenses: Hotel operating expenses 309,100 325,194 608,666 615,537 Other operating expenses 4,372 3,179 8,277 5,650 Depreciation and amortization 94,571 100,520 194,610 204,633 General and administrative 12,420 12,665 23,331 24,452 Transaction related costs 931 743 1,818 1,920 Loss on asset impairment, net 9,005 3,048 9,005 8,548 Total expenses 430,399 445,349 845,707 860,740 Other operating income: (Loss) gain on sale of real estate, net ( 62 ) 38,851 41,836 44,399 (Loss) gain on equity securities, net ( 593 ) ( 10,059 ) 48,837 ( 20,319 ) Interest income 3,468 1,021 6,254 1,294 Interest expense (including amortization of debt issuance costs and debt discounts and premiums of $ 6,804 , $ 5,021 , $ 12,036 and $ 10,934 , respectively) ( 82,503 ) ( 89,820 ) ( 164,083 ) ( 182,164 ) Loss on early extinguishment of debt ( 238 ) ( 791 ) ( 282 ) ( 791 ) (Loss) income before income taxes and equity in earnings of an investee ( 6,548 ) 9,630 19,843 ( 108,780 ) Income tax expense ( 5,247 ) ( 473 ) ( 1,467 ) ( 1,168 ) Equity in earnings (losses) of an investee 517 2,193 ( 3,704 ) 1,476 Net (loss) income ( 11,278 ) 11,350 14,672 ( 108,472 ) Other comprehensive income: Equity interest in investee’s unrealized gains 215 46 1 50 Other comprehensive income 215 46 1 50 Comprehensive (loss) income $ ( 11,063 ) $ 11,396 $ 14,673 $ ( 108,422 ) Weighted average common shares outstanding (basic and diluted) 164,902 164,677 164,884 164,672 Net (loss) income per common share (basic and diluted) $ ( 0.07 ) $ 0.07 $ 0.09 $ ( 0.66 ) 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) (dollars 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 Net loss — — — — ( 11,278 ) — ( 11,278 ) Equity in unrealized gains of investees — — — — — 215 215 Common share grants 56,000 — — 1,474 — — 1,474 Common share repurchases ( 16,761 ) — — ( 150 ) — — ( 150 ) Common share forfeitures ( 1,400 ) — — ( 2 ) — — ( 2 ) Distributions — — ( 33,089 ) — — — ( 33,089 ) Balance at June 30, 2023 165,483,834 $ 1,655 $ ( 5,739,565 ) $ 4,556,650 $ 2,517,951 $ 2,384 $ 1,339,075 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 Net income — — — — 11,350 — 11,350 Equity in unrealized gains of investees — — — — — 46 46 Common share grants 49,000 — — 836 — — 836 Common share repurchases ( 478 ) Common share forfeitures ( 1,600 ) — — ( 8 ) — — ( 8 ) Distributions — — ( 1,651 ) — — — ( 1,651 ) Balance at June 30, 2022 165,138,455 $ 1,651 $ ( 5,638,644 ) $ 4,553,848 $ 2,527,188 $ 829 $ 1,444,872 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 Six Months Ended June 30, 2023 2022 Cash flows from operating activities: Net income (loss) $ 14,672 $ ( 108,472 ) Adjustments to reconcile net income (loss) to cash used in operating activities: Depreciation and amortization 194,610 204,633 Net amortization of debt issuance costs, discounts and premiums as interest 12,036 10,934 Straight line rental income ( 319 ) 3,685 Loss on early extinguishment of debt 282 791 Loss on asset impairment, net 9,005 8,548 (Gain) loss on equity securities, net ( 48,837 ) 20,319 Equity in losses (earnings) of an investee 3,704 ( 1,476 ) Gain on sale of real estate ( 41,836 ) ( 44,399 ) Other non-cash income, net ( 546 ) ( 1,305 ) Changes in assets and liabilities: Due from related persons ( 3,667 ) ( 17,621 ) Other assets 10,006 3,148 Accounts payable and other liabilities 182,792 ( 4,530 ) Due to related persons ( 3,399 ) ( 14,958 ) Net cash provided by operating activities 328,503 59,297 Cash flows from investing activities: Acquisition of real estate properties ( 165,688 ) — Proceeds from sale of TA common shares 101,892 — Proceeds from sale of tradenames and trademarks 89,400 — Real estate improvements ( 63,562 ) ( 41,098 ) Hotel managers’ purchases with restricted cash ( 3,041 ) ( 2,459 ) Net proceeds from sale of real estate 144,959 488,365 Investment in Sonesta — ( 45,470 ) Net cash provided by investing activities 103,960 399,338 Cash flows from financing activities: Proceeds from mortgage notes payable, net of discounts 576,946 — Repayment of mortgage notes payable ( 653 ) — Repayment of senior unsecured notes ( 500,000 ) ( 500,000 ) Repayments of revolving credit facility — ( 200,000 ) Deferred financing costs ( 37,176 ) ( 2,642 ) Repurchase of common shares ( 196 ) ( 4 ) Distributions to common shareholders ( 66,179 ) ( 3,302 ) Net cash used in financing activities ( 27,258 ) ( 705,948 ) Increase (decrease) in cash and cash equivalents and restricted cash 405,205 ( 247,313 ) 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 $ 450,625 $ 700,105 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 $ 434,867 $ 635,204 Restricted cash 15,758 64,901 Total cash and cash equivalents and restricted cash $ 450,625 $ 700,105 Supplemental cash flow information: Cash paid for interest $ 152,294 $ 180,893 Cash paid for income taxes $ 1,398 $ 1,515 Non-cash investing activities: Real estate improvements accrued, not paid $ 17,081 $ 6,189 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 June 30, 2023, we owned, directly and through our subsidiaries, 221 hotels and 763 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 $ 164,718 and $ 142,542 as of June 30, 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 $ 107,478 and $ 82,454 as of June 30, 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 increased rental income by $ 2,767 and reduced rental income by $ 1,712 for the three months ended June 30, 2023 and 2022, respectively, and increased rental income by $ 319 and reduced rental income by $ 3,685 for the six months ended June 30, 2023 and 2022, respectively, to record scheduled rent changes under certain of our leases on a straight line basis. Due from related persons included $ 7,522 of straight line rent receivables related to our TravelCenters of America Inc., or TA, leases at December 31, 2022. TA was no longer a related party as of June 30, 2023. Other assets, net, includes $ 40,887 and $ 32,247 of straight line rent receivables at June 30, 2023 and December 31, 2022, respectively. See Notes 5 and 10 for further information regarding our TA leases. 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 determine percentage rent due to us under our leases monthly, quarterly or annually, as applicable, depending on the specific lease terms, and recognize it when all contingencies are met and the rent is earned. We recorded percentage rent of $ 4,449 and $ 385 for the three months ended June 30, 2023 and 2022, respectively, and $ 4,792 and $ 1,141 for the six months ended June 30, 2023 and 2022, respectively. We had no deferred estimated percentage rent for either the three or six months ended June 30, 2023. We had deferred estimated percentage rent of $ 2,839 and $ 5,338 for the three and six months ended June 30, 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 and six months ended June 30, 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 June 30, 2023, we owned 221 hotels with an aggregate of 37,777 rooms or suites and 763 service oriented retail properties with an aggregate of 13,469,478 square feet that are primarily subject to “triple net” leases, or net leases where the tenant is generally responsible for payment of operating expenses and capital expenditures of the property during the lease term. Our properties had an aggregate undepreciated carrying value of $ 9,694,893 , including $ 13,897 related to properties classified as held for sale as of June 30, 2023. We made capital expenditures at certain of our properties of $ 65,025 during the six months ended June 30, 2023. Acquisitions On June 1, 2023, we acquired a 250 -room hotel located in Miami Beach, Florida for $ 165,400 , excluding closing costs of $ 466 . We allocated the purchase price for this acquisition based on the estimated fair value of the acquired assets as follows: Acquisition Date Location Property Type Purchase Price Land Building and Improvements Furniture, Fixtures and Equipment June 1, 2023 Miami Beach, FL Hotel $ 165,866 $ 83,200 $ 77,987 $ 4,679 Dispositions During the six months ended June 30, 2023, we sold 20 properties for an aggregate sales price of $ 157,850 , 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 / Square Footage Gross Sales Price Gain / (Loss) on Sale Properties sold during the six months ended June 30, 2023 Q1 2023 Hotels 18 2,526 $ 157,230 $ 41,898 Q2 2023 Net Lease 2 2,384 620 ( 62 ) 20 2,526 / 2,384 $ 157,850 $ 41,836 As of June 30, 2023, we had 18 net lease properties with 342,499 square feet and an aggregate carrying value of $ 13,897 classified as held for sale. 8 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) As of August 4, 2023, we have entered into agreements to sell two net lease properties with 39,133 square feet for an aggregate sales price of $ 3,725 . These pending sales are subject to conditions; accordingly, we cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change. We continue to market 20 net lease properties with 358,419 square feet for sale. We expect the sales of these net lease properties to be completed by the end of the first quarter of 2024. See Notes 5 and 13 for further information on our property sales. Note 5. Management Agreements and Leases As of June 30, 2023, we owned 221 hotels which were included in four operating agreements and 763 service oriented retail properties net leased to 173 tenants. We do not operate any of our properties. At June 30, 2023, all 221 of our hotels were operated by subsidiaries of the following companies: Sonesta Holdco Corporation, or Sonesta ( 195 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 June 30, 2023, we owned 763 net lease properties with 173 tenants, including 176 travel centers leased to TA, our largest tenant. Hereinafter, these companies are sometimes referred to as our managers and/or tenants, or collectively, operators. Hotel agreements Sonesta agreement. As of June 30, 2023, Sonesta managed 40 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 49.4 % of our total historical real estate investments. We acquired one hotel in June 2023, and we and Sonesta added this hotel to our Sonesta agreement. We sold 65 Sonesta branded hotels during the calendar year ended December 31, 2022, and we sold two Sonesta branded hotels during the six months ended June 30, 2023. See Note 4 for further information regarding our acquisition and disposition activities. 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 reimbursing owner or manager advances, funding the reserve established for the regular refurbishment of our hotels, or FF&E reserves, and paying Sonesta’s incentive fee, if applicable. We realized returns of $ 84,899 and $ 77,424 during the three months ended June 30, 2023 and 2022, respectively, and $ 115,136 and $ 80,452 during the six months ended June 30, 2023 and 2022, respectively, under our Sonesta agreement. 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 $ 54,209 and $ 33,226 during the six months ended June 30, 2023 and 2022, respectively, which resulted in increases in our contractual annual owner’s priority returns of $ 3,253 and $ 1,994 , respectively. Our annual priority return under our Sonesta agreement as of June 30, 2023 was $ 346,894 . We owed Sonesta $ 4,972 and $ 8,889 for capital expenditures and other reimbursements at June 30, 2023 and December 31, 2022, respectively. Sonesta owed us $ 30,017 and $ 2,975 in owner’s priority returns and other amounts as of June 30, 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 either of the three or six months ended June 30, 2023 or 2022. Pursuant to our Sonesta agreement, we incurred management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing programs and third-party reservation transmission fees of $ 32,121 and $ 32,682 for the three months ended June 30, 2023 and 2022, respectively, and $ 58,257 and $ 56,479 for the six months ended June 30, 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 $ 341 and $ 269 for the three months ended June 30, 2023 and 2022, respectively, and $ 548 and $ 556 for the six months ended June 30, 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. 9 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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 June 30, 2023 and December 31, 2022, we had advanced $ 48,490 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 June 30, 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 June 30, 2023, we are to be paid an annual owner’s priority return of $ 12,781 . 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 the first quarter of 2024. We realized returns of $ 4,388 and $ 4,525 during the three months ended June 30, 2023 and 2022, respectively, and $ 6,711 and $ 6,388 for the six months ended June 30, 2023 and 2022, respectively, under our Hyatt agreement. During the six months ended June 30, 2023 and 2022, we incurred capital expenditures for certain hotels included in our Hyatt agreement of $ 454 and $ 11,936 , respectively, which resulted in an aggregate increase in our contractual annual owner’s priority returns of $ 27 and $ 716 , respectively. Radisson agreement . As of June 30, 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 $ 10,691 . 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 $ 1,799 and $ 3,020 during the three months ended June 30, 2023 and 2022, respectively, and $ 3,364 and $ 3,474 for the six months ended June 30, 2023 and 2022, respectively, under our Radisson agreement. During the six months ended June 30, 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 Radisson made $ 140 of quarterly guaranty payments to cover the shortfall. The available balance of the guaranty was $ 21,860 as of June 30, 2023. During the six months ended June 30, 2023 and 2022, we incurred capital expenditures of $ 4,749 and $ 298 , respectively, for the hotels included in our Radisson agreement which resulted in an aggregate increase in our contractual owner’s priority returns of $ 285 and $ 18 , respectively. Marriott agreement . As of June 30, 2023, we sold all 16 hotels previously managed by Marriott International, Inc., or Marriott. We realized net operating losses of $ 2,762 during the six months ended June 30, 2023 and realized returns of $ 3,842 and $ 3,593 during the three and six months ended June 30, 2022, respectively, under our management agreement with Marriott. We did not incur capital expenditures for any of the hotels included in our management agreement with Marriott during the six months ended June 30, 2023 or 2022. IHG Agreement. Our management agreement with IHG for one hotel expires on January 31, 2026. We realized returns of $ 1,517 and $ 1,208 during the three months ended June 30, 2023 and 2022, respectively, and $ 2,280 and $ 1,337 for the six months ended June 30, 2023 and 2022, respectively, under our management agreement with IHG. 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 June 30, 2023, we owned 763 service oriented retail net lease properties with 13,469,478 square feet with leases requiring annual minimum rents of $ 375,781 with a weighted (by annual minimum rents) average remaining lease term of 9.3 years. Our net lease properties were 96.1 % occupied and leased by 173 tenants operating under 134 brands in 21 distinct industries. 10 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) TA leases. TA is our largest tenant, representing 29.2 % of our total historical real estate investments as of June 30, 2023. We lease to TA a total of 176 travel centers under five leases that expire in 2033, subject to TA’s right to extend those leases, and require annual minimum rents of $ 254,000 as of June 30, 2023. We recognized rental income from our TA leases of $ 65,260 and $ 62,186 for the three months ended June 30, 2023 and 2022, respectively, and $ 127,401 and $ 124,269 for the six months ended June 30, 2023 and 2022, respectively. Rental income was increased by $ 2,555 and reduced by $ 3,241 for the three months ended June 30, 2023 and 2022, respectively, and reduced by $ 686 and $ 6,585 for the six months ended June 30, 2023 and 2022, respectively, to record the scheduled rent changes on a straight line basis. 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. As of June 30, 2023 and December 31, 2022, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of $ 9,076 and $ 30,764 , respectively, included in other assets, net and due from related persons, respectively, in our condensed consolidated balance sheets. Until May 15, 2023, our TA leases required TA to pay us percentage rent based upon increases in certain sales. We recognized percentage rent due under our TA leases as rental income when all contingencies were met. We recognized percentage rent of $ 3,507 during the three and six months ended June 30, 2023 under our TA leases. We did not recognize any percentage rent for the three or six months ended June 30, 2022. We had no deferred percentage rent for either the three or six months ended June 30, 2023. We had aggregate deferred percentage rent of $ 2,839 and $ 5,338 during the three and six months ended June 30, 2022, respectively, under our TA leases. On May 15, 2023, BP Products North America Inc., or BP, acquired TA pursuant to a merger, or the TA Merger, for $ 86.00 per share in cash. At the effective time of the TA Merger, we entered into amended and restated lease agreements, or the A&R Leases, for 176 of our travel center properties. Under the A&R Leases, the aggregate annual minimum rent due to our applicable subsidiaries is $ 254,000 , with annual 2 % increases throughout the initial term of 10 years and any of the five 10-year extension options that may be exercised, and there is no percentage rent requirement. TA prepaid $ 188,000 of rent under the A&R Leases at the effective time of the TA Merger and TA will receive monthly rent credits totaling $ 25,000 per year over the 10 -year initial term of the A&R Leases. In addition, we received $ 89,400 for certain tradenames and trademarks associated with TA’s business that we sold to TA in connection with the TA Merger, which amount equaled our net book value for those tradenames and trademarks. TA is required to maintain the leased travel centers, including structural and non-structural components. In addition, TA has 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 entered into at the effective time of the TA Merger, or the A&R Guarantees, BP Corporation North America Inc. guaranteed payment under each of the A&R Leases. BP Corporation North America Inc.’s obligations under the A&R Guarantees are limited by an initial aggregate cap of approximately $ 3,040,000 . Following the TA Merger, TA ceased being a related party. 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 $ 34,192 and $ 34,607 for the three months ended June 30, 2023 and 2022, respectively, which included $ 212 and $ 1,530 , respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight line basis, and $ 66,464 and $ 68,927 for the six months ended June 30, 2023 and 2022, respectively, which included $ 1,005 and $ 2,901 , respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight line basis. 11 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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 and decreased rental income by $ 1,813 and $ 5,353 for the three and six months ended June 30, 2023, respectively, based on our assessment of the collectability of rents. We reduced our reserves for uncollectable amounts and increased rental income by $ 160 and $ 667 for the three and six months ended June 30, 2022, respectively, based on our assessment of the collectability of rents. We had reserves for uncollectable rents of $ 11,187 and $ 7,697 as of June 30, 2023 and December 31, 2022, respectively, included in other assets in our condensed consolidated balance sheets. Note 6. Other Investments Equity method investment As of both June 30, 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 June 30, 2023 and December 31, 2022, our investment in Sonesta had a carrying value of $ 108,913 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 June 30, 2023 and 2022 and $ 130 in each of the six months ended June 30, 2023 and 2022. We recognized income of $ 582 and $ 2,258 related to our investment in Sonesta for the three months ended June 30, 2023 and 2022, respectively, and losses of $ 3,574 and income of $ 1,606 for the six months ended June 30, 2023 and 2022, respectively. These amounts are included in equity in earnings (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 June 30, 2023 and 2022, respectively, and $ 1,242 for each of the six months ended June 30, 2023 and 2022, respectively, for amortization of this liability. As of June 30, 2023 and December 31, 2022, the unamortized balance of this liability was $ 33,721 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 these fundings. Investment in equity securities The TA Merger occurred on May 15, 2023. We received $ 86.00 in cash for each TA common share that we owned, or a total of $ 101,892 , as a result of the TA Merger. As of May 15, 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 $ 101,893 and $ 53,055 as of May 15, 2023 and December 31, 2022, respectively. Our historical cost basis for these shares was $ 24,418 as of both May 15, 2023 and December 31, 2022. We recorded losses of $ 593 and $ 10,059 for the three months ended June 30, 2023 and 2022, respectively, and a gain of $ 48,837 and a loss of $ 20,319 for the six months ended June 30, 2023 and 2022, respectively, to adjust the carrying value of our investment in shares of TA common stock to its fair value. See Notes 5 and 10 for further information regarding our relationships, agreements and transactions with TA, and Note 13 for further information regarding our investment in TA. 12 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Note 7. Indebtedness Our principal debt obligations at June 30, 2023 were: (1) $ 5,200,000 aggregate outstanding principal amount of senior unsecured notes; and (2) $ 609,548 aggregate outstanding principal amount of net lease mortgage notes. We had no amounts outstanding under our revolving credit facility as of June 30, 2023. On June 29, 2023, we entered into an amended and restated credit agreement, or our credit agreement, governing our $ 650,000 secured revolving credit facility. This new facility replaces our prior $ 800,000 secured revolving credit facility, which had a maturity date of July 15, 2023, and is available for general business purposes, including acquisitions. We can borrow, repay, and reborrow funds available under the new facility until maturity and no principal repayments are due until maturity. The maturity date of the new facility is June 29, 2027, and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to further extend the stated maturity date of the new facility by two additional six-month periods. Interest payable on drawings under the new facility is based on the secured overnight financing rate, or SOFR, plus a margin ranging from 1.50 % to 3.00 % based on our leverage ratio, as defined in our credit agreement, which was 2.50 % as of June 30, 2023. Our obligations under the new facility are secured by 69 properties, including 66 hotels and three net lease properties, with an undepreciated book value of $ 1,520,935 as of June 30, 2023. We also pay unused commitment fees of 20 to 30 basis points per annum on the total amount of lending commitments under our revolving credit facility based on amounts outstanding. As of June 30, 2023, the annual interest rate payable on borrowings under our revolving credit facility was 7.64 %. We had no borrowings outstanding under either the new or prior facility for either the three or six months ended June 30, 2023. The weighted average annual interest rate for borrowings under the new and prior facility was 3.25 % and 3.05 %, respectively, for the three and six months ended June 30, 2022. As a result of the amendment and restatement, we recorded a loss on early extinguishment of debt of $ 238 during the three and six months ended June 30, 2023, which represented the write-off of certain unamortized issuance costs. 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 June 30, 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. 13 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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. The current leases relating to those properties require annual minimum rents of $ 65,490 , and had a gross book value of $ 754,916 as of June 30, 2023. Our net lease mortgage notes are summarized below: Note Class Principal Outstanding as of June 30, 2023 Coupon Rate Term (in years) Maturity Class A $ 304,492 5.15 % 5 February 2028 Class B 172,856 5.55 % 5 February 2028 Class C 132,200 6.70 % 5 February 2028 Total / weighted average $ 609,548 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 six months ended June 30, 2023, which represented the unamortized issuance costs related to these notes. Note 8. Shareholders' Equity Share Awards On June 13, 2023, in accordance with our Trustee compensation arrangements, we awarded 7,000 of our common shares, valued at $ 8.96 per share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day to each of our eight Trustees as part of their annual compensation. Share Purchases During the six months ended June 30, 2023, we purchased an aggregate of 21,732 of our common shares, valued at a weighted average share price of $ 9.03 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. Distributions During the six months ended June 30, 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 April 13, 2023 April 24, 2023 May 18, 2023 0.20 33,089 $ 0.40 $ 66,179 On July 13, 2023, we declared a regular quarterly distribution to common shareholders of record as of July 24, 2023 of $ 0.20 per share, or approximately $ 33,089 . We expect to pay this amount on or about August 17, 2023. 14 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) 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, 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. Effective as of the completion of the TA Merger, we and RMR amended our property management agreement to include properties that we lease to TA. We recognized net business management fees payable to RMR of $ 8,287 and $ 9,305 for the three months ended June 30, 2023 and 2022, respectively, and $ 16,672 and $ 19,183 for the six months ended June 30, 2023 and 2022, respectively. Based on our common share total return, as defined in our business management agreement, as of each of June 30, 2023 and 2022, no incentive fees are included in the net business management fees we recognized for the three and six months ended June 30, 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 $ 1,846 and $ 1,235 for the three months ended June 30, 2023 and 2022, respectively, and $ 3,258 and $ 2,898 for the six months ended June 30, 2023 and 2022, respectively. Of those amounts, for the three months ended June 30, 2023 and 2022, $ 937 and $ 1,014 , respectively, of property management fees were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 909 and $ 221 , respectively, of construction and supervision fees were capitalized for the three months ended June 30, 2023 and 2022. The amounts capitalized are included in building, improvements and equipment in our condensed consolidated balance sheets. For the six months ended June 30, 2023 and 2022, $ 1,882 and $ 2,032 , respectively, of property management fees were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 1,376 and $ 867 , respectively, of construction and supervision fees were capitalized and included in building, improvements and equipment in our condensed consolidated balance sheets. The amounts capitalized 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 $ 1,116 and $ 685 for these expenses and costs for the three months ended June 30, 2023 and 2022, respectively, and $ 2,119 and $ 1,439 for the six months ended June 30, 2023 and 2022, respectively. We included these amounts in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss). 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. As of the effective time of the TA Merger on May 15, 2023, TA is no longer a related person to us. 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 former President and Chief Executive Officer, 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 of other public companies to which RMR or its subsidiaries provide management services. Mr. Portnoy serves as chair of the boards and as a managing trustee of those companies. Other officers of RMR, including Mr. Murray and certain of our other officers, serve as managing trustees or officers of certain of these companies. 15 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) RMR provides management services to us and, until the TA Merger, provided services to TA, and Mr. Portnoy, until the TA Merger, also served as the chair of the board of directors and as a managing director of TA and, as of immediately prior to the TA Merger, 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, 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 services to Sonesta. As of June 30, 2023, we owned approximately 34 % of Sonesta and Sonesta managed 195 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. 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 June 30, 2023, we recognized income tax expense of $ 5,247 , which includes $ 2,884 of state taxes and $ 2,363 of foreign taxes. During the three months ended June 30, 2022, we recognized income tax expense of $ 473 , which includes $ 255 of state taxes and $ 218 of foreign taxes. During the six months ended June 30, 2023, we recognized income tax expense of $ 1,467 , which includes $ 587 of state taxes and $ 880 of foreign taxes. During the six months ended June 30, 2022, we recognized income tax expense of $ 1,168 , which includes $ 835 of state taxes and $ 333 of foreign taxes. 16 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 June 30, 2023 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 404,327 $ — $ — $ 404,327 Rental income — 99,452 — 99,452 Total revenues 404,327 99,452 — 503,779 Expenses: Hotel operating expenses 309,100 — — 309,100 Other operating expenses — 5,202 ( 830 ) 4,372 Depreciation and amortization 53,449 41,122 — 94,571 General and administrative — — 12,420 12,420 Transaction related costs 473 415 43 931 Loss on asset impairment, net — 9,005 — 9,005 Total expenses 363,022 55,744 11,633 430,399 Gain (loss) on sale of real estate, net 20 ( 82 ) — ( 62 ) Loss on equity securities, net — — ( 593 ) ( 593 ) Interest income 21 23 3,424 3,468 Interest expense — ( 11,435 ) ( 71,068 ) ( 82,503 ) Loss on early extinguishment of debt — — ( 238 ) ( 238 ) Income (loss) before income taxes and equity in earnings of an investee 41,346 32,214 ( 80,108 ) ( 6,548 ) Income tax expense — — ( 5,247 ) ( 5,247 ) Equity in earnings of an investee — — 517 517 Net income (loss) $ 41,346 $ 32,214 $ ( 84,838 ) $ ( 11,278 ) For the Six Months Ended June 30, 2023 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 739,123 $ — $ — $ 739,123 Rental income — 193,865 — 193,865 Total revenues 739,123 193,865 — 932,988 Expenses: Hotel operating expenses 608,666 — — 608,666 Other operating expenses — 8,277 — 8,277 Depreciation and amortization 106,834 87,776 — 194,610 General and administrative — — 23,331 23,331 Transaction related costs 473 415 930 1,818 Loss on asset impairment, net — 9,005 — 9,005 Total expenses 715,973 105,473 24,261 845,707 Gain (loss) on sale of real estate, net 41,918 ( 82 ) — 41,836 Gain on equity securities, net — — 48,837 48,837 Interest income 51 25 6,178 6,254 Interest expense — ( 17,757 ) ( 146,326 ) ( 164,083 ) Loss on early extinguishment of debt — — ( 282 ) ( 282 ) Income (loss) before income taxes and equity in earnings of an investee 65,119 70,578 ( 115,854 ) 19,843 Income tax expense — — ( 1,467 ) ( 1,467 ) Equity in losses of an investee — — ( 3,704 ) ( 3,704 ) Net income (loss) $ 65,119 $ 70,578 $ ( 121,025 ) $ 14,672 As of June 30, 2023 Hotels Net Lease Corporate Consolidated Total assets $ 3,908,462 $ 3,159,276 $ 581,913 $ 7,649,651 17 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) For the Three Months Ended June 30, 2022 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 418,984 $ — $ — $ 418,984 Rental income — 96,793 — 96,793 Total revenues 418,984 96,793 — 515,777 Expenses: Hotel operating expenses 325,194 — — 325,194 Other operating expenses — 3,179 — 3,179 Depreciation and amortization 55,878 44,642 — 100,520 General and administrative — — 12,665 12,665 Transaction related costs — — 743 743 Loss on asset impairment, net 3,047 1 — 3,048 Total expenses 384,119 47,822 13,408 445,349 Gain (loss) on sale of real estate, net 39,878 ( 1,027 ) — 38,851 Loss on equity securities, net — — ( 10,059 ) ( 10,059 ) Interest income — — 1,021 1,021 Interest expense — — ( 89,820 ) ( 89,820 ) Loss on early extinguishment of debt — — ( 791 ) ( 791 ) Income (loss) before income taxes and equity in earnings of an investee 74,743 47,944 ( 113,057 ) 9,630 Income tax expense — — ( 473 ) ( 473 ) Equity in earnings of an investee — — 2,193 2,193 Net income (loss) $ 74,743 $ 47,944 $ ( 111,337 ) $ 11,350 For the Six Months Ended June 30, 2022 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 716,390 $ — $ — $ 716,390 Rental income — 193,151 — 193,151 Total revenues 716,390 193,151 — 909,541 Expenses: Hotel operating expenses 615,537 — — 615,537 Other operating expenses — 5,650 — 5,650 Depreciation and amortization 112,040 92,593 — 204,633 General and administrative — — 24,452 24,452 Transaction related costs — — 1,920 1,920 Loss (gain) on asset impairment, net 8,615 ( 67 ) — 8,548 Total expenses 736,192 98,176 26,372 860,740 Gain (loss) on sale of real estate, net 44,868 ( 469 ) — 44,399 Loss on equity securities, net — — ( 20,319 ) ( 20,319 ) Interest income — — 1,294 1,294 Interest expense — — ( 182,164 ) ( 182,164 ) Loss on early extinguishment of debt — — ( 791 ) ( 791 ) Income (loss) before income taxes and equity in earnings of an investee 25,066 94,506 ( 228,352 ) ( 108,780 ) Income tax expense — — ( 1,168 ) ( 1,168 ) Equity in earnings of an investee — — 1,476 1,476 Net income (loss) $ 25,066 $ 94,506 $ ( 228,044 ) $ ( 108,472 ) As of December 31, 2022 Hotels Net Lease Corporate Consolidated Total assets $ 3,882,701 $ 3,376,295 $ 229,195 $ 7,488,191 18 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Note 13. Fair Value of Assets and Liabilities The table below presents certain of our assets carried at fair value at June 30, 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) Non-recurring Fair Value Measurement Assets: Assets of properties held for sale (1) $ 13,741 $ — $ — $ 13,741 (1) We recorded a loss on asset impairment, net of $ 9,005 during the three months ended June 30, 2023, to reduce the carrying value of 16 properties in our condensed consolidated balance sheet to their estimated fair value less costs to sell (Level 3 inputs as defined in the fair value hierarchy under GAAP). 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 June 30, 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: June 30, 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 % 349,713 344,208 349,510 334,292 Senior Unsecured Notes, due 2024 at 4.35 % 823,223 792,990 822,487 749,983 Senior Unsecured Notes, due 2025 at 4.50 % 348,837 330,624 348,493 301,893 Senior Unsecured Notes, due 2025 at 7.50 % 794,840 785,328 793,673 762,344 Senior Unsecured Notes, due 2026 at 5.25 % 347,036 317,450 346,472 292,282 Senior Unsecured Notes, due 2026 at 4.75 % 448,042 390,636 447,736 354,128 Senior Unsecured Notes, due 2027 at 4.95 % 397,295 342,040 396,916 315,040 Senior Unsecured Notes, due 2027 at 5.50 % 445,067 395,645 444,505 387,522 Net Lease Mortgage Notes, due 2028 at 5.60 % 554,058 574,769 — — Senior Unsecured Notes, due 2028 at 3.95 % 394,781 313,204 394,206 283,996 Senior Unsecured Notes, due 2029 at 4.95 % 420,080 329,609 419,684 293,718 Senior Unsecured Notes, due 2030 at 4.375 % 392,489 299,148 391,923 264,280 Total financial liabilities $ 5,715,461 $ 5,215,651 $ 5,655,530 $ 4,830,823 (1) Carrying value includes unamortized discounts and premiums and issuance costs. At June 30, 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 June 30, 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. 19 Table of Contents