Service Properties Trust 10-Q

Item 1. Financial Statements SERVICE PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (dollars in thousands, except share data) September 30, 2023 December 31, 2022 ASSETS Real estate properties: Land $ 1,972,945 $ 1,902,587 Buildings, improvements and equipment 7,745,858 7,658,282 Total real estate properties, gross 9,718,803 9,560,869 Accumulated depreciation ( 3,129,087 ) ( 2,970,133 ) Total real estate properties, net 6,589,716 6,590,736 Acquired real estate leases and other intangibles, net 137,366 252,357 Assets held for sale 13,567 121,905 Cash and cash equivalents 418,162 38,369 Restricted cash 17,366 7,051 Equity method investments 110,533 112,617 Investment in equity securities — 53,055 Due from related persons 28,497 35,033 Other assets, net 289,104 277,068 Total assets $ 7,604,311 $ 7,488,191 LIABILITIES AND SHAREHOLDERS’ EQUITY Senior unsecured notes, net $ 5,164,302 $ 5,655,530 Mortgage notes payable, net 556,447 — Accounts payable and other liabilities 568,325 425,960 Due to related persons 13,287 17,909 Total liabilities 6,302,361 6,099,399 Commitments and contingencies Shareholders’ equity: Common shares of beneficial interest, $ .01 par value; 200,000,000 shares authorized; 165,772,040 and 165,452,566 , shares issued and outstanding, respectively 1,658 1,655 Additional paid in capital 4,556,991 4,554,861 Cumulative other comprehensive income 2,139 2,383 Cumulative net income available for common shareholders 2,513,823 2,503,279 Cumulative common distributions ( 5,772,661 ) ( 5,673,386 ) Total shareholders’ equity 1,301,950 1,388,792 Total liabilities and shareholders’ equity $ 7,604,311 $ 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues: Hotel operating revenues $ 395,526 $ 400,453 $ 1,134,649 $ 1,116,843 Rental income 101,299 97,798 295,164 290,949 Total revenues 496,825 498,251 1,429,813 1,407,792 Expenses: Hotel operating expenses 317,752 318,266 926,418 933,803 Other operating expenses 4,802 3,511 13,079 9,162 Depreciation and amortization 94,498 101,514 289,108 306,147 General and administrative 10,849 11,293 34,180 35,743 Transaction related costs 115 — 1,933 1,920 Loss on asset impairment, net 512 1,172 9,517 9,720 Total expenses 428,528 435,756 1,274,235 1,296,495 Gain (loss) on sale of real estate 123 ( 164 ) 41,959 44,235 Gains on equity securities, net — 23,056 48,837 2,737 Interest income 5,626 1,442 11,880 2,735 Interest expense (including amortization of debt issuance costs and debt discounts and premiums of $ 6,608 , $ 4,595 , $ 18,644 and $ 15,529 , respectively) ( 82,280 ) ( 81,740 ) ( 246,363 ) ( 263,904 ) Loss on early extinguishment of debt — — ( 282 ) ( 791 ) (Loss) income before income taxes and equity in earnings of an investee ( 8,234 ) 5,089 11,609 ( 103,691 ) Income tax benefit (expense) 2,242 ( 390 ) 775 ( 1,558 ) Equity in earnings (losses) of an investee 1,864 2,801 ( 1,840 ) 4,277 Net (loss) income ( 4,128 ) 7,500 10,544 ( 100,972 ) Other comprehensive income: Equity interest in investee's unrealized (losses) gains ( 245 ) 684 ( 244 ) 734 Other comprehensive (loss) income ( 245 ) 684 ( 244 ) 734 Comprehensive (loss) income $ ( 4,373 ) $ 8,184 $ 10,300 $ ( 100,238 ) Weighted average common shares outstanding (basic and diluted) 165,027 164,745 164,933 164,697 Net (loss) income per common share (basic and diluted) $ ( 0.03 ) $ 0.05 $ 0.06 $ ( 0.61 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 4 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 Net loss — — — — ( 4,128 ) — ( 4,128 ) Equity in unrealized gains of investees — — — — — ( 245 ) ( 245 ) Common share grants 382,000 4 — 999 — — 1,003 Common share repurchases ( 76,194 ) ( 1 ) — ( 600 ) — — ( 601 ) Common share forfeitures ( 17,600 ) — — ( 58 ) — — ( 58 ) Distributions — — ( 33,096 ) — — — ( 33,096 ) Balance at September 30, 2023 165,772,040 $ 1,658 $ ( 5,772,661 ) $ 4,556,991 $ 2,513,823 $ 2,139 $ 1,301,950 5 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, 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 ) — — ( 4 ) — — ( 4 ) Common share forfeitures ( 1,600 ) — — ( 4 ) — — ( 4 ) 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 Net income — — — — 7,500 — 7,500 Equity in unrealized gains of investees — — — — — 684 684 Common share grants 384,500 4 — 972 — — 976 Common share repurchases ( 68,371 ) ( 1 ) — ( 458 ) — — ( 459 ) Common share forfeitures ( 1,000 ) — — ( 4 ) — — ( 4 ) Distributions — — ( 1,651 ) — — — ( 1,651 ) Balance at September 30, 2022 165,453,584 $ 1,654 $ ( 5,640,295 ) $ 4,554,358 $ 2,534,688 $ 1,513 $ 1,451,918 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 SERVICE PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (dollars in thousands) For the Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net income (loss) $ 10,544 $ ( 100,972 ) Adjustments to reconcile net income (loss) to cash used in operating activities: Depreciation and amortization 289,108 306,147 Net amortization of debt issuance costs, discounts and premiums as interest 18,644 15,529 Straight line rental income ( 6,867 ) 5,530 Loss on early extinguishment of debt 282 791 Loss on asset impairment, net 9,517 9,720 Gains on equity securities, net ( 48,837 ) ( 2,737 ) Equity in losses (earnings) of an investee 1,840 ( 4,277 ) Gain on sale of real estate ( 41,959 ) ( 44,235 ) Other non-cash income, net ( 897 ) ( 1,635 ) Changes in assets and liabilities: Due from related persons ( 873 ) ( 19,949 ) Other assets 11,743 4,990 Accounts payable and other liabilities 163,155 ( 13,096 ) Due to related persons ( 3,442 ) ( 8,692 ) Net cash provided by operating activities 401,958 147,114 Cash flows from investing activities: Acquisition of real estate properties ( 165,843 ) ( 2,765 ) Proceeds from sale of TA common shares 101,892 — Proceeds from sale of tradenames and trademarks 89,400 — Real estate improvements ( 118,785 ) ( 68,790 ) Hotel managers’ purchases with restricted cash ( 3,943 ) ( 3,951 ) Net proceeds from sale of real estate 148,245 517,956 Investment in Sonesta — ( 45,470 ) Net cash provided by investing activities 50,966 396,980 Cash flows from financing activities: Proceeds from mortgage notes payable, net of discounts 576,946 — Repayment of mortgage notes payable ( 1,142 ) — Repayment of senior unsecured notes ( 500,000 ) ( 500,000 ) Borrowings under revolving credit facility — 20,000 Repayments of revolving credit facility — ( 925,000 ) Deferred financing costs ( 38,548 ) ( 2,959 ) Repurchase of common shares ( 797 ) ( 463 ) Distributions to common shareholders ( 99,275 ) ( 4,953 ) Net cash used in financing activities ( 62,816 ) ( 1,413,375 ) Increase (decrease) in cash and cash equivalents and restricted cash 390,108 ( 869,281 ) 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 $ 435,528 $ 78,137 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 $ 418,162 $ 67,246 Restricted cash (1) 17,366 10,891 Total cash and cash equivalents and restricted cash $ 435,528 $ 78,137 (1) Restricted cash consists of amounts escrowed pursuant to the terms of our hotel management agreements to fund capital improvements at our hotels and amounts escrowed at certain of our mortgaged net lease properties. Supplemental cash flow information: Cash paid for interest $ 243,204 $ 269,461 Cash paid for income taxes $ 1,463 $ 1,647 Non-cash investing activities: Real estate improvements accrued, not paid $ 25,555 $ 16,625 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 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 September 30, 2023, we owned, directly and through our subsidiaries, 221 hotels and 761 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, and 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 $ 163,889 and $ 142,542 as of September 30, 2023 and December 31, 2022, respectively, and consist primarily of our TRSs’ investment in Sonesta Holdco Corporation’s, or Sonesta’s, common stock and amounts due from and working capital advances to certain of our hotel managers. The liabilities of our TRSs were $ 104,943 and $ 82,454 as of September 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 $ 6,548 and reduced rental income by $ 1,845 for the three months ended September 30, 2023 and 2022, respectively, and increased rental income by $ 6,867 and reduced rental income by $ 5,530 for the nine months ended September 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 person as of September 30, 2023. Other assets, net, includes $ 48,986 and $ 32,247 of straight line rent receivables at September 30, 2023 and December 31, 2022, respectively. See Notes 5 and 10 for further information regarding our TA leases. 8 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 $ 591 and $ 2,279 for the three months ended September 30, 2023 and 2022, respectively, and $ 5,383 and $ 3,421 for the nine months ended September 30, 2023 and 2022, respectively. We had no deferred estimated percentage rent for either the three or nine months ended September 30, 2023. We had deferred estimated percentage rent of $ 830 and $ 6,168 for the three and nine months ended September 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 nine months ended September 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 September 30, 2023, we owned 221 hotels with an aggregate of 37,777 rooms or suites and 761 service oriented retail properties with an aggregate of 13,430,345 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 $ 9,733,131 , including $ 14,328 related to properties classified as held for sale as of September 30, 2023. We made capital expenditures at certain of our properties of $ 129,742 during the nine months ended September 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 nine months ended September 30, 2023, we sold 22 properties for an aggregate sales price of $ 161,575 , 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 nine months ended September 30, 2023 Q1 2023 Hotels 18 2,526 $ 157,230 $ 41,898 Q2 2023 Net Lease 2 2,384 620 ( 62 ) Q3 2023 Net Lease 2 39,133 3,725 123 22 2,526 / 41,517 $ 161,575 $ 41,959 As of September 30, 2023, we had 18 net lease properties with 246,952 square feet and an aggregate carrying value of $ 13,408 classified as held for sale. From October 1, 2023 through November 3, 2023, we sold two net lease properties with an aggregate 9,537 square feet and carrying value of $ 1,594 for an aggregate sales price of $ 1,190 . 9 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) As of November 3, 2023, we have entered into agreements to sell six net lease properties with an aggregate 82,159 square feet for an aggregate sales price of $ 6,093 . These pending sales are subject to conditions; accordingly, we cannot be sure that we will complete these sales, that these sales will not be delayed or that the terms will not change. We continue to market 11 net lease properties with an aggregate 162,676 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 September 30, 2023, we owned 221 hotels which were included in four operating agreements and 761 service oriented retail properties net leased to 174 tenants. We do not operate any of our properties. At September 30, 2023, all 221 of our hotels were operated by subsidiaries of the following companies: 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 September 30, 2023, we owned 761 net lease properties with 174 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 September 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, or our Sonesta agreements. The hotels Sonesta managed for us comprised approximately 49.6 % 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 nine months ended September 30, 2023. See Note 4 for further information regarding our 2023 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 paying the owner’s priority return, 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 $ 67,868 and $ 67,765 during the three months ended September 30, 2023 and 2022, respectively, and $ 183,004 and $ 148,217 during the nine months ended September 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 $ 97,745 and $ 56,297 during the nine months ended September 30, 2023 and 2022, respectively, which resulted in increases in our contractual annual owner’s priority returns of $ 5,864 and $ 3,378 , respectively. Our annual priority return under our Sonesta agreement as of September 30, 2023 was $ 349,521 . We owed Sonesta $ 7,710 and $ 8,889 for capital expenditures and other reimbursements at September 30, 2023 and December 31, 2022, respectively. Sonesta owed us $ 28,384 and $ 2,975 in owner’s priority returns and other amounts as of September 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 nine months ended September 30, 2023 or 2022. 10 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Pursuant to our Sonesta agreement, we incurred management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing programs and third-party reservation transmission fees of $ 32,055 and $ 31,136 for the three months ended September 30, 2023 and 2022, respectively, and $ 90,312 and $ 87,615 for the nine months ended September 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 $ 459 and $ 284 for the three months ended September 30, 2023 and 2022, respectively, and $ 1,007 and $ 840 for the nine months ended September 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. 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 September 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 September 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 September 30, 2023, we are to be paid an annual owner’s priority return of $ 13,813 . 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 $ 2,974 and $ 3,116 during the three months ended September 30, 2023 and 2022, respectively, and $ 9,685 and $ 9,504 for the nine months ended September 30, 2023 and 2022, respectively, under our Hyatt agreement. During the nine months ended September 30, 2023 and 2022, we incurred capital expenditures for certain hotels included in our Hyatt agreement of $ 17,652 and $ 12,611 , respectively, which resulted in an aggregate increase in our contractual annual owner’s priority returns of $ 1,059 and $ 757 , respectively. Radisson agreement . As of September 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 $ 10,820 . 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 $ 2,364 and $ 2,873 during the three months ended September 30, 2023 and 2022, respectively, and $ 5,728 and $ 6,347 for the nine months ended September 30, 2023 and 2022, respectively, under our Radisson agreement. During the nine months ended September 30, 2023, the hotels under this agreement generated cash flows that exceeded the guaranteed owner’s priority level due to us for the period. The available balance of the guaranty was $ 22,000 as of September 30, 2023. During the nine months ended September 30, 2023 and 2022, we incurred capital expenditures of $ 6,898 and $ 2,433 , respectively, for the hotels included in our Radisson agreement which resulted in an aggregate increase in our contractual owner’s priority returns of $ 414 and $ 146 , respectively. Marriott agreement . As of September 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 nine months ended September 30, 2023 and realized returns of $ 3,818 and $ 7,411 during the three and nine months ended September 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 nine months ended September 30, 2023 or 2022. IHG agreement. Our management agreement with IHG for one hotel expires on January 31, 2026. We realized returns of $ 1,482 and $ 1,273 during the three months ended September 30, 2023 and 2022, respectively, and $ 3,762 and $ 2,610 for the nine months ended September 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. 11 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Net lease portfolio As of September 30, 2023, we owned 761 service oriented retail net lease properties with 13,430,345 square feet with leases requiring annual minimum rents of $ 374,445 with a weighted (by annual minimum rents) average remaining lease term of 9.1 years. Our net lease properties were 95.8 % occupied and leased by 174 tenants operating under 135 brands in 21 distinct industries. TA leases. TA is our largest tenant, representing 29.0 % of our total historical real estate investments as of September 30, 2023. We lease to TA a total of 176 travel centers under five leases that expire in 2033, or our TA leases, subject to TA’s right to extend those leases, and require annual minimum rents of $ 254,000 as of September 30, 2023. We recognized rental income from our TA leases of $ 67,809 and $ 64,011 for the three months ended September 30, 2023 and 2022, respectively, and $ 195,210 and $ 188,280 for the nine months ended September 30, 2023 and 2022, respectively. Rental income was increased by $ 4,309 and reduced by $ 3,240 for the three months ended September 30, 2023 and 2022, respectively, and reduced by $ 3,623 and $ 9,825 for the nine months ended September 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 September 30, 2023 and December 31, 2022, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of $ 13,891 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 nine months ended September 30, 2023 and $ 1,861 during the three and nine months ended September 30, 2022 under our TA leases. We had no deferred percentage rent for either the three or nine months ended September 30, 2023. We had aggregate deferred percentage rent of $ 831 and $ 6,168 during the three and nine months ended September 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 $ 33,490 and $ 33,787 for the three months ended September 30, 2023 and 2022, respectively, which included $ 2,239 and $ 1,395 , respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight line basis, and $ 99,954 and $ 102,669 for the nine months ended September 30, 2023 and 2022, respectively, which included $ 3,244 and $ 4,296 , respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight line basis. 12 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 reduced reserves for uncollectable amounts and increased rental income by $ 1,041 for the three months ended September 30, 2023 and increased reserves and reduced rental income by $ 4,312 for the nine months ended September 30, 2023, based on our assessment of the collectability of rents. We increased our reserves for uncollectable amounts and reduced rental income by $ 352 for the three months ended September 30, 2022 and reduced our reserves and increased rental income by $ 315 for the nine months ended September 30, 2022, based on our assessment of the collectability of rents. We had reserves for uncollectable rents of $ 2,825 and $ 7,697 as of September 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 September 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 September 30, 2023 and December 31, 2022, our investment in Sonesta had a carrying value of $ 110,533 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 September 30, 2023 and 2022 and $ 195 in each of the nine months ended September 30, 2023 and 2022. We recognized income of $ 1,864 and $ 2,866 related to our investment in Sonesta for the three months ended September 30, 2023 and 2022, respectively, and losses of $ 1,840 and income of $ 4,472 for the nine months ended September 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 September 30, 2023 and 2022, respectively, and $ 1,863 for each of the nine months ended September 30, 2023 and 2022, respectively, for amortization of this liability. As of September 30, 2023 and December 31, 2022, the unamortized balance of this liability was $ 33,100 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 as defined in the fair value hierarchy under GAAP). 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 gains of $ 23,056 for the three months ended September 30, 2022, and gains of $ 48,837 and $ 2,737 for the nine months ended September 30, 2023 and 2022, respectively, to adjust the carrying value of our investment in shares of TA common stock to its fair value. 13 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) See Notes 5 and 10 for further information regarding our relationships, agreements and transactions with TA. Note 7. Indebtedness Our principal debt obligations at September 30, 2023 were: (1) $ 5,200,000 aggregate outstanding principal amount of senior unsecured notes; and (2) $ 609,058 aggregate outstanding principal amount of net lease mortgage notes. We had no amounts outstanding under our revolving credit facility as of September 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 replaced 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 September 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 $ 1,544,227 as of September 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 September 30, 2023, the annual interest rate payable on borrowings under our revolving credit facility was 7.93 %. We had no borrowings outstanding under either the new or prior facility for either the three or nine months ended September 30, 2023. The weighted average annual interest rate for borrowings under the prior facility was 4.37 % and 3.36 %, respectively, for the three and nine months ended September 30, 2022. As a result of the amendment and restatement, we recorded a loss on early extinguishment of debt of $ 238 during the nine months ended September 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 September 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. 14 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 $ 65,137 and had a gross book value of $ 754,966 as of September 30, 2023. Our net lease mortgage notes are summarized below: Note Class Principal Outstanding as of September 30, 2023 Coupon Rate Term (in years) Maturity Class A $ 304,110 5.15 % 5 February 2028 Class B 172,748 5.55 % 5 February 2028 Class C 132,200 6.70 % 5 February 2028 Total / weighted average $ 609,058 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 nine months ended September 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. On September 13, 2023, we awarded under our equity compensation plan an aggregate of 382,000 of our common shares, valued at $ 7.72 per common share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other officers and employees of RMR. Share Purchases During the nine months ended September 30, 2023, we purchased an aggregate of 97,926 of our common shares, valued at a weighted average share price of $ 8.14 per share, from our officers and certain other current and 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 nine months ended September 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 July 13, 2023 July 24, 2023 August 17, 2023 0.20 33,096 $ 0.60 $ 99,275 On October 12, 2023, we declared a regular quarterly distribution to common shareholders of record as of October 23, 2023 of $ 0.20 per share, or approximately $ 33,154 . We expect to pay this amount on or about November 16, 2023. 15 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 $ 8,272 for the three months ended September 30, 2023 and 2022, respectively, and $ 24,959 and $ 27,455 for the nine months ended September 30, 2023 and 2022, respectively. Based on our common share total return, as defined in our business management agreement, as of each of September 30, 2023 and 2022, no incentive fees are included in the net business management fees we recognized for the three and nine months ended September 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 $ 2,031 and $ 1,628 for the three months ended September 30, 2023 and 2022, respectively, and $ 5,289 and $ 4,527 for the nine months ended September 30, 2023 and 2022, respectively. Of those amounts, for the three months ended September 30, 2023 and 2022, $ 923 and $ 975 , respectively, of property management fees were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 1,108 and $ 653 , respectively, of construction and supervision fees were capitalized for the three months ended September 30, 2023 and 2022. The amounts capitalized are included in building, improvements and equipment in our condensed consolidated balance sheets. For the nine months ended September 30, 2023 and 2022, $ 2,805 and $ 3,007 , respectively, of property management fees were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 2,484 and $ 1,520 , 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 $ 1,182 and $ 892 for these expenses and costs for the three months ended September 30, 2023 and 2022, respectively, and $ 3,301 and $ 2,331 for the nine months ended September 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 certain of our officers, serve as managing trustees or officers of certain of these companies. 16 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) See Note 8 for information relating to the annual share awards we made in September 2023 to our officers and certain other officers and employees of RMR and common shares we purchased from our officers and certain other current and 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 to them. We include amounts recognized as expense for share awards to RMR employees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). 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 and 6 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. Mr. Murray is a director of Sonesta and is its president and chief executive officer, and he 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 September 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 September 30, 2023, we recognized an income tax benefit of $ 2,242 , which includes $ 1,773 of state tax benefit and $ 469 of foreign tax benefit. During the three months ended September 30, 2022, we recognized income tax expense of $ 390 , which includes $ 318 of state taxes and $ 72 of foreign taxes. During the nine months ended September 30, 2023, we recognized income tax benefit of $ 775 , which includes $ 1,186 of state tax benefit and $ 411 of foreign taxes. During the nine months ended September 30, 2022, we recognized income tax expense of $ 1,558 , which includes $ 1,153 of state taxes and $ 405 of foreign taxes. 17 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) Note 12. Segment Information We aggregate our hotels and net lease portfolio into two reportable segments, hotel investments and net lease investments, based on their similar operating and economic characteristics. For the Three Months Ended September 30, 2023 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 395,526 $ — $ — $ 395,526 Rental income — 101,299 — 101,299 Total revenues 395,526 101,299 — 496,825 Expenses: Hotel operating expenses 317,752 — — 317,752 Other operating expenses — 4,802 — 4,802 Depreciation and amortization 54,402 40,096 — 94,498 General and administrative — — 10,849 10,849 Transaction related costs 115 — — 115 Loss on asset impairment, net — 512 — 512 Total expenses 372,269 45,410 10,849 428,528 Gain on sale of real estate, net — 123 — 123 Interest income 54 55 5,517 5,626 Interest expense — ( 11,526 ) ( 70,754 ) ( 82,280 ) Income (loss) before income taxes and equity in earnings of an investee 23,311 44,541 ( 76,086 ) ( 8,234 ) Income tax benefit — — 2,242 2,242 Equity in earnings of an investee — — 1,864 1,864 Net income (loss) $ 23,311 $ 44,541 $ ( 71,980 ) $ ( 4,128 ) For the Nine Months Ended September 30, 2023 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 1,134,649 $ — $ — $ 1,134,649 Rental income — 295,164 — 295,164 Total revenues 1,134,649 295,164 — 1,429,813 Expenses: Hotel operating expenses 926,418 — — 926,418 Other operating expenses — 13,079 — 13,079 Depreciation and amortization 161,236 127,872 — 289,108 General and administrative — — 34,180 34,180 Transaction related costs 588 415 930 1,933 Loss on asset impairment, net — 9,517 — 9,517 Total expenses 1,088,242 150,883 35,110 1,274,235 Gain on sale of real estate, net 41,918 41 — 41,959 Gain on equity securities, net — — 48,837 48,837 Interest income 105 80 11,695 11,880 Interest expense — ( 29,283 ) ( 217,080 ) ( 246,363 ) Loss on early extinguishment of debt — — ( 282 ) ( 282 ) Income (loss) before income taxes and equity in earnings of an investee 88,430 115,119 ( 191,940 ) 11,609 Income tax benefit — — 775 775 Equity in losses of an investee — — ( 1,840 ) ( 1,840 ) Net income (loss) $ 88,430 $ 115,119 $ ( 193,005 ) $ 10,544 As of September 30, 2023 Hotels Net Lease Corporate Consolidated Total assets $ 3,916,470 $ 3,122,823 $ 565,018 $ 7,604,311 18 Table of Contents SERVICE PROPERTIES TRUST Notes to Condensed Consolidated Financial Statements (dollars in thousands, except share data) (Unaudited) For the Three Months Ended September 30, 2022 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 400,453 $ — $ — $ 400,453 Rental income — 97,798 — 97,798 Total revenues 400,453 97,798 — 498,251 Expenses: Hotel operating expenses 318,266 — — 318,266 Other operating expenses — 3,511 — 3,511 Depreciation and amortization 55,780 45,734 — 101,514 General and administrative — — 11,293 11,293 Loss on asset impairment, net 867 305 — 1,172 Total expenses 374,913 49,550 11,293 435,756 (Loss) gain on sale of real estate, net ( 188 ) 24 — ( 164 ) Gain on equity securities, net — — 23,056 23,056 Interest income 6 28 1,408 1,442 Interest expense — — ( 81,740 ) ( 81,740 ) Income (loss) before income taxes and equity in earnings of an investee 25,358 48,300 ( 68,569 ) 5,089 Income tax expense — — ( 390 ) ( 390 ) Equity in earnings of an investee — — 2,801 2,801 Net income (loss) $ 25,358 $ 48,300 $ ( 66,158 ) $ 7,500 For the Nine Months Ended September 30, 2022 Hotels Net Lease Corporate Consolidated Revenues: Hotel operating revenues $ 1,116,843 $ — $ — $ 1,116,843 Rental income — 290,949 — 290,949 Total revenues 1,116,843 290,949 — 1,407,792 Expenses: Hotel operating expenses 933,803 — — 933,803 Other operating expenses — 9,162 — 9,162 Depreciation and amortization 167,821 138,326 — 306,147 General and administrative — — 35,743 35,743 Transaction related costs — — 1,920 1,920 Loss on asset impairment, net 9,483 237 — 9,720 Total expenses 1,111,107 147,725 37,663 1,296,495 Gain (loss) on sale of real estate, net 44,682 ( 447 ) — 44,235 Gain on equity securities — — 2,737 2,737 Interest income 7 28 2,700 2,735 Interest expense — — ( 263,904 ) ( 263,904 ) Loss on early extinguishment of debt — — ( 791 ) ( 791 ) Income (loss) before income taxes and equity in earnings of an investee 50,425 142,805 ( 296,921 ) ( 103,691 ) Income tax expense — — ( 1,558 ) ( 1,558 ) Equity in earnings of an investee — — 4,277 4,277 Net income (loss) $ 50,425 $ 142,805 $ ( 294,202 ) $ ( 100,972 ) As of December 31, 2022 Hotels Net Lease Corporate Consolidated Total assets $ 3,882,701 $ 3,376,295 $ 229,195 $ 7,488,191 19 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 September 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) $ 13,252 $ — $ 2,165 $ 11,087 (1) We recorded a loss on asset impairment, net of $ 9,517 during the nine months ended September 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 based on purchase agreements with third parties (Level 2 inputs as defined in the fair value hierarchy under GAAP) or brokers’ opinion of values (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 September 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: September 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 % 349,814 345,230 349,510 334,292 Senior Unsecured Notes, due 2024 at 4.35 % 823,591 791,423 822,487 749,983 Senior Unsecured Notes, due 2025 at 4.50 % 349,009 327,562 348,493 301,893 Senior Unsecured Notes, due 2025 at 7.50 % 795,424 785,952 793,673 762,344 Senior Unsecured Notes, due 2026 at 5.25 % 347,319 318,861 346,472 292,282 Senior Unsecured Notes, due 2026 at 4.75 % 448,194 385,925 447,736 354,128 Senior Unsecured Notes, due 2027 at 4.95 % 397,483 337,752 396,916 315,040 Senior Unsecured Notes, due 2027 at 5.50 % 445,349 384,584 444,505 387,522 Net Lease Mortgage Notes, due 2028 at 5.60 % 556,447 566,384 — — Senior Unsecured Notes, due 2028 at 3.95 % 395,068 311,580 394,206 283,996 Senior Unsecured Notes, due 2029 at 4.95 % 420,278 321,347 419,684 293,718 Senior Unsecured Notes, due 2030 at 4.375 % 392,773 287,048 391,923 264,280 Total financial liabilities $ 5,720,749 $ 5,163,648 $ 5,655,530 $ 4,830,823 (1) Carrying value includes unamortized discounts and premiums and issuance costs. At September 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 September 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. 20 Table of Contents