[Management View]
Service Properties Trust (SVC) management emphasized their strategic priorities, including the ongoing hotel disposition program and the focus on transforming the company into a predominantly net lease REIT. Key metrics highlighted include the sale of 122 hotels expected to generate $966 million in gross proceeds and the retention of 84 hotels delivering a 1.5% YoY RevPAR increase.

[Outlook]
Management provided performance guidance for fiscal Q3 2025, projecting RevPAR between $98 and $101 and adjusted hotel EBITDA of $54 million to $58 million. Future plans include reducing capital expenditures to $150 million in 2026 and continuing the capital recycling strategy to enhance tenant and geographic diversity within the net lease portfolio.

[Financial Performance]
Service Properties Trust reported a YoY decline in normalized FFO to $57.6 million ($0.35 per share) and adjusted EBITDAre to $163.8 million for fiscal Q2 2025. Adjusted hotel EBITDA fell 11.3% YoY to $73 million, primarily due to higher labor costs and renovation-related disruptions.

[Q&A Highlights]
Question 1: Can you expand on the renovation disruption in Q3 and general headwinds in travel and lodging?
Answer: Brian Donley noted softness in Q3, especially in August, due to seasonal drop-off in leisure travel. Forward-looking numbers and group pace are expected to improve in Q4, but Q3 remains weak.

Question 2: Regarding the CapEx commentary for 2026, is the $86 million discretionary spending elevated compared to normal?
Answer: Brian Donley clarified that $64 million of the $150 million CapEx for 2026 is discretionary, with the rest for renovations. Long-term maintenance CapEx is expected to be closer to 10-12% of total revenues.

Question 3: What caused the change in expected gross proceeds from hotel sales from $1.1 billion to $966 million?
Answer: Chris Bilotto explained that one hotel in Atlanta was pulled from the marketing efforts due to unsatisfactory pricing, and the balance was due to diligence conclusions.

Question 4: Can you discuss the pipeline for net lease deals and expectations for acquisitions?
Answer: Jesse Abair mentioned modest acquisitions aligned with disposal proceeds, focusing on casual dining, automotive, medical opportunities, and Dollar General-type uses.

Question 5: What is left to do for the $900 million hotel sales to close, and are there any factors that could derail these transactions?
Answer: Jesse Abair confirmed that there are no contingencies left, and the transactions are expected to close incrementally between now and year-end.

Question 6: How far off are you from meeting the debt service coverage ratio covenant, and what actions are being considered to improve compliance?
Answer: Brian Donley stated that the company is close to the threshold and is considering further asset sales, operational improvements, and potential financing opportunities to improve credit metrics.

Question 7: Can you walk us through the decision to fully draw the credit facility and other ways to address the debt situation?
Answer: Brian Donley explained that the credit facility was drawn to protect liquidity due to anticipated covenant shortfalls. The company is evaluating options like zero coupon bonds for relief.

Question 8: When should we expect you to start addressing the 2027 maturities?
Answer: Brian Donley indicated that additional hotel sales in 2026 will be used to delever, specifically addressing the 2027 maturities.

Question 9: What are the next hotels you might take out of the portfolio?
Answer: Brian Donley mentioned a combination of different chain scales and lower-performing hotels in certain markets.

Question 10: Can you explain the changes to the management agreement with Sonesta?
Answer: Chris Bilotto stated that changes will align incentives with performance-based initiatives without economic impact, reflecting the strategic shift.

[Sentiment Analysis]
The tone of analysts was inquisitive and focused on understanding the strategic shifts and financial implications. Management's tone was confident and proactive, emphasizing strategic initiatives and financial prudence.

[Quarterly Comparison]
| Metric | Q2 2025 | Q2 2024 | YoY Change |
|--------|---------|---------|------------|
| Normalized FFO | $57.6M | $74.0M | -22.2% |
| Adjusted EBITDAre | $163.8M | $171.5M | -4.5% |
| Adjusted Hotel EBITDA | $73M | $82.3M | -11.3% |
| RevPAR (Retained Hotels) | $121 | $119.2 | +1.5% |

[Risks and Concerns]
Key risks include the debt service coverage covenant being below the minimum requirement, prohibiting additional debt incurrence until compliance is restored. Hotel-level EBITDA decline due to higher labor costs, inflationary pressures, and renovation-related disruptions. Softer Q3 hotel fundamentals and lower-than-expected disposition proceeds.

[Final Takeaway]
Service Properties Trust is actively transforming its portfolio through strategic hotel dispositions and focusing on net lease growth. Despite short-term financial challenges and renovation disruptions, management is confident in their ability to restore compliance and improve leverage metrics. The company's proactive approach to capital recycling and deleveraging positions it for long-term stability and growth.