Breaking Down Service Properties Trust's ($SVC) Debt Complex
A Deep Dive into SVC's Debt Stack as Hotel Performance Softens
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This week, I’m looking into a name many are familiar with—Service Properties Trust. This is a diversified, highly-levered REIT managed by RMR Group. The company’s capital structure includes $5.7 billion of debt comprising $1.6 billion of secured/mortgage debt, $1.65 billion of guaranteed notes, and $2.5 billion of non-guaranteed securities. For reference, the long-dated, non-guaranteed notes trade in the mid-70s, yielding ~10% / ~600bps.
While SVC has taken decisive action to shore up its credit profile through a planned $1 billion hotel disposition and 95% dividend reduction, the company faces meaningful challenges including deteriorating hotel margins, elevated leverage, and an extensive renovation program. In this post, I’ll analyze where in the cap stack I find the best relative value, if at all, given the company’s multiple refinancing levers and substantial unencumbered assets.
Let’s dive in.
Situation Overview:
Service Properties Trust (“SVC”) is a diversified REIT split between hotels (56%) and net lease properties (44%). The REIT’s portfolio consists of 214 hotels with 36,875 rooms and 745 net lease properties (avg. remaining lease term of 8.3 years) totaling 13.3 million square feet. The company is externally managed by RMR Group, which has managed the portfolio since SVC’s inception.
Pre-COVID Evolution & Impact
Originally founded in 1995 as Hospitality Properties Trust, SVC historically focused on hotels and travel centers, maintaining a relatively conservative financial profile with leverage in the mid-6x range. In late 2019, the company executed a transformative $2.4 billion acquisition of retail properties from Spirit MTA REIT, significantly diversifying its portfolio beyond hospitality. Although this debt-funded transaction increased leverage, it helped SVC diversify its tenant base and added stable, long-term income from triple-net leases.