10-K: Service Properties Trust Navigates Portfolio Shift, Debt Refinancing

Service Properties Trust reports a reduced net loss for 2025, driven by hotel sales and a strategic rebalancing towards net lease properties, alongside significant debt refinancing activities.

Summary

• As of December 31, 2025, Service Properties Trust owned 760 service-focused retail net lease properties totaling 13,601,902 square feet and 94 hotels with 21,243 rooms or suites.
• The company sold 112 hotels with 14,631 keys for a combined sales price of $858,752 thousand and acquired 29 net lease properties for $93,743 thousand during 2025.
• Net loss decreased to $(202,321) thousand in 2025 from $(275,526) thousand in 2024.
• Total revenues decreased by 4.3% to $1,814,838 thousand in 2025, primarily due to hotel dispositions, partially offset by net lease acquisitions.
• Hotel operating revenues decreased by 5.6% to $1,413,403 thousand, while rental income increased by 0.3% to $401,435 thousand.
• Total expenses decreased by 3.9% to $1,700,356 thousand in 2025.
• A net gain on sale of real estate of $84,218 thousand was recorded in 2025, significantly up from $6,269 thousand in 2024.
• Interest expense increased by 7.8% to $413,614 thousand due to higher outstanding borrowings and weighted average interest rates.
• Funds From Operations (FFO) decreased to $114,954 thousand ($0.69 per common share) in 2025 from $150,550 thousand ($0.91 per common share) in 2024.
• Normalized FFO decreased to $129,884 thousand ($0.78 per common share) in 2025 from $176,402 thousand ($1.07 per common share) in 2024.
• The quarterly cash distribution rate on common shares is $0.01 per share.
• Consolidated debt stood at $5.5 billion as of December 31, 2025.
• The company issued $580,155 thousand in zero coupon senior secured notes due 2027, raising approximately $490,000 thousand in net proceeds.
• Redeemed $350,000 thousand of 5.25% senior unsecured notes due 2026 and $450,000 thousand of 4.75% senior unsecured notes due 2026 in 2025.
• In January 2026, $300,000 thousand of 4.95% senior unsecured notes due 2027 were redeemed.
• Net lease properties were 96.6% occupied with a weighted average lease term of 7.4 years as of December 31, 2025.
• TravelCenters of America Inc. (TA) is the largest tenant, leasing 175 travel centers and representing 33.0% of total historical real estate investments.
• Sonesta International Hotels Corporation managed 69 hotels, representing 41.8% of total historical real estate investments.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a challenging period for the company, marked by a strategic portfolio transition and significant debt management efforts. While the net loss decreased and some hotel metrics improved, the decline in FFO/Normalized FFO, increased interest expense, and ongoing asset impairments reflect underlying pressures. The low dividend and high debt levels indicate continued financial caution.

Positives

• Net loss significantly decreased to $(202,321) thousand in 2025 from $(275,526) thousand in 2024.
• Net gain on sale of real estate increased substantially to $84,218 thousand in 2025 from $6,269 thousand in 2024.
• Interest income increased by 122.1% to $8,998 thousand in 2025.
• Loss on early extinguishment of debt, net, decreased by 82.1% to $(2,897) thousand in 2025.
• Equity in losses of an investee (Sonesta) decreased by 65.6% to $(4,225) thousand.
• Comparable hotel RevPAR increased by 1.5% in 2025, with occupancy up 1.0 percentage point.
• Net lease properties maintained a high occupancy rate of 96.6%.
• Successful lease renewals for 977,089 square feet (32 properties) at weighted average rents 4.6% above prior rents.
• New leases for 137,774 square feet (40 properties) at weighted average rents 19.9% above prior rents.
• Secured new financing with $580,155 thousand zero coupon senior secured notes and priced $745,000 thousand in net lease mortgage notes.
• The minimum fixed charge coverage ratio covenant on the revolving credit facility was reduced from 1.50x to 1.30x.
• Received a $14,377 thousand deferred foreign tax benefit in 2025 due to tax concessions in Puerto Rico.

Negatives

• Total revenues decreased by 4.3% in 2025.
• Hotel operating revenues decreased by 5.6% due to hotel dispositions.
• Funds From Operations (FFO) and Normalized FFO decreased in 2025 compared to 2024.
• Interest expense increased by 7.8% to $413,614 thousand due to higher outstanding borrowings and weighted average interest rates.
• Loss on asset impairment increased by 45.7% to $81,889 thousand in 2025.
• Net lease operating expenses increased by 9.0%.
• The quarterly cash distribution rate on common shares remains low at $0.01 per share, with uncertainty about future increases.
• High concentration of properties leased to TA (33.0% of investments) and managed by Sonesta (41.8% of investments) poses concentration risk.
• Net lease rent coverage decreased from 2.10x in 2024 to 1.98x in 2025, with TA's coverage at 1.20x.
• Non-guarantor subsidiaries had $832,500 thousand in total indebtedness and other liabilities structurally senior to certain notes.
• Consolidated debt remains substantial at $5.5 billion.

Risks

• Unfavorable market and commercial real estate industry conditions due to uncertainties surrounding interest rates and inflation, supply chain disruptions, market volatility, geopolitical instability, pandemics, government shutdowns, economic downturns or recessions, and labor market conditions.
• Inability of tenants and managers to operate profitably or satisfy their obligations, potentially leading to defaults.
• Inability to repay or refinance maturing debt, or increased cost of any refinanced debt.
• Inability to reduce debt leverage levels, which may remain at or above current levels indefinitely.
• Covenants and conditions in debt agreements may restrict operations, limit investments, hinder property sales, and restrict distributions to shareholders.
• Potential downgrades to credit ratings could increase the cost of capital.
• Inability to sell properties at target prices or within expected timing due to market conditions or competition.
• Significant competition in the commercial real estate, hotel, and travel center industries, as well as for property acquisition and financing opportunities.
• Inability to renew leases, lease vacant space, or re-lease space on favorable terms or at all, potentially incurring significant costs.
• Illiquidity of special-purpose properties, limiting portfolio modification in response to market changes.
• Termination or non-renewal of franchise or license agreements by net lease tenants could impair their ability to pay rent.
• Ownership of real estate is subject to environmental risks and liabilities, including cleanup costs and potential liability for hazardous substances, especially at travel centers.
• Risks associated with hotel managers' employment of personnel, including increased labor costs, shortages, strikes, and disruptions.
• Tenant bankruptcy could reduce rental income, delay enforcement of rights, and incur substantial costs.
• Insurance may not adequately cover losses, and insurance costs may increase, particularly for catastrophic events or environmental conditions.
• Risks from adverse weather, natural disasters, and adverse impacts from global climate change, especially in the Southeastern United States, potentially leading to property damage or increased costs.
• Dependence on RMR to manage business and implement growth strategy, with potential adverse effects if RMR's services or key personnel are lost.
• Risks related to the security of RMR's or hotel managers' information technology and RMR's use of artificial intelligence, including cyberattacks, data breaches, and reputational harm.
• Management structure and agreements with RMR, and relationships with related parties (Sonesta, RMR Inc.), may create conflicts of interest or the perception of such conflicts.
• Sustainability initiatives, requirements, and market expectations may impose additional costs and expose the company to new risks, including reputational damage.
• Market and government actions in response to global climate change and supply chain challenges may negatively impact business by reducing travel demand or increasing costs.
• Substantial termination fees for management agreements with RMR may limit the ability to end the relationship.
• Management arrangements with RMR may discourage a change of control of the company.
• Inability to realize expected benefits from the investment in Sonesta due to minority ownership and lack of a public trading market for Sonesta's common stock.
• Increased risk for dissident shareholder activities due to perceived conflicts of interest.
• Ability to change operational, financing, and investment policies without shareholder approval, potentially leading to higher leverage.
• Ownership limitations and certain provisions in the declaration of trust, bylaws, and Maryland law may deter, delay, or prevent a change in control or unsolicited acquisition proposals.
• Certain aspects of the business, such as gambling operations, may prevent shareholders from accumulating large stakes or serving as Trustees due to licensing requirements.
• Limited rights for shareholders to take action against Trustees and officers due to liability limitations and indemnification obligations.
• Bylaws designate the Circuit Court for Baltimore City, Maryland, as the sole and exclusive forum for certain shareholder actions and proceedings.
• Disputes with RMR may be referred to mandatory arbitration proceedings, which follow different procedures than in-court litigation.
• Failure to remain qualified for taxation as a REIT or loss of other special tax statuses could have significant adverse consequences.
• REIT distribution requirements could adversely affect the ability to grow.
• Other tax liabilities (federal, state, local, excise taxes) may reduce cash flow.
• Arrangements involving Taxable REIT Subsidiaries (TRSs) failing to comply with REIT qualification and taxation rules could lead to disqualification or significant penalty taxes.
• Legislative or other actions affecting REITs could materially and adversely affect the company and its shareholders.
• The quarterly cash distribution rate on common shares is currently $0.01 per share and may remain at this level indefinitely or be eliminated, and the form of payment could change.
• Notes and Guarantees are structurally subordinated to the payment of all indebtedness and other liabilities of non-guarantor subsidiaries.
• Unsecured Notes and Guarantees are effectively subordinated to all existing and future secured debt.
• Federal and state statutes allow courts, under specific circumstances, to void guarantees and require holders of notes to return payments received from guarantors.
• There is no public market for the Notes, and one may not develop, be maintained, or be liquid.
• Downgrades in credit ratings could materially adversely affect the market price of the Notes and increase the cost of capital.
• Some or all of the Guarantees may be released automatically under certain circumstances.
• Failure of subsidiaries to make required payments on borrowings secured by a significant portion of assets could materially and adversely affect the company.

Future Outlook

The company expects to fund between $120 million and $140 million for capital improvements to certain hotels during 2026. It plans to continue selling the remaining nine hotels from its disposition plan and has initiated marketing for seven additional full-service Sonesta hotels. Net sales proceeds are expected to be used for general business purposes, including debt repayment. The company anticipates exploring various refinancing alternatives for upcoming debt maturities, such as incurring additional debt, issuing new equity securities, and selling properties. Management believes current funding sources will be sufficient for operating expenses, capital expenditures, debt service, and distributions for the next 12 months and the foreseeable future. RMR, the company's manager, has a zero emissions goal for Scope 1 and 2 emissions by 2050, with a 50% reduction commitment by 2029 from a 2019 baseline.

Management Comments

• "Our current strategy is focused on reducing debt, transitioning to a company with the majority of its properties being service-focused retail net lease properties through the growth of our net lease portfolio and improving the performance of the hotels we expect to retain after completing the sale of our previously announced dispositions."
• "We believe these sources of funds will be sufficient to meet our operating expenses and capital expenditures, pay debt service obligations and make distributions to our shareholders for the next 12 months and for the foreseeable future thereafter."
• "We intend to continue to pay regular quarterly distributions to our shareholders at this rate for an indefinite period, subject to applicable REIT tax requirements."

Industry Context

StockSavvy.ai notes that the company's strategic shift from hotels to service-focused retail net lease properties aligns with a broader trend among REITs seeking more stable, long-term income streams, especially given the volatility and increased operating costs in the hotel sector. The continued high interest rate environment and inflationary pressures, as highlighted in the filing, are significant headwinds for the commercial real estate and hospitality industries, making the pivot to necessity-based, e-commerce resistant net lease assets a defensive strategy. The increase in comparable hotel RevPAR, despite overall hotel revenue decline due to sales, suggests some resilience in the retained hotel portfolio, potentially benefiting from a post-pandemic travel recovery, though this is tempered by ongoing labor shortages and cost inflation.

Comparison to Industry Standards

• The company's net lease rent coverage of 1.98x as of December 31, 2025, is generally considered healthy, as a strong ratio is typically above 1.5x. However, the largest tenant, TravelCenters of America Inc. (TA), has a rent coverage of 1.20x, which is on the lower side and indicates a tighter margin for covering rent obligations compared to industry peers with stronger credit profiles.
• The 1.5% increase in comparable hotel Revenue Per Available Room (RevPAR) in 2025, with a slight 0.2% decrease in Average Daily Rate (ADR) and a 1.0 percentage point increase in occupancy, suggests a mixed performance. While the company notes the U.S. hotel industry generally realized increases in ADR and decreases in RevPAR compared to 2024, a direct comparison to specific STR Inc. benchmarks for similar chain scales (Upper Upscale, Upscale, Upper Midscale, Midscale) and service levels (Full Service, Select Service, Extended Stay) in its markets would provide more precise context on whether this performance is above, below, or in line with industry averages.

Management Changes

Corporate Governance

Legal Proceedings

• Currently not a party to any litigation which is expected to have a material adverse effect on the business.
• Transaction related costs in 2024 primarily consisted of costs related to various labor litigation matters.

Related Party Transactions

• Maintains two management agreements with The RMR Group LLC (RMR) for business and property management services, which were not negotiated on an arms-length basis but with a special committee and disinterested Trustees.
• Pays RMR annual base management fees, property management fees, and construction supervision fees, and reimburses certain expenses.
• Awards common shares to officers and other employees of RMR annually.
• Owns 34% of Sonesta International Hotels Corporation's outstanding common stock; Sonesta is controlled by Adam D. Portnoy (Managing Trustee) and manages 69 of the company's hotels.
• Adam D. Portnoy, the Chair of the Board of Trustees and a Managing Trustee, is the controlling shareholder of RMR Inc. (RMR's parent) and Sonesta, and holds equity investments in other RMR-managed companies.
• Christopher J. Bilotto, a Managing Trustee, President and Chief Executive Officer, also serves as an executive officer of RMR Inc. and RMR, and as a managing trustee and CEO of Diversified Healthcare Trust (DHC).
• Brian E. Donley, Chief Financial Officer and Treasurer, also serves as the chief financial officer and treasurer of Office Properties Income Trust (OPI).
• Other officers and some Independent Trustees also serve in various capacities for RMR and other companies managed by RMR or its subsidiaries.
• The company acknowledges that RMR may engage in other activities or businesses and act as manager to other entities with similar investment policies, potentially leading to competition for investment opportunities and tenants.
• The company consented to RMR's pledge and assignment of its interest in the management agreements to Citibank, N.A. in January 2025, which was approved by Independent Trustees.

Stakeholder Impact

• Shareholders: Face a low quarterly cash distribution rate of $0.01 per share for an indefinite period, with potential for non-cash distributions to preserve liquidity. The ongoing strategic shift and debt management efforts introduce uncertainty regarding future share price performance. Limited rights against Trustees and officers, and specific forum for disputes, may affect shareholder recourse.
• Employees (RMR/Sonesta): RMR had nearly 900 full-time employees as of December 31, 2025. Hotel labor shortages and increased costs, as noted in the filing, could impact employment conditions and compensation within the managed hotel portfolio.
• Customers (Hotel Guests/Net Lease Tenants): Hotel renovations and capital improvements are intended to enhance property appeal and service quality. The focus on necessity-based, e-commerce resistant net lease properties aims to provide stable services to customers.
• Creditors: The company's substantial debt ($5.5 billion) and the structural subordination of certain notes to non-guarantor subsidiaries' debt, as well as effective subordination to secured debt, expose creditors to specific risks. Credit rating changes could affect the cost and availability of capital.
• Suppliers: Supply chain disruptions and changing tariffs/trade policies, as mentioned in the risk factors, could impact the cost and availability of goods and services for the company's operators, potentially affecting their ability to maintain properties and pay rents/returns.

Next Steps

• Complete the sale of the remaining nine hotels (1,167 keys) from the previously announced disposition plan.
• Complete the sale of seven full-service Sonesta hotels (2,010 keys) for which marketing has been initiated.
• Use net sales proceeds from property dispositions for general business purposes, including debt repayment.
• Fund $120,000 thousand to $140,000 thousand for capital improvements to certain hotels during 2026.
• Close the $745,000 thousand net lease mortgage notes transaction (expected March 6, 2026).
• Redeem $700,000 thousand of 8.375% senior guaranteed unsecured notes due 2029 using proceeds from the net lease mortgage notes transaction (expected March 7, 2026).
• Explore refinancing alternatives for debt maturities as they approach, including additional debt, issuing new equity securities, and selling properties.
• Continue to manage the net lease portfolio by engaging in early lease renewal discussions and monitoring tenant credit.
• Apply asset management strategies to aid hotel operators in improving performance.
• Monitor compliance with REIT qualification requirements and debt covenants.
• RMR aims to reduce Scope 1 and 2 emissions by 50% by 2029 and to net zero by 2050.

Key Dates

Recommendation

The company is undergoing a significant strategic transformation, divesting hotels and acquiring net lease properties, which is a positive long-term rebalancing effort. However, the immediate financial impact includes declining FFO/Normalized FFO, increased asset impairment losses, and a very low dividend, reflecting ongoing challenges and the costs of this transition. While debt refinancing activities are underway to manage maturities, the overall debt level remains substantial, and the concentration risk with TA and Sonesta is notable. The stock is currently in a "wait and see" phase as the portfolio rebalancing and debt reduction efforts play out. A "Hold" recommendation is appropriate for investors monitoring the execution of this strategy, acknowledging both the potential for future stability from the net lease focus and the current financial pressures.

Keywords

REIT, Real Estate, Hotels, Net Lease, Travel Centers, Debt Refinancing, Asset Sales, Portfolio Rebalancing, Financial Performance, Corporate Governance, Risk Management, SEC Filing, Capital Expenditures, Shareholder Distributions, Sonesta, TravelCenters of America, RMR Group, Interest Rates, Inflation, Cybersecurity, ESG