Service Properties Trust ((SVC)) has held its Q2 earnings call. Read on for the main highlights of the call.

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Service Properties Trust’s latest earnings call struck a cautiously optimistic tone as management highlighted solid momentum in its core hotel and net lease operations while acknowledging near-term profit pressure. RevPAR gains, improving hotel EBITDA on the retained portfolio, and balance sheet de-risking helped offset renovation disruption, exit-asset losses, higher insurance costs, and a modest decline in normalized FFO.

RevPAR Outperformance and Growth

Retained hotel portfolio RevPAR climbed 6.6% year over year, with the 93 comparable hotels posting 6.5% growth and preliminary July trends showing a 7.1% gain. Management stressed that excluding short-term disruption at the Nautilus South Beach project, underlying RevPAR growth was closer to 9%, underscoring healthy demand across the core lodging footprint.

Improving Hotel EBITDA and Margins on Retained Portfolio

Adjusted EBITDA for the 78 retained hotels rose 4.2% year over year to about $57 million, with portfolio margins around 19.4%. Excluding three renovation-impacted hotels, hotel EBITDA increased by $6.5 million, or 13.4%, signaling that core assets are leveraging revenue growth into better profitability despite external cost pressures.

Net Lease Portfolio Cash Flow Strength

Net lease cash-basis NOI increased 2.2% sequentially and was up $1.3 million versus last year, supported by strong occupancy of 96.6%. The net lease platform now spans 745 properties with nearly $400 million of annualized base rent, more than 95% of which is protected by contractual rent escalators or percentage rent provisions.

Capital Markets Execution and Debt Reduction

The company raised approximately $542 million of net equity proceeds in April and used the bulk of it to redeem about $550 million of unsecured debt, unlocking roughly $30 million in annual cash interest savings. Total debt now stands at $4.7 billion with a weighted average interest rate of 5.66%, and the revolving credit facility remains fully undrawn, giving added financial flexibility.

Active Capital Recycling and Acquisition Activity

Since the start of the second quarter, Service Properties Trust has sold around 20 properties for roughly $32 million, mostly net lease assets plus one hotel. On the reinvestment side, it has acquired about $9 million of assets across four properties at a weighted average cash cap rate of 7.9% and is under agreement to buy five more properties for $14.2 million, running ahead of its $25 million annual acquisition goal.

Operational Cost Initiatives and Early Savings

Management detailed several margin-enhancing initiatives, including cutting property insurance costs by about 20%, which should trim annual premiums by a few million dollars. They also cited a 22% boost in contract segment revenue, improved labor productivity at select hotel operators, and identified roughly $15 million of negative EBITDA drag from exit hotels that they intend to eliminate.

Maintained Full-Year Guidance and Positive Cash Flow Outlook

The company reaffirmed its full-year normalized FFO outlook of $124 million to $144 million, or $1.20 to $1.35 per share, and held guidance for hotel EBITDA, net lease NOI, and consolidated adjusted EBITDA. Cash available for distribution was $42.5 million in the quarter, and management reiterated expectations for positive CAD in 2026 as cost savings, capital recycling, and balance sheet actions flow through.

Normalized FFO Decline

Despite operational progress in the retained portfolio, normalized FFO for the second quarter slipped to $55 million, a 4.5% decline year over year. The drop was driven primarily by a roughly $20 million fall in hotel results, reflecting the impact of recent asset sales and transitions rather than a deterioration in core demand.

Hotel GOP and Cost Pressure

For the 93 comparable hotels, gross operating profit margin dipped 60 basis points to 28.7%, signaling some erosion in hotel-level profitability. Below-GOP costs rose by about $3.5 million compared with last year, driven mainly by higher insurance expenses, although management believes recent insurance savings initiatives should ease this pressure over time.

Dispositions and Exit-Hotel Drag

A cohort of 15 exit hotels continued to weigh on results, operating at a negative EBITDA margin and contributing to losses, including a $1.9 million loss from Sonesta exit hotels, a $2.2 million deterioration from a year ago. Management estimates these exit assets represent about $15 million of negative EBITDA drag and is focusing on sales to remove this overhang.

Renovation-Related Disruption at Nautilus South Beach

The ongoing redevelopment of Nautilus South Beach is generating short-term displacement and performance drag, with completion targeted for late October or early November. For the full year, the property is expected to create a cash drag of roughly $4.5 million, but management views this as a temporary headwind ahead of a planned relaunch.

FFO Per-Share Comparability and Share Count Changes

Recent capital structure moves, including a 1-for-5 reverse share split in July and a sizeable equity issuance, are complicating per-share trend analysis for investors. Guidance now assumes a weighted average share count of 105 million, and management emphasized that headline per-share changes need to be viewed in light of these structural shifts.

Mixed Disposition Timing and Market Conditions

While many hotel sales are under contract or at the letter-of-intent stage, management flagged timing risk, with most deals expected to close in the back half of 2026 and some slipping into early 2027. They also noted that pricing remains softer for larger hotel assets in the $50 million to $100 million range, which could influence eventual proceeds and the pace of capital recycling.

Consolidated Hotel Results Pressure

Consolidated hotel performance showed a $20 million decline quarter over quarter as asset sales and renovation displacement weighed on the top and bottom lines. These headwinds were partially offset by lower interest expense from recent debt reduction and incremental gains from the net lease portfolio, tempering the impact on overall profitability.

Forward-Looking Guidance and Strategic Outlook

Looking ahead to 2026, management reaffirmed normalized FFO guidance of $124 million to $144 million and assumes around $360 million of operating expenses, $40 million of G&A, and $120 million to $140 million of capital expenditures. The plan includes $25 million of net lease capital recycling and expects positive CAD for the year, while guidance does not yet incorporate the full benefit of ongoing dispositions or the roughly $30 million in annual interest savings.

Service Properties Trust’s earnings call painted a picture of a company in transition but moving in the right direction, with RevPAR growth, net lease durability, and balance sheet strengthening offsetting short-term renovation and exit-hotel noise. Investors will be watching execution on asset sales, cost controls, and capital redeployment to confirm that today’s temporary drags translate into sustainably higher margins and cash flow over the next two years.