Service Properties Trust (NASDAQ:SVC), a diversified REIT based in Newton, Massachusetts, reported mixed third quarter 2023 results on November 6th. While FFO and revenue exceeded estimates, SVC carries concerningly high levels of debt that have weighed on the stock.
Q3 Earnings Top Estimates But Revenue Slips Year-Over-Year
In Q3, SVC generated FFO of $0.56 per share, beating estimates of $0.54. Revenue came in at $496.82 million, topping expectations of $489.19 million. However, revenue decreased slightly from $498.25 million in Q3 2021.
SVC’s portfolio consists of 221 hotels and 761 service-focused retail properties located across 46 states, Puerto Rico, and Canada. The company owns many travel centers positioned along major U.S. highways.
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High Debt Load Sparks Concerns
Despite the Q3 beat, SVC is saddled with $5.72 billion in debt, equating to a lofty 83% debt-to-assets ratio. This is twice the hotel REIT peer average and 2.5 times higher than net lease REITs.
On November 13th, Wells Fargo analyst Dori Kesten maintained an Underweight rating on SVC shares and reduced the price target from $8 to $6.50. Kesten cited the heavy debt burden as a chief concern.
Fed Pivot Offers Refinancing Potential
The Fed’s November announcement indicating smaller potential rate hikes buoyed SVC. With lower rates on the horizon, SVC may be able to refinance substantial portions of debt at more favorable terms in 2023.
Before the Fed news, SVC closed at $7.90 on November 2nd. The stock rocketed to $8.60 within three days post-announcement before pulling back to $8.33. Shares have climbed 21.7% off the November 13th low of $6.84.
Healthy Dividend But Cut Possible Without Debt Refinancing
Despite the low 46.5% forward payout ratio, SVC’s high-yielding 9.6% dividend could get reduced. This hinges on whether the REIT can refinance the $1.1 billion in debt coming due in 2024.
Key Takeaways
- SVC posted Q3 FFO and revenue that exceeded estimates
- Balance sheet remains burdened by $5.72B in high-interest debt
- Upcoming debt maturities in 2024 total $1.1B
- Fed pivot offers potential for refinancing at lower rates
- Dividend appears safe for now but cut possible without refinancing
- SVC must address lofty 83% debt-to-assets ratio to ease concerns
With its above-average yield and recent stock surge, SVC offers an appealing dividend play if the REIT can successfully navigate its debt load. But the overleveraged balance sheet presents a significant risk, warranting a cautious approach.
Reducing the debt burden and addressing 2024 maturities are imperative to stabilizing SVC’s future. The company’s Q3 outperformance provides some optimism, but there are still hurdles ahead.