Plenty of room at the hotel-net lease REIT?
What happened to all those single tenant assets Spirit Realty divested into the SMTA entity prior to the former’s sale to Realty Income (NYSE: O)?
Minimally followed by investors, analysts, and the market, Service Properties Trust (NASDAQ: SVC) quietly owns a single tenant portfolio larger than both Four Corners Property Trust (NYSE) and Getty Realty (NYSE: GTY). The REIT is externally managed by The RMR Group (NASDAQ: RMR), a U.S. alternative asset manager with over $40 billion of real estate under supervision.
SVC’s overall portfolio is split between two asset classes typically not viewed symbiotically: hotels, of which SVC owns 214 ($6.0 billion+ invested), and net lease, where SVC owns 745 service-oriented retail assets ($5.0 billion invested).
At the time called Hospitality Properties Trust, SVC bolstered its existing travel center net lease assets via the acquisition of 767 properties (12.4 million square feet) from the SMTA liquidating trust in September 2019 for $2.5 billion. Current exposure, after years of culling, includes:
Within the net lease sub-portfolio, $3.3 billion (2/3) sits within 178 travel centers: 175 of the 178 are leased to TravelCenters of America, via its namesake properties and Petro Stopping Centers brand, representing 68% of net lease annualized minimum rent. The remaining is essentially the former SMTA portfolio.
Net lease property tenant concentrations:
With no other brand exposures exceeding 2% of total net lease rent, SVC owns a smattering of typical net lease assets: three Life Time fitness centers, 23 Express Oil Change shops, a Fleet Farm megastore, various quicks service and casual dining restaurants, nearly 60 Heartland Dental offices, five Mister Car Wash sites, and 15 movie theatres. The REIT’s weighted average lease term is 8.3 years.
SVC’s share price has fallen from $24.33 to $2.61 since the start of 2020 while the $0.54/share quarterly dividend pre-COVID-19 is currently just $0.01/share - due to performance issues and CapEx needs of the hotel portfolio.
The company’s current enterprise value (EV) is under $6 billion with a $430 million market capitalization. With all that leverage, what is a back of the napkin valuation of the net lease assets?
Using the November 2024 investor presentation for minimum rent, 3Q2024 YTD actual results for operating expenses, and a market ‘guesstimate’ cap rate, a $4.5-5.0 billion value on the net lease assets seems reasonable.
Since the 3Q reporting (as of 9/30/24), the company announced multiple closed or pending hotel sales:
Sold 5 hotels (642 keys) for $32.2 million ($50,000/key)
Entered agreement to sell 8 hotels (985 keys) for $44.2 million ($45,000/key)
Announced plan to sell 114 focused service hotels (14,925 keys) in 2025 targeting gross sale proceeds of $1 billion, or $67,000/key, per management
The pro forma hotel portfolio includes:
Using an 8.0% cap rate on the net lease assets leaves a $1.5 billion gap for 209 hotels (36,233 keys) to reach the current EV. Management believes the lower quality targeted 2025 hotel sales will generate $67,000/key ($1 billion for 114 hotels).
Cutting that value guidance by 1/3 (as a downside exercise) would place a $45,000/key valuation on the currently owned 209 hotels (in line or under the pricing of recent sales or pending contracts) and provide a $1.6 billion sale value.
To summarize, the current enterprise value could be bifurcated between at 8.0% cap rate on the 8-year WALT net lease portfolio (with 68% of rent sourced from BP-guaranteed master leases) and a $45k/key value on the owned hotels.
Given just $7 million (3 Taco Bell restaurants) in net lease property acquisitions since the SMTA deal (over 5 years), would RMR entertain offers on the net lease assets? Or will they eventually jump in the acquisitions market and attempt to grow (if cost of capital improves)?
Overall, SVC is externally managed (with multiple fee layers), over-levered, subject to volatility hotel performance, and holds a cross-equity investment in Sonesta hotels operating company - presenting many risks and complexities.
However, the core net lease portfolio has likely retained much of its value and is worth monitoring particularly given the current SVC valuation appears close to, if not below, liquidation price. Given seemingly weekly launches of new net lease platforms with more capital than acquisition ideas, the SVC net lease portfolio may garner more interest than many would think if a sale were ever on the table…
Taking it to the streets
NETSTREIT (NYSE: NTST) closed $275.0 million in additional financing commitments and amendments to its existing credit facilities. Specifics include a new $175 million term loan and a $100 million upsize to the existing revolving credit facility, both now with maturities in 2029. The new term loan was hedged at an all-in fixed interest rate of 5.12%.