Organization and Basis of Presentation

3 Months Ended

Mar. 31, 2021

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization and Basis of Presentation

Note 1. Organization and Basis of Presentation

Service Properties Trust, or we, us or our, is a real estate investment trust, or REIT, organized on February 7, 1995 under the laws of the State of Maryland, which invests in hotels and net lease service oriented retail properties. At March 31, 2021, we owned, directly and through subsidiaries, 310 hotels and 798 net lease properties.

At March 31, 2021, 305 of our 310 hotels were operated by subsidiaries of the following companies: Sonesta Holdco Corporation, or Sonesta (256 hotels), Hyatt Hotels Corporation, or Hyatt (22 hotels), Radisson Hospitality, Inc., or Radisson (nine hotels), Marriott International, Inc., or Marriott (17 hotels), and InterContinental Hotels Group, plc, or IHG (one hotel). We have entered into an agreement to sell five of our 310 hotels and have entered into a short term lease of these properties with the buyer in anticipation of the sale. At March 31, 2021, we owned 798 net lease properties with 168 tenants, including 179 travel centers leased to TravelCenters of America Inc., or TA, our largest tenant. Hereinafter, these companies are sometimes referred to as managers and/or tenants, or collectively, operators.

Impact of COVID-19

The lodging industry and other industries in which our managers and tenants operate have been adversely impacted by the novel coronavirus, or COVID-19, global pandemic, the federal, state and local government mandates intended to contain and mitigate the spread of COVID-19 and market reactions to the pandemic. These matters continue to have a significant negative impact on our results of operations, financial position and cash flow. Our results of operations and cash flows from our hotels are heavily dependent on our operators’ ability to generate returns to us. Although leisure demand at our hotels has improved through the first quarter of 2021 when compared to 2020 levels, business transient and group demand have been limited and, consistent with trends throughout the U.S. lodging industry, continue to lag in recovery. Although overall lodging activity continues to improve over levels seen since the beginning of the pandemic, and our current expectation is that lodging demand may improve in the second half of 2021 at a more meaningful pace than experienced to date, we expect the recovery in the lodging industry to historical levels may take several years. We cannot predict with certainty when business levels may return to normalized historical levels after the effects of the pandemic subside. We currently expect that the recovery with respect to business transient and group business will be gradual and likely inconsistent. Factors such as public health, availability and effectiveness of COVID-19 vaccines, changes in business practices with regard to travel and the geopolitical environment may impact the timing, extent and pace of such recovery. In addition, consumer confidence and leisure demand will continue to be affected by unemployment, perceptions of the safety of returning to normal activities and broader macroeconomic trends. Under the accounting guidance related to the presentation of financial statements, when preparing financial statements for each annual and interim reporting period, management has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. In applying the accounting guidance, we considered our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our unconditional obligations due over the next 12 months. As of March 31, 2021, we were not in compliance with one of our debt covenants necessary to incur additional debt, and as a result, we will not be able to incur additional debt until we meet the required covenant level. On January 19, 2021, we borrowed $972,793 under our revolving credit facility as a precautionary measure to preserve financial flexibility and are currently fully drawn under our revolving credit facility. Based on our cash on hand, the cash flows we expect to receive from our net lease portfolio, improving lodging trends and asset dispositions we expect to complete, we believe we will have sufficient liquidity to meet our obligations for at least the next twelve months.

Basis of Presentation

The accompanying condensed consolidated financial statements of us are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020, or our 2020 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period, have been included. These condensed consolidated financial statements include our accounts and the accounts of our subsidiaries, all of which are 100% owned directly or indirectly by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include the allowance for credit losses, purchase price allocations, useful lives of fixed assets, impairment of real estate and related intangibles.

We have determined that each of our wholly owned taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification™. We have concluded that we must consolidate each of our wholly owned TRSs because we are the entity with the power to direct the activities that most significantly impact such VIEs’ performance and we have the obligation to absorb losses or the right to receive benefits from each VIE that could be significant to the VIE and are, therefore, the primary beneficiary of each VIE. The assets of our TRSs were $140,211 and $118,862 as of March 31, 2021 and December 31, 2020, respectively, and consist primarily of amounts due from and working capital advances to certain of our hotel managers. The liabilities of our TRSs were $91,220 and $70,240 as of March 31, 2021 and December 31, 2020, respectively, and consist primarily of amounts payable to certain of our hotel managers. The assets of our TRSs are available to satisfy our TRSs’ obligations and we have guaranteed certain obligations of our TRSs.