17.3%-Yielding Service Properties Trust a Great Option with Interest Rates Falling
September 20, 2024
SVC Stock Has 80%+ Upside
Real estate investment trusts (REITs) have taken a hit in this high-interest-rate environment. Higher interest rates tend to decrease the value of properties and increase borrowing costs. On top of that, they make high-dividend-yielding REITs appear less appealing when compared with lower-risk, lower-yielding, fixed-income securities.
But, with interest rates expected to start coming down in September, the outlook for REITs like Service Properties Trust (NASDAQ:SVC) is solid. Service Properties stock has actually been negatively impacted by two issues: rising interest rates and weakness in the hotel and retail space. But things have been improving, which is great news for this REIT.
Service Properties is a REIT with over $11.0 billion invested in two asset categories: hotels and service-focused retail net lease properties. (Source: “Investor Presentation May 2024,” Service Properties Trust, last accessed September 10, 2024.)
Service Properties’ $11.4-billion portfolio is invested across two asset classes: hotels and service-focused retail net lease properties.
It currently owns 220 hotel properties with approximately 37,700 rooms throughout the U.S., Puerto Rico, and Canada. Service Properties is the eighth largest hotel company by chain scale, with the majority (46.6%) of its properties being upscale and 15% being classified as upper upscale.
The REIT also owns 969 service-focused retail net lease properties covering 13.3 million square feet, or roughly 231 NFL football fields. The diverse footprint includes 22 industries and 146 brands.
Some of its tenants include TravelCenters of America, Burger King, Kohls Corp, Express Oil Change, and Pizza Hut. A full 97% of its leases have contractual increases or percentage rents, providing Service Properties with a reliable income stream.
Solid Second-Quarter Results
For the second quarter ended June 30, 2024, Service Properties announced that revenue increased 1.8% on an annual basis and 17.5% on a sequential basis to $512.9 million. (Source: “Service Properties Trust Second Quarter 2024 Financial Results and Supplemental Information,” Service Properties Trust, August 6, 2024.)
The company reported a net loss of $73.8 million, or a loss of $0.45 per share, up from a second-quarter 2023 net loss of $11.2 million, or a loss of $0.07 per share. Funds from operations (FFO) came in at $57.7 million, or $0.35 per share, while normalized FFO was $73.8 million, or $0.45 per share. The all-important cash available for distribution (CAD) was $47.6 million, or $0.29 per share.
It ended the quarter with total liquidity of $664.6 million.
Subsequent to the end of the second quarter the company sold two hotels for an aggregate sales price of $10.8 million and entered into agreements to sell 16 hotels for an aggregate sales price of $113.2 million.
Looking ahead, analyst’s expect Service Properties to report earnings growth over the next two years, from $1.87 billion in 2023 to $1.88 billion in 2024 and $1.91 billion in 2025. (Source: “Service Properties Trust (SVC),” Yahoo! Finance, last accessed September 10, 2024.)
Service Properties is expected to continue losing money. After reporting a $0.02 loss per share in 2023, the loss is expected to increase to $1.13 per share in 2024, narrowing to $0.92 in 2025.
The company will need to continue streamlining its cost side and move back to the kind of profitability it enjoyed before the 2020 health crisis.
Declares Quarterly Cash Dividend of $0.20 Per Share
Thanks to its reliable free cash flow (FCF), Service Properties is able to provide investors with a reliable dividend, including $248.6 million in 2023. The REIT uses FCF to pay dividends and reduce debt.
Service Properties has been paying a dividend since 2005. It has suspended it only once, during the 2008/2009 financial crisis. The company has paid its dividend without interruption since then, including through the 2020 health crisis.
However, Service Properties Trust did cut its payout in 2020, which shouldn’t be a big surprise. It currently pays a quarterly dividend of $0.20 per share, or $0.80 on an annual basis, for a current yield of 17.32%.
The five-year average dividend yield is 7.52%. The current ultra-high dividend yield is a result of its lower share price. As of this writing, (September 10), SVC stock is down 43% year to date and 36.5% year over year.
The outlook though for SVC stock remains solid, with Wall Street analysts providing a 12-month share price target range of $5.00 to $8.00. At current levels, this points to potential gains of approximately 13% to 81%.
That’s still a far cry from its April 2017 record high of $20.74, but the current economic and inflationary environment shows that SVC stock is heading in the right direction.
Chart courtesy of StockCharts.com
The Lowdown on Service Properties Trust
Service Properties Trust is a great equity REIT with a geographically diverse portfolio of net lease properties and hotels.
During the second quarter, the company’s top-line hotel performance was highlighted by occupancy gains in its full-service and select-service portfolios. Its net lease assets, meanwhile, anchored by TravelCenters of America, continue to provide stable cash flows and ample rent coverage.
With a strong balance sheet and no debt maturities until 2026, Service Properties is well positioned to continue to implement its strategic capital investment in the hotel portfolio that it expects will create long-term value for shareholders.
This should, within the lower-interest-rate environment, help juice SVC stock. Until such time, investors can take solace in Service Properties Trust’s reliable, ultra-high-yield dividend.
