Service Properties Trust (SVC) stock intrinsic value fair value estimate & owner earnings analysis

Service Properties Trust is a real estate company with two businesses. The larger one by value is a portfolio of about 745 retail properties on long net leases: travel centers, quick-service restaurants, fitness clubs, dental offices, car-care shops and grocery stores. The tenants pay the property costs. The other is a portfolio of 93 hotels that the company owns and that outside operators run for it, mainly Sonesta, along with Hyatt, Radisson and IHG. Because the company owns the hotel operations, it takes the full swings in hotel profits and pays for every renovation. The company has no employees of its own and is managed by The RMR Group for a fee. The anchor of the business is TravelCenters of America, now owned by BP. TA leases 175 travel centers (TravelCenters and Petro) under five master leases that run to 2033. Minimum rent is about $270 million a year and rises 2% each year. TA can renew all of the sites under each lease for up to five more ten-year terms. BP Corporation North America guarantees the rent up to a cap of about $3.0 billion. TA's sites cover their rent about 1.3 times. Until 2033, TA also receives a $25 million yearly credit for rent it prepaid. These leases are about two-thirds of net lease rent and are the most dependable cash the company has. The other roughly 570 net lease properties bring in about $127 million a year from some 180 tenants, with rent covered about 3 to 4 times. What changed. In 2025 and 2026 the company sold 112 of its 206 hotels for about $860 million and agreed to sell 12 more for $77 million. In April 2026 it sold about $540 million of new shares at a low price, then completed a 1-for-5 reverse share split in July 2026. It used the cash, along with a new $745 million mortgage financing on its net lease properties, to retire the 2026 notes, the 2027 unsecured notes and the 8.375% notes due 2029. Debt has fallen from about $5.5 billion at the end of 2025 to about $4.7 billion. The share count has nearly quadrupled on a split-adjusted basis, from about 33 million to about 130 million. Because the share count changed so much, our previous per-share figures are not comparable with these. How we measured earnings. We started with operating cash flow, removed working-capital timing swings, and charged the cost of share awards. We then subtracted all the capital spending needed to keep the properties competitive. That includes hotel renovation spending paid out of the hotel operators' furniture-and-equipment reserves, which was $70 to $210 million a year before 2020. Hotel capital spending is the critical number in this business. It ran $220 to $360 million a year in 2016 to 2019 and $200 to $310 million a year in 2023 to 2025, during a brand-conversion program. That spending wiped out most of the hotels' cash profit, so owner earnings were negative in 2024 and 2025 even though the hotels earned about $133 to $165 million before capital spending. Because the company is now so different, we measure it from 2022 onward and value it before interest. On that basis the business generated $235 to $485 million a year, with a median of about $345 million. 2020 and 2021 were pandemic years and are excluded. The base case. TA rent of about $270 million grows 2% a year under the signed leases. The other net lease properties keep contributing roughly $97 million after costs and normal turnover. The retained hotels earn about $130 million before capital spending, in line with 2025. 2025's retained-hotel profit was $143 million, and RevPAR at those hotels rose 7% in the first half of 2026. Hotel capital spending eases from about $100 million in 2026 to about $70 million a year once the conversion program is finished, which leaves the hotels contributing about $60 million a year. Overhead is about $41 million. That gives business cash flow of about $335 million in the first year, roughly 12% above 2025's $300 million, and about $380 million once the renovation cycle normalizes. It then grows only with the TA rent escalators. TA's renewal options run decades past 2033, the sites are well covered, and the company has kept these sites through several resets, so we carry the TA rent past 2033 at its 2033 level without further increases. We credit no new acquisitions and no hotel margin gains. Valued this way, the business is worth about $7.0 billion. It owes about $4.7 billion. Most of that debt costs less than or about the long-bond rate, but $1.5 billion of it carries 8.6% to 8.9% coupons, and debt refinanced over the next several years is likely to cost about 8.75%. Allowing for that, plus the 12 hotels under contract and others still for sale (about $165 million), net debt is about $5.0 billion. That leaves about $2.0 billion for shareholders, or about $15.50 a share. The bear case. A full downturn like 2008-2010 or the 2020 shutdown hits the hotels. In 2009 hotel RevPAR fell about 17%, and in 2020 this company's hotels lost money. We model two years of hotel cash profit at about $78 million before capital spending, recovering over the following years, while capital spending cannot fall below about $55 million. The smaller tenants see higher vacancies and rent cuts of about 15% during the downturn, settling 8% lower afterwards. At the 2033 expiry TA renegotiates, as it did when its leases were restructured in 2019, and rent resets about 20% lower. Meanwhile the 2027 and 2028 maturities (the $580 million zero-coupon secured notes, $600 million of mortgage notes and $400 million of 3.95% notes) must be refinanced near 9.5%, and the company issues about $400 million of shares near $4 to stay within its covenants. In this case the business is worth about $5.7 billion against about $5.5 billion of debt measured at its true cost, which is about $2.70 a share after the dilution. Without the share issue the equity would be worth less than $2 a share. In this case the shareholders are left with very little after the lenders. The bull case. The renovation program ends on schedule and hotel capital spending falls to about $65 million a year. The retained hotels earn about $145 million before capital spending, consistent with their 2024 profit of $164 million on a slightly larger base. The other net lease properties hold at about $100 million after costs. TA renews in 2033 and the 2% escalators keep running through the first renewal term. Debt is refinanced near 6.5%, which is what the 2026 mortgage notes cost. The shares would then be worth about $23. Margin-of-safety price. We are reasonably confident in the net lease income: it rests on signed leases, BP's guarantee and long coverage records. We are much less confident about hotel cash flow after capital spending, which has been negative or near zero for most of the past six years. The most plausible bad outcome is a recession arriving while the 2027 and 2028 maturities are being refinanced. With $4.7 billion of debt against roughly $380 million of normalized pre-interest cash flow, the company would probably have to sell assets or issue shares at a low price, as it just did. Shareholders were heavily diluted once already in 2026. If we are wrong about hotel capital spending falling (say it stays at $150 million or more) or about the 2033 TA renewal terms, the shares are worth roughly $5 to $10. At a $6 price the company would be valued at about $780 million. Once renovation spending normalizes, cash left after interest of roughly $110 million a year (about $70 million in the near term) would equal 9% to 14% a year of that price before any value growth, of which the current $0.20 a share dividend pays out about 3%. Steady debt reduction plus the base case reaching $15 to $16 within four to five years implies roughly two to three times that price. The margin-of-safety price is no higher than that, because the downside case leaves almost nothing, and only a deep discount supports a 20% annual return across the range of outcomes. What could not be reconciled from the filings: the company reports hotel capital spending in its earnings releases with a split between owner-funded renovations and reserve fundings that does not tie exactly to the cash flow statement. We used the cash flow statement throughout.