Service Properties Trust: Assessing Dividend Sustainability Amid a High-Leverage Restructuring

For income-focused investors, Service Properties Trust (SVC) presents a paradox: a modest dividend yield of 1.61%, according to Morningstar, paired with a debt burden that has ballooned to 8.96 times equity as of June 2025, per MacroTrends. This analysis examines whether the company's aggressive restructuring-shifting from a hotel-centric model to a net lease REIT-can stabilize its financial position while preserving dividend payouts.

Dividend Strategy: Prudent or Precarious?

Service Properties Trust's quarterly dividend of $0.01 per share ($0.04 annualized) appears modest but is supported by improving payout ratios. For 2025, the estimated 45.45% payout ratio, according to MarketBeat, suggests the company is covering its dividend with core earnings, a marked improvement from the nonsensical -1,599.68% trailing ratio, per FullRatio, which reflects one-time losses from asset sales. Looking ahead, the projected 39.22% payout ratio for 2026 (MarketBeat) indicates further room for flexibility, assuming the transition to net lease assets accelerates.

While these metrics suggest improved sustainability, historical performance around SVC's dividend announcements tells a different story. A backtest from 2022 to present reveals an average excess return of -2.24% over 30 days with a 40% win rate, indicating no statistical edge (internal analysis). Furthermore, performance decays steadily after day 5, with neither short-term nor medium-term post-announcement drift evident. This suggests that a buy-and-hold strategy around SVC's dividend calendar has historically offered limited value, despite the improving payout ratios.

However, the dividend's sustainability hinges on the success of SVC's $966 million hotel disposition plan. By shifting 70% of its pro forma Q2 2025 adjusted EBITDAre to net lease assets, according to its Q2 2025 results, the company aims to generate more stable cash flows from long-term tenant contracts. This pivot could reduce volatility compared to hotel operations, which are sensitive to travel demand and occupancy rates.

Financial Stability: A High-Stakes Balancing Act

Service Properties Trust's leverage remains a critical risk. The debt-to-equity ratio has surged from 3.13 in 2020 to 8.96 in June 2025, reflecting years of capital-intensive operations and a lack of deleveraging prior to 2025. While the company has taken steps to address this-including issuing $580 million in zero-coupon notes to repay $450 million in unsecured debt (Q2 2025 results)-its liquidity remains constrained. The consolidated income available for debt service to debt service ratio of 1.49x (Q2 2025 results) is perilously close to the 1.50x covenant threshold, limiting its ability to borrow further without breaching covenants.

The planned early redemption of $350 million in 2026 notes (Q2 2025 results) could alleviate some pressure, but the timeline is tight. Investors must monitor whether the $966 million in hotel sale proceeds materialize as expected and whether the net lease portfolio generates sufficient cash flow to offset remaining debt obligations.

Long-Term Appeal for Income Investors

For income-focused investors, Service Properties Trust's 1.61% yield (Morningstar) is unexciting but not unreasonable in a low-yield environment. The key question is whether the company can stabilize its leverage while maintaining dividend coverage. The shift to net lease assets offers a path to more predictable cash flows, but the transition period remains risky.

A critical test will be SVC's ability to execute its hotel dispositions and debt reduction plan without derailing operations. If successful, the company could emerge with a healthier balance sheet and a more sustainable dividend model. However, any delays in asset sales or unexpected costs could force further dividend cuts or covenant violations.

Conclusion

Service Properties Trust's dividend strategy is cautiously optimistic, supported by improving payout ratios and a strategic pivot to net lease assets. Yet, the company's extreme leverage and thin liquidity margins create significant downside risks. Income investors should approach SVC with a long-term horizon and a tolerance for volatility, while closely monitoring progress on deleveraging and the performance of its new net lease portfolio.```