Service Properties Trust's Strategic Asset Sales and Debt Reduction: Assessing Long-Term Value Creation and Balance Sheet Strength

Service Properties Trust (SVC) has embarked on an aggressive restructuring strategy in 2025, leveraging asset sales and debt reduction to stabilize its balance sheet and pivot toward a net lease-focused business model. This analysis evaluates the effectiveness of these initiatives in creating long-term value for investors, while scrutinizing the risks and opportunities embedded in SVC's current trajectory.

Capital Recycling and Debt Reduction: A Strategic Overhaul

SVC's 2025 asset sales program has been a cornerstone of its debt reduction efforts. By the end of Q4 2025, the company had sold 112 hotels with 14,803 keys, generating approximately $859 million in gross proceeds. These transactions, including the sale of 31 hotels in November 2025, have enabled SVC to fully repay its $650 million revolving credit facility and retire $700 million in senior notes maturing in 2026. Additionally, the company redeemed $300 million of its $400 million unsecured senior notes due in February 2027, funded entirely by proceeds from hotel sales.

This capital recycling has significantly improved SVC's liquidity and reduced its near-term debt maturities. For instance, the early redemption of $350 million in 5.25% unsecured senior notes due in February 2026, as reported in Q2 2025 earnings calls, underscores the company's commitment to deleveraging. By extending its debt runway through zero-coupon senior secured notes-raising $580 million to repay credit facilities-SVC has also diversified its capital structure, reducing reliance on short-term borrowing.

Transition to a Net Lease REIT: A New EBITDA Mix

A critical component of SVC's strategy is its pivot toward a net lease business model. As of Q2 2025, net lease assets were projected to account for over 70% of adjusted EBITDAre (non-GAAP), reflecting a dramatic shift from its historically hotel-centric portfolio. This transition is driven by the sale of low-margin, high-operational-cost hotel assets and the reinvestment in stable, service-focused retail net lease properties.

The net lease segment, which includes 742 properties generating $387 million in annual minimum rents, has demonstrated resilience with 97% occupancy and strong tenant diversity as reported in Q2 2025 earnings calls. This shift aligns with broader market trends favoring income-generating, low-volatility assets, potentially enhancing SVC's appeal to long-term investors. However, the transition has not been without costs: Q3 2025 normalized FFO fell to $0.20 per share from $0.32 in the prior year, primarily due to lower hotel EBITDA and elevated interest expenses.

Balance Sheet Strength and Risks

While SVC's debt reduction efforts have improved its leverage ratios, the company still faces a daunting debt load of approximately $5.5 billion as reported in Q3 2025 earnings calls. Despite the $913.3 million in proceeds from hotel sales (as of November 2025) as reported in the 8-K filing, SVC's debt-to-EBITDA ratio remains elevated, and the projected $50 million EBITDA loss from hotel sales could further strain profitability as noted in Q3 2025 earnings calls. Analysts caution that the company's reliance on asset sales to fund debt repayment creates execution risk, particularly in a slowing real estate market as highlighted in Q3 2025 earnings calls.

Moreover, the hotel segment's performance remains volatile. Q4 2025 RevPAR guidance of $86–$89, coupled with adjusted hotel EBITDA projected at $20–$25 million, highlights the sector's fragility amid rising labor costs and soft demand. While management has deferred non-essential capital expenditures-reducing 2025 capex to $200 million from $250 million-this austerity may limit future growth opportunities.

Long-Term Value Creation: A Calculated Bet

SVC's strategy hinges on the successful execution of its remaining hotel sales and the ability to redeploy capital into higher-yielding net lease assets. By the end of 2025, the company aims to sell an additional seven full-service hotels, generating $90–$110 million in proceeds. If completed, these sales would further reduce leverage and provide flexibility to address the $450 million in senior notes maturing in October 2026 as noted in Q2 2025 earnings calls.

For investors, the key question is whether SVC's net lease pivot can offset the drag from its shrinking hotel portfolio. The company's focus on service-focused retail tenants-such as banks, pharmacies, and automotive services-offers a defensive edge in a high-interest-rate environment. However, the success of this strategy depends on SVC's ability to secure accretive net lease acquisitions and maintain occupancy rates amid economic uncertainty.

Conclusion

Service Properties Trust's 2025 asset sales and debt reduction initiatives have laid a foundation for balance sheet stability, but the path to long-term value creation remains uncertain. While the transition to a net lease model addresses operational inefficiencies and aligns with market demand for stable cash flows, the company's high debt load and exposure to hotel sector headwinds pose significant risks. Investors should monitor SVC's ability to execute its remaining dispositions, optimize its capital structure, and demonstrate EBITDA growth from its net lease portfolio. For now, the strategy appears to be a calculated bet on resilience, but one that requires careful scrutiny of execution and market conditions.