Hyatt considers SVC termination

Sonesta

Service Properties Trust has received a notice of termination from Hyatt with respect to the management agreement for 22 Hyatt Place hotels owned by subsidiaries of SVC.

All or some of the hotels may stay under Hyatt brands, but may also move to Sonesta, the brand in which SVC has a 34% stake.

Last year saw Sonesta add a number of hotels from both Marriott International and InterContinental Hotels Group.

Hyatt’s obligations under the management agreement, which requires minimum returns of $22.0m annually, is supported by a $50.0m limited guarantee. SVC said that, while Hyatt was current on its payments to SVC, it recently exhausted this $50.0m guarantee and under the terms of the management agreement, Hyatt may terminate the agreement upon 90 days’ notice once the guarantee has been fully utilised.

SVC and Hyatt were in discussions regarding possible changes to the management agreement. SVC said that, should such discussions not result in a mutually acceptable agreement, SVC expected to transition management of the 22 hotels to Sonesta International Hotels Corporation, or Sonesta, on 8 April under the Sonesta Select brand. SVC also owns 34% of Sonesta.

Last month saw Sonesta International agreed to acquire RLH Corporation, in an all-cash deal valued at $90m, creating a company with more than 1,200 hotels.

The transaction came after a busy year for Sonesta, which saw a number of hotels owned by 34% shareholder Service Properties Trust take on its brands.

Holders of RLH’s common stock will receive $3.50 per share in cash, representing an 88% premium over the 4 November, closing share price, the last trading date before Red Lion most recently provided an update on its strategic alternatives, and a 30% premium over the closing price prior to the transaction being announced.

R. Carter Pate, chairman, RLH, said: “We are excited about unlocking shareholder value through this all-cash transaction with Sonesta. After conducting a thorough review of strategic alternatives, the board believes today’s announcement is in the best interest of all of Red Lion’s shareholders.”

In August SVC sent notices of termination to IHG for failure to pay SVC’s minimum returns and rents due for July and August 2020 totalling $26.4m, giving until 24 August pay.

SVC said that it had not received payment and did not expect to. The group first announced plans to rebrand in July

Speaking at the group’s first-half results, IHG CFO Paul Edgecliffe-Johnson told analysts: “This is a fairly small portfolio from an earnings perspective. It's less than 0.5% of group earnings. In terms of cash, [there’s] not a significant impact there. You will have seen in the balance sheet that we've written off, effectively the cash that we have as an owner's deposit. But that's not in our cash anyway. So I wouldn't really expect to see any further impact.”

Then in October Service Properties Trust cuts its management agreements with Marriott International across 122 properties.

Service Properties Trust said it planned to change 98 of the hotels to the Sonesta International Hotels portfolio, with the remaining 24 properties set to be sold for just over $153m.

Sonesta announced that upon closing of this transaction, Keith Pierce would be joining Sonesta as EVP, president, franchise & development.

He most recently served as president & managing partner, Passionality Group, a hospitality investment and management advisory firm. Prior to that, he worked at Wyndham Worldwide, where he was EVP,  brand operations, North America

Carlos Flores, president & CEO, Sonesta, said: "Sonesta started 2020 as a manager of 58 hotels under three Sonesta-specific brands in the U.S. Upon the completion of hotel conversions previously announced and the acquisition of RLH, Sonesta will become one of the largest hotel companies in the U.S., with approximately 1,200 hotels under a diverse set of 13 brands in multiple market segments.

"Whereas all of Sonesta's hotels in the U.S. are currently self-managed, the acquisition of RLH significantly accelerates Sonesta's hotel franchising capabilities by adding a franchise platform with more than 900 hotels. With the addition of Keith to our leadership team, we also have an experienced executive ready to manage the RLH business upon closing this transaction and we are well positioned to grow Sonesta's franchising business in the future.”

Pierce said: "I am looking forward to welcoming RLH franchisees to Sonesta at this dynamic and promising moment in the company's growth. I also look forward to working closely with the RLH franchising community and building on the strong foundation RLH has created. I believe Sonesta is currently one of the industry's most exciting, forward-looking hotel companies. I look forward to helping propel the growth of Sonesta and working closely with the leadership team to continue building a world class hotel company.”

 

Insight: Yes, really. If you have a management agreement with SVC - and it has 329 hotels, so you may well do - then it’s time to check your mailbox because you are likely to have a message suggesting you might like to shove off and be replaced by a Sonesta brand. Wyndham and Radisson, take note.

In this case it is Hyatt seeing the writing and rebranding all over the wall after Marriott International and IHG found themselves on the wrong side of expansion last year.

What next for Sonesta? Ongoing massive growth, we suspect, with Red Lion likely to be the first in a series of deals. SVC is managed by the majority-owned operating subsidiary of The RMR Group, an alternative asset management company which has at its helm some very serious real estate folk indeed. Don’t reel in shock if their next deal is for significantly more than 22 hotels.