Transactions

SVC seeks $11m Marriott payment

Service Properties Trust has sent Marriott International a notice requesting an $11m payment to cover a shortfall from the operator.

Last month saw the Reit transfer the branding and management of 103 hotels from InterContinental Hotels Group to Sonesta International Hotels Corporation.

SVC said that Marriott had 10 days from receipt of the letter to make the payment, or SVC would have the right to terminate its agreement with Marriott.

The agreement covered 122 hotels in 31 states (two Marriott, two Springhill Suites, 12 TownePlace Suites, 35 Residence Inns, 71 Courtyards) and currently requires annual minimum returns of $194.6m and expires in 2035. The Reit said that the $11m related to the gap between payments made to date from Marriott International  and 80% of the priority returns due to SVC for the eight months ended August 2020.

SVC said it has used both the security deposit held to secure the minimum return payments under this agreement and the $30m guarantee provided by Marriott International.

SVC owns approximately 34% of Sonesta and said it would “would share in the benefit of this new management agreement and in the hotels’ performance to the extent they ramp up in the post-pandemic recovery”.

There was no immediate response from Marriott International.

The scenario mirrored that at IHG, where SVC sent notices of termination to the group 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 last month that it had not received payment and did not expect to. The group first announced plans to rebrand in July

John Murray, president & CEO, SVC, said: “SVC and IHG have had a long relationship which began in 2003, but we were unable to reach a mutually agreeable resolution to the defaults by IHG under our management agreements with them. Therefore, after a period of negotiation with IHG, we determined to terminate IHG and rebrand these hotels with Sonesta. Based on historical experience, we believe the current portfolio of 103 hotels may perform as well, or better, as Sonesta hotels post-conversion and once stabilised in their respective markets.

“Sonesta currently manages 16 hotels for us that were rebranded from IHG in 2012, and total annual revenue and hotel Ebitda at these 16 hotels improved 14.4% and 10.3%, respectively, post-conversion and once stabilised.

“In addition to Sonesta possibly having a positive impact on these hotels’ performance in the future, we own approximately 34% of Sonesta and we will therefore indirectly share in any benefit of these new management agreements by Sonesta in the future. We also believe having these 103 hotels operated by Sonesta provides us with greater flexibility in managing our business through the current challenging market conditions. For example, we expect that some of the transitioned hotels may be repurposed to an alternative use or sold in the future.”

Speaking at the group’s first-half results, 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."

 

Insight: IHG wasn’t, as the term goes, too fussed about losing its hotels to SVC, a position which it has maintained and we now look to see whether Marriott International thinks this portfolio is worth $11m of its hoarded cash. At the last word, the group was ‘reviewing’ the letter from SVC.

Operators falling behind on payments is nothing new in this pandemic and, if the rumour mill is to be believed, there are plenty of other prominent names keeping their cash close.

What makes this case different is that SVC has decided to call the issue, rather than pretend and extend. This is because in Sonesta it has a new home for its hotels and so why not? Other owners do not have such options and duly find themselves between a rock and a hard place. As this pandemic progresses, we have seen owners unwilling to spend out on conversions, something which is costing the operators in terms of pipeline, but which they may come to bank upon as it progresses.