SVC to rebrand Marriott sites

SVC

Service Properties Trust has 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.

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

John Murray, president & CEO, SVC, said: “SVC and MAR have had a long relationship which began in 1994, but because of MARs current non-payment and our understanding that MAR does not intend to pay SVC any shortfall amounts in the future, we have terminated our agreements with MAR and we plan to rebrand these hotels with Sonesta. We believe that the rebranding of these hotels with Sonesta will benefit SVC as an owner of Sonesta, create greater flexibility in managing these hotels through these challenging market conditions and have a positive impact on this portfolio’s performance in the future.”

“Service, quality and safety are of primary focus for hotel guests at this time and most of Sonesta’s managed hotels have been recognised in the top 10% of TripAdvisor hotels worldwide, demonstrating that Sonesta has established a high standard of service in its hotels that we believe will be essential as it grows.”

"We're proud that SVC continues to grow its relationship with Sonesta by entrusting us with management of another sizeable portfolio of their hotels and resorts", said Carlos Flores, president & CEO, Sonesta International Hotels Corporation. "We are prepared and confident in our abilities to ensure these hotels receive the same level of exceptional care and support as Sonesta's existing 80 plus properties.  We're thrilled to welcome these new hotels to our growing portfolio of destinations."

Last month saw SVC send Marriott International a notice requesting an $11m payment to cover a shortfall from the operator.

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 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: Well IHG didn’t care and so will Marriott International also fret about the loss to its estate? It appears not. Well that’s $11m it can keep and apparently a new owner to try and persuade of its greatness for the remaining 24 properties.

Both IHG and Marriott appear to have been very relaxed about what has happened and why should this be so? SVC appears to be very much an outlier. If your owner suddenly develops a stake in a branded company, then you should start to worry, perhaps, but in the main there is no appetite for owners or banks to take on hotels and the era of pretend and extend continues apace.

As we heard in last week’s AHC reimagined, relationships are becoming more flexible, with more give and take. Yes you get the ones where the locks are changed and clothes thrown into the driveway, but mostly people are civilised. And the hotel sector is nothing if not civilised. So far.