A month after Newton, Mass.-based real estate investment trust Service Properties Trust (which commonly goes by its Nasdaq symbol SVC) sent a notice of event of default and termination to InterContinental Hotels Group, the company is transferring management and branding of 103 hotels from IHG to Sonesta International Hotels Corp.
Service Properties Trust sent notices of termination to IHG for failure to pay SVC’s minimum returns and rents due for July and August totaling $26.4 million, plus accrued interest, and IHG had until August 24 to avoid termination by making payment to SVC, according to the company. SVC did not receive any payment from IHG and does not expect to receive any payments from IHG in the future, leaving the management agreements up for termination.
The transfer will be the largest expansion in Sonesta’s 80-year history, with 22 full-service and 81 extended-stay hotels across the U.S.; Ontario, Canada; and Puerto Rico. The portfolio comprises three InterContinental hotels, five Kimpton Hotels & Restaurants, 11 Crowne Plaza hotels, three Holiday Inns, 20 Staybridge Suites hotels and 61 Candlewood Suites hotels. SVC expects the new additions will be operated under the Royal Sonesta, Sonesta and Sonesta ES Suites brands. Sonesta will transition management following the termination of SVC’s agreement with IHG on or about November 30, but SVC has the right to keep the hotels branded and managed by IHG for up to one year following the termination date.
Among the factors SVC considered in deciding on this change were its 34 percent ownership of Sonesta, its historical experience from the 2012 transition of 16 hotels to Sonesta from IHG and the belief that they will perform as well or better as Sonesta branded and managed hotels post-conversion. At the 16 SVC-owned hotels that were rebranded from IHG in 2012 and currently managed by Sonesta, total annual revenue and hotel earnings before interest, taxes, depreciation and amortization improved 14.4 percent and 10.3 percent, respectively, once stabilized.
Following the utilization of the remaining $9 million of IHG’s security deposit in July, SVC will only recognize the hotel-level cash flow, if any, of its currently IHG branded hotels in its operating results through the termination date. For the six months ended June 30, SVC realized returns and rents of $108.2 million, or 66 cents per diluted common share, under its IHG agreements. The 103 IHG branded hotels generated $12.2 million, or 7 cents per diluted common share, of hotel-level cash flows during the six months ended June 30.
“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,” said John Murray, president and CEO of SVC. “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 stabilized in their respective markets.” The company also expects to have “greater flexibility” in managing its business through the current market conditions through Sonesta, Murray added. “For example, we expect that some of the transitioned hotels may be repurposed to an alternative use or sold in the future.”
During its Q2 earnings call earlier this month, IHG CFO Paul Edgecliffe-Johnson said the portfolio was “fairly small” from an earnings perspective. “It's less than 0.5 percent of group earnings,” he said. IHG said at its half-year results that it had maintained “substantial” liquidity of around $2 billion and said that it was confident of operating through the recovery. Looking into 2021, the company said that, along with the rest of the industry, it had “limited visibility.”
“We’re extremely proud of the continued confidence that SVC has demonstrated by entrusting Sonesta to rebrand and assume management of 103 more of their hotels,” said Carlos Flores, president and CEO, Sonesta International Hotels Corp. “This new agreement with SVC reinforces our continued evolution as a global hotel operator and brand and we look forward to introducing our existing loyal guests, as well as new ones, to all the destinations within our significantly expanded portfolio.”
With this transaction, Sonesta now has more than 160 properties in the U.S. and nearly 200 properties globally, increasing its footprint in key tourism and business regions more than threefold. Destinations new to Sonesta include Washington, D.C.; San Diego; Seattle; Salt Lake City; Denver; Louisville, Ky.; and San Juan, Puerto Rico, among others.