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REIT threatens to terminate agreements for 103 IHG hotels

The Holiday Inn Anaheim Resort Area is part of SPT's portfolio. Photo credit: IHG (Holiday Inn Anaheim Resort Area)

Newton, Mass.-based real estate investment trust Service Properties Trust has sent a notice of event of default and termination to InterContinental Hotels Group as a result of IHG’s failure to pay SPT approximately $8.4 million of required priority return for the month of July. 

IHG has 30 days, or until August 24, to make the payment plus accrued interest to avoid termination of its operating agreements with SPT. The effective date of the termination set in the notice is November 30. IHG’s priority return payment of approximately $17.4 million is also due on August 1 and failure to pay such amounts will be an additional event of default, which would increase the amount IHG is required to pay to avoid termination.

Service Properties Trust’s agreements with IHG covering 103 hotels (three InterContinental, five Kimpton Hotels & Restaurants, 11 Crowne Plaza, three Holiday Inn, 20 Staybridge Suites and 61 Candlewood Suites) in 30 states in the U.S., the District of Columbia, Ontario, Canada and Puerto Rico require annual minimum returns and rents of $216.6 million and currently expire in 2036. IHG’s $100 million security deposit that Service Properties Trust held to secure the minimum return payments under these agreements has been fully utilized. Service Properties Trust has the right to keep the hotels branded and managed by IHG for up to one year post termination to aid in an orderly transition.

Absent a cure payment by IHG, Service Properties Trust currently plans to transition management and branding of these 103 hotels from IHG to Sonesta International Hotels Corporation, or Sonesta, primarily under the Royal Sonesta, Sonesta and Sonesta ES Suites brands. SPT owns approximately 34 percent of Sonesta and would share in the benefit of these new management agreements and in the hotels’ performance to the extent they ramp up in the post-pandemic recovery.

“[Service Properties Trust] and IHG have had a long relationship and we are in regular dialogue with them,” John Murray, president and CEO of SVC, said in a statement. “We hope IHG cures this default so that we can move forward without a termination and rebranding. However, it is important to [Service Properties Trust] that we enforce our agreements and seek to protect our bargained-for cash flows so that we can pay [Service Properties Trust's] operating costs and other obligations without interruption. Furthermore, if IHG is not prepared to continue paying us our returns on these important assets, we believe that the rebranding of these hotels with Sonesta will benefit [Service Properties Trust] as an owner of Sonesta, create greater flexibility in managing these hotels through these challenging market conditions and may have a positive impact on these hotels’ performance during their expected recovery. For example, while all of our hotels have been significantly negatively affected by the COVID-19 pandemic, year to date and for the second quarter of 2020, comparable hotel RevPAR performance at existing Sonesta managed hotels has been among the least negatively impacted of [Service Properties Trust’s] hotel portfolios. If these hotels are all rebranded with Sonesta, we also expect that some of the transitioned hotels may be repurposed to an alternative use or sold in the future.”