SVC beefs up portfolio after terminating Marriott deals

The Residence Inn Fresno is part of Service Properties Trust's portfolio. Photo credit: Marriott International

Newton, Mass.-based real estate investment trust Service Properties Trust (which commonly goes by its Nasdaq symbol SVC) has terminated the management agreements for 122 hotels with Marriott International. 

Late last month, SVC sent a letter requesting Marriott advance $11 million to cover the cumulative shortfall between the payments SVC had received to date and 80 percent of the cumulative priority returns due to SVC for the eight months ended August 2020. Marriott had until Oct. 5 to avoid termination by making payment to SVC. SVC did not receive any payment from Marriott, and based on discussions with the hotel giant, SVC does not expect Marriott to pay the cumulative shortfall for the balance of 2020. 

Accordingly, on Oct. 6, SVC sent Marriott a letter exercising its termination right. The effective date of the termination is Jan. 31, 2021, and SVC currently plans to transfer the branding and management of 98 of these hotels to Sonesta International Hotels Corp.

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SVC’s agreements with Marriott cover two Marriotts, two Springhill Suites, 12 TownePlace Suites, 35 Residence Inns and 71 Courtyards in 31 states, currently require annual minimum returns of $194.6 million and currently expire in 2035.

Pursuant to its existing agreement with Marriott, SVC is proceeding with the sale of 24 of the 122 Marriott branded hotels. SVC has entered agreements to sell a portfolio of eight TownePlace Suites hotels with 834 rooms in four states for an aggregate sales price of $45.3 million and a portfolio of 16 hotels with 2,155 rooms in nine states (13 Courtyard hotels with 1,813 rooms and three Residence Inn hotels with 342 rooms) for an aggregate sales price of $107.8 million. SVC expects these sales to be completed by year-end. Separate from selling these 24 hotels, SVC has been unable to sell nine additional Marriott branded hotels pursuant to its existing agreement with Marriott, and the management of these nine hotels will be transitioned to Sonesta on Dec. 15, 2020. The balance of the Marriott portfolio, or 89 hotels, will be transitioned to Sonesta on Jan. 31, 2021.

Upon transfer to Sonesta, SVC expects that the 98 Marriott branded hotels not being sold will be operated under the Royal Sonesta, Sonesta, Sonesta Select and Sonesta ES Suites brands. There are currently 80 Sonesta branded hotels worldwide. SVC owns approximately 34 percent of Sonesta and will 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.

“SVC and Marriott have had a long relationship which began in 1994, but because of Marriott’s current nonpayment and our understanding that Marriott does not intend to pay SVC any shortfall amounts in the future, we have terminated our agreements with Marriott and we plan to rebrand these hotels with Sonesta,” said John Murray, president and CEO of SVC. “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.”

SVC will only recognize the hotel-level cash flow, if any, of its currently Marriott-branded hotels in its operating results through the termination date. The 122 Marriott-branded hotels generated $2.6 million, or 2 cents per diluted common share, of hotel level cash flows during the eight months ended Aug. 31.

Sonesta’s Growth

This latest announcement follows two other recent SVC transactions that have made Sonesta SVC’s largest operator. Four hotels were transferred by SVC in September have all have been reflagged as Sonesta hotels. A further 103 hotels will be transferred by SVC on Nov. 30, comprising 22 full-service and 81 extended-stay hotels in the U.S.; the District of Columbia; Ontario, Canada; and Puerto Rico. 

Related: Service Properties Trust shifts 103 hotels from IHG to Sonesta

“We’re proud that SVC continues to grow its relationship with Sonesta by entrusting us with management of another sizable portfolio of their hotels and resorts,” said Carlos Flores, Sonesta's president and CEO. “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.”
 
Sonesta expects to have more than 250 properties in the U.S. and over 280 properties globally by the end of Q1 2021, expanding its U.S. footprint in key tourism and business destinations more than fourfold. In the U.S., Sonesta will increase from three to five brands: Royal Sonesta, Sonesta Hotels & Resorts, Sonesta ES Suites, and the two newest brands Sonesta Select and Sonesta Simply Suites.

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