Service Properties Trust Sends Notice to Terminate IHG Agreements Covering 103 Hotels… Update

Main Photo: The Crowne Plaza Atalnta Perimeter at Ravina, one of the 103 IHG hotels owned by SVC

Date: July 2020

Location: 30 states across the USA

Name: Service Properties Trust…SVC

No. of Keys: TBA – 103 hotels

Who: Service Properties Trust or SVC, today (28th July 2020) sent a notice of event of default and termination to InterContinental Hotels Group plc, as a result of IHG’s failure to pay SVC approximately $8.4 million of required priority return for the month of July 2020. IHG has 30 days, or until Monday, August 24, 2020, to make the payment plus accrued interest to avoid termination of its operating agreements with SVC. The effective date of the termination set in the notice is November 30, 2020.

IHG’s priority return payment of approximately $17.4 million is also due on August 1, 2020 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.

SVC’s agreements with IHG covering 103 hotels (three InterContinental, five Kimpton Hotels & Restaurants, eleven 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 SVC held to secure the minimum return payments under these agreements has been fully utilised. SVC has the right to keep the hotels branded and managed by IHG for up to one year post termination to aid an orderly transition.

Absent a cure payment by IHG, SVC 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. SVC owns approximately 34% 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.

John Murray, President and Chief Executive Officer of SVC, made the following statement: “SVC and IHG have had a long relationship and we are in regular dialogue with them. We hope IHG cures this default so that we can move forward without a termination and re-branding.

However, it is important to SVC that we enforce our agreements and seek to protect our bargained-for cash flows so that we can pay SVC’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 SVC 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 SVC’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.”

Service Properties Trust is a real estate investment trust (REIT) which owns a diverse portfolio of hotels and net lease service and necessity-based retail properties across the United States and in Puerto Rico and Canada with 148 distinct brands across 23 industries. SVC’s properties are primarily operated under long-term management or lease agreements. SVC is managed by the operating subsidiary of The RMR Group Inc. or RMR Inc., an alternative asset management company that is headquartered in Newton, Massachusetts.

Update 28th August 2020: Service Properties Trusthas now made the decision to terminate its agreement with IHG “on or about November 30, 2020”. 

Commenting on the news Carlos Flores, President and CEO, Sonesta International Hotels Corporation,

“We’re extremely proud of the continued confidence that SVC has demonstrated by entrusting Sonesta to re-brand and assume management of 103 more of their hotels.

“In these unprecedented times, it is more crucial than ever to ensure we do not compromise our dedication to operational excellence; the safety and security for our guests and employees; and the delivery of skilled and genuine hospitality.

“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.”

THPT Comment: Ouch….Big ouch. IHG has some 5,600 hotels globally….this is just 103 of them! Interesting SVC’s position, given their ownership of 34% of Sonesta….but i guess you gotta do what you gotta do.

First Seen: SVC website

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