SVC Terminated Marriott Agreements for Failure to Meet 80% Termination Threshold for Cumulative Owner's Priority Returns to SVC through August
SVC Plans to Transfer the Management of 98 of the 122 Hotels to Sonesta
SVC has Entered Agreements to Sell 24 of the 122 Hotels for $153 million
Service Properties Trust (NASDAQ:SVC), or SVC, today announced that it has terminated the management agreements for 122 hotels with Marriott International, Inc. (NYSE:MAR), or MAR. As previously announced, SVC sent a letter requesting MAR advance $11.0 million to cover the cumulative shortfall between the payments SVC had received to date and 80% of the cumulative priority returns due to SVC for the eight months ended August 2020. MAR had until October 5, 2020 to avoid termination by making payment to SVC. SVC did not receive any payment from MAR, and based on discussions with MAR, SVC does not expect MAR to pay the cumulative shortfall for the balance of 2020. Accordingly, on October 6, 2020, SVC sent MAR a letter exercising its termination right. The effective date of the termination is January 31, 2021 and SVC currently plans to transfer the branding and management of 98 of these hotels to Sonesta.
SVC's agreements with MAR cover 122 hotels (2 Marriott®, 2 Springhill Suites®, 12 TownePlace Suites®, 35 Residence Inns®, 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 MAR, 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 MAR, and the management of these nine hotels will be transitioned to Sonesta on December 15, 2020. The balance of the MAR portfolio, or 89 hotels, will be transitioned to Sonesta on January 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% 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.
John Murray, President and Chief Executive Officer of SVC, made the following statement:
"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 recognized 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."
Even though SVC has the right to transfer these Marriott branded hotels as early as 60 days from non-payment from MAR, SVC has elected to terminate the agreement effective on January 31, 2021, or almost 120 days later, to ensure there is enough time for an orderly transfer of management of the hotels to Sonesta. MAR has disputed the timing of SVC's termination rights under its agreements with MAR and argued that SVC may not terminate the MAR agreements until after year end 2020.
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 $0.02 per diluted common share, of hotel level cash flows during the eight months ended August 31, 2020.