Service Properties Trust officials said they plan to end their agreement with InterContinental Hotels Group over $8.4 million in unpaid guarantees, which would remove IHG branding from 103 hotels.
NEWTON, Massachusetts—Hotel, retail and travel-center real estate investment trust Service Properties Trust has publicly announced its intention to end an agreement with InterContinental Hotels Group and remove their brands from 103 of their hotels.
In a news release announcing the move, officials with Service Properties Trust cited nonpayment of $8.4 million in guaranteed returns for July. IHG now has until 24 August to pay that amount plus interest to avoid the agreement terminating on 30 November.
In addition to that, the amount IHG owes, according to SPT, is about to grow.
“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,” the news release stated.
IHG officials did not return a request for comment before press time.
SPT’s deal with IHG is one of several the REIT has that guarantees minimum revenue payments. It is the largest agreement within the REITs overall portfolio based on guaranteed minimum revenue contribution to the company’s top line and second largest based on hotel property count, behind only their 122-property Marriott International agreement, as of the end of the first quarter.
The REIT, which was previously known as Hospitality Property Trusts, made investments in 2019 to diversify away from being primarily a hotel REIT, but hotels still contribute more than 60% of their minimum annual returns.
In the release announcing the move, SPT president and CEO John Murray noted he “hopes IHG cures this default so that we can move forward without a termination and rebranding” and that the two sides are “in regular dialogue.”
“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,” Murray said. “
If the nonpayment is not resolved, SPT officials plan to convert the lion’s share of the portfolio to the Sonesta, Royal Sonesta and Sonesta ES brands. SPT owns 34% of Sonesta, which is also managed by SPT’s external manager, The RMR Group.
“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,” Murray said in the release.
The current IHG properties could also be “repurposed to an alternative use or sold in the future,” Murray noted.
Michael Bellisario, senior hotel research analyst and vice president at Baird, noted it would be remarkable to see the IHG-SPT agreement end in this way.
“We’d be surprised to see IHG walk away from 103 hotels over that amount of money,” he said. “SVC is likely using this press release as a way to negotiate in public as well.”
When reached for further comment, Murray referred HNN to its news release, saying his company was seeking to avoid just that.
“We are in the midst of preparing for our quarterly reporting and don’t want to be accused of selective disclosure, nor do we want to negotiate with IHG in the press or analyst reports,” he said.
Until recently, IHG was viewed as the favored brand family—other than Sonesta—for SPT officials, with those two brand families being the top choices for rebranding any recently acquired hotels.
Similar to the issue with IHG, SVC is currently in the midst of selling or rebranding its portfolio of Wyndham Hotels & Resorts properties because of that company’s underpayment of guaranteed returns.