Service Properties Trust (SVC) has reached an agreement with Sonesta International Hotels Corporation to amend their existing management agreements. SVC currently owns 262 hotels that are managed by Sonesta and 68 of these hotels are expected to be sold. Among other terms, the changes to the agreements between SVC and Sonesta for the 194 retained hotels are as follows:
- The term for the retained hotels will expire on Jan. 31, 2037, and includes two 15-year renewal options.
- All retained hotels are subject to a pooling agreement that combines the management agreements for the retained hotels for purposes of calculating gross revenues, hotel operating expenses, fees and distributions and the owner’s priority return due to SVC.
- The owner’s priority return for the retained hotels is set at $325.2 million annually. Although SVC continues to own 34% of Sonesta, SVC will have the right to terminate Sonesta’s management of specific SVC-owned hotels if minimum performance thresholds are not met starting in 2023.
- SVC will renovate the retained hotels to comply with agreed upon brand standards. As such funding is advanced by SVC, the aggregate annual owner’s priority return due to SVC under the amended agreement will increase by 6% of the amounts funded. SVC currently expects to complete these renovations over the next three years at an estimated cost of $600 million.
- Trade area restrictions by hotel brand have been added to define boundaries to protect SVC-owned hotels in response to Sonesta increasing its franchising and third-party management activities.
- For the hotels that are expected to be sold, the term will be extended to the earlier of Dec. 31, 2022, or until the hotels are sold and the FF&E reserve funding requirement will be removed. Following the sale of these 68 Sonesta hotels, SVC’s owner’s priority return will be reduced by the current owner’s priority return for these assets, or $85.5 million.
SVC continues to make progress in its efforts to sell the 68 Sonesta hotels with 8,760 keys and an aggregate net carrying value of $579 million. SVC is currently negotiating purchase and sale agreements or in the final stages of the buyer selection process for these hotels. SVC currently expects to be substantially complete with the sale of these hotels during the first quarter of 2022.
“Between our amended management agreements with Sonesta and the expected sale of 68 Sonesta hotels, we believe we are taking important steps to create a stronger hotel portfolio with improved coverage of our owner’s priority return,” said John Murray, president/CEO, SVC. “The changes announced today to the Sonesta management agreements are substantially similar to the changes recently announced with the Hyatt and Radisson agreements and our 2019 Sonesta amendment. The Sonesta hotel sales process is going well, we have strong interest in these hotels from a deep pool of buyers and we believe that the proceeds will significantly enhance SVC’s liquidity position as it enters 2022.”