Service Properties Terminates Marriott Agreements; Eyes Other Uses

Service Properties Trust announced that it has terminated the management agreements for 122 hotels with Marriott International after the hotel giant fell behind on payments. 

Terminating the agreement appears to be an opportunistic move by Service Properties. It gives the company the flexibility to consider other options with the Marriott-branded hotels, including dispositions or converting some of them into apartments, CEO John G. Murray told Bloomberg. 

“We knew that if we had a significant number of defaults, we’d be able to take back the keys,” Murray told Bloomberg. “It’s a great opportunity that presented itself.”

Service is proceeding with the disposition of 24 of the 122 hotels. It plans to sell a portfolio of eight TownePlace Suites hotels with 834 rooms in four states for $45.3 million and 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 $107.8 million. It expects to complete these dispositions by year-end. The company has been unable to sell nine additional hotels because of an existing agreement with Marriott

Service plans to transfer the branding and management of the 98 remaining hotels to Sonesta. Service owns approximately 34% of Sonesta.

“We believe that the rebranding of these hotels with Sonesta will benefit Service 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,” Murray said in a prepared statement.

In late September, Service sent Marriott a letter requesting that it “advance $11.0 million to cover the cumulative shortfall between the payments Service had received to date and 80% of the cumulative priority returns due to Service for the eight months ended August 2020.” 

Service gave Marriott until October 5, 2020, to make the payments and avoid termination. After Service didn’t receive the payments and learned that Marriott wouldn’t make them, it sent Marriott the termination letter on October 6. 

The termination is effective on January 31, 2021, or almost 120 days later, to ensure an orderly transfer of management of the hotels to Sonesta. Marriott has disputed the timing of Service’s termination rights. It argues that Service can’t terminate the agreements until after year-end 2020.

The 122 Marriott branded hotels generated $2.6 million of hotel-level cash flows during the eight months ended August 31, 2020.

The Service agreement, which covers two Marriott’s, two Springhill Suites, 12 TownePlace Suites, 35 Residence Inns and 71 Courtyards in 31 states, currently requires annual minimum returns of $194.6 million and was set to expire in 2035.