IHG Loses 103 Hotels In North America To Sonesta After Defaulting On Payments

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IHG stopped paying agreed minimum rents to Service Properties Trust (SVC) that owns 103 hotels under InterContinental, Kimpton, Crowne Plaza, Holiday Inn, Staybridge and Candlewood Suites in North America.

SVC already threatened to reflag these hotels under Sonesta in July (read more here) if they couldn’t reach an amicable resolution with IHG. These hotels will now exit the IHG system and join Sonesta on November 30, 2020.

You can access IHG here.

READ MORE: IHG Rewards Club Rate & Bonus Points And Miles Promotions

Here are the hotels that will move to Sonesta:

  • InterContinental = 3 hotels (Toronto, Austin & San Juan)
  • Kimpton = 5 hotels (Palomar DC, Allegro Chicago, Palomar Chicago, Monaco Portland & Alexis Seattle)
  • Crowne Plaza – 11 properties
  • Holiday Inn – 3 properties
  • Staybridge Suites – 20 properties
  • Candlewood Suites – 61 properties

Their IHG affiliated hotels:

Download (XLSX, 59KB)

IHG spokesperson had commented to HNN:

In response to a request for comment, IHG spokesperson Soojin Yoon noted the company’s decision to not continue paying minimum rents was related to cost-containment efforts.

“As the industry continues to recover from the unprecedented impact of COVID-19, IHG is committed to remaining in sound financial condition by reducing costs and protecting cash flow, ensuring our management agreements are in line with this approach,” Yoon said via email. “As we noted in in our half-year results earlier this month, we are well capitalized and maintain a total available liquidity of $2 billion.”

Here’s the announcement from the Service Properties Trust:

Rebranding Hotels to Sonesta Expected to Improve SVC Operating Results

IHG Failed to Pay Owner’s Priority Returns to SVC for July and August

NEWTON, Mass.–(BUSINESS WIRE)– Service Properties Trust (Nasdaq: SVC), or SVC, today announced that it will transfer the branding and management of 103 hotels to Sonesta International Hotels Corporation, or Sonesta, from InterContinental Hotels Group plc (NYSE: IHG), or IHG. As previously announced, SVC sent notices of termination to IHG for failure to pay SVC’s minimum returns and rents due for July and August 2020 totaling $26.4 million, plus accrued interest, and IHG had until August 24, 2020 to avoid termination by making payment to SVC. SVC did not receive any payment from IHG by August 24, 2020, nor does SVC expect to receive any payments from IHG in the future, and the management agreements with IHG will be terminated. The effective date of the termination is November 30, 2020, which is the same date that SVC currently plans to transfer the branding and management of these hotels to Sonesta.

SVC’s management agreements with IHG cover 103 hotels (three InterContinental®, five Kimpton® Hotels & Restaurants, 11 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. Upon transfer to Sonesta, SVC expects that these hotels will be operated under the Royal Sonesta, Sonesta and Sonesta ES Suites brands. There are currently 80 Sonesta branded hotels worldwide.

John Murray, President and Chief Executive Officer of SVC, made the following statement:

“SVC and IHG have had a long relationship which began in 2003, but we were unable to reach a mutually agreeable resolution to the defaults by IHG under our management agreements with them. Therefore, after a period of negotiation with IHG, we determined to terminate IHG and rebrand these hotels with Sonesta. Based on historical experience, we believe the current portfolio of 103 hotels may perform as well, or better, as Sonesta hotels post-conversion and once stabilized in their respective markets.

Sonesta currently manages 16 hotels for us that were rebranded from IHG in 2012, and total annual revenue and hotel EBITDA at these 16 hotels improved 14.4% and 10.3%, respectively, post-conversion and once stabilized. In addition to Sonesta possibly having a positive impact on these hotels’ performance in the future, we own approximately 34% of Sonesta and we will therefore indirectly share in any benefit of these new management agreements by Sonesta in the future. We also believe having these 103 hotels operated by Sonesta provides us with greater flexibility in managing our business through the current challenging market conditions. For example, we expect that some of the transitioned hotels may be repurposed to an alternative use or sold in the future.”

Following the utilization of the remaining $9.0 million of IHG’s security deposit in July, SVC will only recognize the hotel level cash flow, if any, of its currently IHG branded hotels in its operating results through the termination date. For the six months ended June 30, 2020, SVC realized returns and rents of $108.2 million, or $0.66 per diluted common share, under its IHG agreements. The 103 IHG branded hotels generated $12.2 million, or $0.07 per diluted common share, of hotel level cash flows during the six months ended June 30, 2020.

Conclusion

IHG claimed on the recent earnings calls that these payments to the SVC were not guaranteed per their agreement. The SVC is not happy when they fail to receive Owner’s Priority Returns from IHG to the extent that they move 103 hotels to Sonesta.

This opens up a question for developers and REITs that have hotels under IHG brands. Can you trust the company? If they fail to pay agreed-upon payments when things get tough, why would you allow them to rake in fees when the times are good?

This is another blow to the Kimpton brand that loses another five hotels in North America. When IHG took over the previously independent chain, there was an exodus of hotels that left the brand, especially in the Bay area.

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