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Service Trust Properties Plans To Dump IHG For Nonpayment, Rebrand 103 Hotels

Service Trust Properties, a REIT that owns hotels and retail properties, has said that it is terminating its management agreement with InterContinental Hotels Group because of a failure to pay $26.4M.

Sonesta hotel, Bee Cave, Texas

That amount, plus interest, represents priority return payments for July and August.

Currently IHG operates 103 hotels for SVC under a number of brands, including three InterContinental, five Kimpton Hotels & Restaurants, 11 Crowne Plaza, three Holiday Inn, 20 Staybridge Suites and 61 Candlewood Suites in 30 states and D.C., as well as in Canada and Puerto Rico. 

The effective date of the termination will be Nov. 30, at which time Newton, Massachusetts-based SVC will turn management of those properties over to Sonesta, a much smaller hotel company also based in Newton, which will rebrand the properties.

In fact, more than 100 new hotels to manage will represent a major increase in Sonesta's portfolio. It currently has about 80 properties under management as Sonesta, Sonesta ES Suites, Royal Sonesta and other brands. 

"After a period of negotiation with IHG, we determined to terminate IHG and rebrand these hotels with Sonesta," SVC CEO John Murray said in a statement. "Based on historical experience, we believe the current portfolio may perform as well, or better, as Sonesta hotels post-conversion and once stabilized in their respective markets."

During IHG's most recent earnings call in mid-August, Chief Financial Officer Paul Edgecliffe-Johnson characterized the SVC portfolio as "fairly small ... from an earnings perspective."

"It's less than 0.5% of group earnings," he said. "It's about 100 hotels or so ... So we'll see what happens if we do part ways. But there's still a period of time to go before that would happen toward the end of the year. And in terms of cash, not a significant impact there." 

Overall, as a hotel operator, IHG has had a bad year, just like most of the rest of the hospitality industry. Its global revenue per available room, or RevPAR, dropped 52% during the first half of 2020 compared with a year ago and was down 75% in the second quarter year-over-year as hotel demand slumped. The company's operating profit dropped from $410M in the first half of 2019 to $74M in the first half of 2020.

All together, IHG operates about 883,000 hotel rooms worldwide in over 5,900 properties. Despite the pandemic, the company opened more than 90 hotels during the first half of 2020.