With plans to sell 68 of the company's Sonesta-branded extended-stay and select-service hotels, Service Properties Trust President and CEO John Murray said his company faces a complicated decision on whether to market those assets encumbered by their existing brand.
On the company's third quarter earnings call, Murray said that even though historically asset sales garner more favorable pricing unencumbered by brands, Service Properties' 34% ownership stake in Sonesta makes it appealing to retain the branding on those properties both to preserve fees generated and to protect the reputation of the suddenly growing brand family. Asked how his company sorts through all that, he said it's a good question with a "complicated answer."
"It's in our interest, because of our ownership of Sonesta, to continue to see Sonesta do well," he said. "There's been a lot of news about their significant growth over the past year, and so for us to turn around and sell 60-plus hotels unencumbered would sort of deflate that story and that momentum they have. So we've been careful about how we do that."
Murray said that in early marketing efforts for the properties, the pricing dynamics between encumbered versus unencumbered haven't been as stark as feared, especially since many of the properties no longer fit nicely into other brand families because of their age and Sonesta has a more favorable fee structure for owners than some competing brands.
"There's definitely a formula we're applying" to determine the value of selling encumbered versus unencumbered, he said. "The other thing to remember is that, for instance, some of the extended-stay hotels that are being sold are an exterior-corridor format, which is no longer brand standard at Marriott. The offers coming in for those hotels on an encumbered basis are significantly higher than the offers coming in unencumbered. There's just a lot of factors that are impacting where pricing is coming in."
Service Properties executives expect to sell the 68 Sonesta properties by the first quarter of 2022.
Since the beginning of 2020, Service Properties has been one of the primary drivers of growth for the rapidly expanding Sonesta portfolio. The REIT added hundreds of hotels to Sonesta after ending management agreements with companies such as IHG Hotels & Resorts, Wyndham Hotels & Resorts and Marriott International. The company most recently announced an amended agreement with Radisson Hospitality that preserved its branding at eight of nine Service Properties-owned hotels but included the eventual conversion of a flagship Radisson hotel in Minneapolis.
During that period, Sonesta also launched a franchising platform to align with new ownership groups and purchased RLH Corporation, which had an existing hotel franchising operation.
Murray said Sonesta's close relationship with Service Properties has been a selling point to potential franchisees at a time when hotel brands are potentially less empathetic to the needs of owners.
"Most hotel franchising companies today are asset-light and do not have to eat their own cooking," he said. "They can decide that the 48-inch televisions that you bought last week need to be 52-inch televisions this week, and they don't have to buy any more televisions — just franchisees have to. But ... as soon as that changes, SVC has to go out and buy tens of thousands of TVs. So it's not going to be a willy-nilly decision to jam that down franchisees' throats."
The Newton, Massachusetts-based REIT holds a portfolio 304 hotels and 794 net lease properties, including both retail locations and travel centers. Sonesta now represents the lion's share of Service Properties' hotel portfolio with 261 properties, compared to 17 for Hyatt Hotels Corp., nine Radisson hotels, 16 Marriott hotels and one managed by IHG Hotels & Resorts.
Third-Quarter Performance
Service Properties reported a net loss of $59.7 million for the third quarter, according to the company's earnings release.
Revenue per available room at the company's hotels increased 63.7% year over year to $67.71, with hotel-related earnings before interest, taxes, depreciation and amortization of $52.2 million.
As of press time, the REIT's stock was trading at $11.56 a share, a 0.6% increase year to date. The Nasdaq composite was up 25.9% for the same period.