The conversion of more than 200 hotels from Marriott International and IHG Hotels & Resorts brands to Sonesta International flags has understandably disrupted performance for Service Properties Trust.
While overall revenues remain down due to the COVID-19 pandemic, Service Properties President and CEO John Murray believes Sonesta is already realizing some of the expected advantages of its suddenly added scale.
"For example, Sonesta's increased size is enabling it to significantly lower per transaction reservation costs to their own network as well as through [online travel agencies] in the area of 15% to 20% savings versus last year," he said during Service Properties' first quarter earnings call. "In short, we believe once the transition noise is fully behind us and hotel industry demand improves further, Sonesta will deliver solid results on both the top line and the bottom line."
The hotel, travel center and retail-focused real estate investment trust owns roughly a third of Sonesta, while the remaining stake in the hotel branding company is held by The RMR Group, which also externally manages Service Properties along with several other REITs.
Murray said there are still challenges ahead for Sonesta, including a need to increase greater brand awareness and the inherent costs related to converting hotel brands, but he believes "the worst of transition disruption is behind us." Consumer awareness of the brand, which had just 53 hotels roughly a year ago, is already improving, he added.
"We believe [Sonesta] is positioned to perform as well as, if not better than, some of the larger, more well-established hotel brand companies, especially in the post-COVID world with less business travel and more competition for every marginal customer," he said.
However, Murray noted any brand conversion is difficult and has short-term negative impacts on performance, and that's all the more true when hundreds of properties are converting at once.
"The biggest challenge is that notice period when you decide you're going to transition hotels and terminate an operator," he said. "Obviously neither Marriott or IHG were happy about the fact they were losing hundreds of hotels from their systems, so they stopped taking reservations post planned transition days, and there's a couple of months where guests could be making reservations, but Marriott and IHG really aren't letting them."
The conversions from Marriott and IHG brands were spurred by pandemic-induced drops in demand and those respective companies' unwillingness to continue to pay Service Properties minimum returns as part of their management agreements.
Service Properties is currently in negotiations with Hyatt Hotels Corp. over their existing management agreement, which includes similar revenue guarantees. Murray said the two sides are still working on a potential new agreement for a "mutually agreeable path forward" with a deadline of May 22. If no agreement is reached, the REIT's portfolio of 22 Hyatt-branded hotels would similarly be converted to Sonesta's brands.
"We're reasonably optimistic about how this is going," Murray said of the negotiations.
Following the termination of IHG and Marriott's management agreements, along with the earlier divestment of Service Properties portfolio of Wyndham Hotels & Resorts properties, Hyatt is the only company outside of Sonesta to manage the REIT's hotels.
First Quarter Performance
Service Properties posted a net loss of $195 million for the first quarter, compared to a net loss of $33.7 million in the first quarter of 2020.
Hotel performance metrics were still down considerably for the company, with revenue per available room down 50.6% year over year to $34.96 and occupancy down 17.3 percentage points to 40.1%. Murray said extended-stay hotels have been the company's strongest performers throughout the pandemic.
The company recorded adjusted earnings before interest, taxes, depreciation and amortization for real estate of $48.7 million in the first quarter, compared to $195.1 million for the same period in 2020.
As of press time, Service Properties stock was trading at $11.31 a share, down 1.6% year to date. The Nasdaq Composite was up 4.4% for the same period.