How an $8 Million IHG Default Managed to Double the Size of a Boston Hotel Company Overnight

Suburban Boston-based Sonesta International Hotels is slated to more than double the size of its 80-hotel portfolio this fall thanks to an IHG default on guaranteed property returns with Service Properties Trust, a lodging real estate trust that also owns a 34 percent stake in Sonesta.

But Sonesta’s chief executive isn’t settling on one growth opportunity. He expects many more ways to beef up the Sonesta portfolio are coming down the line due to the coronavirus pandemic.

IHG failed to meet a late August deadline on an $8.4 million payment on guaranteed property returns Service Properties Trust, or SVC, said the hotel company had owed since July on 103 properties.

SVC plans to transfer the portfolio — split between 22 full-service hotels under brands like InterContinental and Kimpton as well as 81 extended stay hotels under flags like Candlewood Suites and Staybridge Suites — to Sonesta “on or around November 30,” according to a release.

The brand shift from IHG to Sonesta is an enormous level of growth for the suburban Boston hotel company, which currently has properties across North and South America as well as Egypt.

The 129 percent growth to Sonesta’s portfolio includes properties across the U.S., Canada, and Puerto Rico.

“Without Covid, it would have been a real shock to have an opportunity like this presented to us,” Sonesta CEO Carlos Flores said. “But these are unprecedented times. I’m certainly not going to look a gift horse in the mouth.”

A Fortuitous Working Relationship

SVC’s decision to rebrand stems from its minority ownership stake in Sonesta — an equity deal finalized in February — as well as what the lodging trust claims are superior performance results in prior IHG-to-Sonesta conversions.

SVC converted 16 IHG hotels it owned to Sonesta flags in 2012, and the real estate company claims revenue improved by more than 14 percent under the new flag affiliation.

Flores expects even further growth as struggling hotels face continued uncertainty in the travel economy.

“The opportunity being presented in the way it was is not necessarily planned but not completely unexpected,” he added. “This is the point in the cycle where I expected we would have the greatest opportunity through that capital partnership and, frankly, leveraging our own balance sheet.”

IHG downplayed the potential of such a termination during an August earnings call, with the company’s chief financial officer Paul Edgecliffe-Johnson saying the portfolio represented “less than half a percent of group earnings.”

Analysts previously told Skift annual guaranteed property returns like the deal structured between IHG and SVC had the potential to become financial liabilities in such an uncertain travel climate like the pandemic.

The company’s commitment to reducing costs and protecting cash flow during the coronavirus crisis includes ensuring hotel management agreements are in line with this approach, IHG spokesperson Jacob Hawkins told Skift.

reBranding Bonanza

The Sonesta ES Suites extended stay brand is expected to be the biggest beneficiary of the portfolio addition, as that flag links closely to the 20 Staybridge Suites and 61 Candlewood Suites properties IHG is losing.

The Royal Sonesta upper-upscale brand flag is a natural fit rate-wise for the three InterContinental and five Kimpton properties acquired through the deal.

But the significant extended stay growth is a notable strategy shift for Sonesta.

The hotel company began the year solidifying SVC’s minority interest and even announced it would shed its flags on all 39 extended stay hotels owned by SVC.

“No sooner did we announce that and a planned capital recycling program where we’d exit many, if not almost all, of our extended stay hotels did Covid take off,” Flores said. “Never to let a good crisis go to waste, we retrenched and thought about how this would affect the overall economy and trajectory of the company.”

The global pandemic tanked the travel economy and upended the hotel business. Extended stay hotels were the one resilient spot of the industry, outperforming all other hotel sectors.

Brands like Extended Stay America even attracted interest and capital from investors like Starwood Capital and Blackstone due to the durability of the product.

But Flores isn’t narrowing Sonesta’s growth focus on just extended stay products or even the upcoming 103-hotel addition.

“I think it’s highly improbable we would not explore and pursue other opportunities,” he said. “I say that tongue-in-cheek because we’re already seeing other opportunities in the market.”