Service Properties Trust has to do what’s best for shareholders, and maybe that includes severing ties with Marriott and IHG. But don’t rule out a business traveler rebound, especially with a vaccine looking more likely in the new year.
Two of the most notable U.S. hotel transactions during the pandemic went against the industry’s leading ideology that bigger brand affiliation will be better coming out of the downturn.
Leaders at Service Properties Trust, or SVC — the hotel owner pursing smaller brand affiliation — are finally giving their reasons why.
SVC severed management agreements with IHG and Marriott after both global hotel companies defaulted on property guarantee payments earlier this year. The real estate trust plans to transfer flag affiliation on all of the roughly 200 hotel portfolio to Sonesta International Hotels Corp., a smaller brand in which SVC owns 34 percent.
Analysts and even Marriott CEO Arne Sorenson have questioned the investment logic in such a move, but SVC leaders say it all comes down to money and a negative view of the future of business travel.
“I think probably every finance and accounting team in corporate America and worldwide are looking for some of the silver linings in what’s been going on,” said SVC CEO John Murray during a Monday investor call. “I think there’s going to be a lot of pressure to keep [corporate travel] expenses from increasing dramatically once the vaccine is out and available.”
The investor call is the first since SVC announced plans to sever ties with IHG and Marriott earlier this year. While terminating the IHG and Marriott management agreements over the last few months, SVC has largely kept quiet — deferring to press releases detailing the hotel companies’ respective defaults or declining Skift’s multiple requests for an interview.
Murray confirmed the obvious during the Monday morning call: SVC’s partial ownership stake in Sonesta gives it a greater upside in profits compared to leaving the hotels under Marriott or IHG brand flags.
“When we think about converting these hotels to Sonesta, first of all, we think it’s in the interest of our shareholders not to do what’s good for IHG and Marriott and allow them to not pay us and just sit here and say, ‘Oh, well. Shucks.’ We think it’s better to take control of the situation and be proactive,” Murray said before later adding, “We think that’s going to be a much better result for SVC’s earnings.”
The hotel industry’s bigger-is-better argument when it comes to new deals coming out of the pandemic surrounds distribution channels and the ability to reach customers through loyalty programs like Marriott Bonvoy.
But Murray sees less reason to be affiliated with bigger brands because those loyalty programs largely cater to a clientele that may take years to fully return to hotels. Business travel will take longer to rebound due to technology enabling more remote work and meetings in lieu of in-person meetings, his thinking goes.
“We think it’s that business traveler that’s been historically after the reward program points that has driven the value in those programs,” Murray said. “We think those programs are going to be of less value and less important post-pandemic than they have been historically.”
The Vaccine’s Impact
Murray’s negative outlook on business travel came hours after Pfizer announced early data showed its coronavirus vaccine in development was more than 90 percent effective. That report sent hotel stocks like Marriott’s soaring Monday morning.
But that is unlikely to have an impact on SVC’s portfolio move toward Sonesta.
“So far, I have not received any calls from IHG and Marriott this morning,” Murray said. “If everybody can get the vaccine and boosters by the end of next year, the recovery in the hotel space should accelerate in 2022, which is really good news and sooner than a lot of people are expecting.”
The good vaccine news could impact SVC’s longer-term view on the Sonesta portfolio. While the smaller hotel company is on track to grow exponentially, SVC is only starting with one-year agreements in order to conduct a review of the properties and their potential best use.
Some of those hotels could get converted to residential use, but Murray said the vaccine’s potential to accelerate the travel industry’s recovery timeline from the pandemic could keep the properties as hotels.
“We’ve done various models, we’ve done various projections, but we won’t really know until it plays out,” he added. “We’re confident Sonesta is going to do as well for us as Marriott and IHG, who decided not to pay us at all.”
SVC’s move away from IHG and Marriott was due in part to what the real estate trust claimed were superior revenue results when it made a smaller IHG-to-Sonesta shift with 16 hotels in 2012. That led to a more than 14 percent improvement in revenue, SVC claimed in a release.
But Marriott CEO Arne Sorenson appeared to argue against that idea last week, saying hotels under the Sonesta flag were likely to deliver only half the return on investment under the smaller brand’s flag affiliation compared to under a Marriott brand.
Murray disputed those claims.
“I saw those comments. I don’t want to get in mudslinging, but the Marriott portfolio is a stable portfolio, a large portfolio,” he said. “The Sonesta portfolio had several key assets that were under renovation. The return calculations that were discussed weren’t apples to apples.”
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Photo credit: A slow business travel recovery means less value linking with bigger hotel brand loyalty programs, says the real estate CEO leading a 200-hotel portfolio away from Marriott and IHG. Sonesta International Hotels Corp.