SVC REIT switch their 103 IHG hotels over missed payment to Sonesta (Nov 30, 2020)
 

Looks like IHG owes an owner $7.4 million from June and the owner (SVC REIT) has given them the standard 30 days to remedy it before terminating the agreement November 30.

I'm guessing it is just chest-thumping to pay as SVC is likely to default on their properties due to the much lower occupancy levels post-COVID lockdowns, so even if this was a customary delay before, the additional pressure on them financially means they need to get this payment to prevent a cash flow issue.

The list of the properties that they own in their portfolio is here, with 103 in the US for IHG. Most IHG are select service properties, but they do have the following higher end properties in IC and Kimpton:

InterContinental San Juan
InterContinental Stephen F Austin Hotel
InterContinental Toronto Yorkville
Kimpton Hotel Alexis Seattle
Kimpton Hotel Alegro Chicago
Kimpton Hotel Monaco Portland
Kimpton Hotel Palomar Chicago
Kimpton Hotel Palomar Washington DC

I doubt much will happen here, although the threat to move to Sonesta seems like they may be deeper in talks than expected so these hotels may reflag.

If you think you have a reservation (especially an award reservation) at an affected property after August 24 the termination date of November 30th, I would keep an eye on this to ensure it doesn't evaporate.

Normally I'd say this is definitely just posturing and they'll work it out, although the press release the REIT issued (https://www.businesswire.com/news/ho...-Terminate-IHG) mentioned that they have an ownership stake in Sonesta so perhaps they see this as a strategic opportunity to terminate the management contracts.

That being said, 100+ properties is about equal to Sonesta's entire current footprint; seems like a lot for a relatively small operator to take on.

Also, the press release states that if they terminate the contracts, the effective date will be November 30.

In any case, some of the Kimptons and CPs on there are ones I stay at frequently and like, so I'm hoping this gets resolved with IHG!

Ah, missed the official termination date - corrected my OP.

Yes, I think Sonesta may struggle to grow that quickly, but this downturn could be the impetus to try and gain marketshare when the economy rebounds.

I'm struggling to figure out why IHG owes SVC any money. I would have thought that the franchise fees flow in the other direction...

My guess would be advanced pay reservations - IHG probably collects money up front, takes their cut, and forwards the rest to the hotel. Also, there is reward night reimbursement that could be paid monthly.

AFAIK, the individual hotels themselves always process payments and prepayments. (I've always been directed to the individual hotels for refunds for example)

Award night reimbursement could be it, although there is a lot of offsetting between what the hotels owes IHG for points issued, and what IHG owes the hotel for award nights.

If you think of it as an average of $70K per hotel, the amount kind of makes sense. Higher end properties more, lower end less. I could see that being just what craig says above--prepayments, reimbursements, etc.

I wonder what IHG did with the money?

Hotels collect advance purchase payments on property. This is true for IHG and Marriott. For Hilton they collect payment and forward to hotel via check or ach. My guess as others have stated is reward night reimbursement.

Bye Felicia.

Somewhat curious to see what SVC has planned here. Given they already own a stake in Sonesta this may be a way for them to cut costs and get out of IHG agreements.

Yet right now when cash flow is low, how can they rebrand the hotels successfully?

I do think we are going to see more and more hotels leaving these major brands if they can given what is happening in the travel industry.

By doing the rebranding slowly. Initially just changing the easily changeable items.
It also possible with the low occupancy rates it much cheaper to do the rebranding as it costs less to shut down parts of the hotel. Many of the room being empty in the first place.
It also possible that the new management company is able to find reasonably priced financing. I'm currently blanking on the name of the financial product. They could in essence sell there future franchise fees (something that the hotel in question has to always pay) in return for the money needed to do the rebranding.

Securitization of those future franchise fees

Securitization that's the word. I don't know how I blanked on it. I used to read so much about it. Couple of years ago everyone was securitizing almost anything.

Oh, man. I spent a lot of time at the InterContinental Stephen F Austin before COVID-19 cut travel. I'd hate to lose that option in Austin.

Complete Speculation: Sounds like the owner might have been looking for ways out of the IHG contract. My guess is that they purposely stopped submitting the documentation necessary for reimbursement of points for several months. Then, they sent everything all at once for all 100+ properties hoping that IHG might not pay on time due lack of cash flow from the pandemic.

If that's what's happening, it's crafty and almost certainly legal (as I doubt the franchise contract has a "submit your redemptions within 30 days or don't get paid" clause). It does come across as unethical, however.