• Portfolios shift as contracts creak

Further major hotel portfolios have changed hands, as landlords and operators wrangle their way through contracts signed in happier times.
Investor Colony Capital has sold out of six portfolios of hotels, while Marriott appears to have given up a package of 122 hotels around the USA. Meanwhile, in Europe, UK brand Travelodge is waiting to see how many of its landlords will shift to alternatives, taking advantage of a contract break.
At Colony Capital, a USD2.8bn deal sees the US listed vehicle divest itself of six of the seven portfolios it owns, a total of 197 hotels. The USD2.8bn portfolio has been purchased by privately-held Highgate Hotels, in a move that catapults Highgate into fifth place in the US hotel ownership rankings, with more than 34,000 rooms.
“The sale of our legacy hospitality assets is a significant milestone in Colony’s digital transformation as we pivot to focus exclusively on our fast-growing digital businesses that generate superior returns for Colony shareholders,” said Marc Ganzi, CEO of Colony Capital.
Highgate has paid just USD67.5m to Colony, while shouldering the portfolios’ substantial USD2.7bn debt burden.
For Colony, the decision to quit hotels is part of a stated strategy for its US listed Reit to shift instead into digital assets such as phone masts and data centres, in preference to traditional real estate.
In June, it was revealed Colony had defaulted on a total of USD3.2bn of debt against its hotel portfolios, potentially affecting the future of 245 hotels. In a May filing to the SEC, the company warned it was looking at options to dispose of the hotels, adding: “The company does not anticipate allocating material amounts of its own capital to these hospitality portfolios but reserves the right to participate on a limited basis alongside third-party capital.”
The four largest portfolios had been financed in happier times by single borrower CMBS deals – arrangements that are notoriously difficult to renegotiate, in the duress situation the industry has found itself in due to covid-19.
Colony acquired its stake in the largest portfolio, the 89 hotel THL package, in 2017 when as lender took the assets after the previous owner, Whitehall, defaulted. It acquired majority stakes in the 48 hotel Inland and 46 hotel Inkeepers portfolios in 2014.
The Marriott portfolio was a second tranche of hotels owned by landlord Service Properties Trust, to have fallen foul of a performance guarantee within the properties’ contracts. Earlier this summer SPT took control of 103 IHG branded properties, when IHG failed to settle a contractual payment of USD26.4m that was effectively a minimum performance guarantee. Now, 122 Marriott properties have fallen foul of a similar commitment, albeit in the case of Marriott the sum was USD11m.
The situation has given SPT the opportunity to rebrand the properties under the Sonesta brand family, operated by an affiliate company in which SPT has a roughly 34% stake.
The Marriott contract was due to run to 2035, covering properties in 31 US states. Largely branded Courtyard and Residence Inn, the portfolio required a minimum annual payment of USD194.6m to SPT, and due to shortfalls during the covid-19 crisis, both a security deposit, and a USD30m guarantee provided by Marriott had already been swallowed up.
In 2012, SPT took over 16 former IHG properties, and it is looking forward to absorbing the additional properties. “Total annual revenue and hotel EBITDA at these 16 hotels improved 14.4% and 10.3%, respectively, post-conversion and once stabilized,” said John Murray, president and CEO. Owning and operating also provides flexibility: “We expect that some of the transitioned hotels may be repurposed to an alternative use or sold in the future.”
It was only in January 2020 that SPT and Marriott agreed fresh terms on the portfolio. A deal combined three previous portfolios into one, with a commitment to work together 2035. The agreement also included Marriott effectively guaranteeing up to 85% of owner income due, through to 2026.
Meanwhile in the UK, this week sees the first legal documents being circulated to Travelodge landlords who have indicated an interest in rebranding their properties via a new vehicle, Ago, to the Ibis Budget flag. Viv Watts, who has been leading the creation of Ago, said the coming weeks will see how many of those who sounded keen will be prepared to sign for real. “Only then can we close discussions.”
Watts said that Travelodge is continuing to offer incentives to landlords, having pushed back a previous deadline to sign up for an extension to their Travelodge leases. “The CVA was just a short-term patch,” he warned. “I don’t see how they can keep the model working.”
The Ago proposition offers landlords a flexible lease with minimum guarantee, potential overage from strong performance, and a profit share in the operating company. Accor has also provided guarantees and will underwrite the cost of rebranding properties.
An earlier estimate suggested that upwards of 100 Travelodge properties may sign up for the move to Ibis.

HA Perspective [by Chris Bown]: Colony may have declared it wanted to move on from investing in hotels, but a combination of exceedingly high CMBS leverage and the covid-19 business downturn effectively forced its hand. Faced with an inability to negotiate extensions to the loans it had signed up to, the tidiest thing was to pass them on to someone else, who is prepared to shoulder the payments.
And so to the winners. Highgate gets to massively expand its US footprint – albeit in a number of portfolios where it will need to work alongside minority co-investors, and to negotiate with notoriously inflexible lending from CMBS structures. The move gives it a far greater percentage of branded and lower end properties, in contrast to its preference to date for running luxury and full-service independent properties.
Order up the Christmas hampers for the lawyers who wrote SVC’s contracts – they’ve played a blinder. Sonesta is a big beneficiary of the situation, quadrupling its portfolio of hotels across the US through 2020.
In Europe, are any similar major shifts likely? We’re still watching the Travelodge/Ago situation unfold.
For the brands, losing portfolios of hotels is simply a financial calculation. There’s the income guarantee to pay, not just the arrears but also potentially months to come. Speaking recently about IHG’s decision not to retain the properties, CEO Keith Barr commented: “We had a long-term relationship with SVC, it’s been a great partnership of 16 or 18 years. It was a complex, financial one. We have to do right by our shareholders, they need to do right by their shareholders. We were entitled to not fund aspects of the deal, they’ve chosen to terminate the deal. It’s not a big financial impact, there’s a small amount of fees … we have more interest coming in, than going out.

Additional comment [by Andrew Sangster]: There is an interesting rebalancing of the landlord and tenant relationship underway, as this news story shows. The hotel industry has historically seen the pendulum swung over towards the side of the brand company and operator rather than the owner of the real estate. It is an unusual position to find capital in thrall to managers of that capital.
Bigger owners are, however, flexing their muscles. And where they might not be individually big, they are acting together to exercise pressure, as with Travelodge.
The situation with Travelodge is likely to become clearer by late November by which point landlords have to have exercised their break clauses. It has been reported by news site CoStar that the new brand Goodnight has secured 18 properties from four landlords at a price totalling around GBP60m.
Goodnight, which is being advised by Kimmre, is also understood to be in talks to sign 30 leases. It is on track to have 50 hotels with as many as 70 the target. Interstate is now the rumoured operator, rather than KSL Capital’s Village Hotels which was previously tipped. NP Investment Management, Sherman Financial Group and Grand Heritage Hotels were listed in the media report as investors.
In the case of Sonesta, there is an owner that has spotted the chance to get into the branding and operations game, or at least get a bigger share of this.
Although both IHG and Marriott had cleverly negotiated away compulsory minimum guarantees in their contracts, they had been forced to leave in a clause that failure to make a stated return would void their management agreements.
As we said after the loss of the IHG portfolio, the calculation must be that the return on these contracts is not worth the short-term pain of making the payments. Either the contracts were bad from the start or the future trading outlook is grim. Maybe it’s both.

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