NEWTON, MA—Service Properties Trust (SVC) has entered agreements with Marriott International Inc. that combine its three existing Marriott operating agreements, historically referred to as the Marriott Nos. 1, 234 and 5 agreements, into a single portfolio for a 16-year term commencing January 1, 2020.
The Marriott Nos. 1, 234 and 5 agreements included 122 hotels, provided for aggregate annual owner’s priority returns and rents due to SVC of $192.2 million and were scheduled to expire on December 31, 2024, 2025 and 2019, respectively. Among other terms, the new combined agreements with Marriott provide as follows:
All 122 Marriott hotels will be combined economically so that excess cash flows from any of these hotels are available to pay the aggregate annual owner’s priority returns due to SVC for these hotels, which is $190.6 million (approximately equal to the current aggregate annual owner’s priority returns due to SVC under the Marriott Nos. 1 and 234 agreements and 85% of the rents due to SVC under the Marriott No. 5 agreement (Kauai hotel). SVC’s taxable REIT subsidiaries will continue to participate in the net cash flows from hotel operations after payment of management fees to Marriott, which base fees will continue to be subordinated to the annual owner’s priority returns due to SVC.
The existing security deposit held by SVC for the Marriott No. 234 agreement ($33.6 million estimated as of December 31, 2019) will continue to secure payment of the aggregate annual owner’s priority returns due to SVC under the new combined agreements and may be replenished up to the security deposit cap of $64.7 million from 60% of the cash flows realized from operations of the 122 hotels after payment of the aggregate annual owner’s priority returns due to SVC, Marriott’s base management fees and certain other advances by SVC or Marriott, if any.
Marriott will provide a new $30 million limited guaranty for 85% of the aggregate annual owner’s priority returns due to SVC through 2026 under the new combined agreements if the security deposit is exhausted. The term of the agreements will be extended through 2035, with Marriott having the option to renew for two consecutive 10-year terms on an all or none basis. That 5.5-6.5% of gross revenues from hotel operations will continue to be placed in escrow for hotel maintenance and periodic renovations, or an FF&E reserve.
In addition to amounts available in the FF&E reserve, the new combined agreements provide that SVC will fund approximately $350 million to $400 million for planned renovations of the hotels over the next four years. As such funding is advanced by SVC, the aggregate annual owner’s priority returns due to SVC under the new combined agreements will increase by 8% of the amounts funded.
SVC and Marriott have also identified 33 of the 122 hotels covered by the new combined agreements that will be sold or rebranded, at which time SVC would retain the proceeds of any such sale and the aggregate annual owner’s priority returns due to SVC would decrease by the amount allocated to the applicable hotel.
“SVC and Marriott have had a productive business relationship since 1995,” said John Murray, president and CEO, SVC. “The agreements signed today extend that relationship at least through 2035, strengthen the credit support for SVC’s minimum returns and provide SVC the opportunity to sell non-core hotels, which, together with ongoing renovation activity, is expected to result in improved coverage of SVC’s owner’s priority returns for the portfolio.”
Service Properties Trust is a real estate investment trust, which owns a diverse portfolio of hotels and net lease service and necessity-based retail properties across the United States and in Puerto Rico and Canada with 185 distinct brands across 24 industries. SVC’s properties are primarily operated under long term management or lease agreements. SVC is managed by the operating subsidiary of The RMR Group Inc., an alternative asset management company that is headquartered in Newton, MA.