Marriott Loses Up To 122 Hotels In Contract Dispute

Filed Under: Hotels, Marriott

Marriott may be losing up to 122 hotels in the coming months, which represents around 1.5% of its global portfolio.

SVC’s threat to pull 122 hotels from Marriott

Marriott doesn’t actually own most of its hotels, but rather they’re owned by investment companies, and then Marriott just has a contract to manage them. Service Properties Trust (SVC) owns 122 Marriott properties in 31 states, with the following breakdown by brand (complete SVC property list):

  • 2 Marriotts
  • 2 SpringHill Suites
  • 12 TownePlace Suites
  • 35 Residence Inns
  • 71 Courtyards

A couple of weeks ago, SVC sent a letter to Marriott requesting Marriott pay $11 million within 10 days, or else it would terminate its management contract with Marriott:

  • The $11 million is supposed to cover the shortfall between the payments SVC has received to date from Marriott, and 80% of the priority returns due to SVC for the eight months ending August 2020
  • These properties require annual minimum returns of $194.6 million, but both the security deposit that SVC previously held to secure minimum return payments, and the $30 million guarantee provided by Marriott, have been fully utilized
  • While the contract between SVC and Marriott was supposed to expire in 2035, SVC could terminate its agreement if it doesn’t get the payment

In other words, Marriott has guaranteed a minimum return to hotel owners, but those guarantees haven’t been met due to the pandemic, and that gives SVC an easy out.

The Marriott Nashville Airport will be rebranded

SVC is following through on its promise

SVC has announced that it’s pulling up to 122 hotels from Marriott by January 31, 2021:

  • 98 of the 122 hotels will be transitioning from Marriott to Sonesta
  • 24 of the 122 hotels will be sold for $153 million (we don’t know what will happen to them under new ownership)
For a further breakdown of that:
  • A portfolio of eight TownePlace Suites properties with 834 rooms in four states will be sold for $45.3 million
  • A portfolio of 16 hotels (13 Courtyard properties and three Residence Inn properties) with 2,155 rooms in nine states will be sold for $107.8 million
  • SVC has been unable to sell nine additional Marriott branded hotels pursuant to its existing agreement, and those hotels will be transitioned to Sonesta by December 15, 2020
  • The remaining Marriott properties will be transitioned to Sonesta by January 31, 2021

The SpringHill Suites Nashville Airport will be rebranded

SVC’s strategy with Sonesta

SVC is taking an interesting strategy with Sonesta. A few weeks back it was announced that 103 IHG hotels owned by SVC would transition to Sonesta for exactly the same reason.

In many ways it almost seems like SVC is looking for opportunities to have more hotels join Sonesta, because SVC owns a 34% stake in Sonesta. In other words, it shares in the benefit of the new management agreement on both ends.

Currently Sonesta has about 80 properties. Then there are another 103 coming from IHG, and now there will be at least 98 coming from Marriott, which means the size of Sonesta could more than triple in a year.

One might assume that there’s no way that these hotels will perform as well with Sonesta as with major brands like IHG or Marriott, but history tells a different story:

  • In 2012, 16 IHG properties were already rebranded as Sonestas, and after conversion the total annual revenue and EBITDA at these hotels improved significantly
  • Then again, this was during a period where the economy was doing great, so only time will tell if the same is true this time around

Sonesta’s hotel portfolio is more than tripling

Bottom line

SVC is terminating its contract with Marriott for 122 hotels — 98 of them will be joining Sonesta, while 24 of them are being sold, so we’ll see what the future holds for them (it could be that these properties maintain Marriott branding).

While we’ve seen individual hotels leave the Marriott portfolio during the pandemic (or some just go out of business flat out), this is the biggest exodus we’ve seen from the brand to date

In a way it’s nice to see another major hotel group emerge, as Sonesta potentially goes from 80 properties to 300+ properties in a year. Sonesta even has a loyalty program that’s fairly rewarding.

Comments
  1. “One might assume that there’s no way that these hotels will perform as well with Sonesta as with major brands like IHG or Marriott, but history tells a different story. In 2012, 16 IHG properties were already rebranded as Sonestas, and after conversion the total annual revenue and EBITDA at these hotels improved significantly.”

    That’s from a press release put out by SVC. What they don’t mention is that the period they compare (starting as the US came out of a recession and ending with a booming business travel economy) had overall US hotel RevPAR grow almost 50% higher than their revenues at these reflagged hotels (20% vs 14%).

  2. @ Ben — It is awesome to see a reversal of hotel-industry consolidation, especially away from the worst of all major hotel companies, Marriott. Less Marriott and more competition is good for consumers.

  3. I don’t see this as a Marriott loss. If they wanted to keep then they would have paid their dues.

    Same as IHG.

    Perhaps this portfolio of hotels isn’t oerforming as well as Marriott expected them to and this is their way of getting rid of them with little or no fuss.

    Indeed Sonesta obviously don’t want too much fuss either else they would be suing Marriott.

    TBH the vast majority of people don’t care about hotel brandings or points or status (heresy on blogs like this). They just want a reasonably priced hotel close to where they need to be.

  4. I imagine there’s some “unforseen circumstances”/pandemic clause that Marriott is using not to pay these minimums. If it actually goes to trial, it may be interesting to see what’s in these agreements.

  5. This is factually wrong — “Marriott doesn’t actually own most of its hotels, but rather they’re owned by investment companies, and then Marriott just has a contract to manage them.“

    Marriott does not manage most or even a majority of it so callous at least within North America. The majority of its hotels across all brands in North America or managed either buy a third party operator or the franchisee/license holder. Internationally, Marriott managers most of its high-end branded properties.

  6. @ChrisC,

    “Perhaps this portfolio of hotels isn’t oerforming as well as Marriott expected them to and this is their way of getting rid of them with little or no fuss.”

    Nonsense. Under a management or marketing/branding deal Marriott makes money for every hotel they cover, there’s no incentive for them to get rid of hotels.

    “I don’t see this as a Marriott loss. If they wanted to keep then they would have paid their dues.”

    Also nonsense. These short payments to hotel owners are likely happening all over the US right now. There’s no revenue to pay the owners! The only reason Lucky knows about these is the ownership group *wants* to move to new management/branding and is using this opportunity to do so.

  7. @Reaper – Of course there are situations where Marriott would have incentive to dump properties.

    Within 5 miles of the Austin Arboretum, there 15 Marriott properties. If those properties are not running at a high occupancy, they are effectively going to be cannibalizing themselves. By dumping properties, they can collectively raise the occupancy in the area and raise the average revenue.

    There’s only so many people looking for an $80/night room at any given time.

  8. @Business Guy, Marriott doesn’t own most of its “properties”. Except for a negotiated management or branding fee, all the profit goes to the owners.

    Marriott gets a negotiated fee per hotel, along with some incentives. They make money from every one of their “properties”. Reduced “properties” = reduced Marriott revenue.

  9. @business guy, there are two ways that your theory could actually be true. Lets say that of those 15 properties, 5 were owned by a group that decided to leave marriott. The only ways that Marriott benefits is if either those 5 hotels cease to exist (because otherwise, those $80/night rooms are still there, they are just not getting that $80 for Marriott), or for some reason, people are required to stay at a Marriott, so they have to switch from the now Sonesta hotel to another Marriott. Neither of this possibilities seems likely, so yes, Marriott loses when hotels leave them, even in markets where there are lots of marriotts.

  10. Sonesta may find that there are customers, like me, who have never stayed at their hotel but might like it. Before, I never heard of Drury but like it after I stayed there. Drury’s are like Holiday Inn Express except they have dinner. Technically, snacks, not dinner, but with macaroni, hot dogs, beer, chips, soup, fried chicken, and similar, it can serve as dinner.

  11. Given the ownership stake in Sonesta I will bet the Marriott attorneys will claim bad faith and tortuous interference in order to block this move (especially given their prior actions w IHG). Also I’m not disputing the facts as you posted them but without reading the entire agreement between Marriott and SVC you don’t know if they would like prevail. For example, there could be force majeure language in the agreement that modifies the payment obligations which could be invoked due to COVID (especially if prior payments were all in accordance with the agreement).

    Bottom line this will likely go through several rounds in court so I wouldn’t expect any action with respect to these properties in the near term.

  12. Seems to me as though Marriott (and IHG) failed to install a “catastrophic event” clause in their contracts with SVC or SVC is playing a game of chicken to purposely reflag their properties.

  13. While I’m a fan of Marriott hotels in general, my travel experiences the investor owned properties provide far inferior customer service .

  14. There’s also the horrible issue myself and hundreds of others are now in… Being terminated due to covid,
    losing health benefits for family, life insurance and retirement etc. I have no idea what’s going to happen and there’s no work for bartending/ mixology in Chicago now.

  15. Marriott is a horrible brand. After acquiring Starwood I lost my lifetime status which made me very upset. Marriott could have cared less, this is another example of big fortune 500 companies getting too big to care about the operators and customers that helped make the brand what it is and more about its share price for investors.

  16. Is Sonesta going to be branding the full service and limited service properties all as “Sonesta”? Or do they have a family of limited service brand names as well?

  17. I have experienced exceptional service at the Queen and Cresent hotel in NEW ORLEANS. While I have traveled extensively, there are few establishments that can match it.

  18. Bummer if you happen to work for Marriott (and get their pretty excellent discount). I’m 6 years from my 25-year anniversary with them and that means free hotel rooms for the rest of my life! Can’t argue with that. LOL

  19. Marriott clearly never thought about putting a force majeure clause into the agreement with SVC… and now Marriott has to pay the price for it.
    They learned their lesson the hard way… or, for some of the commenters here, the good way.

  20. @derek, you must be hungry mate! Getting excited about hot dogs and fried chicken and even calling yourself “dinner” 😀

  21. This is a terrible strategy. There isn’t any way that Sonesta can compete with the power of the Marriott 1-800/online reservations system. I hope that there is a follow up article a year from now.

  22. @PW That’s 90K per in addition to the 245K per from the 30 mil guarantee and an unknown amount from the security deposit. I’d assume Marriott ran this letter by finance and legal and everyone had a good laugh before they sent SVC a case of champagne with their reply. They’re not thrilled to lose the properties but they’re ecstatic to not be on the hook for the 194.6 mil in 2021.

  23. Once again, Ben fails to understand Marriott’s model. This is false:

    “Marriott doesn’t actually own most of its hotels, but rather they’re owned by investment companies, and then Marriott just has a contract to manage them.”

    MARRIOTT DOES NOT MANAGE MOST OF ITS HOTELS, PERIOD. THE VAST MAJORITY OF ALL MARRIOTT HOTELS ACROSS ALL MARRIOTT BRANDS ARE MANAGED BY FRANCHISEES OR THIRD-PARTY MANAGEMENT COMPANIES. MARRIOTT ONLY MANAGES A PLURALITY OF ITS UPSCALE AND LUXURY BRANDS INTERNATIONALLY.

  24. to bad. I always like courtyards on my road trips. (or residence inn) Courtyards mostly have a pool and the breakfast is really good (with Starbucks coffee). For me they will be missed.
    I like the luxury/ritz/st Regis and so on really much but when on the road 9 out of 10 times I choice a courtyard. (next best for road trips is Hampton Inn)

  25. @ Eric
    Not too bad.
    These former Marriot properties will retain their pools no matter what they are branded.
    As for the coffee, Starbucks or not it was usually cold or empty when I got to it. Maybe Marriot should have added to its standards a requirement t refill or replace the coffer every hour or two. It always demonstrates that the real Marriot customer is not us, it is the property owner that needs to be kept happy.

  26. What effect will this have on the employees? I’m furloughed through a the end of December with Courtyard. A co-worker told me we were leaving Marriott in January.

Leave a Reply

If you'd like to participate in the discussion, please adhere to our commenting guidelines. Your email address will not be published. Required fields are marked *