Service Properties Trust (Nasdaq: SVC) today announced it has entered into a transaction agreement with Sonesta International Hotels Corporation and its newly formed parent company, Sonesta Holdco Corporation, or Sonesta, pursuant to which SVC and Sonesta agreed to modify their existing business arrangements. SVC currently owns 53 hotels that are managed by Sonesta pursuant to which SVC is due annual returns of $148.5 million. The changes to the arrangements between SVC and Sonesta are as follows:

• SVC and Sonesta have agreed to exit all 39 extended stay hotels managed by Sonesta, which currently require aggregate annual minimum returns of $49.5 million. As the hotels are sold, rebranded or repurposed, SVC’s annual minimum returns due from Sonesta will decrease by the amount allocated to each hotel;
• Sonesta will continue to manage 14 full-service hotels owned by SVC and the annual minimum returns due for these hotels will be reduced from $99.0 million to $69.0 million;
• SVC received an approximately 34% equity interest in Sonesta;
• The amended management agreements require that 5% of hotel gross revenue be escrowed for future capital expenditures as “FF&E Reserves,” subject to available cash flow after payment of SVC’s minimum returns;
• The performance termination provisions under the agreements were modified to a portfolio wide performance test for determining whether the management agreement for any of SVC’s full-service hotels managed by Sonesta may be terminated for performance reasons and the non-economic provisions that previously allowed SVC to terminate an individual management agreement were removed; and
• The initial expiration dates of the management agreements for SVC’s full-service hotels located in Chicago, IL and Irvine, CA and managed by Sonesta were amended to align with the remainder of the Sonesta portfolio and now expire in January 2037.

Except as described above, the economic terms of SVC’s agreements with Sonesta are consistent with the historical agreements between SVC and Sonesta.

John Murray, President and Chief Executive Officer of SVC, made the following statement:

“Today’s restructuring announcement is a strategic shift regarding Sonesta’s business and the hotels they manage for us. To compete successfully in the upscale extended stay segment requires substantially more hotels and brand awareness than a company of Sonesta’s size can achieve, even with SVC’s help. With Sonesta exiting the extended stay business and focusing on full-service hotels where they compete more effectively, we are able to exit the extended stay hotels which do not generate sufficient returns to us. In exchange for being allowed to terminate management agreements early, we agreed to reduce the required returns at some of the full-service hotels, generally by amounts that are not being paid currently. We also received a 34% equity interest in Sonesta so that as performance improves at the full-service hotels, as expected, we and our shareholders will share in that upside. We are optimistic that this restructuring resolves, for the long term, concerns about Sonesta’s performance and our termination rights.”

This transaction was unanimously approved by both the special committee of SVC’s Board of Trustees and the entire SVC Board of Trustees.

Citigroup Global Markets Inc. acted as exclusive financial advisor and Sullivan & Worcester LLP acted as legal counsel to the special committee of SVC’s Board of Trustees in this transaction.

Service Properties Trust is a real estate investment trust, or REIT, 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 151 distinct brands across 24 industries. SVC’s properties are operated under long term management or lease agreements. SVC is managed by the operating subsidiary of The RMR Group Inc. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, Massachusetts.