Late last week, hospitality investment firm TKO submitted a formal written offer to acquire the entire owned hospitality portfolio of real estate investment trust Service Properties Trust (which commonly goes by its Nasdaq symbol SVC) for $2 billion in cash.
According to a statement from TKO, the transaction—subject to execution of definitive documentation and customary closing conditions—would “provide SVC with immediate liquidity to support debt reduction while enabling the company to focus on its substantial and highly attractive net lease retail platform.” The company said the offer would deliver “compelling value” to SVC shareholders by “crystallizing the hotel portfolio's worth at a significant premium to its implied market valuation while eliminating the operational complexity and capital intensity inherent in hospitality assets.”
SVC released its own statement, confirming that it had received the offer and noting that there had been “no prior contact from TKO” beforehand. SVC’s board will “review and consider” the proposal.
"We have tremendous conviction in the long-term value of SVC's hotel portfolio and believe TKO is uniquely positioned to unlock its full potential," TKO CEO Jim Koehler said in his company’s statement. "This acquisition represents a transformational opportunity for our firm. SVC has assembled an exceptional collection of hospitality assets across prime markets, and we are prepared to move swiftly and decisively to bring this transaction to fruition. Our all-cash offer eliminates financing risk and provides SVC with the certainty it needs to execute a successful strategic repositioning. We look forward to engaging constructively with SVC's Board and management to reach a mutually beneficial agreement."
Reuters noted that SVC has “significant exposure” to both hotels and net-lease real estate. The company owned 93 hotels and 745 net-lease properties as of June 30, with the latter providing a steadier stream of rental income than its lodging business
Behind the Deal
SVC has been selling down its hotel portfolio since rebranding from a hotels-only REIT in 2019. The company has gone from 329 hotels with more than 51,000 rooms to 93 hotels with just over 21,000 rooms. The properties are primarily Sonesta-affiliated hotels along with many Hyatt Place hotels, Radisson hotels, two County Inns & Suites and one Crowne Plaza. Its 745-property net-lease portfolio is not part of the proposed deal.
The proposed $2 billion purchase price for the hotel portfolio exceeds SVC's entire current public market capitalization, the company noted in its statement. SVC's 745-property net lease portfolio generates more than $500 million in annual earnings before interest, taxes, depreciation and amortization. “This business is characterized by predictable cash flows, minimal capital requirements, and operational simplicity-attributes that command premium multiples in the public markets,” the statement claimed. “By contrast, the hospitality segment is inherently capital-intensive, operationally complex, and subject to cyclical volatility. So long as both platforms remain on a single balance sheet, the hotel portfolio will continue to dictate SVC's cost of capital, constraining the company's ability to unlock shareholder value.”
TKO noted that SVC’s common shares closed at $6.49 per share on Oct. 6, a decline of more than 50 percent over the trailing twelve-month period.
While SVC's management has articulated a strategy of selective portfolio streamlining rather than a complete exit from the lodging sector, TKO believes the “magnitude and certainty” of the all-cash consideration materially exceed the risk-adjusted present value of executing that strategy over many years. The transaction proceeds would enable SVC to retire more than forty percent (40 percent) of its outstanding indebtedness while preserving the retained net lease platform-potentially positioning the equity for meaningful market re-rating and enhanced shareholder returns.
TKO noted that given current and projected interest rate conditions, SVC's existing weighted average cost of debt is unlikely to be replicated in future refinancing transactions. Additional capital may be required for the company to continue servicing its debt obligations, and continued capital expenditures on the hotel assets do not materially improve the company's refinancing trajectory.