Industry Update
Press Release 6 January 2020

Service Properties Trust Announces New Agreements with Marriott

Combines Three Existing Agreements, Extends Term, Increases Credit Support, Provides for Renovation and Sale of Certain Hotels

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Service Properties Trust

NEWTON, Mass. - Service Properties Trust (Nasdaq: SVC) today announced that it has entered agreements with Marriott International, Inc. (NYSE: MAR), or Marriott, which 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:

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  • That 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.
  • That 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.
  • That Marriott will provide a new $30.0 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.
  • That 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 $350.0 to $400.0 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.

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

"SVC and Marriott have had a productive business relationship since 1995. 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."

WARNING CONCERNING FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon SVC's present beliefs and expectations, but these statements and the implications of these statements are not guaranteed to occur and may not occur for various reasons, some of which are beyond SVC's control. For example:

  • The security deposit for SVC's minimum returns under the new combined agreements 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 covered by those agreements after payment of the aggregate annual owner's priority returns due to SVC, Marriott's base management fees and certain other advances made by SVC or Marriott, if any. This may imply that the security deposit will be replenished and that it may be sufficient to provide for continued payment of SVC's minimum returns. SVC can provide no assurance that the operating results of the hotels will be sufficient to pay SVC's minimum returns or to replenish or maintain the security deposit. The operating results of SVC's hotels which are managed by Marriott depend on Marriott's ability to successfully operate the hotels and, in large part, upon general economic conditions, each of which are beyond SVC's control.
  • Marriott will provide a new $30.0 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. This may imply that SVC will receive at least 85% of the aggregate annual owner's priority returns due to SVC through 2026 under the new combined agreements. However, Marriott's guaranty is limited so that the maximum payments Marriott is required to make to SVC under this guaranty cannot exceed $30.0 million. SVC can provide no assurance that it will receive at least 85% of the aggregate annual owner's priority returns due to it through 2026 under the new combined agreements or that Marriott will honor its guaranty obligations.
  • The new combined agreements will continue to require that 5.5%-6.5% of gross revenues from hotel operations be placed in an FF&E reserve. This may imply that the FF&E reserve will be sufficient to fund future capital needs at the applicable hotels. In fact, the FF&E reserve may not be sufficient to pay all of the costs of maintaining these hotels to brand standards or otherwise in a manner which is attractive to hotel customers.
  • SVC has agreed to fund approximately $350.0 to $400.0 million for planned renovations of the hotels during the next four years in addition to the amounts in the FF&E reserve. The costs and timing of hotel renovations projects are difficult to estimate. Cost overruns may occur and projects may be delayed for various reasons, including reasons that are beyond SVC's control. SVC can provide no assurance that the planned renovations will be completed for the currently expected amounts or within the currently expected timeframe, and additional renovations not currently expected may be made.
  • SVC and Marriott have identified 33 of the 122 hotels included in the new combined agreements that will be sold or rebranded. SVC can provide no assurance that it will be able to sell or rebrand these hotels on attractive terms or at all. In addition, any sales that may be completed may result in less proceeds than SVC currently expects or losses to SVC.
  • Mr. Murray states that the sale of non-core hotels, together with ongoing renovation activity, is expected to result in improved coverage for SVC's owner's priority returns for its Marriott portfolio. In fact, coverage of SVC's owner's priority returns for its Marriott portfolio may not improve or may decline following the completion of any such sales or any such renovation activity.

For these reasons, among others, investors are cautioned not to place undue reliance upon any forward-looking statements in this press release. Except as required by law, SVC does not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.

A Maryland Real Estate Investment Trust with transferable shares of beneficial interest listed on the Nasdaq.
No shareholder, Trustee or officer is personally liable for any act or obligation of the Trust.

About Service Properties Trust

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 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. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, Massachusetts.

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