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Service Properties exits **$63M** in California hotels via default and distressed sales, signaling REIT's shift from gateway recovery bets to Sun Belt operational stability.
$63 million
marking the latest portfolio contraction for the Newton
338-room
Sonesta Los Angeles Airport LAX while simultaneously closing sales…
236-room
Crowne Plaza Union Square and the
417-room
Handlery Union Square—for
Service Properties Trust disclosed the divestiture of three hotel assets across Los Angeles and San Francisco for combined proceeds of approximately $63 million, marking the latest portfolio contraction for the Newton, Massachusetts-based REIT navigating elevated leverage and persistent triple-net-lease concentration risk. The company notified California bankruptcy courts of its intent to allow foreclosure on the 338-room Sonesta Los Angeles Airport LAX while simultaneously closing sales on two San Francisco properties—the 236-room Crowne Plaza Union Square and the 417-room Handlery Union Square—for $38 million and $25 million respectively.
The Los Angeles default represents a tactical surrender in a secondary gateway market where occupancy recovery has lagged coastal leisure destinations by 14 percentage points since 2019, according to STR data through Q4 2024. Service Properties inherited the LAX asset through its 2015 acquisition of an InvenTrust portfolio; the property has operated under a Sonesta franchise since the REIT's 2021 brand migration away from Marriott and Hilton flags. The San Francisco exits were approved by U.S. Bankruptcy Court for the Northern District of California on April 14, with closings expected by May 30. Buyers were not disclosed in court filings, though the $161-per-key blended basis for the Union Square assets signals distressed pricing in a market where pre-pandemic comps traded north of $400,000 per key.
The divestitures arrive as Service Properties manages $2.8 billion in outstanding debt against a portfolio that has shrunk from 164 properties in 2022 to 139 hotels as of March 2025. The REIT's strategy of master-lease concentration—72 percent of EBITDA flows through agreements with Sonesta and Hyatt—has amplified refinancing risk as regional banking covenants tighten. Proceeds from the San Francisco sales will retire secured debt tied to those specific assets, reducing quarterly interest expense by an estimated $1.9 million at current SOFR-plus-275 spreads. The LAX foreclosure, meanwhile, eliminates a property generating negative cash flow since Q2 2023, when airport-adjacent ADR in Los Angeles fell below $140 for the first time in four years.
Allocation strategists should monitor Service Properties' June 2025 refinancing of its $650 million credit facility, where covenant headroom has compressed to 1.1x coverage as of the December filing. The REIT's pivot toward Sun Belt tertiary markets—it acquired four extended-stay assets in Austin and Phoenix during Q1—suggests management is trading gateway volatility for operational stability, even at the cost of long-term appreciation potential. Family offices with lodging exposure through mezzanine debt or preferred equity should reassess collateral quality in any Service Properties-branded vehicles; the company's willingness to walk from a 338-room asset in a top-15 U.S. market indicates surgical triage rather than broad recovery confidence.
The timing aligns with broader REIT recalibration: eleven publicly traded hotel owners have divested $4.2 billion in assets since January 2024, per Real Capital Analytics. Service Properties now trades at 0.43x book value, a 61 percent discount to its 2019 multiple, reflecting investor skepticism that the remaining portfolio—48 percent select-service, 29 percent extended-stay—can generate distribution growth without further asset churn. The company's next earnings call is scheduled for May 8, where management will address whether additional gateway exits are pending and whether the Sonesta master lease—up for renewal in September 2026—will be restructured or terminated.
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