Service Properties Trust (SVC) Q3 2021 Earnings Call Transcript

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Service Properties Trust (SVC 0.41%)
Q3 2021 Earnings Call
Nov 5, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Service Properties Trust Third Quarter 2021 Financial Results Conference Call. [Operator Instructions]

At this time, for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Kristin Brown. Please go ahead.

Kristin Brown -- Director, Investor Relations

Thank you, and good morning. Joining me on today's call are John Murray, President; Brian Donley, Chief Financial Officer; and Todd Hargreaves, Chief Investment Officer. Today's call includes a presentation by management followed by a question-and-answer session with analysts. Please note that the recording, retransmission and transcription of today's conference call is prohibited without the prior consent of SVC.

I would like to point out that today's conference call 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 on SVC's present beliefs and expectations as of today, November 5, 2021. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made on today's conference call other than through filings with the Securities and Exchange Commission or SEC.

In addition, this call may contain non-GAAP financial measures, including normalized funds from operations, or normalized FFO, and adjusted EBITDAre. Reconciliations of normalized FFO and adjusted EBITDAre to net income as well as components to calculate AFFO are available on our supplemental package found in the Investor Relations section of the company's website. Actual results may differ materially from those projected in these forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our Form 10-Q on file with the SEC and in our supplemental operating and financial data found on our website at www.svcreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements.

With that, I'll turn it over to John.

John G. Murray -- President and Chief Executive Officer

Thank you, Kristin, and good morning. Last night, we reported third quarter normalized FFO of $0.27 per share and an adjusted EBITDAre of $137.3 million, an increase of 16% from the second quarter and 33% from the prior-year quarter. Our results reflect improving revenues in our hotel portfolio, driven by elevated leisure demand, coupled with slowly rebuilding business trends in demand as well as steady high rent collections at our net lease service-oriented retail properties.

Our hotel EBITDA has been positive on a monthly basis since April and increased 71% versus the second quarter. We recorded our strongest month year-to-date in July, with the COVID Delta variant slowed momentum in late August and early September, dampening demand. Reports of spiking COVID cases in various markets resulted in some canceled room nights, and, in some urban centers, delayed employee return to office timing. Despite these headwinds, our operating performance improved from the prior quarter.

For our 292 comparable hotels, average occupancy increased 2.9 percentage points to 60.9%. Average daily rate increased 12.5% to $111.19, and RevPAR increased 18.2% to $67.1 on a sequential basis from the second quarter. Comparable hotel RevPAR was 30% below 2019 levels for the third quarter, an improvement from 46% below 2019 levels in the second quarter.

Our extended-stay hotels continue to maintain strong occupancy premiums relative to the industry and compared to our nonextended stay hotels. Our 160 extended stay hotels reported occupancies of 75.3% during the quarter, compared with occupancies of 48.9% and 50.2%, respectively, for our 93 select-service and 51 full-service hotels. Our extended-stay hotel RevPAR was 20% below 2019 levels this quarter and improved to only 13% below 2019 levels in September.

We expect this gap to narrow further as Sonesta continues to manage extended stay mix to shorter stays to grow rate. While demand across the portfolio continues to be stronger on weekends versus weekdays due to the strength in leisure demand, weekday stays have shown a noticeable increase as we begin to see business travel slowly rebuilding. As new COVID cases begin to subside, the recoveries momentum picked up in mid-September and continued through October.

For the fourth quarter, we expect further progress toward recovery tempered by normal seasonality as business travel gradually returns, leisure demand remains elevated and extended stay occupancies remained stable. We also believe the trajectory of recovery, while it may be choppy at times, will accelerate in 2022 as urban markets and CBD office buildings continue to reopen. Historically, SVC select service and urban full-service hotels have generated approximately 75% to 80% of their revenues from business-related travel or meetings, and we believe a more widespread return to in-office work is going to be important to seeing that level of business demand resume.

On the expense side, labor continues to pose a challenge for the lodging industry and our portfolio. Wage increases to attract and retain staff and the use of expensive contract labor have negatively impacted results. On a cost per occupied room basis, wages and benefits increased 2% year-over-year for Q3. Wage inflation was partially offset by increased productivity and labor savings due to open positions and adapted brand standards. Because it's only been a couple of quarters since many of the semester transitions occurred, and because business demand remains anemic versus pre-pandemic levels, OTA usage was elevated this quarter, which drove higher commission expenses. Partially offsetting these costs was reduced pricing on key products and contracts by Sonesta due to their increased portfolio size.

In 2022, Sonesta OTA commission rates will also decline approximately 25%, reflecting Sonesta's brandwide hotel count and transaction volumes. For the 208 hotels that were transitioned to Sonesta over the past 10 months, RevPAR increased almost 22% to $64.43 in the third quarter compared with $52.90 in the second quarter. We believe the transition disruption is generally behind us and with Sonesta's brand awareness is growing.

In addition to benefiting from recovery in hotel industry demand and increasing brand awareness, Sonesta is also realizing the benefit of its larger scale, including integrating systems to reduce IT expenses and cluster staffing in concentrated markets like Atlanta and Chicago to reduce labor costs. Additional benefits from its increased scale should flow through in 2022 as annual contracts currently being renegotiated go into effect next year.

The hotel industry fundamentals continue to improve, we expect Sonesta will deliver solid results on both the top line and bottom line. SVC is well-positioned to participate in any upside realized by the evolution of Sonesta as a major hotel brand, management, and franchise company through its 34% ownership.

Finally, as we announced earlier this week, we amended our management agreement with Radisson for nine hotels. Under the amended agreement, Radisson will continue to manage eight of the hotels for a 10-year term. The amended agreement sets our annual minimum return at $10.2 million, and Radisson provided us with the new $22 million limited guarantee for 75% of the annual minimum returns due to us beginning in 2023. We have also agreed to fund approximately $12 million of renovations that are expected to be completed by the end of 2022. We transitioned the management and branding of one hotel in Minneapolis to a Royal Sonesta on November 1, 2021.

Turning to our net lease assets. This portfolio is continuing to provide a stable base of cash flows, and we collected all of the rents due from our net lease tenants during the third quarter as well as in October. As you may have seen, our largest net lease tenant, TravelCenters of America, reported strong earnings earlier this week as its transformation plan continues to produce financial and operating improvement. This is positive news for TA as our largest tenant, and also because we own approximately 8% of their shares. We have taken steps to preserve capital and solidify our liquidity, including maintaining a nominal dividend, deferring nonessential capital spending, and working with our operators to control costs. We're also well into the sales process with respect to 68 Sonesta branded hotels, which we expect to sell in the first quarter of 2022. Todd will discuss this in more detail.

Overall, we remain encouraged with the recent performance of our hotel operators and net lease tenants as well as progress on our initiatives to reduce leverage and improve liquidity. And we look forward to positioning SVC to benefit as the lodging sector recovers from this historic downturn.

And with that, I'll turn it over to Todd to discuss planned dispositions, other recent transaction activity in the net lease portfolio in further detail.

Todd Hargreaves -- Vice President and Chief Investment Officer

Thanks, John. We continue to make progress in our hotel disposition initiative to raise capital and reposition SVC's Sonesta portfolio through the sale of 68 hotels, which had a net carrying value of $579 million as of September 30, 2021, across the Sonesta, Sonesta ES Suites, Simply Suites and Sonesta Select brands.

We launched our formal marketing effort in August and have recently received first-round offers. We are pleased with the initial pricing and interest level received, and we believe the timing of these sales is favorable given the considerable amount of institutional capital targeting hotel investments, coupled with the low interest rate environment driving cap rates downward.

Generally, the interested investors are groups that plan to acquire the hotels and enter into long-term franchise agreements with Sonesta, but we've also received offers from groups that intend to rebrand the hotels or convert to an alternate use. We expect to select buyers and enter purchase and sale agreements in Q4 2021, and to close in Q1 2022. Post sale, we believe we will have improved the overall quality of the portfolio from a financial, physical, and market perspective.

In terms of other transaction activity, during the third quarter, we sold two net lease properties totaling 6,600 rentable square feet for an aggregate sales price of $700,000. In October 2021, we sold one additional net lease property with 7,000 rentable square feet for $915,000. We've also entered into agreements to sell four net lease properties totaling 14.6000 square feet with an aggregate carrying value of $1.8 million for an aggregate sales price of $2.3 million. We currently expect these sales to be completed by the end of the fourth quarter of 2021.

As with previous quarters, our net lease sales of properties have become vacant or ones we expect to become vacant and what we have -- what we believe to be a low likelihood of relation. As of September 30, 2021, we own 794 net lease service-oriented retail properties, including our travel centers, with 13.6 million square feet, requiring annual minimum rents of $370.9 million. Representing 42.5% of our overall portfolio based on investment, our net lease assets were 98.2% leased by 175 tenants, with a weighted average lease term of 10.3 years and operating under 134 brands in 21 distinct industries at quarter-end. The aggregate coverage of our net lease portfolio's minimum rents was 2.37 times on a trailing 12-month basis as of September 30, 2021, and we collected all of the rents due from our net lease tenants during the third quarter, including all deferred amounts due.

We entered into a rent deferral agreement with one net lease tenant for $2.9 million during the third quarter. As of September 30, 2021, $10.8 million of deferred rents remain outstanding with 15 tenants who represent approximately 3% of our annualized rental income from our net lease portfolio, including [Indecipherable]. We have reduced our reserves for uncollectible rents, providing a positive lift to our third-quarter results of $5.4 million or $0.03 per share based on our cash collections from certain tenants and our collectibility assessment on rents [Indecipherable]. This compares to reducing our rental income by $2.4 million for reserves for uncollected [Indecipherable] during the prior-year quarter.

I'll now turn the call over to Brian.

Brian Donley -- Treasurer and Chief Financial Officer

Thanks, Todd. Starting with our consolidated financial results for the third quarter of 2021. Normalized FFO was $43.8 million or $0.27 per share, a $21 million increase over the prior-year quarter, the sequential increase of almost $18 million over the second quarter of 2021.

Adjusted EBITDAre was $137.3 million for the third quarter, a $33.7 million increase over the prior-year quarter, and an $18.7 million or 15.8% sequential increase over last quarter. The major drivers impacting normalized FFO this quarter included the results from our hotel portfolio, which generated $51.1 million of hotel EBITDA for the third quarter of 2021 compared to negative $6.3 million of hotel EBITDA in the prior-year quarter. Guaranteed payments and security deposit utilization that supported our hotel returns under our historical agreements declined $30.5 million, negatively impacting year-over-year comparisons.

Rental income from our leased properties for the third quarter of 2021 increased $1.9 million for the year year-over-year, primarily as a result of reducing our reserves for uncollectible rents, partially offset by a decline in noncash [Indecipherable] line rent adjustments related to lease restructurings and the sale of certain net lease properties since July of 2020.

Interest expense increased $11.9 million over the prior year quarter as a result of our Q4 2020 senior notes issuance and our revolver draw in January 2021. G&A expense increased $1.9 million in the current year quarter primarily as a result of increased business management fees due to RMR as a result of an increase in our market capitalization when compared to the prior-year period.

We account for our investment in Sonesta under the equity method of accounting and include our share of Sonesta's results in our earnings. Our share of Sonesta's normalized FFO recognized from our 34% ownership interest was $2.8 million, an increase of $5 million or $0.03 per share over the prior-year quarter. Turning to our hotel portfolio results. For our 292 comparable hotels this quarter, RevPAR increased 63. 7%.

Gross operating profit margin percentage increased by 10.2 percentage points to 31.2%. And gross operating profit increased by approximately $56.6 million from the prior-year period. Below the GOP line costs at our comparable hotels increased $10.2 million from the prior year, primarily as a result of an increase in management fees, driven by higher revenues at our hotels and increased insurance costs.

Our consolidated portfolio of 304 hotels generated hotel EBITDA of $51.1 million compared to operating loss of $6.3 million in the prior-year quarter. Our 160 extended stay hotels continued to have the strongest performance, generating $29.3 million of hotel EBITDA during the quarter. Our 51 full-service and 93 select service hotels generated $14.4 million and $7.4 million, respectively.

Overall, RevPAR increased 21% sequentially to $69 this quarter as a result of strong leisure demand and the continued ramp-up from rebranding 88 hotels in Q1. Q3 RevPAR was approximately 32% below third quarter 2019 levels, an improvement compared to Q2, which was 46% below Q2 2019 levels. Preliminary October 2021 RevPAR was similar to September's results of $69. We currently expect Q4 RevPAR to be approximately 35% to 37% below Q4 '19's RevPAR, with the expected drop-off coming from the historically weak holiday season for our portfolio.

Our overall corporate cash flow was positive before capital expenditures for the third quarter. Based on our current outlook and expectation for improved lodging activity and stable rent collections from our triple net lease portfolio, we continue to expect to be cash-flow positive for the full year 2021 at the corporate level before capital expenditures. We made $19.8 million of capital improvements at our properties during the third quarter and $73.2 million year-to-date.

We expect to fund $35 million in the fourth quarter of 2021 for a total of $108.2 million projected for the full year. Project deferrals and lead times with vendors as well as the finalization of Sonesta's new brand standards impacted our pace of capital expenditure activity in 2021. We have committed to spend over $60 million under our amended Hyatt and Radisson agreements for renovations and expect to renovate a significant number of Sonesta hotels. We anticipate our capital spend for 2022 to be around $200 million, assuming lodging fundamentals continue to improve and supply chain challenges abate. We will provide more color on our expected capital spend on our fourth-quarter earnings call as we firm up our 2022 budgeting.

Regarding our common dividend, we expect to maintain the current quarterly distribution rate of $0.01 per share through mid-2022. At quarter-end, we had approximately $912 million of cash on our balance sheet, and our next debt maturity is in the third quarter of 2022. Factoring in our planned hotel sales, we currently believe we have adequate liquidity through 2022 for all of our options to ensure we are well-positioned until the effects of the pandemic are behind us and lodging fundamentals have been covered.

Operator, that concludes our prepared remarks. We're ready to open up the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question comes from Bryan Maher with B. Riley. Please go ahead.

Bryan Maher -- B. Riley Securities, Inc. -- Analyst

Sure. Good morning. Thank you. A couple of quick questions for me. We noticed that the Sonesta select hotels, 263, had fairly weak occupancy down around 42%. I know that you're selling a chunk of those properties with the disposition plan. How much of an impact are the assets being held for sale impacting RevPAR and occupancy across the portfolio?

I'm assuming that those hotels that are being sold, management, and the employees at those properties know they're being sold. Is that correct?

John G. Murray -- President and Chief Executive Officer

Yes, that's correct, Bryan. No, I think that the real issue -- there may be some impact from what you described that there may be a negative impact from the hotels that are being marketed for sale. But I think, really, the main impact for the select hotels is that they were designed from a location perspective to cater to business travel.

Many of them are in business park-type locations that -- where they're still getting business from leisure travel on weekends from sports teams and other SMERF business, but they're not -- nobody's waking up and picking some of these locations for a week's expectation. They're just -- they're business traveler hotels and business travel hasn't come back sufficiently to get the occupancies up.

And we knew that that would be an issue when we converted the hotels to Sonesta, and we've been working on initiatives to try to get that occupancy up. And we were lucky, I guess, that we were able to do the rebranding during the pandemic and get some systems in place to be ready to capture that business travel when it returns, but it really hasn't come back in force yet.

And so I think that's really the reason why the Sonesta select hotels occupancy levels are not where you might expect.

Bryan Maher -- B. Riley Securities, Inc. -- Analyst

And we've noticed when we've been out on the road, some Sonestas that have converted to the Sonesta brand still have some temporary signage up there. Is that because those assets are being held for sale, and you don't really know if they're going to be Sonestas long term? Or is it because there's a delay in getting signage -- permanent signage to put on those properties?

John G. Murray -- President and Chief Executive Officer

It's more the latter, getting the signage delivered, getting the signs manufacturing and delivered has been a little bit more of an issue with supply chain concerns and worker concerns. And so it's really been more about -- and also, there's -- in some markets, there have been a sort of an elongated process with the local municipalities to get the approvals for the new signs. There's a lot more restrictions today about blending in with the community, how bright the lights are if there's -- it may impact for a lot of Dallas wasn't conversion, but for instance, our lighting there is restricted because of turtles on the beach.

So there's a lot of things that impact signage that have caused us to have a slowdown in some locations.

Bryan Maher -- B. Riley Securities, Inc. -- Analyst

You don't want to mess with those turtles?

John G. Murray -- President and Chief Executive Officer

No.

Todd Hargreaves -- Vice President and Chief Investment Officer

Bryan, I'll add -- I think you asked this as well. Of the 68 hotels we're selling, 19 are selects. And those 19 hotels had a Q3 RevPAR of $40 compared to $48 for the total. So again, we're selling office selects, we're selling the lower performers.

Bryan Maher -- B. Riley Securities, Inc. -- Analyst

Okay. And just one more for me and then I'll hop back into the queue. I think you mentioned at the last quarterly call that I think that there's $579 million carrying costs on the 68 hotels for sale. And you felt pretty confident that you would be able to get nicely above that. Now that you've seen the first-round offers, are you still comfortable with that statement?

Todd Hargreaves -- Vice President and Chief Investment Officer

Yes. Bryan, this is Todd. I think based on the first round offers we received -- and again, we've only received offers for the -- just to clarify, we've received first run offers for the $65 million select service and extended stay hotels that we're selling as well as one full service. We're still waiting on offers for the other two. But I would say, generally, we would expect to get at or around that net carrying value in total.

Bryan Maher -- B. Riley Securities, Inc. -- Analyst

Okay. Thank you.

Operator

The next question comes from Dori Kesten with Wells Fargo. Please go ahead.

Dori Kesten -- Wells Fargo Securities -- Analyst

Thanks. Good morning. This is a little bit different way of asking Brian's question, but can you walk through what RevPAR and EBITDA per key differences between the 68 hotels and the remainder of the portfolio back on '19 results?

Todd Hargreaves -- Vice President and Chief Investment Officer

For '19?

Dori Kesten -- Wells Fargo Securities -- Analyst

Yes.

Todd Hargreaves -- Vice President and Chief Investment Officer

Yes. So for '19, for the 68 hotels we're selling, we were at 74 RevPAR versus the hotels less the -- so the remaining portfolio of just Sonestas versus 111. And EBITDA was -- again, this is -- I'm giving you quarter numbers, Dori, was $11 million, $11.5 million for the 68 exit hotels. And then for the Sonesta less the exit, we were at about $106 million.

Dori Kesten -- Wells Fargo Securities -- Analyst

Did you -- sorry, you said $11 million versus $106 million?

Todd Hargreaves -- Vice President and Chief Investment Officer

Right.

Dori Kesten -- Wells Fargo Securities -- Analyst

And that's 2009, like the whole year?

Brian Donley -- Treasurer and Chief Financial Officer

Yes.

Todd Hargreaves -- Vice President and Chief Investment Officer

That was Q3 annualized.

Brian Donley -- Treasurer and Chief Financial Officer

Yes. The full-year number for those 68, Dori, this is Brian. It was around $31 million in hotel EBITDA.

Dori Kesten -- Wells Fargo Securities -- Analyst

Okay. So and the remainder is what, on an annual?

Todd Hargreaves -- Vice President and Chief Investment Officer

I'm sorry, say that again, Dori?

Dori Kesten -- Wells Fargo Securities -- Analyst

So the $68 million was $31 million. What was the remainder on an annual?

John G. Murray -- President and Chief Executive Officer

Yes. The whole portfolio, the up hotels, we were at $500 million in 2019, so that this was a very small percentage of the overall portfolio.

Todd Hargreaves -- Vice President and Chief Investment Officer

Another way to look at it, too, Dori, is if you look at '17 to '19 for the -- just the normalized things for the entire portfolio, the sale portfolio is about 10% of overall EBITDA, and it's over 20% of the rooms and hotels.

Dori Kesten -- Wells Fargo Securities -- Analyst

Okay. And can you talk about the difference in the cost structure with the hotels now under Sonesta as your manager versus Marriott and Intercon? I'm just trying to think through what the margin upside that may exist versus 2019 beyond just what the industry may achieve for your type of hotel.

John G. Murray -- President and Chief Executive Officer

Well, that is a good question. But it's -- the answer is more that it's still evolving. There are some fees that Marriott charged against our hotels that Sonesta doesn't charge, mostly on an individual basis sort of ankle-biters, but together, they're probably a couple of percent of revenue The OTA charges, because of Marriott's significant size and volume of transactions that their hotel guests run through the OTAs, their commission levels are somewhere in the $0.13 to $0.14 -- or 13% or 14%.

Sonestas were slightly above, or I guess, technically still are slightly above 20%. And contracts are in process of being executed that will reduce that to the sort of 17%, or $0.17 range. So still not as low as the much larger top three or four hotel companies but a significant decline in those costs for Sonesta. And then, otherwise, because of their increased size from the transitions, we completed over the last nine months or so. And because of the Red Lion acquisition, they are in the process of renegotiating a lot of contracts, whether it's for trash collection, for supplies, towels, food, and beverage, a lot of their procurement costs have come in substantially. A lot of their service contracts for things like elevators.

So Sonesta's cost structure is changing quite a bit. And it's not really static. So it's hard to compare I think it's fair to say that because of Marriott's size and stability that the -- their costs are a little bit lower on some of those contracts than Sonestas are today.

Dori Kesten -- Wells Fargo Securities -- Analyst

Okay. Thank you.

Operator

The next question comes from Jim Sullivan with BTIG. Please go ahead.

Jim Sullivan -- BTIG -- Analyst

Thank you. John, I'm curious, there was a comment that was made in the prepared remarks that offers were being received for the portfolio of assets for sale both on an encumbered basis and an unencumbered basis. And this, obviously, this sale would perhaps provide a good example for us if we're aware of the difference that the encumbrances make in terms of the terminal cap rate. One of your peers, on the call today -- on their call this morning talked about a 50 basis point difference if you're selling an asset unencumbered versus encumbered.

Obviously, in the case of service properties, you own a significant chunk of Sonestas so you would be retaining the fees or a share of them. So I wonder if you could help us understand the calculus. Presumably selling it unencumbered, you would demand a higher price, but because you would lose your share of the fee revenue there would be -- it wouldn't be a -- it's something that has to take into account.

I wonder if you could help us understand the calculus as you think about it. If you're going to sell the assets encumbered, how much of a difference in the cap rate would you accept to kind of put you in the same position of selling the then unencumbered at a lower cap rate?

John G. Murray -- President and Chief Executive Officer

Thanks, Jim. That's a good question. It is a complicated complicated answer. First of all, strategically, it's in their interest because of our ownership of Sonesta to continue to see Sonesta do well. And there's been a lot of news about their significant growth over the last year. And so, for us, to turn around and sell 60-plus hotels unencumbered would sort of deflate that story and that momentum that they have. And so we've been careful about how we do that.

And so when we evaluate the offers that we get on these hotels, we look at both the purchase price. We look at our estimate of the royalty revenue that Sonesta would generate if they stayed encumbered, less a cost factor, and then our percentage ownership of Sonesta to try to estimate the value to SVC of keeping them encumbered.

And we also -- Sonesta has been in discussions with a number of these potential buyers regarding possible transitions or new development of hotels as part of this process. And to the extent that buyers are committing to additional hotels, we've got a lesser factor because it's further out and less predictable, but we're considering that, too, in our analysis.

So there's -- there is definitely a formula that we're applying. And the other thing to remember is that some of -- for instance, some of the extended-stay hotels that are being sold, our exterior corridor format, which is not brand standard any longer at Marriott. And so the offers coming in for those hotels on an encumbered basis are significantly higher than the offers coming in unencumbered.

And so there's just a lot of different factors that are impacting where pricing is coming in. So we do have a number of hotels that are getting -- where we're getting better pricing keeping it as a Sonesta than letting it go unencumbered. So that -- so that makes it hard for me to give you a specific percentage. But generally speaking, if the hotels are easily rebranded to a Hilton or Marriott brand, there will be probably somewhere around a 50- to 75-basis-point higher pricing difference between encumbered and unencumbered.

Jim Sullivan -- BTIG -- Analyst

Okay. That's helpful. And secondly, back at the time, say a year ago when you were having your ultimately failed negotiations with Marriott, you commented a few times that the Marriott -- Marriott's strength in terms of putting heads in beds was really with the business traveler because of their corporate rate arrangements and relationships and so forth, or at least that was always the perception.

We're now at a point in time where -- with the leisure traveler has come back and been pretty strong, but the business travel hasn't, but we're hearing, in this quarter, a lot of positive commentary about business transient back and business group coming back and the market getting excited about this January four date as kind of a pivot point for next year for the business travel.

And I just wondered, do you have a sense that as that business traveler comes back, the Sonesta brands are not going to be able to keep pace in terms of the gains in the market versus an established -- the bigger established brand like Marriott? Or do you think that -- are you growing in confidence that Sonesta can be competitive to achieve the same kind of growth?

John G. Murray -- President and Chief Executive Officer

I mean, I think we're confident that Sonesta is going to compete well. The companies like Marriott and Hilton and IHG, they're much bigger with much larger reward programs, and they're great hotel companies, and they'll always be tough to compete against. But I think Sonesta is putting programs in place to attract business travelers. And I think that their salespeople are aggressive and more dig it out and press the flash and pound the pavement and continue to develop relationships because that's what it takes.

If you're a smaller hotel company, to be competitive and -- and I think our experience, not in every case, but in a lot of cases was that some of the salespeople in some of the hotels managed by the bigger operators have developed a little bit of a complacency because of the -- because their rewards program was so strong they just thought the spicket was turned on and the flow of guests would show up regardless of how hard they worked at sales.

And Sonestas doesn't have the benefit of just waiting for the flow. They're out there generating the flow. And so I think there -- because of that, I think, they're working harder, they're ultimately going to be very competitive. And we still have 16 hotels that Marriott is managing for us, and they're not improving at a faster rate or dramatically surpassing the Sonesta branded hotels that are similar tiered. So we feel pretty good about how the Sonesta brand is going to stack up.

Jim Sullivan -- BTIG -- Analyst

Great. That is great. Thanks, John.

Operator

The next question is a follow-up from Bryan Maher with B. Riley.

Bryan Maher -- B. Riley Securities, Inc. -- Analyst

Thanks. John, can you give us an update on the franchising opportunity with Sonesta. I know that when you brought in Red Lion, the goal was -- or the thought process was it would help ramp that process. Can you tell us where you are in that stage? And when we might see that roll out in a meaningful way?

John G. Murray -- President and Chief Executive Officer

Just to be clear, we're not in that space. But yes, no, we do own -- that's a fair question because we do own one-third of Sonesta. At the beginning of October, they -- Sonesta filed their franchise disclosure documents for the Sonesta Simply Suites, Sonesta ES Suites, Sunesta Select, and Sonesta Hotels.

And so the timing of that was good. It was right before the start of the Phoenix Lodging Conference. And so they were able to officially start selling franchises at that time. And I think that -- at the same time, we've launched the sales process for the 68 hotels. So I think that the initial feedback has been much stronger than we -- even we had expected or hoped for. And -- but a lot of where the rubber meets the road is going to come from Sonesta finalizing all of their brand standards from both an operational and capital perspective, which is at a very advanced stage also.

And so, I think, Sonesta is in a good position. I think that what we're hearing is that one of the big attractions to Sonesta as a franchise organization is the fact that they do have 34% ownership by SVC. And most of the big hotel franchise companies, today, are asset-light and do not have -- don't have to eat their own cooking. They can decide that the 48-inch televisions that you bought last week need to be 52-inch televisions this week. And they don't have to go out and buy anymore what televisions just their franchisees have to. But if Sonesta changes from 48-inch TVs to 52-inch TVs, SVC has to go out and buy tens of thousands of TVs.

So it's not going to be a will and early decision to jam the extra four-inch size TV down the franchisees throat as it might be -- obviously, I'm overstating. The brand -- all of the brands are thoughtful about their standards, but there are a number of franchisees who feel like the big brands are a lot less thoughtful than owners, and when it comes to what those brand standards are and how quickly they need to be rolled out. And so I think that -- knowing that whatever Sonesta comes up with from a brand standard, that SVC has to live with it as well, has been a big attraction to franchisees and is really helping that program get a good jump start.

Bryan Maher -- B. Riley Securities, Inc. -- Analyst

And just last for me. On the net lease portfolio, it seems like you've been selectively pruning some assets there. Is there a common denominator among what it is you're selling? And any thoughts -- current thoughts on the movie theater component there with what's been going on in that industry? Thank you.

Todd Hargreaves -- Vice President and Chief Investment Officer

Yes, Bryan. So as you can see, they're mostly smaller assets. And typically, our strategy there is something is going to become baked in or is vacant, and we don't think we can release it. We try to sell it, and that's typically how we can best optimize price in that space. So that's most of what we're selling. We're not -- we haven't been selling anything that we view as core.

In terms of the movie theaters, we -- when we first bought this portfolio, we had said that we're unlikely to grow that portfolio, and you may see us sell some movie theaters. I think we've done a -- all of our theaters are now current on rent. I think it's not the right time to sell the movie theaters. I don't think you're going to -- on a lot of our other net lease like our quick-service restaurants and some other industries, you're seeing a lot of cap rate compression.

I think movie theaters, fitness centers are still wider. I don't think it's the right time to sell. But when the market recovers and specific to those sectors, you may see us sell those. I just don't think it's the right time now. But the movie theater industry is coming back, and we're seeing that in our theaters as well.

And again, they're all current on their rents. We still have some deferrals outstanding, but we're not concerned. We don't have any major concerns today about our theaters, but you may see us sell those next year or the year after.

Bryan Maher -- B. Riley Securities, Inc. -- Analyst

Okay. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to John Murray for any closing remarks.

John G. Murray -- President and Chief Executive Officer

Thank you, everyone, for joining us today, and we look forward to speaking with some of you at Virtual NAREIT next week, as maybe seeing the teleconference.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Kristin Brown -- Director, Investor Relations

John G. Murray -- President and Chief Executive Officer

Todd Hargreaves -- Vice President and Chief Investment Officer

Brian Donley -- Treasurer and Chief Financial Officer

Bryan Maher -- B. Riley Securities, Inc. -- Analyst

Dori Kesten -- Wells Fargo Securities -- Analyst

Jim Sullivan -- BTIG -- Analyst

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