Good day, and welcome to the Service Properties Trust Q3 2021 Financial Results Conference Call. This call is being recorded. 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.
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 are prohibited without the prior written 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 5th, 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 in 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.
Thank you, Kristin, and good morning. Last night, we reported Q3 normalized FFO of $0.27 per share and adjusted EBITDAre of $137.3 million, an increase of 16% from the Q2 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 transient 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 Q2. We recorded our strongest month year to date in July, but 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 $111.18, and RevPAR increased 18.2% to $67.71 on a sequential basis from the Q2. Comparable hotel RevPAR was 30% below 2019 levels for the Q3, an improvement from 46% below 2019 levels in the Q2. Our extended stay hotels continue to maintain strong occupancy premiums relative to the industry and compared to our non-extended 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 recovery's momentum picked up in mid-September and continued through October.
For the Q4, we expect further progress towards recovery tempered by normal seasonality as business travel gradually returns, leisure demand remains elevated, and extended stay occupancies remain 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%-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 Sonesta 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 brand-wide 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 Q3, compared with $52.90 in the Q2. We believe the transition disruption is generally behind us, and that 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. As 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 a new $22 million limited guarantee for 75% of the annual minimum returns due to us beginning 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 1st, 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 Q3 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 non-essential 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 Q1 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. We look forward to positioning SVC to benefit as the lodging sector recovers from this historic downturn. 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.
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 30th, 2021 across the Sonesta ES Suites, Sonesta Simply Suites, and Sonesta Select brands. We launched our formal marketing effort in August and have recently received 1st-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 Q3, we sold two net lease properties totaling 6,600 rentable sq ft for an aggregate sales price of $700,000. In October 2021, we sold one additional net lease property with 7,000 rentable sq ft for $915,000.
We have also entered into agreements to sell four net lease properties totaling 14,600 sq ft 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 Q4 of 2021. As with previous quarters, our net lease sales are properties that have become vacant or ones we expect to become vacant, and what we believe to be a low likelihood of releasing. As of September 30th, 2021, we own 794 net lease service-oriented retail properties, including our travel centers, with 13.6 million sq ft, 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 2.37x on a trailing twelve-month basis as of September 30th, 2021, and we collected all of the rents due from our net lease tenants during the Q3, including all deferred amounts due. We entered into a rent deferral agreement with one net lease tenant for $2.9 million during the Q3.
As of September 30th, 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 TA. We have reduced our reserves for uncollectible rents, providing a positive lift to our Q3 results of $5.4 million, or $0.03 per share, based on our cash collections from certain tenants and our collectibility assessment on rents owed to us. This compares to reducing our rental income by $2.4 million for reserves for uncollectible rents during the prior quarter. I'll now turn the call over to Brian.
Thanks, Todd. Starting with our consolidated financial results for the Q3 of 2021, normalized FFO was $43.8 million, or $0.27 per share, a $21 million increase over the prior year quarter, and a sequential increase of almost $18 million over the Q2 of 2021. Adjusted EBITDAre was $137.3 million for the Q3, 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 Q3 of 2021, compared to -$6.3 million of hotel EBITDA in the prior year quarter.
Guarantee 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 Q3 2021 increased $1.9 million year-over-year, primarily as a result of reducing our reserves for uncollectible rents, partially offset by a decline in non-cash straight-line rent adjustments related to lease restructurings and the sale of certain net lease properties since July 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 losses 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 Q3 2019 levels, an improvement compared to Q2, which was 46% below Q2 2019 levels. Preliminary October 2021 RevPAR was similar to September's result of $69. We currently expect Q4 RevPAR to be approximately 35%-37% below Q4 2019'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 Q3.
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 Q3 and $73.2 million year to date. We expect to fund $35 million in the Q4 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'll provide more color on our expected capital spend on our Q4 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 Q3 of 2022.
Factoring in our planned hotel sales, we currently believe we have adequate liquidity through 2022, and we continue to assess and explore all of our options to ensure we are well-positioned until the effects of the pandemic are behind us and lodging fundamentals have recovered. Operator, that concludes our prepared remarks. We're ready to open up the line for questions.
Thank you. We will now begin the question-and-answer session. The 1st question comes from Bryan Maher with B. Riley. Please go ahead.
Sure. Good morning. Thank you. Couple of quick questions from me. You know, we noticed that the Sonesta Select hotels, the 63, 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, you know, across the portfolio? I'm assuming that those hotels that are being sold, you know, management and the employees at those properties know they're being sold. Is that correct?
Yes, that's correct, Brian. You know, 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, you know, they were designed from a location perspective to cater to business travel. You know, 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 you know, they're not. Nobody's waking up and picking some of these locations for a week's vacation. You know, they're just.
They're business traveler hotels and business travel hasn't come back sufficiently to get the occupancies up. We knew that would be an issue when we converted the hotels to Sonesta and you know, we've been working on initiatives to try to get that occupancy up and you know, 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. You know, but it really hasn't come back in force yet. I think that's really the reason why the Sonesta Select hotels occupancy levels are not where you might expect.
We've noticed when we've been out on the road, some Sonesta that, you know, have converted to the Sonesta brand, you know, 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 gonna be Sonesta long term, or is it because there's delay in getting signage, you know, permanent signage to put on those properties?
It's more of the latter. Getting the signage delivered, you know, getting the signs manufactured and delivered has been a little bit more of an issue with supply chain concerns and worker concerns. It's really been more about, and also in some markets, there have been sort of an elongated process with the local municipalities to get the approvals for the new signs. You know, there's a lot more restrictions today about you know, blending in with the community, how bright your lights are, if there's. You know, it may impact, you know, like in Fort Lauderdale, it wasn't a conversion, but for instance, our lighting there is restricted because of turtles on the beach. T here's a lot of things that impact signage that have caused us to have a slowdown in some locations.
Yeah, Brian.
You don't wanna mess with-
Pardon?
You don't wanna mess with those turtles.
No.
Brian, 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. Again, of the selects, we're selling the lower performers.
Okay. Just one more from 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, you know, $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 1st round offers, are you still comfortable with that statement?
Yeah, Brian, it's Todd. I think based on the first round offers we received, and again, Just to clarify, we've received first round offers for the 65 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. I would say, you know, generally, we would expect to get at or around that net carrying value in total.
Okay, thank you.
The next question comes from Dori Kesten with Wells Fargo. Please go ahead.
Thanks. Good morning. This is a little bit different way of asking Brian's question, but can you walk through the key differences in RevPAR and EBITDA between the 68 hotels and the remainder of the portfolio for 2019 results?
For 19?
Yeah.
For 2019, for the 68 hotels we're selling, we were at $74 RevPAR versus $111 for the remaining portfolio of just Sonesta's. EBITDA was $11 million-$11.5 million for the 68 exit hotels. Again, this is quarter numbers, Dori. For the Sonesta less the exit, we were at about $106 million.
Sorry, you said $11 million versus $106?
Right.
Okay. That's on 2019? Like, the whole year?
That was for-
Yeah.
That was Q3 annualized.
Yeah. The full year number for those 68, Dori, this is Brian, was around $31 million in hotel EBITDA.
Okay. 31, and the remainder is what on an annual?
I'm sorry, say that again, Dori.
The 68 was $31 million. What was the remainder on an annual?
Yeah. The whole portfolio, the 304 hotels, you know, we were at $500 million in 2019, so this was a very small percentage of the overall portfolio.
Yeah. Another way to look at it too, Dori, is if you look at 17-19. Just to normalize things, for the entire portfolio, the sale portfolio is about 10% of overall EBITDA, and it's over 20% of the rooms and hotels.
Okay. Can you talk about the difference in the cost structure, with the hotels now under Sonesta, as your manager versus Marriott and InterContinental? I'm just trying to think through, what the margin upside, that may exist, you know, versus 2019 beyond just what the industry may achieve, for your type of hotel.
Well, you know, that's a good question. The answer is more that it's still evolving. There are some fees that Marriott charged against our hotels that Sonesta doesn't charge. They're mostly on an individual basis, so they're ankle biters, but together, they're probably a couple of % 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, you know, somewhere in the $0.13-$0.14 or 13%-14%. Sonesta's were slightly above or I guess technically still are slightly above 20%.
Contracts are in process of being executed that will reduce that to the sort of 17% or $0.17 range. Still not as low as the much larger top three or four hotel companies, but a significant decline in those costs for Sonesta. Otherwise, you know, because of their increased size from the transitions we completed over the last nine months or so and because of the Red Lion acquisition, you know, they are in process of renegotiating a lot of contracts, whether it's for, you know, 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. Sonesta's cost structure is changing quite a bit. 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 their costs are a little bit lower on some of those contracts than Sonesta's are today.
Okay, thank you.
The next question comes from Jim Sullivan with BTIG. Please go ahead.
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. 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 Sonesta, so you would be retaining the fees or a share of them.
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 you'd have 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 as selling them unencumbered at a lower cap rate?
Thanks, Jim. That's a good question. It's a complicated answer. You know, 1st of all, strategically, it's in our interest because of our ownership of Sonesta to continue to see Sonesta do well. There's been a lot of news about their significant growth over the last year. For us to turn around and sell, you know, 60-plus hotels unencumbered would sort of deflate that story and that momentum that they have. We've been careful about how we do that.
When we evaluate the offers that we get on these hotels, we look at both the purchase price and 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. We also, you know, 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. To the extent that buyers are committing to additional hotels, you know, we've got a lesser factor because it's further out and less predictable, but we're considering that too in our analysis.
There is definitely a formula that we're applying. The other thing to remember is that you know, for instance, some of the extended stay hotels that are being sold are exterior corridor format, which is not brand standard any longer at Marriott. You know, the offers coming in for those hotels on an encumbered basis are significantly higher than the offers coming in unencumbered. There's just a lot of different factors that are impacting where pricing is coming in. We do have a number of hotels where we're getting better pricing, keeping it as a Sonesta than letting it go unencumbered. That makes it hard for me to give you a specific percentage. Generally speaking, if the hotels are easily rebranded to a Hilton or Marriott brand, there will be probably somewhere around a 50-75 basis point higher, you know, pricing difference between encumbered and unencumbered.
Okay, that's helpful. Secondly, back at the time, you know, a year ago when you were having your ultimately failed negotiations with Marriott, you know, you commented a few times that 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 you know, and you know, where the leisure traveler has come back and been pretty strong, but the business travel hasn't.
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 fourth date as kind of a pivot point for next year for the business travel. 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 a, you know, an established, the bigger established brand like Marriott? Or do you think that, you know, are you growing in confidence that Sonesta can be competitive and achieve the same kind of growth?
I mean, I think we're confident that Sonesta is gonna compete well. You know, the companies like Marriott and Hilton and IHG, they're much bigger with much larger reward programs and, you know, they're great hotel companies and they'll always be tough to compete against. I think Sonesta is putting programs in place to attract business travelers, and I think that, you know, that their salespeople are, you know, aggressive and they get out and, you know, press the flesh 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.
You know, I think our experience, not in every case, but in a lot of cases, was that, you know, some of the salespeople in some of the hotels managed by the bigger operators, you know, had developed a little bit of a complacency because of the, you know, because the rewards program was so strong. They just thought, you know, the spigot was turned on and the flow of guests would show up regardless of how hard they worked at sales. Sonesta's, you know, doesn't have the benefit of just waiting for the flow. They're out there generating the flow. I think they're working harder because of that, you know.
They're ultimately gonna be very competitive. You know, 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. We feel pretty good about how the Sonesta brand is gonna stack up.
Okay, that's great. Thanks, John.
The next question is a follow-up from Bryan Maher with B. Riley. Please go ahead.
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?
Just to be clear, we're not in that space. Yeah, no, we do own. That's a fair question because we do own a third of Sonesta. The beginning of October, Sonesta filed their franchise disclosure documents for the Sonesta Simply Suites, Sonesta ES Suites, Sonesta Select, and Sonesta Hotels & Resorts. You know, the timing of that was good. It was right before the start of the Lodging Conference. You know, they were able to officially start selling franchises at that time. I think that, you know, at the same time, we'd launched the sales process for the 68 hotels.
I think that the initial feedback has been much stronger than even we had expected or hoped for. But a lot of, you know, 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. I think Sonesta's in a good position. I think that what we're hearing is, you know, that one of the big attractions to Sonesta as a franchise organization is the fact that they do have 34% ownership by SVC.
You know, most of the big hotel franchise companies today are asset light and do not have to eat their own cooking. You know, they can decide that the 48-inch televisions that you bought last week need to be 52-inch televisions this week. You know, they don't have to go out and buy any more 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 gonna be a willy-nilly decision to jam the extra four-inch size TV down a franchisee's 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. 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.
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, you know, what it is you're selling? Any thoughts or, you know, current thoughts on the movie theater component there with what's been going on in that industry? Thank you.
Yeah. Yeah, Brian. As you can see, it's. They're mostly smaller assets. Typically, our strategy there is if something's gonna become vacant or is vacant and we don't think we can re-lease it, we try to sell it, and that's typically how we can best optimize price in that space. That's most of what we're selling. We haven't been selling anything that we view as core. You know, we. You know, 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. 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 gonna. You know, 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 you know, 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. You know, the movie theater industry is coming back, and we're seeing that in our theaters as well. Again, they're all current on their rents. We still have some deferrals outstanding, but we're not concerned.
We're not—we don't have any major concerns today about our theaters, but you may see us sell those next year or the year after.
Okay, thank you.
This concludes our question and answer session. I would like to turn the conference back over to John Murray for any closing remarks.
Thank you, everyone, for joining us today, and we look forward to speaking with some of you at virtual Nareit next week or maybe seeing you at the hotel conference.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.