Good morning, and welcome to the Service Properties Trust third quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Kevin Barry, Senior Director of Investor Relations. Kevin, please go ahead.
Good morning. Thank you for joining us today. With me on the call are Chris Bilotto, President and Chief Executive Officer, Jesse Abair, Vice President, and Brian Donley, Chief Financial Officer and Treasurer. In just a moment, they will provide details about our business and our performance for the third quarter of 2026, followed by a question-and-answer session with sell-side analysts. I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note 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 beliefs and expectations as of today, November 5, 2026, and actual results may differ materially from those that we project.
The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from our website at svcreit.com or the SEC's website, and in the forward-looking statement disclosures in our earnings presentation and investor presentation. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or Normalized FFO, adjusted EBITDAre, Hotel EBITDA, adjusted Hotel EBITDA, NOI, cash basis NOI, and cash available for distribution, or CAD. A reconciliation of these non-GAAP figures to net income is available in SVC's earnings release presentation that we issued last night, which can be found on our website.
Lastly, we will be providing guidance on this call, including estimated 2026 Normalized FFO, Hotel EBITDA, net operating income, and Adjusted EBITDAre. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable effort or at all. I will now turn the call over to Chris.
Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Last night, we reported third quarter results that reflect continued progress in strengthening SVC's cash flows through active asset management, portfolio optimization, and disciplined capital allocation. Normalized FFO was $0.34 per share, and Adjusted EBITDAre was $133.5 million, both of which exceeded consensus estimates. Our rolling four-quarter cash available for distribution turned positive compared with a deficit of $83 million a year ago, helped by lower interest expense and moderating capital spending. At our 77 retained hotels, RevPAR increased 8.3% year-over-year, outperforming the U.S. hotel industry for the eighth consecutive quarter. Adjusted Hotel EBITDA grew 16.2%, and Adjusted Hotel EBITDA margin expanded 130 basis points. Since the end of the second quarter, we sold 14 hotels for $116.7 million, largely completing our 2026 hotel disposition program.
The momentum we are seeing on top line is reflected in our updated full-year guidance. We raised our RevPAR outlook for both our retained and Exit Hotels. At the same time, we narrowed our hotel EBITDA range by lowering the high end for two reasons. First, at our retained hotels, the phased reopening of the James Nautilus in Miami Beach is now concentrated later in the fourth quarter rather than its anticipated earlier opening. That defers approximately $3.8 million of its EBITDA contribution and increases total renovation displacement. Second, the Exit Hotels underperformed our original expectations, in part due to the operational disruption that occurs with the sale process. Even with higher revenue, their losses widened, which reinforces why selling them was the right decision.
Our net lease portfolio, anchored by our TravelCenters of America, continues to provide durable cash flow with rent coverage of 2.17 x and occupancy of 97%. Our priorities are unchanged. Our board-approved strategy is to reduce debt, expand margins at our retained hotels, and continue shifting our portfolio toward service-focused retail net lease properties over time. I would also like to address the proposal we received in October. As disclosed in our earnings presentation, SVC received an unsolicited, non-binding proposal from TKO LLC to acquire our hotel portfolio for $2 billion. Our board of trustees, including all of our independent trustees, unanimously rejected the proposal because it believes the proposal significantly undervalues SVC's hotel portfolio. We intend to continue executing our strategy, including working with our hotel operators to improve hotel performance to maximize long-term value for our shareholders. We will not comment further on the proposal.
What I will do this morning is walk through our operating results and the plan we are executing. I'll start with hotel performance in the quarter, then discuss the operating roadmap outlined in our updated investor presentation. Jesse Abair will then cover our net lease portfolio and TravelCenters of America, and Brian Donley will conclude with our financial results, balance sheet, and guidance. Turning to the hotel portfolio. Our 77 retained hotels delivered their strongest quarter of the year.
RevPAR increased 8.3% year-over-year to $128.38, driven by a 330 basis points increase in occupancy and a 3.4% increase in average daily rate. Our retained hotels have now outperformed U.S. industry RevPAR growth for eight consecutive quarters by an average of 240 basis points. The growth was broad-based. Full-service hotels increased RevPAR 7.6%, and focused-service hotels increased 10.6%, and both grew Adjusted Hotel EBITDA by approximately 16%.
Each of our chain scales outperformed its industry comparable group. Excluding the James Nautilus, RevPAR at our other 76 retained hotels grew 9.8%. By brand, Sonesta Select led with RevPAR growth of 14.7%, and Sonesta Hotels and Resorts increased its Adjusted EBITDAre by nearly 30%. Our hotels in Phoenix, St. Louis, Orange County, and Philadelphia each outpaced their local markets by more than 8 percentage points. Profitability grew faster than revenue. Retained hotel Adjusted Hotel EBITDA increased 16.2% to $41.1 million, and Adjusted Hotel EBITDA margin expanded 130 basis points to 15.4%. The margin gain reflects early progress on two initiatives, labor efficiency and lower customer acquisition costs, partially offset by higher sales and marketing and utility costs. Returns from our renovation program continue to build.
Renovated hotels added $2.9 million of hotel EBITDA compared with last year, led by Sonesta Hilton Head, Sonesta Los Angeles, and our Hyatt portfolio. At Sonesta Los Angeles Airport, Sonesta also added four airline crew accounts in the quarter, which bring a steady base of contract business. We also faced headwinds in the quarter. Renovation disruption at the James Nautilus reduced revenue by $4.1 million and hotel EBITDA by $1.8 million. Hurricane Lowell affected our Kauai resort. Repeat group business in Las Vegas did not return this year, and our food and beverage revenue declined 3.6% on non-repeat banquet events. Even with these headwinds, our retained hotels grew Adjusted Hotel EBITDA by double digits. Turning to the outlook. Last quarter, we outlined the margin initiatives our asset management team identified with our operators, and we said we would provide targets as that work progressed.
With Sonesta's leadership team now two quarters into their tenure, we are doing that today. Slide seven of our updated investor presentation lays out the plan. Starting from the midpoint of our 2026 retained hotel EBITDA guidance of $139 million, our operators, working closely with our asset management team, have identified approximately $96 million of potential operating upside over the next 12 to 24 months. Incremental RevPAR growth based on CBRE's industry forecast could add roughly $13 million more. Together, that represents approximately $109 million of incremental EBITDA and would take retained hotel EBITDA margin to approximately 20%. Our markets also have a favorable event calendar ahead, including the Super Bowl in Los Angeles and the MLB All-Star Game in Chicago in 2027. The plan has four parts. First, renovation lifts and displacement recovery would contribute approximately $35 million.
Since 2023, we have invested $628 million, or about $36,000 per key in our retained hotels. Renovated hotels are ramping towards stabilized market share, and the largest single contributor will be the James Nautilus in Miami Beach, with a phased reopening as the James Nautilus in the fourth quarter. Second, operating synergies would contribute approximately $7 million. This includes the consolidation of vendor contracts across the Sonesta portfolio, including in-room entertainment and payment processing, a leaner staffing model, and an enhanced benefits program. Several of these initiatives are already underway. Third, revenue mix would drive approximately $16 million. The focus is on capturing more business at higher rates by reducing reliance on discounted online travel agency channels in favor of retail direct bookings. Sonesta is launching a new sonesta.com booking platform this month to drive more direct bookings and is lowering its digital marketing costs per booking.
Fourth, and our largest opportunity, lower customer acquisition costs would drive approximately $38 million. Sonesta is setting clear channel mix targets for each hotel, directing marketing spend to the higher converting channels, which reduces discounting needed to win business. In addition, following an evaluation of online travel agency virtual credit card payments for each of our operators, led by our asset management team, hotels have recovered approximately $1.9 million of EBITDA year to date. Our asset management team is working closely with our operators on each of these initiatives. Some will ramp sooner than others, and timing will depend in part on market conditions. However, we are confident in this plan, and we will update investors on our progress. Before I hand off to Jesse, let me close out on hotel dispositions.
Including the Simply Suites we sold in January, we have now sold 15 hotels in 2026 for $123.8 million. Through September, the hotels sold this year generated approximately $10.3 million of hotel EBITDA losses before the capital they would have required. As I noted earlier, they underperformed on expectations even as their revenue improved, which is why prioritizing exiting them. These sales completed a broader repositioning. Since January 2024, we have sold 142 hotels for approximately $1.1 billion. Nearly all of them were focused service hotels with higher capital needs and lower margins. What remains is a portfolio of 77 hotels weighted towards full-service hotels in urban and resort markets. With 86% of keys in the upscale and upper upscale segments compared with 62% in January 2024.
We have signed letters of intent to sell our two remaining asset hotels with 795 keys, including the Crowne Plaza Atlanta Perimeter and Ravinia. Our guidance assumes we own both hotels through year-end, and we will provide updates as those transactions progress. To conclude, our third quarter results show the operating plan is gaining traction, and our 2026 hotel disposition program is largely complete. We have redeemed nearly $1.6 billion in debt this year, and we remain focused on our board-approved strategy to reduce debt, expand margins at our retained hotels, and continue shifting our portfolio towards service-focused retail net lease properties over time. We believe this plan is the best path to maximizing long-term value for our shareholders. I will now turn it over to Jesse to discuss the net lease portfolio.
Thanks, Chris, and good morning. Our net lease portfolio continues to generate stable and dependable cash flows for SVC, with assets that are characterized by minimal capital requirements, long-duration leases, and resilient necessity-based retail concepts. Once again, the portfolio exhibited sequential growth, marked by improvement in cash basis, net operating income, occupancy gains, and ongoing credit strength across our tenant base. Cash basis NOI for the net lease portfolio came in at $93.8 million, up slightly quarter-over-quarter, supported by steady tenant collections and a reduction in credit reserves. Aggregate portfolio rent coverage improved to 2.17 x on a trailing 12-month basis. This performance was once again anchored by our TravelCenters of America locations, where rent coverage expanded 10 basis points to 1.44 x, the third straight quarter of coverage expansion, and a 20% increase from the fourth quarter of last year.
We attribute this to a combination of sector-wide improvements in diesel margins and freight demand, as well as a new TA leadership team focused on driving operational efficiencies at the property level. With 175 travel centers, TA represents our single largest tenant relationship, and the corporate guarantee of its investment-grade parent, BP, provides SVC with exceptional credit protection for nearly 2/3 of our net lease revenue. For the remainder of our net lease portfolio, rent coverage remains very healthy at north of 3.7 x, reflecting persistent demand across our retail operators. From an asset management perspective, this was our most active quarter in more than three years, reflecting both the depth of our tenant relationships and the team's continued focus on value creation. We executed 20 lease deals, impacting 61 assets and totaling over 635,000 sq ft.
Included in these efforts is the negotiated emergence of two of our QSR franchisees from bankruptcy this quarter. As you may recall, earlier this year, these tenants accounted for over $2 million of credit reserves. Both of these master leases have now been assigned to their respective corporate franchisors and received an attendant enhancement in credit profile, and all of the impacted properties were retained. We view this as a positive outcome that ultimately strengthens the portfolio and establishes sustainable lease structures for these tenants going forward. Our lease expirations remain well-laddered, with just 3.2% rolling between now and the end of 2027. Importantly, our asset management team is proactively engaging with tenants well in advance of expirations, working to secure long-term renewals, extend term, and otherwise identify opportunities to enhance lease economics.
In several cases, those discussions resulted in creative restructuring solutions that strengthened tenant commitment while improving the durability of our cash flows. In other situations, the team quickly pivoted to alternative value creation strategies, including adaptive reuse opportunities, ground lease structures with new retail concepts, and selective dispositions where we can generate proceeds to refresh the balance of the portfolio. Broadly speaking, the asset activity level across the portfolio remains elevated, and we believe the work our asset management team is doing today positions us to drive additional leasing successes and create incremental value from our existing real estate. With regard to our capital recycling endeavors, since the end of the second quarter, we have closed on five net lease properties for $14.2 million.
Year to date, we've acquired nine properties totaling $23.4 million at weighted average cash and GAAP cap rates of 7.6% and 8.2% respectively, and a weighted average lease term of nearly 14 years. On the disposition side, we sold seven non-core assets, bringing year-to-date dispositions to 26 properties for $15.3 million. This performance is tracking our 2026 capital recycling target of approximately $25 million. That said, we still have over 40 assets in our disposition pipeline, representing over 250,000 sq ft, much of which could be converted into opportunistic sales where we exit at attractive cap rates and accretively redeploy that capital into brands and markets in which we have long-term conviction. Today, our net lease platform consists of 740 service-focused retail properties totaling 13.5 million sq ft, generating nearly $400 million in annualized minimum rent.
As part of its strategic transformation, SVC expects its net lease platform to comprise an increasingly larger share of its revenue mix. With that in mind, our asset management team remains highly engaged across the portfolio, executing leases, extending WALT, allocating capital selectively, and pursuing creative opportunities to curate our tenant roster, improve credit quality, and maximize value from our net lease real estate. I will turn the call over to Brian to discuss our financial results.
Thank you, Jesse, and good morning. Before I discuss results, I would like to provide a reminder that we effected a one-for-five reverse share split in early July, and all historical share and per-share amounts have been adjusted retroactively to reflect the reverse split. Additionally, comparisons of per-share metrics to prior periods are not directly comparable due to SVC's equity issuance earlier this year. Turning to our third quarter 2026 results, Normalized FFO was $43.8 million, an increase of $9.9 million, or 29.3% compared to the prior year quarter. The increase in Normalized FFO was driven by a $17.4 million decline in interest expense as a result of repaying debt through our equity offering and asset sales, partially offset by a reduction in hotel EBITDA of $6.6 million, driven by our disposition program.
Exit Hotels accounted for an $11.9 million decrease, partially offset by a $5.3 million increase in performance across our retained hotels. Turning to our hotel portfolio performance. Our 87 comparable hotels generated Adjusted Hotel EBITDA of $41.5 million during the quarter, representing an increase of 11.2% compared to the prior year period. For these 87 hotels, occupancy increased by 320 basis points and RevPAR increased by 7.8%. 77 hotels in our retained portfolio generated RevPAR of $128.38, an increase of 8.3% year-over-year, and Adjusted Hotel EBITDA of $41.1 million, representing an increase of 16.2% year-over-year. Excluding the James Nautilus Hotel, which is under renovation, RevPAR for our 76 retained hotels increased 9.8%, and hotel EBITDA increased $9.2 million, or 27.1%.
Within our net lease portfolio, cash basis NOI of $93.8 million was flat compared to the prior year quarter and increased 80 basis points sequentially. Turning to the balance sheet. During the quarter, we used proceeds from asset sales to repay and terminate the $45 million variable funding note that was set to mature in January of 2027. We currently have over $760 million of total liquidity, including full availability of our $650 million revolving credit facility, which matures in June 2027. We are currently in discussions with our lending group to potentially extend or refinance this facility. Our next maturity is $580 million of zero-coupon senior notes that mature in September 2027. These notes are secured by high-quality net lease collateral, which we believe provides strong refinancing optionality. We also have a one-year extension option. Turning to capital expenditures.
During the third quarter, we invested $29.9 million in capital improvements, which continue to be driven by our repositioning of the James Nautilus and renovations at our Royal Sonesta New Orleans. Turning to our updated full-year 2026 guidance, as outlined on page seven of our earnings presentation. We have updated our full-year outlook as follows. For the 87 hotels we owned at quarter end, total Adjusted Hotel EBITDA is now expected to be between $124 million and $134 million, which reflects $135 million - $142.5 million from our retained hotels, offset by $8.5 million - $11 million of losses from Exit Hotels. The lower overall range is largely driven by a $3.8 million reduction to the full-year outlook for the James Nautilus Hotel related to increased displacement and renovation delays.
Timing of dispositions and underperformance of Exit Hotels is the other driving factor to lowering the high end of our Adjusted Hotel EBITDA range. Within our net lease portfolio, NOI is projected to be between $373 million and $379 million. This reduction to guidance is a result of several factors, including higher credit reserves for the full year, higher operating costs for vacant assets, and the timing and pace of our asset recycling plans. For our consolidated metrics, we expect Adjusted EBITDAre of between $489 million and $498 million, and Normalized FFO of $113 million-$128 million, or $1.07-$1.22 per share. This full-year guidance assumes midpoint interest expense of $355 million, with cash interest of $280 million and non-cash amortization of interest of $75 million.
We're also assuming G&A expense of $40 million and a weighted average share count of 105.2 million shares. This guidance does not assume we complete the sale of the remaining two Exit Hotels. We've also reduced our full-year capital expenditure guidance by $10 million at the midpoint, and now expect total CapEx of $115 million-$125 million. Finally, cash available for distribution, or CAD, was $32.1 million for the third quarter, and our rolling four-quarter CAD has now turned positive. We remain confident in our ability to generate positive CAD for the full year 2026. That concludes our prepared remarks. We're ready to open the line up for questions.
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the questions. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Floris van Dijkum with Ladenburg Thalmann.
Morning, guys. Thanks for taking my question. Very encouraging what you are putting together in terms of hotel Adjusted EBITDA growth potential. It is 78% hotel Adjusted EBITDA growth and over 20% company growth. I wanted to maybe dig into that a little bit more. Obviously, the renovations and the capital that you have spent, the ROI that you have spent on the hotels, that is more readily understandable, and that is a big part of that. Maybe talk a little bit about the lower customer acquisition costs. There are two ways to think about that. One is through direct apps, et cetera, which is partly how the bigger brands can lower their costs.
Also talk a little bit about the mix and how you see maybe doing more group business or et cetera, how much of an impact that has, and how comfortable people should be about your ability to actually execute on those lower acquisition costs.
Yeah. Thanks, Floris. I think, look, collectively, it is kind of a multi-tiered approach with respect to kind of those lower customer acquisition costs. I think as you are alluding to, there are channel-specific mix targets, and ultimately kind of directing kind of spend as far as our marketing and other allocations directed toward higher converting channels. That really is just kind of a change in strategy from more so with Sonesta, just given kind of the change in the portfolio and its operations, given the plentiful dispositions that have been done over time. That is going to be a big part of it. There is also kind of a focus on the total discount off the rack rate, which is kind of another big piece, and kind of a broader push around overall discounts.
Targeting kind of mid-teens and kind of total less kind of discounted inventory, again, with the goal to drive overall room revenue to kind of higher paying transient and type business. Then I think, more specifically, there are just other levers, kind of probably more smaller in nature, that fit that kind of profile with respect to that bucket. Again, the two biggest items are more about the channel-specific mix targets and then overall discounts off the rack rate, just given where they have trended over the last year or so.
Thanks, Chris. Maybe my follow-up question.
Floris, I think you cut out. Can you repeat your question, please?
Yes. Sorry. Can you hear me?
Yes.
My question was regarding Sonesta. It appears to be a big value driver for your hotel portfolio, but we don't have much insight into Sonesta, even though I think SVC owns a third of it. Maybe talk about your comfort with what the new management team there is doing and how they're able to drive value, and ultimately, what could be a potential Is there thoughts of an exit strategy for that business going forward?
Yeah. I mean, look, Sonesta's a private company, so I cannot really speak to kind of the broader strategy. I can tell you where the focus is, and all the dialogue that we have had has been around turning around performance and kind of repositioning kind of the overall operations at Holdco. More specifically, I think the things that we have more insight into are consistent with the items that we identified kind of in the NOI bridge and our new investor deck on slide seven. So, look, the conviction level is high. I mean, we have a whole team here who spends time with different folks across the Sonesta platform, spending time kind of more hand-to-hand combat at the asset level.
Myself included, I spend a lot of time with the executives at Sonesta, talking through the strategies that they are undertaking and kind of getting comfortable with the information they put forth to us. So, I think what everyone sees today with respect to what is in our investor deck is a byproduct of that confidence and the ongoing dialogue that we have together. So, I think kind of more directly to answer your question, we have high confidence in being able to achieve these numbers.
Thanks, Chris. Maybe if you can comment on the impact of higher rates on the net lease space as well in the transaction market. What have you seen? Any changes, and does that make you more willing to be a buyer or a seller in this environment?
Yeah. I mean, look, I think it is just a caveat. We have not been a very active buyer in the net lease side. It has been a very small piece of our capital markets activity and has been kind of 100% in the form of capital recycling, so dollar in, dollar out. So I think it is less of a story for us as we think about the transaction side. I mean, certainly being in a position where we can refresh the portfolio and do things strategically, the answer is yes, we will continue to do that. I think our average cap rate for our transactions over the last year is trending around 7.5%. While cap rates may widen depending on the volatility, I mean, look, as we all see, it kind of ebbs and flows over the course of time.
But yes, I think that selective acquisitions on the heels of supporting dispositions is not out of the cards for us, but I would just continue to kind of push the focus to driving hotel performance for the portfolio is where we are going to spend the majority of our time and activity going into 2027.
Thanks, guys.
Again, if you have a question, please press star then one. Our next question comes from Tyler Batory with Oppenheimer.
Hey, good morning. Thanks for taking my question. First one for me, just to clean up the guidance commentary, and specifically on the net lease portfolio, lowering the NOI by $7 million. Can you give a little bit more detail? I think you talked about higher operating costs, credit reserves, et cetera. So just explain a little bit more the dynamic in terms of why you are reducing that NOI, and then should we think about kind of an updated or new run rate for NOI heading into 2027?
Sure, Tyler. Good morning. A big part of the guidance on NOI related around acquisitions and the pace of acquisitions. A lot of that was front-loaded in our guidance. We had a more active pipeline at the outset of the year, and some of that was slowed down over the course of the summer and the back half of the year, and you see interest rates what they are. Good credit reserves is another factor. If you recall, at the end of Q1, we had a significant reserve for two master leases that was not contemplated in our guidance, and the restructuring and some of the mechanics around those master leases put a little more leakage on the portfolio from an expense standpoint. Vacant assets and recycling is the other part.
When you have an asset go vacant, you have to still maintain security and landscaping, so there's additional leakage that we've been seeing over the last couple of months that put us below the range. We took the guidance range down.
Tyler, just on a go-forward basis, with respect to those two franchisees that were in bankruptcy, the story there, I think, on the whole is a good one. One of those franchisees emerged. The corporate franchisor assumed all of those locations and assumed all existing lease terms. No real change from an economic standpoint on a go-forward basis there. With respect to the other franchisee, there was some restructuring work. We took a slight roll-down on that master lease, but also extended term a little bit and got some percentage rent with some percentage upside in the event that they hit certain triggers. With respect to credit issues going forward, there's nothing else on our radar that comes remotely close to those two.
Okay. My follow-up is a multi-part broader strategic question. On one hand, you talked about shifting the portfolio towards net lease over time. At the same time, it seems like you're really optimistic about the hotel side and certainly a lot of growth initiatives that you're talking about here. Can you give us some updated thoughts on your latest thoughts on why you want to transition away from hotels, what that might look like if the hotel performance remains exceptionally strong the next couple quarters or years? Would that change just how you're thinking about portfolio mix?
Yeah, I mean, look, the focus is really on the fact that we think that we can drive meaningful value for the hotels and valuations ascribed to them, just given the upside we see for EBITDA. As we've alluded to, it's a multi-year journey. Then kind of being on the other side, being in a position to continue to evaluate hotel sales and kind of how they inform the portfolio. What I don't want to do is detract from the plan that we're continuing to evaluate long-term for the company with respect to being a majority net lease company, and with that comes sales of hotels over time. But I think more importantly, it's going to take time. Again, I think that time is well rewarded, just given the upside that we see and the potential to do so.
So, I think as time progresses over future quarters, the next year plus, we'll continue to have more inroads into the timing itself. But right now, as we put out, we've got 12 - 24 months of potential meaningful upside with EBITDA. Again, we think that's going to position the hotels to ascribe to meaningful valuation increases.
Okay. Just to put a finer point on that in terms of potential asset sales on the hotel side, obviously, you've got, I guess, two on the market right now. In light of what you just said, I mean, does that make the probability of more sales in the next 12 - 24 months pretty low?
I don't want to say it's low. We haven't put out yet with respect to what our plan is for sales over the next 12 - 24 months, so I think it would be premature to address that. I think, naturally, what we've talked about is that the two remaining hotel sales that will happen probably in the first part of next year. Then again, as we continue to kind of work through quarter to quarter and see where the progress goes with performance, that's going to really be the guide and kind of the testament for how we think about dispositions of hotels.
Okay. This last one from me on the transaction market and the hotel side of things. Just interested a little bit more on your thoughts, what you are seeing. It is interesting, obviously, cost of capital has gone up a little bit here, but hotel industry performance and I think interest in hotels has probably gone up as well. I am not sure what you are seeing just in terms of valuations or any high-level broad-stroke thoughts just on the transaction market.
Yeah, I mean, look, there continues to be, I think, supporting transactions, but it is a pretty wide bar with respect to where those sit. I mean, I think a lot of the prints that have shown meaningful values have really been in that luxury side of the business. Again, those are, I think, much larger, chunkier type transactions. Then certainly on the other side, if you think about focus service, I mean, look, we have got a lot of experience in the transaction market, having sold over 140 hotels. So I think, kind of with some level of confidence, can say that we feel good about our understanding of how these things trade, where there might be disruption, and kind of how to navigate different kind of economic times.
With that, on the focus service, there continues to be kind of a steady state with respect to where transaction volume is. But, look, I think with anything, certainly being mindful of the interest rate environment impacting cap rates are all things that are monitoring. I think it is a little preliminary to tell if there is going to be a broader impact. But generally speaking, there is generally more cushion in cap rates relative to treasuries than other sectors. So, there is not necessarily a kind of a wide swing on values. Again, that is all contingent on kind of where the hotels themselves sit with respect to the relative performance.
Okay. Good detail. Thank you. That is all for me.
Our next question comes from Craig Kucera with Lucid Capital Markets.
Yeah. Hey, good morning, guys. Do not want to beat a dead horse, but I want to circle back to the net lease NOI guidance. You had a couple of tenants that you disclosed in prior quarters that had sub 1x rent coverage. Is any of the adjustment for that related to either credit reserves there or maybe an expectation that those assets go dark?
Not in the guidance range. I think some of these other tenants that we have talked about are not necessarily sub one tenant credit coverage, rent coverage. It is more of situations with the tenants' financials and what they ended up doing from their own business standpoint, and some of the restructuring, which leads to the reserves, which leads to additional operating costs in some cases. So, it is not necessarily specific to some of those other tenants. And for guidance purposes, we generally just try to use a run rate for reserves, and some of these one-offs can pop up here and there.
Yeah. And Craig, just to add to that, with respect to the tenants that have sub one coverage, it is a small list. They all have, for the most part, long terms remaining. They are performing, right? And so, and that coverage can fluctuate quarter to quarter. So, it is a relatively dynamic list. And again, there is nothing that gives us short-term pause or concern with respect to those tenants right now.
Okay, that's helpful. Changing gears, you had the reclass of land held for future uses in the portfolio. Can you give some color around that? Is that just vacant land, or is it land that's sort of adjacent to assets, or just some color on there?
Yes. So, the biggest bump in occupancy related to properties that we were characterizing as being held for lease. With respect to those seven properties that we were able to move off of that list, we've identified either potential ground lease deals or adaptive reuse or repurposing, or they've just kind of rolled into disposition status. The bottom line is they're just no longer being held for lease, and we're pursuing alternate strategies for all of those at this point. So, I think that's a credit too for the asset management team, and we've been charging them with really getting creative and thinking about different ways to use and think about and deal with those properties. I think that's a little bit of function of that.
Okay, that's helpful. Looking at your CapEx, particularly slide nine, $97 million projected full year on the retained portfolio. You've sold almost all the hotels that you want to sell. Is that sort of a normalized level of how we should think about CapEx going forward, sort of in the $100 million range, or would that drop because you no longer have any real meaningful redevelopment projects?
Craig, as where we sit here today, I think that's a fair run rate looking forward. There are still projects that we'll continue to move forward on. The scale and breadth of how much we've invested and how many hotels and size of the projects we've done in the last few years has been tempered. We've gone through a lot of work investing in these hotels. But between regular maintenance CapEx and other projects such as refreshes or renovations, we'll continue to have some level of investment in the hotels. But I think that, where we sit today, that's a fair run rate for future years. We'll provide guidance in the fourth quarter earnings call on our 2027 CapEx.
Okay. I appreciate that. Just one more for me. On the slide on page seven of the deck where you are kind of outlining this $109 million of incremental EBITDA upside. For the $38 million, there have been a few questions about the reduced customer acquisition costs. Does that require any meaningful technology build-out or CapEx? I guess, just how should we think about the spend related to that? Or is that really just a strategy shift?
It is a strategy shift. I mean, there is some investment that has been made in technologies. Some will come through kind of the new website that will launch later this month, and then there are other tools around AI and other initiatives. But I would not look at this as necessarily a larger capital cost as much as just a retooling of the infrastructure and systems in support of that bucket.
Okay, thank you. That is it for me.
Our next question comes from John Massocca with B. Riley Securities.
Good morning. I know you don't want to comment too much on the TKO proposal, but would be remiss not to try to clarify. Was the board's rejection of TKO's offer purely around pricing, or was there something or anything tied to the understanding of the counterparty or the structure of the transaction that was proposed that made it unattractive?
Yeah, I mean, look, John, as we talked about, the board and all of its independent trustees unanimously rejected the proposal. Again, I think the feedback there is it significantly undervalues our hotels. I think if you look at slide eight of our investor deck, more specifically with respect to, I think, where perceived value is, I think generally speaking, there's a view where we feel a high level of confidence that there's a clear path to improve hotel EBITDA in support of better values. Look, we've invested in these hotels. We've done a lot of the work, I mean, as illustrated or indicated in the total CapEx spend over the last several years.
Really, we're sitting here on the other side of a lot of the noise, a lot of the displacement, and in a position to capture more organically the EBITDA upside ascribed to each of these markets and these hotels specifically. This is consistent with what the strategy has been and the plan has been for the company, and that's exactly what we're undertaking as shown with the materials we put out this quarter.
Okay. Maybe thinking then about hotel sales on a granular level, going into 2027 and beyond, is there any kind of strategy shift where maybe you're selling hotels where more about maximizing value in return, where you're starting to see some of this uplift in performance from the CapEx versus selling some assets that maybe were attractive to sell from in terms of what was able to do from a cash flow perspective for SVC? Just curious if, it seems like a lot of the Exit Hotels were poorer performers. Does it kind of shift now maybe to some of your better performers and they're kind of harvest the value you've created?
Yeah, I mean, I think I would said differently, from our view, as we continue to capture upside in EBITDA for the 77 retained hotels, which we think are better performers, a better profile, stronger markets, good real estate, I think it would naturally align with a scenario where we are able to sell them because they are at better values and not sales because their cash drags are highly capital intensive. Yes, to answer your question, that is how we would think about it as we sell hotels in the future.
But I guess, are there additional hotels in your portfolio today that would meet the parameters of what you sold this year?
Yeah, I mean, look, there is a few hotels that are lower performers, but I think that is very immaterial relative to the broader portfolio. Even in those handful of assets, there is a view that we can turn around EBITDA in a meaningful way and allow that to guide next steps in support of those. I think it is fair to say that the hotels that we have sold and the remaining hotels that we are selling represent the larger set of hotels where there is either performance challenges in our view, material capital needs, or market-based headwinds where we felt like exiting those and using those proceeds to delever is a better strategy.
Okay. Then in terms of like immediate impact with the remaining Exit Hotels, is there potential to see, I know it was an outsized impact relative to expectations from certain Exit Hotels, most of which are now gone, that impacted how you felt full year guide would turn out. I mean, is there still some concern about the two hotels you are selling being an additional drag relative to expectations, or is that accounted for in the guide today? Just curious if you can color on how impactful those two assets could be and how they are performing maybe even quarter to date.
Yeah, John, I mean, we've tried to factor all that into our remainder of the year guidance. The Ravinia Hotel in Atlanta actually cash flows, operations are down ever since the sale process started, but we've factored that into our outlook. The other Atlanta hotel had some outsized impacts, but again, factored into our guidance range.
Okay, and then last one for me, now I go on Brian. The recasting of the revolver, is that mostly to kind of continue to have that additional liquidity availability on hand, or could that be used potentially to refinance some of the other debt that's coming due here in the next couple of years? Just kind of curious how you're thinking about best utilizing that potential piece of financing if you end up, and depending on how it ends up looking, post-recasting.
Sure. As you've noted, we disclosed that we're in discussions regarding the facility. It does mature in June of 2027, and we're To us, this is normal course, staying ahead of our maturities and looking to solidify our liquidity through a recast facility. We'll have more to update in the coming months. We do expect something to be done by the end of the year.
I guess given how the portfolio looks today, how the balance sheet looks today, even how the broader market looks today, should we expect that to be significantly changed versus the structure today, or is the target to kind of have it look relatively similar to what's already available to you?
Yeah, I'm not going to comment on specifics, but we're going to size the revolver and make sure we have appropriate level of liquidity for the company.
Okay. I appreciate the color. That's it for me. Thank you.
This now concludes our question- and- answer session. I would like to turn the conference back over to Chris Bilotto, President and Chief Executive Officer, for any closing remarks.
Thank you for joining the call today. We look forward to meeting and seeing many of you at the upcoming industry conferences, including Nareit later this month. That concludes our call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.