Q3 2021 Service Properties Trust Earnings Call
Good day and welcome to the service properties Trust third quarter 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 is prohibited without the prior consent of FCC.
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 SEC's present beliefs and expectations as of today November five 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 Securities and Exchange Commission or SEC.
In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized <unk> and adjusted EBITDA reconciliations.
Reconciliations of normalized <unk> and adjusted EBITDA.
Net income as well as components to calculate <unk> are available in our supplemental package found in the Investor Relations section of the Companys website actual results may differ materially from those projected in these forward looking statements.
Additional information concerning factors that could cause those differences.
As 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 Dot FCC REIT Dot com investors are cautioned not to place undue reliance upon any forward looking statements that I will turn it over to John.
Thank you Kristen and good morning.
Last night, we reported third quarter normalized <unk> of <unk> 27 per share and adjusted.
Adjusted EBITDA 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 transient demand as.
As well as steady high rent collections, and 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.
Recorded our strongest month year to date in July, but the Covid Delta Varian slowed momentum in late August early September dampening demand.
Reports of Spike in Covid cases in various markets resulted in some canceled room nights and in some urban centers delayed employee returned to office Tommy.
Despite these headwinds our operating performance improved from the prior quarter.
For our 292 comparable hotels average occupancy increased two nine percentage points to 69% average daily rate increased 12, 5% to $111 19.
Revpar increased 18, 2% to $67 71 on.
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 a non extended stay hotels.
160 extended stay hotels reported occupancy of 75, 3% during the quarter compared with Occupancies of 48, 9% and 52% respectively.
93 select service in 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 our sonesta continues to manage extended stay mix to shorter stays to grow right.
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.
For the fourth quarter, we expect further progress towards 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 in CBD office buildings continue to reopen.
Historically SPC select service in 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 see that level of business demand resume.
On the.
Syed 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 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 brand wide hotel count and transaction volumes.
So the 208 hotels that were transitioned to sonesta over the past 10 months Revpar increased almost 22% to $64 43.
Third quarter compared with $52 90 in the second quarter.
We believe the transition disruption is generally behind us and that Sonesta is 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 largest 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 total industry fundamentals continued to improve we expect sonesta will deliver solid results on both the topline and bottomline.
SPC 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%.
Okay.
Finally, as we announced earlier this week, we amended our management agreement with Radisson for nine hotels under.
Under the amended agreement Radisson will continue to manage eight of the hotels for a 10 year term.
Ended agreement sets 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 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 one 2021.
Turning to our net lease assets.
This portfolio continues as 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 tenants travel centers 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 is our largest tenant and also because we own approximately 8% of the 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 SBC to benefit as the lodging sector recovers from this historic downturn.
With that I'll turn it over to Todd to discuss planned dispositions of the recent transaction activity and our net lease portfolio in further detail.
Thanks, Sean we continue to make progress in our hotel disposition initiatives to raise capital and reposition SPC sonesta portfolio through the sale of 68 hotels.
Which had a net carrying value of $579 million as of September 32021 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 or 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 us like buyers and enter purchase and sale agreements in Q4, 2021 and to close in Q1 2022.
Post sale, we believe we will improve 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 6000, rentable square feet for an aggregate sales price of $700000.
In October 2021, we sold one additional net lease properties with 7000 rentable square feet for $915000.
We have 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 our properties have become vacant or once we expect to become vacant and what we have what we believe to be a low.
Likelihood of relations.
As of September 32021, we own 794, net lease service oriented retail properties, including our travel centers with $13 6 million square feet, requiring annual minimum rents of $379 million.
Representing 42, 5% of our overall portfolio based on investment are net lease assets were 98, 2% leased by 175 tenants with a weighted average lease term was 10 three years and.
And operating under 134 brands in 'twenty, one distinct industries at quarter end.
The aggregate coverage of our net lease portfolio is minimum rents was 237 times on a trailing 12 month basis as of September 32021, and.
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 that lease tenant for $2 $9 million during the third quarter as of September 32021, $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 tier.
We have reduced our reserves for uncollectible rents, providing a positive lift to our third quarter results of $5 4 million or <unk> <unk> per share based on our cash collections from certain tenants and our collectability assessment on rents owed to us.
This compares to reducing our rental income by $2 $4 million for reserves for uncollectible accounts during the prior quarter I'll now turn the call over to Brian.
Thanks, Todd starting with our consolidated financial results for the third quarter of 2021 normalized <unk> was $43 8 million or 27 per share a $21 million increase over the prior year quarter and a sequential increase of almost $18 million over the second quarter of 2021.
Adjusted EBITDA was $137 3 million for the third quarter of $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 <unk>. This quarter included the results from our hotel portfolio, which generated $51 $1 million of hotel EBITDA for the third quarter of 2021.
Third to negative $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 $35 million negatively.
Negatively impacted 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 straight line rent adjustments related to lease restructurings and the sale of certain net lease properties since July of 2020.
Interest.
<unk> 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 results in our earnings our share Sonesta is normalized <unk> recognized from our 34% ownership interest was $2 8 million.
An increase of $5 billion or <unk> <unk> 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, two 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 100 <unk>.
160 extended stay hotels continued to have the strongest performance generating $29 $3 million of hotel EBITDA during the quarter.
Our 51 full service at 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 with similar to September as a result of $69.
We currently expect Q4 revpar to be approximately 35% to 37% below Q4, 19, 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 we would expect to be cash flow positive for the full year 2021 at the corporate level before capital expenditures.
We paid $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 is new brand standards impacted our pace of capital expenditure activity in 2021.
We have committed to spend over $60 million under our amended Hyatt 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 <unk> 10 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, 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 been recovered.
Operator that concludes our prepared remarks, we are ready to open up the line for questions.
Thank you we will now begin the question and answer session.
I'll ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the key.
Is it 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.
The first question comes from Brian <unk> with B Riley. Please go ahead.
Sure. Good morning, Thank you.
Couple of quick questions for me, yes, we noticed that the sonesta select hotels 63 had a fairly weak occupancy down around 42% I know that you are 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.
I'm, assuming that those those hotels that are being sold yeah.
Management and the employees at those properties no. They are being sold is that correct.
Yes, that's correct Brian.
No I think that.
The real issue there may be some impact from what you've described.
Yes.
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.
That.
They were designed.
From a location perspective to <unk>.
Later to business travel many of them.
Our in business Park type locations.
Debt.
Yeah.
Where they are still getting business from leisure travel on weekends from sports teams and in other smurf business, but but theyre not.
Nobody nobody is waking up and picking some of these locations for weeks vacation.
Just.
Their business traveler.
Hotels and business travel hasn't come back sufficiently to to get the occupancies up and.
And we knew that that would be an issue when we when we converted to hotels.
Two sonesta in.
We've been we've been working on initiatives to try to get that occupancy up.
<unk>.
And.
We were we were lucky I guess that we were able to do the rebranding during during the pandemic and get some systems in place to be ready to capture that business travel one when our returns but.
But it really hasnt come back in force, yet and so I think thats really the reason why.
And thats the select hotels occupancy levels are not where you might expect.
And we've noticed really been out on the road some sonesta.
Does that have converted to the sonesta brand, you'll still have some temporary signage up there is that because those assets are being held for sale and you don't really know if theyre going to be sonesta as long term or is it because there is delay in getting signage permanent signage to put on those properties.
It's more of a latter getting.
Kitting getting.
The signage.
<unk> delivered.
To get into science manufactured and delivered has been a little bit more of an issue with with.
Supply chain concerns in.
<unk>.
Worker concerns.
And so it's really been it's really been more about and also there is in some markets they have been.
Sort of an elongated process with the local municipalities to get the approvals for the new signs.
A lot lot more restrictions today about.
Sure.
Blending in with the community.
How bright the lights are theirs.
It may impact.
I can follow Fort Lauderdale surplus on the conversion, but for instance, our lighting there is restricted because of turtles on the beach. So so theres a lot of.
There's a lot of things that impact signage that.
Of course caused us to have a slowdown in some locations.
I don't want a mixture.
You don't want to mess with those turtle.
Brian I'll add I think asked this as well.
68 hotels, we're selling.
19 are 19, our slacks and.
Those 19 hotels had Q3 revpar at $40 compared to $48 for the total so.
Again, we're selling artificial XOR selling the lower the lower performers.
Okay, and just one more from me and then I'll hop back into the queue.
You mentioned at the last quarterly call that I think that there is $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.
Yes, Brian 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 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 but.
I would say 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.
Hi, Thanks, Good morning, Hey, this is a little bit different way of asking Brian's question.
And can you can you walk through what Revpar and EBITDA per key differences between the 68 hotels in the remainder of the portfolio.
Back on 19 results.
For 19.
Yes.
Yes, so for <unk> team for the for the 68 hotels, we're selling.
We were at.
70 74 Revpar.
Versus the.
Hotels lastly, so the remaining portfolio of just sonesta versus 111.
And EBITDA was.
Again. This is I'll give you a quarter number story was $11 million 11 5 million for the 68 exit in hotels and then for the sonesta unless the exit we were.
About $106 million.
Thank you.
Sorry, you said 11 million person.
Right.
And then from 2019.
Yes.
Q3 annualized yes, that's the full year number for those 68 <unk>. This is Brian was around $31 million and hotel EBITDA.
Okay. So do you want it and the remainder in flat on an annual.
I'm, sorry say that again.
So the 68 was $31 million what was the remainder on anymore.
Yes, the whole portfolio of 304 hotels, we were at $500 million in 2019. So this was a very small percentage of the overall portfolio.
Another way to look at it to dori.
Look at 17% to 19.
For the 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 in hotels.
Okay.
And can you talk about the difference in the cost structure with the hotels now understood.
As you manage our Versal Marriott and Intercontinental just trying to think through what the margin upside that may exist.
First is 2019 beyond just that the industry may have changed.
The hotel.
Yes.
Well.
Thats.
That is a good question.
But the answer is more that it's still evolving.
There are there are some fees that Marriott charge.
Against our hotels.
That sonesta doesn't charge.
Theyre, mostly on an individual basis.
So the ankle biters, but together they are probably a couple of percent of revenue.
The.
Oh Ta charges.
Because of Marriott's significant size and volume of transactions that.
That their hotel guests run through.
Through the Otas their commission levels are.
Somewhere in the 13% to 14.
30% to 14%.
Sonesta is where.
Slightly above or I guess technically still are slightly above <unk>.
20%.
Contracts are in process of.
Are being executed that will reduce that.
To the.
So at a 17% or 17.
Range so.
It's still not as low as much.
Much larger.
Three or four hotel companies, but but.
Significant decline in those costs for four sonesta.
And then otherwise because of their.
The increased size from the transitions, we completed over the last nine months or so.
And because of the Red Lion acquisition.
They are they are in the process of renegotiating a lot of contracts whether it's for.
Trash collection.
Sure.
Four.
Supplies towels and food and beverage.
Their procurement.
<unk>.
Come in substantially a lot of that service contracts for things like elevators.
So sonesta is.
Cost structure is as.
Is changing quite a bit.
And it's not it's not really statics. So it's hard to compare I think it's fair to say that because of marriott's size.
Stability there.
Their costs are.
A little bit lower on some of those contracts then and sonesta are today.
Okay. Thank you.
The next question comes from Jim Sullivan with BT IHG. Please go ahead.
Thank you.
John I'm curious there was a comment.
That was made in the prepared remarks that.
Office, who are being received so the portfolio of assets for sale both of them than timber basis at an unencumbered basis.
And.
This obviously this sale.
Perhaps provide a good example for us if we're aware of the difference.
That the the Incumbrances 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.
It is encumbered.
Obviously in the case of service properties.
You own a significant chunk of sonesta, so you would be retaining the fees.
Our 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.
That would be it.
It wouldn't be.
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 if you're going to sell the assets encumbered.
How much of a difference in the cap rate would you accept it.
Kind of put you in the same position of selling them unencumbered at a lower cap rate.
Thanks, Jim that's a good good question.
It's.
It is complicated.
Complicated answer.
First of all strategically.
Sure.
It's in their interest because of our ownership of sonesta.
Two to continue to see sonesta do well in.
And there has been a lot of news about there.
About their significant growth over the last year.
And so for us to turn our turnaround in cell <unk>.
<unk>.
Plus hotels.
Unencumbered.
Sort of deflate that.
That story in that and.
That momentum.
The momentum that they have and so.
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.
The purchase price we look at.
Our estimate of.
The royalty revenue that sonesta would generate if they stayed in state encumbered less.
Cost factor.
And then our percentage ownership of sonesta to cut to try to estimate.
The value to SBC of keeping them encumbered and we also.
Sonesta it has been in discussions with a number of these.
Potential buyers regarding.
Possible transitions are new development of 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.
Considering that too in our analysis so so.
There is.
<unk>.
There is definitely a formula that we're applying.
The other thing to remember is that.
Some of for instance, some of the extended stay hotels that are being sold.
Uh huh.
Sure.
Exterior corridor.
Format, which is not brand standard any longer at Marriott and so.
Yes.
The offers coming in for those hotels.
<unk>.
On an encumbered basis are significantly higher than the offers coming in on unencumbered and so there's just a lot of different factors that are impacting where pricing is coming in so so we do have a number of hotels that are.
That are getting where we're getting better pricing.
Keeping it as a sonesta then.
Letting it go unencumbered so that so that.
That makes it hard for me to give you a specific percentage, but generally speaking.
If the.
If the hotels are.
Easily rebranded.
Two a hill.
Hilton Marriott.
Brand.
There will be.
There will be probably somewhere around 50 to 75.
Basis points higher.
Pricing difference between encumbered and unencumbered.
Okay, that's helpful and SEC.
Lee.
Back at the time.
A year ago, when you were having your.
Ultimately failed negotiations with Marriott.
Hugh.
You commented a few times that the Marriott.
Marriott's strength in terms of putting heads in beds was really what 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 you know.
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 in business group Kelly back and.
The market is getting excited about this January 4th date is kind of a pivot point for next year for the business travel and I. Just wonder do you do you have a sense that that is as that business traveler. It comes back the sonesta brands are not going to be able to keep pace in terms of the gains in the market versus a piano.
Stablish to the bigger established brand like Marriott or do you think that growth.
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 going to compete well.
Companies like Marriott and Hilton and IHG.
Sure.
They're much bigger with with much larger reward programs and.
Great Hotel companies and they will always be tough to compete against.
But I think sonesta is putting programs in place to attract business travelers and I think that.
Yes.
<unk>.
They are salespeople are.
Our aggressive and.
Uh huh.
More.
They get out and.
Press, the flesh and pound the pavement.
And continue to develop relationships.
Cause.
It takes if you're a smaller hotel company to be competitive.
I think our experience.
Not in every case, but in a lot of cases was that.
Some of the salespeople in in some of the hotels managed by the bigger operators.
<unk> developed a little bit of a complacency because of the.
Because the rewards program.
Strong they just.
They just thought.
The spigot was turned on in the flow of guests Wood wood.
Show up regardless of how hard they work to sales.
Sonesta.
It doesn't have the benefit of just waiting for the for the flow they're out there generating the flowing and so I think there.
Cause of that.
Because I think they're working harder, they're ultimately going to be very competitive.
We still have 16 hotels that Marriott is managing for us.
They're not improving at a faster rate or.
Dramatically.
Passing the sonesta branded hotels that are similar tiered so.
So we feel pretty good about.
About how the sonesta brand is going to stack up.
Okay, that's great. Thanks, Sean.
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 bought in Red Lion. The goal was or the thought process was that would help.
Ramp that process can you tell us where you are in that stage and when we might see that rollout in the meaningful way.
Just to be clear, we're not in that space.
But yes, we do on that's a fair question, because we do on our Sirona sonesta.
At the beginning of <unk>.
October.
Hum.
Sonesta filed there.
Our franchise disclosure documents for the sonesta simply suites, Sonesta, Es suites, sonesta select and Sonesta hotels.
And so.
No.
The timing of that was good it was right before the <unk>.
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 had launched the sales process from the 68 hotels.
So.
I think that the.
The initial feedback has been much stronger than we than even we had expected or hoped for.
And.
But a lot of where the rubber meets the road is.
Going to come from <unk>.
Sonesta finalizing all of there.
Hi.
Brand standards from both an operational and capital perspective, which is.
<unk> is a very advanced stage also in so.
I think sonesta is in a good position I think that.
What we're hearing is.
You know that that.
One of the big attractions to Sonesta as a franchise organization is the fact that they do have 34% ownership by SPC.
And most of the Big Hotel franchise companies today are asset light and do not have.
Don't have to eat our own cooking they can they can.
Decide that.
The 48 inch televisions that you had bought last week need to be 52 inch televisions. This week.
They don't have to go out and buy any more televisions, just just that franchisees have to.
But if sonesta changes from 48 inch Tvs to 52 inch Tvs SPC has to go out and buy tens of thousands of Tvs.
So it's not going to be a Willy nilly decision to Jim the extra four inch size TV.
And our franchisees throat.
As it might be obviously I'm overstating.
The brands all of the brands are thoughtful about.
About their standards, but but there are a number of franchisees who feel like the big brands are a lot less thoughtful.
Then then 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 it from a brand standard.
The SPC has to live with it as well.
Has has been a big attraction to franchisees and this is really really helping that program get a good jumpstart.
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.
What date, you're selling any thoughts.
Current thoughts on the movie theater component there with what's been going on in our in that industry. Thank you.
Yes, yes, Brian So as you can as you can see it there mostly smaller assets and typically our strategy there is.
Something is going to become vacant or is baked in 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 are unlikely to grow that portfolio and you may see yourselves. 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 youre going to.
On a lot of our other net lease like our quick service restaurants.
And so 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 its the right time to sell but when the market recovers.
Specific to those sectors you're base you may see us sell those I just don't think it's the right time now, but that 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 saw some deferrals outstanding but.
Sure.
We're not concerned.
We don't have any major concerns today about our theaters, but you may see us sell those.
Next year after year after year.
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.
Look forward to speaking with some of you at our.
Virtual NAREIT next week.
Maybe shifting to <unk> teleconference.
The conference has now concluded you for attending today's presentation you may now disconnect.