Good morning, and welcome to American Hotel Income Properties REIT LP's third quarter results conference call. At this time, all participants are in a listen-only mode. Following the formal remarks, there will be a question-and-answer session for analysts only. Instructions will be provided at that time for you to queue up for questions. I will now turn the call over to Kelly Iwata, Director of Finance. You may begin your call.
Thank you, operator. Good morning, everyone, and thank you for joining us for our third quarter 2021 results conference call. Discussing AHIP's performance today are Jonathan Korol, Chief Executive Officer, Bruce Pittet, Chief Operating Officer, and Travis Beatty, Chief Financial Officer. The following discussion will include forward-looking statements as required by securities regulators in Canada. Comments that are not a statement of fact, including projections of future earnings, revenue, income, and FFO, are considered forward-looking and involve risks and uncertainties. The risks and uncertainties that could cause our actual financial and operating results to differ significantly from our forward-looking financial statements are detailed in our MD&A for the three and 9 months ending September 30, 2021, our other Canadian securities filings available on SEDAR and on our website at ahipreit.com.
AHIP does not undertake to update or revise any forward-looking statements to reflect new events or circumstances except as required by law. Listeners are urged to review the full discussion of risk factors on AHIP's annual information form dated March 15, 2021, which has been filed on SEDAR at www.sedar.com. Our third quarter results were made available yesterday afternoon. We encourage you to review our earnings release, MD&A, and financial statements, which are available on our website as well as on SEDAR. On this call, we will discuss certain non-IFRS financial measures, including NOI, hotel EBITDA, FFO, and AFFO. For the definition of these non-IFRS financial measures, the most directly comparable IFRS financial measure, and a reconciliation between the two, please refer to our MD&A. References to prior year operating results are comparisons of AHIP's current portfolio of 78 properties results in those periods versus today.
All figures discussed on today's call are in U.S. dollars unless otherwise indicated. I'd like to remind everyone that this call is being recorded today, November tenth, twenty twenty-one, and a replay of this call will be available on our website. Jonathan will begin today's call with an overview of operational and financial highlights, followed by Bruce, who will provide an update on hotel operations. Lastly, Travis will highlight key financial results. I'll now turn the call over to Jonathan Korol, Chief Executive Officer.
Thank you, Kelly. Thank you everyone for joining us today for our third quarter financial results conference call. For the third consecutive quarter, we're reporting rising top and bottom-line results accompanied by improvements to our balance sheet and liquidity positions. This despite an ever-changing hotel operating environment that presents unique challenges for our corporate team and hotel associates. In Q3, these challenges included the rise and fall of daily COVID case counts driven by the Delta variant. While national statistics painted a picture of declining air passenger counts and delayed return-to-work schedules, AHIP's portfolio of secondary market premium-brand and select-service hotels continued to narrow the gap to pre-COVID-19 demand levels. Once again, Q3 cash flows improved versus the prior quarter on the back of rate-driven RevPAR gains, as well as operating margins that remain above pre-COVID levels.
While we wait for broad-based demand from the business traveler, our premium branded affiliated properties are drawing significant leisure demand. In the absence of complete certainty about when the majority of companies will send their employees back on the road or even when they'll return to the office, we're confident that the current demand environment will continue to propel the cash flow recovery in our business that has been underway since the beginning of the year. The sustainability of operating margins remains a major focus for our team. Our margins have been helped by relaxed brand standards and operational efficiencies unlocked by our hotel manager working together with our asset management team. Management regularly discusses service standards with our brand partners and expects that the level of complementary food and beverage offerings, as well as housekeeping frequency, will remain below 2019 levels.
We believe that there are many opportunities to further enhance our operating results beyond 2019 baseline levels. First of all, as mentioned earlier, the eventual sustained return of business travel will provide further demand compression and rate gains, as well as gains to the limited food and beverage offerings within our portfolio. Secondly, our five Embassy Suites properties, or 15% of our total key count, still lag the rest of the portfolio recovery. We are seeing signs of this business coming back. Thirdly, the 12 assets that were purchased in late 2019 have benefited from our asset management oversight and dedicated revenue management and should exceed 2019 results. In 2019, AHIP also renovated several properties. The benefits of these investment dollars did not have enough time to surface prior to the outbreak of the pandemic.
Taken together, these items paint an encouraging picture for the coming business cycle. Given the conviction around the sustainability of the recovery in our operations, we're pleased to announce the reinstatement of our monthly distribution effective March 2022. Distributions will recommence at an annual rate of $0.18 per common unit. In addition, we will be paying our deferred March 2020 distribution, with payment to be made on December 31, 2021. March 2022 will mark two years since the suspension of our distribution, and we believe that we are one of the first North American hotel REITs to reinstate regular distributions. We'd also like to announce that we will be deploying $30 million towards capital improvements to our properties in 2022.
This is an effort to enhance the quality of our existing properties and ensure that they capture returns on investment that we believe are available beyond those associated with organic post-COVID improvements to property cash flows. I'll now turn the call over to Bruce to discuss third quarter hotel operations. Travis will then highlight key third quarter financial metrics. Bruce?
Thank you, Jonathan, and good morning, everyone. We were pleased to see the continued rebound, resilience, and growth of the AHIP portfolio in Q3. Top line was driven by strong ADR growth, which recovered to 2019 levels. This strong rate growth, coupled with continued focus on expenses and ongoing relaxed brand standards, delivered strong portfolio margins and bottom-line performance in the quarter. Despite top-line revenue being down $12.3 million- 2019, NOI only declined by $2.4 million. The portfolio has seen sequential quarterly RevPAR growth since the beginning of 2021, with RevPAR growing 43% since Q1 of this year. Q3 2021 RevPAR is at 87% of the same period in 2019. Total occupancy for our 78 hotels in the third quarter averaged 68.8%.
On a monthly basis through the quarter, July occupancy was 73.1%, August 67.5%, and September finished at 65.7%. From a seasonality perspective, our portfolio typically sees a decline in occupancy from July into August and September as the summer vacation season draws to a close and schools go back in session. We experienced occupancy declines as anticipated. However, the decline appeared to be somewhat amplified due to the surge in COVID cases related to the Delta variant in the U.S. around the same time period. Although difficult to determine precisely, we believe the COVID spike impacted top-line revenues in the range of $2 million this quarter after comparing to prior Q3 seasonal occupancy declines.
Leisure demand continues to support strong weekend occupancies, which range between 78%-84% in the quarter, while weekday occupancy was in the mid-60% to low 70% range. When we look at the three distinct segments of the AHIP portfolio, occupancy for the quarter was led by our 24 extended stay properties at 78.9%. The 49 select-service hotel occupancy was 66.5%, and our five Embassy Suites had an occupancy of 57.8%. In Q3, average daily rate increased from Q2 by 7.7% from $109.31 to $118.49.
Specifically by month, ADR for the quarter was $120.34 in July, $118.20 in August, and $116.68 in September, with an aggregate ADR achievement for the quarter at 2019 levels. Weekends continue to outpace midweek occupancy as a result of strong leisure segment demand. Friday and Saturday nights continue to be peak demand nights, with RevPAR achieving an approximate 20% premium over midweek room nights in Q3. As we move beyond Q3, October preliminary results have portfolio occupancy at 70.2%, ADR at $117.88, and RevPAR at $82.70.
As a reminder, Q4 is a seasonally weaker quarter, and we anticipate seeing typical occupancy declines through Q4 as demand generally declines from U.S. Thanksgiving through New Year's. The leisure segment continues to be the dominant demand driver across our portfolio. Corporate segment performance continues to significantly lag leisure demand. There had been some belief that after Labor Day, there would be a significant return to office for many medium to large-sized corporations. With the spike in COVID cases in August and September, most larger corporations, which tend to have stricter travel policies, delayed their return to office plans until Q1, 2022. Although we are seeing some improvement in corporate demand, we believe the meaningful return of corporate travel will be tied to companies accomplishing their return to office plans.
Overall, we have seen business and occupancy recovery being quite balanced across our 78 hotels and 22 states. Geographically, we have five states reporting occupancy over 80% in the quarter. New Jersey, where AHIP has six hotels, ran 86.4% occupancies. Other states with occupancy over 80% included New York, Michigan, Kansas, and Illinois. On the other end of the spectrum, Oklahoma occupancies continue to lag, with Q3 occupancy at 47.9%, approximately 21 points below the portfolio average and down 29.9% to 2019 levels. Although oil and gas prices have risen significantly over the last few months, we have seen no new room night demand from the oil or gas industry in Oklahoma. As our portfolio performance continues to improve, we are starting to see more hotels reach or exceed 2019 revenue metric levels.
From an occupancy perspective, although aggregate occupancy for Q3 was 13.2% below 2019, 15 hotels or 19% of our portfolio had occupancy above 2019 levels. As mentioned previously, ADR has been the real catalyst in RevPAR growth. Overall, Q3 ADR was flat to 2019 levels. However, 47 hotels or 60% of the portfolio recorded ADR this quarter at or above 2019 levels. Three states, Illinois at 16%, Iowa at 14.1%, and New Jersey at 1%, reported RevPAR performance exceeding 2019 levels for the quarter. Notably, six states had less than a 5% decline in RevPAR to 2019 levels. Florida, Georgia, Kansas, North Dakota, New York, and Tennessee.
In Q3, our hotel manager continued strict cost management initiatives, which, coupled with strengthening ADR, have continued to yield strong margins across the portfolio. In Q3, NOI margins were 38.6% compared to 41.5% in Q2 and 32.1% in Q1 of this year. When compared to Q3 2019 NOI margin, it has improved by 4.7 points from 33.9%. In Q3, we had a non-recurring linen write-down of $1 million. This write-down impacted NOI margins by 1.5 points in the quarter. Similar to the first half of 2021, several factors have contributed to the margin growth from 2019, improving average daily rates, relaxed brand standards, and ongoing cost containment initiatives. The greatest challenge to operating our hotels today is our hotel manager's ability to recruit and retain staff in the hotels.
Currently, the portfolio is operating at 62% of 2019 in-house staffing levels. Staffing levels are being augmented with third-party labor where possible, management support of frontline positions, and we are also seeing overtime costs increase as well. Rooms labor CPOR in Q3 was $14.35, compared to Q2 of $11.78. In Q3 2019 rooms labor was $16.13 as a comparative. Our hotels have seen increased supply chain disruptions in Q3. These disruptions include delivery delays, incomplete or reduced shipment sizes, product category substitutions, as well as issues around general availability of operating supplies and FF&E replacements. Our manager continues to focus on this issue and support properties by sourcing alternative products and bulk purchases where possible.
Our hotels have continued to operate with relaxed brand standards surrounding complimentary services and housekeeping through Q3, although there have been some changes in service levels since the end of the prior quarter. Complimentary services, breakfast in particular, have seen cost increases as a more complete hot breakfast offering has been restored, although streamlined to 2019's breakfast standards. As a complimentary services comparative, in the first half of 2021, our comp services cost, inclusive of labor, was in the $2.17 CPOR range. In Q3, comp service CPOR was $3.26, and compared to 2019, when our comp services cost was at $4.98 CPOR.
From a housekeeping perspective, service levels have shifted to housekeeping by request and more of a light touch housekeeping program, with properties continuing to see cost benefits with this service level compared to pre-pandemic costs. There continue to be many cost and service variables impacting our hotels today, and it's too early in the recovery to provide specific margin guidance. As we've been saying for some time now, we do anticipate that some of the savings that we are currently seeing will become permanent, providing for a leaner and more efficient operating model. Through the first three quarters of 2021, our capital spend was focused on requests related to life safety and asset preservation.
Year to date, we have committed to $5 million in capital repairs and improvements, with 2.2 million of that being committed in Q3. We have not undertaken any capital renovation projects to date. However, we are starting two small PIP projects in Amarillo in Q4 that had been suspended at the onset of the pandemic. As the financial recovery of our business takes hold, we have been in discussions with our brand partners on our 2022 PIP program. Assuming stable or improving financial results, we are anticipating getting back to a renovation program similar in cost and scale to pre-pandemic levels. With that update on our hotel operations, I'll now turn the call over to Travis to highlight key financial and capital metrics for the quarter. Travis.
Thank you, Bruce. Good morning, everyone. We are pleased with the ongoing improvements in financial results. We have made meaningful improvements this year in our capital structure and liquidity that positions us for the ongoing recovery in the hospitality sector. In early 2021, the preferred equity issuance and amendments to our credit facility resulted in improvements to our liquidity position. The ongoing suspension of the distribution, reduced capital expenditures, and positive operating cash flow have all contributed to an increase in our liquidity. Cash flows from continuing operations was 9.6 million for the third quarter, compared to 0.6 million for the same period last year. At the end of the quarter, AHIP had 43.6 million in available liquidity, comprised of unrestricted cash of 14.8 million and 28.8 million available to draw on a revolving credit facility.
This is an improvement from 3.4 million from the second quarter. In addition, we have 36.6 million in restricted cash. This amount is higher than normal due to reduced CapEx spending over the last 18 months. The biggest components are FF&E of 18.6 million, tax escrow of nearly eight million, and a PIP reserve of nearly seve million. We are well-positioned to fund FF&E programs and a large portion of our PIP program, and we'll work to draw down this balance over 2022 and 2023. Reported funds from operations, or FFO, was $26.4 million, or $0.32 per diluted unit, prior to adjustments for two non-recurring items, other income and inventory loss. Recurring FFO was 12.8 million or $0.16 per unit, adjusting for these two one-time items.
Both FFO amounts, with or without adjustments, were the highest total in per unit FFO since Q3 of 2019. For the three months ended September 30, 2021, reported revenues increased to 68.4 million, as compared to 46.3 million for the same period last year. Reported net income improved to $15.7 million, compared to a loss of 12 million for the same quarter last year. The improvement is attributable to the other income and improved operating results. In the last two quarters, we generated an EBITDA of 44 million, and we expect EBITDA to exceed required outflows for principal and interest payments and capital in the fourth quarter. AHIP's portfolio has demonstrated it is resilient and well-positioned to address periods of potential future COVID demand disruption should they arise.
Our hotels continue to achieve strong financial results in a challenging operating environment. With these improved results, AHIP is pleased to announce that its board of directors has approved the payment of the March 2020 distribution, with such payment to be made on December 31, 2021. Secondly, the adoption of a distribution policy providing for the payment of regular monthly distributions commencing in March 2022 at an annual rate of 0.18 per common unit, or a monthly rate of 0.015 per unit in U.S. dollars. The first regular monthly distribution is currently expected to be declared in mid-February, with a record date at the end of February to be paid in March 2022. The declaration and payment of each distribution under this new pcolicy remains subject to board approval.
Debt to gross book value in the third quarter was 54%, compared to 55.4% in the second quarter and 58% at the end of 2020. The decline is primarily due to the government-guaranteed loan forgiveness and CMBS loan repayments during the quarter. Further improvements to leverage are expected over time through a combination of improved operating results, a sustainable distribution, and selective equity issuance in support of growth transactions. In 2020, we were able to obtain relief on all 20 of our CMBS loans. The relief included a deferral for funding of FF&E reserves for 6 months, repayment of this deferral over 12 months, and covenant waivers. 9.3 million out of $10 million of these deferrals have now been repaid, and most of the remaining portions will be repaid in the next 12 months.
AHIP has 20 CMBS loans in total, with eight loans not meeting the minimum debt service coverage ratio threshold this quarter, compared to 16 loans in Q1. Of these eight loans, four do not have covenant waivers. Cash management is not expected with these four loans since AHIP is current on all loan payments and has had improvicng results in the past three quarters. I will now turn the call back to Jonathan for some closing remarks.
Thank you, Travis. In closing, I would like to express my enthusiasm about the improvements in our operating business and balance sheet over the last year. The strong performance of our properties during an historically difficult period has engendered the confidence required to make the announcements that we have made today.
Reinstating our distribution is a strong signal about the belief that our management team has in our business. Our goal remains to drive total return for our unit holders through a sustainable distribution and unit price appreciation. We now have the framework to reinvest in our business through a robust 2022 capital plan, and as well as be an opportunistic buyer of growth assets that are accretive to our portfolio. Finally, let me convey my appreciation to our teams at the property level for their continued dedication to providing a great guest experience. Also, the enduring support and hard work of our corporate team. With that overview of our third quarter and recent initiatives, we'll now open the call to questions from analysts. Operator?
Your first question comes from the line of Lorne Kalmar with TD Securities.
Thanks. Good morning, everybody. On the RevPAR trends, you guys are obviously trending towards 2019 levels. When do you guys think you get there? Would it be fair to say that the resumption of business travel would be the big catalyst for that?
Yeah, that's fair to say, Lorne. I think that's the missing piece to this equation. You know, quite frankly, we're not so concerned about the when, because we're quite content with how we're performing while we wait for that. You know, it's hard to pin down a month. Certainly we look at national data, and we read the headlines, and we read what companies are doing. You know, we suspect that we're gonna continue to see improvements in corporate demand over the coming quarters.
I guess just following on that, would it be fair to say that the group versus leisure demand is still, you know, 30/70?
Um.
You know, it may be more like you said, leisure 70% and group or business 30%. Is that what you had said?
Yeah.
Yeah.
Yeah.
Yeah. I mean, maybe it's 65-35 now, right? We are seeing some improvement on the corporate and group side, but nothing overly substantial.
Fair enough. Well, I guess some improvement is better than no improvement. Maybe just lastly from me, you guys kind of mentioned acquisitions there in the closing remarks. What do you guys see and how do you think about it and, yeah, what's out there?
Sure. There was a substantial amount of new product coming to market in Q2 and Q3. The bid-ask spread closed somewhat in Q3 at the beginning of Q3, and we saw some large public and private transactions that occurred. There was a lot of product that came to market in August and September. Some of that didn't trade, but the ones that did trade are at meaningfully increasing per key levels than what we've seen, you know, nine months ago. There's significant demand in the capital markets and from both private equity and REITs for select service product. We'll continue to mine for opportunities.
Sorry, just one last one, I guess, with the Condor acquisition, obviously some smart money going after your type of product. Have you guys had any inquiries on your front from anyone?
No.
Okay. Thanks so much. I'll turn it back.
Your next question comes from the line of Joanne Chen with BMO Capital Markets.
Hi, good morning.
Good morning.
Maybe just sticking with the acquisition side of things. Have you given some of the recent transactions, have you started to see really pricing really getting more competitive, or has it been kind of status quo over the past year? Past quarter. The last two years just flew by, so.
Yeah. Do you mind just repeating the last two sentences there, Joanne?
Sorry. Just in terms of on the pricing front, your targets of acquisition, are you starting to see competition really pick up for you guys?
Sure. Yeah, no, the competition's been there really throughout the last year. You know, it's not lost on the institutional investor and the investors in the private equity space that have deep pockets that how well select service has performed as a segment within the broader hospitality industry. There's continued demand. We mentioned, you know, you were asking for, I think a proxy on per key. There's
Mm-hmm.
You know, the Condor acquisition, of course, is north of $160,000 a key, which, you know, it really sets the bar for in the public markets for where select-service is trading.
Right. Okay. No, that's helpful. I guess, are there any particular markets that you guys are more focused on and continue to expand right now?
Yeah. We're focused on markets where we see a growth trajectory that meets or exceeds the growth trajectory that's in our existing portfolio. Those tend to be in the markets that where you have net population migration. But we're also mining for deals where maybe it's more of in the middle of the country where there's an opportunity to purchase below replacement cost and perhaps at a level below 2019, where there's still some built-in growth simply by the return of the corporate customer and the business traveler. We're not focusced on one specific area, but of course, we really do like the select service business in the suburban markets.
Right. Okay. I guess, shifting gears a little bit. It's nice to see that the ongoing improvement in your NOI margins. Just kind of thinking over the near term, how should we be thinking about what a good run rate would be over the next couple of quarters?
Yeah. We have a paragraph in our MD&A about this specific topic. One thing we're establishing goalposts, which is we're not going back to 2019 levels, but we're probably not going to be at the levels that we've been at in the last 12 months. You know, that we believe that translates into a permanent 100-200 basis points improvement in GOP margins going forward.
Okay. No, that's good to hear. You guys talked a little bit earlier about the CapEx delay, but should we start to think that for the CapEx spend to kind of pick up starting maybe in Q4, or should we think about it later on in early 2022?
Yeah. We'll think about it in the latter half of 2022.
Okay.
Bruce spoke a little bit about supply chain and.
Yeah
... and really labor crunches in some of the markets. We think we can actually save money by delaying.
Mm-hmm
... and, and that, uh-
Okay.
We'll balance that with, you know, our the really in some cases some stellar ROIs that we can generate on these renovations.
Great. Okay. No, that makes sense. Just ride through the inflationary period. Okay. That's it for me. Thanks very much. I'll turn it back.
Thank you.
Again, ladies and gentlemen, if you would like to ask a question at this time, simply press star, then the number one on your telephone keypad. Your next question comes from the line of Matt Logan with RBC Capital Markets.
Thank you, and good morning.
Morning, Matt.
In terms of your distribution, can you talk a little bit about how you landed on what appears to be a very prudent and sustainable 0.18 level? You know, how you're thinking about the balance of growth and retained earnings going forward?
This is Travis. I can tackle that one. We've been guiding through the summer that we were gonna come back with a distribution in 2022 that was something we viewed as sustainable for the long term. On our numbers, the distribution that we've come out with is gonna be sub 50% on our AFFO. We think that number offers our unit holders an attractive yield at our current unit price. It still allows us to maintain, you know, financial flexibility and discipline on the balance sheet.
With that payout ratio, you know, we should be able to manage our leverage down modestly, and we have some flexibility to pursue acquisitions in 2022 if they're modestly dilutive without putting too much pressure on that distribution. We think that number will be sustainable in the long term, and it reflects our confidence in our operating outlook. When we saw what happened to our earnings in Q3 due to the Delta variant, it was a relatively modest impact. To the extent that there's future variant concerns, you know, we think our operating cash flow will be able to support this in the long term.
In terms of your 2022 CapEx program, can you talk about where you plan to deploy the capital and, you know, maybe what type of returns you're targeting?
Yeah. Hi, Matt. It's Bruce. We have some hotels in the Northeast that we're targeting for renovation next year. As Jonathan mentioned, we anticipate those renovations really be in the back half of the year or maybe even the back third of the year, just for what it's worth. Those properties have been actually fairly high performing, especially in New Jersey through the pandemic. We think we've got an opportunity to make a strategic investment in those hotels and position them for further growth, especially on the rate side.
On the, um-
Basically.
On the ROI side, Matt, I think what we're underwriting on these PIPs is north of what we're seeing on going in yields on acquisitions. High single digits, low double digits.
Good color. Maybe just changing gears to acquisitions. Like, are there any, like, hotel segments, geographies that you're more focused on than others? Does the, you know, certainly the robust pricing environment change your view of whether you're focused on portfolios or individual assets or vice versa?
Well, we're in the market for both portfolios and single asset deals. In terms of segments that we're targeting, well, I'll break it down by hotel type and hotel brand. Of course, we own Marriott, Hilton, and IHG. We certainly are happy with our relationships with those brand partners and are seeking to expand them. On the hotel types, if you look at the STR scale, we're in the upper mid-scale and upscale portions of the segmentation. We'd love to own a whole bunch more extended stay properties, for sure. We're about 30% extended stay right now. Close to 48% of our room count is suite properties.
We would like to maintain that balance, if not increase the extended stay portion. Geographies, like, you know, like I mentioned earlier, we're very opportunistic. Just because there's a tremendous amount of money flowing into the Sun Belt right now doesn't mean that we're going to ignore other areas of the country that may offer growth opportunities and a better return on investment.
Last one for me. In terms of new supply over the next two years, do you see any markets that could have headwinds, or did the pause in construction over the pandemic largely negate some of those concerns?
Deals that were in the ground before the pandemic got completed. The pipeline of deals that are pursuing permits and going into the ground is dwindled dramatically. Not to say that if pricing continues to head north, you know, more developers won't get back into the game. Still there's gonna be headwinds with respect to sourcing materials at an attractive level, sourcing labor, sourcing construction financing. We feel very strong that the next 24-36 months should provide a welcome respite to supply pipelines in most, if not all, of our markets.
I appreciate the color. I'll turn it back. Thank you.
Thank you.
There are no further questions in queue at this time. I'll turn the call back over to you, Jonathan, for closing remarks.
Thank you again, everyone, for joining us on our call today. I look forward to speaking with you in March when we report our fourth quarter 2021 results. Have a good day.
This concludes today's conference call. Thank you for participating. You may now disconnect.