Good day, and welcome to American Hotel Income Properties REIT LP's second quarter results conference call. At this time, all participants are in 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. Before the beginning of the call, AHIP would like to remind listeners that the following discussion will include forward-looking information within the meaning of applicable Canadian securities laws, which forward-looking information is qualified by this statement. Comments that are not a statement of fact, including projections of future earnings, revenue, income, and FFO, are considered forward-looking. Participants on this call should not place undue reliance on such information, which is provided based on management's expectations and assumptions as of the date of this call.
AHIP does not undertake any obligation to publicly update such information to reflect subsequent events or circumstances, except as required by law. On this call, AHIP will discuss certain non-IFRS financial measures. 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 their MD&A. References to prior year operating results are comparisons of AHIP's pro forma portfolio of 63 properties results in that period versus the same properties results today, unless otherwise indicated. All figures discussed on today's call are in US dollars, unless otherwise indicated. A replay of this call will be available on AHIP's website. Discussing AHIP's performance today are Jonathan Korol, Chief Executive Officer, Bruce Pittet, Chief Operating Officer, and Travis Beatty, Chief Financial Officer. I'll now turn the call over to Jonathan Korol, Chief Executive Officer.
Thank you, operator, and thanks, everyone, for joining us today for our second quarter financial results conference call. AHIP's current portfolio of 63 select service hotels continued to demonstrate strong demand metrics in Q2 2024. For the quarter, revenue grew by 6%, and RevPAR for the quarter finished at $104, a 6% improvement over Q2 2023. This increase was driven by both occupancy and ADR growth, with broad demand from leisure, corporate, and group guest segments. The ability to control and manage daily rates is a key advantage of the lodging sector, which enabled AHIP to achieve strong growth in RevPAR over the past few years, partially mitigating the effects of rising costs due to inflationary pressures.
After seeing ADR growth plateau in Q1, we saw a return of the ADR growth witnessed over the past few years, as Q2 2024 ADR finished 2% above Q2 2023. The challenging operating environment, driven by elevated costs and labor shortages that has impacted performance over the past few years, continued this quarter and put downward pressure on operating margins. Q2 2024 NOI margin finished at 0.98 times Q2 2023. However, we are starting to see cost and labor inflation decelerate across many key categories, and dependency on contract labor is on a downward trajectory. In June, we completed our property insurance renewal, effective June 1, 2024, with a decrease in premiums compared to the prior year, ended May 31, 2024. On an annualized basis, the decrease from prior period is approximately $1.6 million.
We remain focused on cost control initiatives across the portfolio, and although we are making progress, we still have room to improve. On the transaction front, we made significant progress on our current capital recycling program. In March and April 2024, we entered into agreements to dispose of two non-core hotel properties in Amarillo, Texas, for $9.3 million and $8.3 million, respectively. These deals were closed in August 2024. In May and June 2024, we entered into agreements to dispose of three hotel properties in Ocala, Florida, for gross proceeds of $33.7 million.
Lastly, in July 2024, we entered into agreements to dispose of two hotel properties—sorry, three hotel properties in Dallas, Texas, Egg Harbor Township, New Jersey, and Corpus Christi, Texas, for gross proceeds of $27 million, $11.1 million, and $10.3 million, respectively. The dispositions are currently expected to close in the third and fourth quarters of 2024. As a reminder, we also completed the strategic dispositions of hotel properties in Harrisonburg, Virginia, and Cranberry Township, Pennsylvania, for gross proceeds of $8.55 million and $8.25 million, respectively, in Q1 of this year. We intend to use the net proceeds from these dispositions to pay down property-level debt, as well as the revolving credit facility.
The combined sales price for these properties, which have been sold or currently under contract for sale in 2024, represent a blended cap rate of 7.4% on 2023 annual hotel EBITDA and a blended yield of 5.6% after adjusting for capital expenditure requirements. We will continue to execute on our strategy to divest assets to reduce debt, and we are currently marketing a select number of additional properties, which are expected to demonstrate value above our current unit trading price. AHIP's board and management continue to advance our plan to preserve cash, enhance financial stability, and protect long-term value for our unitholders. We are currently executing a plan to address 2024 debt obligations with asset sales and loan refinancings, and as just mentioned, we've made significant progress on this item.
These steps are expected to strengthen our liquidity and balance sheet to ensure that we are positioned to benefit from an improving industry and macroeconomic environment. We will continue to monitor conditions and operating performance while considering further strategic opportunities to deliver value over the long term. On July 19, 2024, AHIP announced that AHIP and certain of its subsidiaries are in a dispute with hotel manager, One Lodging Holdings, LLC, itself, a subsidiary of Aimbridge Hospitality, and various of its own subsidiaries related to Aimbridge's mismanagement of AHIP's hotel portfolio. We also delivered a detailed notice of default to Aimbridge, providing notice that Aimbridge is in material default of the Master Hotel Management Agreement dated February 20, 2013, as amended, and the individual hotel management agreements made thereunder.
Aimbridge's management failures, arising in part from a lack of leadership consistency and recurring organizational instability, have caused AHIP material economic harm. AHIP's asset management team continues to work with Aimbridge to deliver on AHIP's pledge to its unitholders. That is, to increase the value of its hotel properties through operating excellence, active asset management, and investing in value-added capital expenditures. I'll now turn the call over to Bruce to discuss second quarter hotel operations. Travis will then highlight key financial metrics. Bruce?
Thank you, Jonathan, and good morning, everyone. AHIP's portfolio of premium-branded, select-service hotel properties continue to demonstrate strong demand metrics in the second quarter of 2024. Total revenue increased by $4 million for our portfolio of 63 properties. As a reminder, during the final week of December 2022, cold weather, particularly in the Northeast U.S. and Texas, caused weather-related damage at 2 hotel properties, resulting in significant number of rooms out of order during Q2 of 2023. Given the operating disruption we experienced from the winter storm impacts and renovation activity during Q2 2023, for year-over-year comparison purposes, I will state operating performance figures for our portfolio of 63 assets, as well as the 61 assets that did not see any significant disruption in an effort to provide better sense of property performance in the quarter.
For Q2 2024, our 63 hotels had an occupancy average of 75% or 103% of 2023 levels. On a 61 hotel basis, occupancy was also 75% or 101% of Q2 2023. We saw a return to the ADR growth seen over the past few years in Q2 of 2024. ADR finished the quarter at $138 for the AHIP 63, and $136 for the AHIP 61, above Q2 2023 levels by 2%. Q2 2024 RevPAR for our 63 hotels was $104, or a 6% increase over Q2 2023. Excluding the two disrupted hotels, RevPAR was $102 for the quarter, which represented a 3% increase compared to the same period in 2023.
We referenced three distinct segments of our business: extended stay, select service, and our Embassy Suites hotels. During Q2 2024, the extended stay vertical, which experienced significant disruption in Q2 of 2023, was the strongest performing vertical, with Q2 RevPAR finishing at $111 or 14% above Q2 of 2023. The select service segment achieved a RevPAR of $97. This represents 103% of Q2 2023 levels. The Embassy Suites segment achieved RevPAR of $111, consistent with Q2 2023. From a segment perspective, we continue to see strong group demand across most of our hotels, and we are seeing government demand strengthen in Maryland and New Jersey markets. Leisure demand is normalizing, and I would categorize corporate segment demand as being inconsistent and has not recovered to the levels we had anticipated in 2024.
The continued elevated operating expense environment impacted our margin performance. For our portfolio of 63 assets, NOI margin finished at 98% of 2023 for the quarter, and this decreased to 96% once you remove the 2 disrupted assets. Although the operating environment remains challenging, particularly around employee turnover and retention, we are seeing inflation impacts easing, specifically, expense stabilizations in key areas such as wage growth, which was up 2.2% versus the same period last year. Comp food CPORs are down 2% year-over-year for the first half of 2024, compared to the first half of 2023. Food inflation was one of the hardest hit categories in hotel operations over the last two years.
We've also seen a sharp decline in the use of third-party labor in Q2 compared to the prior year, with third-party FTEs down 61% from the same period last year, helping stabilize room department costs and improved housekeeping efficiency. During the first half of 2024, we have continued to focus on margin improvement initiatives with our hotel manager, specifically continuing to increase levels of in-house employment, reducing turnover, improving retention, and looking for opportunities to enhance the portfolio's procurement programs to find additional cost savings. Turning to AHIP's capital program, the 2024 capital program includes approximately $5 million in property improvement plans, or PIPs, and $9.5 million in FF&E capital improvements, which will be partially funded by restricted cash.
Total capital spend in Q2 2024 was $3 million, with an estimated escrow recovery of $1 million, for a net spend of $2 million. After completing a renovation of our Connecticut hotel in Q1 of this year, we anticipate starting the renovation process for 2 or 3 additional hotels during the remainder of 2024. As each PIP completes, we expect to see increase in the hotel's market share and RevPAR performance. It's worth reiterating that we will continue to analyze our portfolio to, for opportunities to generate meaningful return on investment through renovating and repositioning hotels, while focusing on maintaining a competitive advantage in the market. Initial results for July show occupancy at 73%, ADR at $138, and RevPAR at $100, or 103% of July 2023 RevPAR 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 second quarter.
Thank you, Bruce. Good morning, everyone. On a 63-hotel basis, revenue increased by 6% to $72 million in Q2 2024, compared to $68 million in Q2 2023. Normalized diluted funds from operations, or FFO, was $0.10 per unit for the quarter, compared to normalized diluted FFO of $0.14 in Q2 2023. At June 30, 2024, AHIP had $26.7 million in available liquidity, compared to $27.8 million as of December 31, 2023. The available liquidity was comprised of an unrestricted cash balance of $16 million and borrowing availability of $11 million under the revolving credit facility. AHIP has an additional restricted cash balance of $40 million at June 30, 2024. Debt to gross book value at June 30 was 52%, an increase of 10 basis points compared to December 31, 2023.
Debt to trailing twelve months EBITDA at June 30, 2024, was 9.7 times, a decrease of 0.1 times compared to June 30, 2023. The improvement of debt to EBITDA, mainly due to the five hotel properties that are in managed foreclosure at the end of the quarter. We continue to execute on our plan to address the company's near-term debt maturities in 2024. During the first quarter, we successfully addressed our Q2 2024 CMBS loan maturity of $22 million with the disposition of one non-core hotel property and the refinancing of the balance of the loan. Our Q4 2024 CMBS loan maturities of $59 million are comprised of three separate CMBS loan pools and eight assets. These will be addressed through a combination of asset sales and CMBS refinancings.
Specifically, in August 2024, AHIP completed the strategic disposition of two hotel properties in Amarillo, Texas, for gross proceeds of $9 million and $8 million, respectively. Under the terms of the Sixth Amendment, 50% of the net proceeds from the sale of these two hotel properties will be used to pay down outstanding amounts under these term loans. In addition, AHIP entered into an agreement to dispose of one hotel property in Dallas, Texas, for proceeds of $27 million. And lastly, AHIP is currently in the process of refinancing and marketing hotel properties in Florida and North Carolina prior to the loan maturity in the fourth quarter of 2024. The credit markets for hotels remain supportive to completing refinancings as they come due.
With the recent drop in interest rates, our variable rate interest expense is improving, and refinancing is expected to be completed in the CMBS market later this year and could also come with lower all-in rates. I'll now turn the call back to Jonathan for some closing remarks.
Thanks, Travis. We continue to believe that AHIP's diversified portfolio of premium brand and select-service hotels with a focused operating model, is well positioned to generate long-term value for unitholders . We continue to execute on our near-term strategic plan and benefit from the initiatives we announced at the end of 2023, which have strengthened our balance sheet to ensure we are positioned to outperform when the operating and macroeconomic environment improves for the industry. Overall, I'm very encouraged by the progress we're making on several fronts this quarter and remain optimistic about the remainder of the year. So with that overview of our second quarter results, we'll now open the call to questions from analysts. Operator?
Thank you. To ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.... Please stand by while we compile the Q&A roster. Our first question today comes from Dean Wilkinson with CIBC. Your line is open.
Thanks. Hi, guys. Travis, a couple of debt questions for you. Maybe just a continuation of conversations we've been having. Looks like with the asset sales and some of the refinancings, you'll be able to pay down the $34 million or so in December, and then that facility goes, I think it was till June or the summer of 2025. Have you had any more thoughts about, you know, and we're a year away from that, terming that out, what that might look like in terms of an interest rate, or are you trying to keep that open, and maybe it's paying it down with further asset sales? Just has the thought process changed on that at all?
No, Dean, it's similar to what we've talked about before. It's gonna be a combination of asset sales and refinancing of loans on that facility to the CMBS market. You're right, the extension we have is for $150 million, so we've gotta pay it down by about $30 million to achieve that extension to June 2025. But with the sales that we've announced, we've got a head start on this. If you include all of the sales in our press release, the credit facility repayments on that are in the $25-$30 million range already.
Mm-hmm.
And we would have about $10 million of net proceeds on top of that, that we could use to pay down the credit facility. So we're, we're already right in the zone, and we're looking at incremental sales on top of that as well, that could further push us below the $150.
Got it.
So-
And then when you think about the rates-
In terms of terming it out, though, Dean, maybe I'll just address that.
Hmm.
We, the banks are supportive of our plan. You know, these discussions started last fall. You know, qualitatively, these are the types of things that they were looking for, so we think we're gonna be in a pretty constructive spot with the syndicate. We're gonna wait until we get through August and some of these sales close, or we have more PSAs that are signed, and then we're gonna start to engage more formally with the syndicate on what that extension could look like, and we'd be looking for a multi-year facility at that time. I would say that with the sales and the reduction, you know, loan to value on the credit facility looks pretty good, and the CMBS market is looking pretty good.
I think we're gonna have more than one option when we get to that moment this fall or into Q4.
Would you expect much of a difference from that, you know, high-7 kind of rate where you did some stuff recently, or is it too early to kind of pencil that in?
It's a little bit too early. We're seeing spreads in the CMBS market. You know, I think they're gonna be low 300s over the five-year U.S. Treasury. That's. The U.S. Treasuries, of course, dropped significantly over the last couple of weeks, so that's-
Mm-hmm
... good news for us. The credit facility is, of course, variable rate exposure on with a spread of 275. So the spreads between CMBS and, and the bank market, at least for us at the moment, are not significantly different for new financings.
Gotcha. And in terms of who the lenders are, I mean, like, I know the one that sort of you handed back, that was a Wells Fargo note. Can you classify those? And, like, would they be more, call it small regional banks, or is it, you know, sort of those names that people would be familiar with, or can you talk to sort of who those lenders are across the facility?
Yeah. Are you talking about the, the foreclosure of the 4 hotels?
Yeah.
Yeah, those are securitized loans, Dean, so it's not like a specific bank. It's not like Wells Fargo or... They're just the servicer to the loan.
They're just the servicer?
So-
Okay.
It's not like we have a specific loan with Wells Fargo. They're the agent for a securitized loan.
Gotcha. Gotcha on that.
That's the way all of our CMBS... All of our CMBS loans are, are that structured, Dean. We just have an agent, and it's securitized-
Yep
behind that.
Right. And the $139 million, those three loans that are in special servicing right now, do they have any, like, near-term maturities, or are there any concerns about, you know, when they come up in terms of, sort of renewing that, or, or they would that be a little farther out?
The loans that are in cash management right now-
Mm-hmm.
If we fail the DSCR test, there's a cash sweep, as you probably know.
Yep.
Those have various maturities. Most of them are later, though, Dean, like 2026, 2027.
Okay.
The refinancing of those would occur later, and we'd either sell the hotels to attract the equity that's left, or we'd refinance the loan when they come to.
Got it. Yeah, and a lot's gonna happen between now and then.
Yeah.
And then just on, I guess, let's just call it the ongoing dispute with Aimbridge. I'm just trying to understand that a little bit better. And, you know, something that kind of struck me odd is that, you know, you've factually hit the highest RevPAR in the history of the company, but you've got a dispute with the property manager or the hotel manager for mismanagement. Can you kind of put into context, and it you might not because it's a legal issue, well, what the quantum of the issue is and how does this ultimately get resolved? And if you come to a point where you've got to replace them, what's the ability to do that?
How does that potentially impact kind of the structure of the REIT, given that you have to have third party management on that front?
Yeah, Dean, Jonathan here. I can't go into too many details on what a possible outcome may be, as you know, that this was just commenced in July.
Mm-hmm.
I would say that, you know, the root of our issues relate to, you know, problems that we identify as our role in as an active asset manager. You know, we, yes, we're very pleased with top line. But the day-to-day and the delivery of margins and costs in line with budget is something that we've fell behind on. And we're being proactive about that.
That hasn't changed sort of, you know, the standby and the fees, and you guys are still, like, running the business, and it's accruing, and it's just a normal commercial dispute, I suppose, is maybe the best way to put it?
Been no impact to the day-to-day guest experience at these hotels. It's situation normal.
Great. That's all I had. I'll hand it back. Thanks, guys.
Thanks, Dean.
As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by. One moment, please. I am showing no further questions at this time. I'd like to turn it back over for closing remarks.
Thank you again, everyone, for joining us on our call today, and we look forward to speaking with you in November, when we'll report our third quarter 2024 results.
Thank you for everyone's participation today. This does conclude the program. Have a good day!