Please stand by. We're about to begin. Good morning, and welcome to the American Hotel Income Properties REIT LP's Second 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 second quarter 2022 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 operating results to differ significantly from our forward-looking statements are detailed in our MD&A for the three months ended June 30th, 2022, 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 risks, of risk factors on AHIP's annual information form dated March 21st, 2022, which has been filed on SEDAR at www.sedar.com. Our second 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. 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 portfolio 76 properties results in that period versus the same period properties results today. All figures discussed on today's call are in US dollars, unless otherwise indicated.
I'd like to remind everyone that this call is being recorded today, August 10th, 2022 , 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 second quarter financial results conference call. We're pleased with the performance of our 76-property select-service hotel portfolio this quarter. Top-line revenue performance grew 19% year-over-year due to steady demand acceleration across the 22 U.S. states in which we operate. Our average daily rate of $125 proved to be the highest quarterly ADR level in the history of the company. The strength of the top line, coupled with the fixed-rate debt structure of our balance sheet, translated into meaningful FFO per unit growth of 29%. Lodging is the only real estate asset class with the capability to adjust rates on a daily basis. In an inflationary environment, our team and hotel manager work diligently to deliver on the benefits of this dynamic pricing model.
For the quarter, rates increased every month, ending at 105% of Q2 2019 levels. At the same time, we posted our highest occupancy quarter since 2019 at 73%. This marks the fourth consecutive quarter where we have matched or exceeded 2019 rates, and we expect this trend to continue in the second half of the year. RevPAR for the quarter finished at a 94% recovery rate to Q2 2019, a market improvement from the 87% recovery rate in Q1 of this year. The upward trend in our RevPAR was not only driven by ADR, but also by robust leisure demand and the gradual return of business and group travelers. Indicators of improving business and group demand include the growth in our weekday occupancies across the country, as well as accelerating demand levels from our corporate booking channels.
Perhaps the most meaningful indicator for AHIP was the impressive performance of our Embassy Suites portfolio during the quarter. Recall that these five properties represent 15% of our total key count. They were renovated in 2018 and 2019, and in Q2, their combined RevPAR improved by 44% year-over-year. While we continue to achieve tremendous top-line results, labor scarcity and inflationary impacts on operating costs have challenged our operating margins. To combat this dynamic, our asset management team, together with our external manager, are focused on revenue management, hiring more in-house labor, reducing turnover, and improving housekeeping productivity. As I've stated in the past, in the current environment, our ability to maintain margins at 2019 levels or better will be determined by achieving revenue growth to offset inflationary cost pressures.
Having said that, given the lean operating model of our select service portfolio, diversified demand profile of our guests, and the dynamic pricing model of the lodging industry, we're well positioned to navigate the current macro economy. Subsequent to quarter end, July results continued the positive monthly trends in ADR and occupancy that will see us once again exceeding 2019 ADR levels and narrowing the gap to 2019 occupancy levels. Bruce will discuss the positive trends that we are seeing in the market that drive our expectations as we approach the middle of Q3. In today's high interest rate environment, the fixed rate nature of our debt obligations is a substantial advantage for us. Today, 93% of our debt is subject to fixed rate coupons. We also do not have any maturities until the fourth quarter of 2023.
Given all of the above, our cash flow profile remains strong and our balance sheet is in good shape and provides the flexibility we require. In June 2022, AHIP completed the strategic disposition of the Hampton Inn Pittsburgh/Greentree property in Pittsburgh, Pennsylvania, for total gross proceeds of $5.7 million. This was a non-core asset for AHIP that contributed negative cash flow over the last 12 months. We will always explore opportunities to dispose of assets where the return projections lag the average return expectations for the remainder of our portfolio. We released our inaugural corporate responsibility and sustainability report during the quarter. This report is designed to help our stakeholders understand our commitment and efforts regarding environmental stewardship, social responsibility, and governance.
We will continue to report on present and future commitments with respect to ESG initiatives, all of which will be overseen by our Board of Directors Nominating and Governance Committee. I'd like to acknowledge the efforts of our brand partners, hotel managers, vendors, guests, and other stakeholders for their stated commitments to implement programs that have a positive effect on our business, the environment, and our communities. In February, we reinstated our monthly US dollar distribution at an annualized level of $0.18 per unit. At the time, we were one of the first North American lodging REITs to reinstate its dividend. Our conservative payout ratio means that we will have the capacity to increase this distribution as operations improve. We are proud of our ability to provide our unit holders with a meaningful cash yield on their investment.
Based on our closing price yesterday, the annualized US dollar distribution of $0.18 per unit represents a cash yield approaching 7%, which we believe represents a conservative FFO payout ratio. I'll now turn the call over to Bruce to discuss second quarter hotel operations. Travis will then highlight key second quarter financial metrics. Bruce.
Thank you, Jonathan, and good morning, everyone. We are very pleased with our operational performance this quarter as we hit pandemic era highs across multiple operating metrics. On an absolute dollar basis, we've seen sequential ADR and RevPAR growth throughout every month in 2022 year to date. Total occupancy for our 76 hotels in the second quarter averaged 73.1%. On a monthly basis through the quarter, April occupancy was 72.4%, May occupancy was 71.5%, and June occupancy was 75.5%, which is the strongest monthly figure since the onset of the pandemic. For the quarter, occupancy was 90% of 2019 levels, compared to 87% in Q1. ADR continues to be the catalyst for RevPAR recovery across AHIP's portfolio, exceeding 2019 performance by 5%.
78% of the portfolio posted ADR above 2019 levels in Q2. This is the fourth consecutive quarter of ADR matching or exceeding 2019 levels. Specifically, ADR for the quarter was $122.84 in April, $124.83 in May, and $126.89 in June. We anticipate continued strong ADR performance going forward. Q2 RevPAR for our 76 hotels was $91.31, or 94% of twenty nineteen levels, which is the highest quarterly RevPAR recovery figure since the onset of the pandemic. Monthly RevPAR was highlighted by June, which came in at $95.82, or 96% of 2019 results.
Looking at our portfolio performance, we reference three distinct segments of our business: extended stay, select service, and our Embassy Suites hotels. The extended stay segment has outperformed throughout the pandemic period, but as the recovery continues, we are seeing a much, much more balance amongst the three segments as demand continues to strengthen and stabilize across the portfolio. For the quarter, the extended stay segment achieved a RevPAR of $98.05, or 95% to 2019 levels. The select service segment achieved a RevPAR of $84.65 in Q2. This also represents a recovery of 95% to the same period in 2019.
The Embassy Suites segment achieved a RevPAR of $102.26, or 92% recovered to the same period in 2019, well ahead of the 88% recovery we saw in Q1 for this segment. As we look back to the beginning of the pandemic, the Embassy Suites segment experienced the largest declines in occupancy and RevPAR in the AHIP portfolio. We are now seeing performance in this segment materially improve as RevPAR has gone from 48% to 2019 levels in Q1 of 2021 to 92% this quarter. Food and beverage revenues are continuing to improve against 2019 benchmarks as well. F&B revenues were 67% of 2019 performance in Q2, compared to 49% in Q1. We view strengthening F&B revenues as another marker in the recovery of corporate and group business demand.
Additional signs of corporate and group travel returning to our hotels is the improvement in the negotiated segment and the GDS channel performance. GDS or global distribution system is mostly driven by travel agents booking corporate travel for their clients. Negotiated segment revenues are now at 77% of 2019 levels, compared to 64% in Q1, while GDS revenues are at 88% of 2019 levels compared to 77% in Q1. As these business oriented channels and segments recover, we are seeing improvement in midweek occupancy, which was just over 70% in Q2. As it has been throughout the pandemic period, weekends continue to outperform midweek from both an occupancy and rate perspective. In Q2, weekend occupancy was approximately 81%. Brand standard service expectations have increased relative to what we saw in the first half of 2021.
However, they remain below 2019 service level standards. Specifically, housekeeping and complimentary food standards continue to be reduced when compared to 2019 requirements. AHIP continues to be impacted by the difficult operating environment and our margins remain challenged in Q2. We continue to experience labor challenges, inflationary cost pressures, and some supply chain disruptions. While margins finished below 2019 levels, ADR driven RevPAR growth has helped mute the challenging operating environment. We continue to work with our hotel manager on revenue management initiatives, particularly maximizing ADR, reducing turnover and improving housekeeping productivity, and hiring more in-house staff in an effort to reduce overtime and third-party labor usage. In-house labor for Q2 was at 72% of pre-pandemic levels, an improvement from 68% in Q1. As previously announced, AHIP's 2022 capital plan represents a return to pre-pandemic spending levels.
As of today, the capital plan is performing to expectations with 14 of 16 smaller projects complete. The plan is weighted heavily towards the second half of 2022, where we are planning significant renovations in seven hotels located in Florida and the U.S. Northeast. The total value of the renovation projects is approximately $20 million, and we expect an improvement to the hotel's market share and RevPAR post renovation. We also anticipate spending $10 million on capital maintenance projects across the portfolio for a total capital commitment of $30 million in 2022. We estimate $15 million of the capital program will be funded from existing restricted cash accounts. So far in 2022, the capital spend is approximately $7 million, of which $4 million was spent in Q2.
As Jonathan mentioned, initial July results suggest continued improvement in top line performance, with occupancy at 75%, ADR at $127, and RevPAR at $95 or 97% of 2019 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 quarter.
Thank you, Bruce. Good morning, everyone. AHIP continued to see improved financial results in Q2 2022 compared to the prior year. Funds from operations or FFO was $16.3 million or $0.18 per unit for the quarter, compared to $11.5 million or $0.14 per unit for the same quarter last year. Included in diluted FFO was $0.03 of one-time items, a $2.3 million gain on debt settlement, and $0.9 million of other income, primarily related to a government grant for previous revenue loss. Reported net income for the quarter was $13.7 million, which was an improvement over the $0.5 million for the same period of 2021.
Along with improved operating results, the increase compared to the prior year was a result of the one-time item noted and a $6.2 million gain in the fair value of warrants and a $1.3 million gain related to the fair value of our interest rate swap. Our interest rate swaps are providing the desired protection in the current rising interest rate environment. At June 30th, AHIP had $51 million in available liquidity, which was comprised of an unrestricted cash balance of $24 million, a borrowing capacity of $27 million under the revolving credit facility. This is an improvement of $7 million compared to December 31, 2021. In addition to this unrestricted liquidity, AHIP has $38 million in restricted cash, which is expected to fund approximately half of our 2022 capital plan.
Debt to gross book value decreased by 50 basis points to 53.6, compared to 54.1% at December 31, which represents about 470 basis point improvement from the end of 2020. Management intends to bring its leverage closer to its peer group over time, which would be in the range of 40%-50% debt to gross book value. This will be done through a combination of improved operating results, a sustainable distribution, and selective equity issuance in support of growth transactions. Our weighted average interest rate for term loans and credit facilities was 4.24% at June 30th, which is a reduction of 28 basis points from the end of the year. This is well below the market for comparable first mortgage debt if it were issued in today's market.
Previously announced in April, AHIP repaid a term loan with an original maturity date of July 2022. The principal amount of $55 million was repaid with $5 million in cash on hand and $50 million borrowing from the revolving credit facility. While market expectations for short and long-term interest rates have increased substantially through the year, we do not expect a material increase in our interest expense in 2022 or 2023, given that 93% of our debt is at fixed rates or is effectively fixed due to interest rate swaps. In addition, we have no maturities related to debt or interest rate swaps till the fourth quarter of 2023. This debt and hedging structure will provide financial stability during uncertain times in the debt financing markets. I'll turn the call back to Jonathan for some closing remarks.
Thank you, Travis. I'd like to begin my closing remarks by conveying my appreciation to our teams at the property level for their continued dedication to providing a great guest experience. Also, the support and hard work of our corporate team. I'm encouraged by the demand acceleration that is occurring across our portfolio in 2022. The trends in rate and occupancy provide evidence of continued robust leisure demand and steadily improving business travel. We believe that our team's focus on hiring and labor productivity will narrow the gap to pre-pandemic margins, allowing for the permanent improvements to the select service hotel operating model to be increasingly evident. We expect to execute on our 2022 CapEx plan on time and within budget, a significant accomplishment during a period when labor scarcity and supply chain disruptions continue to be challenges.
These improvements to our properties will deliver ROI benefits in 2023 and beyond. On the plus side, the same global challenges in sourcing materials and cost-effective labor have also played a part in the overall stagnation of the new hotel construction market. New hotel construction remains below historical averages, a trend that positively impacts cash flow growth and valuation of existing assets. The directional improvements in debt to gross book value that Travis spoke about that have occurred over the last couple of years should provide an indication of the importance that we put on improving our leverage profile. While this metric is not where we would like it to be long term, improving cash flow and a responsible distribution level will allow us to manage this downward over time.
While portfolio growth continues to be a priority over the long term, we are going to be disciplined as the near-term challenges in the macroeconomy and financial markets are resolved. Given our fixed rate debt structure, lack of imminent debt maturities, and the improving demand environment in which we operate, we are in a favorable position to reap the benefits of our portfolio capital investments and improving cash flow profile over the short and intermediate term. In closing, our public market valuation continues to be significantly discounted to private market values and replacement costs for our portfolio. As performance continues to accelerate and as we put more distance between the present and the disruptions of the last couple of years, this gap will begin to close. Our stated mandate remains to drive attractive yields for our investors while maximizing long-term value.
With that overview of our second quarter and recent initiatives, we'll now open the call to questions from analysts. Operator?
Thank you, sir. If you'd like to ask a question, please signal at this time by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one if you'd like to ask a question. We'll take our first question from the line of Mark Rothschild with Canaccord.
Thanks, guys. Looking at your operating performance in the quarter, you're still comparing quite a bit to 2019. I'm wondering to what extent is that the best way to look at your portfolio because when we see some metrics exceed those numbers, it kind of implies that you're doing really well and maybe that's something that cannot be exceeded further. The portfolio has changed, the market's changed. Is that the best way to think about where a good run rate is over the long term for the asset?
Yeah, we tend to compare to 2019 as a proxy for the recovery of our business. You know, when we're operating in an inflationary environment like we are right now, I think it's you know, soon we'll start talking less about 2019 more and more about year-over-year recovery. I think on the operating or the cost side of the business, it's very useful to look at 2019 because when you look at the year-over-year comparisons on margins between 2021 and 2022, you have to factor in not only the inflationary headwinds, but also the changes and the reintroduction of the brand standards that have occurred between now and then.
As you recall, in the early part of 2021, we were talking about the fact that we weren't providing hot breakfast to guests, as an example. Guests weren't asking for housekeeping, and we weren't providing it every day. The brand standards had been relaxed vis-à-vis the delivery of afternoon receptions. The 2021 to 2022 comparison on the NOI and operating margin side is probably not a great one right now. The 2019 one on the operating side, the margin side is probably best for that comparison.
Okay, great. Thanks. One comment you made at the end as far as the price for the units being well below private market values at a discount. Can you talk about what you're seeing in the private market to give you confidence in saying that our deals being done now and what metrics would you think would be appropriate when looking at your valuation now?
Yeah, we haven't seen any meaningful trades that would indicate an expansion in cap rates in Q2. A lot of people are waiting on the sidelines right now to market properties because they're waiting for the dislocation in the debt markets to resolve itself. Certainly in a free-flowing market where supply meets demand of product, you know, there's no indication right now that cap rates have expanded beyond what we saw for trades in the latter half of 2021.
Okay, great. Thanks.
Thanks, Mark.
All right, your next question will come from the line of Lorne Kalmar with TD Securities.
Thanks. Hey, everybody. First on the disposition. It looks like you guys will be up to three once you complete that one in Q3. Could you maybe give us a little more detail on the Q3 one as well as, you know, any future plans for additional dispositions and potential use of proceeds?
Yeah. We've identified the disposition that occurred in Q2 as an impaired asset a while back. I wanna say it began in 2019, and that was the Hampton Inn Pittsburgh/Greentree. The dynamic there is not fully COVID-related. This was a property that was challenged before COVID, but certainly COVID magnified those challenges. I think it was the first portfolio that AHIP purchased post-IPO. Included in that was another Hampton Inn property in suburban Pittsburgh called the Hampton Inn & Suites Cranberry Pittsburgh. That's the property that has very much the same dynamics that Hampton Inn Pittsburgh/Greentree had. We're gonna be selling Hampton Inn & Suites Cranberry Pittsburgh in Q3.
You know, the theme there is decreasing cash flow, non-core asset, impaired short-term franchise agreement, and the requirements from the brands vis-à-vis capital investment resulted in ROI projections that we felt were non-accretive to our existing portfolio.
Lorne, there's really no equity in those. We're gonna be selling those below the value of the debt. Both for Greentree completed, Cranberry to be completed, there's no net proceeds for us, but we will have an extinguishment of the debt that is likely gonna result in another gain in Q2 or Q3.
Okay. Any other disposition plans or is that sort of the extent of them at the moment?
Yeah, we don't have anything imminent, Lorne. I don't think. You know, we've been blessed with really the portfolio performing very well over the last few years. There are some pockets where we're, you know, we would explore a possible sale of certain assets. We've talked about the Oklahoma market being one that hasn't recovered to our expectations. So we would explore that, but nothing's imminent on that front.
Okay. Maybe just flipping to costs. Maybe just firstly, how is the hiring going, and how exactly do you guys go about improving housekeeping productivity?
Sure. Lorne, it's Bruce. From a hiring perspective, you know, our manager tells us that it's still very difficult to attract in-house employees. We bring in third-party labor to help us operate the hotels on a day-to-day basis, predominantly in housekeeping. We're focused with our manager on understanding the dynamic in every market and understanding what they're doing to attract more in-house labor. With in-house labor, it tends to be more productive. We're able to kind of train them to our expectations or to our manager's expectations. Ultimately, that just means that they're cleaning rooms at a higher rate and typically to a stronger standard as well.
Okay. I know this is kind of a crystal ball question, but what's sort of your outlook for the labor market over the next, I guess, maybe 12 months? Is there any expectation of relief coming or more of the same?
Well, there's a couple of things that we continue to look at, and to kind of distill our expectations. The number one is the labor participation rate and the number of folks coming back into the labor market. That's been improving, not to the level that we'd like it to be, but it's certainly going the right way. Secondly is there's been a migration out of the food services and accommodation sector of the labor market into other sectors that's occurred over the last couple of years. A lot of that has been, you know, a lot of people were let go in March 2020 or later. A lot of people migrated to other industries or sectors where they felt safer, physically, during the pandemic.
You know, there's some stickiness with having those folks come back into food services and accommodation. We believe that over time, the comfort level for that group will increase. The attractiveness of working in the lodging industry and the travel and tourism sector will be compelling enough to induce some back migration into our sector.
People will get to enjoy the good parts of working in the hospitality industry again. Just one last quick one for Travis. G&A was down a little bit Q-over-Q. Was there anything one-time in there or is that sort of a good run rate going forward?
It was a little bit low. There was about $300,000 in there, Lorne, that I would call a reduction. You know, some of that's gonna carry through for the balance of the year. I think Q2 is a decent marker for future periods.
Okay. Great. Thank you.
It was a little lower than our run rate. It's definitely a drop from our Q1 run rate.
Yeah. Okay. Perfect. Thanks, Travis. Appreciate it, everybody.
Thanks, Lorne.
All right. We'll next go to Nicholas Telega with BMO Capital Markets.
Thanks, and good afternoon. Congrats on the great quarter. I was just wondering if you could give some more color on what you're seeing with the recovery and demand and how much international travel might have played into that.
I'd say very little at this point, Nicholas. You know, our properties tend to be domestic travel. We're in a lot of suburban markets. If we were in more of the gateway markets, we would be like the coastal New York City, Miami, San Francisco, LA. I think you'd hear us talking more and more about travel disruption and the eventual return of the international travel. That's just not something that we spend a lot of time thinking about.
Fair enough. I guess just building on that. With business demand coming back, where do you see the proportion of leisure demand and business demand for the year moving forward?
Yeah. Pre-pandemic, we were about 2/3 business demand, 1/3 leisure demand. That got flipped over to 1/3, 2/3 during the pandemic. It's safe to say that we're approaching 50/50 right now. That's why you hear us talking a lot about the recovery at our Embassy Suites, the recovery in the corporate distribution channels, and the recovery in the weekday occupancy.
Perfect. Just maybe lastly for me, with a bit of talk about the distribution, do you have any timeline on any potential increases or just general statement moving forward?
Yeah. It's just a general statement moving forward. I think we are constantly monitoring that because we understand that we are heavily retail-based investor base. It's something that's important to our unit holders. It's something that's important to us, that we're constantly reviewing it with our board. At the right time, we will begin increasing it.
Perfect. That's all for me. I'll turn it back.
All right. Next question will come from the line of Tom Callaghan with RBC Capital Markets.
Thanks. Hey, guys. Just wanted to spend a second on ADR, obviously, and the strength you guys have seen there. If you could talk maybe a little bit more about your outlook, going forward on this metric and kind of further room to run or maybe perhaps put a different way, what are the signals, you know, whether occupancy levels or otherwise that you're kind of assessing, with respect to the ability to continue to push these ADRs higher?
Yeah. Tom, it's Bruce. I think there's a couple of things. We've had I think it's fair to say real success moving rates with our leisure customers over the last 12 months, we anticipate that to continue. Typically what we see is our corporate customers tend to pay a little bit more as they stay at our hotels. That makes us feel pretty good about our ability to move rate going forward. The trend that we're seeing today we don't see slowing down at the moment, at least certainly not through the remainder of this year.
Got it. Thanks. Maybe just to follow up there on the business portion of it, just a quick one. Is there any types of organization, whether it be by size or industry, that are kind of leading the way, from your recovery perspective on the business travel side?
Yeah. You know, it has been really from the start, the smaller to midsize businesses that have been coming back to the hotels more frequently. The larger companies are still a little reticent to have their folks traveling.
In some instances, not many, they're still working on their return to office procedures and those sorts of things. Small to mid-size companies. We're also starting to see associations and certainly social groups traveling in good numbers.
Great. Thanks for the color. I'll turn it back.
Once again, everyone, that's star one if you'd like to ask a question. We'll next go to Romel Sabat with Scotiab ank.
Hey, good morning. We saw earlier this week that inflation pressures may be moderating a little. Just wanted to know if you're seeing that in your business so far.
Well, they couldn't get much worse than they were on the gas and diesel side in Q1 and utilities. You know, I say that flippantly, but there's the impact, kind of the overall impact of higher gas prices and those higher diesel costs impact the cost of delivery of operating supplies and our goods. So that coming down has had a meaningful benefit for us in Q2, and I think from what we're seeing, that should continue. You know, same thing on the food costs. Those have been probably at the higher end of the average when it comes to year-over-year inflation.
We're starting to see some normalization of that, not to the 2%-3% that we're all looking for, but certainly that's going in the right direction.
Okay. That's good to know. Also going back to the ADRs, as we see them move higher, we saw that the brands would reintroduce services offered pre-pandemic. To date, have you seen that happen, or do you believe that some of the costs have been permanently removed from the structure?
Yeah, that's a great question, Romel, and it's something that we've talked about a lot on these calls over the last couple of years since I've been here. We believe that there are basic services that are and should be and will be reintroduced, such as hot breakfast, afternoon reception, and more regular housekeeping. But there is a permanent reduction in those services that will occur, that which is what we're referring to when we say that there's a permanent margin benefit that will occur in this business when we finally get to a stabilized inflationary environment. And that would be, you know, the same topics that I just covered, breakfast, housekeeping, afternoon reception, but scaled down versions of all three of those.
I think those are the permanent benefits that the brands themselves have communicated to us and certainly makes sense to us from an overall operating model for the select service business.
Okay. Yeah, makes sense. Okay, thanks. That's gonna be it for me.
Thank you.
All right. One more time, that is star one if you'd like to ask a question. We'll go next to Tal Woolley with National Bank Financial.
Hi, good afternoon.
Hello.
Just wanted to keep going on the ADR question. Just on the leisure side, I'm wondering, is there any thought around as the ADRs continue to move higher, is there any concern around you know just demand destruction in that segment, given that you know like it is a bigger piece of your business now than it sort of used to be? I appreciate that you know post-COVID we're all dying to go somewhere, but at the same time you know wondering just about overall total cost to travel, delays you know all that stuff. Has there been any sort of thinking across the industry just about how you know how far realistically the ADRs for leisure travel can get pushed?
Yeah, I think that's something that we all talk about quite often, and I think it's a broader economic question that I'm sure we're all grappling with when it comes to you know a possible recession in Q4 and Q1. We're not seeing any evidence of leisure demand and leisure ADRs decrease. In fact, the opposite is true. The things that give me confidence that these trends will continue are that. Well, we talked about the supply issue, and there hasn't and there won't be any new supply coming into our markets for certainly for the short to intermediate term.
There hasn't been any evidence that there was a you know pent-up demand that that caused savings rates to increase and that there there could be an impending end to that dynamic. If we were in the $400+ luxury segment and $400+ ADR, I think I'd be more concerned about the impact of a year-over-year increase of 10% on ADRs. In the segments that we operate in, which are the upscale, mid-scale segments of the select service business, those
Those customers tend to be less prone to sticker shock when it comes to the average daily rate. I think we're feeling really good about that, and the evidence is providing us confidence on that.
Okay. Just on the labor side, when you are using, you know, non-in-house staff, is the hourly wage rate like an agency staff person would get? Like, what's the delta between what an in-house person would make, like, net to the employee versus, an agency employee?
Yeah, Tal, it's Bruce. It's roughly 20%. So the way we look at it is for every third-party contractor, we're paying about 20% higher wage than we would for an in-house employee.
Is that agency employee like I appreciate that the agency is charging you guys more, but is that employee seeing a better hourly rate than an in-house employee would?
Maybe marginally. Certainly the third party company, you know, has an administration fee that they take for,
Yeah
... for sourcing and supplying, right? It may be marginally higher. Typically, they don't offer benefits and other things that we do with our in-house employees. You have to. You know, we kinda look at total compensation, I guess, in a way, as opposed to just base wage when we compare.
If the hourly wage rate isn't hugely different whether I work for an agency or whether I work for you in-house, what do you think is the needle mover to get people to take the in-house role?
Yeah. Well, I think our manager has to make sure that they perfectly describe the benefits of working for them, right? There's upward mobility options. There's thousands, millions of stories of how people started as bellmen and housekeepers and became general managers of hotels and executive positions, right? There's a very natural progression there in our industry. That's certainly a benefit. Our manager also has multiple locations, so as people wanna move around within the industry, they can move from hotel to hotel potentially, right? To not only satisfy maybe a geographic need, but also upward mobility type things.
You know, our manager's also looking at different ways of paying people so that if they wanna be paid partially up front or, you know, the day of, kind of gig work type environment, they're endeavoring to provide that kind of an experience for in-house, which you really can't find in a third party environment.
Got it. Just lastly, Travis, I don't know if you hit on this earlier on, but I appreciate you don't have to raise any debt today, but if you did, do you have an idea of what roughly your all-in cost would be, say, for like a five-year mortgage or a five-year term loan?
Yeah. We are monitoring that. The answer is it's a little all over the map.
I see.
The people that are in the debt market are finding a pretty wide range on loan to value. First, the amount of debt you can borrow is pretty uncertain. On the rate, you know, Jonathan used the word dislocated. I think that's a good term for it. You know, issuers are seeing all-in rates in the sevens these days. You know, we've talked to folks. We think that's a relatively temporary phenomenon, notwithstanding what the base rate might be. We think Q3, probably by Q4, it starts to settle out. Much higher today, you know, 200-300 basis points above our weighted average. Normalizing into 2023, which is what we care about most.
That 7% rate would be at what LTV?
There's a range there. That could be anywhere from 50%-70%.
Got it. Okay, great. Thanks very much, gentlemen.
The-
Oh, sorry. Go ahead.
No, I was just gonna say that the bids on these loan offerings right now are wider than usual.
Do you think the depth of that market will return too as well? Like, I'm assuming that's part of how we, you sort of, un-dislocate the market, for lack of a better word. Pardon me.
Oh, absolutely. There's some lenders who are not actively supplying debt capital right now. That's not unique to our sector. That's many sectors. So do we think that normalizes? Yeah, we do. You know, my crystal ball is no better than anyone else's. Again, we think that normalizes in 2023, which is when we care about it taking place.
Okay. All right. Thanks a lot, gentlemen.
Thank you.
One more opportunity. That is star one if you'd like to ask a question. We'll pause for just another moment. Okay. As it looks like we have no further questions at this time, I'd like to turn it back over to our speakers for any additional or closing remarks.
Thank you again, everyone, for joining us on our call today. We look forward to speaking with you in November when we report our third quarter 2022 results. Have a good day.
That does conclude today's conference. We thank everyone again for their participation.