Good morning, welcome to American Hotel Income Properties REIT LP's 1st quarter results conference call. At this time, I'll put us in listen-only mode . Following the formal remarks, there'll be a question and answer session for analysts only. Instructions will be provided at that time for you to queue up for your questions. Before beginning the call, AHIP would like to remind listeners that the following discussion will include forward-looking information within the meaning of the 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 and are based on certain assumptions and involve various risks and uncertainties.
The risks and uncertainties that if realized and assumptions that if false, could cause AHIP's actual financial and operating results to differ significantly from forward-looking information discussed today are detailed in AHIP's public filings, which are available on AHIP's website at ahipreit.com, as well as on SEDAR. 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 reconciliation between the two, please refer to their MD&A.
References to prior year operating results are comparisons of AHIP's portfolio of 71 properties results in that period versus the same properties results today. 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 Pitre, 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. Thanks to everyone for joining us today for our first quarter financial results conference call. Bruce Pitre is here with us today, but I'll be covering for him as he's experiencing some challenges with his voice this morning. We're pleased with the continued strength in the top-line performance of our 71 property select-service hotel portfolio this quarter. In Q1, revenue grew 10% on a same store basis compared to Q1 2022, as occupancy and room rate trends remain positive, with broad demand from leisure, corporate, and group guest segments. RevPAR for the quarter finished at $85, an 8% improvement over Q1 2022. Our ability to control and manage daily rates continues to greatly benefit us as we achieved our highest ADR in the history of the company this quarter.
We have posted an ADR growth rate of over 10% over the most recent 4 quarters. For this quarter, rates ended at 111% of Q1 2022. This marked the seventh consecutive quarter where we have matched or exceeded 2019 rates. We expect this trend to continue. In the past, we've cited the return of corporate demand as a near term catalyst. We continue to see improvements in this segment, demonstrated by the performance of our Embassy Suites portfolio this quarter, which saw a 30% increase in RevPAR compared to Q1 2022. This quarter, we experienced meaningful disruption to our operations related to the effects of winter storms that occurred in late 2022. We completed 3 major hotel renovations, resulting in guest displacement at each of those properties during the quarter.
Removing these impacted properties from our quarterly occupancy results in an upward revision to nearly 67% versus reported occupancy of 64.1%. Similarly, while reported NOI margins decreased by 100 basis points year-over-year to 28.6% for the quarter, once we remove the impacted hotels, NOI margins were up 100 basis points on a year-over-year basis. The challenging operating environment driven by inflation and labor shortages that plagued us throughout 2022 continued this quarter and put downward pressure on operating margins. To address these challenges, our asset management team, together with our external hotel manager, have continued their efforts to reduce turnover, and improve overall productivity. Although we have begun to see some positive results from these efforts, cost pressures and labor issues are expected to remain a challenge for most of 2023.
We are confident in our ability to navigate this dynamic operating environment and to add long-term unit holder value. In today's higher interest rate environment, the fixed rate nature of our debt obligations provides a substantial benefit to us. Overall, 92% of our debt obligations are fixed rate coupons or subject to variable to fixed swap arrangements. We've made steady progress on our leverage reduction goals over the last 12 months, demonstrated by our debt to gross book value being reduced by 210 basis points and debt to trailing 12 months EBITDA down 0.6 times. We do not have any meaningful debt maturities until 2024 and are well-positioned to manage potential economic volatility in the coming quarters.
Last year saw us return to our normal capital program as we invested heavily in renovating our portfolio. Assuming a stable operating environment, we expect a similar level of spend in 2023 as a number of planned projects are expected to generate a meaningful return on investment through the refreshment and upgrade of guest-facing items, ensuring that each property maintains its competitive advantage in the market. We completed the renovations at the 3 hotels that I mentioned earlier at a total cost of $9 million, We believe that these incremental dollars will generate a meaningful return on investment.
After a year that saw us high grade our portfolio by executing on the dispositions of 7 non-core assets, we continue to be active on this front in Q1 2023 as we entered into an agreement to dispose of a hotel property in North Carolina for gross proceeds of $11.7 million. This disposition is expected to close in the second quarter of 2023. As I mentioned before, while our plan remains to grow the company, 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 do continue to evaluate growth opportunities that would expand our hotel portfolio and geographic footprint. As a result of the investment by BentallGreenOak and Highgate, we are aligned with 2 well-capitalized strategic partners who support the pursuit of attractive acquisition opportunities.
I'll now discuss first quarter hotel operations in further detail. AHIP's portfolio of premium branded select service hotel properties continued to demonstrate strong demand metrics in the first quarter of 2023, during what is traditionally the slowest demand quarter of the year. As I mentioned earlier, during the final week of December 2022, cold weather, particularly in the Northeast U.S. and Texas, caused weather-related damage at several hotel properties. Of the properties damaged, 2 continue to have a significant number of rooms out of order. At the Residence Inn Neptune in New Jersey, all 105 rooms have been out of order since December 25th, 2022. At the Courtyard Wall in New Jersey, all 113 rooms were out of order from December 25th, 2022 through mid-January 2023, when about half of the 113 rooms returned to service.
These out of order rooms represent a loss of approximately 2% of total room inventory and are expected to return to service by the end of the second quarter of 2023. 2 other hotels were also materially impacted by the storm. We anticipate those 8 remaining out of service rooms to be back in inventory by mid-May. As I mentioned earlier, we completed major renovations at 3 of our properties during the quarter. These projects were started in 2022 and were completed in March 2023.
Given the operating disruption we experienced in 4 hotels from winter storm impacts and in 3 others from renovation activity during the quarter, for year-over-year comparisons, I will now state operating performance figures for our portfolio of 71 assets, as well as the 64 assets that did not see any disruption in an effort to provide a better sense of property performance in the quarter. For Q1 2023, our 71 hotels had an occupancy average of 64% or 97% of 2022 levels. Excluding the 7 disrupted hotel properties, occupancy was 67% or 102% of Q1 2022. ADR continues to be the catalyst for RevPAR increases across AHIP's portfolio, finishing at a record $132 for the quarter above Q1 2022 levels by 11% for both the 71 assets and 64 asset portfolios.
We continue to anticipate strong ADR performance across the portfolio going forward. Q1 2023 RevPAR for our 70 hotels was $85 or an 8% increase over Q1 2022. Excluding the 7 disrupted hotels, RevPAR was $89 for the quarter, a 14% increase over 2022. We typically reference 3 distinct segments of our business: extended stay hotels, 23 hotels, select service, 43 hotels, and our Embassy Suites hotels, which number 5. During Q1 2023, the extended stay segment achieved a RevPAR of $80 or 95% of Q1 2022, but this segment was impacted substantially by out-of-order rooms as 4 of the 7 disrupted hotels were extended stay properties. The select service segment, which represents 43 hotels, also achieved a RevPAR of $80. This represents 1.1x 2022 levels.
The Embassy Suites segment achieved a RevPAR of $109, a 30% increase over the same period of 2022, and notably 3% above Q1, 2019. The Embassies are a good barometer for the portfolio as it pertains to group and corporate segment demand recovery. With regards to corporate travel, 2 measures that we often refer to as strong indicators of corporate business demand are the negotiated rate segment, which has seen revenue recover to 81% of 2019 levels. As well as the global distribution system or GDS channel, which is mostly driven by travel agents booking corporate travel for their clients. This segment has recovered to 92% of 2019 levels. Finally, food and beverage revenues, which are another proxy for corporate demand, are also continuing to improve against 2019 benchmarks.
F&B revenues were 0.66 times of 2019 performance for the quarter, compared to just 0.49 times in Q1 2022. For our portfolio of 71 assets, NOI margin finished at 0.97 times 2022 for the quarter. This increases to 1.03 times Q1 2022 once you remove the 7 disrupted assets. We continue to see a challenging cost environment putting pressure on our operating margins. Inflationary cost pressures persist, along with year-over-year wage growth. In Q1, margin challenges were amplified by the winter storm and renovation disruptions at the 7 properties we talked about earlier. We are seeing some green shoots related to cost mitigation across the portfolio.
Supply chain disruptions, which we've talked about a lot over the last few quarters, have generally subsided and stabilized. Housekeeping productivity is improving, supported by brand service standards still being below 2019 thresholds. Portfolio employee turnover improved compared to Q4. We also had some success improving our labor mix as the percentage of our total workforce that is in-house increased to 88% versus 79% a year ago. Our focus remains on margin performance initiatives, including the reduction of third-party contract labor, reducing overtime, increasing housekeeping productivity, reducing employee turnover, and improving procurement program compliance. Turning to AHIP's capital program, the 2023 capital plan includes approximately $21.1 million in PIPs, or Property Improvement Plans, $12.8 million in FF&E capital improvements, which will partially be funded by restricted cash.
Total capital spend in Q1 2023 was approximately $4 million. 3 of the 4 remaining projects from 2022 were substantially completed in Q1 2023, while 1 project was suspended due to impacts of the winter storm in late 2022. As each PIP completes, we expect to see increases to the hotel's market share and RevPAR performance. Lastly, initial results for April suggest continued strong top-line performance with occupancy of 71%, ADR of $131, and RevPAR of $94, or 102% of April 2022 RevPAR levels. I'll now turn the call over to Travis to highlight key financial and capital metrics for the first quarter.
Thank you, Jonathan. Good morning, everyone. Normalized diluted FFO per unit was $0.07 for the quarter compared to a normalized diluted FFO of $0.03 in the prior year. At March 31, 2023, AHIP had $22 million of available liquidity compared to $24 million at December 31, 2022. The available liquidity of $22 million was comprised of an unrestricted cash balance of $17 million and borrowing availability of $5 million under our revolving credit facility. AHIP has an additional restricted cash balance of $26 million at March 31, 2023. Increase in unrestricted cash is primarily due to the transfer of $12 million from restricted to unrestricted as a result of improved operations during 2022 at 3 Embassy Suites located in Ohio and Kentucky.
As of the date of this call, the borrowing base availability has increased to $15 million based on our Q1 2023 borrowing base submission completed earlier this week. Debt to gross book value at March 31, 2023 decreased 60 basis points to 52% compared to year-end. AHIP is making steady progress on this measure and over time intends to bring its leverage to a level closer to its peer group, which would be in the range of 40%-50% debt to gross book value. This is expected to be achieved through a combination of improving operating results, a sustainable distribution policy, and selective equity issuance in support of growth transactions. AHIP also improved leverage as measured by debt to EBITDA, reducing this measure to 9.6 for the most recent 12 months.
Our weighted average interest rate for term loans and credit facilities was 4.48% at December 31, 2022. Sorry, at March 31, 2022, compared to 4.46 at year-end. Short and long-term interest rates have significantly increased over the last 12 months. AHIP does not expect a material increase in interest expense in 2023, since 92% of our debt is at fixed rate or effectively fixed by interest rate swaps until November 2023. Our financial position allows us to be patient as we have no maturities relating to our debt or our swaps until the fourth quarter of this year.
In terms of upcoming maturities, AHIP has 2 CMBS loans totaling $15 million coming due in December 2023, 1 CMBS loan totaling $22 million due in the first half of 2024, and an additional 3 CMBS loans totaling $60 million due in the second half of 2024. On the revolving credit facility, $125 million is due at the end of 2024. The revolving portions can be extended at our option to the same date. The cumulative debt yield on these maturities is currently approximately 12%, which we expect to increase as the loans approach maturity. We are currently evaluating our refinancing options. As a result of the weather-related damage, total write-down of hotel properties is approximately $9 million at March 31, 2023. This is comprised of remediation costs of $3 million and rebuilding costs of $6 million.
At March 31, we have spent about $7 million to remediate and rebuild these damaged properties. For property damage insurance, AHIP expects most of the total cost of remediation and rebuilding to be reimbursed in 2023. For business interruption insurance, AHIP also expects to recover most of the lost income from the event in late December until the damaged hotel properties are fully operational, which is expected to be by the end of the second quarter. At March 31, 2023, AHIP recorded a $4 million receivable for a portion of the total expected insurance proceeds. This is comprised of $3 million for the property damage claim and an initial $1 million for the business interruption claim.
The $4 million represents the initial advance of the total expected insurance proceeds. AHIP expects to receive additional business interruption of $0.5 million for lost income related to the first quarter. Business interruption proceeds are included in our FFO calculation. Our distribution policy remains intact. We've now paid U.S. dollar monthly distributions each month since March 2022. We are pleased to be in a financial position to continue to do so. Based on analyst consensus numbers, our next 12-month FFO payout ratio is conservative at under 50%. At our current unit price, the yield supported by this distribution is approximately 10%, which continues to be among the highest in the Bloomberg REIT Hotels Index. The declaration and payment of each monthly distribution under our distribution policy remains subject to board approval.
Lastly, we've had a number of inquiries regarding U.S. withholding taxes. Given that AHIP is expecting 100% of distributions this year to be classified as income and not return of capital, as was the case the past few years, these distributions are subject to a 15% withholding tax unless held in an RSP account. Certain taxpayers can claim a foreign tax credit to recover this withholding. We do not expect non-U.S. investors to be subject to U.S. withholding tax under Section 1446(f) on the sale of units. AHIP has not and does not expect to be engaged in a trade or business within the United States. AHIP intends to issue and publish a qualified notice as applicable to indicate that this withholding does not apply. Please refer to our website for further information on these topics.
I'll turn the call back to Jonathan.
Thanks, Travis. In conclusion, I'm encouraged by the demand acceleration that is continuing across our portfolio in 2023. We are not seeing any evidence of a slowdown in demand trends for our leisure guests and all signs point to steadily improving business traveler demand. We expect that our team's focus on easing the effects of the labor challenges that are evident across the country will begin to narrow the gap to pre-pandemic operating margins, allowing for the permanent improvements to the select service hotel operating model to be increasingly evident. I would like to convey my appreciation to all of our teams at each of our hotel properties for their continued dedication to providing a great guest experience. Last year, we were the first North American hotel REIT to reinstate regular distributions.
This demonstrated the financial resilience of our portfolio, as well as the confidence that we have in the ongoing stability of our cash flows. Our ability to provide our unit holders with a meaningful cash yield on their investment remains a top priority for us. We continue to be confident in distribution levels despite the current macroeconomic headwinds. Our conservative payout ratio means we will have the capacity to increase the distribution as operations improve. Based on our closing price yesterday, the annualized US dollar distribution of $0.18 per unit represents a cash yield of approximately 10% with an FFO payout ratio below 50%. With that overview of our first quarter and recent initiatives, we'll now open the call to questions from analysts. Operator?
If you'd like to ask a question, please press star 1-1 . If your question has been answered and you'd like to remove yourself from the queue, please press star 1 1 again. Our first question comes from Frank Liu with BMO Capital Markets. Your line is open.
Hi, everyone. Good morning, good afternoon. Thanks for taking my questions. I just wanna start with April occupancy of the 71% you mentioned earlier. I wonder, does that also adjust for business interruptions, properties affected by the winter storm damage?
Good morning, Frank. No, that number is does not is not normalized or is not adjusted. If it were to be, it would be adjusted for the 2 hotels that we mentioned are still out of order to varying degrees.
Got it. Thank you. Clearly, occupancy has been trending higher than the 2022 levels. Could you provide some color on what has been driving the occupancy recovery thus far this year? Should we expect this trend to continue the remainder of 2023?
Yeah. I'll address the last part first. There is certainly no signal of the opposite at this point. We would expect occupancy to continue to improve. We're still not at occupancy levels of 2019, and we would expect that that to be the case. In terms of what's driving it, we talked about the, you know, the strength of the leisure customer. That's especially evident during some of the, you know, the spring break and the holiday seasons. That is continuing to be the case. We're also seeing a steady improvement in the corporate demand, which I referenced earlier.
Perfect. I guess the RevPAR, if we're adjusting all those, noise from, renovation.
Yeah
Damage properties, it's like way up 14% year-over-year.
Yes.
should we expect full year RevPAR growth more than... I guess last quarter, we touched on the range is like 5% to 8% for the full year. Should we expect a bit more than that, given the strong Q1 results?
Yeah. I would expect it to be within the range that we referenced earlier, Frank, because of the fact that, if you remember Q1 last year, there was some demand disruption related to the Omicron variant, through the first 6 weeks of the year. That range that we provided guidance on earlier, I would continue to use.
Got it. Perfect. I guess we had a easier comp this quarter. Just lastly, want to touch on the $330 million swap coming off. I'm not sure if I missed anything from your opening address, is there any change of plan either to extend it or amend it?
Frank, this is Travis. We're evaluating that right now. We don't have anything to report on that. We're looking at some extension options, but as of today, no change in status.
Got it. Thanks, Travis. I'll turn it back. Thank you very much. Have a great weekend, guys.
You too. Thank you.
As a reminder, if you'd like to ask a question, please press star 1- 1. Our next question comes from Dean Wilkinson with CIBC. Your line is open.
Thank you. Travis, on the business interruption insurance, the component that flows through as income, how do they calculate that? Is that based off of a model, or is it historical? Are they paying you the top line or a net number?
They triangulate it with a number of factors, Dean. They'll look at last year, they'll look at budget, they'll look at other hotels in the portfolio. They'll look at STR information for the comparison hotels in the market. You know, it's really all the above. It's, it's no single amount. We do get paid on a net basis. The number that we reported was $1 million. We also disclosed we expect the actual number to be $1.25-$1.75. The $1 million is just what we have so far. If you take the midpoint of that, the $1.5, that's really, the best estimate as to what those hotels would've done if they were unaffected by the storms.
Right. Then you've got another $500, which is, like, that comes through Q2, really attributable to Q1. It's almost like we're looking at a normalized H1 as it were.
That's right. By the time we get to Q2, the year-to-date number should be correct.
It should be trued up. Okay. Are there any larger amounts in terms of the physical damage that will flow through to FFO similar to Q1, or is that covered in the receivable?
I'm not sure what you mean. In Q2, the current damage estimate is $8.8 total.
Right. you've
We recognize $3.3 of that in the first quarter.
Yep.
In the second quarter, we'll recognize most of the remainder. I'm not exactly sure where we'll be at the end of Q2, but we'll recognize most of that. On the BI side, we'll recognize that Q2 amount for business interruption as well.
Right. Got it.
The 0.5 that we kinda missed in Q1.
On top of that. Okay.
Yep.
Um-
Does that-
Just on. Yeah, that's what I meant.
Yeah.
On the $11 million, $11.7 million gross asset divestiture, is there debt associated with that?
There's a $6.66 million CMBS loan associated with that.
Okay. Then you take the difference. Would you be looking just, you know, to pay off your credit facility or, you know, given the yield that you've got on your units right now, perhaps doing something around a buyback?
Certainly a portion of it'll go to leverage reduction. We'll look at something on the units, but we don't have an NCIB in place right now, Dean.
Okay, great. That's it for me. Thanks, guys.
Thank you.
Thank you. Our next question comes from Tom Callahan with RBC Capital Markets. Your line is open.
I think the note's good.
Hey, thanks, guys. Just first one for me is you provided some good information there on kind of the recovery on the GDS and negotiated rate side of things relative to 2019 levels. Just curious, I think those were revenue figures. Is it possible to kind of get a sense of where occupancy through those segments would sit relative to 2019?
Yeah. Occupancy recovery versus 2019 would be about 0.86 times. That's actually a pretty precise figure, 0.86 times 2019.
Got it.
That's for the entire 71 hotels.
Got it. Got it. Sorry, but just on the GDS and negotiated rate side, like that 0.86-
Yeah.
Oh, I see. Sorry, I see what you mean. Yeah, okay, got it, got it. Then in terms of booking windows, has there been any shift in terms of visibility there or is it still fairly short-term in nature?
Okay. Yeah, it's still pretty short. I mean, I think we'd average like 10 days to 2 weeks on average.
Okay. still like, from that perspective. Then Travis, maybe...
If-
Yeah, sorry, go ahead.
If you recall, a couple years ago, we were talking about 1-2 days, you know, it's moving in the right direction.
Right. Yeah. Yeah. Then Travis, on the debt side, like I know there's still some time, but can you just give a sense to what you're seeing in terms of costs or yields in the CMBS markets there?
Yeah, I sure can, Tom. It's pretty volatile still. You know, looking backwards at first half of 2022 is pretty good. The market really got soft in the second half of '22. In early '23, I think a lot of banks were starting to reopen and credit spreads were reverting to the normal. Silicon Valley Bank has been the latest shakeup. It's pretty volatile. You know, I'm hearing 300-400 basis point spreads over treasuries. You know, at the low end of that current CMBS refi would be, you know, in the mid to high 6s.
Got it. Thanks. That's a good call, guys. I'll turn it back. Thanks.
Thanks, Tom.
Thank you. Our next question comes from Tal Woolley with NBF. Your line is open.
Yeah, just a quick, housekeeping question. The asset you're intending to sell, do you have a trailing NOI figure?
We have a 2022 figure.
Okay.
Which, if you back into it, would be an 8.7% yield on the purchase price of $11.7.
Got it. Great. When you break down the rooms into select service, extended stay, and the suites, and you sort of offer the revpar for each, can you just talk a little bit about the dynamics for revpar within each? Like, are all of them being driven by rate, then growing rate and growing occupancy? Are there some different dynamics amongst the different segments?
Yeah. I think it's safe to say that all 3 are being driven by rate and occupancy to varying degrees.
Yeah.
I'd put occupancy at a higher degree on the Embassy Suites. Those are bigger boxes. Those are 2- 250 room hotels. You know, the... We've just experienced tremendous demand compression in those markets, that's allowed us to have more pricing power and grow an accelerated occupancy at a higher rate than the extended stay and the select service divisions.
On the RevPAR side, is there one of the segments that's seeing much more growth than the others?
Um, well-
Sorry, not on RevPAR. Pardon me. On ADR. Pardon me, I mean. The growth in the ADR.
Yeah. Yeah.
Is it more?
Yeah. We.
Higher on one of them than the others.
Higher year-over-year growth rate. I don't have the ADRs for each segment with me right now, but we can get back to you on that. The segment, of course, that is experiencing the higher growth is the Embassy Suites.
Okay. Then when you're talking to your brand counterparts, obviously so much of this has been led by rate. You know, like rates can... You know, it's easier to move rates than, you know, necessarily put people or more people or influence occupancy. So I'm just wondering, like, in terms of your conversation with brands, what the outlook they sort of have given the overall kind of macro uncertainty, you know, because this demand has been pretty healthy coming out of COVID. Is there any concern that that might soften up a little bit and maybe could impact, you know, Average Daily Rates going forward?
Hilton and Marriott both reported in the last week. Those are our 2 largest brand partners. They were each asked the same question, and the answer was that they don't see any demand slowdown for the rest of the year. I haven't paid attention to some of the other brands, but those are the ones that we're very interested in. You know, if you know, going back to 2020, when you look at the resilience of the occupancy in this, you know, select service or this suburban select service business that we're running, you know, we always experienced pretty darn good occupancy even in April of 2020.
It's just the rate that's led the recovery. That trajectory just continues to be to be very strong. No signs to indicate that there's a slowdown in occupancy, nor a weakness in rate.
In terms of the brand standards, is all, like the negotiating of, you know, what has to come back, you know, after what it was relaxed during COVID, is all that sort of like standard negotiating that's been complete and like you sort of have visibility on what your costs look like going forward?
Yeah. The standards are still below 2019. You know, the standard that we always talk about is housekeeping. You know, Hilton is at housekeeping on demand. Marriott's on every couple days, IHG is back to what they were in 2019. We don't see that changing for either of those 3 brands. You know, you could basically say that that is set now and that's the business plan going forward.
Okay. That's great. Thank you very much.
Thanks, Tal.
As a reminder, to ask a question, please press star 1-1 . There are no further questions at this time. I'd like to turn the call back over to Jonathan Korol for any closing remarks.
Thanks again everyone for joining us on our call today. Look forward to speaking with you in early August when we report our second quarter 2023 results.
Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.