Good morning, welcome to American Hotel Income Properties REIT LP 2nd 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. Before beginning 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 and are based on certain assumptions and involve various risks and uncertainties.
The risks and uncertainties that, if realized, and assumptions that is 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 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 measures, and a reconciliation between the two, please refer to their MD&A.
References to prior year operating results are comparisons of AHIP's portfolio of 70 properties, results in that period, versus the same properties results today. First quarter and second quarter 2023 occupancy, ADR and RevPAR figures reference exclude the Residence Inn Neptune and Courtyard Wall in New Jersey, as these two, these 2 hotels were not available due to renovation post the weather-related damage in late December 2022. All figures discussed on today's call are in U.S. 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 will now turn the call over to Jonathan Korol, Chief Executive Officer. Please go ahead.
Thank you, operator, thanks everyone for joining us today for our second quarter financial results conference call. Top line performance at our 70 property select service hotel portfolio continued to improve this quarter, with revenue growing by 5% on a same-store basis compared to Q2, 2022. This was driven by occupancy and room rate trends remaining positive, with broad demand from leisure, corporate and group guest segments. RevPAR for the quarter finished at $98, a 4% improvement over Q2, 2022. We'd like to highlight that we once again achieved the highest quarterly ADR in the history of the company this quarter. For the quarter, rates ended at 105% of Q2, 2022, 110% of Q2, 2019.
This marked the 8th consecutive quarter where we have matched or exceeded 2019 rates, and we expect this trend to continue. The overall demand picture remains strong, with sustained demand from our leisure guests, as well as the gradual return of business and group travel, as demonstrated by the 9% growth in RevPAR at our Embassy Suites portfolio during the quarter. The return of business travel remains a near-term catalyst, and we believe the improving results of our Embassy Suites portfolio points to this segment picking up momentum across the United States. Operating margins continue to be pressured by the challenging operating environment we've experienced since early 2022. Specifically, labor shortages and inflationary impacts on operating costs remain our focus.
NOI margins decreased by 210 basis points to 33.3% for the quarter, compared to the same period of 2022. We are continuing to focus on hiring more in-house labor, reducing turnover, and improving housekeeping productivity to address these problems. Progress is slow and labor costs will remain elevated into 2024. This is where our ability to control and manage daily rates is a key benefit. Continued growth in ADR will help in partially mitigating the effects of rising labor costs and general inflationary pressures impacting the portfolio. Despite these persistent challenges, we are confident in our ability to navigate this dynamic operating environment and to add long-term unitholder value. As the interest rate environment remains elevated and volatile, the fixed rate nature of our debt obligations provide a substantial benefit to us.
Overall, 91% of our debt obligations are fixed rate coupons or subject to variable to fixed swap arrangements. Leverage reduction remains a priority, and we continue to trend in the right direction, demonstrated by our debt to gross book values being reduced by 200 basis points, and debt to trailing twelve months EBITDA down 0.2 times over the last 12 months. 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.
Our 2023 capital program is ongoing, given the uncertainty around the timing of our insurance claims on weather-related damage at some of our hotels, we expect a slightly reduced level of spend in 2023 relative to 2022, as some projects initially slated for 2023 will be pushed into 2024. These 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. During the quarter, we closed on the strategic disposition of a hotel property in North Carolina for gross proceeds of $11.7 million.
We used $6.5 million of the total proceeds to repay the mortgage on the property and intend to use the remaining proceeds to further pay down debt or purchase assets with high returns in more attractive markets. Growth remains our priority over the long term. We will always explore opportunities to dispose of assets where the return projections lag the average return expectations for the remainder of our portfolio. Touching on growth, 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 two well-capitalized strategic partners who support the pursuit of attractive acquisition opportunities. Lastly, we released our second annual 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. I'll now turn the call over to Bruce Pittet to discuss second quarter hotel operations. Travis will highlight key financial metrics. Bruce?
Thank you, Jonathan, and good morning, everyone. AHIP's portfolio of premium branded select service hotel properties continued to demonstrate strong demand metrics in the second quarter of 2023. For Q2 2023, our portfolio had an occupancy average of 74% or 99% of 2022 levels. ADR continues to be the catalyst for RevPAR recovery across AHIP's portfolio, finishing at a record of $133 for the quarter, above Q2 2022 levels by 5%. We continue to anticipate strong ADR performance across the portfolio going forward. Q2 2023 RevPAR finished at $98, a 4% increase over Q2 2022. Portfolio results continued to be, to be disrupted by the weather event of late December 2022, that caused weather-related damage at several hotel properties.
Of the hotel properties damaged, 2 hotels continued to have considerable rooms out of order during Q2, skewing year-over-year operational comparisons. The 105-room Residence Inn Neptune, New Jersey, reopened May 18th, with 55 guest rooms in service. At the time of the weather event, the hotel was under renovation. The renovation was restarted in May, and at the end of Q2, 84 fully renovated guest rooms were in service. The 113-room Courtyard, Wall, New Jersey, ended Q2 with 87 guest rooms in service. We anticipate all guest rooms from both properties to be back in service at some point in Q3, and common area elements of both hotels are anticipated to be back in service in Q4. We referenced three distinct segments of our business: extended stay, select service, and our Embassy Suites hotels.
During Q2 of 2023, the extended stay segment achieved a RevPAR, the RevPAR of $100, or 100% of where we were in Q2 2022. The select service segment achieved a RevPAR of $93. This represents 105% of 2022 levels. As Jonathan mentioned, the Embassy Suites segment achieved a RevPAR of $111, or a 9% increase over the same period in 2022, and notably, slightly above 2019. We continue to see signs of corporate and group travel recovery across the portfolio. Midweek occupancy continues to improve, with occupancies in the mid to high 70% range. In comparison, weekend occupancies are more typically in the low to mid 80% occupancy range. We continue to achieve ADR and RevPAR premiums on weekends versus midweek.
Strong indicators of corporate business demand are the negotiated rate segment, which has seen revenue recover to 84% of 2019 levels, and the GDS channel, which is mostly driven by travel agent booking corporate travel for their clients, finished at 86% of 2019 levels. The Embassy Suites are also a good bellwether for the portfolio as it pertains to the group and corporate segment recovery, as we continue to see the greatest RevPAR growth in this segment of our portfolio. Our food and beverage revenues, which are primarily attributed to our Embassy Suites, are continuing to approve against 2019 benchmarks. F&B revenues were 85% of 2019 performance. For our portfolio of 70 assets, NOI margin finished at 94% of 2022.
Rising costs, driven by wage rates, third-party labor usage, turnover, and general inflationary pressures, are holding margins below 2022 levels. Hourly wages, in particular, have been a major headwind, as they are up 5% year-over-year and over 36% since 2019. As mentioned, the disruption at the Residence Inn Neptune and the Courtyard Wall continues to impact results. Excluding these two assets, on a dollar basis, NOI was up 3% versus Q2 2022. Our focus remains on margin performance initiatives with our hotel manager, including the reduction of third-party contract labor, reducing overtime, improving housekeeping productivity, re-reducing employee turnover, and improving procurement program compliance. In general, the pace of cost growth is slowing. Portfolio employee turnover is trending down, and our labor mix has improved with our contract labor use declining.
At the start of 2023, our third-party labor workforce consisted of 254 FTEs, or full-time equivalents. At the end of Q2, we had reduced that number to less than 200 FTEs. However, this number is still significantly above pre-pandemic levels. Turning to AHIP's capital program, as Jonathan mentioned, we have reduced our forecasted capital spend in 2023 to approximately $19 million from the $34 million we had previously communicated. The $19 million capital plan includes approximately $7 million in PIPs and $12 million in FF&E capital improvements, which will partially be funded through restricted cash. Total capital spend through the first half of 2023 was $7.5 million.
Initial results for July suggest a slight step down from June, with occupancy of 73%, ADR of $135, and RevPAR of $99, or 99% of July 2022 RevPAR levels. The first week of July was slower than anticipated, with the July 4th holiday landing on a Tuesday and impacting corporate demand for the entire week. The remainder of July saw weekly occupancy consistent with June. 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. Normalized diluted funds from operation, or FFO, was $0.14 per unit for the quarter, compared to a normalized diluted FFO of $0.15 for Q2 of 2022. As of June 30, 2023, AHIP had $40 million in available liquidity, compared to $24 million at December 31, 2022. The available liquidity of $40 million was comprised of an unrestricted cash balance of $25 million and a borrowing availability of $15 million under our revolving credit facility. In addition, AHIP has a restricted cash balance of $27.6 million as of the end of the quarter. AHIP is making steady progress on our leverage metrics and intend to bring our debt to gross book value closer to a level of our peer group over time, which would be in the range of 40%-50%.
This is expected to be achieved through a combination of improved operating results, a sustainable distribution policy, and selective equity issuance in support of growth transactions. Debt to EBITDA has been stable over the last 12 months. The weighted average interest rate for all term loans and credit facilities was 4.55% as of June 30, 2023, an increase of 9 basis points from the end of the year. AHIP does not expect a material interest expense increase in 2023. While our interest will increase at the expiry of the interest rate swap, we have staggered maturities and no meaningful CMBS maturities until late 2024.
Commencing in the first quarter of 2024, the borrowing base availability under our revolving credit facility will be determined by a revised test, which now includes 65% of the capitalized value of the underlying properties, where value is determined based on the trailing twelve-month cash flows of such properties at a capitalization rate, in most cases, of 8%. This loan-to-value test, included in the 2024 bearing base, may reduce the borrowing base availability under the credit facility. As a result of the weather-related damage mentioned earlier, the total impairment on the hotel properties is $9 million at June 30, 2023. This is comprised of remediation costs of $3 million and rebuilding cost estimate of $6 million. As of June 30, we'd incurred $7.9 million in costs to remediate and rebuild the damaged hotels.
For business interruption insurance, we expect to recover most of the lost income from late December 2022, until the damaged hotels are fully operational, which is expected to be by the end of the third quarter of 2023. In the second quarter of 2023, AHIP recorded $1.9 million for the business interruption claim. The business interruption proceeds are included in our normalized FFO calculation. As a result of the claims noted above, high replacement costs, and generally higher insurance premiums, AHIP completed its property insurance renewal effective June 1, 2023, with a significant increase in premiums compared to the expiring policy. On an annualized basis, the increase from the prior year is approximately $3.5 million, which will be recognized in earnings over a 12-month period. I'll now turn the call back to Jonathan for some closing remarks.
Thanks, Travis. I'm encouraged by the demand acceleration that is continuing across the 22 U.S. states in which AHIP owns hotels. We are not seeing any evidence of a demand slowdown for our leisure guests. Business traveler demand has meaningfully picked up in 2023. I am confident in the ongoing efforts of our asset management team, along with our hotel manager, to navigate this challenging operating environment and drive margin improvement. As Bruce mentioned, we've begun to see some key metrics slowly start to trend in the right direction. We continue to pay out monthly distributions as our ability to provide our unit holders with a meaningful cash yield on their investment remained the top priority for us. Based on our closing price yesterday, the annualized U.S. dollar distribution of $0.18 per unit represents a cash yield of approximately 10%.
Lastly, I would like to convey my appreciation to all of the teams at each of our hotel properties for their continued dedication to providing a great guest experience. With that overview of our second quarter and recent initiatives, we'll now open the call to questions from analysts. Operator?
To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. The first question comes from Frank Liu with BMO Capital Markets. Your line is open.
Hey, everyone. Good morning and good afternoon. Thanks for taking my questions. Just want to start on with ADR. If I did my math correctly, the same probably ADR goals was like roughly 6% this quarter, and that compares to, like, low double-digit growth in the previous two quarters. Do you expect ADR growth to moderate in the second half of this year? Because I read about, you know, the broader U.S. hotel industry saw a moderation in the ADR goals this quarter.
Hi, Frank, it's Jonathan here. Yeah, the second half, the comps are a little bit more challenging because ADR growth really took off back in around this time last year. We would expect the average to come down over the last half of the year.
Got it. Thanks, Jonathan. On the expand-- sorry, on the occupancy side, should we expect occupancy to trend closely to 2022 levels? Sounds like the case from, early July results.
Yeah, I think occupancy is holding pretty steady at those, at those levels. I think we're quite encouraged by the midweek occupancy increases that we're seeing from the corporate traveler. You know, we're in the summer, we're in the summer leisure season right now, and I'd expect that as we get closer to September, October, November, those business metrics are gonna continue to improve.
Got it. Thanks for the color. Considering both end, there shouldn't be much change from your previous guided 5%-8% full year RevPAR goals, right?
It sounds like you're attuned to, to the industry metrics, and I'd say that we're, we're following those pretty closely. Those are good-
Got it.
Good proxy.
All right, that's great. Just wanna lastly touch on the $3.5 million increase in the insurance premium. That, that spans over Q3, 2023 to Q2, 2024, right? The next 12 months.
That, that's right. 1 month of the increase is incorporated in, Q2 results, Frank. This is Travis. 11/12ths of the increase will be included over the next, the next 2 quarters, plus 2 months.
All right. Thanks, Travis.
3 quarters, 3, 3 quarters plus 2 months.
Got it.
Yeah.
Got it. Do you know how much roughly that related to the claims you had? Just wanna get a sense of the, like, you know, the percent of growth on, like, regular premium.
It's pretty tough to back that out, but, you know, we, we talk to other operators who are seeing 75% to 100% increase in, in annual insurance premiums, and it, of course, depends on the nature of their portfolio and how much is in wind or, or flood zones. But, you know, I, I would say of the increase, about a third of it was due to our claims experience.
I see. Okay, all right, sounds good. I'll turn it back.
As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. Please stand by for the next question. The next question comes from Tom Callaghan with RBCCM. Your line is open.
Hey, good afternoon, guys, or, or I guess, maybe good morning, depending on the time zone. Maybe just first one for me, Travis, can you just give a sense or, or a bit of color on, on how you're thinking about the balance sheet over the next 6 months, and, and maybe specifically just the approach to, to liquidity? Just wondering, in this case, you know, given the borrowing base calculation that you flagged, that, that maybe you'll look to, to kind of prioritize liquidity in, in the next 6 months?
Yeah, thanks, Tom. Yeah, the, we, we do have some maturities, of course. We've got a couple on the CMBS side in December and then another portfolio in April. In aggregate, those are, you know, about $35 million. It's not, it's not a huge number, but something we're planning for. The CMBS market is, is available to us now. You know, based on current SOFR rates for 5 and 10 years, you know, you're looking at about 3.75%, and the spreads that they're looking for in that market are in the neighborhood of 400. We're looking at 7.50%-8%, 7.5%-8%, if we were to refinance those today.
We've got some time, although our interest rates seem like they're going to be a little higher than we expected, 3-6 months ago. You know, we still have time to see how the market goes and see if those credit spreads come in a little bit. Those have expanded significantly over the last 6-12 months. If we can get some normalization there, we might have some room to get a better spread. You know, we highlighted in our comments, the borrowing base does change early next year. We don't know if there's going to be a pay-down. It's going to be primarily based on the trailing twelve-month cash flows through Q1 of next year. We've got 9 of the 12 months still to come on that measure.
We've got a number of options. We can refinance that in the CMBS market. There's some assets that we currently have CMBS debt on, that if we put them on the credit facility, it would expand our borrowing capacity. We could get an amendment the same way we did last year. We, we've got a number of options. I think, I think you're, you're on point that, you know, addressing these maturities over the next six to twelve months is a big area of focus for us.
Got it. And maybe just a quick follow-up there. Am I correct in, in, reading between the lines in your, your comments related to the swap there in the prepared remarks that you're planning to, to just let that expire, at the end of November?
Yeah. Yeah.
Okay.
Yeah.
Okay.
We are.
Got it. Got it. Then maybe just one more for me. You guys probably had a bunch of color there on NOI margins in the commentary. Just curious, I know this quarter was impacted from the two weather-related hotels there, but how do you see kind of the gap to 2022 on NOI margins playing out over the course of the year? Is this something where, you know, you think you can narrow that gap versus versus this quarter, or just kind of any thoughts there?
The big change on the NOI margins right now is the insurance step up.
Yeah.
That means about 100 basis points. Minus that 100 basis points, we got about 150-200 to make up to get back to 2019. I think the pace of that is really gonna be determined by the dynamics that Bruce outlined in the labor market. I think, you know, depending on your view of the economy, the labor markets are becoming a lot more accommodating to business. You know, the pace is very market specific. Whether or not we can do that in 6 months, whether or not we can do that in 24 months, a lot of that's gonna be affected by the macro events.
Okay, got it. Thanks, guys. I'll, I'll turn it back.
Please stand by for the next question. The next question comes from Tal Woolley with National Bank Financial. Your line is open.
Hi, good afternoon.
Hey, Tal.
Just to go back to understand the borrowing base impact question for the credit facility. If, if you were subject to the test now, do you have a, a sense of what, like, your exposure might be on the credit facility side?
Tal, the... I don't think that's a number that we don't have that number to provide on the call. We've got the options that I described earlier, mean that we're not gonna face the test that we're looking at today by the time we get to Q1 of 2023. So I think we're gonna look at the operating outlook. It's gonna depend a little bit on interest rates, and we've got some options in terms of amendments or moving different assets on the line or out of line to affect that calculation.
Okay. Like you've-- I'm assuming, like, speaking with your lenders, the addition of, like, securing new properties against that facility is not much of an issue? Like, I'm just curious about, on the lending side, whether they're, you know, as amenable to this kind of stuff as they've been in the past?
Yeah. Yeah, as long as we're in compliance with the agreement, which we expect to be, putting properties on the line is, is well defined in the credit agreement, and it's, it's an available option to us.
Okay. Then I guess, you know, as the unit, the unit prices, you know, come down here, you're now sporting, you know, a double-digit yield. Like, how is the Board thinking about capital allocation right now? Is there, you know, are you wondering if there's more effective ways for you to, you know, deploy your capital right now?
Well, we mentioned, Hey, Tal, it's, it's Jonathan here. I, I think when we, when we announced the distribution back in November 2021, we were, as you know, the one of the first hotel REITs to announce it. And I think a lot of people at the time felt like our $0.18 was quite conservative. And I think that we, we did that because we felt, you know, there could be some headwinds coming our way, and we wanted the flexibility to be able to allocate between, you know, capital into our properties, paying our distribution, and, and growth. I think growth right now is, is a challenge, just because there aren't a lot of trades, as you know.
There aren't a lot of, a lot of owners that are, that are wanting to sell at the moment. I think we all see that, you know, with the headwinds, the headwinds are, you know, the 6-12 month headwinds, and beyond that, there just aren't any hotels being built. Actually, supply is coming out of the market, and most owners are pretty excited about that. Capital, we, we talked a little bit about our capital plans, being pushed back a little bit. You know, but we've always mentioned that, that the distribution, given our, our shareholder base, is a priority for us, and it will continue to be so.
Okay. Sorry, just earlier, your remarks, I, I, I don't know if I, I heard it wrong, but you said that you're not expecting ADR to decline year-over-year in the back half of this year, it's that you're expecting the growth in ADR, the growth in asking delivery to slow versus...
Yeah.
What's been reported in the past, yes.
Think about, let's say the, let's say the average is. Don't quote me on these numbers. Let's say the average is 5, probably, and you ran 7 in the first half, the last half is probably 3, right? It'll, you know, that it's, it's bringing down the average, but it's still growth. The reason for that is last half, the, the last half of last year was pretty, pretty strong.
Okay. Then I'm just wondering if you can speak, you know, it's been a while now since, you know, the new Board, the new Board's come together. How have you found, you know, that process, and has it changed any of your long-term thinking about how to run the company?
Well, it hasn't really been a long time because, we had our first meeting yesterday with our newest, newest board member.
Okay.
We've had a lot of time to discuss. We've had a lot of time to discuss our strategic plan, prioritizing growth, over the long term. You know, it's clear that the Board has strong consensus on desire to continue to grow this company.
Okay. That's great. Thanks very much.
Thanks, Tom.
As a reminder, to ask a question, please press star one, one on your telephone. At this time, I show no further questions. I would now like to turn the call back to Jonathan Korol for closing remarks.
Thanks again, everyone, for joining us on our call today. I look forward to speaking with you in early November, when we report our third quarter 2023 results. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.