Good morning, and welcome to the American Hotel Income Properties REIT LP's third quarter results conference call. At this time, all participants are in the listen-only mode. Following the formal remarks, there will be a question-and-answer session for analysts only. Instructions will be provided at the 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 are 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 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 property results today. 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 today's 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, and thank you everyone for joining us today for our third quarter financial results conference call. Yesterday, we announced a number of initiatives focused on strengthening the company's financial position and preserving unitholder value against the backdrop of a challenging operating and macroeconomic environment. In addition to the cost and operating margin pressures we've felt over the last 18 months, we've recently seen overall demand decrease, something which we expect to continue in the medium term. Therefore, we are taking a number of decisive actions across the business to preserve liquidity and enhance financial stability. These actions include an amendment and extension of our revolving credit facility, a reduction in deferral of third-party management fees, and a temporary suspension of the unitholder distribution. In addition to the timely amendment to our credit facility, we have an executable plan to address all near-term debt obligations.
We are confident in our ability to continue to navigate a dynamic macroeconomic environment. Regarding Q3 results, top-line performance of our 70-property select-service hotel portfolio improved, with total revenue growing by 1% on a same-store basis compared to Q3 2022. This was driven by room rate trends remaining positive, with broad demand from leisure, corporate, and group guest segments. Compared to last year, ADR was up 3%, while occupancy was down 225 basis points. Overall, RevPAR for the quarter finished at $95, flat to Q3 2022. The gradual return of business and group travel continued to be a bright spot, as demonstrated by the 3% growth in RevPAR in our Embassy Suites portfolio during the quarter. Year to date, revenue is up 20% for this segment, and the full return of business travel remains a near-term catalyst.
Labor shortages and inflationary impacts on operating costs continue to put pressure on margins. NOI margin decreased by 270 basis points to 30.6% for the quarter compared to the same period of 2022. While our focus remains on hiring more in-house labor, reducing turnover, and improving housekeeping productivity, progress has been slow, and labor costs will remain elevated into 2024. We believe that continued growth in ADR will help in partially mitigating the effects of rising labor costs and general inflationary pressures impacting the portfolio. As mentioned, we will proceed with a number of transactions that will collectively address all of the company's near-term debt, debt maturities, while also creating modest improvements in ADR, RevPAR, and leverage metrics.
Leverage reduction remains a priority, and we continue to trend in the right direction, demonstrated by our debt to gross book value being reduced by 150 basis points over the last 12 months. Our 2023 capital program is ongoing, but given the uncertainty around the timing of our insurance claims on weather-related damage at some of our hotels, we've reduced the level of spend in 2023 relative to 2022... and push some projects initially slated for 2023 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. Some more color on the strategic initiatives we announced yesterday.
On November seventh, AHIP entered into an amendment to the revolving credit facility and certain term loans to, among other things, modify the calculation of the borrowing base availability, extend the term to June 30, 2025, reduce the required fixed charge coverage ratio, and adjust the permitted payout ratio for distributions. Given tight credit markets, this amendment not only allows AHIP to remain on side on all covenants, but also represents the best solution from both a liquidity and flexibility standpoint. We also successfully entered into a third amendment to our master hotel management agreement with Aimbridge, by which the management fee on certain hotel properties has been reduced or deferred. Collectively, the deferral and reduction of management fees is expected to provide an additional $3.7 million cash on average per annum from July 1, 2023 to June 30, 2026.
This amendment was in response to the margin pressures the company's been facing as a result of rising costs and showcases AHIP's strong relationship with its hotel manager. Regarding our distribution, after having completed an analysis of our policy in the context of recent and forecasted operating results, industry and economic conditions, interest rates for debt refinancing, and future compliance with covenants, the board and management have determined that the long-term interests of AHIP and its stakeholders are best served by a temporary suspension of monthly distributions. We will continue to review AHIP's distribution policy on a quarterly basis. Lastly, in October, AHIP announced the appointment of Amy Freedman as an independent director and the resignation of Rick Frank as an independent director of the company. Amy Freedman is a partner and head of Engagement Fund Investing at Ewing Morris & Co.
Investment Partners, and was appointed following an extensive search and review of qualified candidates. I'd like to welcome Ms. Friedman to AHIP's board, as well as thank Mr. Frank for the efforts and contributions to the board over the years. I'll now turn the call over to Bruce to discuss third quarter and hotel operations. Travis will then highlight key financial metrics. Bruce?
Thank you, Jonathan, and good morning, everyone. As anticipated, AHIP's portfolio of premium branded select service hotel properties saw revenue growth slowing compared to the first half of 2023. The leisure segment, which continues to demonstrate strong performance, has been reverting to a more historic demand pattern after being overheated coming out of the pandemic period. As mentioned in previous quarters, the portfolio continues to see corporate and group segment demand improving. For Q3, our portfolio had an occupancy average of 71% or 97% of 2022 levels. ADR continues to be the catalyst for RevPAR recovery across AHIP's portfolio, finishing at $133 for the second consecutive quarter and above Q2 2022 levels by 3%. Q3 2023 RevPAR finished at $95, flat to Q3 2022.
Looking at the quarter by month, July was impacted by a weak holiday, weak holiday demand around July Fourth, coupled with a down group business month, pushing RevPAR down 2% below 2022 levels. Performance improved in subsequent months, with RevPAR flat in August to prior year and up in September by 2%. Our portfolio results in the first half of the year were disrupted by a weather event in late December 2022 that caused weather-related damage at several hotels. All guest rooms related to the insurance claim were back in service in Q3. Delayed by weather-related damage, the renovation of the 105-room Residence Inn by Marriott at Neptune, New Jersey, hotel restarted in May of 2023 and was substantially completed in August. As mentioned, we continue to see signs of improving corporate and group travel across the portfolio.
In Q3, in Q3, a growing proportion of AHIP room revenue was earned on Tuesdays and Wednesdays. Those are strong business travel days versus Fridays and Saturdays. The Embassies are a good indicator for the portfolio as it pertains to group and corporate recovery, and we continue to see the greatest RevPAR growth in this segment of our portfolio. In Q3, the Embassy Suites segment achieved a RevPAR of $104, a 3% increase over the same period in 2022. Same-store food and beverage revenues increased by 20% over the same period last year, and year to date, NOI is up 35% for our Embassy Suites segment. For our portfolio of 70 assets, NOI margin finished at 92% of 2022 levels. Instability around labor continues to have a significant impact on profitability.
This was also the first quarter that we realized the full impact of insurance expense increases, which are up over 100% and negatively impacted NOI margin. Our focus remains on margin performance initiatives with our hotel manager, specifically improving levels of in-house employment, reducing turnover, and improving retention... In 2023, we're forecasting a 35% reduction in third party contract labor costs across the portfolio. We expect to see continued further reductions in third party labor use in future quarters. As employee needs change, greater employer flexibility is required, and we are seeing a much higher proportion of part-time employees used across the portfolio to fill open positions. Approximately 19% of the workforce in AHIP hotels is categorized as part-time. Coupled with the various labor initiatives, our hotel manager is working to improve purchasing compliance throughout the portfolio.
Heightened purchasing compliance will help offset inflationary cost growth impacts. Turning to AHIP's capital program, as Jonathan mentioned earlier, we have forecasted spend in 2023 of $15 million, from the $19 million we had previously communicated in Q2. The $15 million capital plan includes approximately $5 million for property improvement plans and $10 million for FF&E capital improvements. The majority of this will be funded by restricted cash. Initial top-line results for October show occupancy at 73%, ADR at $133, and RevPAR of $97, or flat to October 2022 RevPAR level. With that update on hotel operations, I'll now turn the call over to Travis to highlight key financial and capital metrics.
Thanks, Bruce. Normalized diluted funds from operations, or FFO, was $0.11 for the quarter, compared to a diluted FFO of $0.13 in Q3 of 2022. At September 30th, 2023, AHIP had $32 million in available liquidity, compared to $24 million at the end of 2022. The available liquidity of $32 million was comprised of an unrestricted cash balance of $17 million and a borrowing availability of $15 million under the revolving credit facility. AHIP has an additional restricted cash balance of $34 million at September 30th, 2023. Effective November 7th, the borrowing availability under the credit facility has been reduced to zero in accordance with the amendment.
The initial maturity of the revolving portion of the credit facility has been extended from December 3, 2023 to December 3, 2024, subject to conditions set forth in the amendment to be satisfied prior to December 3, 2023. The amendment includes an option to extend the maturity of the term loan and the revolving portion to June of 2025, subject to a reduction in the aggregate maximum facility size to $148 million. Fixed Charge Coverage Ratio has been reduced to 1.1 times until the end of 2024. Due to the amendment, the revolving credit facility availability is primarily limited by revised calculations based on the lesser of an implied debt service coverage ratio and a loan-to-value test. For the conditions of the initial extension, December 3, 2024, the loan-to-value test will be based on the new hotel appraisals.
The borrowing availability is subject to a maximum of 67.5% loan-to-value based on these new appraisals, with time permitted to reduce the amount outstanding, should concurrent borrowings exceed 67.5% loan-to-value. Management expects the results of the appraisals to become effective in late November 2023. Any such paydown, which may be required, are expected to be funded through a combination of cash on hand and or net proceeds from asset sales. Under the amendment, the covenants governing the distribution payments have been revised and are now subject to the satisfaction of a more restrictive FFO payout ratio threshold. The timely execution of this amendment highlights the strong relationship we have with each of our syndicate members and their support in the AHIP story.
Debt to Gross Book Value at September 30, 2023, decreased 150 basis points to 51.1%, compared to 52.6% at the end of last year. AHIP has made steady progress on this measure, while debt to EBITDA has been relatively stable over the last 12 months. Regarding upcoming debt maturities, we have two CMBS maturities in the fourth quarter of 2023 for $16 million, made up of two hotels in Pennsylvania, and one more in the first half of 2024 for $22 million, made up of four hotels in Virginia. To address the Q4 2023 loan maturities, AHIP intends to divest of the two non-core properties.
To address the Q2 2024 maturity, AHIP intends to sell one hotel by the end of the first quarter and refinance the balance of the loan with the remaining three hotels in that portfolio. Overall, 92% of our debt obligations are fixed rate or subject to variable to fixed swap arrangements. This figure will decrease to 71% on the expiry of our interest rate swap at the end of this month. Attributable to this expiry, at current secured overnight financing rate of 5.3%, the incremental annual interest expense is expected to be $5.2 million. The actual interest increase will depend on future SOFR rates.
As a result of weather-related damage mentioned earlier, AHIP has recorded total expected insurance proceeds of $16.3 million, which is comprised of $13 million for property damage and $3.5 million for business interruption claims. AHIP has received $4.3 million in insurance proceeds to date and expects to receive the majority of the additional proceeds in the fourth quarter of 2023....As a result of the claims noted above, higher replacement costs, and generally higher market premiums, we have completed its property insurance renewal effective June 1, 2023, with a significant increase in premiums as compared to the previous policy. On an annual basis, the increase from the prior year is approximately $3.5 million, which will increase expense and reduce earnings.
Lastly, as Jonathan mentioned at the top of the call, we've temporarily suspended our monthly distribution, which provides an additional $14 million of cash annually, which will be used to improve the company's balance sheet and liquidity. I'll now turn the call back over to Jonathan for some closing remarks.
Thanks, Travis. Conditions across the industry are currently challenging, but I believe AHIP's diversified portfolio of premium branded select service hotels will generate long-term value for our unit holders. The steps we are taking now will strengthen our liquidity and balance sheet to ensure we are positioned to benefit when the operating and macroeconomic environment improves for the industry. We will continue to carefully monitor industry conditions and our operating performance and consider further strategic opportunities to deliver value over the long term. I remain confident in the ongoing efforts of our asset management team, along with our hotel manager, to navigate the challenging operating environment and drive margin improvement. Lastly, I would like to convey my appreciation to all of our teams that are at each of our hotel properties for their continued dedication to providing a great guest experience.
With that overview of our third quarter and recent initiatives, we'll now open the call to questions from analysts. Operator?
Thank you. And as a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. For our first question, it comes from the line of Dean Wilkinson from CIBC. Please go ahead.
Thanks. Morning, everyone. A couple of questions, I guess, for Travis. Just obviously a lot of moving parts and things going around there. Travis, has the topic of going concern been breached by the auditor, as you sort of went through doing the financials and looking into year-end?
Yeah, that's part of the normal practice. We would do that each quarter, and we've satisfied the going concern considerations, Dean. That's not an issue for us right now.
Okay. And in terms of where the stock currently sits, would you have to consider a share consolidation for your continuing listing requirement or perhaps, you know, going back to maybe more a junior exchange or, you know, what are your thoughts on that?
I'd say it's pretty early days, Dean. Well, obviously, the stock is under some pressure today. I think that we should expect some rebalancing from income-oriented investors to value-oriented investors until the distribution comes back. So I'd say it's too early to tell on that. Let's see where the share price settles out, and then we'll determine which exchange is appropriate for us. But there's no plans at the moment to change our TSX listing.
Okay, great. And then just on the distribution, what would have to happen for you guys to sort of come back to put that on the table again, sort of for the second time? Or do you think that you might actually change the way that you're looking at the REIT as not being an income-oriented investment and, you know, you might not go back to a distribution given that you've had to sort of shelve it twice now?
Yeah, I think, you know, first, this news is relatively new. So step one was to reduce the distribution to address liquidity and the credit facility amendment condition. If you look on SEDAR, the test that will be important for us to achieve is a 1.25 FCCR, and under that test, we'd be looking at a 20% FFO payout ratio test. I think we're gonna be in and around that number in 2024. So while it's suspended now, you know, we could look at bringing it back in the second part of 2024. But to your point, we're gonna have to evaluate, you know, what type of REIT we wanna be and what's the best use of our capital.
So I'd say it's a little too early to speculate on when and how we're gonna bring that back, Dean. You know, we suspended it to navigate the current macroeconomic environment, and over the coming quarters, we'll see how that changes and see what our capacity is to pay a distribution.
I'm assuming you're not running into a tax wall there in terms of your requirement to pay?
No, no, we're okay on the tax side for the time being.
Okay, great. I will hand it back. Thanks, Travis.
Yeah.
One moment for the next question. For the next question, it comes from the line of Tom Callaghan from RBCCM. Tom, your line is open. Please ask your question.
Hey, good morning, guys. Maybe just on the margin side of things, like I think you guys have done a good job kind of highlighting the headwinds in terms of labor and the insurance side of things. But just curious, like as you look to 2024, are there any green shoots here, you know, that could potentially act as a bit of an offset to kind of the headwinds you flagged?
Hey, Tom, it's Bruce. I think there are a couple of things, quite honestly. Mentioned the use of third-party labor and how we've seen that declining through this year. And we expect continuing in future quarters. That should help us on a general labor kind of CPOR basis, going forward. And although generally cost of goods and things have been significantly impacted by inflationary forces, we are seeing some of that being tempered, I think, especially over the last three, four, five months, and we expect that to continue.
So when we talk about procurement compliance within our manager system, we think there's an opportunity to ultimately drive lower cost of goods into our business, just because of what's naturally happening in the market as a whole, as well as heightened compliance using their system that should drive stronger pricing for us and rebates.
Got it. Thanks. Maybe just switching gears. I know you mentioned in terms of potential paydowns post kind of the appraisals, but you know, you could satisfy that with cash or potential non-core dispositions. Just on the disposition side of things, do you guys have any kind of targets in terms of non-core sales, or will that more kind of be on an as-needed basis? How are you thinking about those?
Yeah, that... hey, Tom, it's Jonathan here. We don't know the extent of the paydown at this point, so you know, it's tough to really hone in on the number of assets. We you know, surmise that it's going to be you know, below 5 hotels that we're gonna have to look at. And we're gonna you know, choose the ones that we think that can deliver the level of proceeds, but that aren't integral to the plan going forward. And we'll just leave it at there for now.
Okay, thanks. Then just last one from me. In terms of the business travel and group demand that you kind of flagged, did you see any uptick kind of post Labor Day, or was that fairly consistent in terms of performance across the third quarter?
Yeah. No, I... Things typically do start to improve post Labor Day, right? The July and August travel months are more leisure oriented, and there's less group and corporate travel. So yeah, we have seen an uptick in September and in October, for that matter.
Okay, thank you. I will pass it back. Thanks, guys.
Once again, if you'd like to ask a question, please press star one one on your telephone keypad. There are no further questions at this time. I would now like to turn the conference back to Jonathan Korol for closing remarks.
Thanks again, everyone, for joining us on our call today. Look forward to speaking with you in late February, when we report our fourth quarter of 2023 results.
This concludes today's conference call. Thank you for participating. You may now disconnect.