American Hotel Income Properties REIT LP

Thank you, Amy. Good morning, everyone, and thanks for joining us for our fourth quarter and year-end 2020 results conference call.

Discussing AHIP's performance today are Jonathan Korol, Chief Executive Officer; Bruce Pittet, Chief Operating Officer; and Azim Lalani, Chief Financial Officer.

Thank you, Jamie, and thank you, everyone, for joining us today for our fourth quarter financial results conference call. 2020 was obviously one of the most challenging years that the hospitality industry has ever seen.

I am proud of the performance of our team, our hotel manager and our property level associates during unprecedented circumstances. The hard work completed over the last 12 months sets us up quite well for what lies ahead.

I am going to focus my remarks today on our activities in the first two months of 2021, what we are presently seeing in this rapidly evolving industry environment and our plan for the rest of the year. After that, I will hand it off to Bruce and Azim to provide an overview of the fourth quarter of 2020.

Thank you, Jonathan, and good morning, everyone. The fourth quarter began with continued momentum from the third quarter, but the seasonality we expect to see in our portfolio eventually materialized at mid-November and December.

Total revenue for the fourth quarter was $39.4 million, a decline of 48.2% from the fourth quarter last year. Although we typically see seasonal decline in revenues in the quarter, the decline this year was also impacted by the second wave of COVID-19 as the U.S.

case rate increased significantly throughout the period. In turn, we saw 34.6% decline in RevPAR.

As we have seen since the onset of the pandemic, food and beverage revenues saw significant decline, 83% or $5.5 million in the quarter as this revenue stream continues to be pressured due to ongoing and evolving restaurant and group size restrictions. Total occupancy for our 78 hotels in the fourth quarter averaged 51.4%.

On a monthly basis through the quarter, October occupancy was 58.3%, November occupancy was 50.2%, and the seasonality we expect to see in our portfolio impacted the latter half of November and was most reflected in December with occupancy at 45.6%. The leisure segment continues to be the dominant driver of demand across our portfolio.

Although we did see a modest increase in demand for some small corporate meetings in October and early November with meeting sizes typically ranging from 10 to 20 people. Construction and project-driven business also continued to be a meaningful demand driver in many markets, especially on our extended-stay oriented hotels.

Lastly, youth sports teams continued to travel especially through the first half of Q4.

Thank you, Bruce. Good morning, everyone.

Our seasonally weaker fourth quarter performed as we expected with lower operating performance compared to the third quarter resulting in lower RevPAR, revenues and cash flows. Compared to last year, total revenues for the fourth quarter declined 48.2% to $39.4 million with the sales mix weighted towards occupancies rather than rate this was dilutive to margins during the quarter.

This combined with the relatively high fixed cost nature of hotels, particularly with respect to insurance and property taxes, ultimately led to a 6.5% decline in NOI margin to 24.9%. Hotel NOI was $9.8 million.

FFO was negative $5.2 million or negative $0.07 per diluted unit. This translated into an approximately $6 million cash burn for the quarter offset by the collection of a $2.4 million loan related to the sale of the Economy Lodging Portfolio with the majority of the cash burn occurring in the back half of the quarter.

We also had higher-than-normal corporate, general and administrative expenses due to non-recurring securities-based and compensation expenses related to CEO changes coupled with higher professional fees. We booked $5.6 million, an impairment charges on five hotels located in Pittsburgh and Oklahoma during the quarter.

These hotels have been challenged for some time due to market conditions and new supply. During the quarter, loss and comprehensive loss was $20.9 million compared to a loss and comprehensive loss of $14.5 million last year.

Contributing to the increased loss were lower operating income, higher impairment charges and interest expense. The increase in interest charges ends from a full period of interest charges on the 2019 acquisition term loan, interest on the deferred purchase price related to the 2019 acquisition and higher interest charges from increased borrowings on the revolver compared to last year.

Diluted loss per unit for the quarter was $0.27 compared to $0.19 last year. As mentioned earlier, the seasonal decline in business did result in a cash burn during the quarter.

Generally speaking, we need RevPAR of approximately $55 to generate positive cash flow after debt service. Our ability to generate higher average daily rates will impact our cash flows.

So far in the first quarter of 2021, occupancy levels and RevPAR have improved considerably and market dynamics are continuing to improve. So long as the demand trajectory remains intact, we anticipate positive cash flows during the first quarter.

For full-year 2020, RevPAR declined by 30.7% and coupled with lower food and beverage revenues resulted in total revenue declining by 47.8% to $175 million. ADR during this period actually improved by 50 basis points compared to 2019 as a result of our capital recycling activities resulting in newer, higher quality hotels in our portfolio today.

Net operating income for 2020 was $46.6 million with NOI margins declining 6.8 percentage points to 26.6% reflecting the sales mix. Loss and comprehensive loss for 2020 was $66.4 million as a result of lower NOI, higher interest expense and higher non-cash impairment charges on hotels in Pittsburgh and Oklahoma.

FFO for 2020 was negative $9.5 million or negative $0.12 per diluted unit. With respect to the preferred stock issuance completed in January, this instrument is made up of preferred shares with an allocated value of $48.1 million and classified as equity under IFRS and warrants with an allocated value of $1.9 million classified as a long-term liability under IFRS.

Turning to capital and liquidity metrics. As at December 31, 2020, AHIP had total available liquidity of approximately $36 million and an additional $26 million of unrestricted cash.

After we completed the private placement in January, we use some of the proceeds to paydown our revolver, paid some outstanding obligations and retained the balance of cash. Currently, our total available liquidity consisting of cash and revolver capacity is approximately $60 million.

In addition, our pro forma leverage has declined by 270 basis points to 55.6% or 58.3%. We have no debt maturities until June 2022 and our weighted average debt term to maturity is 4.5 years.

Concurrent with the preferred share offering, we completed the third amendment to our credit facility. Key modifications included extending covenant waivers through December 31, 2021 and modified covenants through December 31, 2022.

Fixing the availability under the facility at approximately $159 million to the end of 2021 and allowing for the issuance of the preferred shares and for the payment to certain outstanding obligations. During the quarter, we also obtained relief on four CMBS loans totaling $57 million.

The relief included a deferral for funding FF&E reserves for six months, repayment of this deferral over 12 months and low debt service covenant waivers. For 2020, we were able to obtain relief on all 20 of our CMBS loans.

We have two underperforming non-core assets in Pittsburgh, which generate little or no FFO. On December 4, 2020, we made a request to the loan servicer for these two single property non-recourse loans totaling approximately $18 million that the loans be transferred to the special loan servicer in order to modify the loan terms.

One of the loans is currently in cash management and the loan servicer is using the cash reserves to keep the loan current. For the second loan, AHIP has not made any loan payments since November 6, 2020, and in January, AHIP was notified by the loan servicer of the occurrence of an event of default.

The event of default does not impact any of AHIP’s other loans. We are currently in discussions with the loan servicer about modification of loan terms.

As mentioned earlier, we also collected $2.4 million loan proceeds plus accrued interest from the purchaser of the Economy Lodging Portfolio. The proceeds were used to paydown our revolving credit facility.

We also entered into an agreement to extend the maturity date for the remaining deferred purchase price of approximately $16.1 million related to the acquisition of 12 premium branded properties that was completed in December, 2019 with periodic payments and a final maturity date of December 31, 2021. As a result of the preferred stock issuance, we intend to make a one-time lump sum payment in April 2021.

After the quarter, we obtained an additional $5 million in U.S. government guaranteed loans, which maybe forgivable under certain conditions.

With that financial discussion, I'll turn the call back to Jonathan for some closing remarks. Jonathan?

Thanks, Azim. Having joined AHIP at October of last year, I've now had the opportunity to evaluate our strategy and market positioning, as well as hear from current and potential investors and all of you in the analyst community.

Our near-term financial focus will continue to be on protecting the balance sheet and preserving liquidity. Operationally, we will maintain disciplined cost controls to drive sustainable margin enhancement, ensuring that as rate growth accelerates, we are capturing that incremental revenue to our bottom line.

As we distance ourselves from the impact caused by COVID, we will be busy growing our portfolio through accretive acquisitions and ROI generating investments in our current properties as well as employing a measured approach to debt reduction. Obviously, all of this will be accomplished with the end goal of driving total return for our unitholders through unit price appreciation as well as reinstating our unitholder cash distribution at a sustainable level and at the appropriate time.

AHIP continues to have a solid platform for cash flow generation as normalized business conditions return. The initiatives undertaken over the last year have positioned our business to perform very well as the pandemic subsides and pent-up travel demand benefits our sector.

With a stronger platform for performance and an improving sector outlook, we are optimistic about the opportunities ahead. So with that overview of the fourth quarter and recent initiatives, we'll open the call to questions from analysts.

Operator?

Thanks. Hey there, everyone.

It looks like things are starting to look up on the travel front in the states and obviously some good numbers in February. Could you maybe give us an indication of what the March occupancies have looked like thus far?

Hi, Lorne, it's Bruce. I think through last night, approximately, we're running through the first 10 days, about 63% occupancy.

It sounds great. Still trending in the right direction.

That's fantastic.

Yes.

And did you guys – I know you said, hopefully, you don't expect any negative financial impact from the storms. But was there any uptick in stays in Texas and Oklahoma in the affected areas as a result of the storms?

Yes. Not so much in Oklahoma, but we did see some increased volume in Texas.

It wasn't so much project-related business we saw in Texas, but it just seemed like people were moving around quite a bit. And in some instances, there were homes without either power or water.

So people looking for kind of a well provisioned hotel to shelter until their homes were back on line.

Fair enough. But it was a material or not really?

Not overly. I mean, as we've mentioned, we've seen a noticeable uptick in general since President's Day week.

And certainly, it's been a little stronger in Texas, but the portfolio overall has been exhibiting stronger occupancies.

Okay. And then you guys kind of mentioned just at the end there, leverage reduction remains a priority.

And I think that you guys are still above to the 55% even after the investment. How do you see that kind of unfolding?

Where do you want to get and what leverage do you guys have to pull to get there?

You bet. Lorne, it’s Jonathan.

And certainly, directionally, we want to be at a level that's more consistent with what you'd see from other U.S. hotel REITs, certainly, those in the select-service space.

Our debt to enterprise value, of course, is going to look fairly lofty in these times given the unit price. But directionally, that's where we're headed.

In the near-term, we're focused on generating the cash that would allow us to begin to paydown debt either on a one-off basis or just by growth initiatives that are taken on at lower leverage rates.

Okay. Would you guys think about doing any more non-core dispositions?

Or is there an appetite for that out there?

Certainly, the - there's a lot of capital in the market right now chasing deals. And on the flip side, there’s not a lot of deals available for that capital.

So we actually expect that, in the short-term, assets will begin to trade up because of the immense supply of private capital. Whether or not we would like to transact probably – it's probably for debate, recall that we have fixed rate debt securing our properties.

And so in many cases, releasing that tends to be punitive.

Got it. And then one last, just a clarification, I guess.

I think I read you guys can't reinstate the distribution as long as you guys are in the covenant waiver period. Is that December 2021 that ends?

Or is that 2022?

The covenant waiver period ends 2021, but then there's modified covenants through 2022.

So you wouldn't be able to reinstitute a distribution until the end of 2022?

No. That's not correct.

No. It's only until the end of 2021 there is restrictions.

Got it. Okay.

So as long as we’re on covenant waiver, we can't reinstitute a distribution. But if 2021 was to really improve and we were able to come out of covenant waiver earlier than December 31, 2021, we would be able to reinstitute the distribution.

Okay. Great.

Thanks so much for the color, guys. I'll turn it back.

Great. Thanks.

Thank you, and good afternoon, guys.

Hi, Matt.

In terms of your occupancy, certainly, things are trending positively at 63% in March. How should we be thinking about the near-term ceiling before the business travel starts to come back?

Hi, Matt, it’s Bruce. My view is we still – we certainly still have room to grow.

And we are seeing along with the leisure travel more project-oriented business, right? That's maybe related to medical and COVID type things, but also construction and projects just in markets as a whole.

So we're seeing that segment grow, so that should help boost our occupancy as well. I think our challenge quite frankly in the months to come is going to be our ability to move average daily rate in the short-term until the corporate segment returns.

So I guess if current trends persist, we should hopefully see steady occupancy increases through the balance of the year, but with the ADR generally steady until the corporate demand returns?

Yes. I think that's fair.

And I think also just to be mindful, we do have a – we're coming out of a seasonally lower occupancy period, right? And the portfolio has operated really in a very similar way to previous years over these last three or four months.

So we traditionally see occupancies grow as we head out of February into March and beyond and kind of see peak occupancies more like June, July, August and even a little bit in the fall months. So I think we're going to – I see no reason why we won't continue that pattern.

And maybe turning to the margin, you talked a lot about being able to preserve that as costs starts to come back on line. Any sense for how we should be thinking about emerging in 2021 more broadly?

Yes. Well, let me give you a couple of examples of what we've seen.

And it's difficult to answer your question, and I'll tell you why. But in our rooms-oriented hotels, right, which is the portfolio that we have, two of the larger costs are housekeeping and comp food and beverage, okay?

So when we look at comp food and beverage, which again, is breakfast and evening receptions, our costs have declined from 2019 where they were at $3.87 per occupied room. In Q4, that number was a $1.69.

So – and based on a minimal offering. We do believe that that cost will start to increase as the brands kind of reset some of those offerings as we head in towards the summer.

But we don't see them going all the way back to where they were in 2019. So it's difficult to say because we still don't know today what that offering is going to look like.

But we would expect to see some more expense out of that line item. Similarly, from a housekeeping perspective, our housekeeping costs for occupied rooms declined 21% this year compared to prior year.

So I don't imagine we're going to see significant changes in housekeeping quite honestly through the remainder of 2021. But there maybe some additional costs that creep into that line item.

So maybe if I try to roll all that commentary up, if we think about the margins for 2021, hopefully they’ll be above where they were last year, but maybe not quite as high as 2019 this year, and then moving on to 2022, perhaps you could see them even a little bit better than 2019.

Yes. I think that's fair.

And the other thing I'll add, Matt, is that Q1 of this year is acting very much like Q3 and Q4 of last year, right, given the volumes that we've had, so there's been very little ramp up of costs in Q1. So the cost increases, we'll see – I think we'll see over the summer.

I think when we talk again in a couple of months, we'll probably be in a better place to give you a sense of what we're seeing and what the brands are thinking.

And I totally appreciate the challenges in the current environment, just trying to make sure we get the directionality correct. Maybe changing gears to a couple of your hotels in Pittsburgh where the CMBS loans are under modified covenants, maybe just some color on what's happening there?

And if there are other similar hotels across the portfolio that could be finding some trouble?

I'll take that. Matt, it’s Jonathan here.

And these properties were purchased in 2013, they're roughly 130, 116 keys. We’re entering into discussions with the loan servicers, which would entail either a deed in lieu foreclosure or an amended loan amount.

So we're focused on things like releasing reserves, restricted cash that's currently sitting at the property level to buy some optionality for the properties to bounce back. But we're – all initiatives are currently on the table in our discussions with the loan servicers.

These properties have been distressed pre-COVID. There's been a substantial amount of supply coming into these particular sub markets outside Pittsburgh.

And so there's recognition on both sides that values have decreased. There are a few other properties that we're looking at, but that are not in this – that I wouldn't categorize in the – exactly the same as the ones I just discussed.

But those are regular asset management discussions that we have with our team and with our lenders.

Would that be a similar quantum roughly $18 million little bit less, little bit more?

It would be similar. Yes.

And maybe just one last big picture question for me. Like when you guys take a step back and think about the year ahead, obviously 2020 was a very challenging year, but for 2021, where would your top three priorities lie?

So operationally, what we just talked about with margins and margin control and maintaining our operating expenses where they are, and really focused on as we mentioned as rate comes back, we want those incremental dollars to flow directly to the bottom line. Number two, we're continuing to preserve liquidity, protect the balance sheet.

And number three, as we get closer to the end of the year, I think we're going to start to see with growth opportunities. And with that, we'll have more conviction with respect to our balance sheet to be able to go out and pursue those opportunities.

Well, I appreciate the commentary. I'll turn the call back.

Thank you.

Thanks.

Hi. Good afternoon, everyone.

Hi, Joanne.

Maybe just a follow-up – just maybe a quick follow-up on that margins, see if I'm getting it correctly. So do we expect – should we expect margins, I guess, in the first half of the year to remain somewhat similar to what we saw in Q4 and potentially given the pickup in occupancy that we could see still some deterioration in the back half of the year?

Yes. I think – Joanne, it’s Bruce.

I think in general, that's fair. I think we'll continue to see our costs tamped down similar to what we saw in Q4 certainly through Q1 and coming into Q2 as well.

And then I think we will see some cost increase as we get into the key summer months. But that's also one we're anticipating certainly more occupancy and we believe we'll start to see more rate at that time of the year as well.

So we anticipate strong margins quite frankly through the entire year, but we'll see some more costs come into the business in the back half of the year.

Okay. That's helpful.

And I guess, right now is – internally what is the thinking – I know it's good to see the occupancy will pick up. But for the first half of the year, internally, what are you guys thinking in terms of the overall occupancy and it’s kind of hovering around the mark with – March numbers are?

Or…

Yes. Joanne, it’s Bruce, again.

Our visibility is incredibly limited, right. I think I mentioned in my opening comments.

Our booking windows are five and eight days, like five days for kind of the nightly stay and eight days for the extended-stay. And even the group and project type work is booking incredibly close into arrival.

So we don't have our usual visibility on demand patterns kind of little further out. So that's handicapping us just as a comment.

But I would expect as vaccination levels increase, we believe there's certainly pent-up leisure demand, which is the market segment that we're seeing the most of today, that demand is going to continue to grow as we head to the kind of peak summer months.

Great. That's helpful.

I think you guys in the U.S. vaccination, a lot of focus on what's happening here in Canada.

So that helps. Okay.

So yes, and most of my questions have been asked, so maybe I'll leave it there and I'll turn it back. Thanks very much.

Thank you.

Thanks, Joanne.

Hi. Good afternoon, everybody.

Hi, Tal.

Just to pivot back to the balance sheet. Jonathan, you had mentioned earlier, like some potential sort of debt targets that you're looking for and made the comment that we want to sort of be where some of our peers are.

And I guess when I'm thinking about things on through debt-to-EBITDA basis, I kind of look at all the peers right now and everybody's balance sheets a little off. So I'm kind of wondering like what in a more stabilized world, what number on a debt-to-EBITDA basis would you kind of be shooting for?

Yes. That’s – you're correct.

In this environment, everything is little skewed and the best you can do is look at comparatively speaking to 2019 levels. But I would venture to say that when you look at our select-service peers, and as we get better visibility to normalized EBITDA, we'll be able to come out with a – the stronger statement around what our targets will be.

But in this environment, clearly we are super focused on preserving liquidity and bolstering the balance sheet. And we'll continue to do that until we – I can give you normalized metrics in terms of debt-to-EBITDA.

If I recall correctly, like I think like a lot of the select-service – it sort of felt like that kind of five-ish time EBITDA number on a stabilized basis was sort of in and around where most people were playing. Does that match your thinking?

It was a little higher than that, Tal, I think you're looking at 2019 levels.

Yes.

Yes. It range between 5.5, say to 6 or 7.

Okay. And then just a couple other questions just overall industry, it’s just about the industry cycle.

This is obviously like – I think the commentary prior to this event had sort of been how long the prior hotel cycle had been running. And this is such also not sort of like your kind of standard turn in the cycle as sort of a weird turn in the cycle.

Do you think like the history of kind of prior cycles applies sort of the same way that sort of like the industry kind of take a sharp turn and then rebuild really slowly? Or do you think it's going to vary a little bit differently this time just because the circumstances were so weird this time?

Yes. I assume are you talking more about supply and demand.

Are you talking more about just operating performance?

Yes. Like just operating performance, just overall the industry's growth had sort of – coming out of the financial crisis had really gone on quite a long time?

Right. Yes, I mean, there are varying theories on that.

Certainly, if you'd speak to – we spend a lot of time on this call talking about normalized demand levels in the full-service sector i.e. business demand.

And if you follow many of the public – full-service REIT companies, they're signaling tremendous group demand for the second half of the year. And that's being driven by the groups themselves.

It's the meeting planners reaching out to the hotels and scheduling meetings, people want to meet. And so unlike many of the downturns, whether it be 2001 or 2008 that have occurred previously.

This downturn has really been a single event-driven. And there's speculation about who will, whether people will return or whether people will want to meet.

What we're hearing from the market is that people want to meet. And so there is a strong and compelling argument to state that there'll be a quick snapback and release of pent-up demand.

Okay. And then just lastly to – there’s a lot of sort of conventional wisdom around the impact of Airbnb on the industry pre-crisis, the company since gone public, the world has shifted on taxes.

Do you think what's your sort of view on that kind of service offering and its impact on the hotel industry over the longer time in a post-pandemic world?

Yes. Certainly, that was a topic of discussion within our industry and continues to be since pre-pandemic.

Airbnb is really a – it's a supply phenomenon that exists, that is market specific. So what you'll see that – where it primarily impacts is larger of an environments, where people are renting out their multi-family residences condominiums.

And in our situation in suburban properties with properties next to interstates that really, really catered to interstate travel and highway travel, they're less impacted. So not to say that, overall, Airbnb supply in the market affects overall hotel supply and therefore leads to a lack of compression in certain markets.

And it's – that phenomenon is out there, but less of an impact in the markets that we play.

So that would be a pretty similar view at least for your portfolio from pre-pandemic to post-pandemic, I mean, you don't really see much of a change.

Absolutely. Yes, it's the same.

Okay. Great.

Thanks very much.

Thanks so much, Tal.

Thank you again, everyone for joining us on our call today. And we look forward to speaking with you in May, when we report our first quarter 2021 results.

Have a good day.