American Hotel Income Properties REIT LP

Thank you, operator. Good morning, everyone, and thank you for joining us for our first quarter 2021 results conference call.

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

Thank you, Kelly, and thank you, everyone, for joining us today for our first quarter financial results conference call. I’m going to begin by highlighting our results in the first quarter of 2021 and the various dynamics currently at play in the hotel industry environment.

After that, I'll hand it off to Bruce and Azim to provide more details on the company's operational and financial performance in the first quarter. The month of March 2021 marked one-year since the global pandemic began to impact the U.S.

hospitality industry. The last 12 months have reinforced our belief in the premium branded select-service hotel business model.

During this timeframe, AHIP’s topline performance has surpassed industry averages, while generating operating margins that have exceeded our peers. For every month since April 2020, AHIP has generated positive hotel EBITDA across the portfolio.

Since June 2020, all of our hotels have been open for business.

Thank you, Jonathan, and good morning, everyone. The first quarter began as a continuation of the lower demand seasonality that we typically see in Q4 and in early Q1.

That changed around President's Day weekend in mid-February, when demand patterns began an upward trajectory that has not subsided. Although, we typically see sequential monthly improvement as we distanced ourselves from the colder winter months, the percentage revenue increases between January and March were more significant than most years.

March RevPAR of $68.13 represented a 46% increase over January RevPAR of $46.52. As a whole, Q1 RevPAR of $57.01 exceeded Q4 2020 RevPAR by over 20%, pointing to meaningful signs of recovery for AHIP'S portfolio.

The macro driver of the demand increase across the portfolio has been the rapid dissemination of vaccines throughout the United States. At the beginning of the year, less than 2% of the U.S.

population had been vaccinated with one dose of the COVID vaccine. Three months later, almost 30% of the population had been vaccinated at least once.

Today, counting those who have been exposed to the virus, well over half of the U.S. population has some form of protection against the virus.

Total occupancy for our 78 hotels in the first quarter averaged 60.2%. On a monthly basis through the quarter, January occupancy was 51.2%, February occupancy was 59.9%, and March, which saw a major breakthrough in demand due to spring break traffic in the Sunbelt finished at 69.4% for the month.

Thank you, Bruce. Good morning, everyone.

The last three months operating performance has brought confidence that sustained business recovery is underway. As we have since the pandemic began, we continue to focus our efforts on protecting our balance sheet and maximizing liquidity.

We believe that our collective efforts are reaping rewards as cash generated from hotel operations along with our preferred equity raise have allowed us to paydown debt and significantly reduce our payables since beginning of the year. For the three months ended March 31, 2021, revenues decreased by $15.1 million to $46.7 million as compared to $61.9 million for the same period last year.

Q1 2021 reflected a full quarter of pandemic impacted results as compared to 2020 when the pandemic was first declared in March. Q1 of last year also incorporated an extra day of revenues in a leap year, which translated to approximately $1 million of the topline.

RevPAR decreased 19.5% to $57.01 primarily driven by ADR decrease of 16.8% to $94.70 as occupancy only declined by 3.2% to 60.2% for the first quarter of 2021. Despite the 24.5% decline in revenues in the quarter, NOI only decreased by 16.1% and NOI margins increased from 28.9% in Q1 2020 to 32.1% in Q1 2021.

Loss and comprehensive loss for the quarter was $14 million compared to a loss and comprehensive loss of $12.6 million for the same quarter last year. Diluted loss per unit for the quarter was $0.18 compared to $0.16 in 2020.

Funds from operations was negative $2 million or negative $0.03 per diluted unit after deducting the net income attributable to non-controlling interest of $689,000, which is a new item this quarter in connection with the preferred stock issued in January. Two non-recurring items caused FFO to go from breakeven to negative $2 million or negative $0.03 per unit.

The first, approximately $1.3 million in non-recurring financing charges related to interest and penalties, and the second, $1 million in non-recurring general and administrative charges related to employee severance costs. In terms of the liquidity metrics, in Q1 2021, we obtained an additional in U.S.

government-guaranteed loans, which maybe forgivable if certain conditions are met. The total amount of such loans received in 2020 and 2021 was approximately $15 million.

AHIP did not recognize any additional impairment charges in the quarter. AHIP’s discussions with loan servicers on the two underperforming non-core assets in Pittsburgh that we discussed on the Q4 earnings call are ongoing with respect to modification of the terms of these loans.

As at March 31, 2021, AHIP had total available liquidity of approximately $60 million with an additional $31 million of restricted cash held in various reserves with the loan servicers. This was compared to March 31, 2020, when AHIP had total available liquidity of only $20 million.

Subsequent to quarter end, we continued with our efforts to clear significant outstanding liabilities. We repaid the deferred purchase price of approximately $16.2 million, including accrued interest to the vendor on AHIP's acquisition of the 12 premium branded hotels in December 2019, thereby fully discharging this liability.

Today, following our preferred equity raise and debt paydown, we have approximately $40 million of available liquidity comprised of both unrestricted cash and revolver capacity. With these financial highlights, I will turn the call back to Jonathan for some closing remarks.

Jonathan?

Thank you, Azim. Over the last 12 months, we witnessed the incredible commitment, kindness, and encourage from the frontline hotel teams responsible for greeting the guests that frequent into our properties on a daily basis.

We've also seen our regional management teams shepherded by our external manager, adjust our operations in a very unpredictable demand environment. The resulting performance of our portfolio speaks to the diligence and pride that they take in their work.

We are very grateful for their collective efforts. As announced, Chris Cameron, our Chief Investment Officer will be departing AHIP at the end of May.

Chris has a long track record of service to AHIP, and we are grateful for his time here and wish him all the best in his future endeavors. After withstanding the challenges of the last four quarters, I'm very excited about the opportunities that lie ahead for our business.

The strength of our premium branded suburban select-service hotel portfolio has shown through over this past year. As we look ahead, we will continue to focus on our key priorities.

Operationally, we'll maintain our attention on cost containment and margin enhancement, so that as rate growth accelerates, we optimized flow through to our bottom line. We will continue to protect the balance sheet near-term and deleverage over time.

We will pursue accretive opportunities to deploy capital in our existing portfolio and through new acquisitions. Our end goal remains to drive 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.

So with that overview of our first quarter and recent initiatives, we'll now open the call to questions from analysts. Operator?

Hi. Good afternoon, everyone.

Hi.

Hey. In regards to the distribution and you kind of just alluded to it before, and also in earlier comments you said that there still is a lot of uncertainty regarding where margins will stabilize the costs and recovery.

Can you just update us maybe on what metrics – and what are the steps that you would take before we could see the distribution reinstated just so we should know what to look for?

Sure. So it's a great question and we understand the value of the distribution to our investors.

And just from a macro standpoint, we believe we understand the importance of reinstating a more meaningful dividend as operations continue to improve. One of the things to focus on is as we look at the metrics related to cash flow, the driver of that is our recent amendment to our revolver, which has a covenant waiver period, which ends at the end of 2021.

And according to the recent amendment, there's a restriction, so long as we're in covenant waiver that we can't reinstate a distribution. But if 2021 was to meaningfully improve and we are able to come out of covenant waiver earlier than December 31, we would be able to reinstate the distribution, and of course, that is a Board decision and the Board would weigh all factors.

So would it be reasonable to say that you expect that by this time next year though that there will most likely be a distribution?

If we were to continue on our current trajectory, Mark, certainly that would be – that's what the models would tell us. But like I said before, this is ultimately a Board decision and the Board would weigh several factors into totality.

Okay, great. On a separate point, you've brought in two sophisticated investors to partner up with you and with the preferred capital.

Can you just talk about what benefits this brings to AHIP maybe that you've seen already or that you expect to come in the future?

Sure. Yes, we've since closing on the transaction at the end of January, we've had two Board meetings already.

And these folks are also part of our investment committee, governance committee, and we have a chance to interact with them on a daily basis. These are two investors both in the hospitality and real estate that have a quite a broad reach across the United States and provide some really meaningful information and feedback on the state of the market and what they're seeing both from counterparties on acquisitions.

But also in the debt markets and also bring with them a view on our business, on our operations, and validation in that respect. So all those factors contributed to why we chose them ultimately to – as the investor in our company, and those have played out exactly and if not better than what we had hoped for.

Okay, great. Thanks so much.

Thanks, Mark.

Hey. Good afternoon, everyone.

So just going back to your comments about May continuing to improve, do you guys have any numbers on occupancy and ADR thus far?

Yes. Hi, Lorne, it's Bruce.

Yes. So through May 11, so a couple of days ago, we don't have last night's results yet.

Occupancies at 66.7% through the first 11 days and our ADR is at $107.23.

That's good. You're seeing the ADR keep climbing.

Okay. And I guess there was a few kind of groups you mentioned that are sort of, I guess, supporting the occupancy of the National Guard and some construction projects.

Do you guys expect there to be a drop-off in demand from those groups and a corresponding drop off in occupancy? Or do you think kind of nets out to zero as this progresses?

Or do you see a net improvement going forward?

Yes. I don't think there's going to be a drop back just for what it's worth.

I think at a minimum, it'll stay at the kind of the current rate that we're seeing if not grow some. I think there continues to be pent-up demand not just for leisure travel, but for some of the construction and project work that we seem to be seeing kind of across the states we operate in.

Okay. And then I think you guys mentioned the capital cycle in the MD&A.

I was wondering what the intentions for that? And just as an extension, maybe where do you guys want to try and get leverage to by the end of the year?

It's pretty difficult to model that right now, Lorne, just with the variants in the operating environment. Certainly, we know where we want to be in the intermediate to long-term and that's more in line with our peer group average.

But it would be difficult at this point to provide a metric for year end.

Okay. And then maybe just lastly, are you guys seeing anything on the acquisition front?

Is there any – if the right opportunity came along, would you guys be willing to execute? Or is that you guys still kind of focused on stabilizing the operations?

No. We're in the market to track acquisitions and for the right opportunity, we would find a way to get a transaction done.

There has been just as a industry metric, Q1 transaction volume was down 52% year-over-year nationally. But in the last month or so, there's been a meaningful increase to the number of broker deals in the market.

And by our count right now, there's over a 100 deals in the select-service space alone. So there's activity out there.

We need to be part of – we need to be underwriting those deals to understand where values are, but also minding them for a potential opportunistic purchase.

Great. Okay.

Thanks, everyone. I will turn it back.

Thank you, and good afternoon. Jon, when we think about the recovery, I know it's hard to pin down the exact details.

But could you talk a little bit about how you expect the shape of the recovery to progress? Like, said differently, do you expect a big surge in demand and the back half of this year is vaccines rollout and your momentum continues or do you think that eventually we kind of reach a point where the initial surge is over and there's a long drawn-out tail to the recovery?

Well, this recovery is different than what you would have seen after the global financial crisis in early 2000 and that is single-event driven. And there's a tremendous amount of pent-up demand out there when consumers as we've seen in Q1 with disposable income wanting to spend on travel.

So unlike what we would typically see, which would be stepwise recovery, the dynamics shaping up for Q3, Q4, i.e. the return of the business traveler could entail is something much more than a stepwise recovery i.e.

more of a V-shaped recovery on the demand side. So that's as you know, very difficult to model.

As you look at our full service peers and what they're saying with respect to corporate and group business, they're having inbound calls from meeting planners for corporate business in Q3, Q4. And like we said in our past call, that's kind of when we expect really demand to leap and therefore create some compression in some of these markets that we are in thereby allowing us to pick up rate even more than what we're seeing right now.

So semantically would you hope to be approximating 2019 levels next year or the year after?

Well, we would hope to be approximating 2019 levels in the next 12 months, but realistically the – depending on who you speak to and whether it be CBRE or STR or HVS most are modeling 2023 as the return of 2019 levels. But that is like I said, extremely difficult to model at this time.

You certainly sell a lot of variables. Maybe just changing gears a little bit, when you think about the mix of demand for your business in terms of leisure versus corporate, could you tell us where that was in 2019?

Where that is currently? And if you think that mix shift will go back to the way it was or if we could see more demand from leisure travel going forward?

Hey, Matt. It's Bruce.

I'll take that question. I think in many ways what happened is we've kind of flipped the demand.

So we were probably more in the 60% to 70% corporate demand range and with the remainder being leisure in 2019 or prior, and I would suggest to you today, we're more like 60% or 70% leisure with the remainder being kind of corporate and group oriented business. Although we have seen some corporate business kind of coming back into our hotels, I would tell you that it's been quite slow.

I do expect there will be a day when our peak days return to Tuesdays and Wednesdays away from Fridays and Saturdays, right, which is really that corporate group-driven business. So when that's going to happen?

I'm not too sure. I am optimistic that as we get into the back half of 2022, that life will feel a little bit more like it did pre-pandemic as far as the demand coming into our hotels.

The other thing about corporate business just that I think is worth commenting on, that's typically higher rated business for us. So as it comes back into the hotels, I think that's going to have a beneficial impact on the rate that we see.

Good color, Bruce. And maybe last one for me, just in terms of the transaction market.

I know you're monitoring it closely. Could you give us a sense for the – where you're seeing pricing for non-distressed assets, I mean, relative to kind of pre-pandemic levels?

Sure. We can tell you where the ask is because a lot of these transactions haven't consummated yet.

If you look at the transactions that have been done in Q1, there were lot of kind of lender controlled dispositions. But as we enter Q2, there'll be more arm's length non-lender involved by sales.

And so the ask right now from the – on the deals that we've been tracking are – and everybody's price into 2019 levels are in the 8.5 cap range on 2019 NOI. Buyers, there's about a 15% to 20%, bid-ask spread.

But that's changing pretty dramatically in favor of the sellers. So it's quickly becoming a sellers market.

And there's a lot of capital on the sidelines waiting to pass.

If it does indeed become a sellers market, would you be open to selling any assets to reduce leverage?

We're always contemplating that just because it's a sound policy with respect to asset management. We don't have any currently that we're actively engaged on.

But we certainly do get inquiries from time-to-time.

Well, appreciate the color. Thanks, Jon.

I will turn it back.

Thanks Matt.

Hi. Good morning, everyone.

Sorry, good afternoon.

Hi, Joanne.

Hi. Just wanted to check on the acquisitions front, obviously things are picking up just within right now.

What would you say your overall capacity would be for – within your threshold for acquisitions, if you were to undertake any overall acquisition capacity?

You cut out a little bit, Joanne.

Sorry about that. As your balance sheet stands right now and kind of you're thinking over the near-term.

With respect to undertaking acquisitions like what would you say your capacity is right now?

Sure. Well, looking at the – our cash balances right now, it's limited in what we could do.

I can tell you that the debt markets are opening up quickly. But we see acquisitions as a way to re-equitize our portfolio.

So if we did so in the next 12 months, it would be simply by either transacting with a vendor that would take equity in our units or perhaps by bringing in a strategic investor issuing equity directly to them on an acquisition. So those are some of the structures that we're contemplating.

Certainly, we'd like to be in a position where we reinstate the distribution and we can issue equity in the open markets. But in this environment with some of the attractiveness of the deals that we're looking at, we have to look at creative ways to be able to fund acquisitions in the next nine to 12 months.

Got it. That's helpful.

And maybe just going back on the ADR, obviously it's nice to see that swift recovery. But – and just going back to your previous comment with respect to kind of the corporate clients coming back, should we be expecting kind of a acceleration in the back half and business travel do in fact presume?

Hi Joanne, it's Bruce.

Hi, Bruce.

So I think it's fair to think that we'll see greater ADR recovery as that corporate customer returns to the business. It's going to be contingent on how quickly they come back, right and what kind of compression we start to see across our portfolio.

But I do think we'll see greater growth with the corporate customer back in the market.

Have you been seeing some – a little bit of a recovery in the last month or so?

Yes, we have. It hasn't been substantial like over the last two or three months, there are a few markers that we see in the business that are showing some positive signs.

So negotiated rates, segment is something that's improving on a month-over-month basis. And those negotiated rates are typically with corporate clients.

As well GDS bookings, global distribution systems, again, typically more a business or corporate customer using that stream to book hotel rooms we're seeing. And then I would also just tell you anecdotally, our meeting room revenue from just booking our meeting rooms across our portfolio has been increasing over the last three or four months.

So it's not always attached to guest rooms, but we certainly have more local businesses that are booking our meeting rooms for day meetings or meetings over a couple of days. So we see more revenue from meeting room book rentals as well as actually some F&B revenue.

Still the F&B revenue is still far from where it was, but we see that as a positive sign of that guest type returning to the hotels.

Got it. That's helpful.

And just one last one for me. I know you said there's a lot of moving pieces, obviously still in this recovery process.

Didn't want to really get guidance with respect to – on the margin front, but I would imagine with demand coming back up that we should continue to see a slow improvement in margin, obviously above the 2020 levels, but would it still likely be below 2019 levels for 2021?

No. Joanne, I think we're going to see – well, so two – kind of two questions or your two comments.

I think we're going to continue to see margin improvement as we move forward certainly compared to 2020. And in fact, what we're seeing is some margin improvement over 2019 at this point because of the relaxed brand standards and around complementary services and housekeeping type services.

So we're anticipating we're going to see some margin growth on an ongoing basis when we look back at 2019.

Okay. That's really helpful.

Okay. That's it for me.

Thanks. I'll turn it back.

Hi, Tal.

Hey. Just to maybe put a finer point, I mean, this portfolio sort of as it exists right now was sort of only in that, like as it was constructed just for a moment right before the pandemic hit like with the final transaction to get some of the portfolio to where it is today.

And so we've been talking a lot about like, trying to get, making a lot of references back to 2019, I guess, like what I'm asking though is when I look at like some of the operating metrics, it's like, we don't really have a lot of history with the portfolio as it is. And so what are the target ADR, target occupancy you think you ultimately can get with the current portfolio of the hotels?

Yes. Well, I – it's Bruce.

You're absolutely right. We didn't really get to see the full benefit of the assets we acquired right back in December of 2019.

Those are newer assets, more extended – eight of the 12 are extended stay, which run at higher margins. So you're absolutely correct on that point.

And we clearly improve the quality of our portfolio with that acquisition. With regards to target ADRs, that's a difficult question to answer today because there's been so many dynamics that have been impacting regions and our portfolio as a whole.

I would hope that by the end of the year or maybe this time next year that we can have a much more educated comment around where we see ADRs and RevPARs for this portfolio stabilizing. But it's pretty tough to tell right now in the absence of that group segment, really that isn't in the market these days.

So I think we honestly need a little bit more time before we can get you a solid answer on that.

Okay. So if you can’t give us a solid answer, then I would assume then if you're looking to take on more strategic equity or something like that, you are going to need to have an answer to that question now?

With respect to our guidelines for the next 12 months or the next 24 months?

Well, no, you said in earlier question that you would maybe look to raise more equity with strategic investor to go buy stuff. I'm assuming you need to have answers to those questions about sort of where your long-term targets are in order to bring in more equity.

Yes. I mean, we successfully did our prep raise in January based on the current dynamics, I think with – as we – with each week that goes on Tal, we have a greater visibility to what we think are our new kind of 78 hotel portfolio will perform at in the next 24 months.

Certainly, that's a challenge in this environment right now. And that’s really, I think, frankly, nobody has the – I know is with 100% certainty.

Okay. And then if performance normalizes in the way that you think it might, what does the debt-to-EBITDA ratio for this company look like coming out of that?

Yes. Again, Tal, that's a pretty difficult question to answer right now.

I think you asked me a variance on this – the same question in March, which is directionally where we headed. And based on 2019 EBITDA levels, the peer group median is around 5x and there's a broad range around that, but directionally that's where we want to be heading.

And all of our efforts with respect to acquisitions and how we finance new deals, how we refinance existing deals, we'll all be pointed towards that target.

Okay. That's great.

Thank you very much.

Great. Thank you.

Great. Well, thank you again, everyone for joining us on our call today.

And we look forward to speaking with you in August, when we report our second quarter 2021 results.