American Hotel Income Properties REIT LP

Thank you, Operator. Good morning, everyone and thank you for joining us for our Fourth Quarter 2021 Results Conference Call.

Discussing AHIP's performance today are Jonathan Korol, Chief Executive Officer, Bruce Pittet, Chief Operating Officer, and Travis Beatty, Chief Financial Officer. The following discussion will include forward-looking statements as required by securities regulators in Canada.

Comments that are not a statement of fact, including projections of future earnings, revenue, income, and AFFO are considered forward-looking and involve risks and uncertainties. The risks and uncertainties that could cause our actual financial and operating results to differ significantly from our forward-looking statements are detailed in our MD&A for the three and 12 months ended December 31, 2021.

Our other Canadian securities filings available on SEDAR and on our website at ahipreit.com. AHIP does not undertake to update or revise any forward-looking statements to reflect new events or circumstances, except as required by law.

Investors are urged to review the full discussion of risk factors on annual information form dated March 15th, 2021, which has been filed on SEDAR at www. sedar.com.

Our fourth quarter results were made available yesterday afternoon. We encourage you to review our earnings release, MD&A, and financial statements, which are available on our website as well as on SEDAR.

On this call, we will discuss certain non-IFRS financial measures, including NOI, hotel EBITDA, FFO, and AFFO. 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 our MD&A. References to prior year operating results are comparisons of a hit current portfolio of 78 properties results in those periods versus today.

All figures discussed on today's call are in U.S. dollars, unless otherwise indicated.

I'd like to remind everyone that this call is being recorded today, March 9, 2022, and a replay of this call will be available on our website. Jonathan will begin today's call with an overview of operational, and financial highlights, followed by Bruce, who will provide an update on hotel operations, and lastly, Travis will highlight key financial results.

I'll now turn the call over to Jonathan Korol, Chief Executive Officer.

Thanks, Kelly. And thanks everyone for joining us today for our fourth quarter financial results conference call.

During 2021, we witnessed an acceleration in the recovery of our business following the outbreak of the COVID-19 pandemic in 2020. Despite an ever-changing operating environment that presents unique challenges for our corporate team and hotel associates, our business continued to narrow the gap to 2019 revenue levels in each quarter of the year.

This was true for all three segments of our business. Our 49 select service properties, our 24 extended stay hotels, and our five property Embassy Suites segment.

Similarly, Q4 was characterized by increasing revenue recapture rates in each month of the quarter. Highlighted by November and December, average daily rates finishing above 2019 levels.

As we have highlighted in the past this recovery is being led by rate growth with average daily rate narrowing the gap to 2019 sooner than occupancy. This is a healthy signal for operating margins.

For the year, although we ended up missing 2019 revenue levels by 22%, our GOP margin was up by 370 basis points versus 2019. A meaningful amount.

This points to the brand driven modifications to services and amenities in the operating model, that benefit hotel and the owners, in addition to average daily rate driving the demand recovery. Consistent with what was experienced across the industry, January demand softened as omicron concerns postponed travel plans and led many companies to delay return to office plans.

We have witnessed a bounce back in demand in February that is accelerated into March. February finished with a 91% RevPAR recapture rate versus February 2019, which is a continuation of the trends that we saw in the latter half of 2021.

Easing restrictions and return to office trends across the U.S. bode well for improving business and group demand as we approach our busiest quarters of the year.

We are continuing to improve our leverage and liquidity profile. In Q4, we refinanced our convertible debentures well ahead of their June 2022 maturity.

Our cash position is improving, while our debt-to-gross book value declined every quarter in 2021, improving by 420 basis points for the year. In January, we closed on the sale of an 89 room Fairfield Inn in Lake City, Florida in an off-market transaction to a local hotel owner operator.

The sale price of $10.3 million translates to roughly $115,000 per key and it's roughly a 7.6 yield on 2021 income. This was a non-core asset for a AHIP in a location characterized by imminent new supply.

In addition, a pending PIP requirement from Marriott that AHIP estimated would generate a low return on investment made the sale decision consistent with our overall asset management philosophy. When we announced the reinstatement of our distribution in November, we're one of the first North American hospitality REIT to do so.

At that time, we had no visibility to the coming COVID Omicron variant, but we had confidence that our business could withstand a variety of demand scenarios. Over the last few years, the resilience of the portfolio has been tested during some of the most challenging circumstances ever experienced in our industry.

AHIP's performance during this latest variant has reaffirmed our decision to reinstate the distribution and we are pleased to recently announce that our Board approved the February distribution payable in March, equivalent to $0.18 U.S. per unit on an annualized basis.

I'll now turn the call over to Bruce to discuss fourth quarter hotel operations. Travis will then highlight key fourth quarter financial metrics.

Bruce.

Thank you, Jonathan, and good morning, everyone. We're pleased to see the continued recovery of our portfolio in Q4.

Reduced brand standards coupled with strong ADR performance continue to result in margins above 2019 levels. Revenue increased from $39.4 million in Q4 2020 to $62.6 million in Q4 2021.

The leisure segment and project-related business continues to be the dominant demand driver across our portfolio as it has been throughout 2021. Corporate segment performance continues to lag leisure demand, although in February, we are seeing some improvement in corporate demand as measured by two key performance indicators, the negotiated market segment and GDS booking channels, both which have improved compared to Q4.

As more medium to large-sized companies returned to their offices, we believe that this will be the catalyst for increased corporate travel. Total occupancy for our 78 hotels in the fourth quarter was 64.9%.

On a monthly basis through the quarter, October occupancy was 70%, November occupancy was 65.3%, and December finished at 59.5%. In Q4, we experienced seasonal occupancy declines as anticipated.

However, the decline appears to be somewhat amplified due to the surge in COVID cases related to the Omicron variant in the United States from U.S. Thanksgiving through the end of the year.

Q4 2021 occupancy was 90% of Q4 2019 levels. 21 hotels or 27% of our portfolio posted occupancy above 2019 levels.

ADR recovery continues to outpace occupancy. Q4, 2021, average daily rate increased from Q1 2021 by 19.9% from $94.70 to $113.58.

Specifically, ADR by month for the quarter was $117.85 in October, $113.61 in November, and $108.52 in December. An aggregate ADR achievement for the quarter reached 2019 levels.

50 hotels or 60% of the portfolio -- 64% of the portfolio had ADR at or above 2019 levels in Q4. Q4 RevPAR was $73.76 or 90% of 2019 levels.

To better understand portfolio performance, we frequently referenced three segments in our business. Extended stay, select service, and our Embassy Suites hotels.

The extended stay segment outperformed the other two segments throughout 2021 with full-year RevPAR of $86.35, which is 87% of 2019 performance. The select service segment, full-year RevPAR was $65.98 or 82% of 2019 levels.

Despite lagging behind the other two segments, the Embassy Suites ' full-year RevPAR was $68.69 or 66% recovery to 2019. As a note, the Embassy Suites ' segment saw the biggest improvement in terms of recovery in 2021, moving from 48% of 2019 levels in Q1 to 80% in Q4.

Throughout 2021, several factors have contributed to margin growth in 2019, improving average daily rates, relaxed and reduced brand standards, and ongoing cost containment initiatives. Margins continue to benefit from the modification of certain brand standards, services, and amenities, following the onset of the pandemic in 2020.

These modifications varied by hotel brand and chain. For example, hotel breakfast has been reintroduced in the hotels, but with a narrower array of menu items.

Similarly, daily stay over housekeeping is now available for all brands, but only upon guest request. Total savings have been realized in rooms labor expense, which on a CPOR basis in 2019 was $15.84 compared to $13.76 in 2021.

Similarly, on a CPOR basis, complimentary food and beverage expense, including labor in 2019 was $4.98 compared to $2.97 in 2021. In both instances, cost pressure on these two expense categories has become more acute in the second half of 2021.

Although we have seen improved margin performance to 2019 levels, the hotels continue to have challenges sourcing labor, with in-house labor at approximately 65% of 2019 levels forcing hotels to use more third-party contract labor and experience higher overtime expenses, supply chain disruptions persist and our impacting hotel operations. In 2021, our capital spend has been focused on requests related to life safety and asset preservation.

In Q4, our total capital spend was $1.7 million and for the full-year 2021, capital spend was $6.6 million. In November, AHIP restarted two smaller property improvement plan renovations in Amarillo, Texas.

These projects to the onset of the pandemic in March 2020. These renovations were completed in February of 2022, looking at preliminary results for the first two months of 2022, the Omicron variant was most impactful to our business in January, where we saw forecasted occupancies declined throughout the month and finish at 54.7%.

ADR was flat to December at $109.27 and RevPAR was $59.72 or 81% of 2019 levels. The impacts of Omicron in February have rapidly diminished and business demand has quickly rebounded.

Initial results have occupancy in February at 65.8%, ADR at a $118.25 and RevPAR at $77.82 or 91% of 2019 levels. The February result is more aligned with the revenue recovery we experienced in Q4 21.

And 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 quarter.

Thank you, Bruce. We are pleased with the ongoing improvements and financial results compared to 2020.

Throughout 2021, we have made meaningful improvements to our debt structure and liquidity position despite the changing operating environment. These improvements position AHIP for the ongoing recovery in the hospitality sector.

At December 31, 2021, AHIP had $44 million in available liquidity, comprised of $15 million in unrestricted cash and $29.5 million of availability under our revolving credit facility. Q4 2021 liquidity remains stable from Q3 of 2021.

Restricted cash balance increased by $2 million from $36 million to $38.5 million at the end of the fourth quarter. The restricted cash will support our capital plans in 2022, where we intend to invest $20 million in PIP programs and $10 million in FF&E programs.

Cash flows from continuing operations was $10.4 million in the fourth quarter compared to a deficit of $1.6 million in the same period last year. Funds from operation or FFO was $6 million or $0.07 for the quarter compared to a negative $5.2 million or negative $0.07 for the same period last year.

These improvements were due to higher operating income and lower finance costs. Reported net income for the quarter was $14.1 million compared to a loss of nearly $21 million for the same period last year.

These improvements are primarily attributable to hotel EBITDA improvement of $10.4 million, fair value gain on interest and warrants of $1 million offset by a $12.4 million impairment charge for the period. In 2021, we generated EBITDA of $81.6 million, more than double the $41.3 million in 2020.

The increase in EBITDA significantly improved our debt to EBITDA ratio, which was 10.7 for the year ended 2021, compared to 25.4 at the same time last year. During the fourth quarter, we measured impairment at six hotels for a total of $12.4 million.

This impairment was isolated to certain hotels in the Pennsylvania and Oklahoma markets. We did not detect impairment in any of our other markets.

The carrying value for these assets has been reduced based on valuations of precedent transactions or value at a direct cap method based on stabilized NOI. Debt-to-gross book value at the end of the year reached 54.1% compared to 58.3% at the end of 2020, the decline is due to the repayment of $25 million of the revolving credit facility at the beginning of 2021, repayment of $16.6 million of a deferred purchase price on a prior acquisition, and $14.7 million in government guaranteed loan forgiveness.

Further improvements to leverage are expected through a combination of improved operating results, a sustainable distribution, and refinancing of debt instruments coming due. With improved operating results AHIP paid off the deferred March 2020 distribution on December 29th, 2021, as well as the first payment of regular monthly distribution of 0.015 per Common unit was announced on February 15th, 2022 payable on March 15th of 2022.

We're pleased to be in a position to resume the distribution. This reflects our confidence in our operating model and our outlook for the sector for the remainder of 2022.

The declaration and payment of each monthly distribution under AHIP's distribution policy remains subject to ongoing board approvals. On the revolving credit facility, we report that we're out of the covenant waiver period and expect to meet the debt service coverage ratios on a go-forward basis.

At the end of 2021, there were six out of our 20 CMBS loans not meeting the minimum DSCR or debt service coverage ratio threshold compared to 16 loans at the beginning of the year. Of these six loans, fiber and cash management, were in the process of being placed in cash management, and AHIP has not received any notifications from loan servicers regarding the remaining loan.

Failing debt service is not an event of default and AHIP has improving debt service coverage results for the past six quarters on these loans. Our recent convertible debenture issuance was successfully completed and at addressed a portion of our 2022 refinancing’s.

Our remaining 2022 maturity relates to a portfolio of four hotels in the Northeastern U.S. These hotels have strong operating results during the pandemic, and we do expect to address this maturity in the next few months.

I will now turn the call back over to Jonathan.

Thanks Travis. As announced, Matthew Cervino has replaced Mark Van Zant as a member of our Board of Directors effective March 8, 2022.

I would like to thank Mark for his service and welcome Matthew to our Board. Matthew's experienced with BentallGreenOak value-add fund initiatives will provide a meaningful benefit as we seek to grow the partnership between AHIP and BentallGreenOak that began with their equity contribution to the REIT in early 2021.

In closing, we continue to be enthusiastic about the ongoing recovery of our industry and the outlet for AHIP in particular. Reinstating our distribution is a strong signal about the belief that our management team has in our business.

We will continue to look to establish a distribution rate that's sustainable over an extended period of time, and that allows flexibility to utilize capital and other ways to improve the asset values. Our goal remains to drive total return for our unit holders through a sustainable distribution and unit price appreciation.

I appreciate all of our teams at the property level for their continued dedication to providing a great guest experience, and also the continued hard work of our corporate team. So, with that overview of our fourth quarter and recent initiatives, we will now open the call to questions from analysts.

Operator.

Thanks. I guess, good morning to you, guys.

More on the loan forgiveness, you guys said you're expecting in -- I think it's $5 million in Q1. Will that be in included in FFO?

And then how much additional government loans are currently under review for forgiveness?

So, Lorne, let me clarify. We had about $15 million in loan forgiveness and we recognized that in the third quarter.

We included it in our FFO, but noted that it was a one-time item and gave the adjusting items there. We don't expect any further loan forgiveness under that program.

Okay. Yes, I was wondering the 14.17 to line up with the number you guys had in Q3.

So that's great. And then maybe sticking with the debt side of things.

What's the market rate for refinancing now and would you guys expect to do any up financing on the 2022 maturities?

So, the numbers right now are in the mid-to-high 4s on the CMBS market. So, the maturity we had in July of 2022 is about $54.5 million.

So, we're expecting to refinance that in 4.5 to five range lowering it. It depends a little bit on how much leverage we take on at the lower-end of the leverage spectrum, we'd be at the lower end of that range and at the higher end of the spectrum, we'd be closer to 5%

Okay. And then maybe shifting over to the operation side of things.

Look like, I guess many operating businesses, obviously you guys got impacted by the labor shortages caused by all Omicron. How is that played out in Q1 so far?

And what's the premium you guys have to pay for contracted labor?

Hi, Lorne. It's Bruce.

I think we were clearly impacted in January from a labor perspective and illness was, I think across the entire portfolio, so our manager had to act quickly. We're probably paying about a 15% to 20% premium for labor when it's contracted.

There's at times a bit of an offset because we don't have to pay benefits to those folks. So, there's a bit of a calculation involved depending on how many of the in-house employees are in the benefit program and that thing.

But I think in general you can think of it as about a 15% to 20% premium for contract labor.

And do you guys think that will normalize in Q2 and go back to the -- I guess the average run rate?

I think it started to normalize in February. We're yet to see any results for February, but the issue was difficult in January.

And from what we've heard from our manager, things have started to sort themselves out in February. So, I would certainly hope by the time we get into Q2 that we'd be back to what we saw, call it the last half of 2021.

Okay. And then last one from me on the utility side.

Obviously, commodity prices are -- pricing environment is frothy, I guess you could say. You guys typically ran, I think, about 4% of revenue prior to the pandemic.

How do you guys see that checking out over the balance of the year? Or, I guess, over 2022.

If you have a crystal ball to share with us, we'd certainly like to share -- compare notes. We -- clearly this is --there's some macro trends here that would suggest that we're increasing.

But as a percentage of revenue, clearly in our business, we have the luxury of being able to pass on cost to customers, or resetting rates every day. So as that -- insofar as how it shakes out from a percentage of revenues, I think we'll just have to wait and see.

Fair enough.

I have a follow-up comment on the question you asked before. I answered that question in the context of CMBS refinancing, so kind of a like-for-like on that maturity.

We also have capacity on our revolving credit facility to address that maturity, either temporarily or into the medium-term; that credit facility doesn't mature until December of 2023. And if we put it on the revolving credit facility, the rate will be in the 2% zip code.

Although we acknowledge that that's based on rates today with the Fed-expected hikes, that rate would be rising but the initial rate under the revolver would be around two.

Okay. Thanks so much.

I'll turn it back.

Hey, good morning, guys. Sticking on the labor shortage front, I was reading a report from CBRE that the labor cost hotel hourly wage did go up by about 16%, which definitely outpaced the national average of just about 6%, which is in line with what you were just quoting earlier with reflective of and wage.

But over the past year, you guys have really structurally optimized your operations. Do you think that the pressure from the will be offset by the savings that you guys are -- have already realized?

And then with the eventually reopening and the ongoing top line growth that margins -- how should we be thinking about margins from that perspective?

I'll start that answer, Joanne. I think we started talking about the dynamics surrounding wage inflation really early in 2021 and we've been adjusting wage rates along the way in 2021.

And we're going to continue to see that dynamic in 2022, we're still meaningfully below what our headcount was in 2019. And -- but the beauty of this select service operating model is you have the ability to adjust your labor model as your top-line adjusts.

And that's what we've been doing and Bruce and his team do a fantastic job of ensuring that we are meeting the customers in terms of guest service, but also generating some pretty impressive margins for our business. The second part of your question, maybe just repeat that for me.

How should we be thinking about the margin, because obviously you guys have done a tremendous job and I'll be expecting that even some structural changes. But how should we be thinking about it for 2022?

Sorry, I didn't mean to tell you -- my bad.

Well, that's okay. We think that there's a sustainable shift in the operating model of our business, i.e., around items that Bruce mentioned, housekeeping, complimentary food and beverage, and items and guest services.

Now, that'll be -- there's going to be some inflationary noise here in the short-to-medium intermediate term. But we believe that those structural changes are sustainable.

Like I mentioned before, our ability to adjust rates. And so far, as you've seen, rates have been tremendous in terms of being able to bounce back and shift the burden of these expense increases to the customer.

As you look forward to the rest of 2020, we believe the business customer is coming back and that business customer is traditionally less sensitive to rates than our leisure guests. So that certainly bodes well for the operating margins for the remainder of the year.

Yeah, I think I remember when I used to travel for business, I don't think I've ever looked at what the rate was. I don't remember what that's like to be paid for, it's been a while.

But again, just -- sorry?

We think it's coming back, Joanne.

Yeah, so I guess I'm --

On the road shortly.

Unless you're going to be my next question, I guess kind of where what you guys are thinking would be that inflection point, I guess. obviously, none of us have a crystal ball and clearly COVID has gone on a lot longer than we thought, but what you guys are thinking, what it can be around that Q3 time frame, where, the business travel will pick up a little bit and then.

We spend a lot of time looking at return to office mandates in the U.S. And recall before our November meeting, a lot of companies were scheduling return to office January 1st and Omicron shifted that back by two to three months.

And so now you're seeing a lot of your counterparts in New York, for example, they're back in the office. And once you're back in the office, you are more -- there's a higher probability that you're going to travel.

And so, if you listen to Hilton and Marriott and IHG discuss this topic, they're very bullish about the return of the business customer guardian in Q2 and Q3. And we'll continue to monitor that.

We typically take a pretty conservative approach, but I think you're going to see something in 2022 year marking the return of the business customer.

And I guess right now with things picking back up in February, which is definitely very encouraging, I guess what markets are you seeing are the most strength right now for you guys within your portfolio?

Are bringing the most what? Excuse me.

Are the most strength -- which markets has --

The most strength?

Yes.

No, it's a really good question. And to be honest, it's really very much across the board.

The strongest hotels from a performance perspective, we've had through the pandemic are in New Jersey. But I think it's also fair to say the Sunbelt, States, Arizona, Texas, Florida are seeing particular strength.

But overall, states are not terribly outsized as far as growth. If I was going to make one comment about maybe where we're not seeing growth.

It would be in Oklahoma where we've had some demand struggles over the last couple of years. It's also worth mentioning and I mentioned in my comments, the embassies are seeing more business come through their doors.

We were quite pleased with this past fall and the guest volumes that came through. So, we're feeling much better about those five hotels.

That's great. And maybe just one last one for me.

I guess, with a little bit more clarity now, for the back-half of 2022, are we seeing a little bit more activity on the transaction-front now. How should we be thinking about that before we get over the near-term?

So, 2021 was a record year in terms of hotel transaction volume. I think there is 40 -- in the United States, there's roughly $40 billion of transactions that occurred.

About four -- 10% of that was in the REIT space, and a lot of the REIT transactions that were done we're -- on the purchase side were done, we're using cash on the balance sheet or recycling proceeds from sales. And so, we didn't have that luxury.

So, we were focused on looking at ways that perhaps we could creatively structure transactions, assuming that we would have some renewed strength in our unit price. The last three months, we haven't seen that, so we've been -- while we're actively engaged in underwriting potential transactions, there's nothing imminent on that front.

But should we see strength in our unit price, we're going to become more aggressive on the transactions that we are underwriting.

Got it. Very helpful.

That's it for me. I'll turn it back.

Thank you very much.

Thank you, Joanne.

Hi, good morning. Just quick on that last point.

In terms of acquisitions, you've highlighted RevPAR running at 90% of 2019 actual fewer assets. The assets that you are looking at are underwriting.

Where would you see -- why did you say pricing is relative to 2019 levels?

Pricing is actually in some cases north of 2019 levels, especially when you look at the Sunbelt. There has been a tremendous growth in demand in the Sunbelt and a lot of investors, a lot of private equity funds of dry powder climber to acquire properties in the Sunbelt, even in the Midwest and the Northeast, where as Bruce has mentioned, we've had tremendous strength in our portfolio.

There have been some transactions that at sub seven yields on 2019 income. And that income isn't forecast to come back for 24 months.

So really a lot of capital deployment in our space, which is driving up prices.

Okay. I wanted to shift here now to the operations side.

I think Bruce, you've mentioned a couple of times, early signs of resurging corporate and group travel. The dividend metrics that you can provide in terms of events booking, it's relatively small for your portfolio overall in terms of group.

But are there any data points that you can offer that kind of highlight where things stand today for the next couple of quarters with the season in relation to where you were at this time last year?

Yes. So forward-looking still is fairly tricky, Mario.

The booking windows are still quite tight. We saw them -- we saw the booking windows opening up last fall.

Call it August through October or early November, and then with the onset of the Omicron variant, booking windows tightened right down. So, we don't have great visibility honestly beyond a week or two at best, it would be really hard for me to provide you any kind of guidance or thought there unfortunately.

As I mentioned in my comments though, we are seeing more strength coming out of our corporate negotiated segment, which is typically rates that we have booked with our corporate clients, so we're seeing a greater percentage coming through that segment as well as the GDS channel. And the GDS channel is quite frequently used by travel agents that are actually booking rooms for their corporate customers.

So, we look to measure those on a monthly basis, but they provide a little bit of forward guidance, but not much, frankly, just given the booking windows today.

And on the -- on those corporate rates that you have seen, how do those compare on a year-over-year basis or how do those compare to the leisure recruiting plan?

Well, we can typically yield a bit of a higher rate off of corporate guests than we do off leisure guests. And I would tell you, corporate rates haven't changed too dramatically since 2019.

They've typically rolled year-over-year. There hasn't been much of an RFP process over the last couple of years because of the lack of travel, and in some instances, just the time it takes for those negotiations, corporations just have been staying away from it because they've got other things to do.

And then just on utilities or natural gas, and not so much on the expense side, but I'm thinking more on the top line growth, the revenue side. Last year, big benefit of drive to portfolio was just an influx of leisure demand that captured some of regression in the corporate demand.

Natural gas pricing or gas pricing has really spiked as a result of what's going on globally. How much of a risk do you see the -- internally in terms of impacting drive to demand over the Q2 and Q3 time period for leisure?

How price sensitive do you think your customer profile is to fluctuating gas prices?

Well, our leisure guests are going to travel and they've proved to be pretty resilient in terms of their rates, sensitivity. Prior gas price shocks, if you look back there hasn't been a meaningful impact to demand levels.

You can make a case that with the cost of jet-fuel increasing, this makes it less likely that folks are going to travel long-haul for their leisure travel, or that they're going to travel internationally for their vacations. So, there's a case to be made that we could actually see a net benefit to gas price increases but we're going to have to see how it shakes out.

The last question is just in terms of new supply, you kind of mentioned it impacting Pennsylvania and Oklahoma a little while. What percentage of the portfolio today do you think is our risk of above average supply growth over the next two years?

Till we confine to the markets -- where

Yes. So, the dynamics in the Oklahoma and Pennsylvania markets were in place prior to COVID.

There was -- there is a rush of new supply in Pennsylvania and a rush of new supply in Oklahoma City. And so, looking forward, you mentioned two years, it's typically a six-month pre -development period followed by a 12 to 18-month construction period.

And we'll monitor permits in all of our markets, and we just don't see a lot of demand coming into our -- to the other markets that we're in already. Construction financing is tougher to get right now; tougher to pencil a new construction because of the impact of inflation on construction costs.

Though we feel like we have a pretty good runway here for the next 2–3 years before we see any impact of new supply.

Okay. Thank you.

Hi, good afternoon.

Hey, Tal.

Between the three segments, the extended stay, flux service and the suites, what segment do you expect is going to have -- I appreciate that you get the most rebound potential to 2019 levels than the Embassy Suites segment. But of the three, which would you actually expect to have the biggest rebound this year?

Is it still Embassy Suites or the extended fair select service segments?

Hey Tal, it's Bruce. I think it's going to be the embassies.

The conversation we were just having about corporate coming back, those hotels are very strong corporate hotels as well as group hotels. And I think we're -- I'm quite confident that we're going to see them continue this rebound that we've seen, especially over the last couple of quarters.

So that's where I expect we're going to see the most strength. But I also don't think they're going to be at full strength by the end of this year.

Okay. And can you just remind us from 2019 for this portfolio, what was the proportion that was corporate travel?

Oh yeah, certainly we -- it's somewhat reversed itself from 2019. We were probably more in a 65, 35, 65% corporate and group versus 35 leisure.

And through the pandemic, I would suggest that it's reversed itself and a lot of the corporate that we've seen has been very project-related coming into the hotels, so that also gives us some confidence by the way, just on the demand side that I would expect over time, these hotels will revert back to how the segments were pre -pandemic.

Okay I guess I, leads into my next question, I appreciate the dynamic that you're talking about with, this is an ADR lead, recovery and you've gotten some concessions from the management teams around -- oh sorry, from the hotel companies around service levels. And so, I get the math on that.

I guess my one question there that it doesn't solve for the consumer perception. And I'm wondering how the more people got out there on the road and going back to Mario's point, like gas prices are up, food prices are up, their mortgage rates there potentially going higher.

Do you not worry a little bit that the customer comes back? Or you see their customers sitting there and saying, hey, and paying what I was paying two to three years ago, but I'm not getting the same level of service that I was before.

So, we monitor our indexes versus our competitors every week. And we're looking for a relative strength versus each of our contest.

So, if we were to notice that we're charging more, but we're now losing share to our competitors, then this dynamic would change pretty quickly. But we're not in -- we're not seeing that at all.

And we believe that actually, fact that we have premium branded product through that the Hilton in the Marriott in the IHG channel, we're at a relative strength in this dynamic that we're honing in on here, Tal. So, we haven't seen the customers pushing back.

And certainly, we're encouraged by the fact that many of our competitors are also driving rate.

Okay. And then how many of your room nights are booked through people who are members of a loyalty program, as one of those larger players?

Well, it's typically pretty high. It's actually probably got down a little bit over the last year-and-a-half or so.

But I would tell you that at least 50% the guesting at our hotels is part of a loyalty program.

And you guys get to see the full suite of data on that?

Pardon me?

You get to see the full suite of data? Like on those loyalty members, like you have a sense of income level where they're coming from, that kind of stuff.

No. No.

That kind of -- that loyalty information's really kept with the brands. We see penetration by hotel and even the level of participation the guest is in the loyalty brand, gold, silver, bronze type thing but we don't get the demographics provided to us, no.

And you don't track that yourself either?

Well, they --

Like your customers or anything like that.

The brands will track that and whatever data is public sure, certainly we'd look at that. But the customer information proprietary and lies with brand.

Yeah. Okay.

Got it. Just trying to understand where that information sits.

And then I guess -- just my last question just around the balance sheet duration. The management team prior to you had made a lot of -- made a point of showing how a lot of non-recourse debt it was really long term, I think at one point it was seven -- seven plus gears.

We're now getting down to four. You've got a very chunky renewal year in 2024.

I'm just wondering if you can talk a bit about how you want to -- how you're going to approach refinancing over the next several years. What do you want the balance sheet to look like in a few years time, what sort of a term should we expect there to be as well.

I don't have a specific number for you, but I can tell you we've looked at our maturity profile for the next 24 months, that's why we addressed the convertible debentures last year. The portfolio we've got in July, we're well down the path of evaluating that and expect to refinance that, and then in the next couple of months without a lot of difficulty.

As I mentioned, we may go shorter duration on that to capture some rate benefits, because the revolving credit facility we have is got capacity and we've got turned to the end of 2023 and we actually have a one-year extension option on that, so we could push it to 2024 or replace or extend that facility later this year. The further out maturities are also manageable based on our outlook, we think we're going to be able to address those.

There's one in Oklahoma that might be a little tougher, but that doesn't come till I think it's mid-2024, so I look at it as the next 24-month window. All of our maturities can be managed in the context of where those properties are and the NOI s they're generating.

Whether we go five or 10 years on those in the CMBS market, I expect the majority of them will be into the CMBS market, not all, but the majority. I'm not sure that we're going to go ten years on all of them.

I think it's going to depend on where the rate outlook is at the time and how far along those specific properties are on the recovery curve with respect to COVID.

And that 4.5% to 5% quote you were giving, that was for five or 10?

That was 10.

For 10. And then just lastly, obviously, every -- when you look at a peer group, everyone's numbers are, messy I guess is probably the best way to put everyone -- numbers are in transition.

What do you think balance sheets are going to look like for the sector in two years time? Is it a six to seven times EBITDA you think that's where the industry will shakeout or how do you -- how are you evaluating that?

I'm not sure where the -- our peers, as you know, have leveraged much below ours. Their pre -pandemic debt-to-EBITDA was in a five zip code.

So I don't think they're going to move much off that number. The -- our U.S.

peers, only one has come back in a meaningful way with their distribution and they came back at half of what it was before. So similar to us, we by more than half, but I think it's reasonable to assume that the U.S.

lodging REITs well will come back more conservative on the distribution which can help their leverage in the long term. We're at 10 on that measure now; our peer group is at five.

Are we going to get closer to those U.S. peers?

I think that's reasonable, but it's going to take a while. Part of it will be the organic recovery into 2022 and 2023 and part of it will be how we manage the balance sheet with respect to growth going forward.

Okay, that's great. Thanks very much, gentlemen.

Thanks. Hey guys.

Most of my questions were answered. Jonathan, regards to distribution, your comments were to me at least somewhat broad in the context of how you think about the distribution level.

When you look at how you said it versus the payout ratio today, do you view this as a distribution that you believe can be increased annually over the next few years or is this a level that maybe you'd like to let the payout ratio even trend lower as you can grow cash flow?

I think it's a conservative payout ratio given the circumstances of where we are right now, Mark and I do believe it can grow over time.

Okay. Great.

And then just in regards to asset sales and you spoke about it somewhat, but ideally based on the market, the way it looks now, how much from the current portfolio we would you still want to sell? And does the cost of capital impact that at all in regards to having Capital to fund growth.

But certainly, it would be ideal.

but when I take cost and capital, I mean the share price.

Well, from an accretion dilution standpoint using proceeds from sales to fund acquisitions is much more attractive right now than issuing equity, at these -- these unit prices, so do we have the luxury of selling, a bunch of assets or even want to sell a bunch of assets to do that? No, we don't have any assets right now that we are marketing.

The transaction that came about in January was a one-off, opportunistic deal from, a gentlemen that owned the property neighboring ours. We do understand there's a disconnect in the private between our valuations in the private markets.

And so if there is an opportunity to sell an asset and recycle those proceeds into an asset that perhaps as a newer or has a better cash flow profile, or is it a market that we prefer will look at that, but we don't have anything imminent right now.

Okay, great. Thanks so much.

Great. Well, thanks, everybody and appreciate it.

We'll now will look forward to hearing from all of you in May during our Q1 earnings conference call. Have a good day.