American Hotel Income Properties REIT LP

Thank you, operator and thanks everyone for joining us today for our third quarter financial results conference call. AHIP's portfolio of 58 hotels continued to demonstrate top line growth in Q3 2024.

For the quarter, total revenue grew by 2.3% and RevPAR for the quarter finished at $98, a 2% improvement over Q3 2023. This increase was driven by both occupancy and ADR growth with broad demand from leisure corporate and group guests segments.

The challenging operating environment, driven by elevated costs and labor shortages that has impacted performance across the industry over the past few years continued into this quarter and put downward pressure on operating margins. Q3 2024 NOI margin finished at 0.98 times Q3 2023.

The US labor market remains tight and has resulted in increased rooms labor expenses due to overtime and higher wages for employees. High levels of employee turnover, consistent operating performance – inconsistent operating performance at the asset level and elevated undistributed expenses also continued to negatively impact the bottom line.

However, throughout 2024, we have seen rooms cost and productivity continuing to stabilize and dependency on contract labor has been on a downward trajectory. We remain focused on cost control initiatives across the portfolio and although we are making progress we still have much room to improve.

We have made significant progress on our disposition program in 2024. So far this year AHIP has completed the dispositions of 11 properties for gross proceeds of $112 million.

In addition, AHIP has five other hotel properties under purchase and sale agreements for gross proceeds of $53 million. The combined sales price for these properties which have been sold or that are currently under agreements for sale before year-end, represents a blended cap rate of 7% on 2023 annual hotel EBITDA, after adjusting for an industry standard 4% FF&E reserve.

AHIP's disposition efforts have mainly focused on low EBITDA, high near-term CapEx properties in markets with new or imminent supply growth and low demand growth. Leverage reduction remains a top priority for us and AHIP intends to use the net proceeds from these dispositions to repay certain CMBS mortgage loans and to reduce the balance of our revolving credit facility.

We have reduced debt to gross book value by 180 basis points so far this year and debt to trailing 12 months EBITDA has come down a full turn over the past 12 months, indicating significant progress on this front. We will continue to execute on our strategy to divest assets to reduce debt and are currently marketing a select number of additional properties which are expected to demonstrate value above our current unit trading price.

AHIP's Board and management team continues to advance our plan to preserve cash enhance financial stability and protect long-term value for our unitholders. In 2024 AHIP has made significant progress on our plan to address upcoming debt obligations with asset sales and loan refinancings.

In addition to the aforementioned disposition efforts, AHIP is working with a major US bank to refinance certain hotel properties currently held on our revolving credit facility. We expect this refinancing to close in November.

These steps have strengthened our liquidity and balance sheet and put us in a position to benefit as the industry operating and macroeconomic environment improves. We will continue to monitor macroeconomic conditions and operating performance while considering further strategic opportunities to deliver value over the long-term.

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

Bruce?

Thank you, Jonathan and good morning, everyone. AHIP's portfolio of premium branded select service hotel properties continue to demonstrate strong demand metrics in the third quarter of 2024.

Total revenue increased by $1.4 million for our portfolio of 58 hotels. In Q3, our hotels had an occupancy average of 73% or 101% of 2023 levels.

Average daily rate finished at $135 for the quarter also above Q3 2023 levels by 1%. Through the first two quarters of 2024, the AHIP portfolio of 58 hotels has experienced RevPAR growth in every month on a year-over-year basis.

In Q3, July RevPAR grew 3% and August RevPAR grew 6%. In September, leisure demand slowed impacting the Labor Day weekend and the subsequent week.

As a result, September saw a 3% decline in RevPAR. Overall, Q3 2024 RevPAR was $98 or a 2% increase over Q3 2023.

Preliminary October top line figures indicate growth more in line with July and August, suggesting the September decline was a short-term setback. We referenced three distinct segments in our business: Extended Stay, Select Service and our Embassy Suites hotels.

During Q3 2024, Extended Stay continued to be the strongest performing vertical in the AHIP portfolio with Q3 RevPAR finishing at $106 or 104% of Q3 2023. The Select Service segment achieved a RevPAR of $91.

This represents 102% of Q3 2023 levels. The Embassy Suites segment achieved RevPAR of $103 flat to the same period last year.

The ongoing elevated operating expense environment impacted our margin performance again this quarter. For the 58 hotels, NOI margin finished at 30.2%, approximately 50 basis points below the same period in 2023.

Over the past few quarters, we've begun to see inflation impacts easing. Specifically, we are seeing expense stabilization in key areas such as rooms wage growth, which was up 2.2% versus the same period last year.

The cost of operating supplies and food is also moderating. Additionally, we are seeing a sharp decline in the use of third-party labor in Q3 compared to the prior year with third-party FTEs down approximately 50% from the same period last year, helping stabilize rooms department costs, and improving housekeeping efficiency.

We will continue to focus on margin improvement initiatives with our hotel manager, reducing turnover with a focus on management retention, increasing levels of in-house employments, and looking for opportunities to enhance the portfolio's procurement programs to find additional cost savings. Turning to AHIP's capital program.

The 2024 capital plan includes approximately $5 million in PIPs and $9.5 million in FF&E capital improvements, which will be partially funded by restricted cash. Total capital spend in Q3 was $3 million with an estimated escrow recovery of $2.1 million for a net spend of $900,000.

We selected a designer for two of our 2025 PIPs during the quarter. 2024 expenditures for these projects will be limited to design fees with procurement and project construction anticipated in 2025.

As each PIP completes, we expect to see increases in the hotel market share and RevPAR performance. It's worth reiterating that we'll continue to analyze our portfolio for opportunities to generate meaningful return on investment through renovating and repositioning hotels while focusing on maintaining a competitive advantage in the market.

Initial results for October show occupancy at 76%, ADR at $137 and RevPAR at $104 or 4% above October 2023 RevPAR levels. 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 third quarter.

Thank you, Bruce. Normalized diluted funds from operations or FFO, was $0.07 per unit for the quarter compared to normalized diluted FFO of $0.11 per unit in Q3, 2023.

At September 30 2024, AHIP had $37 million of available liquidity compared to $28 million at December 31, 2023. The available liquidity of $37 million is comprised of an unrestricted cash balance of $26 million and a borrowing availability of $11 million under the revolving credit facility.

AHIP has an additional restricted cash balance of $35 million at the end of September. Debt to gross book value at September 30, 2024 was 50.1%, a decrease of 180 basis points compared to December 31, 2023.

Debt to trailing 12-month EBITDA as at September 30, 2024 was 9.1 times, a decrease of 1.0 times compared to September 30, 2023. The improvement in debt to gross book value and debt to trailing 12-month EBITDA was due to the use of net proceeds from the completed dispositions to pay down the CMBS mortgage debt and the revolving credit facility.

We continue to execute on our plan to address the company's near-term debt maturities. To address upcoming CMBS loan maturities, which includes $59 million in the fourth quarter of 2024, AHIP completed the following.

In August 2024, AHIP completed the dispositions of two hotel properties in Amarillo Texas for gross proceeds of $18 million. The CMBS mortgage loan of $16 million was fully repaid in the third quarter of 2024.

In September 2024, AHIP completed the dispositions of two hotel properties in Ocala Florida for gross proceeds of $26 million. The CMBS mortgage loan of $19 million was fully repaid in the third quarter of 2024.

In October and November 2024, AHIP completed the disposition of two hotel properties in Statesville, North Carolina and one property in Melbourne Florida for gross proceeds of $32 million total. The CMBS mortgage loan of $25 million was fully repaid in the fourth quarter of 2024.

In addition, 50% of the net proceeds after the CMBS mortgage loan repayments from the dispositions of these seven hotel properties, which is $8 million was used to reduce outstanding amounts under the revolving credit facility in the third and fourth quarters of 2024. The revolving credit facility includes an option to extend the maturity to June of 2025 with the primary remaining condition to reduce the facility size to $148 million prior to December 3rd.

During the quarter, AHIP completed the dispositions of one hotel property in Egg Harbor, New Jersey for gross proceeds of $11 million with net proceeds of $10 million used to repay the facility. In November of 2024, AHIP completed the disposition of one property in Houston for gross proceeds of $9 million with the net proceeds of $8 million being used to reduce the revolving credit facility.

Collectively, AHIP has made a total repayments of $11 million during the quarter and an additional $15 million since September 30, 2024. This has resulted in the balance of the revolving credit facility being reduced to $156 million as of today.

To further reduce the credit facility before December 3rd, AHIP currently has five hotel properties under purchase and sale agreement for gross proceeds of $53 million with expected closing dates prior to December 3rd. The completion of these dispositions is expected to reduce the revolving credit facility balance by approximately $23 million, which represents more than the required repayment to meet the extension requirement.

AHIP also has a term sheet with a major US bank to refinance in the CMBS market certain hotels on the revolving credit facility. Management is currently targeting to close this refinancing by the end of November 2024.

This refinancing if completed is expected to further reduce the revolving credit facility balance by approximately $60 million. Accordingly, AHIP expects to achieve the required pay down with either the asset sales noted or the refinancing with both achieved the aggregate credit facility balance would be reduced to approximately $72 million.

With that, I'll turn the call back to Jonathan.

Thanks, Travis. Before we close, I'd like to mention that we released our third annual corporate responsibility and sustainability report during the quarter.

This report is designed to help our stakeholders understand our commitment and efforts regarding environmental stewardship, social responsibility and governance. I'd like to acknowledge the efforts of all of our stakeholders for their stated commitments to implement programs that have a positive effect on our business, the environment and our communities.

Finally, I'm confident that AHIP's diversified portfolio of premium branded select service hotels with a focused operating model is well-positioned to generate long-term value for unitholders. This year our team has executed on the strategic plan, we announced at the end of 2023, which has addressed near-term obligations and strengthened our balance sheet.

Overall I'm very impressed with the ongoing efforts of our team and remain optimistic about the overall industry outlook heading into 2025. So with that overview of our third quarter results, we'll now open the call to questions from analysts.

Operator?

Thanks. Hi, guys.

Travis, I just want to clarify my understanding on the credit facility. The two events, the five asset sale and the CMBS financing, they are separate and apart from each other right?

That's right. No overlap there.

No overlap there. Okay.

So assuming you get that done would that then suggest you would have something in the area of $75 million, $76 million available on the credit facility as you go into 2025?

I would say it a little differently, Dean. After the closing of the sales that we have under contract right now there's five left.

Adjusting for the expected pay downs from those and assuming the revolving credit facility refinancing that we're doing with -- in the CMBS markets, the remaining balance would be around $70 million.

The remaining balance and that would be off of a maximum facility size of the $148 million? Or would the facility size be different as a result of doing the CMBS transaction?

So once we're down to the $70 million there'll still be a borrowing base availability to us in excess of that. I'm just talking about what would be outstanding on the facility.

Right, right. Yeah.

No, I'm trying to get to see just sort of how much borrowing capacity you would have on the line after this is all done not that you would run it up just looking at sort of...

I see. Yeah.

We'd have another $10 million or $15 million on the line pro forma all of these transactions. So there's …

Okay.

…still a little bit availability there.

Perfect. Perfect.

The others are a little more, less technical. The Marriott franchise agreement default can you remind me what that is?

And what is the remedy for the default?

Yeah. Dean, just -- there are a couple of angles to this.

So I just want to be clear on the CMBS side. We are trying to secure that as long as we stay within the guardrails under the franchise agreement and there's no impact on these, as it relates to the credit facility.

So that's the credit side of this. It's a relatively small story.

Got it.

But I'll let Bruce, speak to the operational side.

So Dean, on the operational side, the issue for us is working with our manager to improve brand standards and guest satisfaction in the hotels. So that comes with potentially spending some capital where required, but then also improving generally the operations in the hotels.

So for us on the operating side we're just focused with our manager to kind of clear the concerns the brand has and then we move forward.

I got it. So this is kind of wrapped up into the ongoing situation with the manager which will be determined however it gets determined?

Dean, I wouldn't go that far. Obviously everything that we're doing is wrapped up with our manager.

But this is a non-monetary default that existed because of a brand audit.

Got it.

And we're going to -- as Bruce mentioned, we're going to take care of this in due course.

Yeah. Okay.

That's clear.

Just to add -- just one step further. We continually have quality assurance audits by our brand partners.

And so when they discover something that they feel should be resolved we work to do that. So that's what we're doing.

Got it. Got it.

And Travis, just on the G&A run rate, I think we may have hit this one before. Is that $3 million a quarter kind of a good number to use and part and parcel of that building up the sort of deferred management fee of about $300,000 a quarter?

Are those numbers sort of in the ballpark?

Is that $3 million a quarter excluding...

On the corporate, G&A Yeah, excluding.

That's a little high. That's a little high.

I think $2.5 million is a better number $2 million $2.5 million. Once you dig in you'll see the Q3 numbers a little lower than run rate.

We had a bit of a true-up there on some compensation expenses related to transactions. So the Q3 number will look a little light.

But if you look at the year-to-date September number that should be a good annual run rate number.

Okay. Perfect.

That I can adjust to. And then, just the last question is around the 2025 debt maturity.

The -- just looking at the maturity schedule. The $36.6 million that comes up is that sort of property specific?

Is that a -- like what's the nature of that debt? And how are you guys looking at that one?

Or is it too early?

No, we're looking at it right now. It's tied up.

It's one single loan that's collateralized by eight hotels in the Midwest.

Okay.

These are hotels that we've owned for maybe 10 years at maturity. And we're looking at all possibilities with respect to either refi or sales.

Okay. I think we'd have -- well we'll be closer to a solution when we do our Q4 call Dean.

We're just looking at some different options right now for that portfolio.

Right. I'm assuming rates will probably be a little bit lower by the time that rolls over hopefully.

Okay. That's all we had.

Thanks a lot guys.

Thank you. Thank you.

Thanks again everyone for joining us on our call today. And we look forward to speaking with you in March, when we'll report our fourth quarter and full year 2024 results.