American Hotel Income Properties REIT LP (HOTUN) Earnings Call Transcript & Summary

Good morning, and welcome to American Hotel Income Properties REIT LP's Fourth Quarter 2019 Analyst Call. [Operator Instructions] At this time, I'll turn the call over to Jamie Kokoska, Director of Investor Relations. You may begin your call. Thanks.

Thank you, Joanne. Good morning, everyone, and thanks for joining us for our fourth quarter 2019 results conference call. Discussing our performance today are John O'Neill, Chief Executive Officer; Bruce Pittet, Chief Operating Officer; and Azim Lalani, 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, FFO and FFO payout ratios 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 3 and 12 months ended December 31, 2019, and our other Canadian securities filings available on SEDAR and our website. AHIP does not undertake to update or revise any forward-looking statements to reflect new events or circumstances, except as required by law. Listeners are urged to review the full discussion of risk factors on AHIP's annual information form dated March 22, 2019, which has been filed on SEDAR at sedar.com. Our fourth quarter and year-end results were made available earlier this morning. We encourage you to review our earnings release, MD&A and financial statements, which are available on our website as well as SEDAR. On this call, we will discuss certain non-IFRS financial measures, including FFO and AFFO. For the identification of these non-IFRS financial measures, the most directly comparable IFRS financial measure and a reconciliation between the 2, please see our MD&A. All figures discussed on today's call are in U.S. dollars, unless otherwise indicated. I would like to remind everyone that this call is being recorded today, March 11, 2020. A replay of this call will be available on our website. John will begin today's call with an update regarding portfolio strategy, Bruce will provide a brief update on hotel operations and Azim will review our financial results. I'll now turn the call over to John O'Neill, Chief Executive Officer.

Thank you, Jamie, and thank you, everyone, for joining us today. We appreciate you adjusting your schedules to participate on the call this morning. Given the recent market volatility, we believed it would be best to provide investors with an update on our performance this morning rather than waiting for another trading day to occur. We are very pleased with our fourth quarter performance, especially as we completed 2 significant transactions that reshaped our portfolio during the quarter. We'll come back to that in a moment. This is clearly an unusual time in the markets for the macroeconomic environment and for the hotel sector. But within this, we believe that AHIP is one of the best-positioned hotel REITs to withstand these temporary coronavirus-related headwinds and prepare for future opportunities for growth. So far, we have not seen any significant material impact in the performance of our 79 hotels. In fact, in both January and February, our properties generated better-than-expected revenue, and while we're still only partway through March, our occupancy levels have remained very strong. This past Saturday, for example, we had 84% occupancy throughout the company, which is higher than what we've seen in the past 4 weekends, with only minimal cancellations. That said, we are very aware that broader sector concerns have weighed on our unit price and that coronavirus concerns will affect our growth prospects over the near term. As management, we are focusing on what we can control and our own strategies and plans to best position our business within this dynamic environment. Our recent initiatives and the actions we're taking will continue to provide AHIP with a strong foundation to both withstand this temporary period of disruption and prepare for growth. We believe our hotels are well positioned to better withstand the impact of this current environment. Our select-service properties are located in secondary U.S. markets, not gateway cities. Our hotels are rooms-focused and generally appeal to individual corporate travelers, not conferences and groups. Only a few of our properties provide meeting space facilities. Our hotels are in locations that benefit from multiple demand generators, which diversifies risk associated with any particular demand driver. And approximately 30% of our guestrooms are in extended-stay properties, where room turnover is low and cancellations are less frequent. And almost all of our guests are domestic U.S. travelers, which means international travel restrictions should not have a direct impact on our business. For these reasons, we've seen very limited impact from the coronavirus so far and believe that while we won't -- we likely won't be immune to the sector downturn in the near term, we will perform better than most. That said, this week, we have started to see some limited reservation cancellations related to corporate group and meeting space bookings, mostly at our larger embassy suites properties, and to a much lesser extent, slower future bookings across our other select-service properties. So far, these cancellations have resulted in approximately $500,000 of future lost revenue. We expect we will see further cancellations and a slowing pace of future guestroom bookings in the near term as U.S. travelers adjust their plans due to coronavirus concerns. In light of this and slowing short-term growth prospects, we are taking measures to preserve capital, reduce our expenses and ensure the health and safety of hotel employees and guests. As you read this morning, our Board of Directors has approved a 29.6% reduction of our monthly cash distribution, bringing our annualized distribution from USD 0.648 to USD 0.456 per unit. As a result of this adjustment, we will retain approximately $15 million annually, which will help, a, better withstand any short-term headwinds and allow us to achieve some of our longer-term strategic objectives. Namely, this capital will provide us with the ability to strengthen our balance sheet, reduce our leverage, further invest in our existing hotel properties to drive FFO growth and provide us with the ability to fund potential opportunistic accretive acquisitions. This adjustment will also better align our payout ratios with other publicly traded hotel REITs. On a pro forma basis, using 2019's performance and unit count, this reduction would bring our FFO payout ratio down to 64%. Importantly, even with this reduction, our distribution still represents a 14.6% yield based on yesterday's Canadian dollar closing price, providing incredible value to our investors. We are also working closely with our hotel manager on a multitude of expense reduction initiatives, which includes a hiring freeze, restricting nonessential training and travel and curtailing our capital spending. We continue to monitor our markets in the coronavirus situation closely. Like everyone, we hope it will be resolved quickly. We're doing everything we can in the meantime to properly protect our business, our market position and our hotel employees and guests in these circumstances. Turning to our strategic initiatives. 2019 was a year of exceptional transformation for AHIP as we pivoted our strategy to focus on high quality, Premium Branded Hotels. We welcomed new highly experienced executives, and we updated some of our largest properties to offer the latest in design and furnishings with extensive renovations. In the midst of this, our unitholders received a healthy 26% total return through a combination of stock appreciation and U.S. dollar distributions. The fourth quarter was a pinnacle of much of this activity as we completed 2 transformational transactions to improve the composition of our hotel portfolio, which will enhance the long-term stability of our cash flows and provide a strong platform for future earnings and cash flow growth. We completed the sale of the 45 Economy Lodging hotels and efficiently redeployed the proceeds from the sale into the acquisition of 12 younger, higher-quality Premium Branded properties. This strategy has both further diversified our geographic markets and also provided us a stronger growth prospect for the future, with newer, larger and higher-quality properties that appeal to a wider variety of travelers. We were able to execute these capital-recycling initiatives within just 5 days, minimizing any dilutive impact. We also recently renegotiated the terms of our hotel management agreement to reduce our hotel management costs. And finally, we meaningfully reduced our cost of debt, with financing activities taken in December. Combined, these initiatives have strengthened our business. Today, we are a pure-play, select-service, Premium Branded Hotel owner. Our hotels are being operated more efficiently. And our new term loans and financing have lowered our cost of capital. These are strong foundations we can leverage for future growth when the right opportunities and environment materialize. With that update on our sector and strategy, I'll now turn the call over to Bruce to discuss hotel operations in more detail. Azim will then discuss our solid fourth quarter performance. Bruce?

Thank you, John, and good morning, everyone. As John mentioned, we welcomed 12 new Premium Branded Hotels to our portfolio during the quarter. Aimbridge managed these hotels for the previous owner, making the transition somewhat seamless. We have been pleased with how these hotels have been performing out of the gate as part of the AHIP portfolio. This transaction also boosted AHIP's number of extended-stay properties from 16 to 24, which now represents 30% of our portfolio. These properties generally benefit from higher margins when compared to other select-service hotel properties. During the fourth quarter, we also completed renovations at 4 hotels, on time and on budget. In total, $10.9 million of renovations took place at the 111-room Holiday Inn Express & Suites Fort Myers East - The Forum; the 101-room Holiday Inn Express & Suites Sarasota I-75; the 87-room TownePlace Suites, Chattanooga near Hamilton Place; and the 271-room Embassy Suites Cleveland Rockside. The Cleveland renovation marked the last of our Embassy Suites properties to be updated, with all 5 now extensively renovated and modernized in the past 2 years. As mentioned last quarter, the final renovation work for the Homewood Suites Dover, which was delayed due to a permitting issue, has now restarted. We anticipate this work to be completed in April. There will be no revenue displacement associated with the remaining work. Given the nature of our business, we will always experience some renovation activity across our portfolio as we are continually focused on improving asset performance and maintaining brand standards. Looking forward for 2020, we currently expect just 6 smaller hotel properties will undergo renovations with most work scheduled for the back third of 2020. These plans were put in place at the beginning of the year, and as the economic situation in the U.S. is still evolving, we may revisit the schedule and work with the hotel brands to adjust the timing of these PIPs as the year progresses. As for our portfolio performance during the fourth quarter, I'll speak specifically to our same-store metrics. Our portfolio continued to outperform their competitive set in their markets. The STR Index for the -- for our 67 legacy hotels during the fourth quarter was 120.9, with 100 representing a fair share of the market. For the hotels that AHIP acquired in December, the STR Index was 134 for the month of December. More specifically, we saw strong RevPAR growth in both Kentucky and Ohio, 17.3% and 10%, respectively, due to post-renovation tailwinds. Strong demand also contributed to RevPAR growth in Maryland, Arizona and Virginia, with RevPAR growth of 7.8%, 6.1% and 5.6%, respectively. This was partially offset by RevPAR declines in Oklahoma and Amarillo as these markets are contending with oil and gas and continued new supply challenges. Overall, our NOI margin for same store declined by 60 basis points to 29.6% during the quarter as a result of higher labor costs, higher maintenance expenses and a higher proportion of food and beverage revenues, which have lower margins. In fact, food and beverage revenues increased by 9.2% from the same period last year. On the labor front, wage and benefit costs grew by 3.3% during the quarter compared to Q4 2018. Like all U.S. hotel owners, increasing labor cost is something that we're focused on with our hotel manager. As John mentioned earlier, we have implemented some expense-reduction initiatives that include a hiring freeze across our portfolio. Given labor is the largest operating expense, we are pleased that in late 2019, Aimbridge rolled out a new labor-management tool to support stronger labor-management practices at our hotels. This program, along with enhanced checkbook accounting efforts, will provide hotels with better expense management going forward. It should also be highlighted that during 2019, some AHIP hotels introduced a paid parking program. This program, which started in Q2 2019, generated $750,000 of parking revenue during the year. We look forward to continued revenue growth from this initiative in 2020. On a same-property basis in the quarter, we recorded a 1.3% increase in revenue. RevPAR increased by 0.8% to $81.46, primarily due to ADR growth. Excluding the 5 hotels under renovation, same-property revenue grew 3.4%, with RevPAR increasing by 2.3%. Perhaps most importantly, net operating income from the 62 properties not under renovation increased 4.5% relative to the fourth quarter last year. This was driven by the aforementioned RevPAR growth, improved food and beverage revenues and the implementation of paid parking at certain properties. And with that update on our hotel operations, I'll now turn the call over to Azim to discuss financial and capital metrics. Azim?

Thank you, Bruce. Good morning, everyone. As John mentioned, the fourth quarter was obviously a very busy time for us, with the closing of the Economy Lodging portfolio sale, the acquisition of 12 Premium Branded properties and financing activities related to these transactions to meaningfully lower our cost of debt. These capital-recycling initiatives did create some noise during the quarter, however, we were very pleased with the performance of our hotels during the quarter, and with how quickly we were able to redeploy capital to minimize any dilution from these transactions. Overall, fourth quarter FFO increased 3.8% compared to last year to $10.2 million, and AFFO is unchanged at $9.2 million. We believe this performance demonstrates the strength of our Premium Branded Hotel platform and the markets our hotels operate in, despite renovation impacts and portfolio changes during the quarter. Let me go into further detail for our consolidated performance, including discontinued operations. Total revenue for the fourth quarter declined 4.4% to $76.1 million as a result of portfolio changes. Despite the lower revenues, EBITDA was up 3% as a result of lower property taxes, lower management fees and corporate G&A. In turn, EBITDA margin improved by 190 basis points. Net loss and comprehensive loss for the seasonally weaker fourth quarter was $14.5 million, down from $6.1 million in the same quarter last year. Contributing to the reported loss this quarter was a loss of approximately $6.8 million related to the sale of the Economy Lodging portfolio, $1.7 million on noncash impairment charges related to 2 hotels and $1.4 million of costs associated with loan defeasance activities, which allowed us to secure new lower-cost debt. Excluding these 3 nonoperating, nonrecurring charges during the fourth quarter, net loss would have been approximately $4.6 million. Reported net loss per unit for the quarter was $0.19 compared to $0.08 last year. Diluted FFO per unit was $0.13 and diluted AFFO per unit was $0.12, both in line with the fourth quarter last year. We continue to utilize actual maintenance capital expenditures in calculating AFFO, and we spent $1.6 million in maintenance capital expenditures this quarter. I will now talk about same-store metrics. Same-store includes the 67 hotels that were owned by AHIP since January 1, 2018. As Bruce mentioned, RevPAR was up 0.8%, led by higher occupancy and ADR rising by 0.6%. Total revenues increased by 1.3% to $62.5 million, led by higher food and beverage and parking revenues. Lower property taxes and management fees resulted in hotel EBITDA rising by $209,000 or 1.3%, and EBITDA margin remained consistent with the prior year at 27.2%. Our business is seasonal in nature, and we expect our second and third quarters will continue to be our strongest quarters during the year. The 12 additional Premium Branded Hotels we acquired in December have similar seasonality to the 67 original Premium Branded Hotels in our portfolio. For modeling purposes, we recommend you review past seasonality of our Premium Branded portfolio as a guide. You'll note that our former Economy Lodging portfolio was less seasonal, so we expect a greater proportion of our revenue to be generated in the second and third quarters going forward than we've seen in prior years. As we pay a monthly cash distribution, we view our payout ratios on a trailing 12-month basis. For the fourth quarter of 2019, our trailing 12-month FFO payout ratio was 91.5%. This metric was elevated as a result of the impact from properties that were under renovation during the year. Going forward, with today's distribution adjustment, we expect our payout ratio will come down considerably. As John alluded to earlier, our pro forma FFO payout ratio, which measures the adjusted distribution against our 2019 actual FFO, would have been approximately 64%. We are also pleased to confirm that for 2019, 92.1% of our distributions were considered return of capital and 7.9% were considered taxable dividend income. This may have beneficial tax consequences to certain Canadian unitholders subject to U.S. withholding tax. We recommend Canadian unitholders speak with their brokerage firms and tax advisers about recovery of any overwithholding using the collective refund mechanism between the IRS and various Canadian financial institutions. Today's announced change in our U.S. dollar cash distribution means unitholders of record will now receive $0.038 per unit each month going forward, starting with the March 2020 distribution, representing USD 0.456 on an annualized basis. This adjustment will allow us to retain approximately $15 million annually and will provide us with available capital for accretive activities and strengthening our balance sheet. Turning to capital metrics. As at December 31, 2019, AHIP had an unrestricted cash balance of $17.8 million. We also had restricted cash balances of $28.8 million, including $8.8 million on deposit for upcoming property improvement plans. At the end of December, we had a weighted average remaining term on our total debt of 5.5 years and a weighted average interest rate of 4.41%. And as of December 31, all of AHIP's term loans had fixed rates. During the quarter, we completed $165 million credit facility consisting of a revolver and term loan. The facility was funded by a syndicate of 5 banks and was increased in size to $225 million in February 2020. This facility is currently secured by 18 properties and provides AHIP with low-cost, interest-only, flexible debt to achieve its strategic objectives. With that financial discussion, I'll turn the call back to John for some closing remarks. John?

Thank you, Azim. The enhancements we've made to our portfolio over the past several months continue to position us well for long-term growth. Clearly, the macroeconomic environment has presented some unforeseen challenges for the hospitality industry in the near term, but we have taken quick and decisive actions to help us better withstand this period of temporary disruption. We believe our unitholders will support us in making these changes as we continue to focus on the long-term health of our business and our balance sheet, while looking -- still looking for opportunities to drive future accretive growth. Our hotels are uniquely positioned to help shield some of the impact facing other hotel REITs. Our select-service properties are located in secondary markets, not gateway cities and often cater to extended-stay guests. Very little of our business is generated through conference and meeting space activity, and our properties are near multiple demand generators and don't rely on corporate groups or international travel alone. The majority of our guests are also domestic American travelers, which means any restrictions on international travel is unlikely to affect us. While we expect we will start seeing increased cancellations and reduced booking pace in the near term, we have taken the initiative to prepare for that. And given our locations and market segment of our properties, as previously described, we are well positioned to overcome the challenging weeks or months ahead. The guidance provided by some of our U.S. hotel REIT peers has unfortunately impacted the market value of our publicly traded units alongside the entire hotel sector. It is important to differentiate between the different hotel REITs, the markets we cater to and the composition of our hotel portfolios. We believe investors have not valued AHIP appropriately within this context, and that has provided an incredible opportunity for value and income investors. We are currently trading significantly below our net asset value. We continue to trade at a discount to our peers on a price-to-FFO metric. And even with today's distribution adjustment, we provide a 14.6% yield to investors with a much stronger balance sheet and long-term growth prospects. We are also continuing to focus on driving long-term FFO and AFFO growth. Market dislocations like this don't happen often, and travel habits will eventually return to normal. Given this, there could be some very compelling growth opportunities available to us over the next several months. Under the right circumstances, we will be prepared to consider them. So with that overview of our fourth quarter and recent initiatives, we'll now open the call to questions from analysts. Operator?

[Operator Instructions] Your first question comes from the line of Mark Rothschild from Canaccord.

Maybe just in regards to the impact from hotel renovations, can you just give a little bit more to some numbers, I'm not sure if I fully got, what was the impact in the quarter. I saw the drop in RevPAR of that versus the growth of other parts of the business. And then what's the time for that to come back online? And what are your expectations?

We renovated 4 hotels in -- completed renovations of 4 hotels in the quarter, Mark. All 4 of those hotels are now back -- all the rooms are back online. There's typically a little bit of a ramp-up post-renovation, so those hotels will be going through that now. Although the 2 hotels that we have in Florida ramped up quite quickly as we came into their peak season in January. From a -- so does that help?

Yes. But just maybe as far as what was the financial impact on the quarter, so we can know what came back online?

It's John. Of the hotels that were renovated in fourth quarter under renovations, those properties had about $600,000 of sort of income displacement impact in the quarter as a result of their renovation. So close to about $0.01 per unit of income displacement on those properties that were under renovation in the quarter.

Okay. And then when you spoke about a payout ratio for the year, can you just maybe give some more information on what's assumed there: one, in regards to other displacement from any other renovations; and two, what impact -- temporary impact from the coronavirus was assumed in that, if any?

Mark, this is Azim. So the way we calculated the pro forma payout ratio, we just applied the adjusted distribution to our 2019 FFO. And so we...

So that's not based on anything in 2020?

No, no. It's strictly backwards looking in terms of actual data. And so we just assume that our revenue and income stream stays intact.

Okay, fine. And then, John, you made a comment to that under the right circumstances, that you would be looking to grow and complete acquisitions. Can you maybe just talk a little bit more about what you meant by that? And what are the right circumstances?

Well, as we talked about and with respect to the distribution adjustment, we'll be strengthening our balance sheet and essentially conserving cash for a variety of purposes. One of them could be acquisitions under the right circumstances. And what I really meant by that was, it's going to be an interesting time in the hotel acquisitions and M&A environment, there's going to be opportunities, certain properties or companies may be transacting. And we just really need to be ready to look for opportunities, which are well priced, have to be accretive, of course, or else we're not looking at them. So it was really simple as that, Mark, not to read too much into it. I just think it's going to be an interesting year in the -- 2020 ahead in the U.S. hotel market, and there's going to be some interesting opportunities to look at that are perhaps more attractive financially than have been over the last couple of years in terms of pricing per room and cap rates for hotel acquisition opportunities, that's all. So we'll keep our eyes open.

Understood. And then maybe just lastly, based on your comments, it sounds like this adjusted distribution is pretty much entirely because of the coronavirus situation. So I would assume that there was no talk of adjusting distribution before. So therefore, to the extent the market would recover strongly, which we all hope and there aren't acquisition opportunities, would you then consider adjusting the distribution back to the previous level if things settle down quickly?

Well, heading into 2020, Mark, our payout ratios were on the high side. And clearly, we were expecting and planning for growth to bring down our payout ratios. You and I have had those discussions previously. Any change on a distribution amount and level is a Board decision from our point of view. So whether -- when the market goes back to "normal levels," we move our distribution back up again. Again, difficult to say for me right now. It depends where we come out in terms of our run rate, of our income and our payout ratio and really we assess at that point in time. So I wouldn't characterize this as temporary, nor would I say this is an absolute permanent level of our distribution, I think it really remains to be seen how our income performance is.

Your next question comes from the line of Colin Healey from Haywood Securities.

Just on the distribution cut. What kind of scenario analysis have you guys done to kind of see what FFO or kind of revenue net of margins level you're going to have to maintain in 2020 before another potential distribution cut? Just trying to gauge where those thresholds are? What kind of run rate you'd be comfortable with? Or is it going to be totally reactive?

Colin, this is Azim. So as John mentioned, at this point, we're not materially impacted by coronavirus. But at the same time, we're seeing what's happening in the marketplace. And so we adjusted our distribution accordingly. In terms of scenarios, we looked at various scenarios and discussed those with our Board and felt at this time that this was an appropriate adjustment. And as circumstances evolve, our Board is prepared to evaluate the circumstances again. So at this point in time, this was -- this is what our Board landed on.

Okay. So when you say it was an appropriate adjustment, can we assume that you thought that, that would be a level that you could maintain through 2020 in the context of coronavirus?

Absolutely. As we've discussed earlier, given our portfolio and the way we're positioned relative to our comp set, we felt comfortable at these levels of distributions.

Okay. And you mentioned earlier in your comments that January and February were better than expected. Does that mean that they're tracking ahead of January, February 2019? Or is that in the context of coronavirus? I'm just trying to get a gauge of what your expectations were for January and February.

No. Better than previous year, not better than expected in terms of coronavirus. So basically, very little or essentially no impact from coronavirus in January and February. So trending as expected and also as compared to last year. So it's a good start to the year.

Okay. And one last thing. You mentioned that international travel restrictions wouldn't affect AHIP. Does that mean that you think that it's reasonable to think that, I guess, hotel room inventory created by international travel bans wouldn't affect pricing? Like that -- I realize it's crossing kind of into secondary markets, and you're referring to international travel bans affecting primary markets, let's say. But is it reasonable to assume that there wouldn't be some crossover impact between markets?

Well, there's a couple of questions in there, Colin, but I think what I really heard was about pricing, right? And so far, we haven't seen any impact on pricing. And again, that's the strength of the market segment that we operate in. We're not a high-priced or luxury or gateway or large international city hotel company. So we don't expect pricing issues with respect to the question that you just asked, any international travel bans, et cetera, those would affect the larger markets. Now I think part of your other question was essentially a trickle-down effect or a compression sort of a thing, if there's less travel into large city will that -- might that affect the smaller towns. Well, our kind of traveler isn't coming from an international destination, they're coming with -- from within the United States. So I think any reduction in that travel is going to come not as a result of international travel bans, but just what is going on inside the U.S. borders. And I guess the last part of the question is, hotels are always -- revenues are always a factor of occupancy and rate that you can charge. And clearly, the higher the occupancy, the stronger the rate you can charge. So if there is a even a marginal drop-off on occupancy, sometimes that might affect your pricing power, but we haven't seen that. And again, at the rates that we're operating at around the USD 100 level, we're not expecting really any significant impact on our rates. It's just where the occupancy and the amount of travel goes, still remains a little bit to be seen inside the U.S. borders.

Colin, this is Azim. One comment I will add is, given the type of hotels that we have and the fact that most American travelers will drive with a 6-hour radius of where they live, the fact that we don't have international exposure and more American staying within the states actually bodes better for our hotels because of the type of hotels and where they're located that we'd actually see more domestic travel than international.

Your next question comes from the line of Matt Logan from RBC Capital Markets.

John, could you give us a little bit of color on your group space? You mentioned that conferences weren't a very big portion, but maybe just some color on what is budgeted for 2020, like what can you see in the pipe? And if there were cancellations, would there be any potential offset for cancellation fees?

And I'll have Bruce weigh in, in a minute, but just overall, primarily our Embassy Suites properties, our 5 Embassy Suites properties that have meeting space and any kind of meaningful conference or meetings business. So that's -- still those are larger hotels, but a small percentage of our overall 79 properties. So that's one fact point there. In terms of cancellations or what we had budgeted for food and beverage, maybe Bruce can discuss that a little bit.

Yes. It's an interesting question. So I think it's probably fair to say at the moment, where we've seen impact has been in the embassies more so than anywhere else from a cancellation perspective, and it does revolve around that group business that does have food and beverage. In the great scheme of things, it's not a big piece of our business on an annualized basis. So those hotels also cater to other market segments, leisure and corporate that don't involve group and food and beverage. So those hotels are going to have to pivot to those segments to try and -- to make up for kind of whatever group and conference business that they'll lose.

A lot of our -- as you know, our Embassy suites were just -- have just completed sort of a renovation program, and we're essentially just ramping up again on the meetings and convention conference business in any event. So they're in good shape. And in terms of cancellations, our fees, oftentimes, you're not necessarily getting penalties, but you're keeping a booking on the books or you're rebooking for a different date and the guests or the group that's made the booking just has a credit with us, and we'll carry that forward to, for example, if a booking was made in March then rescheduled for September, and they'll roll the credit through and we would fully expect that then they'll do it in September and have the meeting in September. But overall, I guess, really, to answer your question, it's 5 properties out of our 79 that have any kind of meaningful meeting space. And so that's...

But given the size of your Embassy Suites properties, would this be 5% of your total revenue? Would this be 10% from group? Or would it be like 1% or 2%?

Well, overall on an annual basis, our total food and beverage revenue, just looking back historically, we expect about 5% of our total revenues as a company, overall, 5%. So let's not to say that, that 5% is disappearing. So if that's down 20%, then that's down essentially 20% of 5% or 1% of our total revenue. So I'm just using that as a math example as to the quantum so -- which is not overall...

Maybe just changing gears here. In terms of the distribution level, you mentioned that you believe the REIT can sustain that through 2020, even with the coronavirus. How should we be thinking about same-property RevPAR and margins for the portfolio under that -- your baseline scenario?

And just to clarify, what you're meaning by baseline scenario? Just so I can understand what that means.

The scenario that underpins the distribution outlook.

Okay. Well, I'm going to answer that in a couple of different ways and let anyone else jump in. But the -- difficult to predict a RevPAR number for our company for the year 2020, whether that ends up being up, down or flat. We had -- I will point you to a couple of things. When we talk about a 64% payout ratio based on 2019 income levels, we clearly entered 2020 with growth prospects and growth forecast in mind and planned for and sort of showed that after the first couple of months. So even now that turning a year to flat will still give us a 64% payout ratio and much coverage on the distribution. So an earlier question talked about scenarios, right? So I think it's a little dangerous for me to say, "Oh, gee, what does 5% look like?", "What does 10% down look like?" We don't know. We've run those math. The math is relatively easy to figure out and that will still allow for very comfortable room over our -- on our payout ratio and to cover our distributions extremely comfortably. Just as an aside, we also have far fewer PIPs, capital programs planned in 2020 with essentially no disruption as a result. So that also is sort of an added growth factor as it were over 2019 results that did have some income displacement as a result of a large capital PIP program. So even just on a year-over-year basis, if nothing else changed, we would have income growth as a result of essentially no disruption due to lesser amount of PIPs. So -- and hopefully, that answers your question with respect at least to sustainability of distributions with how we're entering the year and where we're at in terms of after 2.5 months of the year, plenty of coverage in terms of that.

So I guess, in short, you're kind of looking for revenues to be flat to up slightly?

I don't know that I said that. I said, your crystal ball may work better than ours. It is a fairly fast and evolving situation. We know where we are year-to-date. We know we've seen minimal cancellations and just a minimal slowing of our booking pace. And so that was just to hold, for example, and then I think, yes, we -- I think the kind of a flat year-over-year is absolutely reasonable. If that escalates due to macro issues that we can't foresee right now or can't predict, how much will it escalate. Again, as I just said earlier in the answer, if you're 5% or 10% down, which is significant for a lot of people given the moves we've taken on expense reductions, limited capital and a lower monthly distribution, we still have plenty of coverage in those kinds of scenarios.

Would there be any parallels that we could draw on prior U.S. government shutdowns and the impact of DC as we start to see more federal employees work from home?

No, you'll probably have to go back to SARS in 2003 in terms of something similar or results after 9/11 or -- but those weren't sort of people working from home. And then I guess the most recent would be sort of the post-2008 kind of slowdown in the industry, in the economy. But again, that was just a lesser amount of travel, not people working from home. So it's -- there's no real other sort of comparison in recent memory in terms of our industry to see what the comparable impacts might be on travel. But again, I reiterate our -- the differences between sort of international travel and intra-U.S. travel and drive travel within regional markets. So much different and reiterate why we're much better positioned to withstand and continue to perform even during these kinds of slowdowns.

And maybe one last question from me. In your prepared remarks, you mentioned that AHIP is trading significantly below its NAV. Where would you peg the REIT's NAV today given the improvements in portfolio quality?

I mean I think those of you listening on the call, sort of consensus NAV is probably around $8, high $7s or something of that nature. Up until 2 weeks ago, our units were trading at a -- in the low $7, $7 to $7.25 for a consistent period of time, 3 to 4 months after a lot of our initiatives were announced and understood in Q4. So I hesitate to sort of throw out a guess. Specifically, from -- again, I talked about sort of analysts on the call and consensus is CAD 7.86 from a NAV point of view. So I'm not going to sit here and dispute that. But clearly, trading at a price in the $4-and-something range, we're well below NAV. So long answer to a question that I don't necessarily -- we don't necessarily disagree with where analyst consensus is on our NAV.

Your next question comes from the line of Brad Sturges from Industrial Alliance Securities.

Just following up with that question, where do you think your NAV per unit could trend in the next 12 months when you factor in cap rates and NOI changes?

Well, Brad, this is Azim. Clearly, from our perspective, as we've mentioned, we haven't seen any meaningful impact from coronavirus to date. So based on that, and we look at our income levels to stay flat. So based on that, we don't expect our NAV to change materially.

Right. But you don't have much visibility I think looking out. And I guess assuming there is a weaker demand environment across the industry, what's your expectations for cap rates if you're looking on over the next 12 months?

Yes. I think it's probably fair to assume that cap rates might sneak up a little bit in terms of valuation of properties, even in our segment and even in the luxury segment. And so with the higher cap rates may have a slight impact then on NAV, even if you're flat on revenues. So but it's -- the change in the marketplace and the effects of coronavirus are so kind of recent, I don't know that there's any sort of relevant data in terms of cap rates. We are obviously following extremely closely the last half of 2019 with the transactions that we are doing to know exactly where NAVs were, but there hasn't been the amount of transactions and the transactions that are closing right now are completing, they were priced 60, 90, 120 days ago. So I think it's going to be another 3 or 4 months to see if hotels are transacting and if there's a change in their cap rates and pricing.

The one comment I would add is, given what's happened in the debt markets, with the 10-year being under 1%, as John mentioned, until we see transactions, we -- it's hard to get visibility on where cap rates will land.

Right. I guess just related to that, you do have -- compared to your U.S. hotel peers, your leverages is higher. And you landed on a yield that's still 14% at the current trading price. So I guess why pay out 14% cash still today when the market is not giving you credit for it and why not retain that cash to improve the balance sheet or fund other growth opportunities or position the REIT for a recovery in the market going forward?

So Brad, this is Azim. So the 14.6% is really a function of our $4-and-change unit price. If you look at our adjusted distribution at our closing unit price at the end of December, which is around $7.10 or so, the yield is 8.6%, so well in line with Canadian REITs generally of our size. And so we think this is just a temporary dislocation that's happened because of macroeconomic circumstances.

Right. But again, like even if it is temporary, you can always increase it back if that ends up being the case, why not save some of the cash now in case it's more prolonged, rather than maybe having to cut down the road again. Like I'm just trying to understand why this level was the level you landed at.

Well, I mean, again, it was a level that was selected in consultation with our Board, based on the visibility that we had in the marketplace. And ultimately, at the end of the day, we can only focus on what we can control. We can't control our unit price, but what we can do is ensure the business is well capitalized, has the cash to support our strategies, and we need to run the business. That's what our focus is on.

Okay. Maybe switching gears. We've talked a lot about the demand side of the equation. I want to get a little bit more sense of what you're seeing on the supply side as it relates to the pipeline for 2020? And where in the portfolio today, you might be a little bit more exposed in terms of that new supply?

It's -- Brad, it's Bruce. We do continue to see new supply in various markets that we operate in. The first one that comes to mind is Amarillo, quite frankly, that has seen kind of a number of new hotels in the -- over the last couple of years. Oklahoma is another market that has seen a lot of new supply, Oklahoma City proper as well as even a couple of the smaller markets that we operate in. Chickasha, which is a fairly small market, has seen some new supply. So as we go around the country, we pretty much see it in most markets, although I do think, in general, it's starting to slow down.

Yes, absolutely. It's John. At the beginning of the year, the supply was essentially -- new supply was essentially projected to equal the new demand -- increase in demand. So what's under construction now will likely get finished. But you hate to say silver lining, but some silver lining on our current situation is that we would venture to project that new construction and new supply will be dramatically reduced as a result of the current situation. So for '21 and '22, when one would expect and hope some "serious recovery" from -- in the lodging sector and strength of demand, you're going to see new supply much lower and a nice differential between supply and demand. So perhaps similar to what we saw coming out of 2008 when ensuing 5 years sort of from 2010 to 2015 saw demand far higher than new supply.

Your next question comes from the line of Lorne Kalmar from TD Securities.

On -- I'm trying to think of a good way to phrase it, I guess, if -- what sort of margin impact would you guys expect to reach sort of 10 basis point decline in occupancy or 100 basis point decline in occupancy? I know you guys said you had a couple of levers pulled, but just trying to get an idea here.

A couple of points to talk about that. Actually, I don't think -- we're not really expecting to see any margin impact. In fact, given the nature of our portfolio, we're absolutely planning for projecting increased margins in our properties this year, just given that we're no longer in the Economy Lodging sector and the 12 new Premium Branded properties that we purchased in December are higher margin properties. So overall, under normal circumstances, our margins, as a company throughout our whole portfolio, should be increasing in 2020. Given the expense controls and essentially reductions and tightening as a result of the current situation, we don't really expect to see much margin impact at all even under some of your scenarios. You mentioned scenarios, right? So that's not really an area that -- we can continue to be focused on that, and we just don't expect much change in our margins as a result of if you were -- one was 5% down or 2% up. We've got a good handle on where the expenses are.

Okay. And just turning back to the F&B question, I think Matt was asking. So in terms of total revenues for 2019, how much of that would have been related to conferences?

On the food and beverage side in 2019, it's about $15 million.

In total.

Yes, in total.

And how much of that is conferences?

Well, probably $10 million of that amount would be related to conference-type business. And I think it is important to reiterate what John said earlier, because it's very much on point. A lot of times in the hotels as a group may be canceling today, we will get them to rebook a little further down the road. So it's a shift of the business as opposed to a complete loss just as something to think about.

And a reminder that food and beverage revenues have a much lower margin. So if you're hearing $10 million in conference business: a, that does not all go away; but b, it's not like rooms division and guestroom business, which has a higher margin. So...

Okay. And then so even I guess sort of over the last couple of weeks, you guys just had the conferences going on with no issues.

Oh, yes, absolutely. The hotels have actually been -- all our hotels have been quite busy, including our embassies. So without a doubt, but obviously, there's more sensitivity around that type of business at the moment.

Okay. And then just looking now at leverage, it's up there a little bit. I know, obviously, you guys have a distribution cut. Where do you sort of see that trending over the next 4 quarters?

Well, we expect our leverage to come down, just as we have more cash that we'll be retaining, we'll just be using that to pay down revolvers. And so we'll see the leverage come down just naturally.

Do you guys have sort of a target range for the end of 2020? Or is it a little bit tough with everything going on right now?

Well, it's a bit tough. But as we mentioned, our target is 55%. So yes, we're a little bit elevated right now, but we'll come within that range by the end of the year.

Okay. And then on the extended-stay hotels that you guys were mentioning earlier. What's the delta in margin between those 2? Between the extended stay and a typical hotel?

Yes. Well, in our portfolio, extended-stay margins are, I don't know, somewhere in the range of 5% to 7% higher than our other select-service hotels.

There are no further questions at this time. I will turn the call back over to the presenters.

Great. Well, thank you, everyone, and thank you for joining us today on our call. We look forward to speaking with you in May when we report our first quarter results. Thank you, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.