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

Ladies and gentlemen, thank you for standing by, and welcome to American Hotel Income Properties REIT LP Third Quarter Results Conference Call. [Operator Instructions] I would now like to turn the conference over today to Jamie Kokoska, Director of Investor Relations. You may begin your conference.

Thank you, Michelle. Good morning, everyone, and thanks for joining us for our third quarter 2020 results conference call. Discussing AHIP's performance today are Jonathan Korol, Chief Executive Officer; Bruce Pittet, Chief Operating Officer; and Azim Lalani, Chief Financial Officer. 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 FFO, 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 9 months ended September 30, 2020, and our other Canadian securities filings available on SEDAR and 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. Listeners are urged to review the full discussion of risk factors on AHIP's annual information form dated March 24, 2020, which has been filed on SEDAR at sedar.com. Our third quarter results were made available yesterday evening. 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 NOI, FFO and AFFO. For the identification of these non-IFRS financial measures and 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, this call is being recorded today, November 10, 2020. A replay of this call will be available on our website. Jonathan will begin today's call with an update regarding recent initiatives and portfolio strategy. Bruce will provide an update on hotel operations, and Azim will review our financial results. I'll now turn the call over to Jonathan Korol, Chief Executive Officer.

Thank you, Jamie, and thank you, everyone, for joining us today for our 2020 third quarter financial results conference call. I look forward to speaking with many of you over the next few weeks. It's been a very busy time since joining AHIP in early October. I'm very impressed with the dedication of our team, our external manager and the many associates at our hotels, whose combined efforts have allowed us to operate profitably in a very challenging environment. As we all await events that will allow travel volumes to normalize, our performance during the darkest days of the pandemic bolsters my confidence in our positioning relative to other lodging REITs now, and in future phases of the economic cycle. AHIP is among the first in our publicly traded lodging peer group to generate positive cash flow. We've proven an ability to operate efficiently and most of all, profitably at low occupancy levels. Going forward, our association with top global hospitality brands and the strong value proposition of a select-service model bodes well for our continued outperformance. In short, the portfolio as assembled, provides us with security in uncertain times and the ability to produce strong returns for our investors during periods of economic prosperity. Our third quarter demonstrated the resilience of AHIP's premium branded rooms-focused hotel portfolio. Our hotels recorded average occupancy of 57.1%, significantly higher than the U.S. national average occupancy of 48.5% as reported by STR for the quarter and more than 64% higher than AHIP's second quarter occupancy of 34.7%. While our financial results continue to be impacted by the ongoing pandemic, we were pleased to see a sustained improvement underway across all of our hotel segments. RevPAR at our 24 extended-stay properties was approximately $77, 33% better than the second quarter. They continue to be our best-performing properties. But perhaps more importantly, our other 49 select-service hotels saw RevPAR improve by 88%, and our 5 Embassy Suites Hotels saw RevPAR improve more than 200% from Q2, as 4 of the 5 of those hotels spent parts of Q2 closed for business. These trends indicate that U.S. domestic travel is improving, whether it's for leisure, youth sports, medical or government needs, even in states contending with rising COVID-19 counts. We're very pleased to report positive FFO for the third quarter, which very few U.S. hotel REITs have been able to achieve since the pandemic began. This was helped in part by diligent property level cost containment, and efficient hotel staffing levels implemented by our external manager and in-house asset management team. Net operating income margins for the third quarter were 31.5%, almost doubling from 15.8% in the second quarter of 2020. Turning to the balance sheet. In the last several weeks, we have continued our discussions with our CMBS lenders, and were successful in negotiating relief on all of our remaining loans. So we're pleased to confirm that as of yesterday, all 20 CMBS loans totaling $578 million, have now received relief terms to assist us as we continue contending with COVID-19 related pressures. Given the uncertainty around when the pandemic will end, and more normalized travel patterns will resume, we remain focused on maintaining liquidity and preserving capital over the next several quarters. Doing so increases our flexibility to navigate an unpredictable operating environment. It will also allow us to emerge from the pandemic in a position of strength, ensuring that we have access to capital for future opportunistic growth. Today, we have $40.2 million of available liquidity, comprised of both unrestricted cash and available revolver capacity, plus an additional $25.7 million of restricted cash. During the quarter, we significantly improved our operating performance, resulting in increased cash flow compared to the second quarter. We remain confident in the resilience of our portfolio as we actively manage through the ongoing pandemic. And with those quarterly highlights, I'll now turn the call over to Bruce to discuss third quarter hotel operations in more detail. Azim will then discuss our third quarter financial metrics. Bruce?

Thank you, Jonathan, and good morning, everyone. AHIP's portfolio continues to recover in Q3, with revenues increasing from Q2 by approximately $19 million or 70%, from $27.1 million to $46.1 million. The third quarter was marked by sustained occupancy and RevPAR recovery, alongside a continued focus on operating efficiencies across AHIP's portfolio. All of AHIP's hotels have been open since mid-June. We are pleased to see all 3 segments of our business, Embassy Suites, extended-stay, and select-service have sustained and materially improved business levels compared to the second quarter. In fact, our same-store 66 properties' third quarter gross operating profit margin of 41.3% was significantly higher than the 30.9% we recorded last quarter and higher than the 40.1% margin, our same-store hotels generated in the third quarter last year. While the pandemic continues to provide headwinds for the hotel sector in terms of occupancy and revenue, we have been very pleased with our hotel manager's execution on cost containment initiatives. Specifically, hotels continue to operate with relaxed brand standards, positively impacting margins in our rooms department, particularly around housekeeping and complementary services. Our hotel manager has added back staffing positions in Q3 in accordance with growing business demand. Our hotels continue to operate at staffing levels 48% below pre-pandemic levels. This margin enhancement, coupled with our ongoing revenue recovery, has supported our positive cash flow and FFO this quarter. RevPAR across our portfolio improved 67% from the second quarter due mostly to occupancy growth and some improvement in average daily rates. All of AHIP's hotel segments saw ADR growth from Q2. Our 49 select-service hotels grew ADR 3.8%, with 5 embassies 3% and our 24 extended-stay properties, 2.1%. Total occupancy for the 78 hotels in the third quarter was 57.1%, a 22.4% improvement from the second quarter. On a monthly basis, we continue to see consistent occupancy in each month of the quarter. Occupancy in July was 55.3%. Occupancy in August was 58.3%, and occupancy in September was 57.7%. There were concerns that our occupancy would fall in September with the return to school and a typical reduction of leisure demand after Labor Day. This has not been the case, and we have seen strong leisure segment demand continue through the months of September and October. In October, our occupancy was 58.3%, demonstrating continued recovery in the start of the fourth quarter. It's worth noting, historically, we see seasonal softening of our occupancy in the months of November and December. As mentioned, much like the second quarter, our occupancy continues to be driven by the leisure segment, which has resulted in the peak occupancy at our hotels shifting from midweek to weekends. Our booking windows continue to be shorter than historical norms, with guest rooms typically being reserved within 5 days of arrival. Geographically, our best occupancy performing markets during the third quarter were New Jersey 6 hotels at 79.7%, our 5 hotels in the Midwest, in Illinois, Iowa, Kansas and Missouri at 77.3% and Tennessee's 2 hotels at 73.4%. Overall, we saw broad-based occupancy growth across many other regions. In fact, 9 hotels recorded 80% occupancy in the quarter, including 2 hotels over 90%. The Holiday Inn Express in Emporia, Kansas at 91.3% and the Residence Inn Neptune, New Jersey, at 90.3%. We also saw 14 hotels with occupancy for the quarter between 70% and 79%. AHIP's 24 extended-stay properties -- excuse me, continue to be the best-performing segment within our portfolio, averaging 70.6% occupancy during the third quarter with an average rate of $108.30. These extended -- these 24 extended-stay hotels accounted for 29% of our guest rooms, and their strong performance generated 39% of our revenue during the quarter. Our 49 select-service properties had an average occupancy of 55% for the quarter, growth of 24.6 points from 30.4% occupancy in Q2. Our 5 Embassy Suites hotels, which are generally located in larger secondary markets and have exposure to meetings and conference business segments, were the most challenged properties in our portfolio, recording average occupancy of 39.5% during the third quarter. We did see the first signs of some small meeting business in these hotels in Q3, and also the return of youth sports teams that tend to have an affinity for the Embassy Guest Suite product. Occupancy in October for our 5 embassies was 43.4%. Our capital spend in Q3 was limited to emergency requests related to life safety and asset preservation. We had no new capital renovation projects scheduled in Q3 or for the remainder of this year. While it has been an unprecedented operating environment over the last several months, it should not be forgotten that our portfolio is significantly different today than it was in the same period last year, with the sale of our former economy lodging portfolio and acquisition of 12 additional premium branded hotels, both occurring in the fourth quarter of 2019. And more recently, the sale of the Wingate Tampa at the end of August this year. While all metrics improved on a same-store basis compared to the second quarter this year, compared to the third quarter last year, AHIP's 66 same-store hotels saw RevPAR decline of 41% to $54.46, with ADR decreasing 18.2% and occupancy decreasing 22 percentage points, all due to ongoing pandemic-related sector headwinds. Overall, our 78 hotels continued to outperform their respective comp sets with a RevPAR index of 122.6 during the third quarter and further demonstrated by higher occupancy figures than many of our hotel REIT peers. Our extended-stay properties once again led this performance with a RevPAR index of 144.25, where 100 represents a fair share of market. This continues to be a dynamic operating environment, and our hotel manager and all the employees working at our 78 hotels, have done an exceptional job at adjusting to new operating protocols and safety measures. I would like to thank them again for their ongoing efforts to ensure our properties remain safe and comfortable for all our guests and employees. And with that update on hotel operations, I'll now turn the call to Azim to discuss financial and capital metrics. Azim?

Thank you, Bruce. Good morning, everyone. During the quarter, RevPAR declined 28.1% with occupancy dropping by 19.4 percentage points due to COVID-19 and ADR declining by 3.7%, partly caused by the pandemic and portfolio changes, as last year, we had the lower-rated Economy Lodging Portfolio in our quarterly results. Total revenues declined 47.7% to $46.3 million. Our ongoing cost containment initiatives have been successful in moderating the impact to net operating income for the third quarter, and enabled us to generate $14.6 million of NOI. This represents an NOI margin of 31.5%, just 2 percentage points lower than the 33.5% NOI margin recorded in the third quarter last year and significantly better than the NOI margin generated during the second quarter. Loss and comprehensive loss for the third quarter was $12.1 million compared to net income of $2.1 million last year. Contributing to the reported loss this quarter were lower operating income, higher interest expense and impairment charges recorded for 3 Oklahoma based hotels. Diluted loss per unit for the quarter was $0.15 compared to a diluted income per unit of $0.03 last year. We were pleased to generate positive FFO during the quarter at $120,000, and AFFO was $218,000. Although both these metrics are down compared to last year, these are significantly better than the FFO of minus $9.1 million and AFFO of minus $8.7 million reported in the second quarter. On a per unit basis, both FFO and AFFO were 0, significantly better than the minus $0.12 and minus $0.11 respectively, reported in the second quarter. Our same-property results for the third quarter represent the 66 hotels owned continuously since January 1, 2019. For the third quarter, same-property RevPAR declined by 41% resulting in total revenues declining by 42.4% to $39.3 million, and same-property net operating income was $12.3 million, down from the third quarter last year, reflecting the impacts of COVID-19. Despite the lower revenues, strong cost containment initiatives helped and keep -- helped in keeping the margin decline to only 2.7 percentage points at 31.4%. For the first 9 months of 2020, total revenue declined 47.7% to $135.4 million due to pandemic-related occupancy declines. ADR during this period actually improved 4.2% compared to the same period last year as a result of our capital recycling activities, resulting in newer, higher quality hotels in our portfolio today compared to last year. RevPAR for the first 9 months declined 29.3% to $52.95. Net operating income for the first 9 months was positive at $36.8 million, with NOI margins declining 6.8 percentage points to 27.1%. Loss and comprehensive loss for the 9 months was $45.5 million, including $8 million of noncash impairment charges. FFO for the first 9 months was minus $4.3 million or negative $0.06 per unit, and AFFO was minus $4.8 million, also negative $0.06 per unit. Turning to capital and liquidity metrics. As at September 30, AHIP had total liquidity of $40.2 million, consisting of cash balances of $26.9 million and available revolver capacity of approximately $13.3 million. In addition, AHIP had restricted cash balances of approximately $25.7 million. As Jonathan referenced, we have successfully completed negotiations with all of our CMBS loan servicers that have allowed us to utilize restricted cash reserves to fund debt service for the next 90 days, as well as a deferral on funding FF&E reserves for 90 days for all of our CMBS loans totaling $578 million. The relief amounts will be repaid over the next 6 to 12 months after the completion of the relief period. At the end of September, we had a weighted average remaining term on our total debt of 4.8 years and a weighted average interest rate of 4.55%. We have no immediate debt maturities until June 2022. We are also current on all of our debt service payments. As the recovery continues and we generate incremental positive cash flow, our plans are to continue focusing on paying down our debt and further enhancing our liquidity. We believe this is a prudent and conservative approach given the ongoing pandemic and economic environment. During the quarter, we sold the Wingate Tampa for a sale price of $7.5 million. On October 31, AHIP collected a $2.4 million receivable plus accrued interest arising from the sale of the economy lodging portfolio. In both cases, net proceeds were used to pay down our revolver. With that financial discussion, I'll turn the call back to Jonathan for some closing remarks. Jonathan?

Thanks, Azim. The pandemic has presented challenging conditions for all hotel owners, and we are pleased overall with how our portfolio performed within this context. The pace of occupancy and RevPAR recovery underway across all of our 78 hotels has bolstered my confidence that our portfolio is primed to emerge from the pandemic in a position of strength. Our portfolio remains uniquely positioned to cater to the increased proportion of domestic leisure travel demand with a suites-focused select-service hotel product and hotels strategically located in drive-to locations outside of large urban centers. And while our 24 extended-stay properties continue to lead our performance with 70.6% occupancy in the third quarter and 70.7% occupancy in October, the strong RevPAR recovery underway at our other select-service properties and Embassy Suite hotels is further strengthening our revenue streams and cash flows. I think it's important to note that as much as we are focused on our financial performance, there has been an incredible effort by our hotel manager to ensure the ongoing health and safety of our guests and our hotel staff during this time. Masks are now mandatory in all of our hotels. Front desk plexiglass barriers are now used across our portfolio. Enhanced cleaning and disinfecting schedules are underway. And we've provided alternative grab-and-go food and beverage options to guests at properties that would otherwise offer restaurant or bar amenities. I'd like to thank our hotel manager and all of our hotel associates, for their continued efforts in these unusual times. I would also like to thank our lending partners and fellow unitholders for their ongoing support. And I look forward to growing our relationships in the future as our business recovers and grows in the years ahead. The cloud of uncertainty in the macro economy will dissipate eventually, and with that, hospitality and tourism businesses will once again have their moment in the sun. Everything we do here at AHIP is to ensure that we are well prepared for that day, and that our financial standing affords us the ability to get back to what we were built for: generating monthly distributions, enhancing the value of our portfolio and increasing FFO per unit through accretive acquisitions and targeted CapEx programs. So with that overview of our third quarter and recent initiatives, we'll now open the call to questions from analysts. Operator?

[Operator Instructions] Your first question comes from Lorne Kalmar from TD Securities.

Jonathan, congratulations on the new role.

Thanks, Lorne.

My first question is looking at the STR stats and the occupancy stats that you guys had in the third quarter, it looks like things have kind of plateaued. I mean for STR, it's a little bit below you guys for the reason you stated. But for the duration of the pandemic, do you see any catalysts to drive that occupancy up further? Do you think it's sort of fair to say that for as long as this thing drags on, the occupancy will be more or less range bound?

Lorne, it's Bruce. It's a good question. We do believe that we're going to continue to see leisure travel across our portfolio. And our manager tells us that they're starting to see a little bit of corporate travel. I think as people become more comfortable with a therapeutic or a vaccine, that, that will also enhance travel patterns, both for leisure and corporate guests. So I wouldn't say that we've plateaued. I think as we get into 2021, we'll be more optimistic and see more growth across the portfolio.

Okay. That's good color. And then the next big one is on the operating cost. You guys have always been in the range, but have done a great job keeping the costs down this quarter. I think year-over-year is down about 400 basis points as a percentage of revenue. And I understand that's a part of the restricted housekeeping operations now. How long do you guys think you can keep this going? Or is this maybe a structural change where on a go-forward basis, this is how things will be run?

Yes. I think -- Lorne, it's Bruce again. I think there will be some structural change to how we operate these hotels, from what the offering is from a complementary services perspective, breakfast and even receptions, I think, is going to change going forward. I think as well, our manager has really refined the management requires -- requirement to operate these hotels. And we believe we're going to see that benefit going forward, even as our business comes back to normal, so to speak. So there will be some adjustments to our cost structure going forward.

Okay. Bruce, maybe I'll give you a break and a quick one for Azim. I was just wondering, was there anything onetime in interest expense?

Not necessarily. I think some of it was tied to, as we were using some of our suppliers and working capital financing, we had some interest expense coming out there, but nothing out of the ordinary.

And your next question will come from Matt Logan from RBC Capital.

Based on your prepared remarks, it sounds like the occupancy is holding in so far in the fourth quarter. But in your press release, you mentioned that you expected you could see some performance deterioration over the seasonally slower winter months. Can you just give us a sense for your expectations over the next couple of quarters? And if you think those trends will be sufficient to maintain the positive FFO trajectory?

Matt, it's Bruce. I'll answer the best -- the question the best that I can. As I mentioned, our booking windows, give or take, 5 days. So we don't have great visibility on the business going forward, right? What Q1 might look like next year as an example. We have historically seen occupancy soften as we get into later November and December. And although we don't have any visibility into those time periods yet, I think our current assumption is that we'll see that again this year. So where the hotels in aggregate have been running 57% occupancy, let's say in Q3, and again a very good month in October, I suspect they will tick down maybe closer to the 50% range for November and December. And it's very difficult to talk about the first quarter at this point.

Appreciate the difficulty in trying to put a pin in the numbers. Perhaps on the expense front, wondering if there is any major capital items over the next year that you have visibility towards?

Yes. Honestly, not really. The brands have been very open with regards to, let's say, what our PIPs schedule might have looked like a year ago. And, in fact, Marriott as an example, has basically suspended or pushed out PIPs with a view of having those conversations as we get back into 2022. Hilton is really looking at things on a case-by-case basis. But we see really very minimal significant capital projects as we head into 2021. I think it will be more a discussion about what things might look like into 2022.

And in terms of your CMBS deferrals, those are for a period of 90 days. If we find the economy has taken a step back or there are more lockdowns in Q1, is there an ability to extend any of those for another quarter until we get a vaccine later next year?

The plan would be to go for a second round of CMBS relief, which some issuers -- or some borrowers are already doing. So that would be our strategy for that.

And in terms your portfolio, are there any properties currently delivering a negative EBITDA number that you might consider selling as noncore assets in the near term?

Yes. There are a few that fit into that category, Matt. We would -- we're constantly looking at evaluating opportunities to sell. I think in this environment, there's a significant bid-ask spread, as many have talked about. The financing pool is limited for potential buyers. So we're quite happy with where we sit right now. Our hotels have always been attractive to potential buyers just because of their -- where -- on a whole where they stand portfolio wide, witnessed by our RevPAR index of 122 in Q3, but we're not distressed sellers. It would have to be the right circumstances.

Makes sense. And John, I know you've only been in the role for a short period of time. But perhaps you could talk about your top 3 priorities over the next year and potentially give us a sense for how you'd like to see the business evolve as the industry recovers?

You bet. And I'll just -- I'll speak to the first part first. And certainly, in this environment, as we alluded to in the remarks, the focus is on the balance sheet. Capital preservation, maintaining liquidity, balancing our payables with the backdrop of operating these hotels safely and in a manner that is comfortable for not only our customers, but also our hotel staff. I've spent the majority of my career as an owner, primarily through private vehicles, but in all cases, with the same dynamics as AHIP, i.e., an internal asset management team monitoring the activities of an external manager. A good owner is a good -- is a great asset manager. So my focus is on balancing capital needs with an eye on return on investment. I understand the cyclicality of our business, and the need to be prepared to transact and dip into the capital markets at the right time, and also the need to be willing buyers, but also willing sellers at the right time. So I think you'll see that kind of -- those kind of dynamics play out in how we manage this business going forward.

Your next question will come from Joanne Chen from Bank of Montreal.

Just a quick question on -- not to harp too much on the occupancy front, but -- and I apologize if I missed this earlier. But can you tell us maybe a little bit on how -- in terms of the occupancy recovery during Q3? Was it primarily in group travel? Or was there a certain group exception in travel that contributed to that recovery?

Joanne, it's Bruce. Honestly, the recovery of occupancy has really been almost exclusively in the leisure segment. So it was leisure that we first saw in Q2 along with some government medical logistics type groups. That group, government, medical logistics is still active in Q3. But what has really grown has been the drive -- has been the leisure side, really since Memorial Day. We are still seeing very limited corporate or corporate group business in any of our hotels at this point.

And so far in October, you're still seeing that kind of -- in October and November, the leisure is still kind of keeping at the same pace?