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 Results Conference Call. [Operator Instructions] At this time, I will now turn the call over to Jamie Kokoska, Director of Investor Relations. You may begin your call.

Thank you, Amy. Good morning, everyone, and thanks for joining us for our fourth quarter and year-end 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 months and year-end December 31, 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 fourth quarter results are made available yesterday afternoon. We encourage you to review our earnings release, MD&A and financial statements, which are available on our website as well as 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 of the most directly comparable IFRS financial measure and a reconciliation between the 2, please see our MD&A. All financial -- 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, 2021. 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 highlight key 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 fourth quarter financial results conference call. 2020 was obviously one of the most challenging years that the hospitality industry has ever seen. I'm proud of the performance of our team, our hotel manager and our property level associates during unprecedented circumstances. The hard work completed over the last 12 months sets us up quite well for what lies ahead. I'm going to focus my remarks today on our activities in the first 2 months of 2021, what we're presently seeing in this rapidly evolving industry environment and our plan for the rest of the year. After that, I will hand it off to Bruce and Azim to provide an overview of the fourth quarter of 2020. So far in 2021, we're pleased to see a fairly dramatic rebound from our winter demand lows. Traffic improved at our hotels starting in mid-January, ultimately leading to 59.9% occupancy in February, the highest monthly occupancy we've achieved since the pandemic began. More recently, we've witnessed exceptionally strong performance from many of our leisure-oriented Florida and Texas Hotels. During February, several of our Florida hotels were 100% sold out, mainly on weekends, which is obviously a welcome sign, an indicative of the broader leisure travel segment recovery underway. Vaccination rates are already rising rapidly across the U.S. since they initially began in December. Today, nearly 20% of the U.S. population has received an initial shot of the COVID vaccine, while almost 10% are now considered fully vaccinated. All indications are that vaccination rates will rise exponentially over the next 30 to 60 days. This, coupled with declining COVID-19 infection rates, bodes well for the U.S. economy and travel demand in particular. Over the last couple of weeks, we have seen the strongest demand since the pandemic began with midweek occupancy in the mid-60% range and weekend occupancy in the mid-70s. As we look ahead, U.S. spring break has already started for some schools and will begin in other regions over the next several weeks. Similar to how we say strong demand over President's Day long weekend, we expect this will drive heightened leisure demand through the rest of March and into April. The U.S. stimulus bill, which was passed yesterday, will likely spur additional travel demand. We say increased bookings soon after last year's stimulus checks were issued as they provided both cash in hand and a boost to U.S. consumer activity. All of this supports a continued travel sector recovery. And should set a solid foundation as we lap COVID-19-impacted months and begin seeing year-over-year growth in our operating performance. There are undoubtedly continued uncertainties that balance the optimism that we currently have for the demand signals in the market. One, while the vaccine rollout is gaining momentum, relaxed state and regional health mandates and the natural progression of the virus could produce a third wave or even additional COVID variations before widespread immunity can be achieved. Additionally, business travel continues to lag leisure travel. And with that, the industry will be challenged to return to 2019 rate levels without the necessary demand compression. In 2020, our asset management team, together with our hotel manager, proved to be adept at flexing the hotel operating model in response to fewer guests at our hotels. This was evidenced by our properties generating higher operating margin than most of our U.S. hotel REIT peers throughout most of 2020. We'll continue to focus our asset management efforts on expense control and margin preservation to ensure that as higher occupancies lead to rate growth, those gains flow directly to our bottom line. Several other events, of note, have occurred since the year began. In mid-February, as you're all aware, the Southern U.S. was hit with a massive winter storm. I'm pleased to confirm that our 7 Oklahoma and 10 Texas hotels were relatively unscathed by the cold, with only minimal damage occurring. Some of our properties were faced [indiscernible] and intermittent city water supply. Despite this, the property teams were able to provide a safe and comfortable environment for guests at our hotels. Note that the majority of these hotels are on fixed-price contracts, so we don't expect any significant impact to our energy costs related to the storm. I would like to take this opportunity to thank our dedicated hotel staff and our hotel management company for their tremendous efforts during the storm. Even while their own families and personal residences were impacted, they continued to provide our hotel guests with a comfortable stay. It's a testament to the quality of our teams, and we're very thankful to be able to rely on such dedicated staff. At the end of January, we were pleased to complete a $50 million preferred share in warrant private placement with 2 well-recognized and highly regarded real estate and hospitality investment firms, BentallGreenOak and Highgate Capital. Through this investment, we not only bolstered our balance sheet with additional capital to reduce our debt and enhance our liquidity, we also gained 2 highly experienced board members who will provide invaluable input as we pursue our long-term growth strategies. I would like to formally welcome Mark Van Zandt, managing partner at BentallGreenOak; and Mahmood Khimji, Co-Founder and Managing Principal of Highgate to our Board of Directors. Their investment validates our strategy of owning branded, selected-serve hotels in secondary markets, which has proven to be particularly resilient during the current pandemic. Except for a 2-month window between April and June, all 78 of our hotels have been open. And in fact, over the past 12 months, other than April, our portfolio has generated positive hotel EBITDA in every month, something that very few of our U.S. hotel REIT peers were able to achieve. Concurrent with the preferred stock investment, we also successfully negotiated amendments to our $225 million corporate credit facility with our lending syndicate. As a result, we received waivers for key financial covenants through the end of 2021 and modified covenants through the end of 2022. I'd like to thank our lenders for their continued partnership. Today, following our preferred share, private placement and loan amendments, we have approximately $60 million of available liquidity, comprised of both unrestricted cash and revolver capacity, plus an additional $26 million of restricted cash. While we're cautiously optimistic about improving travel patterns, there is still some uncertainty around when the pandemic will end. Until we see a sustained return to more normalized business levels, we remain focused on maintaining liquidity and preserving capital. Doing so provides flexibility to navigate this unique operating environment and will also ensure that we're well positioned for long-term growth. And with those recent highlights, I'll now turn the call over to Bruce Pittet, our COO, to discuss fourth quarter hotel operations. Azim will then follow and highlight key fourth quarter financial metrics. Bruce?

Thank you, Jonathan, and good morning, everyone. The fourth quarter began with continued momentum from the third quarter. But the seasonality we expect to see in our portfolio eventually materialized in mid-November and December. Total revenue for the fourth quarter was $39.4 million, a decline of 48.2% from the fourth quarter last year. Although we typically see seasonal decline in revenues in the quarter, the decline this year was also impacted by the second wave of COVID-19 as the U.S. case rate increased significantly throughout the period. In turn, we saw a 34.6% decline in RevPAR. As we have seen since the onset of the pandemic, food and beverage revenues saw a significant decline, 83% or $5.5 million in the quarter as this revenue stream continues to be pressured due to ongoing and evolving restaurant and group size restrictions. Total occupancy for our 78 hotels in the fourth quarter averaged 51.4%. On a monthly basis through the quarter, October occupancy was 58.3%, November occupancy was 50.2% and the seasonality we expect to see in our portfolio impacted the latter half of November and was most reflected in December with occupancy at 45.6%. The leisure segment continues to be the dominant driver of demand across our portfolio, although we did see a modest increase in demand for some small corporate meetings in October and early November, with meeting sizes typically ranging from 10 to 20 people. Construction and project-driven business also continued to be a meaningful demand driver in many markets, especially on our extended-stay oriented hotels. Lastly, youth sports teams continue to travel, especially through the first half of Q4. As Jonathan mentioned, we have seen considerable increase in demand in occupancy across our portfolio beginning in mid-January and meaningfully, since President's Day long weekend in mid-February, especially on weekends and in Florida and Texas. Over the last 6 weeks, we have seen a noticeable uptick in group bookings, particularly social, military, educational, religious and fraternal organizations, along with project-based business. We also have seen a limited number of corporate bookings, which have basically been absent since the onset of the pandemic. Although we have seen occupancy rise over the last couple of months, average daily rate hasn't improved proportionately. We believe that the key variable for ADR recovery will be in the reemergence of the corporate business segment. As we saw last summer, the benefit of AHIP's drive-to hotel locations continue to position our portfolio to overachieve from an occupancy perspective versus the broad industry. Our business and channel mix has stayed consistent through the onset of the pandemic, with 88% transient demand, which is primarily leisure, and only 12% group, which is oriented to local project work, regional medical support and logistics and some youth sport activity. Weekends still outpace midweek occupancy, reinforcing there is a strong leisure segment demand and continued limited corporate travel. From a channel mix perspective, property direct bookings represent 30% -- 36% of our bookings, up 5% from prior year. Bookings from brand.com represent 31% of bookings, consistent with prior year. Online travel agents or third-party sites are up 1% to 14%. Our booking window, although improved since Q2, are still within 5 days of arrival and closer to 8 days for extended stay bookings. The channels mentioned aligned with the increased leisure demand our portfolio has seen. The more corporate-oriented channels have continued to see reduced and limited booking volumes. With regards to corporate demand, as vaccination rates continue to improve and the pandemic recovery accelerates, we anticipate we'll start to see more corporate and small group and conference demand in our hotels in the second half of 2021. Geographically by state, our best occupancy performance markets in the fourth quarter were Kansas, where our Holiday Inn Express, Emporia recorded 73.6% occupancy. Our 2 hotels in Tennessee at 70% occupancy. And 2 hotels in Illinois at 63.9% occupancy. Our 10 hotels in Texas also performed very well with 60.3% occupancy during the quarter. In particular, a subset of our Texas hotels, our 3 hotels in Amarillo, ran a combined occupancy of 83.5% and achieved RevPAR growth from prior year of 18.8% to $73.62. This area of Texas saw significant medical and logistics demand related to COVID-19. Overall, we saw solid occupancy across many regions in the fourth quarter. In fact, 12 hotels recorded over 70% occupancy for the quarter, including 5 that achieved higher occupancy than in the comparable period in 2019. And 29 properties recorded over 60% occupancy in the quarter. AHIP's 24 extended stay properties continue to be the best-performing segment within our portfolio, averaging 62.4% occupancy during the fourth quarter with an average rate of $100.7. These 24 extended state hotels generated 38% of our revenue during the quarter, while representing only 29% of our available rooms. When compared to prior year, RevPAR for these properties declined 31.4% versus the non-extended stay AHIP hotels that saw RevPAR year-over-year decline of 47.7%. With the strength of the brands and the amenities offered at extended-stay hotels, this subset of hotels achieved a RevPAR index in Q4 and of 138.9% with index growth of positive 8.4%, driven by both higher occupancy and rate. Within this segment, our 10 Residence Inn by Marriott Hotels continued to lead performance, with an aggregate average occupancy of 65.1%. AHIP's 49 select-service properties had an average occupancy of 49.7% for the quarter. Our 5 Embassy Suites hotels, which are generally located in larger secondary markets and have exposure to meetings and conference business segments, continue to be the most challenged properties in our portfolio and in aggregate, had a 64.4% decline in RevPAR to prior year. Our Embassy Suites in Tempe, Arizona, did see some improved activity relative to prior quarters, running 44.5% occupancy for the quarter as warm seasonal weather returned. Business drivers were mostly related to leisure travel and sports teams. There was also a notable uptick of travelers from California due to local COVID-related restrictions in their home state. Overall, our 5 Embassy Suites hotels reported occupancy of 36.6% in the fourth quarter. On a same-store basis, including only 66 hotels owned since January of 2019, in Q4, those hotels saw a RevPAR decline of 42.7% to $46.85, with ADR decreasing by 19% and occupancy decreasing by 21.3 percentage points, all due to ongoing pandemic-related sector headwinds. Our 78 hotels continue to outperform their respective comp sets with a RevPAR index of 120.5 during the quarter. As mentioned, our extended stay properties once again lead this performance. 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 managers 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, which includes breakfast and evening receptions where required by the brand. Our hotel manager has been adjusting staffing levels in accordance with changing business demand. During Q4, on average, our hotels operated at staffing levels 48% below pre-pandemic levels. Through January and February, following demand and occupancy dynamics in the winter, our properties are running below 50% of pre-COVID staffing levels. As demand returns, our variable labor, primarily in housekeeping, will flex to accommodate increased occupancy. We will also be working with our hotel manager to reset the operational and sales management requires -- required, excuse me, to successfully manage our properties. Further, we believe our brand partners will look to reestablish a modified complementary service offering that will be more substantive than what is currently being offered. Ultimately, we believe we will have a leaner operating model versus our pre-pandemic cost basis. One challenge we foresee in coming months for the industry will be the ability to recruit employees as the economy recovers. Our capital spend in Q4 was limited to emergency requests related to life safety and asset preservation. We had no new capital renovation projects in the fourth quarter and expect PIP projects will be limited in 2021 and dependent on the financial recovery of our business. As business conditions normalize, we will begin to have discussions with our brand partners regarding our properties and the long-term renovation pipeline. We expect these discussions will begin in spring and summer of this year. As a reminder, approximately 80% of our guest rooms were built or renovated in the last -- in the past 5 years. As Jonathan mentioned, 2020 was an incredibly challenging year in our industry. I would also like to thank our hotel manager for their diligence and focus on keeping our guests and employees at all our hotels safe and comfortable through this extraordinary period of time. More recently, I would like to acknowledge and thank our hotel teams in Texas and Oklahoma for their exceptional dedication as they navigated through the extreme winter conditions that hit these states in mid-February. We're proud to have such dedicated teams running our hotels. And with that update on our hotel operations, I'll now turn the call to Azim to discuss financial and capital metrics. Azim?

Thank you, Bruce. Good morning, everyone. Our seasonally weaker fourth quarter performed as we expected with lower operating performance compared to the third quarter, resulting in lower RevPAR, revenues and cash flows. Compared to last year, total revenues for the fourth quarter declined 48.2% to $39.4 million. With the sales mix weighted towards occupancies rather than rate, this was dilutive to margins during the quarter. This, combined with the relatively high fixed cost nature of hotels, particularly with respect to insurance and property taxes, ultimately led to a 6.5% decline in NOI margin to 24.9%. Hotel NOI was $9.8 million. FFO was negative $5.2 million or negative $0.07 per diluted unit. This translated into an approximately $6 million cash burn for the quarter, offset by the collection of a $2.4 million loan related to the sale of the Economy Lodging portfolio, with the majority of the cash burn occurring in the back half of the quarter. We also had higher than normal corporate, general and administrative expenses due to nonrecurring securities-based and compensation expenses related to CEO changes, coupled with higher professional fees. We booked approximately $5.6 million in impairment charges on 5 hotels located in Pittsburgh and Oklahoma during the quarter. These hotels have been challenged for some time due to market conditions and new supply. During the quarter, loss and comprehensive loss was $20.9 million compared to a loss and comprehensive loss of $14.5 million last year. Contributing to the increased loss were lower operating income, higher impairment charges and interest expense. The increase in interest charges stems from a full period of interest charges on the 2019 acquisition term loan, interest on the deferred purchase price related to the 2019 acquisition and higher interest charges from increased borrowings on the revolver compared to last year. Diluted loss per unit for the quarter was $0.27 compared to $0.19 last year. As mentioned earlier, the seasonal decline in business did result in a cash burn during the quarter. Generally speaking, we need RevPAR of approximately $55 to generate positive cash flows after debt service. Our ability to generate higher average daily rates will impact our cash flows. So far in the first quarter of 2021, occupancy levels and RevPAR have improved considerably, and market dynamics are continuing to improve. So long as the demand trajectory remains intact, we anticipate positive cash flows during the first quarter. For full year 2020, RevPAR declined by 30.7%, and coupled with lower food and beverage revenues, resulted in total revenue declining by 47.8% to $175 million. ADR during this period actually improved by 60 basis points compared to 2019 as a result of our capital recycling activities, resulting in newer, higher quality hotels in our portfolio today. Net operating income for 2020 was $46.6 million, with NOI margins declining 6.8 percentage points to 26.6%, reflecting the sales mix. Loss and comprehensive loss for 2020 was $66.4 million as a result of lower NOI, higher interest expense and higher noncash impairment charges on hotels in Pittsburgh and Oklahoma. FFO for 2020 was negative $9.5 million or negative $0.12 per diluted unit. With respect to the preferred stock issuance completed in January, this instrument is made up of preferred shares with an allocated value of $48.1 million and classified as equity under IFRS and warrants with an allocated value of $1.9 million classified as a long-term liability under IFRS. Turning to capital and liquidity metrics. As at December 31, 2020, AHIP had total available liquidity of approximately $36 million and an additional $26 million of unrestricted cash. After we completed the private placement in January, we used some of the proceeds to pay down our revolver, pay some outstanding obligations and retain the balance of cash. Currently, our total available liquidity, consisting of cash and revolver capacity, is approximately $60 million. In addition, our pro forma leverage has declined by 270 basis points to 55.6% from 58.3%. We have no debt maturities until June 2022, and our weighted average debt term to maturity is 4.5 years. Concurrent with a preferred share offering, we completed the third amendment to our credit facility. Key modifications included extending covenant waivers through December 31, 2021, and modified covenants through December 31, 2022, fixing the availability under the facility at approximately $159 million to the end of 2021 and allowing for the issuance of the preferred shares and for the payment of certain outstanding obligations. During the quarter, we also obtained relief on 4 CMBS loans totaling $57 million. The relief included a deferral for funding FF&E reserves for 6 months, repayment of this deferral over 12 months and low debt service coverage covenant waivers. For 2020, we were able to obtain relief on all 20 of our CMBS loans. We have 2 underperforming noncore assets in Pittsburgh, which generate little or no FFO. On December 4, 2020, we made a request to the loan servicer for these 2 single property non-recourse loans totaling approximately $18 million that the loans be transferred to the initial servicer in order to modify the loan terms. One of the loans is currently in cash management and the loan servicer is using the cash reserves to keep the loan current. For the second loan, AHIP has not made any loan payments since November 6, 2020. And in January, AHIP was notified by the loan servicer of the occurrence of an event of default. The event of default does not impact any of AHIP's other loans. We are currently in discussions with the loan servicer about modification of loan terms. As mentioned earlier, we also collected $2.4 million loan proceeds plus accrued interest from the purchaser of the Economy Lodging portfolio. The proceeds were used to pay down our revolving credit facility. We also entered into an agreement to extend the maturity date for the remaining deferred purchase price of approximately $16.1 million related to the acquisition of 12 premium branded properties that was completed in December 2019, with periodic payments and a final maturity date of December 31, 2021. As a result of the preferred stock issuance, we intend to make a onetime lump sum payment in April 2021. After the quarter, we obtained an additional $5 million in U.S. government guaranteed loans, which may be forgivable under certain conditions. With that financial discussion, I'll turn the call back to Jonathan for some closing remarks. Jonathan?

Thanks, Azim. Having joined AHIP in October of last year, I've now had the opportunity to evaluate our strategy and market positioning as well as hear from current and potential investors and all of you in the analyst community. Our near-term financial focus will continue to be on protecting the balance sheet and preserving liquidity. Operationally, we'll maintain disciplined cost controls to drive sustainable margin enhancement, ensuring that as rate growth accelerates, we're capturing that incremental revenue to our bottom line. As we distance ourselves from the impacts caused by COVID, we'll be busy growing our portfolio through accretive acquisitions and ROI-generating investments in our current properties as well as employing a measured approach to debt reduction. Obviously, all of this will be accomplished with the end goal of driving total return for our unitholders through unit price appreciation as well as reinstating our unitholder cash distribution at a sustainable level and at the appropriate time. AHIP continues to have a solid platform for cash flow generation as normalized business conditions return. The initiatives undertaken over the last year have positioned our business to perform very well as the pandemic subsides and pent-up travel demand benefits our sector. With a stronger platform for performance and an improving sector outlook, we're optimistic about the opportunities ahead. So with that overview of the fourth quarter and recent initiatives, we'll open the call to questions from analysts. Operator?

[Operator Instructions] Your first question today comes from the line of Lorne Kalmar with TD Securities.

Looks like things are starting to look up on the travel front in the states. And obviously, some good numbers in February. Could you maybe give us an indication of what the March occupancies have looked like thus far?

Lorne, it's Bruce. I would -- I think through last night, approximately, we're running through the first 10 days, about 63% occupancy.

So great, still trending in the right direction. That's fantastic. And did you guys -- I know you said, hopefully, you don't expect any negative financial impact from the storms. But was there any uptick in stays in Texas and Oklahoma and the affected areas as a result of the storms?

Yes. Not so much in Oklahoma, but we did see some increased volume in Texas. It wasn't so much project-related business we saw in Texas, but it just seemed like people were moving around quite a bit. And in some instances, there were homes without either power or water, so people looking for kind of a well-provisioned hotel to shelter until their homes were back online.

Fair enough. Was it material or not really?

Not overly. I mean, as we've mentioned, we've seen a noticeable uptick in general since President's Day week. And certainly, it's been a little stronger in Texas. But the portfolio overall has been exhibiting stronger occupancies.

Okay. And then you guys kind of mentioned just at the end there, leverage reduction remains a priority, and I think you guys are still above to the 55% even after the investment. How do you see that kind of unfolding? Where do you want to get? And what leverage do you guys have to pull to get there?

You bet. Lorne, it's Jonathan. And certainly, directionally, we want to be at a level that's more consistent with what you'd see from the other U.S. hotel REITs, certainly those in the select service space. Our debt to enterprise value, of course, is going to look fairly lofty in these times given the unit price. But directionally, that's where we're headed. In the near term, we're focused on generating the cash that would allow us to begin to pay down debt either on a one-off basis or just by growth initiatives that are taken on at lower leverage rates.

Okay. Would you guys think about doing any more noncore dispositions? Or is there an appetite for that out there?

Certainly, there's a lot of capital in the market right now chasing deals. And on the flip side, there's not a lot of deals available for that capital. So we actually expect that in the short term, assets will begin to trade up because of the immense supply of private capital. Whether or not we would like to transact is probably for debate. Recall that we have fixed rate debt securing our properties. And so in many cases, releasing that debt tends to be punitive.

Got it. And then 1 last, just clarification, I guess. I think I read you guys can't reinstate the distribution as long as you guys are in the covenant waiver period. Is that December 2021 that ends? Or is that 2022?

The covenant waiver period ends 2021, but then there's mod covenants through 2022.

So you wouldn't be able to reinstate the distribution until the end of 2022?

No. That's not correct. No. So only until the end of '21, there's a restriction. So as long as we're on covenant waiver, we can't reinstitute distribution. But if 2021 was to really improve and we were able to come out of covenant waiver earlier than December 31, 2021, we would be able to reinstate the distribution.

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

In terms of your occupancy, certainly, things are trending positively. At 63% in March, how should we be thinking about the near-term ceiling before the business travel starts to come back?

Matt, it's Bruce. My view is we still -- we certainly still have room to grow. And we are seeing, along with the leisure travel, more project-oriented business, right, that may be related to medical and COVID-type things, but also construction and projects just in markets as a whole. So we're seeing that segment grow. So that should help boost our occupancy as well. I think our challenge, quite frankly, in the months to come is going to be our ability to move average daily rate in the short-term until the corporate segment returns.

So I guess, if current trends persist, we should hopefully see steady occupancy increases through the balance of the year, but with the ADR generally steady until the corporate demand returns?

Yes. I think that's fair. And I think also just to be mindful, we do have -- we're coming out of a seasonally lower occupancy period, right? And the portfolio has operated really in a very similar way to previous years over these last 3 or 4 months. So we traditionally see occupancies grow as we head out of February into March and beyond and kind of see peak occupancies more like June, July, August and even a little bit in the fall months. So I think we're going to -- I see no reason why we won't continue that pattern.

And maybe turning to the margin. You talked a lot about being able to preserve that as costs start to come back online. Any sense for how we should be thinking about the margin in 2021 more broadly?

Yes. Well, let me give you a couple of examples of what we've seen. And it's difficult to answer your question, and I'll tell you why. But in our rooms-oriented hotels, right, which is the portfolio that we have, 2 of the larger costs are housekeeping and comp food and beverage, okay? So when we look at comp food and beverage, which again is breakfast and evening receptions, our costs have declined from 2019 where they were at $3.87 per occupied room. In Q4, that number was $1.69. So -- and based on a minimal offering. We do believe that, that cost will start to increase as the brands kind of reset some of those offerings as we head in towards the summer, but we don't see them going all the way back to where they were in 2019. So it's difficult to say because we still don't know today what that offering is going to look like, but we would expect to see some more expense out of that line item. Similarly, from a housekeeping perspective, our housekeeping costs for occupied rooms declined 21% this year compared to prior year. So I don't imagine we're going to see significant changes in housekeeping, quite honestly, through the remainder of 2021, but there may be some additional cost that creep into that line item.

So maybe if I try to roll all that commentary up. If we think about the margins for 2021, hopefully, they'll be above where they were last year, but maybe not quite as high as 2019 this year. And then moving into 2022, perhaps you could see them even a little bit better than 2019.

Yes, I think that's fair. And the other thing I'll add, Matt, is that Q1 of this year is acting very much like Q3 and Q4 of last year, right, given the volumes that we've had. So there's been very little ramp-up of cost in Q1. So the cost increases we'll see, I think we'll see over the summer. I think when we talk again in a couple of months, we'll probably be in a better place to give you a sense of what we're seeing and what the brands are thinking.

And I totally appreciate the challenges in the current environment, just trying to make sure we get the directionality correct. Maybe changing gears to a couple of your hotels in Pittsburgh, where the CMBS loans are under modified covenants. Maybe just some color on what's happening there and if there are other similar hotels across the portfolio that could be finding some trouble?

I'll take that, Matt. It's Jonathan here. And these properties were purchased in 2013. They're roughly 130, 116 keys. The -- we're entering into discussions with the loan servicers, which would entail either deed in lieu or closure, or an amended loan amount. So we're focused on things like releasing reserves, restricted cash that's currently sitting at the property level to buy some optionality for the properties to bounce back. But we're -- all initiatives are currently on the table in our discussions with the loan servicer. These properties have been -- were distressed pre-COVID. There's been a substantial amount of supply coming into these particular submarkets outside Pittsburgh. And so there's recognition on both sides that values have decreased. There are a few other properties that we are looking at, but that are not in -- that I wouldn't categorize is in the -- exactly the same as the ones I just discussed. But those are regular asset management discussions that we have with our team and with our lenders.

Would that be a similar quantum, roughly $18 million, a little bit less, a little bit more?

It would be similar. Yes.

And maybe just one last big picture question for me, like when you guys take a step back and think about the year ahead, obviously, 2020 was a very challenging year. But for 2021, where would your top 3 priorities lie?

So operationally, what we just talked about with margins and margin control and maintaining our operating expenses where they are and really focused on -- as we mentioned, as rate comes back, we want those incremental dollars to flow directly to the bottom line. Number two, we're continuing to preserve liquidity, protect the balance sheet. And number three, as we get closer to the end of the year, I think we're going to start to see growth opportunities. And with that, we'll have more conviction with respect to our balance sheet to be able to go out and pursue those opportunities.

Your next question comes from the line of Joanne Chen with BMO Capital Markets.

Just -- maybe just a follow-up -- just maybe a quick follow-up on that margin to see if I am getting it correctly. So do we expect -- should we margins in, I guess, the first half of the year to remain somewhat similar to what we saw in Q4 and potentially giving right across with the pickup and occupancy that we could see still some deterioration in the back half of the year?

Yes. I think -- Joanne, it's Bruce. I think in general, that's fair. I think we'll continue to see our costs tamp down similar to what we saw in Q4, certainly through Q1 and coming into Q2 as well. And then I think we will see some costs increase as we get into the key summer months. But that's also when we're anticipating certainly more occupancy, and we believe we'll start seeing more rate that time of the year as well. So we anticipate strong margins, quite frankly, through the entire year, but we'll see some more costs come into the business in the back half of the year.

That's helpful. And I guess right now, internally, what is the thinking. I know it's good to see the occupancy really pick up. But for the first half of the year, what -- internally, what are you guys thinking in terms of the overall occupancy kind of hovering around the 60% to 70% mark with what March numbers are? Or...

Joanne, it's Bruce again. It's -- our visibility is incredibly limited, right? I think I mentioned it in my opening comments, our booking windows are 5 and 8 days. Like 5 days for kind of the nightly stay and 8 days for the extended stay. And even the group and project type work is looking incredibly close into arrival. So we don't have our usual visibility on demand patterns kind of a little further out. So that's handicapping us just as a comment. But I would expect, as vaccination levels increase, we believe there's certainly pent-up leisure demand, which is the market segment that we're seeing the most of today, that, that demand is going to continue to grow as we head to the kind of peak summer months.

Okay. That's helpful. I guess you guys -- I mean, in the U.S., the vaccination is lot focused than what's happening here in Canada. So that helps.

[Operator Instructions] Your next question comes from the line of Tal Woolley with National Bank Financial.

Just to pivot back to balance sheet. Jonathan, you had mentioned earlier like some potential sort of debt targets that you're looking for and made the comment that we want to sort of be where some of our peers are. And I guess, when I'm thinking about things on a sort of debt-to-EBITDA basis, I kind of look at all the peers right now, and everybody's balance sheet is a little off. So I'm kind of wondering like what -- in a more stabilized world, what number on a debt-to-EBITDA basis would you kind of be shooting for?

Yes. That's -- you're correct. In this environment, everything is a little skewed. And the best you can do is look at comparatively speaking to 2019 levels. But the -- I would venture to say that when you look at our select-service peers and as we get better visibility to normalized EBITDA, we'll be able to come out with a stronger statement around what our targets will be. But in this environment, clearly, we are super focused on preserving liquidity and bolstering the balance sheet. And we'll continue to do that until we -- I can give you normalized metrics in terms of debt to EBITDA.

If I recall correctly, like, I think like a lot of the flex service guys, like it sort of felt like that kind of 5-ish times EBITDA number on a stabilized basis was sort of in and around where most people were playing. Does that seem that -- does that match your thinking?

It was a little higher than that, Tal. I take it, you're looking at 2019 levels?

Yes.

Yes. It ranged between 5.5%, say, to 6% or 7%.

Okay. And then just a couple of other questions, just overall industry -- just about the industry cycle. This is obviously like I think the commentary prior to this event had sort of been how long the prior hotel cycle had been running. And this is such also not sort of like your kind of standard turn in the cycle has sort of a weird turn in the cycle. Do you think like the history of kind of prior cycle applies sort of the same way that you if you sort of like the industry kind of take a sharp turn and then rebuild really slowly? Or do you think it's going to vary a little bit differently this time just because the circumstances were so weird this time?

Yes. I assume -- are you talking more about supply and demand, or are you talking more about just operating performance?

Yes. Like just operating performance, but just overall, the industry's growth had sort of -- coming out of the financial crisis had really gone on quite a long time.

Right. Yes, I mean -- there are varying theories on that. Certainly, if you speak to -- we spend a lot of time on this call talking about normalized demand levels in the full-service sector, i.e., business demand. And if you follow many of the public -- full-service REIT companies, they're signaling tremendous group demand for the second half of the year. And that's being driven by the groups themselves. It's the meeting planners reaching out to the hotels and scheduling meetings. People want to meet. And so unlike many of our -- many of the downturns, whether it be 2001 or 2008 that have occurred previously, this was -- this downturn has really been a single event-driven. And there's speculation about who will, whether people will return or whether people will want to meet. What we're hearing from the market is that people want to meet. And so there is a strong and compelling argument to state that there will be a quick snapback and a release of pent-up demand.

Okay. And then just lastly to there's a lot of sort of conventional wisdom around the impact of Airbnb on the industry pre crisis. The company has since gone public. The world has shifted on its axis. Do you think -- what's your sort of view on that kind of service offering and its impact on the hotel industry over the longer time in a post-pandemic world?

Yes, the -- yes, certainly, that was a topic of discussion within our industry and continues to be since pre pandemic. Airbnb is really -- it's a supply phenomenon that exists that is market specific. So what you'll see at where it primarily impact is large urban environments where people are renting out their multi-family residences, condominiums. And in our situation in suburban properties, with properties next to interstates that really cater to interstate travel and highway travel, they're less impacted. So not to say that overall, Airbnb supply in the market affects overall hotel supply and therefore leads to a lack of compression in certain markets. I mean it's -- that phenomenon is out there, but less of an impact in the markets that we play in.

So that would be a pretty similar view, at least for your portfolio from pre-pandemic to post-pandemic, you don't really see much of a change?

Absolutely. Yes. It's the same.

And there are no further questions in queue at this time. I turn the call back to the presenters for any closing remarks.

Thank you again, everyone, for joining us on our call today, and we look forward to speaking with you in May when we report our first quarter 2021 results. Have a good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.