RE:2022 THIRD QUARTER HIGHLIGHTS “This quarter we achieved our highest ADR and RevPAR since the onset of the pandemic. Quarterly RevPAR continued its upward trend, finishing at 97% of 2019 levels.” Mr. Korol added: “This was driven by sustained demand from our leisure guests as well as the gradual return of business and group travellers, as demonstrated by the tremendous recovery in our Embassy Suites portfolio during the quarter.”
"Recent operating results are negatively impacted by inflation, labor shortages and supply chain disruptions. To address these issues, we are continuing to focus on hiring more in-house labor, reducing turnover and improving housekeeping productivity. We remain well positioned to navigate the current macroeconomy given the lean operating model of our select-service portfolio as well as the diversified demand profile of our guests. This was evident throughout the pandemic, as the portfolio achieved positive hotel EBITDA (1) every month since May 2020. Our balance sheet is well-positioned, with no debt maturities until late 2023 and 93% fixed rate debt. We remain confident in our ability to navigate a dynamic operating environment and to add long-term unitholder value."
2022 THIRD QUARTER REVIEW
11.3% GROWTH IN REVENUE
Improving demand levels resulted in enhanced pricing power and greater opportunity to manage revenue for various hotel segments. As a result, AHIP’s revenue continued to improve in the third quarter of 2022. Revenue increased by 11.3% to $76.2 million compared to $68.4 million in the same period of 2021. This improvement was due to higher ADR and increased occupancy. Same property occupancy (1) increased by 310 bps to 72.1% in the current quarter from 69.0% in the same period of 2021, which is a 91% recovery compared to the pre-COVID occupancy level in the same period of 2019. Same property ADR (1) increased by 6.7% to $127 in the current quarter compared to $119 in the same period of 2021, which is 6% higher than the pre-COVID ADR in the same period of 2019.
AHIP’s five Embassy Suites properties represent 15% of the portfolio by room count. The performance of these hotels is a key indicator of the recovery level in business and group travel. For the three months ended September 30, 2022, RevPAR for these properties was $100, an increase of 33.0% compared to the same period in 2021 and a 98% recovery compared to pre-COVID pandemic RevPAR in the same period of 2019. The Embassy Suites experienced recovery in business and group travel in the current quarter, supplemented by leisureoriented groups. AHIP’s five Embassy Suites were renovated in 2018 and 2019 and are well positioned to capture improving business and corporate group demand.
NOI MARGIN AND FFO
Same property Net Operating Income (“NOI”) margin (1) decreased by 630 bps to 32.4% in the third quarter of 2022, compared to the same period of 2021, which is a 91% recovery compared to the pre-COVID NOI margin in the same period of 2019. The decrease in NOI margin was due to higher operating expenses as a result of inflation, labor shortages and increased hotel operating standards. In 2022, housekeeping frequency, and complimentary food and beverage all increased compared to 2021, to a level closer to pre-COVID standards. Inflation resulted in higher costs of operating supplies and higher utilities expenses. Labor shortages resulted in increased room labor expenses due to the need for overtime and contract labor.
Diluted FFO per unit was $0.13 for the third quarter of 2022, compared to normalized diluted FFO per unit of $0.16 excluding the non-recurring gain of $14.7 million and $1.0 million inventory adjustment expense for the same period of 2021. NOI (1) decreased by $1.8 million in the current quarter compared to the same period of 2021, due to higher operating expenses and the dispositions of two hotel properties since the third quarter of 2021.
LEVERAGE AND LIQUIDITY
Debt to gross book value as at September 30, 2022 decreased by 150 bps to 52.6% compared to 54.1% as at December 31, 2021. The decrease was mainly due to the increase of $8.2 million in cash and restricted cash as a result of improving operating results. Management intends to bring its leverage to a level closer to its peer group over time which would be in the range of 40-50% debt to gross book value. This is expected to be achieved through a combination of improving operating results, a sustainable distribution policy and selective equity issuance in support of growth transactions. AHIP has 93% debt at fixed interest rates or effectively fixed by interest rate swaps until November 2023. AHIP does not have any maturities of debt or interest rate swaps until the fourth quarter of 2023.
On November 3, 2022, AHIP entered into an amendment to the revolving credit facility and certain term loans (the “Fifth Amendment”) to, among other things, modify the calculation of the borrowing base availability amount and certain financial covenants. The modifications significantly improve the expected borrowing base availability and reduce the required fixed charge covenant ratio. For further details, see a copy of the Fifth Amendment, which has been filed under AHIP’s profile on SEDAR at www.sedar.com.
As at September 30, 2022, AHIP had $35.7 million in available liquidity, compared to $51.1 million as at June 30, 2022. The available liquidity of $35.7 million was comprised of an unrestricted cash balance of $17.3 million and borrowing availability of $18.4 million under the revolving credit facility. In addition, AHIP has restricted cash balance of $44.0 million as at September 30, 2022. The decrease in the available liquidity as at September 30, 2022, compared to June 30, 2022 was due to a decrease in unrestricted cash and a reduction in borrowing availability. The decrease in unrestricted cash is primarily due to cash generated by three Embassy Suite properties located in Ohio and Kentucky in the current quarter being held in restricted cash accounts by the lender, as a result of these properties not meeting the minimum debt service coverage ratio prior to the third quarter of 2022 (the “Cash Management Properties”). The operating performance of the Cash Management Properties has been steadily improving and exceeded the minimum debt service coverage ratio in the third quarter. Management expects this to continue in future periods which would result in a return of a portion of the restricted funds in the first half of 2023.
GROWTH AND STRATEGIC CAPITAL DEPLOYMENT
AHIP is evaluating growth opportunities that would expand the hotel portfolio and geographic footprint. As a result of the investment by BentallGreenOak and Highgate, AHIP is aligned with two well-capitalized strategic partners who support the pursuit of attractive acquisition opportunities. AHIP is also reviewing strategies for divesting assets to recycle proceeds into higher return assets in more attractive markets.
On October 6, 2022, AHIP entered into a purchase and sale agreement for the disposition of four non-core assets located in Oklahoma for gross proceeds of $26.3 million. In addition, management expects a return of restricted cash by the end of the fourth quarter in an amount of $3.1 million. The transaction is expected to be completed in the fourth quarter of 2022 subject to the satisfaction of customary closing conditions. On October 26, 2022, AHIP completed the disposition of a non-core asset located in Pennsylvania for gross proceeds of $5.4 million. These dispositions allow AHIP to avoid future PIP investments in assets that will not meet returns available elsewhere in the portfolio. Management expects that the average quality of the portfolio will improve and that there will be a modest improvement in certain leverage metrics following these dispositions.