VANCOUVER—For American Hotel Income Properties REIT LP (AHIP), Q1 2020 was a tale of two quarters.
Bruce Pittet, SVP, asset management/COO, noted, “This quarter proved to be an extremely busy time for managing our assets, with two very distinct operating periods. In January and February, we were very involved in ensuring a seamless transition of the 12 recently acquired premium-branded hotels into our portfolio. And beginning in the second half of March, our attention quickly turned to efficiently reducing our operating costs and implementing health and safety protocols in our hotels due to COVID-19.
“These 12 hotels have proven to be some of the best performing properties in our portfolio, year-to-date, including during the sector downturn. Sixty-seven percent, or 8 of the 12 hotels, are extended-stay properties, and we see this segment as being the most resilient segment at holding occupancy over the last eight weeks,” he added.
John O’Neill, CEO, said, “We had a strong start to the year with better than expected contributions from our 12 recently acquired hotels and a 9.8% net operating income growth from our other 67 hotels in January and February. Our first quarter was also the first quarter in recent years that we did not have any of our properties affected by renovation activity. We are very pleased with how our portfolio was performing before COVID-19 impacts hit in mid-March.”
And post COVID-19, O’Neill is still optimistic. “The composition of our hotel portfolio has also shielded us from some of the worst impacts on our industry, with locations in secondary markets, not large gateway cities or resort locations, and with 24 extended-stay hotels that represents 30% of our total [portfolio],” he said. “Our properties have continued to operate at higher occupancy levels than reported by many other hotel owners over the past two months.”
He added, “We continue to believe that our shift to become a pure-play premium-branded hotel portfolio with the recent sale of our 45 economy properties and recent acquisition of 12 new premium-branded properties was the right strategy both for long-term growth and near-term performance. In this economic downturn, extended-stay hotels continue to be the best performing segment, and eight of the 12 hotels we acquired in December are extended-stay properties, including five of the six hotels located in Texas.”
O’Neill reported that AHIP is seeing a sustained uptick in occupancy levels from the lows experienced in mid-April. “So far in May, we have averaged 38% occupancy across the 63 hotels we currently have opened,” he said. “This is up from approximately 22% occupancy when COVID-19 measures had its worst impact on our hotel occupancy in mid-April. Occupancy levels of some of our open hotels have been very high despite the overall downturn, due in part to large groups such as government agencies, military and the medical sector. For example, yesterday, we had 24 of our 79 hotels operating at over 50% occupancy, with 12 hotels at 70% or better.”
Pittet reported that on a geographic basis, the company’s hotels in Virginia, Maryland and Florida fared best, while its Embassy Suites properties—located in larger secondary markets with exposure to meetings and conference business segments—have been the most challenged during the pandemic.
He added that 63 of the company’s 79 hotels remain open. Six properties have temporarily suspended operations, while 10 have consolidated operations with nearby properties. The company expects most, if not all, properties to be reopened by the end of June.
Azim Lalani, CFO, said, “Based on current hotel occupancy levels, AHIP estimates the monthly cash burn rate covering all expenses, including all monthly debt service payments, to be approximately $2.2 million per month. At current occupancy levels, we expect to have sufficient liquidity to maintain all current expenses and debt payments for approximately 20 months. As overall occupancy levels reach 50%, we anticipate an overall breakeven cash level.”
- Revenues for the quarter decreased 23.2% to $61.9 million (Q1 2019 – $80.5 million) due to COVID-19 impacts in March 2020.
- ADR increased 17.0% compared to Q1 2019, to $113.88, due mostly to the higher quality hotels in AHIP’s portfolio in Q1 2020 compared to the same quarter last year.
- RevPAR increased 0.5% compared to the same quarter last year, to $70.83. The STR RevPAR index, which compares the performance of AHIP-owned hotels to their competitive set in each region, indicated AHIP’s 79 premium-branded hotels generally outperformed their identified direct competition with AHIP having an average index rating of 122.4 during the quarter (Q1 2019 – 121.4) – with 100.0 representing a ‘fair share’ of the market. AHIP’s recently acquired 12 premium-branded hotels achieved an STR RevPAR index of 131.5.
- The occupancy rate during the first quarter decreased 10.2 percentage points to 62.2% (Q1 2019 – 72.4%). There was a marked difference in occupancy during January and February 2020, compared to March 2020, when COVID-19 impacts had a significant and immediate effect in the second half of that month. Average occupancy in January and February was 69.7%—in line with the same period last year, while average occupancy in March was 47.6%.
- NOI decreased by 30.8% to $17.9 million (Q1 2019 – $25.8 million) due to lower revenues. Net operating income for January and February 2020 grew 3.6% compared to the same period last year.
- NOI Margins decreased by 320 basis points to 28.9% (Q1 2019 – 32.1%) as a result of lower revenue.
- Loss and comprehensive loss for the seasonally slow first quarter was $12.6 million, compared to loss and comprehensive loss of $0.5 million in Q1 2019, as a result of lower revenues, a $5.8 million loss on the fair value of interest rate swaps due to falling interest rates, and a $1.9 million impairment charge on four hotels.
- Diluted loss per unit for the quarter was $0.16 compared to a diluted loss per unit of $0.01 in Q1 2019.
- FFO decreased 59.0% from Q1 2019 to $4.7 million and adjusted funds from operations (AFFO) decreased 63.9% to $3.6 million, primarily as a result of the impact of COVID-19.
- Q1 2020 Diluted FFO per Unit was $0.06 (Q1 2019 – $0.15) and Diluted AFFO per Unit was $0.05 (Q1 2019 – $0.13).
“The impacts of COVID-19 have presented some unforeseen challenges for the hospitality industry and overall economy in the near term,” O’Neill said. “The actions we’ve taken will help us to withstand and quickly recover from this period of disruption. We have reduced operating costs wherever possible. We’ve taken several cash preservation strategies to enhance our liquidity. We expect to receive waivers on financial covenants shortly to further provide us with financial flexibility, and we are continuing to operate 80% of our hotels at occupancy levels higher than many other hotel owners.
“Overall, we are optimistic that the worst of the impact from COVID-19 is now behind us and that a path to economic recovery is underway,” he added, noting that the pandemic has served to reaffirm AHIP’s strategy of focusing on extended-stay and premium-branded hotels in secondary markets. “If anything, the events of the last 60 days have solidified that strategy,” he said. So if and when market activity starts up again…if we were to continue to grow, I think our current market segmentation and focus is where we want to be. So we’re happy with the changes we made at the end of 2019.”