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Edited Transcript of HOT.UN.TO earnings conference call or presentation 7-Nov-19 10:30pm GMT

Q3 2019 American Hotel Income Properties REIT LP Earnings Call

Vancouver Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of American Hotel Income Properties REIT LP earnings conference call or presentation Thursday, November 7, 2019 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Azim Lalani

American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc.

* Bruce Pittet

American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO

* Jamie Kokoska

American Hotel Income Properties REIT LP - Directorof IR - American Hotel Income Properties REIT GP Inc

* John Christopher O'Neill

American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc.

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Conference Call Participants

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* Bradley Sturges

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Colin Healey

Haywood Securities Inc., Research Division - Research Analyst of Mining

* Lorne Kalmar

TD Securities Equity Research - Associate

* Mario Saric

Scotiabank Global Banking and Markets, Research Division - Analyst

* Matt Logan

RBC Capital Markets, Research Division - Senior Associate

* Tal Woolley

National Bank Financial, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to American Hotel Income Properties REIT LP's Third Quarter 2019 Results Conference Call. (Operator Instructions)

At this time, I'll turn the call over to Jamie Kokoska, Director of Investor Relations. Ma'am, you may begin your call.

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Jamie Kokoska, American Hotel Income Properties REIT LP - Directorof IR - American Hotel Income Properties REIT GP Inc [2]

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Thank you, Jason. Good afternoon, everyone, and thanks for joining us for our third quarter 2019 results conference call. Discussing AHIP's 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, FFO payout ratios and AFFO 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 9 months ended September 30, 2019, 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 22, 2019, which has been filed on SEDAR at sedar.com.

Our third quarter results were made available earlier this afternoon after market close. 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 to 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, November 7, 2019. A replay of the call will be available on our website.

John will begin today with an overview and update regarding portfolio strategy and performance, Bruce will provide an update on hotel renovations and operations and Azim will provide a summary of our financial results.

I'll now turn the call over to John O'Neill, Chief Executive Officer.

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [3]

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Thank you, Jamie, and thank you, everyone, for joining us today. The third quarter was a very busy time for AHIP as we prepared for the sale of our 45 economy lodging properties and continued to evaluate attractive acquisition opportunities to redeploy the capital from these soon-to-be sold hotels. We also negotiated new contract terms with our hotel manager, which we believe will significantly enhance our margins and growth profile. And we had 8 hotels undergoing renovations with work at 5 of those properties now completed, on time and below budget.

The quarter's performance illustrates all of these activities and is why you'll see our financial results note both continuing and discontinuing operations, considering that contributions from the 45 economy lodging hotels will soon conclude with their sale. Our third quarter financial results are generally in line with our expectations and prominently reflect the 8 hotels under renovation compared to only 3 in the same quarter last year.

For the total portfolio, including continuing and discontinuing operations, revenue for the quarter increased 0.6% to $88.5 million. This was due to stronger average daily rates, higher food and beverage sales and new parking revenue. Reported net income for the quarter was $2.1 million. However, excluding nonrecurring transaction expenses of $2.5 million relating to the sale of our 45 economy lodging hotels, net income from the quarter would have grown 10% from Q3 last year to $4.6 million. Overall, FFO for the quarter was $15.6 million or $0.20 per diluted unit, and AFFO was $14.1 million or $0.18 per unit.

As a large segment of our business is in the process of being sold, a more meaningful measure of our operational performance is demonstrated through our Premium Branded portfolio, which we note as continuing operations in this quarter's reports. Revenue for our Premium Branded portfolio increased 1% to $69.3 million due largely to the strong performance of our hotels that were previously under renovation and now fully operational. The growth and contribution from these properties mostly offset the income displacement of 8 hotels that were under renovation during the quarter. In fact, the 59 hotels that were not under renovation saw a 2.5% increase in RevPAR, a 4.4% increase in revenue and a 5.1% increase in net operating income. We're very pleased overall with the strength of our Premium Branded portfolio.

This was also the last quarter we expect to see much impact from our major renovations program, which has been ongoing for the past 2 years. Importantly, all 5 of our Embassy Suites hotels, our largest properties, have now had substantial renovations. So we believe the third quarter is the last time we will see displacement of this magnitude from renovations at our hotels.

Our hotel renovations program has been an important initiative and enabled us to effectively modernize and renew many of our properties, including all of our largest hotels, through approximately $40 million in hotel improvements and upgrades.

The pending sale of our Economy Lodging portfolio continues to progress well. We will update the market when the transaction has closed. Alongside this closing process, we've been very active in reviewing hotel acquisition opportunities to effectively and efficiently redeploy the proceeds from the Economy Lodging sale. We hope to be in a position soon to share more on this acquisition strategy.

In preparation for redeploying this capital, we've also been working with our lending partners to source the best debt terms for our growth strategy. We believe that significant cost savings can be captured compared to the current debt carried by our Economy Lodging hotels with more advantageous interest-only options and lower interest rates. When our acquisition initiatives crystallize, we will certainly share more regarding this debt refinancing as well.

Finally, we are pleased to have negotiated new contract terms with our hotel manager, resulting in expense savings and lower management fees.

And with that overview of our third quarter activities, I'll now turn the call over to Bruce to provide some more details on our hotel performance. Bruce?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [4]

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Thank you, John, and good afternoon, everyone.

I'm going to focus my remarks on our Premium Branded hotels or continuing operations today, beginning with an update on hotel renovations during the quarter, then focusing on the strong performance of our other 59 Premium Branded properties. During the third quarter, we completed $10.7 million worth of renovations at 5 hotels. These properties include the 89-room Fairfield Inn & Suites in Jacksonville, Florida, the 108-room Homewood Suites in Allentown West, 113-room Homewood Suites Allentown Bethlehem Airport, the 224-room Embassy Suites Phoenix Tempe and the 109-room Residence Inn Chattanooga near Hamilton Place. I'm pleased to say that all 5 of these projects were completed on time and on or under budget.

In addition, we continued renovations at the 270-room Embassy Suites Independence Cleveland, which we anticipate to be completed this month. And we began renovations at the 111-room Holiday Inn Express & Suites in Fort Myers and the 101-room Holiday Inn Express & Suites Sarasota East, which are both running on schedule.

Collectively, more than 14,600 guestroom nights were taken out of inventory during the third quarter to accomplish these property improvements compared to approximately 6,500 guestroom nights in the third quarter of last year when 3 properties were undergoing renovations. We estimate that had this guestroom displacement not occurred, our third quarter revenue would have been approximately $1.5 million higher, which would translate to about 1.5% -- $0.015 of FFO impact.

I'll also take this opportunity to update you on the Homewood Suites Dover in New Jersey, which began renovations in the second quarter. Nearly all property improvements at this hotel have been completed, including all guestroom upgrades and the vast majority of the common area work. Completion of the project was delayed due to a permit delay, specifically for an outdoor pergola and an open concept business center. Guests staying at this property today experience no disruption or construction activity, and we will remove this hotel from our PIP schedule as soon as we receive the required city paperwork to finish the last few components of this hotel renovation.

Overall, we are very pleased with the progress of our 2019 renovation program as we undertook to renovate 10 hotels in our Premium Branded portfolio. Our overall budgeted spend for this program was $25 million, and these projects are being completed on time and on or below budget. It's worth noting that the third quarter marked the last significant renovation period related to the renovations undertaken at all of AHIP's 5 Embassy Suites properties from our previously announced 2018-2019 renovation program. These assets are the largest in AHIP's Premium Branded portfolio when measured by property room count, revenue and contribution.

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. This is a common practice in the hotel industry.

Turning to hotel operations. As John mentioned, the 59 hotels that were not under renovation saw a 2.5% increase in RevPAR, a 4.4% increase in revenue and a 5.1% increase in net operating income compared to the same quarter last year. We are very pleased with the performance of these properties. Including hotels under renovation, revenue from our total Premium Branded portfolio grew 1% to $69.3 million.

Several factors supported the strong revenue growth. First, occupancy increased across hotels not under renovation, on average, 2%. Second, ADRs improved, especially at several properties that were under renovation last year. Third, our recent hotel renovations also facilitated new incremental food and beverage revenues. And finally, the paid parking initiative we began implementing in the first quarter of this year at several of our properties also generated new incremental revenue for us.

Geographically, we saw strong RevPAR growth from our hotels in Kentucky, Virginia and Ohio, which had increases of 8.7%, 3.8% and 2.5%, respectively. We also saw strong growth in our Florida hotels that were not under renovation as these 11 assets saw RevPAR growth of 7.5%.

Conversely, the most challenged region we had during the quarter was Oklahoma, which saw a RevPAR decline of 7% given the unique circumstances of both new supply and challenging market conditions in certain areas of Oklahoma. We took a noncash write-down of $1.2 million for the Holiday Inn Oklahoma City North Quail Springs this quarter.

In late August and early September, uncertainty around Hurricane Dorian's path caused some disruption to hotel occupancy in our properties in the mid-Atlantic and Southeast. We're happy to say that none of our hotels experienced any storm-related damage during this quarter.

Overall, our NOI margin for Premium Branded hotels declined 1.1 percentage points to 33.9% during the quarter as a result of higher labor costs, a higher proportion of food and beverage revenues which have lower margins and higher maintenance and insurance expenses. More specifically, wage and benefit costs grew 5.1% during the quarter compared to Q3 2018 due partially to legislated minimum wage increases in certain states but also due to higher participation in a recent optional employee health care enrollment period.

Like all U.S. hotel owners, increasing labor cost is something we are focused on with our hotel manager, Aimbridge. Recently, they have introduced a new labor management software that will provide property-based management, greater visibility of daily labor costs as well as future labor requirements based upon real-time forecasted room night demand. As well, through their recent merger with Interstate that firmly positions them as the largest independent hotel management company in the United States, we believe there may be opportunities to capture even more cost savings through their significantly increased purchasing power.

Excluding labor expense increases, the NOI margin of our Premium Branded hotels would have been roughly 35%, in line with third quarter last year. As I previously mentioned, NOI grew faster than revenue at the 59 hotels not under renovation. These properties collectively generated an NOI margin of 36% during the quarter.

Finally, turning to market share. Our Premium Branded portfolio continues to outperform its designated peer group. The STR RevPAR Index, which compares the performance of AHIP-owned hotels to their competitive set in each region indicated AHIP's Premium Branded hotels had an average index rating of 117.6 with 100 representing fair share of the market. This was achieved despite 8 of our hotels being under renovation during the quarter.

And with that update on our renovation program and hotel performance, I'll now turn the call to Azim to discuss financial and capital metrics. Azim?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [5]

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Thank you, Bruce. Good afternoon, everyone. I'll provide some more metrics on the quarter and the first 9 months of 2019 for our total portfolio, including both continuing and discontinued operations and also provide some information about capital metrics and financing opportunities.

My commentary on this call includes the results of the 45 Economy Lodging properties for all periods presented. As these hotels are in the process of being sold, this may impact the comparability of our metrics in the coming quarters. Total revenue for Q3, including discontinued operations, improved by $490,000 to $88.5 million, a 0.6% increase from the third quarter of 2018. NOI margins for the total portfolio contracted 150 basis points as a result of hotels under renovation, higher labor costs and a higher proportion of food and beverage revenue compared to the same period last year. NOI margin for the total portfolio was 33.5% compared to 35% in Q3 2018.

Net operating income was $29.7 million compared to $30.8 million last year. Net income and comprehensive income for the third quarter was $2.1 million, down from $4.2 million last year as a result of $2.5 million of nonrecurring transaction expenses related to the sale of our Economy Lodging portfolio, a $1.2 million noncash impairment charge on the Quail Springs hotel in Oklahoma City and an unrealized loss on the fair value on interest rate swap contracts for certain Economy Lodging hotel loans. Excluding these nonrecurring transactions, net income for the quarter would have been $5.8 million, a 38% increase compared to the same quarter last year.

Diluted net income per unit for the quarter was $0.03 compared to $0.05 last year. Funds from operations, or FFO, was $15.6 million or $0.20 per diluted unit compared to $16.4 million or $0.21 per diluted unit last year, with the decline caused by lower income from properties under renovation. AFFO was $14.1 million or $0.18 per diluted unit compared to $15.1 million -- sorry, $15.1 million or $0.19 per diluted unit last year, with the decline resulting from higher actual maintenance capital expenditures.

For the first 9 months of 2019, revenue was in line with the same period last year at $259 million. A higher proportion of food and beverage revenues, which typically generate a lower margin than rooms revenue, caused some margin pressure. The NOI margin for the first 9 months for our total portfolio was 33.9% compared to 34.6% in the same period last year. Overall, NOI for the company in the first 9 months of 2019 was $87.9 million. And net income and comprehensive income was $7.5 million, representing $0.10 per diluted unit.

As our total portfolio of properties was unchanged from last year, no same property metrics have been presented this quarter. Given the impending sale of our 45 Economy Lodging hotels, these assets and liabilities have been shown as assets held for sale and segregated separately on our balance sheet as well as discontinued operations in our income statement, cash flow statement and MD&A.

Our business is seasonal in nature, and our second and third quarters tend to be our strongest performing quarters during the year. As we pay a consistent monthly cash distribution, we view our payout ratios on a trailing 12-month basis. For the quarter -- for the third quarter of 2019, our trailing 12-month FFO payout ratio was 92% and our trailing 12-month AFFO payout ratio was 101.4%. Both of these metrics are elevated as a result of lower income, arising primarily from properties under renovation.

Turning to capital metrics. As of September 30, 2019, AHIP had an unrestricted cash balance of $11.7 million. We also had a restricted cash balance of $34.8 million, including $20.6 million on deposit with our lenders for upcoming property improvement plans and other capital expenditures. At the end of September, we had a weighted average remaining term on our total debt of 5.7 years and a weighted average interest rate of 4.64%. We expect these metrics to improve once we pay down the existing debt on our Economy Lodging portfolio. Approximately 97% of AHIP's total terms loans have fixed interest rates.

Before I turn the call back over to John, I'll highlight 2 additional items. As John mentioned in his opening remarks, during the quarter, we negotiated amendments to our hotel management agreement, which we believe will strengthen our margins, cash flow and growth potential over the next few years. Specifically, the hotel management fee for our existing 67 Premium Branded hotels will be reduced. In addition, any new hotels added to our portfolio will benefit from reduced management fees. As well, our costs related to property accounting and revenue management services will also be reduced. These changes collectively should enhance operating margins for all of our hotels.

The nature of our properties has evolved from our IPO where we had 32 unbranded smaller properties to today where we also have 67 larger branded properties. Our renovations are more complex, prescriptive and require additional CapEx support for project management, procurement and reporting, resulting in changes to the CapEx fee. We're pleased with these new contract terms and expect them to enhance our cash flow and FFO growth over the next several years while addressing our CapEx management needs. We anticipate the sale of our 45 Economy Lodging hotels will be completed in November, and there may be some lag with the redeployment of that capital. So there will be a short period of earnings dilution during the fourth quarter. As a result, we expect our Q4 results will be impacted, which may result in an elevated payout ratio for the quarter. This is a temporary impact of our capital recycling strategy. We're committed to maintaining our monthly cash distributions of USD 0.054 to our valued unitholders.

With that financial discussion, I'll turn the call back to John for some closing remarks. John?

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [6]

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Thank you, Azim. We continue to be very excited about the capital recycling initiatives we have underway and the compelling acquisition opportunities available in the market. As we near the completion of the sale of our Economy Lodging portfolio, I think it's an opportune moment to thank all of the dedicated hotel employees at these 45 properties for their years of appreciated work and the many valued rail crew customers we served in the past 6.5 years. We know the purchasers of that business and those hotels are excited about the opportunities ahead.

As we pivot our business to focus entirely on Premium Branded select service hotels, we continue to believe the U.S. market has growth ahead, especially in the secondary metropolitan markets our properties are concentrated in, where we own and will own locations near multiple demand generators, such as universities, hospitals, business parks and sports arenas. Our hotels cater less to the international tourists and more to the domestic business, leisure and extended stay guests who seek out value, comfort and modern amenities, which our hotels all provide. This is evident in the STR Index, which confirms we continue to command more than our fair share of the markets we operate in. We believe we have partnered with the strongest brands and now have substantially renovated a large portion of our portfolio, and we expect to outperform the broader U.S. hotel industry during 2020.

We look forward to growing our portfolio of Premium Branded hotels in the next several months as more capital recycling initiatives are completed and acquisition opportunities crystallize. On this front, we expect to be able to redeploy the capital from the Economy Lodging sale quickly and hope to be in a position to announce some exciting growth plans shortly. Until then, we continue to reward our unitholders with our monthly cash distributions currently yielding more than 12% to our Canadian unitholders.

With that overview of our third quarter performance, we'll now open the call to questions from analysts. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Lorne Kalmar.

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Lorne Kalmar, TD Securities Equity Research - Associate [2]

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Just on the -- so it looks like the changes to the management contract were in effect for the quarter, correct?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [3]

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That's correct.

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Lorne Kalmar, TD Securities Equity Research - Associate [4]

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So just what was the impact dollar-wise?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [5]

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So for example, on the management fees, it was 0.5 point reduction. So that was something like $350,000.

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Lorne Kalmar, TD Securities Equity Research - Associate [6]

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Okay. And then I guess would the current G&A of about 3.7 be a good run rate going forward?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [7]

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So that includes corporate G&A as well, is that what you're looking at?

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Lorne Kalmar, TD Securities Equity Research - Associate [8]

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Yes. Or I guess, the 1.9 or whatever it is in the management...

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [9]

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For the management fees?

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Lorne Kalmar, TD Securities Equity Research - Associate [10]

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Yes.

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [11]

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Yes. That's a -- yes, because it's effectively as a percentage of total revenues. So that's a fair number.

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Lorne Kalmar, TD Securities Equity Research - Associate [12]

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Okay. And then for the PIPs, I know you guys said they're winding down. This is kind of the last big quarter. What sort of FFO impact are you guys expecting for Q4 and for 2020?

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [13]

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For PIPs. PIPs impact.

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [14]

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Yes. Well, our PIP activity in Q4 will certainly be greatly reduced from what we saw in Q3. Yes. Well, we have 4 hotels that are under renovation in Q4, with 2 of them expected to finish this month in November.and 2 in mid-December, approximately. So it's a tough question. I don't have the number off the top of my head.

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [15]

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And as we move to 2020, it's John, our renovation program is smaller still with no major projects and no major projected income displacement. So in order to give an estimate of the potential impact on FFO, our capital program next year, the displacement will be minor. So how do you define minor? Maybe in the $0.01 FFO range but nothing major.

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Lorne Kalmar, TD Securities Equity Research - Associate [16]

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Okay. Yes. So it's definitely far less than it was last year -- or this year rather. And then...

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [17]

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Absolutely, yes.

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Lorne Kalmar, TD Securities Equity Research - Associate [18]

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Yes. And then just lastly for me, do you guys have a target AFFO payout ratio for 2020? Or even -- I know you like to do the rolling quarter -- so even for 2020?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [19]

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Well, we've given a target for once we complete our renovation program, which was 85%. What I can tell you is for 2020, we're heading towards that target. But as we still got some renovation activity planned for 2020, it will be after -- in 2021, where I think we'll get closer to that target. But we're certainly moving in the right direction in 2020.

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Operator [20]

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And our next question comes from Colin Healey.

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Colin Healey, Haywood Securities Inc., Research Division - Research Analyst of Mining [21]

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Just wondering if you could give us a little more color on the deployment of the proceeds of sale. I understand it's quickly, but are there any acquisitions that you've already negotiated there, contingent on the close of the Economy portfolio or maybe just when you expect to be fully deployed? And if there's going to be any kind of increased capital requirement to fund something maybe larger than the proceeds.

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [22]

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It's John, Colin. Thank you. A few questions in there. So no, we currently do not have an acquisition contingent on the completion of the Economy Lodging portfolio. However, it's a very healthy market out there right now in terms of acquisition opportunities. We've been looking at a lot of hotels and some quite seriously. So we do expect to redeploy most of the proceeds fairly quickly.

And I'm trying to remember the third part of your question, which was, in terms of capital needs. As we said before, though, one of our main objectives in this transaction, the sale of the Economy Lodging portfolio and our stated strategy for new acquisitions, is to focus on Premium Branded properties in larger markets, so secondary markets, even suburbs of major metropolitan areas and newer hotels, younger hotels and those that require far less capital or PIPs. And as a result of that, then you're really looking at little or no displacement for large PIPs. So that continues to be our acquisition strategy and targets.

So I covered a few of your points there. So we expect most of those proceeds to be deployed fairly quickly with younger assets not requiring large renovations.

And in terms of are we looking at doing -- I think actually raising more equity to help with those acquisitions, no plans at the moment to do that. So it's to use our existing equity and our equity from the sale proceeds. But at this point in time, no more than that.

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Colin Healey, Haywood Securities Inc., Research Division - Research Analyst of Mining [23]

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Okay, great. And how are you seeing the market since you announced this? Are cap rates still at the point where you think you can kind of redeploy at the same kind of rate that you're selling at?

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [24]

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Short answer to that is yes. I think the market and the pricing has not really moved since the last time we spoke, about 3 months ago. There's good assets available at cap rates that make sense for us, so we can redeploy and effectively replace that income that we're selling and we believe in a higher quality kind of asset in a larger market with a younger hotel.

So I think the answer to all those questions is yes. And the market really hasn't moved that much, still an active, frothy market for buyers and sellers in the U.S. hotel industry. And we're happy about that. So some good targets there.

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Colin Healey, Haywood Securities Inc., Research Division - Research Analyst of Mining [25]

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Okay. And just last one for me. In your FFO, AFFO discussion, you identified higher actual maintenance CapEx is one of the factors for the decrease. I'm just wondering what's driving that. Is it basic cost inflation? Or is it a more costly scope of work than you expected or some other factor? And should we kind of budget for higher average maintenance CapEx going forward?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [26]

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Well, I think as long as we're going through the renovation cycle, you'll probably see us spending less than the full 4%. I think as we have fewer and fewer properties that are being renovated, you'll see that maintenance number go up a little bit. So I think what you'll probably see in the coming quarters is that number going up slightly, but not quite to the full 4%.

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Operator [27]

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And our next question comes from Tal Woolley.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [28]

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Just wanted to go back -- your earlier comment, you had estimated, I believe, that the cost of the renos to revenue was about $1.5 billion. Do I have that right?

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [29]

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Can you repeat that again? Sorry.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [30]

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The cost -- the revenue impact of the renos this quarter was roughly $1.5 million?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [31]

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Yes. You're right, $1.5 million. Exactly.

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [32]

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And about $0.015 of FFO impact this quarter, the third quarter.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [33]

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Okay. And so that would -- if you took the renos into account like in both quarters, the same-property NOI for the portfolio will be running sort of 0% to 1%, that sound about right?

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [34]

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If you factor that out? Exactly. The 59 hotels Premium Branded that were not under renovation were actually like 5% up NOI. So they had a good growth quarter, the 59 out of the 67 properties.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [35]

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Okay. And then just in the changes for the management agreement -- oh sorry, before we go there, just when you sell the Economy portfolio, you guys have used a lot of secured debt. Will the new buyer be taking all the secured debt? Or are you going to have to rejig your financing there?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [36]

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No. The buyers got their own financing. And so we're basically going to pay off the debt with the proceeds from the sale.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [37]

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Okay. And do you have a -- like, I'm assuming you'll have some sort of charge to do that. Do you have an idea of what it will cost?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [38]

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Not really because all of it's variable rate. There will be some breakage fees for the swaps, but we won't know that until we get closer to the actual completion date.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [39]

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Okay. And then just similarly on the change to the management fee agreement, I know part of the -- I think part of the rationale for working with Aimbridge to try and restructure things was also to handle how the termination fees would go with the rail portfolio coming out of your possession. What's your estimate of the termination fee that you'll have to pay now in order to -- under the new agreement with the rail portfolio sale?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [40]

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So with the rail portfolio sale, it's basically 3x trailing management fees. And so it's approximately $9.5 million, what needs to be paid.

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Operator [41]

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Our next question comes from Brad Sturges.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [42]

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Just with the rail portfolio sale, what is left to do for it to close? Is it still a matter of getting a couple more consents? Or just walk us through what's left to do to get it to close this month.

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [43]

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No, there's -- we've received all the third-party consents, and it's just normal sort of closing checklist now between now and closing. So it's fairly normal course. It's taken a little while for us to get there, a little longer than anticipated. But we're in great shape now, and we should be closing in the next 2 or 3 weeks.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [44]

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Okay. In terms of the management contract changes, so it's fair to say that because of the negotiation with the rail portfolio termination fee, that was a part of the rationale to make the amendments on the contract for the Premium Branded hotels in the master agreement right now as well?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [45]

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So the termination related to the sale of Economy Lodging, so that was a legacy from the initial agreement. The changes that we're looking at going forward were more driven by what our portfolio was going to look like today and going forward because if you recall that our initial agreement was done at IPO time when it was just that basket of 32 hotels. And so as we stand here today, our portfolio is completely different and will be completely different going forward. And so what we wanted to do was just try and address some of those issues for what our portfolio looks like today.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [46]

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Great. I guess with the increase in the termination fee, one, I think there's a change in control feature for the master agreement. Does that change at all as well? Or is it just the change on the individual asset sales?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [47]

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It's just on the individual asset sales.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [48]

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Okay. And then I guess in terms of the rail portfolio sales and given the $9.5 million termination fee, $10 million, is the net proceeds still roughly $90 million you're expecting to get from the sale?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [49]

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Yes.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [50]

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Okay. And then on the CapEx, I think the verbiage in the MD&A was there's a cap on that. What -- how does that cap work? And how would that -- I guess what would be the limit on the CapEx fee going forward given the increase on the percentage?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [51]

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So basically, it's just a reflection of what we spend. And so it will be there until -- for the next few years. And at some point, once we're done on our renovation program, you'll see that actual dollar amount drop.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [52]

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Right. And I guess the other note there was the base fee, I guess, for existing assets at July 1, it drops to 2.5% until 2021. Is it renegotiated? Or does it -- like how does that work after 2021? Is that in that 2% to 2.5% range after that? Or how should we think about that base fee going forward?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [53]

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Yes. So after 2021, it goes back up to 3%.

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Operator [54]

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Our next question comes from Matt Logan.

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Matt Logan, RBC Capital Markets, Research Division - Senior Associate [55]

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Given the success that you're seeing with some of your hotel renovations, can you talk about what you think it will do to your market share in terms of your, say, STR RevPAR Index? Will that still remain around 118? Or do you think that may move higher?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [56]

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Yes, this is Bruce, I would expect it will move a little higher as we draw the renovations to an end, maybe move up a couple of points to the 120, 122 range.

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Matt Logan, RBC Capital Markets, Research Division - Senior Associate [57]

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And in terms of how this translates into same-property NOI growth, how should we be thinking about that for 2020?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [58]

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Yes. I think that index move, for what it's worth, will predominantly come from ADR versus occupancy. There will be some occupancy reset, obviously, as these hotels come out of their renovation. But in 2020, we see -- we believe we'll see a bigger benefit on the ADR side.

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Matt Logan, RBC Capital Markets, Research Division - Senior Associate [59]

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But excluding the impact of renovations in 2019, do you think growth will be kind of in the 1% to 2% range? Or how should we be thinking about the relative change?

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [60]

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Yes. I think -- this is John, I think we're looking at about 1% growth right now, which is really in line with the U.S. market for our nonrenovated hotels, hotels that have not yet been renovated essentially. So in line with the U.S. market, and we're experiencing that level this year and expect next year to continue around those levels of 1%.

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Matt Logan, RBC Capital Markets, Research Division - Senior Associate [61]

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Appreciate the color. And just changing gears on your hotel management agreement. Can you walk us through what the logic was for making the changes effective July 1?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [62]

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I think it just reflects the fact that we started the negotiations after we had basically locked up the Economy Lodging portfolio. And so it was just a matter of just time in terms of when we started and when we concluded the negotiations.

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Matt Logan, RBC Capital Markets, Research Division - Senior Associate [63]

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And the negotiations would have been concluded after August when you released your Q2 results?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [64]

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Yes. Yes. We concluded them just a little while ago. So yes.

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Matt Logan, RBC Capital Markets, Research Division - Senior Associate [65]

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Okay. And last one for me. On the CapEx fee, what is the cap in terms of the dollar amount of maintenance capital spending?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [66]

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So the maintenance CapEx, I guess, the maximum amount that we will spend in the year is the 4%, right? Is that what you're asking?

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Matt Logan, RBC Capital Markets, Research Division - Senior Associate [67]

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Well, you mentioned there was a cap on the CapEx fee in the amended agreement. Is that a cap in percentage terms or a cap in dollar terms?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [68]

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Well, it's a cap in dollar terms for the aggregate amount over the term of the agreement. And so the maximum amount would be $9 million, and then it goes back down.

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Matt Logan, RBC Capital Markets, Research Division - Senior Associate [69]

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And so that's over the life of the contract?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO & Corporate Secretary of American Hotel Income Properties REIT (GP) Inc. [70]

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Yes, that's correct.

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Matt Logan, RBC Capital Markets, Research Division - Senior Associate [71]

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And in terms of the hurricanes here this quarter, was there any lift or impact for Hurricanes Barry or Dorian on the portfolio?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [72]

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Dorian was the one where we saw a little bit of impact. And we saw a few hotels that had occupancy impacted in a negative way. And we saw other hotels where we saw actually occupancy improve. So not a material impact one way or the other. But if you recall, through a period of 7 or 8 days from Florida up to North Carolina and Virginia, there were various states of emergency and that sort of a thing. And that certainly impacted what we would say would be the typical flow in and out of our hotels in that region.

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Matt Logan, RBC Capital Markets, Research Division - Senior Associate [73]

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But on balance, it was pretty much awash from an FFO perspective?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [74]

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Yes. Yes.

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Operator [75]

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Our next question comes from Mario Saric.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [76]

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Just a couple of quick questions. The first one, a clarification to the previous question in terms of the 2020 outlook. I think you mentioned 1% for the nonrenovated suites, in line with the U.S. industry. Were you referring to RevPAR or just same property?

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [77]

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I was referring to -- we were referring to RevPAR growth of the nonrenovated properties. So not -- yes, I don't know your definition of same store in this context. But of our 67, those that aren't coming off of a renovation is we're forecasting 1% RevPAR growth and significantly more for those who were just completed renovations.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [78]

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So I was asking about RevPAR versus NOI in terms of the 1%. That's what I was looking for clarity on.

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [79]

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Oh, I see. Well, we were talking about RevPAR, the 1%. So are you now asking about NOI growth in those nonrenovated hotels? Just trying to understand the question.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [80]

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Yes. No, I was just -- I was looking for clarity on whether that 1% was RevPAR or NOI growth? You're saying it's RevPAR.

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [81]

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It's RevPAR. Yes.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [82]

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Okay. And then you made the comment that the kind of renovated rooms were experiencing pretty strong 5% NOI growth this quarter. Based on your history with renovations, like what does that translate to in the year after, assuming kind of a steady market environment? I guess what I'm asking is, can you expect that level of elevated growth for a couple of years? Or is it in the year after the renovation that you see it and then it comes back down to 1% to 2% type of thing?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [83]

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I think in some instances, right? I mean every market is unique, it's probably fair to say that first. But certainly, in the larger hotels, I think we expect there'll be some tailwinds for the first couple of years as they come out of their renovation as opposed to just one.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [84]

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Okay. And then my last question is just maybe trying to get a better understanding of the relationship between the STR RevPAR Index and the RevPAR that you report. So this quarter, the RevPAR growth was 40 basis points and the index rating at 117 or 118 was fairly strong, and you mentioned you expect that to move higher. So does that necessarily mean that the RevPAR in the broader market, the growth would have been negative in those markets that you participate in? Or what does that say about the actual RevPAR growth for your competitor set during the quarter?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [85]

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Yes. No. Typically, a little under ours, right? So not necessarily negative. Although in some markets, that is the case. But I think you can consider that our comp sets in aggregate is low growth environment today. And we do typically -- or are typically gaining share in the majority of our markets.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [86]

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Okay. Would you have the available data in terms of what the average RevPAR growth would have been in your markets weighted to your portfolios?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [87]

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Yes, we do.

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [88]

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Absolutely. Yes.

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [89]

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Absolutely.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [90]

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And what would that number have been in Q3?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [91]

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Yes. Well, the one thing that we don't know is we don't always necessarily know exactly the impact if any of our comp set hotels are experiencing any renovation displacement-type issues, just for what it's worth. But in aggregate, when we look across the 67 hotels, comp set RevPAR actually declined 0.2 for the quarter and the AHIP 67 hotels improved by 0.2, and that included the hotels where -- that were under renovation. And I believe if we remove those 8 hotels from that metric, we would have seen our Star RevPAR grow by 2.4% compared to what we saw with our comp set. So strong index growth once we removed the 8 hotels that were under renovation. And actually, we beat the comp set even with the hotels in the metric. Does that make sense?

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [92]

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Yes. No, that does. So I guess at a higher level, though, like with respect to the index, is it fair to say that you don't want that number to be extremely high? That can be indicative of just kind of broader market weakness in the markets. And so like is there an optimal number that kind of indicates a healthy market and you're outperforming a healthy market?

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Bruce Pittet, American Hotel Income Properties REIT LP - Senior VP of Asset Management & COO [93]

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Well, maybe -- first of all, every market is different. When we're talking about a market, a smaller market, it's maybe a little harder to get good comps to compare to. But what I would tell you is that across all 67 comp sets, we worked very hard to make sure we have true competitors in our comp sets, so we can really understand what our performance looks like. So to your point, if we were running at 200 index everywhere, then that probably could suggest some weakness in a particular market. But I think if we're in that 120 range, that, that would be a comfortable place for us to be, for what it's worth.

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Operator [94]

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Your next question comes from Brad Sturges.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [95]

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Just back to the contract change, again. I just would like to understand, I guess, a little bit more on the rationale between balancing the base fee changes, the CapEx fees change, but also increasing the termination fees for individual asset sales. I mean to me, it seems like it would be a little bit cost prohibitive to selling underperforming assets going forward. So maybe just walk me through that a little bit more.

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [96]

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I think good questions. But on balance, for sure, the reduction in the management fees, Brad, both in terms of our existing properties as well as for new properties for the next 5 years, lower management fees as well as the reduction in the expenses relating to accounting and revenue management provide significant earnings and cash wins and savings for AHIP over the next number of years.

So basically, if you sort of marry that or match that against individual -- termination fee for individual asset sales, which are not a large portion of our strategy, for sure, we see the overall benefit clearly for us over the next few years, driving lower costs, increased cash for us, lower expenses. So we're very pleased with the balance of changes on that contract. We think it's a phenomenal opportunity for us for driving increased profitability, getting our costs down and it's a win from a cash point of view as well for us. So we're happy with it.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [97]

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And I guess, is there -- given the cash savings that you are getting effective July, is there a payback period on that to outweigh the cost of -- the increased cost on the termination side? Or is there any analysis you could share on that front?

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [98]

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Well, the termination -- the single-asset termination fee, we don't know how many single-asset terminations we may or may not have in the next few years. So if we, for example, didn't sell any hotels or the payback is extremely large, right, and -- but we don't anticipate. So there's no change to the sort of portfolio asset. If we were to sell a portfolio, over 10% of our assets, no change to that, no change to retention and control fee. So it's only on a sort of one-off single asset sale, which isn't a frequent thing.

So from NPV, payback, it's all positive in terms of the fee savings and the cash savings. So this is clearly a positive for us, and we're very happy about it. And I think, as Azim said, the catalyst was is we're transforming. It's really a real transformative time for AHIP as we're moving -- selling our Economy Lodging portfolio, and we're a totally different company than we were 6 years ago in terms of the kind of assets that we have and where we are going forward. So these new fees, expense, regimes totally fit with where we're going in the future. So we're happy about it.

So -- and we're very excited also about where Aimbridge is at these days and their acquisition of Interstate, and we expect to see even bigger, better but lower cost, cost savings from their strength, over 1,400 hotels now, which is pretty incredible from a buying power point of view. So continue on with their economies of scale and their strength. So they're great partners.

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Operator [99]

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And there are currently no further questions at this time.

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John Christopher O'Neill, American Hotel Income Properties REIT LP - CEO of American Hotel Income Properties REIT GP Inc. [100]

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All right. Thank you. Great. Well, thank you all for listening and participating today. It's a busy time and a transformational time for AHIP. We continue to be focused on our core business and delivering organic growth while working to complete our renovation activities. The makeup of our portfolio of hotels will change in the near future with focus on higher-quality of assets, younger, newer hotels in larger markets.

I look forward to speaking with you all soon with an update on these activities and speaking with you in March of next year when we report our fourth quarter and year-end results. So thank you for your continued interest in American Hotel Income Properties. Operator?

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Operator [101]

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Ladies and gentlemen, this does conclude today's results conference call. Thank you for your participation, and you may now disconnect.