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Edited Transcript of HOT.UN.TO earnings conference call or presentation 8-Mar-17 9:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 American Hotel Income Properties REIT LP Earnings Call

Vancouver Mar 8, 2017 (Thomson StreetEvents) -- Edited Transcript of American Hotel Income Properties REIT LP earnings conference call or presentation Wednesday, March 8, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Rob O'Neill

American Hotel Income Properties REIT LP - CEO

* Azim Lalani

American Hotel Income Properties REIT LP - CFO

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Conference Call Participants

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* Jonathan Kelcher

TD Securities - Analyst

* Mark Rothschild

Canaccord Genuity - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to American Hotel Income Properties REIT LP's fourth-quarter 2016 and year-end financial results conference call.

(Operator Instructions)

Before beginning its formal remarks, AHIP would like to remind listeners that today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. 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 17, 2016, which has been filed on SEDAR at www.sedar.com.

I would like to remind everyone that this call is being recorded today, Wednesday, March 8, 2017. A replay of this call will be available on AHIP's website at www.ahipreit.com. I would now like to turn the call over to Rob O'Neill, CEO of AHIP. Please go ahead, Mr. O'Neill.

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [2]

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Thank you, operator, and good afternoon, everyone, and welcome to our discussion of American Hotel Income Property REIT's fourth-quarter and year-end 2016 results. As the operator said, I'm Rob O'Neill, I'm CEO of AHIP, and with me this afternoon is Azim Lalani, our CFO.

We'll keep our opening remarks on this call brief, trusting that you've had a chance to review our MD&A dated March 6, and related financial statements for the year ending December 31, 2016, which were released yesterday after market close. And for more information, please refer to our filings on SEDAR and our website at www.ahip.com. And please note that all of the amounts that I talk about, and Azim talks about, are expressed in US dollars unless we otherwise indicate.

We're pleased with the performance of our diversified portfolio of high-quality select service hotels, as shown in our fourth-quarter results, with revenues up 11.5% compared to last year, net income increasing by 3-fold and, more importantly, our same-store revenues were up 3% and same-store net operating income increased by 10.3%. Branded Hotels had same-store NOI increases of 16.5%, reflecting the strong efforts of the hotel manager to drive top-line growth and maintain flow-through by managing costs. Our Rail Hotels also contributed a positive 3.2% to same-store NOI growth from guaranteed contract revenues.

We were busy during the quarter, as we fully utilized the proceeds of the July 2016 unit offering by acquiring four Marriott hotels in Florida and Tennessee at the end of October; six branded hotels in central Florida in late November; and one railcrew hotel in Nashville, Tennessee, which is located right next to the Nashville airport, and also has strong transient business. We also completed a CAD115.1 million unit offering on December 22, which was used to acquire the three Midwestern Embassy Suites hotels in January 2017. The time lag for the deployment of the July and December offering proceeds created a cash drag on our FFO and AFFO per-unit numbers.

For the fourth quarter, according to STR, RevPAR increased by 3.2% nationally. Our Branded portfolio increased by 3.4%, and our same-store Branded portfolio saw RevPAR increases of 4.3%. The strong performers included central Florida and Georgia, which had RevPAR increases of 17%. Our Texas properties increased RevPAR by 12.3%, and the North Carolina properties increased RevPAR by 8.3%.

For the full year, same-store RevPAR was up 13% in Virginia, as the tailwind of the 2015 fully renovated Hampton Harrisonburg University hotel continued. Florida, Georgia, and North Carolina also put up some solid RevPAR growth rates of over 10%.

However, we continued to face headwinds in Pittsburgh and Oklahoma due to weakness in the energy industry and significant new direct competitive supply. The one positive note in those regions is that occupancy turned positive, but the ADR is still soft. We expect those markets to remain weaker for the next few quarters, as the new supply gets absorbed.

In general, the US hotel industry continued to grow, as RevPAR has increased for the 82nd consecutive month in the current cycle. STR reported positive operating metrics for the fourth-quarter and full-year 2016, with RevPAR increasing by 3.2%. For 2017, STR expects RevPAR to grow by 2.5%, driven primarily by growth in the average daily rate, which should be positive for NOI margins. However, we expect the current US hotel industry cycle to moderate, as rising room demand meets up with new room supply growth reaching historic levels. AHIP's diversified portfolio is generally well positioned to continue to participate in the sector's RevPAR growth.

The US rail industry continues to recover from declining railcar volumes over the last 24 months. Lower freight rail carload volumes, coupled with reduced non-rail hotel traffic, has reduced occupancy at AHIP's Rail Hotels.

We are, however, seeing signs that the US rail industry has turned the corner and has started to recover as rail car volumes -- say that quickly three times -- have been increasing since November 2016. In fact, for the first two months of 2017, total carloads were up by 4.8% thanks to mainly a 15.5% increase in coal carloads. This nascent recovery is encouraging, as we are hopeful it will continue, and expect it to translate into higher room nights sold at our Oak Tree Inns.

In December 2016, we announced we renewed six maturing railcrew contracts with our customer, our largest customer, for a six-year term. As an underlying premise to our negotiations, we reduced the occupancy guarantee in exchange for increased daily rates, cost-of-living escalators, and diner and transportation subsidies. Overall, this increased our average remaining contract term by 18% to 4.6 years.

We are fortunate to have been able to lock into long-term contracts with some of our rail customers last year, which has allowed us to better weather through the various cycles of the Business, and we estimate that we continue to have an approximately 75% of our rail rooms guaranteed. We continue to experience support from these contracts, and expect this support to decline as railcar volumes rebound.

Anecdotally, our Oak Tree Inn in Comfort, West Virginia, was hit hard over the last 18 months when the coal mines and rail yards shut down in Appalachia. Since late 2016, however, two coal mines have reopened, and additional mines are getting ready to resume operations. This kind of activity looks very promising for our railcrew business.

We continue to work with our rail customers to target additional hotels for acquisition to grow our portfolio of industry-leading Oak Tree Inn hotels, with additional stable, long-term contracted revenues. We completed the acquisition of a 104-room railcrew hotel located in Nashville in December, as I just said, and completed the necessary renovations and welcomed our first railcrew guests on February 1 this year.

Our hotel manager has also focused on strong cost discipline to improve income and to maintain consistent operating margins in spite of the challenges at certain hotels. Other initiatives undertaken include optimizing or complexing staffing at the hotels, which is translated into increased GOP and NOI margins, mainly at the Branded Hotels. The hotel manager is working very hard to schedule the capital expenditures and PIP renovations to minimize guest displacement.

During 2016, a $2.5 million renovation was done satisfactorily at the Courtyard Inn in Ocala, Florida, and a $1.8 million renovation was done at the Holiday Inn Express in Chickasha, Oklahoma. The renovations were extensive, and the completed product looks excellent.

We're also in the process of selling a Branded Hotel asset. The property was non-core when we acquired it in 2015. It is not branded with the big three brands, and required extensive renovations. We decided to recycle the capital into a more productive hotel. The transaction is expected to close in the next 7 to 10 days.

Our diversified portfolio, supported by guaranteed rail contracts, modest leverage, and conservative full-year pay-out ratio, continues to provide investors with stable, consistent, US dollar-denominated distributions with exposure to the much larger US hotel market. I'll now pass the discussion over to our CFO, Azim Lalani, to provide a summary of the financial and operating results for the fourth quarter and full year. Azim?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO [3]

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Thanks, Rob. Here is a summary of some of our key financial results for the quarter ended December 31, 2016, compared to the same periods in 2015. Revenues were up by 11.5% to $44.3 million, and EBITDA was up 16% to $12.1 million, with EBITDA margins increasing by 100 basis points to 27.2%. The improved margins reflect the efforts of our hotel manager to manage certain expenses, such as utilities and insurance premiums, along with driving revenue growth. It also reflects the efficient operating model of the select service segment within the hotel industry.

FFO for the quarter was up 23.8% to $8.9 million, and AFFO was up 24.2% to $7.7 million. Diluted FFO per unit was $0.19, and diluted AFFO per unit was $0.17, with both metrics being affected by the delayed deployment of the July 2016 offering proceeds.

Our pay-out ratio for the quarter was 103.5%, and reflected the additional units issued from the July and December unit offerings. This metric will improve as the recent acquisitions start contributing NOI.

For the full year, revenues were up 20.7% to $173.5 million, and EBITDA was up to 27.2% -- sorry, EBITDA was up 27.2% to $52.4 million. EBITDA margin improved by 160 basis points to 30.2%.

FFO for the year was up 30.3% to $36.5 million, and AFFO was up 31.2% to $31.9 million. FFO per unit was $0.92 and AFFO per unit was $0.80. Both metrics were impacted by the cash drag from the delayed deployment of the July offering.

Same-property RevPAR for the year for Branded Hotels was up 4.5%, outpacing the growth in the US hotel industry by 130 basis points. Strong performers included North Carolina, Virginia, and Florida properties, which all had growth rates over 11%. This was offset by weakness in Pittsburgh and Oklahoma, which saw RevPAR declines of between 4% and 5%.

Total same-property revenues for the year was up 2.3% to $131.3 million, and total same-property NOI was up 5.3% to $47.2 million. Our AFFO calculation reflects the full FF&E reserve, and excludes the impact of any FF&E reserve waivers provided by our lenders.

Our full-year pay-out ratio was 83.4% and run-rate pay-out ratio is approximately 75%. Our annual distribution is $0.648, and provides a solid 8% yield from a balanced and diversified portfolio, and well supported by operating cash flow and available liquidity.

I will now review our liquidity and financial condition as at December 31, 2016. Our debt to gross book value was down to 44%, reflecting our large cash position at year end. Our leverage ratio today is approximately 49%. Our debt-to-EBITDA ratio was 7.2 times, down from 7.4 times last year.

Our weighted average interest rate was 4.59%. Our weighted average loan term to maturity was 7.7 years, with no significant debt maturities until 2023.

Our available unrestricted cash balance at year end was approximately $81 million, and we have an available operating facility of $10 million. Of the $81 million, we used approximately $65 million for the acquisitions in January. Our restricted cash balance was approximately $18 million and is available to fully fund brand-required capital expenditures over the next 12 to 24 months. Thank you, and now back to Rob.

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [4]

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Thanks, Azim. I'd like to close the formal portion of this call with the following key points. We're very pleased that our operating results have generated meaningful growth in our FFO and AFFO. We see rail volumes starting to turn around, and expect this to translate into modest increases in railcrew occupancies over the coming quarters.

For the broader US hotel industry, the current cycle continues but at a more modest rate, with supply increasing to average historical levels. We expect our diversified portfolio to participate in the growth of the industry.

Notwithstanding we're Canada's only US-focused hotel REIT, we do have a strong position within the hotel REIT sector in Canada. We are the largest by a factor of 5. And from a publicly traded point of view, we are also Canada's largest public hotel company.

We're also pleased that our hotel manager has done an excellent job of pushing revenue growth and cost controls, and has delivered meaningful growth in income and operating margins. We continue to actively evaluate development opportunities, secured by long-term rail contracts, to deliver industry-leading high-quality hotels that meet the employee accommodation requirements of our rail customers, and, in fact, today are in preliminary discussions regarding some newer large-scale hotels.

We continue to identify quality, accretive branded hotel acquisition opportunities, and we also are highly focused and motivated in executing our stated growth strategy of building AHIP with a conservative balance sheet, diversified with high-quality properties in secondary and tertiary markets in the US that create long-term value for our unit holders. As always, I'd like to thank our investors, our Board, our Management, and all of our employees for their hard work in 2016 and the fourth quarter. And now I'd like to open up the lines for questions. Operator?

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Questions and Answers

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Operator [1]

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Thank you.

(Operator Instructions)

Jonathan Kelcher.

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Jonathan Kelcher, TD Securities - Analyst [2]

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Thanks. Good afternoon.

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [3]

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Hi, Jonathan.

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Jonathan Kelcher, TD Securities - Analyst [4]

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First, on the operating results, pretty strong same-property NOI growth in the branded portfolio. I'm curious as to, if there is anything one time in there on the cost side that drove that?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO [5]

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Hi, Jonathan. Probably the biggest thing was some of the properties are, individual properties, were undergoing renovations in 2015. So, for example, the Harrisonburg-University Hampton had a big renovation in 2015.

The Residence Inn, Cranberry, had a big renovation. The Hampton in Asheboro, had a big renovation. So some of those properties had lower operating results in 2015. Some of that contributed to some of that growth.

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Jonathan Kelcher, TD Securities - Analyst [6]

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Okay, so Q4 2016 would be kind of a good margin number for Q4?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO [7]

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Yes, I think so.

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Jonathan Kelcher, TD Securities - Analyst [8]

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Okay. And the new stuff you bought, that just closed in January, are margins and seasonality on those 1,300 rooms similar to the current branded portfolio?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO [9]

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So you're talking about the Florida, Nashville, Tennessee

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [10]

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Or the Embassies.

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Azim Lalani, American Hotel Income Properties REIT LP - CFO [11]

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Or the Embassies?

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Jonathan Kelcher, TD Securities - Analyst [12]

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Well, both, really.

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [13]

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Well, the Embassies have got better margins and better flow-through. They're larger hotels with higher average daily rates and higher occupancy. So I think those will be -- not I think -- I know they are at the top end of our scale in terms of contribution at the bottom line per room. So that will be a new metric that comes into the system first quarter.

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Jonathan Kelcher, TD Securities - Analyst [14]

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Okay. So overall, all else being equal, margins in 2017 should be a little bit higher than 2016, just based on the acquisitions you've done?

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [15]

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That's correct, yes.

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Jonathan Kelcher, TD Securities - Analyst [16]

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Okay. And then just on the -- I know it's a small -- small hotel, but how many rooms were in the hotel that you sold?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO [17]

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77 rooms.

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Jonathan Kelcher, TD Securities - Analyst [18]

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77 rooms.

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Azim Lalani, American Hotel Income Properties REIT LP - CFO [19]

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Yes.

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Jonathan Kelcher, TD Securities - Analyst [20]

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Okay. Thanks. I'll turn it back.

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [21]

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Thanks, Jonathan.

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Operator [22]

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Mark Rothschild.

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Mark Rothschild, Canaccord Genuity - Analyst [23]

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Thanks, good afternoon.

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [24]

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Hi, Mark.

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Mark Rothschild, Canaccord Genuity - Analyst [25]

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Just sticking on that point on the strong same-store growth, I guess, two points to start with, one, are there any more renovations ongoing? And, secondly, I realize that the same-store NOI portfolio you've owned already a year, but are you seeing the opportunity -- is there any benefit in that portfolio from the fact that you have your own management?

I'm just looking at the acquisitions you have going forward. Do you expect to be able to achieve any stronger growth from those assets after you acquire them, or is it going to be more in line with maybe the national average for hotels?

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [26]

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We have historically -- we're getting old enough to be historic here -- that they have produced better results than the incumbent managers. We're still seeing opportunities in complexing and yield management, and just generally getting the teams together and giving them a professional guidance. So there is some future benefits hoped for there.

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Mark Rothschild, Canaccord Genuity - Analyst [27]

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And are there any current renovations ongoing?

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Azim Lalani, American Hotel Income Properties REIT LP - CFO [28]

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Yes, there is -- there are some properties that will be renovated this year. It's just part of the normal cycle as we're acquiring properties. Some of them do require change of ownership [kits] and so we have probably five or six properties that are undergoing renovations. Probably not to the same extent as some of the ones we've previously mentioned, but there are properties that are undergoing renovations this year.

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Mark Rothschild, Canaccord Genuity - Analyst [29]

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Okay. And then, maybe just talk a little bit about the rail portfolio, are you seeing acquisition opportunities for Rail Hotels and what type of cap rates would they range by?

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [30]

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Well, the acquisition opportunities really sort of -- we pursue after we identify demand for the rail -- from a rail customer. Our hurdles are higher than the branded portfolio. And so that's really all we can say is that if we're looking at 8, 8.5 caps in the branded portfolio, maybe even a little bit higher, that the rail opportunities we want to see a higher return.

Generally, because they are smaller hotels, and to make it worth all our while we don't want to go into a 25-room hotel if we -- it's tough to make the professional management and the systems and all of that work in a very small property. So to get the bottom lines and the returns that you need we're generally moving larger hotels.

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Mark Rothschild, Canaccord Genuity - Analyst [31]

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Great. Thank you very much.

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [32]

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Thanks, Mark.

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Operator [33]

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There are no further questions at this time. I will now turn the call back over to Rob O'Neill.

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Rob O'Neill, American Hotel Income Properties REIT LP - CEO [34]

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Thanks, operator, and in behalf of Azim and the entire AHIP management team that is with us today, we would like to thank you all for sharing your time with us. Please feel free to contact myself, Ian McAuley, our President, or Azim, any time. Thank you very much.

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Operator [35]

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This concludes today's conference call. You may now disconnect.