Mr. Jonathan Korol reports

AMERICAN HOTEL INCOME PROPERTIES REIT LP ANNOUNCES Q3 2023 RESULTS AND INITIATIVES TO STRENGTHEN FINANCIAL POSITION AND PRESERVE UNITHOLDER VALUE

American Hotel Income Properties REIT LP today released its financial results for the three and nine months ended Sept. 30, 2023. All amounts presented in this news release are in United States dollars unless otherwise indicated.

AHIP announced today a number of initiatives focused on strengthening the company's financial position and preserving unitholder value against the backdrop of a challenging operating and macroeconomic environment. AHIP's operating challenges are primarily attributable to higher operating expenses and a decline in year-over-year occupancy. The macroeconomic conditions remain difficult, with elevated inflation, higher interest rates and increasing risks of business and consumer demand. The company is addressing these issues, and the strategic initiatives summarized herein are intended to improve liquidity, address near-term debt maturities and provide the company with financial stability.

"Conditions across the industry are challenging, with cost and operating margin pressures increasing over recent quarters. More recently, overall demand has also decreased, which is expected to continue in the medium term," said Jonathan Korol, chief executive officer. "Against this challenging backdrop, the board and management team are taking a number of decisive actions across the business to preserve cash, enhance financial stability and protect long-term value for our unitholders. These actions include an amendment and extension of our revolving credit facility and certain term loans, a reduction and deferral of hotel management fees, and temporary suspension of the distribution. We also have an executable plan to address near-term debt obligations."

Mr. Korol added: "AHIP's business is a diversified portfolio of premium branded select-service hotels with a focused operating model that we believe will generate long-term value for unitholders. The steps we are taking now will strengthen our liquidity and balance sheet to ensure we are positioned to benefit when the operating and macroeconomic environment improves for the industry. We will continue to carefully monitor industry conditions and operating performance, while considering further strategic opportunities to deliver value over the long term."

2023 third quarter highlights

• Diluted FFO (funds from operations) per unit and normalized diluted FFO per unit were 17 cents and 11 cents, respectively, for the third quarter of 2023, compared with diluted FFO per unit of 13 cents for the same period of 2022.
• Occupancy was 71.5 per cent for the third quarter of 2023, a decrease of 60 basis points (bps) compared with 72.1 per cent for the same period of 2022.
• ADR increased 4.7 per cent to $133 for the third quarter of 2023, compared with $127 for the same period of 2022.
• RevPAR increased 3.3 per cent to $95 for the third quarter of 2023, compared with $92 for the same period of 2022.
• Revenue decreased 3.3 per cent to $73.7-million for the third quarter of 2023, compared with $76.2-million for the same period in 2022.
• NOI (net operating income) and normalized NOI were $22.6-million and $23.1-million, respectively, for the third quarter of 2023, decreases of 8.5 per cent and 6.5 per cent, respectively, compared with NOI of $24.7-million for the same period in 2022.
• Amendment and extension of AHIP's revolving credit facility and certain term loans.
• Amendment of the master hotel management agreement with reduced and deferred fees.
• Temporary suspension of monthly cash distribution effective November, 2023, to enhance liquidity; the previously announced October, 2023, distribution of 1.5 cents per unit will be paid on Nov. 15, 2023.

2023 third quarter review

Growth in ADR and Revpar, decline in occupancy

For the three months ended Sept. 30, 2023, ADR increased 4.7 per cent to $133. The increase in ADR was partially offset by the decrease of 60 bps in occupancy, which is primarily attributable to lower demand at the extended stay and select service properties. Over all, improved ADR resulted in an increase of 3.3 per cent in RevPAR, compared with the same period in 2022.

This result is attributable to improvements in the corporate and group traveller segments, sustained demand from leisure travellers, as well as the disposition of properties with lower than portfolio average RevPAR. The ability to control and manage daily rates is a key advantage of the lodging sector, which has enabled AHIP to achieve strong growth in ADR, partially mitigating the effects of rising labour costs and general inflationary pressures impacting the portfolio.

NOI, NOI margin and FFO per unit

NOI and normalized NOI were $22.6-million and $23.1-million, respectively, for the three months ended Sept. 30, 2023, decreases of 8.5 per cent and 6.5 per cent, respectively, compared with NOI of $24.7-million for the same period in 2022. For the three months ended Sept. 30, 2023, normalized NOI included $500,000 business interruption insurance proceeds as a result of the weather-related damage at several hotel properties in late-December, 2022. NOI margin was 30.6 per cent in the current quarter, a decrease of 180 bps compared with the same period in 2022. The decreases in NOI and NOI margin were due to the decline in revenue as a result of fewer properties in the portfolio, lower occupancy and higher operating expenses as a result of cost inflation, labour shortages and higher property insurance premiums. General inflation resulted in higher costs of operating supplies and higher utilities expenses. Shortages in the overall U.S. labour market resulted in increased room labour expenses due to overtime, higher wages for employees and dependency on contract labour. The increase in the annual premium for property insurance effective June 1, 2023, is approximately $3.5-million.

Diluted FFO per unit and normalized diluted FFO per unit were 17 cents and 11 cents for the third quarter of 2023, respectively, compared with diluted FFO per unit of 13 cents for the same period in 2022. Normalized diluted FFO per unit in the current quarter excluded non-recurring expected insurance proceeds of $5.4-million as a result of weather-related property damage at several hotel properties in late-December, 2022. The decrease in normalized diluted FFO per unit was primarily due to lower NOI in the current quarter.

Insurance and weather-related issues

During the final week of December, 2022, extreme cold weather caused damage at several hotel properties. For property damage, AHIP expects most of the total cost of remediation and rebuilding to be reimbursed from insurance policies. For business interruption, AHIP expects to recover most of the lost income on these properties from insurance policies for the period from late-December, 2022, until the damaged hotel properties became fully operational in September, 2023.

Of the hotel properties damaged, two had a significant number of rooms out of order. At the Residence Inn Neptune in New Jersey, all 105 rooms were out of order from Dec. 25, 2022. Of the 105 rooms, 72 rooms returned to service in May, 2023; 19 rooms returned to service in June, 2023; and the hotel fully returned to service in September, 2023.

At the Courtyard Wall in New Jersey, all 113 rooms were out of order from Dec. 25, 2022. Of the 113 rooms, 54 rooms returned to service in mid-January, 2023; 31 rooms returned to service in June, 2023, and the hotel fully returned to service in September, 2023.

As a result of the weather-related damage, the total writedown of the costs of these hotel properties is $13.8-million as of Sept. 30, 2023. This is comprised of remediation costs of $3.0-million and rebuilding costs of $10.8-million. AHIP recorded a $4.8-million non-cash writedown in the third quarter of 2023, in addition to the $9.0-million non-cash writedown recorded in the fourth quarter of 2022 and the first half of 2023. As of Sept. 30, 2023, AHIP had incurred $13.8-million in costs to remediate and rebuild the damaged hotel properties.

For the nine months ended Sept. 30, 2023, AHIP has recorded total expected insurance proceeds of $16.3-million, which comprised $12.9-million for the property damage claim, and $3.4-million for the business interruption claim. AHIP has received $4.3-million of total expected insurance proceeds to date and expects to receive additional insurance proceeds in the fourth quarter of 2023.

As a result of the claims noted herein, higher replacement costs and generally higher market premiums, AHIP completed its property insurance renewal effective June 1, 2023, with a significant increase in premiums compared with the previous policy. On an annual basis, the increase from prior year is approximately $3.5-million, which will increase expenses and reduce earnings.

Leverage and liquidity

Leverage ratio

Debt to gross book value as at Sept. 30, 2023, decreased by 150 bps to 51.1 per cent compared with 52.6 per cent as at Dec. 31, 2022. AHIP has made steady progress on this measure, while debt to EBITDA (earnings before interest, taxes, depreciation and amortization) has been relatively stable over the last 12 months.

Cash and borrowing base

As at Sept. 30, 2023, AHIP had $32.4-million in available liquidity, compared with $24.1-million as at Dec. 31, 2022. The available liquidity of $32.4-million comprised an unrestricted cash balance of $17.4-million and borrowing availability of $15.0-million under the revolving credit facility. AHIP has an additional restricted cash balance of $33.9-million as at Sept. 30, 2023. On Nov. 7, 2023, the borrowing availability under the revolving credit facility was decreased to zero until the effective date of the appraisals in accordance with the sixth amendment (as defined herein).

Capital recycling

AHIP is reviewing strategies for divesting assets to recycle proceeds into higher return assets in more attractive markets and reduce debt.

In 2022, AHIP completed the strategic dispositions of seven non-core hotel properties for total gross proceeds of $47.5-million. These dispositions i) allowed AHIP to avoid future PIP investments that would not have met returns available elsewhere in the portfolio; ii) increased portfolio RevPAR by approximately $3, and iii) improved AHIP's debt to EBITDA ratio by approximately 0.4 times.

In June, 2023, AHIP completed the disposition of a non-core hotel property for gross proceeds of $11.7-million. As a condition of the fifth amendment to the revolving credit facility and certain term loans, AHIP made a repayment of $1.8-million (50 per cent of the net proceeds of this disposition) to the term loan. This repayment resulted in a permanent reduction of the term loan, which reduced the total borrowing availability from $200.0-million to $198.2-million.

Same property KPI

The attached table summarizes key performance indicators (KPIs) for the portfolio for the five most recent quarters with a comparison with the same period in the prior year.

Same property ADR increased by 3.1 per cent to $133 in the current quarter compared with $129 in the same period of 2022. Same property occupancy decreased by 220 bps to 71.5 per cent in the current quarter, which included occupancy declines of 393 bps in July, 191 bps in August and 87 bps in September, all compared with the same periods in 2022. The decrease in occupancy is primarily attributable to lower demand at the extended stay and select service properties. Preliminary results for October, 2023, indicate occupancy is 130 bps below the same period in 2022, and this demand level is expected to continue in the fourth quarter of 2023.

Same property NOI margin decreased by 270 bps to 30.6 per cent for the third quarter of 2023, compared with the same period of 2022. Same property NOI margin decreased due to higher operating expenses as a result of inflation and labour shortages. General inflation resulted in higher costs of operating supplies and higher utilities expenses. Shortages in the overall U.S. labour market resulted in increased room labour expenses due to overtime, higher wages for employees and dependency on contract labour.

In Q3 2023, Q3 and Q4 2022, the same property ADR, occupancy and RevPAR calculations excluded the seven hotels sold in 2022 and the one hotel sold in 2023. The same property NOI margin calculation for the five most recent quarters excluded the seven hotels sold in 2022 and the one hotel sold in 2023.

In Q1 and Q2 2023, the same property ADR, occupancy and RevPAR calculations excluded the seven hotels sold in 2022, the one hotel sold in 2023, and Residence Inn Neptune and Courtyard Wall in New Jersey as these two hotels had limited availability due to remediation and rebuilding after the weather-related damage in late-December, 2022.

Initiatives to strengthen financial position and preserve unitholder value

The board of directors and management are implementing a plan to strengthen AHIP's financial position and to preserve unitholder value. Initiatives, both planned and under way, are outlined herein.

Amendment and extension of revolving credit facility and term loans

On Nov. 7, 2023, AHIP entered into an amendment to its revolving credit facility (the RCF) and certain term loans (the sixth amendment).

The total facility size under the sixth amendment is $198.2-million. The initial maturity of the revolving portion of the credit facility has been extended from Dec. 3, 2023, to Dec. 3, 2024, subject to conditions set forth in the sixth amendment to be satisfied prior to Dec. 3, 2023. The sixth amendment includes an option to extend the maturity of the term loan and RCF to June, 2025, subject to reduction of the aggregate maximum facility size to $148.2-million from and after Dec. 3, 2024. The fixed charge coverage ratio has been reduced to 1.1 times until the end of 2024.

Pursuant to the sixth amendment, the RCF availability is primarily limited by revised calculations based on the lesser of an implied debt service coverage ratio and a loan-to-value (LTV) test. As a condition to the initial extension to Dec. 3, 2024, the LTV test will be based on new hotel appraisals. The borrowing availability is subject to a maximum of 67.5-per-cent LTV based on the new appraisals, with time permitted to reduce the amount outstanding should current borrowings exceed 67.5-per-cent LTV. Specifically, from the effective date of the new appraisals and if applicable for each threshold, AHIP will have three business days to pay down any excess borrowings to 75-per-cent LTV, 90 days to reduce to 72.5-per-cent LTV and a further 90 days to reduce to 67.5-per-cent LTV. Management expects the results of the appraisals to become effective in late-November, 2023. Any such paydowns which may be required are expected to be financed through a combination of cash on hand and/or net proceeds from asset sales. The borrowing availability under the RCF has been reduced to zero pending the outcome of the above noted appraisals and subsequent application of the LTV test under the sixth amendment.

Under the sixth amendment, the covenants governing distribution payments have been revised and are now subject to the satisfaction of a more restrictive FFO payout ratio threshold, calculated on a trailing-12-month basis on a sliding scale based on the fixed charge coverage ratio.

For further details, see a copy of the sixth amendment, which has been filed under AHIP's profile on SEDAR+.

Plan to address near-term loan maturities

AHIP intends to proceed with a number of transactions that will collectively address all of the company's near-term debt maturities, while also creating modest improvements in ADR, RevPAR and leverage metrics.

AHIP's has 91.7 per cent of its debt at fixed interest rates or effectively fixed by interest rate swaps until Nov. 30, 2023. Upon the expiry of the interest rate swaps, the percentage of AHIP's debt at fixed interest rates will decrease to 71 per cent. The notional value of the interest rate swaps is $130.0-million which will expire on Nov. 30, 2023. As a result of this expiry, at the current secured overnight financing rate (SOFR) of 5.3 per cent, the incremental annual interest expense is expected to be approximately $5.2-million. The actual increase in interest expense will be dependent on future SOFR.

The commercial mortgage-backed securities (CMBS) debt maturities in the fourth quarter of 2023 are $16.3-million for two hotels (two loans) in Pennsylvania, and in the first half of 2024 are $22.0-million for four hotels (one loan) in Virginia.

To address the Q4 2023 CMBS loan maturities of $16.3-million, AHIP intends to divest of two non-core properties, specifically:

• The sale of one Pennsylvania hotel by the end of the first quarter of 2024, which will be used to satisfy the $7.0-million non-recourse mortgage;
• A managed foreclosure process for one Pennsylvania hotel, which will result in a discharge of $9.3-million in non-recourse mortgage debt.

To address the Q2 2024 CMBS loan maturity of $22.0-million, AHIP intends to:

• Sell one hotel in the Virginia portfolio by the end of the first quarter of 2024, which will be used to partially satisfy the non-recourse mortgage;
• Refinance the balance of the loan with the remaining three hotels in the Virginia portfolio.

Amendment of the master hotel management agreement with reduced and deferred fees

On Sept. 30, 2023, with a retroactive effective date of July 1, 2023, AHIP entered into a third amendment to its master hotel management agreement with One Lodging Management LLC (an affiliate of Aimbridge Hospitality LLC), with an estimated annual savings for the first three years following the amendment of approximately $3.7-million.

In accordance with the amendment, the management fee on certain hotel properties has been reduced or deferred. The reduction of management fees is estimated to provide approximately $300,000 of cash savings per annum, and the deferral of management fees is estimated to provide approximately $3.4-million of cash savings on average per annum from July 1, 2023, to June 30, 2026. The fees in the years 2027 through 2032 will be slightly higher to offset the fee deferral in the first three years.

The amendment to the master hotel management agreement also includes waivers of all or a portion of termination fees for certain hotels, as well as a limited exception to the exclusivity of the master hotel manager in respect of the acquisition of owner-operated hotels, subject to certain conditions. For further details, see a copy of the amendment to the master hotel management agreement, which has been filed under AHIP's profile on SEDAR+.

Reducing cash portion of board compensation

Effective Oct. 1, 2023, the majority of the board's compensation will be paid in AHIP RSUs (restricted share units) which will be priced and vest in the form of units at the end of each fiscal quarter. Previously, board compensation was paid entirely in cash.

Temporary suspension of U.S. dollar distribution

Since February, 2022, AHIP's distribution policy provided for the payment of regular monthly U.S. dollar distributions at an annual rate of 18 cents per unit (monthly rate of 1.5 cents per unit). The board and management have completed an analysis of this policy in the context of recent and forecast operating results, industry and economic conditions, interest rates for debt refinancing, the general financing environment, future compliance with the adjusted FFO payout ratio covenant in the sixth amendment, and determined that the long-term interests of AHIP, its unitholders and other stakeholders are best served by a temporary suspension of monthly distributions.

The amendment of the distribution policy is expected to provide an additional $14.2-million of cash annually, which is expected to be used to strengthen the company's balance sheet and liquidity, supporting the long-term enhancement of unitholder value.

The board, with the assistance of management, will continue to review AHIP's distribution policy on a quarterly basis. The previously announced October, 2023, distribution of 1.5 cents per unit will be paid on Nov. 15, 2023, to unitholders of record as of the close of business on Oc. 31, 2023.

Financial information

This news release should be read in conjunction with AHIP's unaudited condensed consolidated interim financial statements, and management's discussion and analysis for the three and nine months ended Sept. 30, 2023 and 2022, that are available on AHIP's website and under AHIP's profile on SEDAR+.

Q3 2023 conference call

Management will host a webcast and conference call at 8 a.m. Pacific time on Wednesday, Nov. 8, 2023, to discuss the financial and operational results for the three and nine months ended Sept. 30, 2023, and 2022.

To participate in the conference call, participants should register on-line via AHIP's website. A dial-in and unique PIN will be provided to join the call. Participants are requested to register a minimum of 15 minutes before the start of the call. An audio webcast of the conference call is also available, both live and archived, on the events &nd presentations page of AHIP's website.

About American Hotel Income Properties REIT LP

American Hotel Income Properties is a limited partnership formed to invest in hotel real estate properties across the United States. American Hotel's premium-branded, select-service hotels are located in secondary metropolitan markets that benefit from diverse and typically stable demand. American Hotel's hotels operate under brands affiliated with Marriott, Hilton, IHG and Choice Hotels through licence agreements. The company's long-term objectives are to build on its proven record of successful investment, deliver monthly U.S.-dollar-denominated distributions to unitholders and generate value through the continued growth of its diversified hotel portfolio.

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