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Good afternoon, and welcome to American Hotel Income Property (sic) Properties REIT LP First Quarter 2018 Results Conference Call. [Operator Instructions] At this time, I'll turn the call over to Jamie Kokoska, Director of Investor Relations. You may begin your call.
Thank you, Cheryl. Good afternoon, everyone, and thanks for joining us for our first quarter 2018 results conference call. Discussing AHIP's performance today are Rob O'Neill, Chief Executive Officer; Ian McAuley, President; 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, FFO, AFFO and AFFO payout ratio are considered forward-looking and involve risks and uncertainties. The risks and uncertainties that could cause our actual financial and operating results differ significantly from our forward-looking statements are detailed in our 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 discussions of risk factors on AHIP's annual information form dated March 27, 2018, which is filed on SEDAR and at sedar.comOur first quarter results are made available yesterday after market closed. 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, such as FFO and AFFO. For the identification of these non-IFRS financial measures, the most directly comparable IFRS financial measures, and a reconciliation between the 2, please see our MD&A.All financial -- 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, May 10, 2018. A replay of this call will be available on our website.Rob will begin today's call with some opening remarks, then Ian will discuss our hotel operations, and Azim will provide a detailed discussion of our financial results. I will now turn the call over to Rob O'Neill, Chief Executive Officer.
Thank you, Jamie, and thank you, everyone, for joining us for today's earnings call. Our first quarter was marked by several important milestones that I believe will truly set the stage for improved hotel performance and provide us with better flexibility to pursue growth, both organically through hotel development or through small acquisitions.Specifically, we announced that Aimbridge Hospitality has assumed the hotel management contract for all of our 115 hotels. We formalized and expanded a true asset management department. We secured a new $40 million revolving line of credit for corporate development activities. And we refinanced our Economy Lodging portfolio to improve operating efficiencies and generate tax savings.Let me expand on these in more detail. First, we were pleased to announce that Aimbridge Hospitality is assumed our hotel management contract. Aimbridge is one of the world's largest hotel management companies and manage more than 800 hotels with over 100,000 guestrooms. This scale and their long-standing experience in the U.S. hotel sector, including REITs, will inherently provide AHIP with significant opportunities to improve our purchasing power, hotel general manager bench strength, recruiting and retention capabilities, and revenue management capabilities.In short, we see tangible opportunities to drive margin improvement, both immediately and over the long run. While it's too early to quantify what the total margin accretion will be, we are already seeing early signs of opportunity. Just as important, Aimbridge scale also provide them with the ability to use best-in-class technology to drive faster reporting times and higher accountability across our hotel platform, which will dramatically improve our sightline of hotel performance and allow us to be more agile in our capital plans and portfolio decisions.Today, we are already actively meeting with and collaborating with our new hotel management team, and we are more optimistic than ever about the future of our hotel portfolio. The professionalism and sense of urgency the Aimbridge team exudes is palpable, and we expect it will filter through all the ranks of our hotel staff in the coming months.Second and in an association with our new Hotel Manager arrangement, AHIP announced a new extended asset management department to more effectively evaluate the performance, returns and investment strategy for each of our 115 hotel properties. This team is in constant contact with our Hotel Manager and has already developed performance plans and strategies for each of our hotels. They are currently focused on driving stronger NOI margins with Aimbridge's more robust yield management team, ensuring that rooms are only sold at rates that correspond with margin improvement. Third, while we continue to view 2018 as a year of hotel investment and optimization with a focus on property renovations and generating the kind of performance we know these hotels can deliver, we continue to see tremendous opportunities to tuck-in small hotel acquisitions or to develop properties. To provide us with the flexibility to pursue these specific growth opportunities as they arise, we have secured a new USD 40 million line of credit through a U.S. affiliate of a Canadian chartered bank. This credit facility has initial size of USD 90.8 million, based on the current borrowing base of 3 Premium Branded Hotels secured under the facility and includes an accordion feature that allows us to increase its size to USD 75 million subject to certain conditions.Currently unutilized, this new facility has an initial term of 3 years with 2 additional 1-year extension options. And there is an interest rate of LIBOR plus 2.75%. We're quite pleased to have this financing option available to us to ensure we have the ability to properly evaluate and potentially act on growth opportunity in the year ahead.And finally, we consolidated the debt and business structure of our Economy Lodging hotel portfolio to generate improved operating and tax efficiencies. As part of this strategy, we refinanced our rail portfolio term loan of $19.6 million, obtained a new $4 million mortgage for 2 hotels we required -- we acquired in Q4 2017 and increased our secured revolving line of credit to $30.5 million.All of this was accomplished through our existing syndicate of U.S. chartered banks. Both these financing transactions highlight the confidence our bankers have in AHIP's portfolio, management and strategy.In total, 97% of our debt is fixed rate, with an average term remaining of more than 7 years and no significant loan maturities until June 2022, and an average interest rate of approximately 4.6%. With the current 10-year U.S. Treasury at around 3% and spreads around 250 basis points, we see clear value in our debt profile. We're pleased to say that AHIP remains very well protected against the rising interest rate environment. We believe that the investors and analysts have not fairly accounted for the reemerging seasonality of our business. And we're basing investing decisions on our traditionally softer fourth and first quarter. As a reminder, our business has daily leases and has a strong operational profile. Therefore, operating results are best evaluated on an annual basis rather than on a seasonally impacted quarterly swing. The current second quarter and upcoming third quarter are typically our strongest in terms of occupancy, revenues and cash flows. And I believe we'll more than accurately demonstrate the power of our larger, higher quality hotel portfolio and the cash-generating capabilities of our properties, which should more than offset the expectedly soft quarters we've experienced over the winter. And for your information, we included example of this seasonality in our news release yesterday and our MD&A, which we posted on SEDAR.I continue to believe that our units provide a compelling buying opportunity for long-term investors looking for value, a steady distribution, and of course, a source of U.S. dollars. Our assets are high quality and have a track record of cash generation and strong market share. Our new hotel manager is already uncovering tangible cost savings and will continue to enhance a margin profile of our business through purchasing power, labor management and optimizing sales mix. Our predominantly fixed rate debt strategy positions our business extremely well to withstand a rising interest rate environment. The hotel industry, in general, is the best real estate investment to mitigate inflation, given we negotiate our room rates daily. And we are investing in improving the profile of our portfolio through pre-funded hotel renovations over the next 2 years, to drive stronger performance from these properties post-renovation.By making these capital investments, we are making our properties best-in-class and reducing their average age. And by the end of 2019, 81% of our Premium Branded Hotels will have been refreshed. Within all of this, our unitholders are rewarded with a strong and stable monthly cash distribution at what is now a 10.5% yield, based on today's Canadian dollar unit price. This is one of the highest yields available across the Canadian traded REITs. And the fact that we pay our distributions in U.S. dollars means there is potentially even more for Canadian investors to capture value, particularly as forecasters are expected to see continued weakness for the Canadian dollar versus the U.S. dollar. So it should come as no surprise that when we released our Q1 news release yesterday, I also announced that upon the expiry of our trading blackout, I will be making additional large investments in the company through open market purchases in the weeks ahead. I expect these purchases will firmly position me as the largest holder of AHIP units at this point, further aligning my interest with all AHIP investors. More information about my investment will be appropriately disclosed as these units or purchases are completed.With those opening remarks, I'll turn the call over to Ian to discuss the operational highlights of the quarter. Ian?
Thanks, Rob, and good afternoon, everyone. Our first quarter performance was marked with strong revenue growth and market share and RevPAR performance. But these highlights were offset by less-than-ideal revenue management strategies in some of our hotels, which drove higher occupancy at room rates that ultimately eroded margin alongside the industry-wide continued labor cost pressures.First, I'll discuss some of the highlights during the quarter, then I'll discuss where we have identified some opportunities to drive margin improvement. And finally, I'll provide an update on the hotel renovations or property improvement plans that are underway and are scheduled for the remainder of the year.We're pleased with the strong RevPAR performance during the quarter, which grew 5.5% compared to the first quarter of last year. This was led by a 2.9% increase in occupancy, along with 2.5% increase in ADR, which reflects the higher proportion of upscale properties in our portfolio today relative to the entire portfolio this time last year.Nearly all of our hotels continued to outperform their competitive sets with higher-than-average rankings in each perspective RevPAR index, demonstrating the quality of the properties that we had purchased. On a same property basis, RevPAR for the total portfolio increased slightly by 0.4%. Our Premium Branded Hotel portfolio had mixed RevPAR results during the quarter. Pro forma RevPAR, which includes operating results for hotels for periods prior to them being acquired by AHIP was strongest with Ohio and New Jersey, up by 5.8% and 5.4%, respectively. RevPAR was strong in Oklahoma with a 17.3% increase, due to increased oil and gas sector activity. As well Florida RevPAR grew by 3.6%, as this region continues to perform strongly after the hurricane impacts from last year.In addition, we saw weakness at our 8 Baltimore properties, which have pro forma RevPAR declines of 4.7% compared to Q1 2017. This was primarily caused by the presidential inauguration-related business in January 2017, which obviously did not repeat this year. There were also 5 Nor'easter storms in this quarter, which created havoc all over the northeast and which impacted travel patterns. And finally, there were 2 U.S. federal government shutdowns that resulted in government group business simply canceling the reservations at the last minute with no cancellation penalties. The hotel manager was then left scrambling to fill these rooms at discounted rates. During the quarter, 2 of our larger upper upscale assets, the Embassy Suites, Cincinnati located across the river in Covington, Kentucky; and the Embassy Suites, Dallas and Fort Worth, Texas, began significant hotel renovations involving the grand lobbies and were temporarily affected by this activity during the quarter. The performance of the Cincinnati hotel was most affected due to room renovations with RevPAR declining by 21.5% and NOI declining by approximately $0.5 million. At the Fort Worth property, only lobby public space and atrium renovation work is underway. Although less disruptive to guests, this construction did result in a 1.2% decline in RevPAR and NOI impacts of approximately $100,000.Excluding those properties affected by tip renovations, the highest RevPAR declines were largely due to increased supply in certain markets. RevPAR declined 14.6% in Amarillo, 8.5% in Virginia and 8.2% in Pittsburgh, all due to new supply impacts. We expect the absorption to take a little longer in Amarillo and believe Pittsburgh has hit the bottom. On a same property basis, which excludes hotels under renovation, RevPAR for Premium Branded Hotels declined marginally by 0.1% compared to the same quarter last year. However, with challenges in managing costs and higher utility maintenance costs, we saw NOI margins decline. I think it's important to note that while some of our markets are challenged with new supply, our Premium Branded Hotels consistently achieve market-leading positions with respect to RevPAR index, even within this competitive environment. Across our entire Premium Branded portfolio, our hotels achieved 118% RevPAR index during the first quarter, meaning that we captured 18% more revenue in those markets than our fair market share, based on competitive set and STR data. In fact, it's heartening to know that 70% of our Premium Branded Hotels ranked in the top 2 hotels within the respective regions and chain scale, based again on STR data. However, as Rob mentioned, the sales mix of selling more rooms at lower rates is less than ideal and unfortunately compresses margin.Within our Economy Lodging portfolio, we're beginning to see some benefits from the Wyndham rebranding initiative. Same property RevPAR increased 1.9%, driven by a 2.8% increase in occupancy. The increased occupancy was partially from more rail crews staying at our hotels, as rail car volumes have continued to improve from more intermodal shipments. Average daily rates for Economy Lodging declined 0.9%, primarily as a result of lower contractually guaranteed revenues. But this decline was offset by higher rates achieved by transient non-rail guests staying at these hotels. The decline in ADR was frankly a function of a railway customer lowering their guarantee at the Gillette, Wyoming property in January '18, which resulted in an NOI drop of about a $150,000.All of our Economy Lodging Hotels now have new property management systems and signage in place. And they are now operating on Wyndham's reservations, networks and systems. However, this implementation was completed as planned at the end of March. So the first quarter only partially benefited from the Wyndham branding impact. That said, recent performance already indicates a positive impact with first quarter same property transient, that's non-rail accrual related revenue, increasing by 10.9% relative to the first quarter last year.72% of this increase was achieved through higher-average daily rates and 28% was driven by higher transient occupancy. Probably more telling, in the month of March alone, transient non-rail crew guest revenue increased by almost 18%, with nearly equal contributions from both rate and occupancy. Net operating income was negatively affected by higher expenses during the quarter. While some of these expense increases were expected and have affected the entire industry, such as labor costs, we were a bit concerned with some of the revenue mix and yield management results of certain properties during the quarter, which essentially drove higher occupancy alongside lower room rates, which results in a flow that erodes the margin, given the very low component of occupancy cost. Simply put, we would have been happier to sell fewer rooms at higher rate. And we've already tasked our new hotel manager, who assumed responsibility of our hotels after the first quarter to identify opportunities to drive better yield management, and we have made this a focal point of their strategy to improve hotel margins. Increased labor costs and higher utilities expense, related to more extreme winter weather along the Eastern Seaboard, where we now have a concentration of hotels, also drove expenses during the quarter. On a same-store basis, our Premium Branded Hotels on utilities and maintenance expense increased 6.5%. Increasing wage and benefit costs, particularly in larger urban areas, are also pressuring margins across the industry, as rising minimum wage requirements that turn alongside very low unemployment rates in the U.S.We are focused on getting the new manager to retain our good staff wherever possible to limit retraining expenses and to keep productivity high across our properties. Given these expense pressures, same property NOI for the quarter declined 3.7% to $16.6 million. As a reminder, our same property metrics still only represent 88 of the 115 hotels we currently own and only 65.5% of our total net operating income, which came in at $25.4 million for the first quarter. As Rob briefly discussed earlier, we believe the market may not be fully accounting for the seasonal swings in our business. Unlike many other real estate investments, our results are affected by weather, holidays and shifts in business travel. And given the geographic distribution of our hotels, the first and fourth quarters have always been seasonally weaker than a much stronger second and third quarters where revenue, margins, NOI and cash flows have always been more robust.In 2015 and 2016, we intentionally invested in a portfolio of Florida-based hotels to offset these seasonal quarterly swings, as hotels in these regions generally perform best in the winter months. This strategy certainly helped for a period of time and smoothed out our seasonality. However, our acquisition of 18 high-quality hotels along the Eastern Seaboard in June of 2017 reweighted our portfolio and increased our exposure to seasonal swings once again. Prior to the acquisition of that portfolio, our Florida properties represented 14% of our total [guests]. Today, our Florida hotels represent only 11%. And to help you better understand how much those Eastern Seaboard hotels are expected to contribute to the seasonality of our business, combined those 18 hotels are expected to represent approximately 24% of AHIP's total revenues during 2018. The first quarter only represents 20% of the contribution. This 4% additional seasonality impacted our quarter 1 2018 NOI by approximately $1.2 million.We're basing this distribution of income and cash flow on how these hotels have performed in recent history prior to our ownership. So it's not surprising the real value of our June acquisition hasn't been fully demonstrated yet. We truly believe the best is yet to come, when it comes to seeing what these properties can deliver. I will remind you that these properties are all Marriott and Hilton-branded products, located in strong secondary markets. 58% of these hotels are all suite products and all are over 100 rooms. Seasonality also comes into consideration when you review our cash flow and payout ratio, which are budgeted and set for annual results. We choose to provide our investors with a stable consistent monthly cash distribution as we understand the importance of that reliable income to many of our unitholders. This stable monthly distribution is paid regardless of the seasonal nature of our business. As it's based on how we expect the business will perform over the entire course of the year, including months and quarters, which bodes significantly stronger seasonal weaker cash flows.For the seasonally affected first quarter, however, it was much higher, as we expected, at 127.9%. We understand that quarterly payout could be concerning in almost any other real estate sector. However, it is not an indication of our true run rate payout ratio, given how seasonal our business is and the fact that we have daily leases on our business and how the high operational element compared to an office or multi-family REIT. Again, based on the historical performance of our hotel assets and our current forecast, we expect our annual AFFO payout ratio will land in the low 90% range.As we announced in March, when we reported our year-end numbers, 2018 is going to be a year full of hotel renovations and upgrades through our scheduling -- scheduled property improvement plans or PIPs in short. In total, approximately $20 million of pre-funded capital will be deployed for these renovations during 2018, which will both enhance the guest experience under properties and lower the average age of our portfolio.Two of our larger hotel properties, the Embassy Suites in Cincinnati and in Dallas-Fort Worth, began renovation activity during the first quarter. Approximately $1.9 million has already been invested in these hotels, which will ultimately make them the newest next-generation Embassy Suites in the United States. We expect the lobby, atrium, restaurant and room upgrades as part of the first wave of PIPs will be completed by June. AHIP invested further $2.7 million to continue its refresh of other hotels. In total, AHIP invested $4.6 million during the current quarter for capital investment.During the second quarter, we will also begin PIP upgrades at our Hilton Garden in White Marsh in Baltimore and smaller soft goods renovation projects at 3 other hotels. As discussed last quarter, construction activity at these hotels may cause some guestroom displacement and could temporarily impact hotel performance, including revenues and cash flows. Therefore, our asset management team is actively working with the new manager to develop strategies to mitigate these impacts of the renovation.Finally, we're very pleased to announce during the quarter that we reached an agreement with our former hotel development partner SunOne Developments terminate their exclusive agreement with AHIP at no cost. This contract termination means we are now free to tender business to the most qualified and appropriate development partners available, the opportunities we consider in the future. This flexibility will be especially helpful as we look for organic growth opportunities alongside the acquisition prospects we are constantly presented with.And with that overview of our hotel operations and renovation plans, I will turn the call over to Azim to discuss our financial performance in more detail. Azim?
Thank you, Ian. Good afternoon, everyone. Overall occupancy ADR RevPAR revenues and NOI have increased since last year due to the addition of 18 Premium Branded Hotels and 2 Economy Lodging Hotels. Total revenue for the first quarter increased by 31.3% to $81.1 million compared to Q1 2017. Our addition of new hotels are focused on growing our exposure to higher quality hotel properties with multiple demand generators in larger secondary U.S. markets.Our portfolio today is dramatically different than it was a year ago. As a result, we believe our same property metrics provide a limited analysis of the true operating performance of our business. For the first quarter, hotels at our same property metrics comprised only 77% of the total number of properties we own today and contributed just about 65% of our net operating income during the quarter.Similarly, same property NOI for our Premium Branded Hotels only comprised 58% of our total NOI from our current Premium Branded portfolio. Total properties same -- total portfolio of same property revenues for the quarter increased marginally by 30 basis points to $48.1 million. Revenue from same property Premium Branded Hotels declined by 60 basis points to $31.9 million. This was partially offset by stronger first quarter performance in our Economy Lodging segment, where same property revenue increased by 1.9%, due primarily to a 2.8% increase in occupancy.The dynamics of rail crew contract revenue and associated flow has shifted since 2016, when more hotel rooms were guaranteed but not used by rail customers. This has pressured the average daily rate achieved through rail crew contracts and our Economy Lodging portfolio. As Ian discussed, early contributions from the Wyndham rebranding initiative that positively impacted transient, non-rail crew occupancy, rates and revenue, which have helped somewhat to mitigate lower rail crew revenues.For our total portfolio, same property NOI for the quarter was $16.6 million. Including all properties, reported NOI for the quarter was $25.4 million, a 22% increase from last year. EBITDA for the first quarter increased 20.8% to $20.4 million as a result of our larger portfolio, while our EBITDA margins declined 220 basis points to 25.1%. The decline in margin was caused by higher occupancy-related operating expenses, higher utility and maintenance expenses resulting from the multiple winter storms that hit the Eastern U.S. this past winter.Relative to last year, first quarter net income was $1.4 million compared to $2.4 million last year, and net income per unit was $0.02 compared to $0.04 last year. The decline was caused by higher depreciation and interest charges from the acquisition of the new hotels and the related debt, including the convertible debenture. FFO declined marginally to $11.4 million from $11.6 million last year, while AFFO was $9.9 million compared to $10.8 million in the first quarter last year.Diluted FFO per unit during the quarter was $0.15, while diluted AFFO per unit was $0.13. We continued to pay a U.S. dollar denominated monthly distribution of $0.054, which is equivalent to $0.648 per unit on an annual basis. Based on this morning's Canadian dollar opening unit price, this provides a 10.5% yield, one of the highest in our sector.Turning to our capital metrics.AHIP's interest coverage ratio for Q1 2018 was 2.3x, a decline from the 3.0x coverage in the same quarter of last year due to interest expense from the convertible debentures that were issued in June 2017. In terms of our debt structure, substantially all of our hotel mortgages are fixed -- fixed rate long-term loans. As a result, our long-term debt has virtually no exposure to any short-term volatility in interest rates or the expected rise in interest rates by the Federal Reserve during 2018.Our debt has an average remaining term of 7.1 years and a fixed weighted average interest rate of approximately 4.64%. Our debt to gross book value at March 31 was 53.6%, well within our target range of 50% to 55%. As of March 31, AHIP had an unrestricted cash balance of $15.3 million and approximately $26 million available through revolving credit facilities. We also have a restricted cash balance of $50.9 million, of which $33.8 million has been earmarked for hotel capital improvements. We intend to invest approximately $20 million in 2018 to fund upcoming PIP projects, including $1.9 million already deployed during the first quarter. And with that financial overview, I'll turn the call back to Rob now for some closing remarks.
Thanks, Azim. We continue to see a lot of opportunity for our business, and even more now with Aimbridge as our hotel manager. While our PIP hotel renovations may cause some noise as we upgrade several of our hotels this year, these projects enhance the value of our portfolio over the long term to both our hotel guests and our unitholders as we elevate our market position in these regions and can justify higher rates per night. The hotel model is ideally situated for inflationary times, as our rates are negotiated nightly. This allows us to factor in rising costs, competitive influences and market demand in almost real-time. Compared to most other real estate investments, this provides a significant advantage to us. We are extremely well positioned against rising interest rates at substantially all of our hotel mortgages as Azim has outlined our fixed rate loans. Our revolving credit facility provides us with flexibility to pursue specific growth opportunities, whether they be acquisitive or organic to drive AFFO accretion in the future. And we are entering in to 2 of our strongest quarters of the year. Once again, we'll reiterate that our distribution is well-covered based on how our company has historically performed on a quarterly basis and how we believe the company will perform in the future. We expect our annual AFFO payout ratio for 2018 to land in the low 90 percentile range.We hope the market begins to understand that as a composition, our hotel portfolio has changed dramatically over the course of the last 2 years. The seasonality of our business, the geographic dispersion, the components of our revenue and our margin for that matter and all of our cap rates have all adjusted. We believe our platform is far stronger today with a high quality of cash flow than it was 5 years ago. And once we cycle through a full year with this larger, primarily Premium Branded and renovated portfolio, we believe the market will better understand this and reward us for it.And with that, we'll open the calls to the questions from the analysts. Operator?
[Operator Instructions] Our first question comes from Matt Logan, RBC Capital Market.
Can you guys talk about how the integration of the Eastern Seaboard portfolio was going? And how it's tracking relative to your initial expectations?
Sure, Matt, it's Ian. The transition is going well. Especially now with Aimbridge, because they have some hotels in those same markets. We've had some transition cost with new personnel. In some of our markets, we've had supply come in that we were aware of when we bought them. The biggest impact that, that portfolio has had for us is as we talked about, the seasonal impact with the Nor'easter's and the government shutdown. Other than that, the portfolio is operating as we had planned and hoped. And we're going through some renovations on some of those properties, smaller, soft, good kind of renovations, but they are still running in #1 -- that portfolio runs #1 and #2 in every single one of their RevPAR markets. That's an exceptional fete or the one lodging group that has been relatively operating them and that's primarily why we bought them.
Indeed. Can you comment on some of the property tax appeals that were likely related to that portfolio and maybe what the status of those were?
Matt, this is Azim. We actually don't have any property tax appeals for northeastern yet. The one that we're working through are primarily in Oklahoma and Pittsburgh. So we have other fields, and it's just working its way through the process, in terms of getting a meeting date set up with, I guess, the tribunals to present our case.
Maybe just along those lines, where do you think -- can you give us any color on where property taxes may end up in the year, either as a percentage of growth or maybe as a percentage of revenue?
That's a good question, I don't have that offhand. I apologize.
That's okay. And maybe just changing gears quickly to the Economy Lodging portfolio. A couple of quarters ago, you mentioned there was a raging debate on how much potential upside you'd seen from the Wyndham rebranding initiatives. Has there been any result or thought to where the ultimate upside from the portfolio might be?
Ask us after the third quarter. A good portion of the rebranded hotels are travel lodges, which a lot of them sit outside national parks and that are well focused on rubber tire traffic. So we're very hopeful that we'll see some positive results and get a clear understanding what the brands will deliver. All we can say is, the numbers -- well, they are very early and they were based on relatively small amounts of transient business have grown. A small double-digit growth is nothing to be sneezed at. And I think, we're going to grow nicely from there. One of the things that did happen, though, which was very interesting, was our manager with Ian's leadership -- Ian, maybe you can tell him about the Las Vegas introduction of Wyndham.
Sure. So Wyndham worldwide the largest hotel company in the world have their conference every 18 months. And it just happens that this year we were able to have all 50-some managers and regional managers showed up from across our economy portfolio to Vegas. And so they got indoctrinated very early in the process into the Wyndham system and are drinking the Wyndham Kool-Aid.
Wait. Not too much of anything else.
And what's important about that is -- thing about that -- is a lot of these folks are managers of these properties have never been exposed to brand -- reservations, brand systems, all the marketing, the distribution systems, et cetera. They've always worked in the rail crew contract business. So it's kind of a structural change for them. And the biggest piece of the Wyndham part is the rewards program and getting to managers to understand that when somebody stays at their property in Bill, Wyoming, they collect Wyndham rewards there; and if they collect enough, they can spend them in Maui or the Riviera or in Paris. That's a unique system that they didn't have before. And there were stories, lots of people talking about how they would typically never see a full house on a Friday night when there is no rail crew. But because of the Wyndham hotel in the next town was full, all that business got delivered over there. And there was one of our properties in the cold country in West Virginia, where they were receiving a lot more of transient guests just simply because of that Wyndham reservation system. So we will have more, as Rob said, talk to us in the fourth quarter and we will have the second and third quarters under our belt, and we'll have more to say about that, and probably to figure out who won the raging debate.
Our next question comes from Jonathan Kelcher, TD Security (sic) Securities.
How did Q1 compare to your internal expectations?
I think there was a bit of difference on the mix, when we talked about revenue and occupancy. While we were still achieving high market penetration, this transfer between occupancy -- from the revenue to occupancy cost us a lot of money. It's both yield management, but sometimes people go into a store and buy different brand of bread or pay a little more or a little less for it, they do that in hotels. And when we had this displacement in the northeast because of these storms, a lot of our business travelers weren't traveling and a lot of people got pushed out of their homes and a lot of the government traffic was canceled because of the closures. We took a different level of customer in there. So it cost us to make the beds, and we got lower rates, we got the overall the same revenue, just a different thing, and that cost us an overall mix, I think, about $1.5 million or $1.3 million. So you got a $0.015 of the $0.02, I think, just in that change up.
Okay. And then just at the end of your prepared remarks, did I hear right that you said AFFO for 2018 should be low 90% payout ratio?
Correct.
And our next question comes from Colin Healey, Haywood Securities.
Can you guys talk about competitive pressures that haven't shown up in the results yet? Specifically, are there any regions where you see new pressure coming down the pipe? And what kind of impact do you expect from those?
You are referring to new supply, Colin?
Yes, new supply in regions where we haven't seen it yet in the financials. If you guys see any, and what you are expecting in terms of impact?
Yes, that's a good question and that's one that we deal with every day. And in some of our markets, we think all that land has been used up and there aren't any more opportunities for people to come in. In others, we know that there is still opportunity for people to come in. So that's why we are continuing to do our renovations and to really push that we are going to be the best in the market and be as competitive as we possibly can with new product coming in. Some of the new product coming in, though, is not at the same level as our brands. The new product that we are seeing is more downmarket, so more economy-driven, lower-rated business. Even though a bed is a bed, they are lower rated. So we've seen it in a couple of markets where people have left, and they've gone and tried out the other property, and they said, "No, not for me" and they come back. So it's truly -- the manager is truly focused on service, and it's really making the guest feel like they are important, and that's what will bring them back. So it's inevitable by hotels in strong markets with the kind of levels of occupancies that our hotels achieve. It's inevitable that we will always see new supply. But thankfully it's new supply that is down market from us. That's in some of our Hampton Inn, Hilton Garden Inn kind of markets. You go to the Embassy Suites market, and there it's impossible -- not impossible, but it's highly less likely that we will see competitive products coming in like that, large, over 250-room group business hotels. We feel very protected in those markets. And in that Eastern Seaboard portfolio, the price of land, the price of construction, the labor cost and the union cost to build, we feel very protected there. So I know that I'm not giving you specifically where we are. We've got a couple in Florida where we've had some application show up, we always object strongly, and some of them we win, some of them we don't. But the brands are very concerned, and they make sure that they are not going to completely cannibalize any of their own business. So it is a part of the business that we are in, Colin, and we deal with it as pragmatically as we can.
I appreciate that answer, and it's good to hear that you guys have your eye in the market like that. Just on the existing portfolio. Have you identified any properties that any of the -- perhaps older ones that you like to sell or refresh? Is there anything in the portfolio that you would like to change up for something else?
Yes, good point. We, under Pankaj's direction and our asset management team, we've gone through every single one of our assets and created a very detailed market analysis. And it's placed in the market in a kind of a future look at what might happen in that market with new supply, et cetera, when our kids come up. And at this point in our life cycle, we are not ready to start recycling. Our debt really kind of inhibits our ability to do any of that. So it's good. We are in the business of building sustainable, reliable income. And that's what we have in place. So right now, we're not interested in entertaining any sort of recycling. Talk to us in another 5, 7 years, and we might have...
Other than just a few of the older rail hotels.
Oh, you are right, absolutely.
And we're working on a couple of those right now. I think, we are transacting one small one and have another transaction hoped for in the upcoming 3 months. They are not material that are going to change any. We just continue to look at that. So as I said, 81% of our hotels will have been refreshed by the end of '19. And hopefully, we're going to continue to take advantage of what is now the 97th month of this growth cycle, which looks like it's going to continue in the U.S. as GDP growth continues close to 3%, rail traffic goes up, and -- again with the GDP growth, our traveling business is improving. And just as an aside to the new construction issue, if anyone's trying to do anything around Vancouver, Toronto, in terms of building how difficult and expensive it is to get contract as well. A lot of the markets in the U.S, that same issue is happening. We look at our portfolio and were measured by a number of analysts in the United States. It's heartening to see that our portfolio on a cost-per-room basis is the lowest cost per room of all of the large hotel companies in the U.S. And I think that's good, because our revenue per available rooms is certainly not the lowest. And with a conservative mid-50s leverage, I think that speaks very well to protect this -- our assets and protect them against assets coming in and they look at what we got on the books. And they look at what it's going to cost them to compete with us, at sometimes double, for new build. I feel pretty good about our ability to sustain this investment.
That's great. I appreciate that answer. Last question, and it's pretty simple. The seasonality sensitivity that you provided for 2017, are those kind of proportional seasonality changes between quarters, pretty typical of the historical performance of the Eastern Seaboard portfolio? Is that what we can expect going forward? Or is that -- is there anything about those quarters that would say is not typical in terms of the sense of seasonality?
No, I think they are pretty representative. I think, as Ian mentioned earlier, because we were so centered -- so heavily centered on Florida before, it sort of [bumped] AHIP's seasonality. But now with having exposure to all of those, the larger Eastern market, it tilted our portfolio back to actually our historical seasonality levels.
Our next question comes from Tal Woolley, National Bank Finance.
I just wanted to talk a bit about Aimbridge, and how they are getting started up. What sort of a realistic time frame under this kind of manager change scenario for someone like Aimbridge to get their arms sort of fully around the business and really start pulling levers to make things -- to improve things?
Yes, good question, Tal. Aimbridge is -- they have the largest hotel company in North America, and they've done that over the last 10 years. So they are very professional at managing hotels. But they're also very confident at buying management companies and incorporating them and bringing them into their systems. So with one lodge they purchased one lodge. So they purchased all the people in the systems and saturated. Now they are just going through terminating where the opportunities are right away and who they want to keep and how they make it all fit. So nothing from our perspective truly changes. We've got all the same people are doing all the same things to prior. So we expect that during quarter 2, they will have an opportunity to kind of go through and make those kind of decisions. Quarter 3, we fully expect that we'll have some of their purchasing power in place and some of their -- one of the things that they've already done, I should say, is plugged in our vacant hotel manager and sales Manager positions into their HR system, and they've already had people from the Aimbridge world step up and say, "I want that opportunity over there in the AHIP hotels." So that's been in the immediate -- and they have only been around for 2 weeks. So that's wonderful to hear because retaining really good people is what really drives this business. So we expect -- again, talk to us after the third quarter, and we'll be able to give you far more tangible evidence of what they've been able to accomplish. But right away, actually this afternoon, after this call, we have a revenue management call. And as you know, and we've said it many times in our script today, revenue management is paramount to us, and controlling cost is also paramount. So both at the same time. That's what we're working on.
In the last week, we have had visits by their total senior executive team, their President's been in our offices twice from Texas. Technology people have been over at the one of our offices. They are very enthusiastic and have committed to AHIP that the transition will continue to be seamless, because it's been seamless. There is a transition agreement in place for 50 to 90 days with the total 1 executive team here in Vancouver, and if that's worked through, if any of those positions are moved to other offices, we've got a group on our side, that's on the AHIP side, that's watching this very carefully and challenging them to deliver on the initiatives that they talked about. One of the real early luxes will be is they ensure, I think, something like -- I don't know, was it $30-somewhat billion or -- $3 billion of sales. But the insurance over top of the portfolios that they do a lot of work on, and so they are going to bring the AHIP portfolio into this insurance quote, and we're hoping to see some tangible savings in that. We haven't seen it yet, but they grabbed it virtually in the first week and said, "Hey, let's get that out and see what we can save here."
Okay. And then, Ian, I can't recall if we discussed this at the time of the announcement or not, but just AHIP's ability to monitor performance. Does it improve under this agreement? Because the system is better, that you're able to sort of understand what's going on day-to-day, so you guys can make more active decisions?
Yes, yes. It's a good observation, and we did make that comment. And they are the largest, but they are also world-class. And being the largest is something that they don't apologize about because it does give them the opportunity to buy and create systems that are just more effective. And in the last little while, since we've been aware who it is, I've met with 6 of their other large owners, 2 of their larger owners to discuss what they get from Aimbridge, what they like about Aimbridge, and plugging into their systems is -- it's going to happen, and we see that as a true -- great opportunity. One has got some really excellent people, and they're going to stay in place. And this just gives them better tools and better resources to exactly do that. Give us more real-time reporting, so our team concerned around to make better decisions on capital allocation, resources and -- back to Colin's point, maybe some capital recycling in the future.
And the next question comes from Dean Wilkinson, CIBC World Markets.
Just quick simple question for me, Azim. Can you remind us what you are using for the CapEx reserve? And how you are calculating the AFFO over the course of the year?
Sure. So our CapEx reserve is 4% total revenues for our Premium Branded and 3% of room revenues for Economy Lodging. Of the 4% of Q1 2018 AFFO, we're actually using actual. So it's going to be different than that.
Okay. So that's what is sort of just getting to the math on. So we use the actual, the blended of the 4% and 3%, and that would get us to the guidance that you've given to in the low 90% payout ratio?
Yes. The low 90%, that's right.
And that concludes the questions at this time. I will turn the call back to the presenter.
Thank you, operator. And as always, thank you to the analysts and interested parties and shareholders that are on the call and taking their valuable time to listen to the story of AHIP. I'd like to also thank our manager, their employees, all of the AHIP team and thank the Board of Directors for their support. We had a great Annual General Meeting here in Vancouver, yesterday, looking back at 2017. And quite frankly, there was a lot of palpable excitement about the year ahead of us and the opportunities. We got to translate that excitement in the work into tangible results, and hopefully -- and improve share price. Thank you, again, and talk to you next quarter.
Thank you very much. Ladies and gentlemen, this concludes today's conference. You may now disconnect.