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Good morning, and welcome to American Hotel Income Properties REIT LP's Fourth Quarter Results Conference Call. [Operator Instructors] Before beginning the call, AHIP would like to remind listeners that the following discussion will include forward-looking information within the meaning of applicable Canadian securities laws, which forward-looking information is qualified by the statement. Comments that are not a statement of fact, including projections of future earnings, revenue, income and FFO are considered forward-looking and are based on certain assumptions and involve various risks and uncertainties. The risks and uncertainties that, if realized and assumptions that if false could cause AHIP's actual financial and operating results to differ significantly from forward-looking information discussed today are detailed in AHIP's public filings, which will be available on AHIP's website at ahipreit.com as well as SEDAR.
Participants on this call should not place undue reliance on such information, which is provided based on management's expectations and assumptions as of the date of this call. AHIP does not undertake any obligation to publicly update such information to reflect subsequent events or circumstances, except as required by law.
On this call, AHIP will discuss certain 9 IFRS financial measures -- for the definitions of these 9 IFRS financial measures, the most directly comparable IFRS financial measures and a reconciliation between the two, please refer to their MD&A. References to prior year operating results are comparisons of AHIP's portfolio of 69 properties results in that period versus the same properties results today. All figures discussed on today's call are in U.S. dollars unless otherwise indicated. A replay of this call will be available on AHIP's website.
Discussing AHIP's performance today are Jonathan Korol, Chief Executive Officer; Bruce Pittet, Chief Operating Officer; and Travis Beatty, Chief Financial Officer. I would now like to turn the conference over to Jonathan Korol, Chief Executive Officer. Please go ahead.
Thank you, operator, and thank you, everyone, for joining us today for our fourth quarter and full year 2023 financial results conference call. In 2023, AHIP's current portfolio of 69 select service hotels continued to demonstrate strong top line performance.
For the year, revenue grew by 4% due to steady rate growth across the 22 U.S. states in which we operate. RevPAR for the year finished at $90, a 2% (sic) [ 5.9% ] improvement over 2022. This was driven by room rate trends remaining positive with broad demand from leisure, corporate and group guest segments. For the quarter, revenue was flat to Q4 2022.
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 costs due to inflationary pressures. For the year, rates ended up at 105% of 2022 levels. For the fourth quarter, rates were flat to Q4 2022.
The gradual return of business and group travel continues to be a bright spot as demonstrated by the 10% growth in RevPAR in our Embassy Suites portfolio for the year. Operating margins continue to face substantial pressures due to higher labor and operating costs. NOI margin decreased by 270 basis points to 29.8% for the year compared to 2022. For the fourth quarter, NOI margin decreased by 490 (sic) [ 480 ] basis points to 26.1% compared to the same period in 2022.
General inflation resulted in higher cost of operating supplies and higher utilities expenses. Shortages in the overall U.S. labor market resulted in increased room labor expenses due to overtime, higher wages for employees and dependency on contract labor. We also saw a meaningful increase in the annual premium for property insurance effective June 1, 2023. While our focus remains on hiring more in-house labor, reducing turnover and improving housekeeping productivity, progress has been slow and labor costs have remained elevated into 2024.
At the moment, we are proceeding with a number of dispositions and refinancing that will serve to: one, address our near-term loan maturities; two, delever the portfolio; and three, also improve overall portfolio operating metrics. Leverage reduction remains a priority, and we continue to trend in the right direction, demonstrated by our debt-to-gross book value being reduced by 70 basis points over the last 12 months.
On the transaction front, in June 2023, we completed the disposition of a noncore hotel property for gross proceeds of $11.7 million. In the fourth quarter of 2023, AHIP entered into agreements to dispose of a hotel property in Harrisonburg, Virginia for $8.55 million and a hotel property in Cranberry Township, Pennsylvania, for $8.25 million. The dispositions are expected to close in the first quarter of 2024. These 2 latest sales combined are equivalent to an 8.6% cap rate on 2023 annual ANOI before factoring in any required CapEx, roughly a 6% cap rate, including estimated CapEx.
In November, we announced 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. The actions taken include an amendment and extension of our revolving credit facility and certain term loans, a reduction in deferral of hotel management fees and a temporary suspension of the unitholder distribution. The amendment of the distribution policy reduces cash payments by $14.2 million annually, which improves AHA's balance sheet and liquidity, supporting the long-term enhancement of unitholder value.
These steps will ensure that we are positioned to benefit when the industry operating in a macroeconomic environment improves. We will continue to monitor conditions and operating performance while considering further strategic opportunities to deliver unitholder value over the long term.
Lastly, we released our second corporate responsibility and sustainability report during the second quarter of 2023. This report is designed to help our stakeholders understand their commitment and efforts regarding environmental stewardship, social responsibility and governance. We will continue to report on present and future commitments with respect to ESG initiatives, all of which will be overseen by our Board of Directors Nominating Governance and Sustainability Committee.
I'd like to acknowledge the efforts of our brand partners, hotel managers, vendors, guests and other stakeholders for their stated commitments to implement programs that have a positive effect on our business, the environment and our communities. I'll now turn the call over to Bruce to discuss fourth quarter and full year hotel operations. Travis will then highlight key financial metrics. Bruce?
Thank you, Jonathan, and good morning, everyone. Reflecting on the 2023 operating theme of the portfolio, it could best be summarized by continued ADR growth, up 5% year-over-year, being countered by weaker-than-expected demand, down 2% year-over-year, translating to RevPAR growth of 2% -- of 2%, along with persistent cost challenges impacting margin performance.
However, cost headwinds began to subside in the second half of the year. Revenue across the portfolio continued to grow, with ADR continuing to be the impetus for RevPAR growth in 2023. Food and beverage growth was also notable and a signal that group and business travel continues to emerge. For the year, revenue increased by $10 million compared to 2022 on a same-store basis.
Demand did not perform as predicted in 2023. Group segment recovery was evident all year. However, business travel growth was slower than anticipated. Leisure demand, although strong, returned to more traditional demand levels by mid-2023 versus the overheated demand displayed coming out of the pandemic period.
For full year 2023, our 69 hotels had an average occupancy of 69%, or 98% of 2022 levels. For Q4, occupancy was 67% or 99% of the same period in 2022. We anticipated ADR to show continued strength in the first half of 2023 and then nominal growth for the remainder of the year, which is how the year unfolded.
ADR continued to be the catalyst for RevPAR growth across AHIP's portfolio finishing at $131 for the year and above full year 2022 levels by 5%. 86% of hotels posted ADR above 2022 levels in 2023. From a Q4 standpoint, ADR was $126 or flat to Q4 2022.
2023 RevPAR finished at $90, up 2% compared to prior year. RevPAR for the quarter was down 1% year-over-year to $84. Portfolio results for the first half for the year were significantly impacted by the weather event in late December of 2022 that caused weather-related damage and disruption at several AHIP hotels. All guestrooms related to the insurance claim were back in service in Q3. For property damage, AHIP expects the total cost of remediation and building repairs to be reimbursed from insurance coverages. Also, for business interruption, AHIP expects to recover the lost income from these properties' insurance policies for the period from late December 2022 until the damaged hotels became fully operational in September 2023.
We referenced 3 distinct segments of our business: extended stay, select service and Embassy Suites hotels. During 2023, the extended stay segment achieved a RevPAR of $92, or 98% of 2022. This segment was most impacted by the weather event, as 3 extended state properties had significant damage and disruption. The select service segment achieved a RevPAR of $84. This represents 102% of 2022 levels, and the Embassies were our strongest performing vertical in 2023 and remain a good indicator of group and business segment recovery, with RevPAR up 10% and NOI up 16% compared to 2022.
The elevated cost profile of hotels of hotel operations continue to impact NOI throughout 2023. For our portfolio of 69 assets, NOI margin finished at 92% of 2022 for the year and 84% for the quarter.
Instability around labor continues to have a significant impact on profitability. During the second half of the year, we felt the impact of insurance expense increases, which were up 100% year-over-year, or about $1.8 million, negatively impacting NOI margin.
At the start of Q4, Hilton Hotels adjusted housekeeping standards, which are now more aligned with their industry peers. Select service and extended stay hotels require housekeeping service every second day. Embassy hotels have returned to a daily housekeeping program.
The operating environment remains challenging. However, we have seen some improvement in key areas such as wage rate growth starting to normalize. It was approximately 5.4% in Q4 versus the prior -- on a year-over-year basis. Inflationary cost impacts are subsiding. Supply chain issues are limited to a few select items, and there is a reduction in the reliance of third-party labor, whose FTEs have been reduced by 50% at the end of 2023 compared to 2022.
The nature of the hotel hourly employee base has changed, with 81% of in-house employees being full-time compared to over 95% pre-pandemic. We foresee continued reliance on part-time employees supporting hotel operations going forward.
In 2024, we will continue to focus on margin performance initiatives with our hotel manager, specifically, improving levels of in-house employments, reducing turnover, improving retention and looking for opportunities to enhance the portfolio's procurement programs to find additional cost savings.
Turning to AHIP's capital program, the 2023 capital plan included approximately $5 million in PIP spend, which supported the completion of 6 renovations that had begun in Q4 of 2022 and $12 million in FF&E capital improvements for a total spend of $17 million, of which 77% was funded through restricted cash.
In November of 2023, we restarted the renovation of a hotel in Connecticut, which we anticipate being substantially completed this quarter. We will continue to analyze our portfolio for opportunities to generate meaningful return on investment through renovating and repositioning hotels while maintaining a competitive advantage in the marketplace.
Initial top line results for the seasonally weaker January show occupancy at 60%, ADR at $123 and RevPAR at $94 or 101% of January 2023 RevPAR levels. And with that update on our hotel operations, I'll now turn the call over to Travis to highlight key financial and capital metrics for the year and the fourth quarter. Travis?
Thank you, Bruce. Hello, everyone. AHIP's portfolio of hotel properties continued to demonstrate strong demand metrics in 2023. On a same-store basis, revenue increased by 4% to $276 million in '23 compared to $226 million in 2022. For the quarter, revenue finished at $65 million, which was flat relative to the prior year.
Normalized diluted funds from operation, or FFO, was $0.36 per unit for the year and $0.03 per unit for the quarter compared to normalized diluted FFO of $0.38 per unit for fiscal year 2022 and $0.07 per unit for Q4 2022.
At December 31, 2023, AHIP had $27.8 million of available liquidity compared to $24 million at the end of the prior year. The available liquidity of $28 million was comprised of an unrestricted cash balance of $17.4 million (sic) [ $17.8 million ] and borrowing availability of $10 million under our revolving credit facility. AHIP has an additional restricted cash balance of $31 million at December 31, 2023.
During Q4, AHIP entered into an amendment of its revolving credit facility and certain term loans, the total facility size under the Sixth Amendment is $198 million. The total appraised value of the 20 hotel properties secured under the facility is $286 million. This results in maximum borrowing availability under the revolving credit facility of $193 million in accordance with this amendment, which is 67.5% of the appraised value of the borrowing base properties. The appraised value of $286 million for these properties is equivalent to $138,000 per key.
AHIP has satisfied the condition to extend the maturity of the credit facility from December 2023 to December of 2024, with no paydown being required as a result of the appraisal values on the borrowing base properties. The new hotel appraisals were obtained in accordance with the terms of the Sixth Amendment. The fixed charge coverage ratio has been reduced to 1.1x until the end of 2024 as part of the same amendment package.
The credit facility availability in 2024 is primarily limited by a revised calculation based on the lesser of an implied debt service coverage ratio and the loan-to-value test. The borrowing availability is subject to a maximum 67.5% loan-to-value based on the new hotel appraisals. The covenants governing distribution have been revised and now are subject to a more restrictive FFO payout ratio threshold calculated on a trailing 12-month basis.
The Sixth Amendment includes an option to extend the maturity of the term loan and credit facility to June 2025, subject to a reduction in the facility size to $148 million from and after December 2024. We are pleased with the execution of this amendment, as it highlights the strong relationship we have with our lenders and continue to support the AHIP story.
Debt to gross book value at December 31, 2023, decreased by 70 basis points to 51.9% compared to the prior year. AHIP is making steady progress on this measure, while debt to EBITDA has increased slightly over the last 12 months.
Regarding debt maturities, we had 2 CMBS loan maturities of totaling $16.3 million in the fourth quarter of 2023. We have upcoming maturities of $22 million in the first half of 2024 and $58 million in the second half of 2024. To address the Q4 2023 maturities, AHIP is in the process of divesting 2 noncore properties. To address the Q2 2024 CMBS maturity, AHIP intends to sell 1 hotel in this loan portfolio by the end of this quarter and refinance the balance of the loan with the remaining 3 hotels. Lastly, to address the Q4 2024 maturities of $58 million, AHIP intends to address these through a combination of asset sales and CMBS refinancings.
AHIP has 71% of its debt at fixed rates after the expiry of the interest rate swaps on November 30, 2023. The notional value of these swaps was $130 million, which expired. As a result of this expiry at the current secured overnight financing rate of 5.3%, the current annual incremental interest expense is approximately $5.2 million. The actual interest expense increase will depend on SOFR rates during the year.
As a result of weather-related damage previously mentioned, AHIP has recorded a total expected insurance proceeds of $14 million, which is comprised of $11 million for property damage and $3 million for the business interruption claim. AHIP has received $11 million of insurance proceeds thus far and expects to receive additional proceeds in the first half of this year.
Lastly, during the fourth quarter of 2023, the company recognized noncash impairment charges of approximately $65 million related to hotel properties. The hotels are primarily located in Maryland, New Jersey, Pennsylvania and Texas. AHIP completed the valuation process based on a mix of external appraisals, purchases and sales agreements, recent market transactions and internal valuations. The impairment is primarily due to revised expectations for the timeframe for properties to return to stabilized income levels.
Higher operating costs as result of inflation and higher property insurance premiums. I will now turn the call back to Jonathan for closing remarks.
Thanks, Travis. 2023 was a challenging year across the industry, but I believe AHIP's diversified portfolio of premium-branded select service hotels with a focused operating model will generate long-term value for unitholders. While we expect continued challenges from general inflation, escalated labor costs, higher property insurance and elevated interest rates, we are in a position to address uncertainty with a resilient portfolio, sufficient liquidity and an executable plan to address all near-term debt obligations in 2024.
The initiatives we announced at the end of 2023 will strengthen our balance sheet to ensure that we are positioned to benefit when the operating and macroeconomic environment improves for the industry. I remain confident in our business model and strategy and believe we are well positioned to outperform in the year ahead.
Lastly, I would like to convey my appreciation to all of our teams at each of our hotel properties for their continued dedication to providing a great guest experience. So with that overview of our full year and fourth quarter results, we'll now open the call to questions from analysts. Operator?
Thank you. [Operator Instructions] The first question comes from Dean Wilkinson with CIBC.
Travis, a couple of questions for you, I think. Just on the credit facility extension, I just want to make sure I understand that. The amendments says you can renew it or extend it to June 2025, subject to reducing the maximum facility size to the $148 million. Does that imply that you have to pay off $35 million on that facility before you make that extension? Or just what are the mechanics there?
Yes, that's exactly right, Dean. So, that will be achieved through a combination of the asset sales that Jonathan has mentioned. And we can also do a like-for-like exchange, which we're evaluating right now. And what I mean by that is, if we have a borrowing base property, let's say it's contributing $10 million to the credit facility borrowing base, we could refinance that hotel in the CMBS market for a similar amount. It won't be dollar per dollar, but it would be very similar, and that would achieve the requirement under the credit facility test as well.
And I guess that kind of runs into the second part of that question. Are any of those assets that you're looking to sell part of that borrowing base? Or are those separate and apart?
The properties we're looking to sell are not on the credit facility. And in those cases, there's an asset sweep that's another condition of the credit facility. So 50% of the net proceeds from noncredit facility hotels would be implied as a reduction to -- I should say, not a reduction, I should say, a payment on the credit facility.
So okay, it will naturally bring it down outside of the normal more that you put up on those things.
That's right.
Second question, just -- and maybe it's in the full financials when they come out. On the gross book value calculation, the $360 million -- let's call it $366 million that you add back, which is depreciation and impairment charges, what's the breakdown of that number between depreciation and impairment?
It's a good question. Dean, I'll get back to you after the call and that I don't have the breakdown of that in front of me.
And the last one is just on the managed foreclosure process. Is that something that you entered into? Or was that just -- was that served on you? Or just sort of how did that come about? And are there any other assets that might be sitting in that similar situation?
Dean, it's Jonathan. Yes, it was initiated by us. We had a maturity in December and that was initiated by us. And no other assets to speak of with respect to managed foreclosures.
The next question comes from Tom Callaghan with RBC Capital Markets.
Maybe just to follow up on some of Dean's line of question there. Travis, can you just give a bit of color or flavor on what you're seeing in the CMBS market right now and kind of where spreads sit?
Yes. Yes, I can. We're currently in the market right now on the Virginia financing. So we're selling one. So we've got a 3 hotel package in the market right now. We're actually pretty close to closing on that. I expect that shortly. And the spread is 270 basis points over treasury. So that's the current market rate we're seeing on that one.
And then just in terms of NOI margins, like, obviously, labor is a well-known headwind here, and you touched upon it a bit. But just curious, in terms of brand standards, it seems like that also impacted Q4. What's the outlook there into 2024? Are you expecting kind of increased standards elsewhere? Or should that stay stable into this year?
Tom, it's Bruce. No, we're expecting to be pretty stable this year. Hilton was really the last brand family to make this change. So we haven't been given any indication of any changes -- any additional changes coming across any of the brand families in 2024.
And maybe last one. Jonathan, in the press release, there was some commentary around, obviously, monitoring conditions and operating performance but also considering further strategic opportunities to deliver value over the longer term. Just curious if you can provide a little color there on what types of opportunities would be alluded to in that comment.
Yes. I think that while we're entering into a disposition program here on some of these assets, strategically, this is going to serve to high-grade the portfolio. And I think it's going to provide a -- it's going to bolster our cash balances and provide us with some optionality to grow the portfolio.
And that would include repositioning existing hotels, but also entering into acquisitions. And so that might be some good timing here with respect to where the markets are going on certain of our target assets, and we're excited about that. I think there's some growth opportunities out there.
[Operator Instructions] I show no further questions at this time. I would now like to turn the call back to Jonathan for closing remarks.
Great. Well, thanks again, everyone, and thanks for joining us on our call today. I look forward to speaking with you in May when we report our first quarter 2024 results. Have a great day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.