American Hotel Income Properties REIT LP
TSX:HOT.UN
American Hotel Income Properties REIT LP
TSX:HOT.UN
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Good afternoon, and welcome to the American Hotel Income Properties REIT LP Third 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, operator. Good afternoon, everyone, and thanks for joining us for our third quarter 2018 results conference call. Discussing AHIP's performance today are John 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 ratios are considered forward-looking and involve risks and uncertainties. The risks and uncertainties that could cause our actual financial and operating results to differ significantly from our forward-looking statements are detailed in our MD&A for the 3 and 9 months ended September 30, 2018, and our other Canadian securities filings available on SEDAR and our website at ahipreit.com.AHIP does not undertake to update or revise any forward-looking statements to reflect new events or circumstances, except as required by law. Listeners are urged to review the full discussion of risk factors on AHIP's annual information form dated March 27, 2018, which has been filed on SEDAR at sedar.com.Our third quarter results were made available earlier this afternoon after market close. We encourage you to review our earnings release, MD&A and financial statements, which are available on our website as well as SEDAR.On this call, we will discuss certain non-IFRS financial measures, including FFO and AFFO. For the identification of these non-IFRS financial measures, the most directly comparable IFRS financial measure and a reconciliation between the two, please see our MD&A.All figures discussed on today's call are in U.S. dollars unless otherwise indicated. I would like to remind everyone that this call is being recorded today, November 7, 2018. A replay of this call will be available on our website.John will begin today's call with some opening remarks, and then Ian will discuss our hotel operations, and Azim will provide a summary of our financial results.I'll now turn the call over to John O'Neill, Chief Executive Officer.
Great. Thank you, Jamie, and thank you, everyone, for joining us. I am very pleased to have been appointed AHIP's new CEO. As a cofounder and large unitholder of AHIP, I spent the last 30 years managing, developing and owning hotels. I'm truly passionate about this business and look forward to leading this company with its fine group of hotel assets. Since joining AHIP at the beginning of October, I've spent my time reviewing our portfolio, our strategy and our forecasts. And I feel confident we are on the right path. For the next year, we will continue to be focused on deploying our reserve capital towards hotel upgrades, which leads to improved hotel performance, evaluating each of our hotels to ensure we have the right hotels for long-term cash flow growth and driving operating efficiencies through our new external Hotel Manager, Aimbridge Hospitality. Our third quarter results benefited from solid performance in our same-store assets but were negatively impacted by significant renovations we undertook at several of our newest and largest hotels. We were very pleased to see continued improvement in the Economy Lodging portfolio, which benefited from increased rail volumes across the United States and, therefore, higher occupancy from our rail crew contract business. This portfolio also benefited from ongoing strength in commercial nonrail business, proving the rebranding of those hotels under Wyndham brands, such as Travelodge, Days Inn and Super 8 has had a sustained positive impact. We were also pleased to see the same property net operating income increased 1.2% during the quarter, with our same-property NOI margin growing 80 basis points to 35.3%, up from 34.5% in the same period last year.This was achieved despite the top line compression we faced as a result of the challenging comparative with Q3 last year when extended-stay bookings related to last summer's Hurricane Irma improved our results in Florida, where our 13 hotels comprised 18% of our total room count. The performance of our Premium Branded portfolio was affected by 3 of our recently acquired and largest hotels that were negatively impacted by significant renovations during the quarter. Upgrading these properties will better position them over the long term. In total, at 3 Embassy suites located in Dallas, Cincinnati and Columbus, we have spent or allocated $10.4 million towards completely rebuilding the atriums and lobbies, expanding and rebuilding the bars and restaurants, updating the breakfast rooms and renovating guest rooms. We are extremely pleased with the transformation of these 3 properties and expect these hotels to have strong results in 2019. These hotels face guestroom displacement while rooms were being updated, reducing the overall number of rooms available for booking. Food and beverage revenues were also impacted during renovations. Collectively, the renovations negatively impacted revenue by approximately $2.2 million or about 2.5% of total revenues during the quarter, which clearly had a temporary effect on the overall performance in the third quarter. During the third quarter, total revenue declined 2.5% to $88 million. Adjusting for the $2.2 million impact of hotel renovations this quarter and approximately $700,000 of nonrecurring revenue in Florida from last summer's Hurricane Irma, revenue would have grown $600,000 from the same quarter last year. As reported, FFO for the quarter was $0.21 per unit as compared to 25% -- $0.25 in Q3 last year. And AFFO was $0.19 per unit, down from $0.22 last year. We expect the next several quarters will continue to face intermittent impacts from upcoming hotel renovations. But we strongly believe these investments are the right strategy to pursue as we want our assets to continue outperforming our competitive set by providing our guests with the best hotel experience.Just as important, putting this prefunded capital to work by investing in our properties through hotel upgrades and renovations means this cash will begin generating returns rather than sitting as restricted cash on our balance sheet and creating dilution to our AFFO per unit. We also continue to work closely with our new Hotel Manager, Aimbridge, to drive higher efficiencies and productivity at our hotels. With that overview of our quarter, I'll now turn the call over to Ian to discuss our operational metrics and hotel renovation plans in more detail. Ian?
Thank you, John, and good afternoon, everyone. As John discussed, renovation activity did affect our quarter and these projects are highly strategic investments into some of our largest hotels. While it may take a few months for the full benefit of these hotel upgrades to materialize, we and our guests are exceptionally pleased with how beautiful the atrium and room renovations have turned out and expect our market share in these regions will reflect this positive reaction in the future. We are also very pleased with the expansion of the atrium bar and restaurant at each of these 3 large hotels which we expect will also drive additional food and beverage revenue and income at these properties. Total portfolio RevPAR declined 1.6% from the third quarter last year, primarily due to a 1.9% decline in ADR. Reflecting the impact of lower room rates at Premium Branded Hotels under renovation. Excluding these hotels under renovation, our total portfolio RevPAR would have been flat compared to Q3 last year. Premium Branded hotel RevPAR declined 3.5% with the 3 Embassy suite properties under renovation experiencing RevPAR declines between 11.2% and 21.1%. Excluding these 3 hotels, RevPAR for Premium Branded Hotels declined 1.7%, due mostly to the difficult comparative results at our Florida-based hotels as a result of the Hurricane Irma last year. North Carolina and New Jersey, however, were our highest RevPAR growth regions during the quarter with RevPAR increasing by 6.9% and 5.2%, respectively. North Carolina was positively impacted by Hurricane Florence as we saw crews coming in before the storm to prepare and then cleanup crews afterward. On a RevPAR index basis, which measures the performance of hotels relative to their competitive set in each respective market, our Premium Branded Hotels continued to command a leading position, averaging 116% during the third quarter. Meaning, we're capturing much more than our baseline 100% benchmark of fair share in each market. This reflects the strength of our brands, the strength of our people and the improving quality of our assets. RevPAR for Economy Lodging hotels increased 6.3% during the quarter, driven mostly by higher occupancy as both rail crew and transient guest space increased relative to the third quarter last year. The increased utilization of rail crew contract room guarantees corresponded with pressure on ADR as total contract revenue was attributed to more guest rooms being used. Similarly, high rail crew utilization left fewer rooms available for transient guests to book during the quarter. Even with limited room inventory for transient guests, we did experience a 1.8% increase in commercial or nonrail revenue during the quarter, though the positive impacts of rebranding this portfolio to Wyndham brands continues to generate improved hotel performance.On a same-property basis, total portfolio RevPAR decreased 1.1% during the quarter, which was 90 basis points better than their competitive set where RevPAR declined by 2%. This indicates we grew or maintained our market share in the regions where we operate.Looking ahead to our fourth quarter, the extensive renovations currently underway at the Embassy Suites Columbus hotel have caused some displacement and room rate pressures at that property during October. But I was there last week, and we're happy to report these renovations are now largely complete with only some remaining furniture and finishings in the atrium to be added. In fact, we welcomed a large group at this hotel on Monday, which utilized the renovated atrium space. There are also 4 smaller hotels scheduled to begin renovations during the fourth quarter, all expected to be completed during the first quarter of 2019. These include the 100-room Staybridge Suites Tampa; the 131-room Residence Inn White Marsh, which is located just outside Baltimore; the 89-room Fairfield Inn & Suites in Jacksonville, Florida; and the 109-room Residence Inn in Chattanooga, Tennessee. In addition, 3 Homewood Suites properties are also scheduled to begin the design and planning phase for their upcoming renovations. While some capital outlay will occur for this process during the fourth quarter, we do not expect any guest impacts will occur at these hotels when construction gets away during the first quarter of 2019.It's also important to note that our Florida hotels continue to benefit from the impacts of Hurricane Irma during the fourth quarter last year, which will create a challenging comparison for that region again in the fourth quarter this year. I'll now turn the call to Azim to discuss financial and capital metrics. Azim?
Thanks, Ian. Good afternoon, everyone. John has already touched on the impact of renovations to our revenue line this quarter which had a similar impact on NOI and NOI margins. For this quarter, total NOI excluding IFRIC 21 property tax adjustments decreased 4.3% to $30.8 million, with the decline entirely attributable to the 7.7% NOI decline in our Premium Branded portfolio, which included the 3 Embassy Suites under renovation and the difficult Florida comparables.Partially offsetting this was a 9.7% increase in NOI in our Economy Lodging portfolio, which benefited from both higher occupancy and lower property taxes, and insurance premiums relative to the third quarter last year.On a same-property basis, total portfolio NOI increased 1.2% to $17.7 million as a result of continued efforts to contain operating costs and lower property taxes and insurance premiums. Same-property NOI margin improved 80 basis points to 35.3% from 34.5% in the third quarter last year. Net income for the third quarter was $4.2 million compared to $8.8 million in the same period last year. The decline to net income was due to lower hotel net operating income and then nonrecurring $500,000 foreign exchange gain that was realized in the third quarter of 2017.Turning to capital metrics. As of September 30, 2018, AHIP had cash balances of $14 million and approximately $31 million available through revolving credit facilities. We also have a restricted cash balance of approximately $45 million, which includes approximately $25 million earmarked for upcoming property improvement plans. At quarter end, we had a weighted average remaining term on our debt of 6.7 years and a weighted average fixed interest rate of 4.64%. In today's rising rate environment, it's important to clarify that approximately 97% of AHIP's term loans have fixed interest rates, meaning, we continue to be well shielded from near-term rate increases. We continue 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% yield, one of the highest in our sector. Our AFFO payout ratio for the third quarter was 84.6%. Due to the seasonality inherent in the hotel business, this can cause fluctuations in the company's performance and payout ratio throughout the year.The renovation activity we experienced at hotels during the third quarter took longer than we originally anticipated due to a combination of permitting delays and the tight U.S. labor market. As a result, there were challenges in scheduling and sequencing skilled labor to complete the construction work. This longer renovation timeline did result in more displacement and more discounted room rates during the third quarter than we originally expected. Taking this into account and adjusting our renovation timeline expectations for the fourth quarter, we now expect our full year AFFO payout ratio for 2018 to be close to 100%. We believe the payout ratio will improve in 2019 due to positive contributions from the company's recently renovated properties. Looking forward, some of the productivity improvements and efficiencies we've identified through our new Hotel Manager should also begin to materialize during 2019, as we continue to plug-in to the various products and systems Aimbridge has to offer. With that financial discussion, I'll turn the call back to John for some closing remarks. John?
Thank you, Azim. The 3 Embassy Suite properties that were under renovation in the third quarter were some of our largest hotels and together represent 11% of our total Premium Branded guestrooms. That is a meaningful number of rooms. Yes, our upcoming quarters will see some negative effects of other hotel renovations underway or scheduled. But we believe the most significant quarterly impact is now behind us. As a reminder, once we complete this cycle of scheduled property improvements, 85% of our Premium Branded Hotels will have completed a major renovation within the last 5 years. Our business remains strong as was demonstrated by another quarter of positive same-property NOI growth and the nearly 10% growth in NOI in our Economy Lodging portfolio. As I mentioned at the start of today's call, our focus for the next year remains on actively managing our portfolio to deliver sustainable, long-term growth with a focus on organic initiatives. This, combined with the identified operating efficiencies we expect to capture in 2019 through our third-party Hotel Manager, is how we intend to deliver results for our unitholders over the next several quarters.And with that, we will open the call to questions from analysts. Operator?
[Operator Instructions] Your first question comes from the line of Mark Rothschild from Canaccord.
John, so you're obviously very familiar with AHIP and with the asset, so it doesn't seem like there's anything new to you in that regard. But now that you've assumed that you are the CEO, could you maybe speak more broadly about any changes in the strategy you might think you might be implementing? Or is there anything that you will be doing differently? Or should we consider it more continue on the theme of repositioning assets and growing in the U.S.?
I think the strategy the company has articulated and we've articulated over the last little while is basically going to remain unchanged. The real focus on improving results, focus on completing our renovations, getting these displacement issues essentially behind us as quick as possible and getting some stabilized assets and focusing on bottom line profitability. We want to and will get our payout ratio down in the future, improve AFFO. And as I said, work with our manager, improve results, work on our margins. And that's our strategy -- our continued strategy. And that's basically it. Focus on our core results, focus on profitability and focus on improving the assets, so they compete -- can compete more effectively in the marketplace. So no major change.
Okay, understood. Of the $2.2 million that was missing or negatively impacted this quarter, it sounds like you're expecting all of that to go back over the course of the remainder of the year. And while there are some additional property still to be renovated, that should all be completed -- if I understood correctly, all be completed by the end of this year. Should I assume that 2019 will be relatively clean then with no properties being repositioned. So all of that $2.2 million should ideally be back and, in fact, maybe grow with the completion of the other repositioned properties?
Mark, it's Ian. Keen observation. However, we still have more to work on in '19 in terms of there's still assets that need to go through PIPs. And we're still working on our '19 budgets now. So we can't give you any sort of guidance on what that's going to look like. If you looked at our MD&A, we do have a schedule in there and I did list off the assets that are going into Q1, and there still will be some more into the next year. But as John said and as Azim said, our focus is on maintaining a lower payout ratio than where we are today and that will really impact which properties go into renovation and which don't.
Okay, and then maybe just lastly. Labor cost has clearly been an issue for some. Are you seeing that increasingly as something that you're going to have to deal with? And to what extent will this be a headwind going into 2019?
Yes, you're absolutely right. I just read a document. There's 900,000 vacant positions in the hospitality business in the U.S. They can't find enough people. So if you have people, you pay them well and you treat them well. And that is showing up in our operating costs. And the good thing about having a large operator like Aimbridge, they have a larger pool, they have different programs, they're able to attract people that want to work for a larger company. So that's a good thing, and we are expecting now that there will be continued wage pressures throughout the U.S. And it's part of our planning, and it's part of this business. And as we always say, we're a people business in the real estate world, and so we need to pay, treat our people well.
Your next question comes from the line of Brad Sturges from Industrial Alliance.
Just to continue on with the renovation discussion here. I guess, it's fair to say, given the size of these hotels and the extensive nature of the work being done, that's part of the reasons for the delay. And then looking at what you've got scheduled for Q4 into 2019, are they -- those renovations essentially a little bit smaller renovations? And would that mean a little bit less potential displacement?
Yes, you're absolutely right, Brad. They're smaller hotels, they're not as large food and beverage, they don't have the large group business. And we are trying to schedule the ones that we are aware of now around slower periods and with less displacement. But yes, the hotels that we have outside of those Embassy Suites are smaller and are less disruptive.
And if you could give a best guess, what type of displacement could we see into Q4 and then maybe early 2019 right now?
Probably similar to what we saw in Q3 just in terms of getting through Q4 and into Q1. But again, we're still working on our '19. So we don't want to give any sort of misinformation on what we're expecting.
I guess, part of the strategy for 2019, as John alluded to, was more active asset management and organic initiatives. I guess beyond the regular scheduled PIP work that needs to be. What does that really entail? And how do you essentially try to work the portfolio a little bit more to get better results?
It's John, Brad. One of the things that we haven't mentioned yet is reviewing all the hotels in our portfolio. And there's always going to be a few that aren't in the right place at the right time. And we're looking to really recycle the capital a little bit and look at some selective sales of properties that can then be replaced with hotels that are more appropriate for our strategy and can -- consistent on long-term cash flow growth. So on a small basis, we're looking at some portfolio pruning, as they say, and looking at selling some assets really to improve our cash position. And that's one of the organic measures. Two, we're focusing on revenue management and active revenue management. Our hotels perform very well against their competitive set in virtually all of our markets, and we want to maintain and increase that market penetration in the RevPAR index, and that's a real focus for us and with our manager in 2019. And then continue the cost-saving initiatives. It is a rising labor cost environment, a rising cost environment. And Aimbridge can and will deliver us some good cost savings or at least in the alternative no cost increases on a number of issues, implied savings due to their strength, due to their strength in procurement and bulk purchasing. And so those are the organic moves that we -- that we'll continue to focus on.
And I guess, with that cost savings last quarter you talked about a couple of million dollars of potential savings over time. Now that you've had a little bit more time for analysis, is that still a run rate you're looking at? Or is there more to do to kind of offset some of the inflation pressures you're seeing?
Brad, this is Azim. So there's -- I guess, I'd look at the cost savings in really 2 buckets. There's the cost savings that we've locked in and we're expecting to realize. For example, the insurance savings, certainly on the supplies and procurement side. There's other savings which looks like we'll be able to mitigate any cost increases by being part of a larger buying group. So that's how we're looking at some of those cost-saving initiatives in terms of just dollars saved. If we weren't -- if we -- being part of Aimbridge versus not being part of Aimbridge.
Your next question comes from the line of Colin Healey from Haywood Securities.
You kind of talked about the tight labor market in the context of your operations. But in the MD&A, you kind of talked about it in the context of renovation activity and delays there. So I wonder if you could -- do you expect to see the same tight labor market conditions affecting the renovation timelines going forward? And I guess, also if you could clarify just the planned renovation spend in 2019, that will be great. And maybe also just talk about, in terms of renovation, contracting, what kind of recourse you have with contractors, if they're delayed due to their inability to procure labor?
Colin, it's Ian. The labor issues are rampant across the country. I was just in Columbus, Ohio last week talking to the super there. And in order to move a switch from 1 wall to another, they contacted over 30 HVAC vendors and only 1 responded. So it's kind of like Alberta was in the mid-'20s, very, very tight. And the contractors that we're working on the future deals, they're smaller deals. So they won't have the same level of expertise required, won't be the same level of construction that actually is taking place. But we are attuned to it, and we are considering contingencies and different style of contracts in our future contracts. And as we've said a couple of times already, we're still in that planning phase. So to put out a number on what we might spend next year, it's a little premature, but it will probably be less than what we spent this year.
Okay, great. That's helpful. Maybe if you could just talk a little bit about the benefits and maybe if you could quantify kind of a target for the efficiency here you think you can get from the new independent hotel operator and kind of what the primary areas of focus are or if they've changed.
Certainly from -- this is Azim. Certainly from our perspective, from a financial reporting perspective, some of the efficiencies are clearly tied to financial reporting, just having a more robust accounting and reporting platform as well as from a forecasting perspective. Those are really some of the key initiatives that we're focused on from certainly a financial reporting perspective.
So, I guess, you can't put that in terms of a financial target like 100 basis points improvement in a financial metric at this time.
Yes, that's a bit difficult to do. Certainly we'll have more visibility in terms of 30, 60, 90-day window in terms of how the hotels are -- or what the booking windows look like. But from a tangible number in terms of margin improvement, that's a bit more difficult.
[Operator Instructions] Your next question comes from the line of Matt Logan from RBC Capital Markets.
When we take a step back and think about the business, not just say over the next 12 months, but say 24 months or potentially beyond. How should we think about the stabilized earnings power of the business once we get through some of the near-term renovations and push through some of the operating efficiencies?
Well, clearly, we believe in the long-term sustainable cash flow. We're going through a time now of renovations and some business displacement that is likely to see our payout ratio close to 100% this year, and we're certainly believing that it will be improved on that next year. And that by 2020, as we probably are, as I said earlier, in a position where 85% of our Premium Branded properties have gone through the renovation cycle. We believe that even our results will be stronger yet again, once we're through that renovation cycle. And also a full year with our Hotel Manager and the savings and the efficiencies that, that's going to see in 2019. So looking ahead in 2020, we have a diversified portfolio in over 30 states, stable results. The industry is strong, it's in good shape. With overall it's an industry with strong and growing RevPAR. We also have, we believe, a strong balance sheet with good long-term locked-in levels of debt at low attractive levels. So you combine all of that with a very positive long-term outlook on the strengths of this business. I've probably touched on a few of the bullet points there in terms of how we believe. You add on to that the world's strongest hotel brands in Marriott and Hilton and IHG and Wyndham. This portfolio has gone through a lot of strengthening and changes all for the good in the recent years, and we're looking forward to sustained growth. And that shouldn't be too long from now. Probably another year of the kind of improvements that we're making right now, and that's our strategy.
So would it be fair to maybe look back at say 2016 as a kind of normalized year for earnings power at about $0.80 of AFFO kind of medium-term?
Matt, this is Azim. So that's -- it's a great question. I guess the way we look at it is once we get the noise out of the way, we should see our AFFO improving, certainly to levels that have been achieved before. But certainly, with the target of getting our payout ratio down.
And just on the topic of the payout ratio, would you say management and the board is comfortable with the capital structure and current dividend payout?
Certainly, from our perspective, the 100% payout ratio, is a very temporary position and due primarily to the renovations. And as we complete those renovations, we should see income improving and that payout ratio coming down naturally.
Fair enough. And just on some of the improvements with financial reporting for the benefits of the new Hotel Manager, has the REIT considered giving formalized guidance over the next couple of years?
It's an interesting question. It's something that we've tossed around. As you know, we started giving guidance for AFFO payout ratio this year, but it's certainly something that we're considering, and we'll evaluate over the coming quarters.
Fair enough. Maybe just changing gears quickly. John, after 2 months on the job, could you give us maybe a little bit of contrast on the difference of being inside the REIT versus working for the Hotel Manager? And just maybe a few things that AHIP does well and a few things that you'd like to improve on?
Geez. That's a lot of questions there. Matt, it's the same assets that I'm very familiar with, and have been since the 6 years ago that we founded and started AHIP. Clearly, a focus not on the day-to-day operations, but on the focus of asset management, and a clear focus on maintaining and improving distributions to unitholders. And the deployment, the strategic deployment of capital as to which hotels and when. And that's the biggest difference really between day-to-day operations all with the same view of driving the best bottom line. But clearly, that's the focus over here at AHIP. I believe we do a lot of things well. I think we've assembled an amazing portfolio with great upside, with stable income on some great brands. And some good markets that are strong markets, consistent markets, not New York, Chicago, Los Angeles low cap rate, expensive markets, but solid markets with great sources of business. So our objective as we said a few times is to maintain those cash flows and improve on them. And work with the brands. They can deliver so much strength to our profits and our revenues and our bottom line. And we do that well here at AHIP, and we have a real focus on working with our brands, the Marriotts and the Hiltons of the world and working with Aimbridge on the portfolio. Select service is a great level of hotel to be operating. While it has food and beverage, it's limited in food and beverage and rooms division drives the most profitability. So I also think that AHIP has done an excellent job in selecting and assembling a portfolio in that market and focusing on that market. So those are a few of the things that I've observed in my first couple of months, but no surprise as we live through this growth and operating hotels on a day-to-day basis. So of course there's always a few changes like quarterly earnings and calls such as this, which are an excellent way for -- to communicate with all the unitholders and analysts and get feedback and to communicate what we're doing and what our strategy is for next year and beyond.
Your next question comes from the line of Brad Sturges from Industrial Alliance.
Just following up on the renovation program again. Just want to understand how the process works from your perspective? Are you effectively running the renovations as a project manager or would that be a third party?
Brad, it's Ian. Part of our hotel management contract was Aimbridge, includes them running that project management position. So we asset manage that and control the capital, but all of the contracting, et cetera, is done at the Hotel Manager, project manager level. And the team that they have there is very seasoned, they're very good at construction. We provide regular monitoring of the capital draws, and we go through very extensive oversights of all of the payables, et cetera. But I can tell you that the team and I have been in construction most of my career. And the team that they've got there is excellent. And even with the pressures that we have on labor and on PIPs, they have a great understanding of how to negotiate with the brands and that's, as John said, one of our strength is our brand relations. And I've spent a lot of time working with the brand in conjunction with Aimbridge on the PIPs and the scope of the PIPs and in the pricing of the PIPs and then with the operations team on when is the best time to actually pull the trigger and displace income. So it's a big part of the hotel business, and it's a big part of what REITs do. We don't operate the hotels, but we certainly operate our capital.
Great. And what's -- what would be the timeline now that let's say you finish a renovation for that asset to restabilize and walk us through maybe the expectations from a return perspective on this additional capital being spent on the renovation program?
Sure. So as an example, DFW, we finished that in Q2. And September, it took some time for it to get retraction, but it's running very high in its market. And just the other night, I noticed there was 100% occupancy at about a $180 rate, both we haven't seen in quite a while. So it's definitely found its tracking. And those are big boxes with groups, and groups like that book out 1 year, 6 months in advance. So the ramp up of one of those hotels can be based on the ability of management to forecast when they have the hotel available. Like in Columbus last week, they were hard at it in the construction on Thursday, when I was there, and Sunday night, a group 170 booked, walked in, and they all utilized the facility on Monday. So it can happen actually pretty quick if there's good coordination. Now I'm coughing. I can't remember what the second part of your question was.
Just in terms of return expectations. Once -- on the capital being spent on this program, just walk through sort of your expectations there.
Well, it happens at the underwriting when we buy the assets. And we at that time negotiate with the brands and what the change of ownership PIP will be and when it might happen and the amount of time that they give us to do it. And we estimate that at the same time and then we look at where that property sits in the market and whether that's going to improve it or actually just maintain it because there's new supply coming in. So in all instance, we expect to at least get the cost of our capital coming back to us in that -- in the PIP. But that's a very short-term kind of metric. It truly is high grading the quality of our AFFO and continuing to be competitive. And you can see right now with our comp set, we're 116% in our comp sets. We are outperforming our comp set. And that's due to the manager, number one, but also the amount of time and effort we take on asset management in terms of making sure we're putting money where it should be going. And so, I guess that's -- or truly, if you want to just do an ROI, it's our cost of capital when we raise the capital. But truly it's the overall value of that asset in terms of where it sits in the market and our valuation of the company.
Your next question comes from the line of Jonathan Kelcher from TD Securities.
How many hotel rooms -- hotels or hotel rooms do you have to go through to get -- remaining to get to the 85% of hotels renovated that you referenced earlier?
Boy, that's -- through the end of 2019 to get to the 85% is probably another 10 to 12 Premium Branded Hotels. Some are small, and there is essentially 2 more big boxes in Tempe, Arizona and Cleveland, Ohio. So the total on those might be about 1,000 rooms, 900 rooms. But Jonathan, I think we can zero that in a little more specifically offline for you. But that's the approximate number to get to that 85%.
Okay. And that's -- you expect to have those done by the end of 2019?
Yes. And as we've said a couple of times, we're still in our budgeting process. And there's some that we might push into '20 that are in '19 now, and there's some that the brands say well, no, we need you to do it now, so that we had it scheduled for '20. So it's all in negotiations. Sorry to be vague on this, but it is truly where we are in our budget process for '19 and '20. But I guess, suffice it to say, every asset that we buy will eventually go through a PIP at some point, whether it's immediately upon acquisition or within its cycle. So this will be -- especially since this portfolio has changed so much in the last 3 years, the nature of the business is, we will always, at some point, be going through some sort of renovation on some sort of hotel.
Right, fair enough. And then so this year, you're doing, what, about 750 or 800 rooms through your -- the rental process?
It's more than that. Just with -- yes, it's probably 1,000 rooms that we PIP this year.
Okay. So if we're looking over a couple year period, then you've got displacement of about 1,000 rooms over the course of 2018, about 1,000 rooms over the course of 2019. And then you should start to see the real benefit in 2020. Is that sort of the way to look at it?
Yes, that's fair. And if you want, we'll go offline with you later, we can kind of nail that down because it's not really fair to look at the displacement from say the DFW and the Cincinnati hotels which have a significant amount of food and beverage. And as [ Ian ] just showed you, we were about 1,700 rooms this year. But next year, we won't have as many of the larger food and beverage outlets going through renovations and smaller hotels so.
And for example, if we do go on a hotel by hotel basis, one of our larger hotels, the Embassy Suites in Tempe, we will schedule that renovation during its very low season in the summer where business in the general Phoenix area is not as high. So even though it's a big hotel, over 200 rooms, can't do much less displacement than, say, another hotel with 200 rooms which is more in a stable market as opposed to a seasonal market like Phoenix, Tempe. So again, we're happy to go through those with you on a more granular basis. But overall, we would have less -- we will have less rooms under renovation and displacement in 2019. But we're still finalizing our 2019 plans.
Jonathan, this is Azim. Just one other comment on that. Some of the hotels that are part of that 85%, those rentals have already been done. They were done in '15, '16 and '17. So we're just saying that by the time 2020 rolls around, 85% of our portfolio will have been fully renovated.
Great, I get that. Okay, so you should get some year-over-year RevPAR growth then, right? If you're 1,700 rooms this year, 1,000 next year, all else equal and no recession or anything like that, you should have some RevPAR growth?
That's right. That's the theory. And in some cases, the renovation is defensive against the market because we have new supply as you heard us talk about previously. So it's a combination of both. But that is the -- we're looking at our numbers for next year, and yes, some of these hotels have double-digit RevPAR growth because of where they're from in '18.
There are no further questions at this time. I turn the call back over to the presenters.
Great, thank you, operator, and thank you -- and thank all of you for being on today's call and for your questions and participation. Our team at American Hotel Income Properties will continue to work hard to deliver strong results. We look forward to speaking with you on our next call at year-end. And thank you for your time, and thank you for your participation.
That concludes today's conference call. You may now disconnect.