American Hotel's (AHOTF) CEO Rob O'Neill on Q2 2016 Results - Earnings Call Transcript

| About: American Hotel (AHOTF)

American Hotel Income Properties REIT LP (OTC:AHOTF) Q2 2016 Earnings Conference Call August 10, 2016 4:00 PM ET

Executives

Rob O'Neill - CEO

Azim Lalani - CFO

Ian McAuley - EVP Asset Management

Analysts

Jonathan Kelcher - TD Securities

Mark Rothschild - Canaccord

Brad Sturges - Industrial Alliance

Trevor Johnson - National Bank

Yash Sankpal - CIBC

Operator

Good afternoon, ladies and gentlemen, welcome to the American Hotel Income Properties REIT LP Second Quarter 2016 Financial Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation we'll conduct the question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

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

AHIP does not undertake to update or revise any forward-looking statements to reflect new events or circumstances, except as required by law. Listeners are urged to review the full discussion of Risk Factors in AHIP's annual information form, dated March 17, 2016, which has been filed on SEDAR at www.sedar.com.

I would like to remind everyone that this call is being recorded today, Wednesday, August 10, 2016. A replay of this call will be available on AHIP's Web site at www.ahipreit.com.

I would now like to turn the call over to Rob O'Neill, CEO of AHIP. Please go ahead, Mr. O’Neill.

Rob O'Neill

Thank you, operator, and good afternoon to everybody. And welcome to our discussion of American Hotel Properties REIT second quarter 2016 results. As the operator said I’m Rob O'Neill, I’m CEO of AHIP and with me this afternoon is Azim Lalani, our CFO and Ian McAuley, our EVP of Asset Management. We’ll keep our opening remarks brief trusting you had a chance to review our management discussion and analysis and the related financial statements for three and six months ended June 30th, which were released yesterday after the market close.

And for more information on our filings on SEDAR or on our Web site at www.ahipreit.com. Would you also please note that all the amounts I talked about our expressed in U.S. dollars unless otherwise indicated. The second quarter of 2016 was strong as we generated some of the best second quarter numbers in our short history. Azim will provide the detailed numbers later on during our call. Our current geographically diversified portfolio is located in 27 U.S. States and is made up of 80 properties totaling 7,095 guestrooms with 45 hotels and 3,765 guestrooms in the Rail portfolio and 35 hotels and 3,330 guestrooms in the branded.

Our branded portfolio continued to perform well during the second quarter. We saw very strong performance from our branded hotels with same property RevPAR growth of 4.4% which exceeded the RevPAR growth of the U.S. hotel industry by 90 basis points. Our portfolio was led by the Virginia region, which was up by 16.1% followed by North Carolina which was up by 12.4% and the Florida region which generated RevPAR growth of 7.8%.

This was offset by weaker performance in our Pittsburgh and Oklahoma hotels caused by the continued volatility in the oil and gas business and the residual impacts of new supply absorption. We believe the U.S. economy will continue growing in the near-term with some of the positives including low unemployment rates, rising home values and consumer confidence paired with study increases in leisure travel. The growth will be muted by the global economic volatility struggling commodities including coal and oil along with the strong U.S. dollar, which could weigh down GDP growth.

However, on balance given the strong correlation between the U.S. economy and the U.S. lodging sector. We continue to expect the hotel industry to grow over the next 24 months. The U.S. hotel industry continued to grow as RevPAR has increased for the 76th consecutive month in the current cycle. STR reported positive operating metrics for the second quarter of 2016 with occupancy up slightly by 0.6%, ADR was up by 2.9% and our resulting RevPAR increased by 3.5%.

For the year 2016, STR expects RevPAR to grow by 4.4% and further 3.8% in 2017 driven primarily by growth in the average daily rate. We expect the current U.S. hotel cycle currently in sixth year to last longer than pervious cycles led by rising room demand and modest new room supply growth. On the other hand, the U.S. Rail industry is facing headwinds with lower coal and commodity shipments, a strong U.S. dollar which results in tepid growth in exports resulting in lower growth in intermodal carloads. This reflects the cyclical nature of the industry. Lower Rail volumes coupled with reduced non-rail hotel traffic has reduced occupancy at AHIP's rail hotels. We're fortunate to be able to lock in the long term contracts however with our rail partners to ride out the various cycles of the business. The benefit of these contracts is that during the down cycle as we're currently experiencing is the stability to revenues and cash flows. We continue to experience support from these contracts and expect this to continue for the balance of 2016. The hotel manager has also been actively pursuing commercial travelers to absorb some of these excess rooms available at the Oak Tree Inns. In fact on a year-over-year basis they have increased commercial traffic by 65% with average rates 37% higher than our contracted rail rates.

Despite the weakness in rail volumes we continue to work with our rail customers to target additional hotels for acquisition to try and grow our portfolio of industry leading Oak Tree Inns with additional stable long term contracted revenues. We've identified with the rail's two opportunities, one in Kansas City and one in Nashville and are working towards acquiring those properties in the coming months. Our hotel rent manager has been successful in bringing expertise in yield management and strong cost discipline to the hotels. And this is translated into higher income and better operating margins. In fact during the second quarter AHIP's branded hotels improved their RevPAR index by 5.4% compared to their competitive set in all of their locations.

Other initiatives undertaken include optimizing staffing in hotels which has translated into increased GOP and NOI margins across both segments of our portfolios. During 2016 we're also continuing to implement our $7.5 million capital investment program at our hotels to upgrade technology and to enhance the guest experience including new rooms, lobby and common areas to enable our hotels to compete at the top of their respective markets. The hotel manager is working very hard to schedule the capital expenditures and PIP renovations to minimize guest displacements.

Our development partner SunOne delivered two more completed hotel expansions totaling 48 rooms at existing high occupancy Oak Tree Inns in Texas and Oregon and is planning to deliver another 24 rooms expansion later this month. AHIP continues to review a number of potential accretive branded acquisitions as well with an emphasis on hotels that have strong demand generators and are priced below replacement cost. We've seen the public U.S. hotel REITs along with private REITs head for the sidelines for a variety of reasons. With the smaller pool of potential buyers along with the tightening of available debt we're seeing cap rates move up by as much as 50 bps. On July 26th we completed a $103.5 million Canadian equity offering which included the full exercise of the overallotment option. We were delighted to see investor support as our offering was oversubscribed. We have converted the funds into U.S. dollars and are ready to deploy the capital into the various hotel acquisitions over the coming months.

As disclosed in the July 2016 perspectives we plan on acquiring two high quality Embassy Suite hotels in Dallas and Phoenix for approximately U.S. 57 million plus PIPs and closing cost. The transaction is expected to close in mid to late September and will involve the issuance also of approximately 2.2 million AHIP units as partial consideration. In addition to the two crew hotel opportunities in Kansas and Tennessee previously mentioned we've also identified two to three hotel portfolios that we're actively pursuing and expect to complete the acquisition during late Q3 or early Q4.

We pay monthly distributions, I remind everyone of U.S., $0.054 per month, which is U.S. $0.648 on an annual basis. This translates into a payout ratio of approximately 75% based on analyst current consensus of 2016 AFFO. This aligns our distributions with our U.S. sourced income and avoids entering into extensive hedging programs to reduce currency risk. We continue to implement our strategy of building a solid and reliable income stream for investors and with our conservative balance sheet and modest payout ratio.

I’ll now pass the discussion onto our CFO, Azim Lalani to provide a summary of the financial and operating results for the first quarter. Azim?

Azim Lalani

Thanks Rob. The hotel industry is seasonal in nature with operating results stronger in the second and third quarters and weaker in the first and fourth quarters of the calendar year. As a result, there will be variability in various operating metrics between the quarters. Here’s a summary of some of our key financial results for the quarter ended June 30, 2016 compared to the same periods in 2015. Since the second quarter of 2015, we have acquired 10 hotels adding 1,235 guestrooms to the total AHIP portfolio. The increase in revenues, net operating income and FFO can be attributed to the portfolio changes that have occurred over the past 12 months.

For the quarter, our occupancy was 74.3% down from the same period last year. This was due primarily to lower occupancy in our rail portfolio due to lower coal and commodity shipments compared to 2015. This was offset by higher occupancies in our branded hotels as same-store occupancies jumped by 3.5% to 83.9% led by strong performance in Virginia, North Carolina and Florida. The Virginia and North Carolina hotels had a positive tailwind this quarter, as they were undergoing significant renovations last year, which resulted in some guest displacement. These two regions had robust double-digit RevPAR growth rates of between 12% to 16%.

ADR for the quarter was up 7.1% to $84.59 and our RevPAR was $62.85 down marginally from last year. This was due to a combination of lower rail occupancies offset by rail crew contract revenues and higher ADR from the branded hotels. Total same property NOI for the quarter was up 3.5%, reflecting effective yield management strategies implemented by the hotel manager that help AHIP’s hotels outperformed their comparative set.

For the quarter total revenues were up 30.5% to $44.5 million compared to last year. This coupled with good cost controls drove EBITDA up by 36% to $15.1 million and EBITDA margin improved by 140 basis points to 34%. For the quarter FFO was up 37.9% to $10.5 million as a result of higher NOI and AFFO was up 38.4% to $9.3 million. Diluted FFO per unit for the quarter was up 11% at $0.30 and diluted AFFO per unit was up 12.5% to $0.27. Our AFFO calculation reflects the full FF&E reserve and excludes the impact of any FF&E reserve waivers provided by our lenders. Our current AFFO payout ratio improved to 61% for the quarter compared to 83.7% last year.

We anticipate some cash drag from a recent bought deal and expect our payout ratio to move higher in the coming quarters. I will now review our liquidity and conservative financial condition as at June 30, 2016. Our debt to gross book value was under 50%, our weighted average interest rate was 4.56% down from last year. Our weighted average loan term to maturity was 7.7 years compared to 7.5 years last year. Our available cash balance at June 30, 2016 was approximately $8 million. Our cash balances today are significantly higher as a result of July offering. We expect to utilize this cash during the third and fourth quarters. Our restricted cash balance was $16 million and available to fully fund all brand mandated capital expenditures over the next 12 to 18 months. We continue to fund FF&E reserves of 3% of room revenues for Oak Tree rail hotels and 4% of gross revenues for branded hotels.

Thank you. And now back to Rob.

Rob O'Neill

Thanks Azim. Before questions I'd like to close the formal portion of this call with a few key points. We're very pleased that our record breaking operating results have generated meaningful growth in our FFO and AFFO. We continue to expect rail headwinds for the balance of 2016 even though we see stabilization. As the rail industry tries to recover from cyclical lows. We expect this to continue to put pressure on rail occupancies, however the benefit of the contracted rail revenues are being realized and our revenue and cash flow streams have stayed on target. The stability from the contractual revenues certainly differentiates us from all other hotel companies in Canada and the U.S. Also with the expected completion of the Invest transaction in the coming days we expect to become Canada's largest publicly traded Hotel Company by a factor of five.

This we believe will bring us the potential for more institutional investors. Our hotel manager has done an excellent job of pushing revenue growth and cost controls and has delivered meaningful growth in income and operating margins. We continue also to actively evaluate development opportunities secured by long term rail contracts to deliver industry leading high quality hotels that meet the employee accommodation requirements of our rail customers. We also continue to identify quality, accretive, branded hotel acquisition opportunities at or below replacement cost and expect to complete some more acquisitions in the coming months. We're certainly pleased with the recent CAD$103 million bought deal. And are focused on accretively deploying this as soon as reasonably possible and we're mindful of the dilution given the timing drags of when the funds are actually deployed over the next two quarters.

Q2 has been the strongest quarter in AHIP's history with revenues up by 30.5%, net income up by 46.4%, and diluted FFO per unit increasing by 11.1%. As we move forward we're highly focused and motivated in executing our stated growth strategy of building AHIP with a conservative balance sheet, diversified with high quality properties in secondary and tertiary markets in the United States that create long term value for our unit holders all the while being open to considering strategic initiatives that can add value to our shareholders.

Thanks, and I'll open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jonathan Kelcher from TD Securities. Your line is open.

Jonathan Kelcher

First just on the acquisition front, the multi-brand portfolio you guys have under contract, it's a pretty good size portfolio at a pretty attractive cap rate. Are you seeing a lot more or a lot of or any portfolio's out there that are in that SNAK [ph] bracket, or are you seeing more, would you be looking more at one-off opportunities?

Rob O'Neill

No, we're seeing a fair amount of portfolios north of 8.5 cap, some with even better characteristics on age and price per key.

Jonathan Kelcher

And similar sort of call it $75 million or $100 million size?

Rob O'Neill

I would say $50 million to $70 million would be the more normal level. We're also very early days involved and looking at portfolio that is considerably larger than that also. So one of the things that happened, the U.S. rail analytics delivered their second quarter numbers in U.S. hotel transactions yesterday or on Monday.

And transactions are down by 55% in the U.S. and in the secondary and tertiary markets down by 68%, pricing which came down in the fourth and the first quarter, which allowed us to get some higher cap rates up from the 8% -- 8.25% range more to 8.50% and north are stabilizing at that area. But it’s pretty clear that a lot of the REITs, private REITs and one of the private equity are on the sidelines in the U.S. for all sorts of reasons. And we’re finding ourselves a lot of opportunities to back stop the ones that we’ve initially identified.

Jonathan Kelcher

Okay. Is that, I guess deals being down is completed deals, has there been a difference or change in the amount of supply that’s come to market in the first half of that year or is it just like a no buyer, same amount of supplier or is it also a lack of people putting portfolios out there for sale?

Rob O'Neill

I don’t know, there is a lot of transactions, we have, one of our directors of acquisitions with us in the meeting today and he’s nodding. Our prospect list is very, very deep and so I don’t see a lack of product. I see a lack of product transacting and the opportunities for us are revisiting some of the portfolios that we weren’t successful with last year, didn’t transact, they were at much higher prices, we’ve just look at one recently that transacted, pick a number close to $70 million and we had some initial discussions in the high-60s. So I think some of the seller expectations are coming more into line with what we can buy accretively.

Jonathan Kelcher

Okay. And then secondly on the 65% increase in the Transient traffic at the rail portfolio that you talked about. Is that just on the 20 or so hotels where Transient actually works best?

Rob O'Neill

Yes. And it’s not a huge number, yes. But it’s a big number over what it was and really represents focus by the team there on starting to fill that transient revenue. They’re in the middle right now of a new technology implementation for throughout a whole Oak Tree Ins, which will tie the inventory together. They’ve hired in Wichita a yield manager and they have a new director of sales for Transient rooms in lodging enterprises. So bringing that all together, I think what the quality of product that they have, they’re setting themselves up to continue this type of growth in the Transient area.

Jonathan Kelcher

Okay. When you say not a big number. What sort of range would you -- how much occupancy will be from the Transient in those hotels?

Rob O'Neill

Well, my sense is, it’s probably close to 3% to 5%. As I say, it’s not a big number at this stage.

Jonathan Kelcher

Okay. Thanks. I’ll turn it back.

Operator

Your next question comes from the line of Mark Rothschild from Canaccord. Your line is open.

Mark Rothschild

Rob you noted that the RevPAR Transient portfolio 4.4% [ph] outperformed the market. Maybe could you just -- two different points that I have. First of all, what do you think led to that performance in your portfolio versus the market and then secondly maybe looking forward is that something you’d expect to continue over the next few quarters?

Rob O'Neill

Well, we talked about that at the Board yesterday and talk about the statistic of outperforming our competitive sets. In some markets, where you don’t have as much growth as the national average, while you can get there if you can beat the other competitors being aggressive in pricing and yield management.

So, they have been successful in that I think the number was -- they had outperformed approximately 5% their competitors as a total over all of the 35 hotels. So, that's a significant number and I don't think that's going to get any worse. We listen to some of the sales initiatives that they had put in place for the branded hotels and what they call the perfect field competition that’s going on right now, because a lot of hotels are very full in the summer, but they have those days that don't quite fill and lots of incentives to get the occupancy to the 100% range.

And just regionally Florida, the Virginias, Carolinas has been exceptionally strong. We're coming off the seasonally high period for Florida, but they have outperformed our estimates significantly.

Mark Rothschild

Understood and then the two embassy suites that you're acquiring I understand sourcing these properties were unique, not the way you -- your typical deals are being done, but should we expect more of those types of properties and those types of markets, a little different from what the portfolio has been until now?

Rob O'Neill

Well let me out it this way, if I could acquire airport -- major airport embassy suites that are doing around 80% occupancy for a $130 a key at [indiscernible] in good condition, I'll be there all day long, but I don't know that I'm going to be successful, we talked in our acquisitions meeting this morning, there's a couple more available out in the market, but we don't have the pricing yet. I like the idea of having -- so, these are so -- the embassy suites are select service which is in our category, they're in the upper, up-scale of select service, they provide higher quality services, a cook to order breakfast and they also have the managers hosted bar -- free bar at night, and I'll tell you that gets a lot of attention in taxes.

Operator

The next question comes from the line of Brad Sturges from Industrial Alliance. Your line is open.

Brad Sturges

Just to continue on the acquisition front in terms of your capital raising and congratulations on that, just want to get a sense of when -- what your expectation is or timeline is to have the capital fully deployed at this point?

Rob O'Neill

I certainly would hope no later than the end of October. That’s my hope. All my guys are looking at me and saying, well if something goes wrong. Well hopefully it won't. We've been good at what we do. So, I'm sure we'll get the embassy suites done in September. The rail hotels hopefully by the end of September, but probably in October. One of the portfolios we should get done in October and we'll see where we go from there.

Brad Sturges

And the rail assets and the other branded hotels, not the Sunstone portfolio, those are still non-binding LOI at this stage?

Rob O'Neill

Well, one of them is a purchase --.

Azim Lalani

It’s a conditional purchase and sale agreement.

Brad Sturges

Switching to the RevPAR outlook that you provided, SCR Global has been taking down their growth outlook for the rest of this year and 2017, just want to get a sense of what your view would be for your particular portfolio given some of the strengths and weaknesses that you've been experiencing so far.

Rob O'Neill

You may remember I was involved another REIT 20 years ago in Canada and I always used to look south and figure that Canada would be a year late as to what was happening in the United States. That same type of dynamic plays out in the secondary and tertiary markets in the United States. You don't normally get as much new construction, you get good growth, which we have in a lot of secondary and tertiary market hotels. Excluding the Oklahoma hotels, which there is a specific reason, which is the low oil and gas prices and lack of exploration going on. Even though, we’ve seen slight increases in drilling rate.

So I think we’re going to be okay now -- let’s just rephrase. Everybody’s got this negative, geez that growth is decelerating. This is the word growth and we’re still growing. Five years ago, we’d love to have been growing at 3%, while we’re coming off 6% or 7% growth and we’re at 3%. We’re at 3%, its historic highs in a lot of areas, so the hotels are profitable. This is not growth slowing at the bottom. So we’ve got good occupancies, we’ve got very strong rate growth. And when they talk about RevPAR, they’re generally not talking about occupancy. We’re talking about rate growth and rate growth flows to the bottom-line way more than occupancy.

So I think we’ve got a couple of years in the runway sort of like we’re in the may be the eighth inning, but the innings been in the couple of hours. It may be a couple of hours more. Right, this is a long inning, there is just not a lot of change you’ve got, muted GDP growth, you’ve got very low debt costs, but a lot of CMBS renewals heading in the fall in the U.S. So I know it’s -- they’re getting tougher, but they’re certainly are lending to people like us who have low leverage, good management, strong brands, that are all the right components. So I think our forward-looking outlook is very good on the branded hotels.

Brad Sturges

And lastly, just on the Rail side. In terms of maturing contract this year, can you remind me how many contracts are expiring? What is that account for in terms of total rooms and where you stand on those negotiations?

Rob O'Neill

We have three hotels that are expiring, but we’re discussing six. And with one of the rails and some of those have expired, one has just expired or just is expiring and one has expired, which is in this six, but they were under a lot of hurry to -- even though it might have saved them a few pennies to negotiate contract earlier. They want to get a sense of where they’re going and deal with the more comprehensive agreement and they don’t want to go back to the negotiating table next year. So we may move some of next year’s hotels into this negotiation.

So collaborative, you may remember last year we renewed 15 hotels with one of our customers. You’re seeing the results of that this year, there is pretty steady revenue. So we’re trying to trade occupancy guarantees for revenue and again that will benefit us in the long-term as we believe whether rails are working hard and if you watched rail profitability, the companies are focused on that. They’re focused now on utilizing a lot of this spare equipment and their competitor is trucking in the United States. And they are for certain classes of freight way more competitive. And so they are starting to reallocate their equipment in those areas and we believe they’re going to build again.

So long story, that they want to make sure where they are going before, they give us too much rate for the next term. There is this fine balance between rate and occupancy. So collaborative we’re cognizant of what they need and I think that the renewals we did last year are holding is in good stead in the toughest time that the rails have seen in the last 30 years I think.

Brad Sturges

So it sounds like using last year a benchmark that you could be looking at kind of similar outcome?

Rob O'Neill

What we hope so, we can’t predict ahead. We have some meetings upcoming at the end of this month with one of the Rails. At the same time with some other rail roads, we’re negotiating some potential new opportunities. You have to remember the premise is, hotel rates are now a lot higher than they were five years in the United States and our rooms are still very competitively priced with good quality. So, for the thousands of rooms every night in the rail industry that go to branded hotels to remain in their cost budgets, they've had to go down the quality ladder, so they're staying in a lot of the old exterior corridor motels that -- next used as a development lot.

So, for us to be competitive, get some good rates, they're looking at their workers and where they're currently staying and this Nashville is a very good example of that as well as Kansas. These are opportunities for them to move out of inferior accommodations into better accommodations filled with a long term stable price.

Operator

Your next question comes from the line of Trevor Johnson from National Bank. Your line is open.

Trevor Johnson

Just touching on that what you just said Rob, I think the contracts last year had some built in cost of living escalators, is that something that was kind of unique to that renegotiation, or was that something like might be important to bargain with the renewals going forward?

Rob O'Neill

Yes, they are being proposed in this negotiation.

Trevor Johnson

And then also just, do you mind us reminding us what the developments capacity is on SunOne side, is that ever potentially going to be a bottleneck if in fact that you get a big rush of expansions or is that kind of just good to go based on what you're seeing with the current outlook?

Rob O'Neill

Absolutely, we're at a reduced level right now, we haven't got any new build contracted at the moment, though some are on -- have been under discussion. No, actually it's working out quite well because a lot of the resources are being deployed to -- in the One Hospitality management side to complete the PIPs that were taken on through our acquisition activities last year. So, it's worked out very well and they're working on a hotel right now at the largest yard in the United States for a 24-room expansion which should be finished in the next month.

Trevor Johnson

And just last one on the branded side, I believe that is your first kind of foray in the Dallas and Phoenix with branded hotels, the economics you've touched on that and the obvious reasons behind the rationale there. Is this maybe more of a strategy as you get bigger to maybe looking at more dense, larger cities provided that the opportunities in albeit to the economic make sense, is that, is it today that's been more kind of in niche demand driven markets for either military, [indiscernible], et cetera. Just wondering if that's kind of broadened now given your size?

Rob O'Neill

It's interesting, I think my last comment in my prepared remarks says we continue to look for opportunities to create shareholder value and one of that ways of value is diversification. Considering where most of our properties are, Tempe and Dallas are a nice diversification, I'm not so brazen to say that I'm going to get that quality of product at that cap rate all day long. I certainly -- and we find it more efficient here to have larger hotels in secondary and tertiary markets.

So, we're more enamored with a 100-room plus rather than under 75 or 60 rooms, we can get better operating efficiencies in some of these smaller select service hotels, it's still one desk clerk, one manager, one sales manager, one maintenance person and you distribute that cost over a 100 room versus 60 and you're throwing out a better margin. And so, we're focusing on that right now and we've got some opportunities in front of us for some of these larger properties.

Operator

Your next question comes from the line of Yash Sankpal from CIBC. Your line is open.

Yash Sankpal

Rob do you think Q1 ’16 month bottom occupancy and RevPAR for your rail portfolio?

Rob O'Neill

I hope so. I can’t see forward thought, I can see what’s happening right now. We seem to have stabilized through the last couple of months and we see no indications of any further deterioration. So from a cyclicality point of view, first quarter is always tough or the toughest. So it’s a pretty fair comment that could be the bottom. I just don’t know, that could affect the rails going forward any more than they have. We have seen in the last couple of weeks.

What they call sort of surplus guarantee or extra guarantee agreements being made, where the rails, to just give you example, if you have a 75 room guarantee and a 100 room hotel and in the past, when they needed more space they would give us short-term guarantees for 10 rooms or 20 rooms. Just to make sure, we didn’t sell them to other people and we gladly took their guarantees.

That’s cooled off quite a bit at the end of last year and early parts of this year. Well we’ve started to see those guarantees comeback again were four, five, six room guarantees have been added on top of our existing guarantees. So I think that’s a good indicator and even globally with the U.S. rails, they all seem on average to be about 10% down. Well 90% of the high levels they were at a year ago is not that bad, considering it is the coal that’s really drag the numbers down, the intermodal container type traffic still extremely strong.

Yash Sankpal

Right. Now in Q1 for example your occupancy, year-over-year occupancy was down 15% in Q2, it was 11%. So do you think that in Q3 and Q4 year-over-year occupancy decline will be lower than these numbers?

Rob O'Neill

Well. Azim is looking at me very sternly. We don’t give forecasted numbers out.

Yash Sankpal

I’m just looking at the trend.

Rob O'Neill

Yes. I think the trend certainly isn’t going to increase. Let me just say that. From what we can see sitting here today.

Yash Sankpal

And how is your Rail Hotel portfolio doing now in terms of occupancy in Q3 are you able to say anything?

Azim Lalani

Unfortunately, Yash, we can’t give --.

Yash Sankpal

Okay. Now Azim the next question is for you then. So based on what you’re seeing in your rail portfolio the occupancy has come down quite a bit. Do you think at some point, you will have to write-down the rail portfolio?

Azim Lalani

I don’t think so, I think it’s a question of we’re in the tranche of the cycle and as Rob mentioned, what we’re seeing is that even though volumes have come down over the last couple of quarters. We are seeing some stabilization from the rail perspective, in terms of their volumes are stabilizing. And so just a question of monitoring over the next few quarters to see if there is in a recovery in those rail volumes.

Rob O'Neill

Yash, I’m going to say something else though. One of the things that’s naturally happening in a time, where there is been compression on the rail side. We’re still finding ways to increase it a little bit. But the opportunities obviously for American Hotel, right now since we have favorable capital market is to pivot and I’ve always said that we would take advantage of the marketplace while it exists if it meets all of our criteria, and this pivot will take us a little bit further away from the huge dependence on the rails. And we just have to do that on a conservative basis and take advantage of the opportunities that are there today. And that's why this current bought deal is being deployed substantially in the branded area.

Yash Sankpal

And do you think you're current branded portfolio will be able to outperform the national RevPAR number in 2016?

Rob O'Neill

I think that was asked before and I think we've got the initiatives in place with the local markets to try and out -- it’s hard to outperform nationally and have a strategy that works nationally. We're not that big. The only way we can outperform is beating the hotel down the street and in our neighborhood and that's what the hotel manager is working hard to do and that's why he beat the national average last time. So, those strategies, were talked about at the Board yesterday and encouraged, so I'm hopeful we'll continue producing as they have for the rest of the year.

Yash Sankpal

And just one last question, you talked about tightening in the U.S. hotel lending, can you maybe provide some more color on that?

Rob O'Neill

Well, I think it starts in the renewals that are coming in the fall of 2016 in the CMBS world. There's a real significant amount of real estate financing that has to be refinanced. So, that's been known for a long time as well the market, the lending market always seems to get a little spooked at when the cycle appears to be changing regarding hotels. So, what's happened is the 75% mortgage to value borrowers are being discouraged.

So, when I say it's tightening, it's not tightening for us, we still have a lot of people bidding on our work, we've got who're bidding on our loans, we've got the Tempe re-fi, it has had a lot of interest and we have a very competitive 10 year proposal under signature at the moment and for the upcoming portfolios we have been talking to a wide variety of CMBS and regular bank lenders. So, as you know the 10 year has come down from 165 to close to 150. The spreads have stabilized in the 300 in the quarter range. So, we're still looking at sub-five borrowing levels for 10 years and getting some proposals that have interest only for a couple of years. So, tightening for other people, not so much us.

Yash Sankpal

Actually I have one more question if there's no one else in the queue after me. You said that you want to diversify away from the rail component or at least reduce it on proportion, so at what point you think the portfolio will be balanced?

Rob O'Neill

Well, I've always said that the opportunities might be countercyclical as the U.S. economy grows again which it inevitably will, the U.S. rails will start to reapply the capital, they're still at high levels but they're deferring some and as they increase that capital and the unions, it increases and they would have increased profitability at the time, the unions will demand more and more it’s their union trainmen, enginemen and yard-enginemen that we service and they will become more discerning customers and we think they're going to want more of our custom build hotels.

So, at that point in time I'm hopeful that we can re-grow the Oak Tree Inns into a more significant piece of the pie. So, we'll just take advantage -- we're not in this for the short term and neither are the rails. They've been around for a long time and safety of the public becomes a bigger and bigger issue and the demands of the unions for sleep, that they don’t get bothered, and the tagline of Oak Tree Inn is When Rest Matters and that says at all. Thanks Yash.

Yash Sankpal

Okay. Thank you.

Operator

There are no further questions at this time. Mr. Rob O'Neill I’ll turn the call back over to you.

Rob O'Neill

Thanks operator. And on behalf of Azim, Ian and the entire AHIP management team, we would like to thank you all for sharing your time with us today. And as usual please feel free to contact myself Azim or Ian if you have any questions. Thank you very much for your support as we strive to continue to grow AHIP in a prudent and profitable manner for all our shareholders. Thank you.

Operator

This concludes today’s conference. You may now disconnect.

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