American Hotel Income Properties REIT's (AHOTF) CEO John O'Neill on Q3 2018 Results - Earnings Call Transcript

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About: American Hotel Income Properties REIT LP (AHOTF)
by: SA Transcripts

American Hotel Income Properties REIT LP (OTC:AHOTF) Q3 2018 Earnings Conference Call November 7, 2018 5:30 PM ET

Executives

Jamie Kokoska - Director, IR

John O'Neill - CEO

Ian McAuley - President

Azim Lalani - CFO

Analysts

Mark Rothschild - Canaccord

Brad Sturges - Industrial Alliance

Colin Healey - Haywood Securities

Matt Logan - RBC Capital Markets

Jonathan Kelcher - TD Securities

Operator

Good afternoon and welcome to the American Hotel Income Properties REIT LP Third Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, there will be a question-and-answer session for analysts only. Instructions will be provided at that time for you to queue up for questions.

At this time, I'll turn the call over to Jamie Kokoska, Director of Investor Relations. You may begin your call.

Jamie Kokoska

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 risk 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 three to nine 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 are made available earlier this afternoon after market close. We encourage 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 measures, 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 will now turn the call over to John O'Neill, Chief Executive Officer.

John O'Neill

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 Co-Founder 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 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 non-rail 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 that 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 three 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 three 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 three properties and expect these hotels to have strong results in 2019.

These hotels faced guestroom displacement while rooms were being updated reducing the overall number of rooms available for booking. Food and beverage revenues were also impacted during renovation. 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 non-recurring revenue in Florida from last summer's Hurricane Irma, revenue would have grown $600,000 from same quarter last year.

As reported, FFO for the quarter was $0.21 per unit as compared to $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 pre-funded 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 efficiency 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?

Ian McAuley

Thank you, John, and good afternoon everyone.

As John discussed, renovation activity did affect our quarter and these projects with 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 to reflect this positive reaction in the future.

We're also very pleased with the expansion of the atrium bar and restaurant at each of these three 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 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 three Embassy Suites properties under renovation experiencing RevPAR declines between 11.2% and 21.1%. Excluding these three 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 afterwards.

On a RevPAR index basis which measures the performance of hotels relative to the 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 days 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 guestrooms 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 non-rail revenue during the quarter. So the positive impact 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, extensive renovations currently underway at the Embassy Suites, Columbus Hotel, across 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 welcome to the large group at this hotel on Monday which utilize the renovated atrium space.

There are also four smaller hotels scheduled to begin renovations during the fourth quarter, all expected to be completed during the fourth quarter of 2019. Excuse me 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 and Suites in Jacksonville, Florida, and the 109-room residence in Chattanooga, Tennessee. In addition three Homewood Suites properties are also scheduled to begin the design and planning phase with their upcoming renovation. 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 and construction gets away during the first quarter of 2019.

It's also important to note that our Florida Hotels continue to benefit from the impact 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 financials and capital metrics. Azim?

Azim Lalani

Thanks, Ian. Good afternoon everyone.

John has already touched on the impact on 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 three Embassy Suites under renovation and a 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 the non-recurring $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 $5.04 which is equivalent to $64.08 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 displacements 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 into 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?

John O'Neill

Thank you, Azim.

The three 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 guest rooms. 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 the cycle of scheduled property improvements, 85% of our premium branded hotels will have completed a major renovation within the last five 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?

Question-and-Answer Session

Operator

[Operator Instructions].

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

Mark Rothschild

Hey you're obviously very familiar with they have been with the asset, so it doesn't seem like there's anything new for you in that regard but now that you've assumed that you are the CEO, can you maybe speak more broadly about any changes in strategy you might think, you might be implementing, or is there anything that you will be doing differently, or should we consider it more continuing on this theme of repositioning assets and growing in the U.S.?

John O'Neill

I think the strategy that the company is articulated and we've articulated over the last little while is basically going to remain unchanged. With a real focus on improving results, focus on completing our renovations, getting these displacement issues potentially 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, improved 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 more effectively in the marketplace.

Mark Rothschild

Okay. And --

John O'Neill

No major change.

Mark Rothschild

Okay, understood. Of the $2.2 million debt that was negatively impacted this quarter, it sounds like you're expecting all of that to back over the first amended year and while there are some additional properties that will 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?

Ian McAuley

Hi Mark, it's Ian. Excuse me. Keen observation however we still have more to work in 2019 in terms of there's still assets that need to go through PIPs and we're still working on our 2019 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 both Azim said, our focus is on maintaining a lower payout ratio than where we are today and that will really impact which property is going to renovation and which don't.

Mark Rothschild

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.

Ian McAuley

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 though that there will be continued wage or 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.

Operator

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

Brad Sturges

Hi there.

John O'Neill

Hi, Brad.

Brad Sturges

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 -- the work being done that's part of the reasons for the delay and then looking at what you've got scheduled for Q4 in the Q -- in the 2019 are they -- those renovations potentially a little bit smaller renovations and what that mean a little bit less central displacement.

Ian McAuley

Yes, yes, you're absolutely right, Brad. The 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 that the hotels that we have outside of those Embassy Suites are smaller and are less disruptive.

Brad Sturges

And if you're to give a best guess what type of displacement could we see into Q4 and maybe early 2019 right now?

Ian McAuley

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 2019, so we don't want to give any sort of misinformation on what we're expecting.

Brad Sturges

I guess part of the strategy between 2019 as John alluded to was more active asset management and organic initiatives. I guess beyond the regular schedule PIP work that needs to be done what does that really entail and how do you essentially try to work the portfolio a little more to get better results.

John O'Neill

It's John. Brad one of the things that we haven't mentioned yet is we're viewing all the hotels in our portfolio and there's always going to be a few that 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 the 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 performed very well against our competitive set in virtually all of our markets and we want to maintain and increase that that market penetration and their RevPAR index and that's a real focus for us and with our manager in 2019. And then continue the cost savings initiatives. It is a rising labor cost environment, 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 and tight savings due to their strength, due to their strength in procurement and bulk purchasing and so those are the organic moves that we will continue to focus on.

Brad Sturges

I guess with tight cost savings last quarter you talked about a couple million dollars of potential savings over time, now that you've had a little 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?

Azim Lalani

Hey Brad, this is Azim. So there's -- I guess I'd look at the cost savings in really two buckets. There's a cost savings that 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 being part of Aimbridge versus not being part of Aimbridge.

Operator

Your next question comes from the line of Colin Healey from Haywood Securities. Your line is open.

Colin Healey

Hey guys, thanks for taking my question. 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 clarified just the planned renovation spend in 2019 that would 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?

Ian McAuley

Hi Colin, it's Ian. Yes, the labor issues are ramping across the country I was just in Columbus, Ohio last week talking to the Super there. And in order to move a switch from one wall to another big contractor, they contacted over 30 HVAC vendors and only one responded. So it's kind of like Alberta was in the mid-20s, very, very, tight and the contractors that we're working on, 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 of what we might spend next year, it's a little premature, but it will probably be less than what we spent this year.

Colin Healey

Okay, great, that's helpful. Maybe you could just talk a little bit about the benefits and maybe if you can quantify kind of a target for the efficiencies you're thinking you got from the new independent hotel operator and kind of what the primary areas of focus are or if they've changed?

Azim Lalani

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 financial reporting perspective.

Colin Healey

So I guess you can't put that in terms of financial target like 100 basis point improvement in a -- in a financial metric at this time?

Azim Lalani

Yes, that's a bit difficult to do, certainly we will 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.

Colin Healey

Okay, that's fair enough guys. Thanks a lot for taking my call.

John O'Neill

Thank you.

Operator

[Operator Instructions].

Your next question comes from the line of Matt Logan from RBC Capital Markets. Your line is open.

Matt Logan

Hi guys. 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?

John O'Neill

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 as I said earlier in a position where 85% of our premium branded properties have contributed to renovation cycle. We believe that even our results will be stronger yet again, once we are through with 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 as 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 strength of this business.

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.

Matt Logan

So would it be fair to maybe look back at say 2016 as a normalized year for earnings power to vote $0.80 of AFFO, kind of medium-term?

Azim Lalani

Hey Matt, this is Azim. So that'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 that have been achieved before, but certainly with the target of getting our payout ratio down.

Matt Logan

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?

Azim Lalani

Certainly from our perspective, the 100% payout ratio the 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.

Matt Logan

Fair enough. And just on some of the improvements with financial reporting in the benefits of the new hotel manager has the reconsidered given formalized guidance over the next couple of years?

Azim Lalani

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.

Matt Logan

Fair enough. Maybe just changing gears quickly, John, after two months on the job, can you give us maybe a little bit of contrast on the difference of being inside the recourses 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.

John O’Neill

Well there -- Keith [ph], that's a lot of -- a lot of questions there. Matt, it's the same assets that I'm very familiar with and have been since the six 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 the clear focus on maintaining and improving distributions to unitholders. And the deployment, the strategic deployment of capital as to in which hotels and when and that's the biggest difference really between day-to-day operations. All with the same -- 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 amazing portfolio with great upside, but with stable incomes and great brands is in good markets that are strong markets consistent markets not the New York, Chicago, Los Angeles low cap rate expensive markets, but solid markets with great source of the business. So our objective as we've 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 Marriott and the Hiltons of the world and working with Aimbridge on the portfolio.

Select-service is a great level of hotel to be operating, it -- while it has food and beverages, 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 few of the things that I've observed in my first couple of months but no surprise as we live through this growth in operating hotels on a day-to-day basis.

So of course is -- there always a few changes like quarterly earnings and in call 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 so.

Matt Logan

That's great color, appreciate the commentary. That's all from me.

Operator

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

Brad Sturges

Hi just following up on the renovation program again just want to understand how the process first from your perspective? Are you effectively running the renovations as a project manager or would that be a third-party.

Ian McAuley

Hi, Brad it's Ian. Part of our hotel management contract with Aimbridge includes them running that project management position. So we asset manage that and control the capital but all 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 payrolls et cetera. But I can tell you that the team that I've 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 on how to negotiate with the brands, and that's as John said, one of our strengths is our brand relations. And I spend a lot of time working with the brand in conjunction with Aimbridge on the PIPs and the scope of the PIPs and then the pricing of the PIPs and then with the operations team what's 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 we need to do, we don't operate hotels but we certainly operate our capital.

Brad Sturges

Great. And what’s -- what would be the timeline now that let's say you've finished your 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?

Ian McAuley

Sure. So as an example DFW, we finished that in Q2 and September it took some time for us to get retraction but it's running very high in this market. And just the other night I noticed it was 100% occupancy at about $180 rate, both we haven’t seen in quite a while, so it's definitely sound, it's tracking. And those are big boxes with groups and groups like that book out year, six 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, Thursday, when I was there and Sunday night a group of 170 booked and walked in and they all utilized the facility on Monday. So happened actually pretty quick, if there is good coordination.

Excuse me, now I'm coughing I can’t remember what the second part of your question was?

Brad Sturges

Just in terms of return expectations --

Ian McAuley

Right.

Brad Sturges

Once -- on the capital being spent on this program just walk through sort of your expectations there?

Ian McAuley

So it happens at the underwriting when we buy the assets. And we at that time negotiate with the brands on 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 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 concepts we're 116% in our concepts, we are outperforming our concept and that's due to the manager number one, but also the amount of time and effort we take on an asset management in terms of making sure we're putting money where it should be going.

And so I guess that's true 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.

Operator

Your next question comes from the line of Jonathan Kelcher from TD Securities. Your line is open.

Jonathan Kelcher

How many hotel rooms -- hotels or hotel rooms would you have to go to get -- remaining to get to the 85% of hotels renovated that you referenced earlier?

John O'Neill

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 two more big boxes in Tempe, Arizona; and Cleveland, Ohio. So the total on those might be about 1,000 rooms, big rooms. But Jonathan we can zero that in a little more specifically offline for you, but that’s the approximate number to get to that 85%.

Jonathan Kelcher

Okay. And that’s you expect to have those done by the end of 2019?

Ian McAuley

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 2020, that are in 2019 now, and there's some that the brand say well, no, we needed to do it now, so that we had it schedule for 2020, so it's all the negotiations, sort to be vague on this but it is truly where we are in our budget process for 2019 and 2020.

But I guess sufficed 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 three 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.

Jonathan Kelcher

Right, fair enough. And then so this year you -- you're doing, what about 750 or 800 rooms through the -- through your rental process?

Ian McAuley

It's more than that. Just with -- yes it's probably a 1,000 rooms that we hit this year.

Jonathan Kelcher

Okay. So if we're looking over a couple year period then you've got displacement of about a 1,000 rooms over the course of 2018, about a 1,000 rooms over the course of 2019, and then you should start to see a real benefit in 2020 is that the sort of the way to look at it?

Ian McAuley

Yes, that's fair. And if we want to 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 Jarvis [ph] it's got a good amount of food beverage. And Azim just showed me 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.

John O'Neill

And for example 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 the business in the General Phoenix area is not as high. So even though that's a big hotel over 200 rooms causing much less displacement then say another hotel with 200 rooms which is more on the 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. We're still finalizing our 2019 plans.

Azim Lalani

Hi 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 2015, 2016 and 2017. So we're just saying that by the time 2020 rolls around 85% of our portfolio will have been fully renovated.

Jonathan Kelcher

Right, right, I get that. Okay. So you should get some year-over-year RevPAR growth at? If you're 1,700 rooms this year or 1,000 next year, all else equal and no recession or anything like that, you should have some RevPAR growth.

Ian McAuley

That's right. That's the theory and in some cases the renovation is defensive against the market because we have new suppliers as you've heard us talked 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 coming from in 2018.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

John O'Neill

Great, thank you operator and thank you -- 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.

Operator

That concludes today's conference call. You may now disconnect.