AMERICAN HOTEL INCOME PROPERTIES REIT LP MANAGEMENT S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Transcription

1 AMERICAN HOTEL INCOME PROPERTIES REIT LP MANAGEMENT S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION For the three months and year 2017 (Expressed in U.S. Dollars) Dated: March 6, 2018

2 TABLE OF CONTENTS FORWARD-LOOKING DISCLAIMER 3 BASIS OF PRESENTATION 5 THIRD PARTY INFORMATION 5 NON-IFRS MEASURES 6 OPERATIONAL METRICS 8 INFLATION 9 SEASONALITY 9 APPROVAL BY THE BOARD OF DIRECTORS 9 OVERVIEW OF AHIP 9 TAXATION 11 MARKET ENVIRONMENT 12 RECENT DEVELOPMENTS FOURTH QUARTER RECENT DEVELOPMENTS FULL YEAR OUTLOOK 15 FOURTH QUARTER HIGHLIGHTS AND KEY PERFORMANCE INDICATORS 16 RESULTS OF OPERATIONS 18 TOTAL PORTFOLIO OPERATING STATEMENTS 21 FUNDS FROM OPERATIONS ( FFO ) AND ADJUSTED FUNDS FROM OPERATIONS ( AFFO ) 28 RECONCILIATION OF CASH FLOW FROM OPERATIONS TO AFFO 29 DISTRIBUTION POLICY 30 DISTRIBUTION SUMMARY 30 USE OF PROCEEDS FROM JUNE 2017 OFFERING 31 SUMMARY OF QUARTERLY RESULTS 32 LIQUIDITY 32 CAPITAL EXPENDITURES 34 GROUND AND AIR RIGHTS LEASES 35 DEBT STRATEGY 35 CAPITAL RESOURCES 38 PARTNERS CAPITAL 38 OFF-BALANCE SHEET ARRANGEMENTS 39 TRANSACTIONS WITH RELATED PARTIES 39 SUBSEQUENT EVENTS 40 ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGEMENTS 41 ACCOUNTING STANDARDS 42 INTERNAL CONTROLS 43 FOREIGN EXCHANGE MANAGEMENT 43 RISKS AND UNCERTAINTIES 44 RISKS OF REAL ESTATE OWNERSHIP 44 RISKS RELATED TO THE HOTEL AND LODGING INDUSTRY 55 PREMIUM BRANDED HOTELS PORTFOLIO 71 ECONOMY LODGING PORTFOLIO 74 ECONOMY LODGING PORTFOLIO 75 AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 2

3 PART I FORWARD-LOOKING DISCLAIMER This Management s Discussion and Analysis of Results of Operations and Financial Condition ( MD&A ) contains forward-looking information within the meaning of applicable securities laws (also known as forward-looking statements). Forward-looking statements generally can be identified by words such as anticipate, believe, continue, expect, estimates, intend, may, outlook, objective, plans, should, will and similar expressions suggesting future outcomes or events. Forward-looking statements include, but are not limited to, statements made or implied relating to the objectives of American Hotel Income Properties REIT LP ( AHIP ), AHIP s strategies to achieve those objectives and AHIP s beliefs, plans, estimates, projections and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Some specific forward-looking statements in this MD&A include, but are not limited to, statements with respect to: the expectations of STR with respect to key performance indicators in the U.S. hotel and lodging industry, including in relation to certain segments thereof; AHIP management s expectations and outlook with respect to RevPAR (as defined below), ADR (as defined below), lodging demand, occupancy rates, cash flows from hotel operations, real estate values and other key performance indicators, including such expectations with respect to specific markets and hotels; AHIP management s expectation that most of its Premium Branded Hotels will continue to outperform their respective competitive sets in terms of RevPAR, but that certain regions, such as Pittsburgh and Amarillo, may experience ongoing headwinds as a result of elevated new supply and softness in demand; AHIP management s expectation that the seasonal nature of the lodging industry will cause quarterly fluctuations in occupancy rates, room rates, revenues, operating expenses, and cash flows; AHIP management s expectations with respect to how it will pay expenses, service debt and pay distributions to unitholders if cash flow from operations is insufficient to cover such obligations in a given quarter; the expectation that AHIP s expenses will grow at, or greater than, the general rate of inflation; the expected cost and timing of brand mandated property improvement plan ( PIP ) renovations to be completed in 2018 and the expected impacts thereof on the applicable hotels including on occupancy levels and revenues; the expected negative impact on margins of increases to minimum wage and tighter labour markets in certain states; AHIP s expectations as to the cost and timing of the rebranding of its Economy Lodging Hotels under various brands franchised by Wyndham Hotel Group ( Wyndham ); AHIP management s belief that the rebranding will drive higher transient (non-rail crew) revenues at many of AHIP s Economy Lodging hotels during 2018; AHIP s expectation that the new Master Agreement entered into with one of its largest and most significant railway customers will allow both parties to expedite new future contracts and contract renewals; AHIP management s belief that AHIP is well positioned to deliver a stable and reliable income stream to its unitholders; AHIP s expectation that business acquisition costs will vary between periods; AHIP s ability to repay maturing debt and its means of doing so; the expected maturities and amortization periods on future long term debt; the timing and amount of payments under term loans, finance and operating leases, Debentures (as defined below) and deferred compensation; the expected guaranteed room night revenue from its railway customers; AHIP s expectation that it will utilize the balance of the proceeds from the June 2017 Offering for general corporate purposes, including capital acquisitions and capital expenditures; AHIP s intention to make capital investments or improvements to its Premium Branded Hotels and Economy Lodging AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 3

4 Hotels; AHIP s intention to make expenditures necessary to comply with loan and franchisor requirements and otherwise to optimize operating performance; AHIP s intention to maintain total indebtedness at approximately 50% to 55% of AHIP s Gross Book Value (as defined below); management s intention to obtain additional equity financing and/or secured debt financing with similar interest rates and terms as past financings to meet AHIP s planned growth strategy; AHIP s intention to refinance the NC/GA Portfolio Assumed Loan #1 that matures on August 1, 2018; the expected timing of the payment of the February 2018 distribution; AHIP management s expectation that AHIP s AFFO Payout Ratio (as defined below) and Debt-to-EBITDA Ratio (as defined below) will improve in the coming quarters; AHIP management s expectation that AHIP s Interest Coverage Ratio (as defined below) will improve in the second and third quarters; AHIP s intention to complete the design of DC&P (as defined below) and ICFR (as defined below) for the Sunstone Embassy Suites Portfolio and the Midwestern 3 Embassy Suites Portfolio by March 31, 2018 and the Eastern Seaboard Portfolio by June 30, 2018; AHIP s objective to generate stable and growing cash distributions through operation of its properties and AHIP s other stated objectives; AHIP s intention to declare regular monthly cash distributions and the expected timing of the record and payment dates for monthly distributions; AHIP management s intention to continue to operate AHIP in such a manner to remain exempt from the SIFT Measures (as defined below) on a continuous basis in the future; and the possibility that the U.S. REIT may be subject to certain state and local income, franchise and property taxes even if it continues to qualify as a real estate investment trust under the Code (as defined below). Although AHIP believes that the expectations reflected in the forward-looking information contained in this MD&A are reasonable, AHIP can give no assurance that these expectations will prove to have been correct, and since forward-looking information inherently involves risks and uncertainties, undue reliance should not be placed on such information. The estimates and assumptions, which may prove to be incorrect, include, but are not limited to, the various assumptions set forth in this MD&A as well as the following: critical accounting estimates; capital markets will provide AHIP with readily available access to equity and/or debt financing on terms acceptable to AHIP; AHIP s future level of indebtedness and its future growth potential will remain consistent with AHIP s current expectations; there will be no changes to tax laws adversely affecting AHIP s financing capability, operations, activities, structure or distributions; the useful lives of AHIP s assets being consistent with management s estimates therefor; AHIP will be able to successfully integrate properties acquired into its portfolio; AHIP management s estimates with respect to replacement costs are accurate; the accuracy of third party reports with respect to lodging industry data; the brand licensing agreement with Wyndham will have its int benefits and costs related thereto will be consistent with management s expectations; the U.S. REIT will continue to qualify as a real estate investment trust for U.S. federal income tax purposes; the SIFT Measures in the Tax Act (as defined below) will continue to not apply to AHIP; AHIP will retain and continue to attract qualified and knowledgeable personnel as AHIP expands its portfolio and business; the impact of the current economic climate and the current global financial conditions on AHIP s operations, including AHIP s financing capability and asset value, will remain consistent with AHIP s current expectations; there will be no material changes to government and environmental regulations adversely affecting AHIP s operations; and conditions in the international and, in particular, the U.S. hotel and lodging industry, including competition for acquisitions, will be consistent with the current economic climate. Forward-looking statements are provided for the purpose of presenting information about management s current expectations and plans relating to the future and readers are cautioned that such statements may not be AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 4

5 appropriate for other purposes. Certain material factors or assumptions are applied in making forwardlooking statements and actual results may differ materially from those expressed or implied in such forward-looking statements. In addition, forward-looking statements involve significant risks and uncertainties and should not be read as guarantees of future performance or results. Those risks and uncertainties include, among other things, risks related to: general economic conditions and consumer confidence; the growth in the U.S. hotel and lodging industry; prices for the Units and Debentures (as defined below); liquidity; tax risks; ability to access debt and capital markets; financing risks; changes in interest rates; real property risks, including environmental risks; the degree and nature of competition; ability to acquire accretive hotel investments; ability to integrate new hotels; construction of new hotels; renewal of rail crew lodging contracts; environmental matters; and changes in legislation. Additional information about risks and uncertainties is contained in this MD&A and in AHIP s annual information form ( AIF ) dated March 27, 2017 for the year 2016, a copy of which is available on SEDAR at The forward-looking information contained in this MD&A is expressly qualified in its entirety by these cautionary statements. All forward-looking statements in this MD&A are made as of March 6, AHIP does not undertake any obligation to update any such forward looking information, resulting from new information, future events or otherwise, except as required by applicable law. BASIS OF PRESENTATION This MD&A for the three months and year 2017 has been prepared and includes material financial information as of March 6, This MD&A should be read in conjunction with AHIP s audited consolidated financial statements for the years 2017 and 2016, prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board. Historical results, including trends which might appear, should not be taken as indicative of future operations or results. All amounts presented in this MD&A are in United States dollars ( U.S. dollars ), unless otherwise noted. Additional information relating to AHIP, including its AIF for the year 2016, is available on SEDAR at THIRD PARTY INFORMATION This MD&A includes market information, industry data and forecasts obtained from independent industry publications, market research and analyst reports, surveys and other publicly available sources. Although AHIP management believes these sources to be generally reliable, market and industry data is subject to interpretation and cannot be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey. Accordingly, the accuracy and completeness of this data are not guaranteed. AHIP has not independently verified any of the data from third party sources referred to in this MD&A nor ascertained the underlying assumptions relied upon by such sources. AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 5

6 NON-IFRS MEASURES AHIP has included certain non-ifrs financial measures throughout this MD&A. Management believes that in addition to conventional measures prepared in accordance with IFRS, investors in the real estate and lodging industries use these non-ifrs financial measures to evaluate AHIP s performance, its ability to generate cash flows and its financial condition. Accordingly, these non-ifrs financial measures are int to provide additional information and should not be considered in isolation or as a substitute for performance measures prepared in accordance with IFRS. These terms are not recognized under IFRS; as a result, they do not have standardized meanings prescribed by IFRS and may not be comparable to measures used by other issuers in the real estate or lodging industries. The non-ifrs financial measures used in this MD&A include debt-to-gross book value, funds from operations, adjusted funds from operations, Diluted FFO per Unit, Diluted AFFO per Unit, gross operating profit, net operating income, earnings before interest, taxes, depreciation and amortization (EBITDA), interest coverage ratio, debt-to- EBITDA, same property metrics and payout ratio. a) Debt-to-Gross Book Value AHIP believes that debt-to-gross book value is an important supplemental measure of financial condition. Debt-to-gross book value is a compliance measure pursuant to AHIP s Limited Partnership Agreement (as defined below) meant to limit AHIP s financial leverage. Debt means any obligation for borrowed money including the face amount outstanding (excluding deferred financing costs, unamortized mark-to-market adjustments and interest rate swap contracts) of revolving credit facilities, term loans, convertible debentures, deferred compensation payable and finance lease liabilities provided that: (i) an obligation will constitute indebtedness only to the extent that it would appear as a liability on the consolidated statement of financial position; and (ii) indebtedness excludes accounts payable, accrued liabilities, distributions payable, short term acquisition credit facilities and deferred income. Gross Book Value means, at any time, the book value of the total assets of AHIP and its consolidated subsidiaries, as shown on its then most recent consolidated statement of financial position, plus the amount of accumulated depreciation and amortization in respect of such assets (and related intangible assets) shown thereon or in the notes thereto, less: (i) the amount of any receivable reflecting interest rate subsidies on any debt assumed by AHIP; and (ii) deferred income tax liabilities arising out of fair value adjustments in respect of indirect acquisitions. Debt-to-Gross Book Value is the ratio of Debt divided by Gross Book Value. b) Funds from Operations ( FFO ) and Adjusted Funds from Operations ( AFFO ) AHIP believes FFO and AFFO are important measures of operating performance of real estate properties. FFO is a supplemental non-ifrs financial measure of operating performance widely used in the Canadian real estate industry. FFO is not defined under IFRS and should not be considered as an alternative to net income, cash flow from operations, or any other operating or liquidity measure prescribed under IFRS. Instead, FFO has been included to provide readers and investors with additional information to improve AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 6

7 their understanding of AHIP s operating results. As it is not defined by IFRS, it does not have a standardized meaning and may not be comparable with similar measures presented by other issuers. In compliance with Canadian Securities Administrators Staff Notice (Revised), Non-GAAP Financial Measures, FFO has been reconciled to net income and comprehensive income in the section Funds from Operations and Adjusted Funds from Operations below. FFO is defined as net income and comprehensive income calculated in accordance with IFRS excluding: (i) depreciation and amortization; (ii) gains (or losses) from sales of hotel properties and equipment; (iii) deferred income tax expense (recovery); (iv) impairment losses or reversals recognized on land and depreciable real estate properties; (v) business acquisition costs related to the purchase of a property being accounted for as a business combination; (vi) foreign exchange gains (or losses) on monetary items such as loans and receivables due to a net investment in a foreign operation; (vii) fair value adjustments to financial instruments; and (viii) adjustments for property taxes accounted for under IFRIC 21 Levies ( IFRIC 21 ), an interpretation of the requirements under IFRS in IAS 37 Provisions, Contingent Liabilities, and Contingent Assets for the recognition of liabilities for obligations to pay levies and taxes. Hotel operations require maintenance capital expenditures to maintain the occupancy and revenue streams of the business. AFFO is a widely used non-ifrs measure in the Canadian real estate industry to indicate recurring economic performance and is indicative of our ability to pay distributions. AFFO is not defined under IFRS and should not be considered as an alternative to cash flow from operations as prescribed under IFRS. As AFFO is not defined under IFRS, the method applied by AHIP to calculate AFFO may differ from methods applied by other issuers and as a result may not be comparable with measures used by other issuers. AHIP calculates AFFO as FFO subject to certain adjustments including: (i) amortization of deferred financing costs on loans and convertible debentures; (ii) accretion on the liability portion of convertible debentures; (iii) amortization of mark-to-market adjustments on assumed term loans; (iv) amortization of deferred compensation payable; (v) securities-based compensation expense; and (vi) deducting FF&E Reserves (as defined below) for maintenance capital expenditures. Other adjustments may be made to AFFO as determined by the Board of Directors of the General Partner at its discretion. Upon the acquisition of certain hotels, AHIP negotiated FF&E Reserve waivers with its lenders for periods of up to 24 months and has not factored in the benefit of these FF&E Reserve waivers in calculating AFFO. In compliance with Canadian Securities Administrators Staff Notice (Revised), Non-GAAP Financial Measures, AFFO has been reconciled to cash flow from operations in the section Reconciliation of Cash Flow from Operations to AFFO below. For the purposes of calculating Diluted FFO per Unit and Diluted AFFO per Unit, the weighted average number of diluted units outstanding is calculated assuming the conversion of unvested Restricted Stock Units and the conversion of the convertible debentures outstanding. This may differ from the weighted average number of diluted units outstanding calculated in accordance with IFRS. AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 7

8 c) Gross Operating Profit ( GOP ) and Net Operating Income ( NOI ) AHIP believes GOP and NOI are important measures of operating performance of real estate properties. GOP is defined as total revenues less hotel operating expenses, energy and property maintenance (excluding depreciation and amortization). NOI is defined as GOP less property taxes, insurance and ground lease payments (excluding depreciation and amortization). AHIP calculates GOP Margin as GOP divided by total revenues. AHIP calculates NOI Margin as NOI divided by total revenues. d) Earnings before interest, taxes, depreciation and amortization ( EBITDA ) AHIP calculates EBITDA as NOI less corporate and administrative expenses. AHIP calculates EBITDA Margin as EBITDA divided by total revenues. e) Interest Coverage Ratio AHIP calculates the Interest Coverage Ratio as EBITDA for the period divided by interest expensed during the period comprised of interest expense on term loans, convertible debentures, finance lease liability and dividends on preferred shares. The Interest Coverage Ratio is a measure of AHIP s ability to service the interest requirements of its outstanding debt. f) Debt-to-EBITDA Ratio AHIP calculates the Debt-to-EBITDA Ratio as the aggregate amount of debt at face value divided by the trailing twelve months EBITDA. AHIP uses this ratio to measure leverage and determine the approximate time it will take AHIP to repay its debt. g) Same Property Metrics Same property metrics represent operating results for the same properties over comparable reporting periods and is int to measure the period-over-period performance of the same asset base. A property must be owned for the entire year for inclusion in this metric. These metrics exclude the impact of properties that have been acquired, sold, for sale, or under renovation during the comparable reporting periods. h) Payout Ratio AHIP calculates its Payout Ratio as distributions declared divided by AFFO for the period. OPERATIONAL METRICS a) Furniture, Fixtures and Equipment Reserves ( FF&E Reserves ) FF&E Reserves are calculated as four percent of total revenues for the Premium Branded Hotel portfolio and three percent of room revenues for the Economy Lodging Hotel portfolio. b) Occupancy Rate Occupancy Rate represents the total number of hotel rooms sold in a given period divided by the total number of rooms available during such period. Occupancy measures the utilization of a hotel s available capacity. AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 8

9 c) Average Daily Rate ( ADR ) ADR represents the total room revenues divided by total number of rooms sold in a given period. ADR is a measure of the average rate paid for rooms sold. d) Revenue Per Available Room ( RevPAR ) and Pro-forma RevPAR RevPAR is the product of occupancy and ADR for the period. Pro-forma RevPAR ( Pro-forma RevPAR ) includes operating results for newly acquired hotels and includes data for periods prior to their ownership by AHIP. INFLATION AHIP relies on the performance of its hotel portfolio and the ability of its hotel manager to increase revenues to keep pace with inflation. AHIP s hotel manager can change room rates quickly, but competitive pressures may limit the hotel manager s ability to raise room rates. AHIP s expenses are subject to inflation and are expected to grow at, or greater than, the general rate of inflation. SEASONALITY The lodging industry is seasonal in nature, which can be expected to cause quarterly fluctuations in occupancy rates, room rates, revenues, operating expenses, and cash flows. Historically, occupancies, revenues, and cash flows tend to be higher in the second and third quarters and lower in the first and fourth quarters. Quarterly earnings may also be influenced by factors beyond AHIP s control including overall economic cycles and weather conditions. To the extent cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, AHIP expects to utilize cash on hand or borrowings under its credit facility to pay expenses, service debt, or to make distributions to unitholders. COMPETITION The lodging industry is highly competitive. Our hotels compete with other hotels and alternative accommodations for guests in their respective markets which includes competition from existing and new hotels. Competition could adversely affect AHIP s occupancy rates, ADR and RevPAR, and may require AHIP to provide additional amenities or make capital improvements that AHIP would otherwise make, which may reduce AHIP s profitability. APPROVAL BY THE BOARD OF DIRECTORS The Board of Directors of AHIP s General Partner, upon recommendation of its Audit Committee, approved the contents of this MD&A for release on March 6, PART II OVERVIEW OF AHIP AHIP is a limited partnership formed under the Limited Partnerships Act (Ontario) to invest in hotel real estate properties in the United States ( U.S. ) and engaged primarily in growing a portfolio of premium branded, select-service hotels in larger secondary markets with diverse and stable demand generators as well as long standing contractual railway customers. AHIP was established pursuant to the terms of AHIP s AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 9

10 Limited Partnership Agreement dated October 12, 2012, which was subsequently am and restated on February 20, 2013 and further am as of June 9, 2015 ( Limited Partnership Agreement ). AHIP s general partner is American Hotel Income Properties REIT (GP) Inc. ( General Partner ). AHIP s head office and address for service is Suite West Georgia Street, Vancouver, B.C., Canada V6C 3L2. The principal business of AHIP is to issue limited partnership units ( Units ) and to acquire and hold shares of American Hotel Income Properties REIT Inc. (the U.S. REIT ). The U.S. REIT was established for the purposes of indirectly acquiring and owning hotel real estate properties in the U.S. AHIP has two operating segments: (i) Premium Branded Hotels, which are premium branded, select-service hotel properties that have franchise agreements with international hotel brands, such as Marriott, Hilton and IHG; and (ii) Economy Lodging Hotels, which are select-service hotel properties that have rail crew lodging agreements with large U.S. freight railway companies and, effective November 1, 2017, also have franchise agreements with Wyndham. AHIP s long-term objectives are to: (i) (ii) (iii) generate stable and growing cash distributions from hotel properties located substantially in the U.S.; enhance the value of its assets and maximize the long-term value of its hotel properties through active asset management; and expand its asset base and increase its AFFO per Unit through an accretive acquisition program, participation in strategic development opportunities and improvements to the properties through targeted value-added capital expenditure programs. AHIP s Units trade on the Toronto Stock Exchange ( TSX ) under the symbol HOT.UN (Canadian dollar) and HOT.U (U.S. dollar) as well as on the OTCQX International Marketplace in the U.S. under the symbol AHOTF (U.S. dollar). AHIP s convertible debentures trade on the TSX under the symbol HOT.DB.U (U.S. dollar). As of March 6, 2018, AHIP s diversified portfolio is comprised of 115 hotels located in 33 states across the U.S., representing an aggregate of 11,708 guestrooms. AHIP s 67 Premium Branded Hotels (comprised of 7,684 guestrooms) are geographically located in secondary markets with diverse and stable demand generators and are supported by the world s leading hotel brand partners, such as Marriott International Inc. ( Marriott ), Hilton Worldwide ( Hilton ), InterContinental Hotel Group ( IHG ), and Wyndham who provide global distribution channels, targeted brand segmentation, strong loyalty programs, and premier system standards. This operating segment includes 28 Marriott branded properties totalling 2,885 guestrooms (Courtyard, Fairfield Inn & Suites, Residence Inn, Springhill Suites and TownePlace Suites), 23 Hilton branded properties totalling 3,336 guestrooms (Embassy Suites, Hampton Inn, Hilton Garden Inn and Homewood Suites), 14 IHG branded properties totalling 1,314 guestrooms (Holiday Inn, Holiday Inn Express and Staybridge Suites), one 86-room Wyndham branded property (Wingate by Wyndham) and one 63-room Choice Hotels branded property (Sleep Inn & Suites). For its Premium Branded Hotels, by chain scale, AHIP has approximately 17% of its guestrooms in the Upper Upscale segment, approximately 35% of its guestrooms in the Upscale segment, approximately 46% of its guestrooms in the Upper Midscale segment and approximately 2% of its guestrooms in the Midscale segment. AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 10

11 AHIP s Economy Lodging Hotel portfolio consists of 48 hotels (comprised of 4,024 guestrooms) which have been purpose-built for mobile workforce employees primarily in the transportation, construction, and resource sectors while also providing corporate and leisure guests with a superior quality, select-service lodging experience. On November 1, 2017, AHIP entered into a 15-year brand licensing agreement with Wyndham to rebrand its Economy Lodging hotels under various Wyndham brands including Baymont Inn and Suites, Travelodge, Super 8 and Days Inn. AHIP previously operated these hotels under its proprietary brand Oak Tree Inn. The licensing agreement does not affect the contractually guaranteed room revenues under the various rail crew lodging agreements currently in place at the Economy Lodging hotels. As at 2017, management estimates that approximately 73% of the current room revenues within the Economy Lodging Hotel portfolio were covered under lodging agreements containing contractual revenue guarantees. TAXATION AHIP is not subject to tax under Part I of the Income Tax Act (Canada) (the Tax Act ). Accordingly, no provision has been made for Canadian income taxes thereunder in respect of the partnership. The Tax Act also contains rules regarding the taxation of certain types of publicly listed or traded trusts and partnerships and their investors (the SIFT Measures ). Management believes that AHIP is not a SIFT partnership as defined in the Tax Act and therefore not subject to the SIFT Measures. Accordingly, no provision has been made for Canadian income tax. Management intends to continue to operate AHIP in such a manner to remain exempt from the SIFT Measures on a continuous basis in the future. AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 11

12 AHIP s indirect Canadian subsidiary, AHIP Management Ltd., is a taxable Canadian corporation subject to Canadian income tax. AHIP s indirect U.S. subsidiaries, Lodging Enterprises LLC, IML Enterprises LLC, AHIP Enterprises LLC, are taxable REIT subsidiaries ( TRS ) of the U.S. REIT that are treated as U.S. corporations subject to U.S. income tax. The U.S. REIT elected to be taxed as a real estate investment trust ( REIT ) for U.S. federal income tax purposes. As a result, the U.S. REIT generally is not subject to U.S. federal income tax on its taxable income to the extent such income is distributed to its stockholders annually. A REIT is subject to numerous organizational and operational requirements, including a requirement to make annual dividend distributions equal to a minimum of 90% of its taxable income each year. If the U.S. REIT continues to qualify as a REIT under the Code, it may also be subject to certain state and local income, franchise and property taxes. For the U.S. REIT to qualify as a REIT under the Code, the U.S. REIT cannot operate any of its hotels it acquires and owns. Therefore, the U.S. REIT and its subsidiaries lease the hotels to its TRS lessees who in turn engage an eligible independent contractor to manage their hotels. MARKET ENVIRONMENT According to STR, Inc. ( STR ), U.S. hotel RevPAR grew by 4.2% during the fourth quarter of 2017 with ADR improving by 2.4% and occupancy growing by 1.8%. December 2017 marked the 94th consecutive month that RevPAR has increased in the current lodging cycle. For the full year of 2017 U.S. hotel RevPAR grew by 3.0% with occupancy up by 0.9% and ADR up by 2.1%. Demand outgrew supply in all the chain scales with the largest demand increases in the Upscale and Upper Midscale hotel segments RevPAR growth by chain scale (according to STR) was: Chain Scale Segment Representative Hotels Q Full Year 2017 Upper upscale Embassy Suites 3.8% 1.4% Upscale Courtyard, Hilton Garden Inn, Homewood 3.3% 1.4% Suites, Residence Inn, Springhill Suites. Staybridge Suites Upper Midscale Fairfield Inn, Hampton Inn, Holiday Inn, 4.4% 2.2% Holiday Inn Express, TownePlace Suites Midscale Sleep Inn, Wingate by Wyndham 3.4% 3.3% Approximately 81.0% of AHIP s Premium Branded Hotels fall within the Upscale and Upper Midscale Segments. During the quarter, AHIP s same-store Premium Branded Hotel portfolio achieved RevPAR growth of 2.1%, with both Oklahoma and Florida regions performing well with RevPAR increases of 26.5% and 17.6%, respectively. Conversely, the continuing supply-related weakness experienced within the Pittsburgh and Amarillo regions generated RevPAR declines of 12.4% and 14.4%, respectively. Excluding these weaker performing regions, AHIP s same-store Premium Branded Hotels produced RevPAR growth of 8.0% for the quarter, well ahead of the industry chain scale averages for the same period. For the full year 2017, RevPAR within AHIP s same-store Premium Branded Hotels remained unchanged while the regions of Florida and Oklahoma grew RevPAR by 13.1% and 7.9%, respectively. Excluding the weaker performing regions of Pittsburgh and Amarillo, which experienced supply-related RevPAR declines AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 12

13 of 10.7% and 8.9%, respectively, AHIP s same-store Premium Branded Hotels produced RevPAR growth of 3.8% for the 2017 year, again ahead of the industry chain scale averages for the same period. RECENT DEVELOPMENTS FOURTH QUARTER 2017 (a) Acquisition of 74-Room Economy Lodging Hotel in Fargo, ND On October 13, 2017, AHIP acquired the 74-guestroom Days Inn Fargo located in Fargo, North Dakota for a total investment (inclusive of purchase price and expected renovations), before closing costs and postacquisition adjustments, of approximately $3.8 million (or $50,700 per key). This hotel has a rail crew lodging agreement that currently guarantees 77% of the available guestrooms. The Days Inn brand was relicensed under the terms of the new Wyndham agreement. (b) Wyndham Branding Agreement for Economy Lodging Hotel Portfolio On November 1, 2017, AHIP entered into a 15-year licensing agreement with Wyndham Hotels Group ( Wyndham ) to rebrand 46 hotels in its Economy Lodging Portfolio under Wyndham s brands including Baymont Inn and Suites, Travelodge and Super 8 brands. The rebranding was completed on December 19, In total, 28 hotels were converted to Travelodge hotels, 15 hotels became Baymont Inn and Suites, two properties are now Super 8 hotels, and one hotel will remain a Days Inn hotel. AHIP expects to spend approximately $4.0 million over the next 24 months in transition costs including new signage, adoption of Wyndham brand standards and select Property Improvement Plans. (c) Master Rail Crew Agreement with Significant Railway Customer On November 1, 2017, AHIP announced that it had entered into a new Master Agreement with one of its largest and most significant railway customers for its future rail crew lodging contracts. This new Master Agreement will allow both parties to expedite new future contracts and contract renewals. (d) Acquisition of 64-room Economy Lodging Hotel in Whitefish, MT On November 7, 2017, AHIP acquired a 64-guestroom rail crew hotel located in Whitefish, Montana for a total investment (inclusive of purchase price and expected renovations), before closing costs and postacquisition adjustments, of approximately $3.7 million (or $57,800 per key). This hotel has a rail crew lodging agreement that currently guarantees 60% of the available guestrooms. This hotel was rebranded as a Baymont Inn and Suites under the new Wyndham agreement. (e) CEO Open Market Purchase of 184,000 Units On December 13 and 19, 2017, AHIP s CEO purchased 184,000 of its Units in the open market and will be taking 100% of his 2018 compensation in the form of Units. AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 13

14 RECENT DEVELOPMENTS FULL YEAR 2017 (a) Acquisition of the 529-room Sunstone Embassy Suites Portfolio On January 6, 2017, AHIP completed the acquisition of the 305-room Embassy Suites by Hilton Dallas DFW Airport South (the Dallas Hotel ) and the 224-room Embassy Suites by Hilton Phoenix-Tempe (the Tempe Hotel and together with the Dallas Hotel, the Sunstone Embassy Suites Portfolio ) for an aggregate purchase price of approximately $57.6 million before closing adjustments and excluding $5.7 million in property improvement plans ( PIPs ). The acquisition was funded using a combination of cash from AHIP s bought deal offering of 10,000,400 Units that closed on July 26, 2016 and AHIP s bought deal offering of 11,281,500 Units that closed on December 22, 2016 (the December 2016 Offering ), the assumption of an existing $19.0 million commercial mortgage backed securities ( CMBS ) loan on the Dallas Hotel, a new $13.5 million CMBS loan on the Tempe Hotel, and the issuance of approximately $17.4 million (or 2,242,761) in new Units from treasury. b) Acquisition of the Midwestern 3 Embassy Suites Portfolio On January 19, 2017, AHIP completed the acquisition of the three Embassy Suites by Hilton branded hotels totaling 782-guestrooms ( Midwestern 3 Embassy Suites Portfolio ) for an aggregate purchase price of $124.0 million including the expected cost of capital work on acquisition and PIPs. The Midwestern 3 Embassy Suites Portfolio included the 284-room Embassy Suites Columbus Dublin hotel located in Dublin, Ohio, the 271-room Embassy Suites Cleveland Rockside hotel located in Independence, Ohio and the 227- room Embassy Suites Cincinnati Rivercentre hotel located in Covington, Kentucky. The acquisition was funded with cash on hand from the December 2016 Offering and a new $65.0 million CMBS loan. c) Sale of Branded Hotel in Norman, Oklahoma On March 16, 2017, AHIP completed the sale of the 77-room Country Inn & Suites by Carlson hotel located in Norman, Oklahoma (the Norman Property ) for gross proceeds of $4.5 million. After repayment of the outstanding mortgage on this property and transaction related costs, AHIP realized net proceeds of $2.3 million. d) Completion of Cdn$200.9 million Unit Issuance and $48.9 million Convertible Debenture Issuance On June 9, 2017, AHIP completed a public offering, on a bought deal basis, of: (i) 19,410,000 Units at a price of Cdn$10.35 ($7.69) per Unit, for total gross proceeds of approximately Cdn$200.9 million ($149.3 million); and (ii) approximately $48.9 million aggregate principal amount of 5.00% convertible unsecured subordinated debentures due on June 30, 2022 (the Debentures ) at a price of $1,000 per Debenture (collectively the June 2017 Offering ). Included in the closing were 1,050,000 Units from the partial exercise of the Unit over-allotment option and approximately $6.4 million from the full exercise of the Debenture over-allotment option. e) Acquisition of the Eastern Seaboard Portfolio On June 22, 2017, AHIP completed the acquisition of 18 premium branded Marriott and Hilton hotels containing 2,187 guestrooms and located in Maryland, New Jersey, New York, Connecticut and Pennsylvania (collectively Eastern Seaboard Portfolio ) for a purchase price of approximately $395.0 million excluding approximately $12.4 million in brand mandated property improvement plans (the PIPs ). The acquisition was funded with cash on hand from the June 2017 Offering and four new AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 14

15 commercial mortgage backed securities loans in the aggregate amount of $236.2 million (collectively, the Eastern Seaboard Loans ). OUTLOOK During 2018, U.S. GDP is expected to continue to grow, fueled by recently announced tax cuts and steady job gains which are expected to bode well for the U.S. hotel industry. STR currently forecasts U.S. hotel demand to outpace supply growth, with demand growing by 2.3% and new supply growing by 2.0%. Along with continued strong occupancy levels, 2018 U.S. RevPAR is expected to grow by 2.7% led primarily by ADR growth of 2.4%. By chain scale, STR predicts 2018 RevPAR growth rates of 1.8% in the Upscale segment, 1.9% in the Upper Midscale segment, and 2.6% in the Midscale segment. AHIP expects most of its Premium Branded Hotels will continue to outperform their respective competitive sets in terms of RevPAR; however, certain regions, such as Pittsburgh and Amarillo, may experience ongoing headwinds as a result of elevated new supply and softness in demand. The recent rebranding of AHIP s rail crew hotels to various Wyndham brands is expected to drive higher transient (non-rail crew) revenues at many of AHIP s Economy Lodging hotels during AHIP continues to monitor both low unemployment rates and rising minimum wage requirements across several U.S. states. These circumstances, coupled with a tight labour market, may put upward pressure on labour costs and may cause some margin compression. During 2018, AHIP expects to spend approximately $20.0 million for brand-mandated property improvement renovations which are designed to enhance the overall guest experience at recently acquired properties. This capital investment program has been pre-funded with our lenders and will transform the grand lobby space at three of our Embassy Suites hotels and will also include guestroom and common area renovations at other hotels. In some cases, the renovations will impact hotel operations including some guest displacement which may affect our quarterly results. We are actively working with the Hotel Manager to minimize these disruptions. AHIP is focused on performance, is poised for growth, and is structured to mitigate risk. AHIP owns a highquality hotel portfolio of premium, select-service properties which are partnered with the world s preeminent and trusted hotel brands. AHIP also owns a well-maintained portfolio of economy, selectservice hotels which are underpinned with long-term guaranteed contractual revenue, and are branded with the world s largest hotel company. Our conservative capital structure, with no significant debt maturities until June 2022 and a currency-aligned distribution, positions AHIP well to deliver a stable and reliable income stream to its unitholders. AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 15

16 FOURTH QUARTER HIGHLIGHTS AND KEY PERFORMANCE INDICATORS (US$000s unless noted and except Units and per Unit amounts) Three months 2017 Three months 2016 Twelve months 2017 Twelve months 2016 Number of rooms (1) 11,708 8,156 11,708 8,156 Number of properties (1) Number of restaurants (1) Occupancy rate 72.8% 70.3% 74.7% 72.1% Average daily room rate $ $ $ $ Revenue per available room $ $ $ $ Revenues $ 82,222 $ 44,346 $ 303,710 $ 173,515 Net operating income $ 25,148 $ 15,149 $ 105,752 $ 64,503 Net income (loss) and comprehensive income (loss) $ (5,613) $ 3,398 $ 89 $ 9,280 EBITDA $ 20,435 $ 12,072 $ 89,761 $ 52,355 EBITDA Margin % 24.9% 27.2% 29.6% 30.2% Funds from operations (FFO) $ 13,150 $ 8,864 $ 58,597 $ 36,550 Diluted FFO per Unit (3) $ 0.17 $ 0.19 $ 0.82 $ 0.92 Adjusted funds from operations (AFFO) $ 11,060 $ 7,657 $ 50,064 $ 31,941 Diluted AFFO per Unit (3) $ 0.14 $ 0.17 $ 0.70 $ 0.80 Distributions declared $ 12,732 $ 7,927 $ 45,491 $ 26,651 AFFO Payout Ratio 115.1% 103.5% 90.9% 83.4% Debt-to-Gross Book Value (1) 53.9% 44.0% 53.9% 44.0% Debt-to-EBITDA (2) 8.4x 7.2x 8.4x 7.2x Interest Coverage Ratio 2.3x 3.0x 3.1x 3.6x Weighted average loan face interest rate (1) 4.61% 4.59% 4.61% 4.59% Weighted average loan term to maturity (1) 7.59 years 7.70 years 7.59 years 7.70 years Number of Units outstanding (1) 78,047,806 56,374,042 78,047,806 56,374,042 Diluted weighted average number of Units outstanding 83,479,320 46,410,264 73,625,387 39,757,170 Same property Occupancy rate 72.3% 70.3% 73.8% 72.3% Same property Average daily room rate $ $ $ $ Same property RevPAR $ $ $ $ Same property Revenues $ 38,160 $ 38,038 $ 157,061 $ 159,439 Same property Net operating income $ 13,007 $ 13,427 $ 53,693 $ 58,440 Same property NOI Margin % 34.1% 35.3% 34.2% 36.7% (1) At period end. (2) Aggregate amount of debt at face value divided by annualized EBITDA. (3) The Debentures are dilutive for three and twelve months Therefore, Debenture finance costs of $760 and $1,698, respectively, were added back to FFO; and $611 and $1,365, respectively, were added back to AFFO. AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 16

17 OPERATIONAL AND FINANCIAL HIGHLIGHTS The increase in occupancy, ADR, RevPAR, revenues and NOI for the three and twelve months 2017, compared to the same periods last year, resulted from the growth in AHIP s hotel portfolio between reporting periods; specifically, the addition of 23 Premium Branded Hotels totalling 3,498 guestrooms and two Economy Lodging Hotels totalling 138 guestrooms, offset by the sale of one Premium Branded Hotel in Oklahoma in March During the current quarter, AHIP s total portfolio RevPAR increased 19.6% when compared to the same period in 2016, reflecting AHIP s recent acquisitions of larger, premium branded, select-service properties located within larger secondary markets. As a result, AHIP s Premium Branded portfolio achieved RevPAR growth of 15.7% which was offset by a RevPAR decline of 7.7% in the Economy Lodging portfolio as a result of lower guaranteed revenues. Total revenues were up 85.6% to $82.2 million ( $44.3 million) with Premium Branded revenues increasing by $38.4 million to $64.9 million ( $26.5 million) and Economy Lodging revenues declining by $567,000 to $17.3 million ( $17.9 million). Total NOI was up 66.2% to $25.1 million ( $15.1 million) with Premium Branded NOI increasing by $11.1 million to $20.2 million ( $9.1 million) and Economy Lodging NOI declining to $4.9 million ( $6.0 million). For the twelve months 2017, AHIP s total portfolio RevPAR increased 19.3% compared to 2016, with Premium Branded RevPAR growing by 15.4% offset by a RevPAR decline of 7.4% in the Economy Lodging portfolio. Total revenues increased by 75.0% to $303.7 million ( $173.5 million), with Premium Branded revenues increasing by $132.8 million to $234.3 million ( $101.5 million) and Economy Lodging Revenues declining by $2.6 million to $69.4 million (2016 $72.0 million). Total NOI increased by 64.0% to $105.8 million ( $64.5 million) with Premium Branded NOI increasing by $45.9 million to $83.5 million ( $37.5 million) and Economy Lodging NOI decreasing to $22.3 million ( $27.0 million). FFO for the three months 2017 was up 48.3% to $13.2 million ( $8.9 million) resulting from additional NOI generated by the recently acquired hotels within AHIP s portfolio. Diluted FFO per Unit was $0.17 for the three months 2017 ( $0.19) as a result of lower income from the Economy Lodging hotels and higher property taxes and transition related expenses, including increased staffing and deferred maintenance costs, from the newly acquired properties. FFO for the twelve months 2017 was up 60.1% to $58.6 million ( $36.6 million). Diluted FFO per Unit was $0.82 ( $0.92) with the decline resulting from the same reasons as stated above and the temporary dilution arising from the June 2017 Offering. AFFO for the three months 2017 was up 44.1% to $11.1 million ( $7.7 million). The increase in AFFO reflected the contributions from the new hotels added to the portfolio. Diluted AFFO per Unit was $0.14 for the three months 2017 ( $0.17) due to the same reasons as stated above for the decline in FFO compared to the prior period. AFFO for the twelve months 2017 was up 57.1% to $50.1 million ( $31.9 million). Diluted AFFO per Unit was $0.70 ( $0.80) impacted by the same reasons as stated above and the temporary dilution from the June 2017 Offering. AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 17

18 AHIP s payout ratio during the seasonally weaker fourth quarter was 115.1% ( %) and on a full year basis was 90.9% ( %). The numbers were partially affected by the June 2017 Offering, lower Economy Lodging guaranteed revenues, and higher property taxes and transition costs for the newly acquired properties. AHIP s target run-rate payout ratio is approximately 85%. PART III RESULTS OF OPERATIONS The following discussion highlights selected financial information for AHIP for the three and twelve months 2017 and This information should be read in conjunction with AHIP s audited consolidated financial statements and the related notes for the years 2017 and (US$000s unless noted and except Units and per Unit amounts) Three months 2017 Three months 2016 Twelve months 2017 Twelve months 2016 Revenues $ 82,222 $ 44,346 $ 303,710 $ 173,515 Hotel expenses 57,074 29, , ,012 Net operating income 25,148 15, ,752 64,503 Depreciation and amortization 11,670 6,500 40,912 24,351 Income from operating activities 13,478 8,649 64,840 40,152 Loss (gain) on disposal of property, buildings and equipment (1) 43 (5) 91 Corporate and administrative 4,713 3,077 15,991 12,148 Impairment loss on hotel assets 3,459-10,808 - Business acquisition costs 1,541 2,392 8,146 5,056 Income before undernoted 3,766 3,137 29,900 22,857 Finance income (35) (217) (110) (368) Finance costs 8, ,669 14,685 Income (loss) before income taxes (4,738) 2, ,540 Current income tax expense Deferred income tax expense (recovery) 791 (564) (296) (1,234) Net income (loss) and comprehensive income (loss) $ (5,613) $ 3,398 $ 89 $ 9,280 Basic and diluted net income (loss) and comprehensive income (loss) per Unit $ (0.07) $ 0.07 $ - $ 0.23 AHIP REIT LP MD&A Quarter and Year Ended 2017 Page 18