Condor Hospitality Trust, Inc.
Q1 2018 Earnings Call Transcript

Published: 10 May 2018

[Operator:]

Good morning, and welcome to the Condor Hospitality Trust conference call to review the company's results for the first quarter of 2018 and its outlook for the remainder of 2018. On the call this morning will be Bill Blackham, President and Chief Executive Officer, and Jonathan Gantt, Chief Financial Officer. Before management begins, I would like to remind you that this call may include forward-looking statements concerning the Company’s operations and financial condition, including markets and industry trends. The company’s forecasted operating results, the company’s business and investment strategy, the company’s projected capital expenditures, and the company’s ability to obtain capital such statements are subject to various risks and uncertainties. Actual results could materially differ from results currently anticipated due to a number of factors, which are identified in the company’s SEC reports, including the company’s 10-Q filed yesterday evening. The company assumes no obligation to update or supplement forward-looking statements that may become untrue because of subsequent events. During this call, the company will also discuss non-GAAP financial measures such as, FFO, adjusted FFO, hotel EBITDA, EBITDA and EBITDA RE and adjusted EBITDA RE. Management’s view of the usefulness and risks of these non-GAAP measures and applicable reconciliations to GAAP measures can be found in both the company’s earnings release and the company’s 10-Q, both filed yesterday evening. I will now turn the floor over to management. Bill?

[William Blackham:]

Thank you, moderator. Good morning and welcome to Condor Hospitality's First Quarter 2018 Earnings Conference Call. On our call today, we will discuss our first quarter 2018 operational performance, our acquisitions and dispositions activity and the result achieved in executing our strategy. Jonathan will provide further detail on our financial results and balance sheet as well as a review of our outlook. The first quarter of 2018 was another very successful quarter for Condor, there are three key accomplishments that I would like to highlight on our call today. The first, is that we achieved 3.9% same store RevPAR growth for our new investment platform hotels in the first quarter. The second is that, we expanded same store hotel EBITDA margin by 60 basis points in the first quarter to 38.9%.And third, we successfully closed on the disposition of two legacy hotel assets while closing on the acquisition of two high quality new investment platform hotels during this quarter. I'd like to quickly review each of these accomplished, with regards to the RevPAR growth accomplishment, we are pleased to report another strong quarter of RevPAR growth for our new investment platform hotel. In the first quarter, our new investment platform hotels on a same store basis delivered RevPAR 3.9%. This 3.9% RevPAR growth was driven primarily by gains in ADR. Occupancy increased 0.4% year over year, while ADR increased 3.5% year over year. Recall that on our last earnings call, we indicated that we expected a significant portion of near term RevPAR growth would be comprised of ADR expansion, given the portfolio occupancy and our asset management initiative. Importantly, we realized positive RevPAR growth broadly across our hotel and market . Additionally the Aloft Leawood was under renovation during the first quarter of 2018 and experienced negative growth due to the renovation and that effect is embedded within our same store RevPAR growth. If we remove Aloft Leawood from our first quarter 2018 RevPAR growth, our RevPAR growth would have been 5.6%. These positive results continue to indicate that our differentiated strategy is advantageous with regards to market and the stage of the lodging site. As Jonathan will review later, we remain highly confident that our portfolio of high quality new investment platform hotels should continue to deliver RevPAR outperformance for the remainder of 2018. Next, regarding the hotel EBITDA margin growth, during the first quarter we increased same store hotel EBITDA margin for our new investment platform hotel is nearly 39% representing an expansion of 60 basis points over last year's quarter. When excluding the Aloft Leawood margins would have expanded by approximately 100 basis points. We continue to take an intensely active approach to asset management and the positive growth in hotel EBITDA margin is a result of our working closely with our third party managers to drive improvements in revenue management and cost control. While, our hotels already maintain a traffic margin, we believe there remain opportunities to realize additional flow through as demonstrated in our 2018 outlook of margins increasing to a range of approximately 39% to 40% on our new investment platform hotel. Some of these opportunities continue to be optimizing our revenue mix, improving our cost control, displacing lower rated OCA derived business and beginning to realize benefits from our growing scale. This is an appropriate place to pause and a review of change in Condor’s executive team. As you are all aware, Jeff Dougan, Condor’s Chief Operating Officer with a tenure starting two years before my arrival, resigned this past quarter to assume a leadership position with a Boston based hotel management company. I'd like to take a moment to thank Jeff for his service to Condor over the past five years, especially for his commitment and dedication over the past three years as we executed a remarkable transformation of Condor. We wish him all the best in his new role. I would also like to announce that we have engaged Cindy Potter to assume and lead our Asset Management function. Cindy brings a wealth of expertise to the role, having served most recently as Vice President of Real Estate Investment Management with Starwood Hotels and Resorts. Additionally Cindy has held asset management leadership role with both HEI hotels and Newcastle Hotels and Resorts. Cindy began in her role nearly four weeks ago, ensuring a smooth transition of the asset management function, prior to Jeff's departure on Friday, May 4. We are excited to work with Cindy and thank her for her commitment to Condor. We took action quickly in order to preserve our operating success and as you will hear from Jonathan we have no reason to believe this transition will affect our guidance for 2018. Returning now to our three key accomplishments from the first quarter; our third key accomplishment, involves the continued pursuit of our differentiated investment strategy and growth of our new investment platform portfolio. During the first quarter, we advanced the portfolio transformation of Condor. We closed on the approximately $36 million acquisition front of two new investment platform hotel, the Home2 Suites Summerville/Charleston in South Carolina and the Towne Place Suites, North Tech Ridge in Austin Texas. Both of these assets is squarely within Condor’s stated investment strategy. These two premium branded select service assets have an average age of just one year and are attractively located in a high growth market. Additionally during the first quarter, we sold two legacy hotel assets generating 8.2 million in gross sales price. Only three legacy hotels remain of the 55 hotels, the company owned when this process began three years. One of the three remaining legacy hotels is currently under contract for sale and one additional legacy hotel is being actively marketed to. I am extremely pleased with the success in transforming the portfolio. Our portfolio is now comprised of 15 high quality select service assets with 1,908 rooms in attractive high growth markets. The average age of our new investment hotel is just four years. The assets are of exceptional quality, have guest experience and design attributes sought by our target customers and our aggregate acquisition price was approximately $288 million for $151,000 per key. These factors should enable us to continue to drive outperformance relative to our competitive set. Additionally, we maintain a robust pipeline of acquisition opportunities. We intend to remain disciplined in our acquisition strategy and we remain confident in our ability to continue to find attractive assets to add to our portfolio. We are reiterating our guidance provided earlier this year for the remainder of 2018. Based on first quarter results, we remain confident in our 3% to 4.5% RevPAR outlook, the 13 new investment platform hotels owned as of December 31, 2017. Our markets generally continue to experience positive economic expansion and attract their supply and demand dynamic. These factors combined with the fact that we have young, high quality assets that are still ramping and gaining market share should enable us to continue the drug RevPAR performance. We remain singularly focused on our mission of delivering attractive total return to our shareholders. We have assembled the high quality young, premium branded portfolio that is currently generating top of our sector, if not industry leading RevPAR, resulting in strong cash flow and yields on investment as demonstrated by the approximately 10% hotel EBITDA yield on investment, we expect to achieve in 2018 on our recent acquisition. The positive benefits of the transformation of Condor can be seen in the year over year growth in revenue, Hotel EBITDA an AFFO. In short, we have established a strong foundation that is poised to continue to deliver shareholder value and per share value creation. And with that I will turn the call over to Jonathan Gantt Condor’s, Chief Financial Officer.

[Jonathan Gantt:]

Thank you, Bill. And will begin with a quick review with the composition of our portfolio. As of today, our portfolio is comprised of 15 new investments hotels in three legacy assets for a total of 18 hotels. These 18 hotels are in 10 states and represent 2,215 rooms. As Bill reviewed, Condor delivered strong results for the first quarter of 2018. Condor’s first quarter 2018 revenue excluding revenue from our JV increased to 16.7 million a 61% increase over the same 2017 period. The vast majority of Condor’s revenues are now generated by our high quality select service new investment hotel which contribute over 95% of our 2018 outlook revenue estimate. First quarter net earnings attributable to common shareholders was 0.6 million or $0.05 for basic and diluted share compared to a net loss of 14 million or negative $4.75 per basic and diluted share for the same 2017 period. In last year's quarter, the company recognize the 11.6 million in dividends and income dividends being the preferred stock. Funds from operations or FFO for the three months ended March 31, 2018 increased to 3.3 million from negative 0.7 million for the same prior year period. Adjusted funds from operations or AFFO for the first quarter increase the 3.5 million as compared to 0.3 million for the same period in the prior year. The company's AFFO per diluted share for the first quarter was $0.29 as compared to $0.10 for the same period of 2017. This compares favourably when at the analysts estimate range of $0.20 per share to $0.25 per share for the six analysts that cover Condor. The increase in a FFO per diluted share for the first quarter was primarily caused by growth in the revenue attributed by the growing portfolio of new investment hotel. As we continue to benefit from the increased scale of our portfolio. EBITDA for the first quarter of 2018 is 5.9 million as compared to 1.4 million for the same period prior year. Adjusted EBITDA RE for the three months ended March 31, 2018 increased almost 136% to 5.8 as compared to 2.5 million for the same prior year period. This compares favorably to an analysts estimate range of 3.8 million to 5.6 million for the six analysts that cover Condor. The increase in adjusted EBITDA RE was primarily driven by strong topline performance and higher margins from the new investment platform assets. Lastly, hotel EBITDA was 7.4 for the first quarter an 84% increase from the 4 million in the prior year quarter. Turning now to our acquisition and disposition activity. In the first quarter of 2018, we closed on the acquisition of the Towne Place Suites, Austin, North Tech Ridge and a Home2 Suites Summerville/Charleston for a combined purchase consideration of 36.1 million. The acquisitions were financed utilizing availability under our revolving credit facility. During the first quarter of 2018, we still have two legacy assets as of today only three legacy assets remain. As Bill mentioned, one of these remaining legacy assets is currently under contract for sale and the second is currently being marketed for sale. We continue to evaluate alternatives to maximize shareholder value for the final legacy asset the quality and Solomon's Island. In terms of our balance sheet, as of March 31, 2018, we have total outstanding long term debt of 145 million associated with asset sale with a weighted average maturity of 2.8 years and a weighted average interest rate for 4.29%. Note that this is as follows thirty 34 million of debt and covering our Atlanta Law firm of which Condor owns an 80% share. As a quarter end March 31, 2018. We had cash and restricted cash of 9.6 million and available revolver capacity of 3.3 million. During the first quarter we sold 12,334 shares of common stock under the ATM program and an average sales price of approximately $10.40. With regards for common dividend Condor’s Board of Directors declared a common stock dividends of $19.50 per share related to the first quarter of 2018. This represents $0.78 per share on an annualized basis and an annualized dividend yield of approximately 7.6% based on the closing price at the time of announcement. We continue to maintain highly attractive dividend coverage. Condor’s Board of Directors will continue to evaluate the company's dividend policy on a quarterly basis, evaluating both the appropriateness and amounts of any future common day. Finally, with regards to our outlook, we are reiterating the guidance we provided earlier this year for 13 hotel owned at the time that at Bill related based on our first quarter results, we remain confident in our 3 to 4.5% RevPAR outlook to the 13 hotel owned at the time of guidance. Given the acquisition of two new investments by four hotels on the first floor, we will reexamine our 2018 guidance to the second quarter relative to these two new addition. I would like to end by thanking Jeff again for his service to Condor. It was a privilege of working alongside him for the past three years and I wish him continued success at his new role. Finally, I am looking forward to working with my former colleague, Cindy Potter in the coming months as we continue to focus on delivering our performance and shareholder value creation. And with that, Bill and I will be happy to address any specific questions. Moderator?

[Operator:]

Thank you. And I'll be conducting a question and answer session. [Operator Instructions] Our first question today coming from Jim Lykins from DA Davidson. Your line is now live.

[Jim Lykins:]

Good morning everyone and congrats on a really nice quarter.

[William Blackham:]

Thanks Jim.

[Jim Lykins:]

First of all, could you talk a little bit about your acquisition pipeline right now? What's your thinking about the M&A in the space in general? Maybe the competition you're seeing out there for some of the assets. Just any color at all you can give us on how the pipeline shaking up right now?

[William Blackham:]

In the markets that we're in, the position that we're in, things are not really changing that much from what I reported on our last earnings call. We are still obviously in the secondary markets. And so there are less of the large money players in those markets unless and until the specific asset is at a purchase price, which is greater than a number. And that number seems to be in the $35 million or $40 million range before we're seeing competition from other private equity funds or a public hospitality REITs. Clearly the number of assets that are in the marketplace is reduced to last year. If you study the transactional volume that has been recently released, a transaction volume is somewhat off, but interestingly enough, our pipeline is still exceeds our enterprise value. And I think I can attribute that to the same factors mostly that, I gave in my last response last quarter. And that is, our strategy of aligning ourselves with management companies and sellers that continue to manage the asset, has desirability, assuming that the price is acceptable. And so we become a first stop, if you will, for many assets. Number two, I believe that our circumstances are a little unique in that we are buying relatively new assets. The last two we bought were a little bit less than a year old. They have not stabilized. And as such candidly, it's a little bit more risky because you have to drill down and have confidence in your underwriting. But at the same time you don't necessarily have to meet the full stabilized value pricing. But for a number of potential buyers, that's problematic, particularly if they're depending upon a financing in order to prospectively by an asset. There are developers that are looking to shed earlier than later because they are looking to either reduce their exposure or reload to do just one more deal, if you will, before such time as they slowdown or shut down their expansion operations. So I think all of those things are contributing positively to us maintaining a pipeline. Now remember this large, now remember I indicated on our last two calls that we have a rolling pipeline, some assets that were in our pipeline in the fourth quarter of 2017 are gone. Either we've elected to not pursue them. And in fact, in several cases I have elected, I've provided the seller's notice that we're not moving forward or alternatively, did pricing dynamics were not acceptable to us and we've moved on, but there has been an introduction of new assets. And so with all of that detail, the answer is, it's about the same in terms of it's a volume level.

[Jim Lykins:]

Okay. So about the same when you're looking at, call it $250 million to $300 million in the pipeline that you're looking at?

[William Blackham:]

Yes.

[Jim Lykins:]

Okay. And, and what about cap rates? Have you seen any noticeable change in cap rates?

[Jonathan Gantt:]

It's very similar to what I reported on our last call. In some markets cap rates have contracted a bit, they've come down and in other markets we're not seeing a rise in cap rates. What we're seeing is just the stability, same cap rates. So it depends on the market, it depends on the asset, but I think when you look at it on balance, I am seeing a little bit more in the way of lower cap rate expectation from sellers than I am stable. And I think that's being driven not entirely, but in some part by, you know, the option to still refinance right now and hold on a little longer.

[Jim Lykins:]

Okay. And one more and I'll hop back in the queue. Regarding guidance, you had a good print, but guidance is unchanged or you may be taking a cautious view this early in the year or perhaps it's driven by the economy or where we are in the cycle. Just any color on a guidance being unchanged?

[Jonathan Gantt:]

Well, we wanted to do is get ourselves fully through the second quarter before we made a decision to make changes to that guidance. I mean, after all, if you look at our guidance, our guidance is significantly ahead of everyone else in the sector. And so, one could say that, if given that as measuring criteria, we're not conservative, but you know, in the wake of our first quarter actual results, obviously we're a little bit, the first quarter was a little bit above mid range of our guidance for 2018. And so we really wanted to get through April and May to see what additional trends we're evolving in several of our hotels before we took a look at the possibility of potentially raising the guidance.

[Jim Lykins:]

Okay. That makes sense. All right, thanks Bill.

[Operator:]

Thank you. Our next question is coming from Austin Wurschmidt from KeyBanc Capital Markets. Your line is now live?

[Austin Wurschmidt:]

Hi, good morning guys. First off you reported obviously strong results this quarter that outperform certainly our other analysts expectations. You've continued to refine the portfolio but obviously the stock has remained stubbornly below the valuation range of 12.25 call it to little over $13 that you've published earlier this year. So I'm just curious, what's the next step for you guys as it relates to growing the enterprise?

[William Blackham:]

Well obviously – and I'm going to answer your question with some thoughts that are not directly, but indirectly responses to your question that may be on other's lists. Look, we're in a situation right now where if you take a look at year to date, REIT stocks in general, and hospitality stocks in particular have not necessarily had a robust first 120 days to the year. And so with that, our share price obviously is that a level, it's about -- the last statistics that I saw indicated that about 86% of our stock trading during that 120 day period of time has been in a band of between, I think it's $10.05 and $10.30. And that is a number which is lower than, obviously we would like to issue a new equity add in order to move forward with expanding the company. And so not unlike other management teams and other hospitality REITs, we're watching the market. We are trimming our balance sheet. We are taking actions to recycle capital. We're doing a number of those things. But that doesn't necessarily grow the size of the enterprise, which is critical to us moving out of that lock that you have referred to. So, as I said on our last earnings call, there were other options. We have available that could short term, to the extent that our stock price does not rise, allow us to continue to acquire assets and grow the bottom line of this company. One would be private equity and to potentially do a off balance sheet or a series of off balance sheet joint ventures that would acquire assets, warehouse them, provide asset management fees to Condor, which would then reduce the relative percentage of overhead in the company, increase our AFFO and get us going in the direction of having a catalyst for the potential of the stock price to increase market conditions being cooperative. Another tool that we could use which would not, which would involve in direct -- well directly and equity race but not a formal offering would be to do transactions with sellers. That would be involving a, taking back a shares of Condor stock, new shareholders, new share issuance, new shareholders at a price that strikes a relative balance between the price being paid for the hotels that are being acquired and recent equity offerings, NAV and those types of things i.e. not providing the stock at the current closing price which many days bears no relationship to the value of the underlying value of this company. But rather something that it takes into consideration some of the underlying value of this company. And so those are two possibilities. There are others, but clearly, what that should be signalling to you is that, we are very much still engaged in pursuing the correct strategy to continue to grow this company. Interestingly enough, I would share with you that while it's a beneficial for us to have two very large institutional investors with a large position in our company, approximately 51%. The other side of that is that, that prevents both trading volume in our stock as does it prevent the possibility of people looking at a Condor as being potentially a valued as a takeout play closer to NAV. Because at the end of the day, if we have 12 million shares outstanding and 6.6 million shares of those are controlled by two people, that leaves about 5.3 million or 5.4 million shares that are tradable, if you will. And then if in our last offering we issued another 3 million shares to institutional, small cap investors that are not trading than that really means you have a little over 2 million shares that are in the potential active float, hence the very low trading volume that's out there. But now beyond that, it eliminates the company from getting the benefit if other companies start to run in reaction to potential mergers that are happening or buyouts that may come up during this year. That overhang of control, if you will, by a small number of shareholders prevents that from occurring or can prevent that from occurring. So the bottom line is that, we have to simply move forward with the best strategy to raise capital in the least diluted manner to continue to acquire assets that are equally as I'm performing as what we have done. Clearly the results speak for themselves. The acquisitions that we have bought are doing extremely well, as I indicated on our last call there they are outperforming our projections at that we did at the time that we underwrote the assets to acquire and our yield on investment is on an EBITDA basis, is double digits. And so if we continue to repeat that by appropriately priced capital number one, the company will grow. And number two, it should be a accretive. Sorry for the long winded answer, but there's a lot of concepts that I think are directly or indirectly involved in answering your question.

[Austin Wurschmidt:]

No, thank you for the detailed and thoughtful response. Just the one follow up I'd have is, would you be willing to issue equity today or at a price, you know, similarly to where you raised capital last March? And may be near term diluted to NAV, but help improve the liquidity of the stock and to help grow the enterprise and potentially earnings going forward?

[William Blackham:]

I can respond to that by saying we have already taken action and a $10.50 per share on our last offering. And we have deployed that capital we believe successfully. And so, that would be a roadmap for moving forward to repeat for the purpose of growing the company. The challenge that we have right now is that the stock price is below $10.50 cents per share.

[Austin Wurschmidt:]

No, that's fair and a thank you. And then this last one for me, just the current line capacity and availability and include those most recent acquisitions. And then just how comfortable are you with the current liquidity position? I think around $10 million a quarter end. How comfortable are you taking that any lower?

[William Blackham:]

I'm going to have Jonathan go to the line. Let me, let me talk about the liquidity. We have, for a company our size and for our payout ratio, excuse me, for our yield on our dividends, we have actually a very attractive coverage of our dividend. And so with that, it is not necessarily in the best interest of shareholders for us to forecast not earning money. We have to keep a balance of having this much of our available resources invested in yielding return as possible. Now that being said, obviously the gauge that we have to equally watch and take into consideration is leverage ratios, because at some point we will get to the point where people will perceive that we're too far stretched and approaching the danger zone or not. But perception is everything. So with that, Jonathan, why don't you talk a little bit about a lot of credit, new availability?

[Jonathan Gantt:]

Sure. I will fit into simple answer is yes, they are. The availability reflects the acquisition and disposition activity through March 31, 2018.

[Austin Wurschmidt:]

Great, thank you guys.

[Operator:]

Thank you. [Operator Instructions] Our next question is from Michael Bellisario from Robert W. Baird. Your line is now live.

[Michael Bellisario:]

Good morning guys.

[William Blackham:]

Hey Mike, good morning.

[Michael Bellisario:]

I'm going to ask Austin’s question just a little bit differently. I know the stock price is the big variable here, but kind of we switched to fundamentals and think about it through that lens. Maybe how have all the options you just listed, three, four, five, six of them, how have they changed at all in terms of pecking order, based on the recent uptake in performance that you've got that you guys have seen lately? I mean, kind of trying to tie together more bullish outlook on the fundamental side. What's your longer term strategy and maximizing value stock prices side?

[Jonathan Gantt:]

Yeah. I think that, it's a balanced response might because we literally are watching, none of those, we watch it daily, but we're watching the trendline at the end of every week on what's happening with volume, our shares, what's happening to the sector, what's happening, funds, flows and what is happening to our shareholder base? To try and make judgements on near term the most likely scenario for what's going to happen in a demand for our shares and in, uh, the pricing of our stock? And that's going to cause us to put a stake in the ground is too, which we pursue. We are not at the point today where we're ready to do that. But I would tell you that near term, certainly I would expect by the end of the quarter we will have made that judgment and be underway with perhaps a much more formalized approach and details provided on what we're doing. We have -- we wanted to clean up the sale of a couple of additional legacy hotels. We have one of the remaining 300 contract. We are in discussions with buyers on another one of the two. We've been actively marketing it. And candidly, at some point near term, as soon as we receive a final verification from the municipality about entitlement possibilities for our last remaining asset, we will likely put that on the marketplace. So as to completely cleanse any remaining legacy hotels and then have nothing, but new investment platform hotels in place. So I wanted to get that out of the way this quarter because it seemed like a really good time while this, we were watching the stock price in evaluating some of these options to get that out of the way. So when we're ready to run hard again, there's nothing standing in our way. There's no interference. No, I know that's not specific to your question. What I'm really saying to you is it being close to the middle of May. We're about 75 days off from having some very real clarity on the answer to that question.

[Michael Bellisario:]

Fair enough? That's helpful. Thank you.

[Operator:]

Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.

[William Blackham:]

We would like to thank everybody for dialing into our earnings call this morning and we look forward to following up with any offline questions that people may have into our next conference call to be schedule.

[Operator:]

Thank you. That does conclude today's teleconference you may disconnect your line at this time and have a wonderful day. We thank you for your participation today.