Condor Hospitality Trust, Inc.
Q1 2017 Earnings Call Transcript

Published: 15 May 2017

[Operator:]

Greetings, and welcome to the Condor Hospitality Trust, Inc. First Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] On the call this morning will be Bill Blackham, President and Chief Executive Officer; and Jonathan Gantt, Chief Financial Officer. It is now my pleasure to introduce your host, Mr. Bill Blackham. Thank you. You may begin.

[William Blackham:]

Thank you, operator. Good morning everyone, and welcome to the first quarter 2017 earnings call and webcast for Condor Hospitality Trust. Today we are having a conference call to review the company's results, and the call will be purposely brief given the dramatic transformation that has occurred in 2016 and continued into the first quarter of 2017. We have been advised that this is the first such conference call for the company since its formation in 1994; however, we intend with this initiation to continue this practice on a quarterly basis in the future. With that I will now turn the call over to Jonathan Gantt, our Chief Financial Officer, for the financial review.

[Jonathan Gantt:]

Thank you Bill, and thank you to everyone for joining our call this morning. Before we begin, I would like to remind you that this call may include forward-looking statements concerning the Company's operations and financial condition, including market and industry trends, our forecasted operating results, our business and investment strategy, projected capital expenditures and our ability to obtain capital. Such statements are subject to various risks and uncertainties. Actual results can materially differ from results currently anticipated due to a number of factors, which are identified in our SEC reports, including our first quarter 10-Q filed this morning. The Company assumes no obligation to update or supplement forward-looking statements to become untrue because of subsequent events. During this call, we will also discuss non-GAAP financial measures such as FFO, adjusted FFO, hotel EBITDA, EBITDA and adjusted EBITDA. Management’s view of the usefulness and risk of these non-GAAP measures and applicable reconciliations to GAAP measures can be found in both our earnings release and 10-Q filed this morning. I will now transition to a review of the company’s performance. Prior to any discussion of any financial measures, it is important to review the status of the portfolio as it provides the necessary context to understanding the financial results. We continue to have success selling the legacy hotels at what we consider to be attractive valuation, but also closing on highly attractive acquisitions that meet our investment criteria. We began the year with 13 legacy hotels and six new investment platform hotels for a total of 19 hotels. During the first quarter, we sold two legacy hotels and subsequent to the close of the first quarter we sold two additional legacy hotels. Thus we have sold four legacy hotels year-to-date 2017. Late in the first quarter, we acquired three Home2 Suites by Hilton, and subsequent to the close of the first quarter we closed one additional Home2 Suites. Thus we have acquired four assets year-to-date. As of today our portfolio is comprised of 10 new investment platform orders and nine legacy hotels for a total of 19 hotels. We have publicly announced that by mid-2017 we aim to sell or have under contract to sell seven legacy hotels. As I previously mentioned, we have sold four of these seven hotels. Off the three remaining that we intend to sell, we have one under contract with a buyer, and we are in active negotiations with buyers for the remaining two. We fully expect to end 2017 with only six of the legacy hotels remaining. Bill will speak further to our anticipated acquisition activities, including the announced purchase contract to acquire the Hampton Inn and Suites in Lake Mary, Florida. I will now turn my attention to the financial results of the company. Condor’s first quarter 2017 revenue from continuing operations was $10.4 million compared to $12.5 million in the same 2016 period. Revenue from wholly owned properties acquired in and since 2012 in the three months ended March 31, 2017 totaled $6.0 million. Revenue from legacy properties totaled $4.4 million in this same period. First quarter net earnings attributable to common shareholders was a negative $14.0 million, or negative $4.75 per basic share, and negative $4.75 per diluted share, compared to negative $10.4 million, or negative $13.72 per basic share and negative $13.72 per diluted share for the same 2016 period. It is important to understand that the 2016 and 2017 periods included substantial dividends declared and undeclared in kind dividends on preferred stock. Decreased gains on the sale of assets and decreased net gain on derivatives and convertible debt also created the differences in net income between the two years. Funds from Operations, or FFO, for the three months ended March 31, 2017 decreased to negative $0.7 million as compared to $5.8 million for the same period prior year. The decrease in FFO was primarily driven by a decrease in net gains on derivatives and convertible debt, which decreased by $5.9 million between the first quarter periods. Adjusted FFO for the first quarter 2017 was negative $11.6 million as compared to negative $17.9 million for the same period in 2016. The increase in AFFO, which excludes net gains on derivatives and convertible debt, was primarily a result of lower preferred dividend expense. Earnings before Interest, Taxes, Depreciation, and Amortization or EBITDA for the three months ended March 31, 2017 decreased to $1.4 million as compared to $10.6 million for the same period prior year, a decrease of 86.4%. The decrease in EBITDA for the three months ended March 31, 2017 was primarily driven by a decrease in net gains on the disposition of assets, which decreased by $4.0 million between the first quarter periods, and by a decrease in net gains on derivatives and convertible debt, which decreased by $5.9 million between the first quarter periods. Adjusted EBITDA for the three months ended March 31, 2017 increased to $2.4 million as compared to $1.3 million for the same period prior year, an increase of 79.8%. The increase in adjusted EBITDA was primarily driven by strong performance in the new investment platform assets. And now for an update on our capital structure, capacity and leverage. As of March 31, 2017, we had approximately $110.7 million of debt outstanding, including our JV partner’s pro forma share of the debt on the Atlanta Aloft. We had approximately 45.6 million of outstanding debt on our secured credit facility. This provides us with approximately 20.9 million of net availability based on the contributed assets to the borrowing base. We successfully closed the increase to our credit facility to $150 million on May 11, 2017, and we continue to have the ability to exercise an accordion feature to $400 million contingent upon additional lender commitment. Total net debt to enterprise value at the end of the first quarter was approximately 40%. The additional dispositions of legacy hotels that the company is currently marketing will help reduce our overall debt and enhance our coverage ratios. In addition, upon execution of these dispositions we will have increased capacity on our balance sheet to make additional accretive acquisitions. With regard to common dividends, Condor’s Board of Directors declared a common stock dividend of $0.195 per share related to the first quarter of 2017. This represents $0.78 per share on an annualized basis. The first-quarter dividend was paid on April 7, 2017 to shareholders of record on March 31, 2017. The first quarter dividend represents the fourth consecutive quarterly dividend for the company since declaring a dividend in July of 2016 for the first time since 2009. This concludes the review of the financial highlights. I would now like to turn the call over to Bill, who will discuss some of the operational highlights for the quarter, our other first quarter accomplishments and our outlook for the year.

[William Blackham:]

Thank you, Jonathan. And thanks to everyone again on this call for taking the time to allow us to update you on Condor Hospitality Trust. As the transition of the company has almost been completed as it relates to the legacy hotels, we have encouraged that the results of the new investment strategy hotels be the gauge by which the company be evaluated. Using that measure, our RevPAR growth for the first quarter grew by 7.7% over the same period in 2016 for the nine new investment strategy hotels owned by the company at the end of the quarter. If adjusted to include the Southaven Home2 Suites hotel acquired in early April, the RevPAR growth combined with 6.5% over the same period one year earlier. This compares to RevPAR growth of between negative 0.6% and 1.5% for the four non-urban focused hotel REITs that concentrate on select service between negative 3.6% and 5.5% for eight of the remaining hotel REITs between 2.1% and 4.4% for six of the largest hotel brands, and 3.4% RevPAR growth for the quarter for the hotel industry as reported by STAR. Our RevPAR growth for the quarter was distributed across our new investment strategy hotels as follows

[Operator:]

Thank you. [Operator Instructions] Our first question is coming from Austin Wurschmidt of KeyBanc Capital Markets. Please go ahead.

[Austin Wurschmidt:]

Hi, good morning guys, and thank you for taking the questions. Recognizing that a lot has been accomplished here before, as you look forward would the incremental availability on the line of credit, I was wondering Bill, if you could provide some additional details on the acquisition pipeline. I know you guys have cast a wide net in terms of markets, but where are you targeting I guess on that 175 million that you said is in the analysis phase? And then just give us a sense on target cap rates and how we should think about the timing of you deploying that incremental dry power to that?

[William Blackham:]

Have you got all of it out Austin, or is there more to the question?

[Austin Wurschmidt:]

That will do it for the first part.

[William Blackham:]

Happy to do so. I think what we are trying to do is stay extremely disciplined within the box of what we defined is our investment strategy, and so the markets that we are looking at continue to be top 100 MSAs, but candidly staying away from the top 20 markets unless we see something that is truly compelling. We continue to seek markets that have population growth or job growth percentages that exceed what is going on in the national markets, our agent quality parameters are being adhered to. Recall that we stated we are not going to buy anything that is more than 10 years old unless it has had extensive renovations and brought to current brand standards as this is the case with Lake Mary. So all of that has come into play. Now a little bit of greater visibility. What I don't want to do is drill down too much in terms of specific markets because recognize that the bucket of perspective acquisitions is a moving target with some things coming out, others coming in as well as there are active negotiations and discussions that are taking place with several sellers, but with that being said we are looking at additional hotels in Texas, we are looking at hotels in Florida, we are looking at hotels in the Carolinas, we are looking in several other markets and those are all consistent with what we have communicated is our strategy. The cap rates that we are seeing for the markets that we are in there is some pressure on cap rates taking place but we are looking to achieve an 8.5% trailing 12-month cap rate after if any reserves on what we are buying unless there has been some kind of demonstrable event or occurrence that – cause for there to be a lower yield. For example, there could have been displacement caused by renovations within that 12-month period of time. But absent that type of adjustment we are looking at 8.5% trailing 12-month cap rates as Lake Mary is very specifically within that gauge. Our expectation and our desire, of course, is for the cap rate and EBITDA yield to increase in our first year of ownership, but that is obviously going to be a function of many market conditions that we don't control but in our underwriting we are looking for markets where there continued to be -- some ADR growth, possibly some expense control containment, or some additional things that we can do in revenue management to really jump what is going on with the revenue side. For example, our RevPAR growth in Atlanta I think was almost 12% in the quarter from the last year, and that is a result of us really changing the mix of business and moving the levers in a few areas. So I think I was responsive. But if I left anything out Austin, jump back in.

[Austin Wurschmidt:]

Just curious on the last part on how we should think about the timing of deploying the incremental dry powder that you have today recognizing the increase in the line of credit here recently?

[William Blackham:]

Well, I think that what we are causing ourselves to not do is be under tremendous pressure to just get the money out the door for all the obvious reasons. But with that being said, it serves no purpose for us to remain at our existing size. We have to grow and we have to grow with accretive acquisitions that will accomplish our objectives. So with that I would say to you certainly that by the end of this year we will be done with our buying power, but our hopes and our expectations would be to have that done by the end of the third quarter.

[Austin Wurschmidt:]

Great. I appreciate the detail there, and then on the remaining legacy hotels, any sense of timing of how we should think about you continuing to dispose those legacy assets over time?

[William Blackham:]

I think that as Jonathan indicated we have one that is under contract, and we believe that that will close before the end of this month – before the end of the month of May. We are in active negotiations with respect to two additional legacy hotels and we believe that those contracts will be signed before the end of May. And so with that that would put us squarely into a position of doing what our – what we have indicated was our objective, which is to have seven legacy hotels either closed or under contract by the end of June with a closing shortly thereafter. What that means is that certainly by the end of July, we would then have remaining only six legacy hotels in the company. And that is very much our objective. We will more likely than not keep those six through the balance of this year in order to maintain certain levels of EBITDA and coverage ratios, but also importantly in at least three of those assets capture the benefit of non-disruption as compared to prior period so that we can maximize the value of those assets when it's time to sell them.

[Austin Wurschmidt:]

That's helpful. And then just one more here from me. Was the outsize or above average RevPAR growth in the first quarter, something that we should read through into the balance of the year as being upside opportunities that you've seen in the new investment platform or is there anything specific or one time in nature that drove that outsides growth in the first quarter that we should expect to perhaps decelerate into the back half or into the middle of the year?

[William Blackham:]

Let me say this. We're not providing guidance per se, but to be specific to your question, certainly we are very pleased with the 7.7% growth and it speaks to a number of factors. Some of it are some adjustments that we saw when we went through the acquisitions that have been implemented. Not the new acquisitions bound to switch that we took title to, I think it was March 23, but rather the five that we had previously acquired. We are now seeing the benefit of that. Some of it has to do candidly with the fact that our investment platform projects that the non top 20 MSAs in the country will outperform the rest of the country, will outperform those top 20 markets for the balance of this year in RevPAR growth. We've seen a little or gaining the benefit of the little of that as well. And I think some of it has to do -- with there was a little bit of disruption in at least one of the hotels and we obviously we didn’t experience that in the first quarter here. So we were able to get this from a lot of different what you call meters or leverages that we were pulling. That said, we still expect that our RevPAR growth in our new investment hotels as well as our acquisitions will exceed the projections by Star and others for the industry for 2017. I would also say to you for example, you may have picked up that they were negative RevPAR growth in two of our hotels. Well, in that case, in the case of the Jacksonville Courtyard, it was a situation where we had a large piece of training business in the first quarter of 2016 that we did not have in 2017 and so therefore that affected the revenues as did the opening of a residence in that particular marketplace which is directly competitive. Now, our underwriting for the asset itself included that opening of the residence in our projections. And so, therefore that's not inconsistent with our expectations. But we don’t expect that situation to continue to go on into the future unlimited. We will see some mitigation of that. And we look to achieve at least neutral dispositive RevPAR growth going forward. In the case of the Leawood Aloft, we actually had some rooms, about 200 room nights that we lost as a result of some renovations that were already taking place. And so, obviously that's a temporary situation as well. So, well some of the larger growth will not be repeated with as much robust in a RevPAR expansion. We will pick up some RevPAR growth from assets that were previously in the first quarter negative. I think that the two that are most significant obviously are the San Antonio Spring Hill suites at 22.5% and the Atlanta Aloft at an 11.7%. And I think that in that case, you'd have a situation where the marketplace in San Antonio is just significantly better. We've improved the revenue management of that hotel, but the city wide conventions are up dramatically in San Antonio. The convention center had been closed for expansion and renovation and so now that it's opened and the last year and bookings came back, that’s affecting that business quite nicely. And we expect that that will continue throughout the balance of the year, at least through the third quarter in that hotel. In the case of the Atlanta Aloft, frankly we knew when we underwrote the hotel that way too much business was being given at low rates to the March across the street. And we've taken the chance of eliminating that level of sales and putting back in higher rated business and we're seeing the benefits of that. And that should actually continue at least into the second quarter, notwithstanding the fact that Atlanta is having some issues right now in terms of the RevPAR expansion. So, I think that gives you a pretty good picture on our expectations.

[Austin Wurschmidt:]

Yes. I appreciate the color there Bill and congrats again on a good quarter.

[Operator:]

Thank you. Our next question is coming from Jim Lykins of DA Davidson. Please go ahead.

[Jim Lykins:]

Good morning, everyone.

[William Blackham:]

Good morning, Jim.

[Jim Lykins:]

So the six legacy assets that you figured on a whole through the year, what about into 2018. How should we be thinking about that, any planned asset sales in 2018 for the rest of those legacy assets?

[William Blackham:]

Currently we don’t have a specific plan in place that says that we're going to definitely keep them, definitely sell them or do some combination of both. However, we are going to constantly evaluate those hotels from the perspective of can we receive higher yields on our investment through alternative acquisitions and alternative ownerships, said differently, on a quarterly basis at least ask if we would buy them at that price and if not we should sell them at that price and reinvest the proceeds to drive shareholder value. Our guess is that certainly a few of those hotels will be earmarked to be sold in 2018, it will be a function of how quickly we are able to grow Condor with new acquisitions in during 2017. And so, we won't have a better picture on that until the third quarter. What I can tell you is that at least two of the assets we also have to conclude and will do so this summer, how to maximize the value of those assets. One, to be specific is the hotel that we own down in the Chesapeake in Solomons and that hotel is surrounded on three sides by water. It has a marina and a restaurant. And it's highly likely that alternative usage to our hotel and hotel operation will maximize value to shareholders. And we're trying to get a handle on exactly what that means in dollars. Very similar to the process that we just went through in Key Largo where in the case of that hotel [if it was] to be sold on a revenue multiplier basis. The sale price would have been somewhere in the vicinity of between $3.5 million and $4 million and on the sale that we have now, we are going to be selling that hotel for almost twice that amount. And so, that's exactly the exercise that we're going to do on several of these to see what truly is the value that can be captured for our shareholders.

[Jim Lykins:]

Okay, that's very helpful. And also, with the Vista portfolio now completed. With the Home2 Suites you talked about RevPAR growth, but can you just give us a sense for how those four hotels are performing versus what your expectations were?

[William Blackham:]

Well, so far they're tracking slightly better than our underwriting. An area it’s a very obviously it's somewhat nebulous because the three of them we've owned for 45+7, 52 days. But for March and for April, the period that we owned for the three. We were slightly ahead of our plan. The same held through for the fractional period, I think it was around 20 days for Southaven. So, so far so good. They're tracking exactly with our underwriting called for.

[Jim Lykins:]

Okay. Thanks, Bill.

[William Blackham:]

Thank you, Jim.

[Operator:]

[Operator Instructions] Our next question is coming from Michael Bellisario of Robert W. Baird. Please go ahead.

[Michael Bellisario:]

Good morning, guys.

[William Blackham:]

Good morning, Michael.

[Michael Bellisario:]

I just wanted to circle back on the asset sales front. How should we think about remaining value of the legacy hotels and it’s more specifically what revenue multiple are buyers looking for today?

[William Blackham:]

In that marketplace, it varies a little bit by what is going on in the specific geographic region. For example, one of the legacy hotels that we are trying to sell is in Morgantown. And that is an area that has been affected directly and indirectly by energy related matters. And so, the revenue multipliers that we see in that marketplace are less than the 2.5 to 3.0 range that we are seeing in some of the more stable markets. I think that generally though our expectation and our historical results have been between 2.5 and 3.0 of gross revenues on a trailing 12 month basis for everything that we've sold.

[Michael Bellisario:]

Got it, that's helpful. And then, maybe taking a step back, just on capital allocation, acquisitions and disposition more broadly. You think about accretion and aside from some of the qualitative benefits that you already outline like hotel brand and age. What are the key quantitative metrics that you're looking at for potential growth to be accretive to shareholders?

[William Blackham:]

Well, I think it ultimately yield on investment drives everything else. We are constantly looking at what unleveraged yield on our total investment is at the point of contact if you will like closing and how quickly that can grow from the perspective of growth in the hotel operating income as the numerator and our investment in the hotel including any capital improvements that we have to make. Which I think as you know, most of the hotel acquisitions we've done, we have not had to do capital improvements. But taking a look at that is extremely important as really the driver. Now, obviously that has to be compared to our cost of capital and sort of the leverage decisions that we're making. But I would have to say the balance sheet determinations are being made somewhat independent on the acquisitions currently. Because right now it's hugely important to be getting double-digit yields on our investment as quickly as we possibly can. And at the same time manage our cost of debt, the equity pricing is what it is and our dividend is right now at a yield that we are comfortable with. So, that's the way we're looking at it, Mike.

[Michael Bellisario:]

Great, that's helpful. Thank you.

[Operator:]

Thank you. At this time I'd like turn the floor back over to Mr. Blackham for any additional or closing comment.

[William Blackham:]

Well, again we'd like to thank everyone for taking the time with us today and participating and your interest in Condor Hospitality Trust. We look forward to speaking with you again during our second quarter conference call. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation. Today's conference has concluded. You may disconnect your lines at this time. And have a wonderful day.