Sotherly Hotels Inc.
Q2 2021 Earnings Call Transcript

Published: 12 Aug 2021

[Operator:]

Good day, and welcome to the Sotherly Hotels Second Quarter 2021 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mack Sims. Please go ahead.

[Mack Sims:]

Thank you, and good morning, everyone. If you did not receive a copy of the earnings release, you may access it on our website at sotherlyhotels.com. In the release, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with the Reg G requirements. Any statements made during this conference call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained. Factors and risks that can cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in today's press release and from time-to-time in the company's filings with the SEC. The company does not undertake the duty to update or revise any forward-looking statements. With that, I'll turn the call over to Scott.

[Scott Kucinski:]

Thanks Mack. Good morning, everyone. I'll start off today's call with a review of our portfolio's key operating metrics for the quarter, which we are pleased to report exceeded our expectations, reflecting the accelerating momentum in travel demand and confirming our position that a sustained recovery is underway for our industry. Looking at the second quarter results for the composite portfolio, RevPAR was $94.93, driven by an occupancy of 59% and an ADR of $161. Looking at these figures versus the second quarter of 2019, RevPAR was down 25.9% with occupancy down 22.7% and ADR down 4.1%. Year-to-date RevPAR for the composite portfolio was $80.54 with an occupancy of 50.4% and an ADR of $159.93. Looking at these figures versus the comparable period in 2019, RevPAR was down 35.6% with occupancy down 31.1% and ADR down 6.4%. These operating metrics were ahead of most of our REIT peers that have reported thus far for the quarter. The results were also better than our market competitors as nearly all of our hotels gained share from their competitive sets in the quarter. As a group the portfolio gained 3,150 basis points in share in the quarter. We are also pleased to see the incremental pace of demand recovery throughout the quarter examining composite portfolio RevPAR results on a monthly basis benchmark against 2019, highlights the quarter's continuous improvement. April RevPAR of approximately $93 was 68% of April 2019 RevPAR, May RevPAR of $95 was 73% at May 2019, and June RevPAR of $97 was 83% of June 2019. Dave will speak to our forecast for the third quarter a little later in the call that we are seeing this trend continue. The second quarter's performance was characterized by strong leisure travel fueled by pent-up demand for our warm weather and coastal locations with leisure performance eclipsing 2019 levels in some markets. Looking at some highlights across the portfolio. The DoubleTree resort in Hollywood, Beach Florida saw RevPAR surge past 2019 levels by nearly 11% in the quarter, driven by substantial rate growth of nearly 14%. Hotel Alba and Tampa produced RevPAR over 15% greater than 2019 with ADR growing over 5% and occupancy up nearly 10%. This hotel is nearing stabilization following its repositioning and is now performing at over 125% fair share against its competitive segment market. The DeSoto Savannah's Q2 RevPAR was only off by 5% compared to 2019 but grew ADR by 1.3%. This hotel gained nearly 10,000 basis points in RevPAR share from its competitors in the quarter. When compared to its competitive set this hotel is producing some of the best results we've seen since it was converted to an independent lifestyle hotel in 2017, a commendable job for our hotel staff and our new management partner. During the quarter, municipalities across our markets reopen their local economies by lifting restrictions and reopening our demand generators. While this had an immediate impact on leisure travel segment, it is also directly correlated with the recent improvement in the group and business travel segments, which we believe will provide a considerable base of business in the fall once major corporations return to the workplace and continue to lift corporate travel restrictions. Our sales teams are producing impressive bookings for the second half of the year, especially at our core group locations such as, Wilmington, Jacksonville, Savannah and Atlanta. Examining booking trends for the year, we have witnessed a steady acceleration in group business. The first quarter, only produced approximately 15% of the stabilized group revenue, when compared to 2019 results. In the second quarter, this more than doubled to 32.5% of Q2, 2019 bookings. We are forecasting this to nearly double again in the third quarter, to nearly 60% of Q3 2019 group bookings. While still plenty of room to grow compared to 2019, this trajectory of group demand recovery is a promising indicator, of how quickly our industry can return to a state of normalcy. Looking forward, although, the recent rise of the Delta variant, creates additional uncertainty in forecasting travel demand, we have not experienced any significant cancellations or changes to booking trends as a result of these concerns. We continue to monitor the impact of the Delta variant. And we'll adjust our operational strategies accordingly. During the quarter, not only did top line revenue production surpass our expectations, but so did bottom-line profitability, with hotel EBITDA margins, increasing 1,000 basis points over the first quarter of the year. Our managers have continued to adhere to strict expense controls. And just-in-time delivery of services and amenities, that coincide with the return of demand to their individual markets. This resulted in strong flow-through in profit margins. Staffing is one area we wouldn't mind adding a little expense. However, the labor market remains a challenge we face, as an industry and as a nation. We have seen some incremental improvement as our southern state governors have worked to encourage their population back to work. And we expect this to continue to improve in a meaningful way, through September, as government benefits burn off. And schools resume normal operations. Turning to corporate activity, during the quarter, we addressed the upcoming loan maturity for our Doubletree asset in, Laurel Maryland, by extending the maturity date with our existing lender through, May of 2022. By extending this loan, we believe this will allow the industry a chance to enter a sustained recovery. And we'll facilitate better opportunities for a more permanent loan restructuring solution next year. Also during the quarter, we executed on an agreement with one of the largest holders of the company's preferred stock to exchange 220,000 shares of preferred stock, for approximately 1.5 million common shares. The execution of this exchange fits with our long-term strategy to shore up our balance sheet, while also preserving liquidity. This transaction eliminated approximately $660,000 of deferred dividend payments, as well as $440,000 in annual preferred dividend payments going forward. In June, the company entered into a hotel purchase and sale agreement to sell the Sheraton Louisville Riverside Hotel, for a price of $11.5 million, including the assumption by the buyer of the mortgage loan on the hotel, which currently has an outstanding balance of approximately $11 million. The agreement includes a $200,000 deposit which is now nonrefundable. As a result, of the market's underperformance and the steady decline in brand contribution, the company's smallest asset no longer fit our long-term strategy. If successful, we believe the disposition of this asset will be newly accretive to our cash flow. Lastly, the company recently filed an S-11 registration statement with the SEC, which contemplates an unsecured note offering. Net proceeds from any offering would be used to repay, in full or in part the loan that was originated in December of 2020, to replenish the cash burn during the depth of the pandemic. We continue to evaluate all capital markets options available to us, with the goal to enhance our liquidity position, bolster our balance sheet and position the company for future success. I will now turn the call over to Tony.

[Tony Domalski:]

Thank you, Scott. Reviewing performance for the period ended June 30th 2021. For the quarter, total revenue was approximately $34.4 million, representing an increase of 549.5%, over the same quarter in 2020. Year-to-date, total revenue was approximately $57 million, representing an increase of 34.2%, over the same period in 2020. Comparing these results to the second quarter of 2019, total revenue was down $17.2 million or 33.3%. And year-to-date, total revenue was down $41.9 million or 42.4%, over the same period in 2019. Hotel EBITDA for the quarter was approximately $9.7 million, representing an increase of 285.5% over the same quarter in 2020. Year-to-date, hotel EBITDA was approximately $13.9 million representing an increase of over 9,000%, over the same period in 2020. Comparing, the current periods results over 2019, Hotel EBITDA was down $5.9 million or 38%. And year-to-date hotel EBITDA was down $14.9 million to 2019 year-to-date Hotel EBITDA. Adjusted FFO for the quarter was approximately $1.1 million or 108.3% over the same quarter of 2020. Year-to-date, adjusted FFO was a deficit of approximately $4.1 million, representing an increase of 76% over the same period in 2020. Comparing these results to the same period in 2019, adjusted FFO was down approximately $6.1 million or 84.6% and year-to-date adjusted FFO was down $16 million or 134% over the same period in 2019. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, gains and losses on derivative instruments, charges related to aborted or abandoned securities offerings, changes to the deferred portion of our income tax provision, as well as other items. Hotel EBITDA excludes these charges, as well as interest expense, interest income, corporate G&A expenses and the current portion of our income tax provision as well as other items. Please refer to our earnings release for additional detail. Looking at our balance sheet. As of the end of the quarter, the company had total cash of approximately $33.5 million, consisting of unrestricted cash and cash equivalents of approximately $21.8 million as well as approximately $11.7 million, which was reserved for real estate taxes, capital improvements and certain other items. Looking at cash burn. For the second quarter, the company generated a positive cash flow of approximately $0.5 million, compared to our forecast in May, which was a cash burn of approximately $5.1 million. This represents a sizable outperformance, which was driven by stronger-than-expected cash flow at the property level, as well as excellent flow-through. This positive change in cash flow is an important inflection point in the company's recovery. Looking ahead to the third quarter, our outlook continues to trend positively. The company estimates that average monthly cash generated at the hotel level to range between $2.9 million and $2.95 million. We expect corporate level G&A expenses to range between $400,000 and $450,000 per month and capital expenditures will be – of approximately $0.5 million per month. And outlays for scheduled payments of principal and interest are expected to be approximately $2.4 million per month. Overall, we're expecting a total cash burn of approximately $400,000 per month in the third quarter or approximately $1.2 million for the quarter as a whole, as higher levels of hotel profitability assist us in meeting our debt service obligations, which include scheduled repayment of deferred interest and principal from 2020. At the end of the quarter, we had principal balances of approximately $387.5 million in outstanding debt at a weighted average interest rate of 4.66%. Approximately 87% of the company's debt carried a fixed rate of interest. As a result of our wholly owned guestrooms undergoing renovation over the past five years, we have significantly scaled back our capital projects and anticipate the capital expenditures, which primarily represents the replacement of systems critical to the operation of our hotels will amount to approximately $4 million for calendar year 2021. In March of 2020, we announced the suspension of our dividend and a deferral of payment of dividends on our common stock announced two months previous. The suspension and deferral eliminated draw on the company's cash reserves of approximately $4.4 million per quarter. I'll now turn the call over to Dave.

[Dave Folsom:]

Thank you, Tony. Good morning, everyone. We're pleased to report that the recovery of our operations and financial results continue to accelerate and results for the second quarter exceeded management's expectations in all metrics and segments of our business. Through July, the steady improvement in occupancy and rate in the lodging industry indicates that the recovery is ongoing, as demand since the onset of the pandemic, notably reached record high levels in June and RevPAR exceeded 2019 for the fourth of July weekend, which acts as an important milestone for our industry. The second quarter built on the strong and solid foundation established during the first quarter, as the recovery continued to be characterized by strong leisure demand, which was especially robust in our warm weather and coastal locations. Expectations for strong, leisure demand were high going into the summer and it did not disappoint. Weekend travel continue to dominate bookings, but mid-week travel did experience a steady improvement throughout the quarter. Occupancy improved each month as leisure demand was combined with pockets of corporate and group business. As performance steadily ramped up throughout the first half of the year, we were able to exceed each month's internal budget and forecast. As a result, hotel EBITDA was positive each month during the quarter. This was the first time we've seen that since the fourth quarter of 2019. Focusing on composite RevPAR compared to the same period of 2019 further highlights this trend. As Q1 2021 was down 45.8% to Q1 2019 and Q2 2021 -- and Q2 2021's RevPAR declined 25.9% versus 2019. Both quarters RevPAR performance relative to 2019 are we believe among some of the best results in the lodging REIT space. Looking towards the back half of the year, we believe these trends will continue. July's preliminary RevPAR of $105.84 is only 2.8% lower than our 2019 July results. July's results significantly outperformed the national upper upscale segments July RevPAR, which was 20% below 2019 levels. Factoring in July's strong results, we're currently forecasting third quarter composite RevPAR to be down approximately 5% to 10% to 2019. This is an impressive accomplishment only months following the worst recession in the history of the lodging industry. The quick rebound in RevPAR has not only been attributable to surges in occupancy but also due to strong ADR. Pent-up transient demand coupled with consumers' increased savings during the pandemic has led to less price sensitivity among travelers, enabling our managers to achieve better than expected rates during the quarter. As Scott mentioned, average daily rates for the quarter at some of our hotels eclipsed the same period in 2019, and our portfolio's June average rate exceeded 2019 levels. In addition to rate expansion during the quarter, we were able to achieve strong margins and excellent flow-through with diligent management and cost controls at the properties. We believe the second half of the year is emerging with a number of unique challenges and opportunities. The recent headlines reflecting the resurgence of COVID-19 with the Delta variant, create additional uncertainty in the operating environment. Although, to-date we have not experienced any wholesale cancellation of our booked group business. Those groups that have canceled in the near term are simply rebooking in later months, indicating that the demand is there. In the short-term, our managers believe transient pace will replace any such group cancellations. While the recovery of our urban markets has lagged up to this point, we expect the return of demand generators will act as a positive catalyst for our assets located in more heavily impacted urban markets. For example, the Fox Theatre, which is slated to return to full schedule of events later this months -- later this month serves as a major source of business for the Georgian Terrace Hotel in Atlanta. Similarly, our DoubleTree Hotel in Raleigh which is located adjacent to NC State University is poised for a significant boost in business with a return of in-person learning and more normalized operations at the university later this month. Generally, the reopening of restaurants along with the full schedule of concerts, sporting events, and festivals will reinforce transient travel demand for our portfolio going forward. We believe our concentration of assets in the Southern United States will continue to act as a tailwind for our portfolio and a competitive advantage versus our peers. Leisure travel to these destinations has outperformed, the broader US lodging market and should continue to be on this track into the fall. As a result of these factors along with the increasing vaccination rates, we are optimistic about our growth prospects heading into the fall and into 2022. We remain dedicated to proactive investment strategies and making sound operational decisions, while delivering long-term value for our shareholders. With that, I'll open the call up to questions.

[Operator:]

We will now begin the question-and-answer session. And the first question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

[Alexander Goldfarb:]

Hey, yes, good morning. And I have to say nice to see some good things coming out of the Hotel business. So, you guys must feel quite -- I don't know relief, but certainly much happier. So, just a few questions here. First Scott, interesting transaction that you were able to negotiate with the preferred holder. As we think about the go-forward assume that the pay rate or the preferred dividends in the quarter in the second quarter is the good run rate going forward?

[Scott Kucinski:]

Tony, I'd defer to Tony on that question.

[Tony Domalski:]

Yes. This is Tony there, Alex. The expense there in the second quarter reflects the reversal of the deferred dividend -- of the deferred dividends on those exchange preferred. So that's not a good --hat $1.5 million $1.6 million is not a good run rate. It's closer to $2 million.

[Alexander Goldfarb:]

Okay. So $2 million is the preferred run rate we should think of going forward?

[Tony Domalski:]

That's correct.

[Alexander Goldfarb:]

Okay. Second along the same map, the shares you issued 1.54 million shares. Is that -- again the share count that we see for the second quarter is that the appropriate share count for the fourth -- for the third quarter and going forward or we need to time adjust it?

[Tony Domalski:]

You need time adjust it. We did that transaction at the very end of the quarter. So when you're looking at average number of shares outstanding in calculating earnings per share and FFO per share that's a weighted average. And so it's going to be a bit higher than that going forward.

[Alexander Goldfarb:]

Okay. So if you did it at the end it sounds like we got to add like another 1.2 million shares or something.

[Tony Domalski:]

Something like that. Yes.

[Alexander Goldfarb:]

Okay. Great. And then going on to the business and the leisure. You mentioned a number of stats a little fast for me to get everything down. But just big picture as a percent of recovery how much have you guys recovered the leisure business? And how much have you recovered the business/group bookings? And you mentioned where you thought group bookings would be it was 15% in the first quarter; then 30%; and you think third quarter would be 60%. So I want to be clear that's group and business or business would be incremental to that? So if you could just answer that.

[Scott Kucinski:]

Yes. Alex, this is Scott. So those stats are for group business -- group contracts whether that's a business group for a meeting or a wedding, leisure group whatever it may be it doesn't account for your individual business traveler -- your road warriors that are staying at the hotel on their own. That's what the statistics are measuring. So again, we've seen that incremental increase, doubling quarter-after-quarter and we see that trend continuing for the rest of the year. So we're not going to see group business nearly fully back to 2019 levels, but it's obviously coming back at a very quick pace. And then as I mentioned leisure travel in many of our markets has eclipsed 2019 levels handily particularly in Florida, Georgia, markets in North Carolina we're well above the leisure demand that we saw in 2019. So it's helping fill that gap.

[Alexander Goldfarb:]

Scott, big picture. You've laid out a good perspective for the group bookings, as a percentage overall it's great that some of your markets are exceeding 2019. But in total leisure is what is back to 80% of 2019, 90%?

[Scott Kucinski:]

Well I mean as we -- as Dave said I mean our third quarter RevPAR is forecasted to only be down 5% to 10% over all of 2019. So if we're going to be down -- if we're going to be back to 60% of our group bookings for the third quarter that means that leisure travel is in excess of 100% to fill that gap if we're only going to be down 5% to 10% on the top-line.

[Alexander Goldfarb:]

Okay. That's awesome. And then the final question which segues to that is the discussions with the mortgage holders on forbearance and modifications what they're seeing now that you have this uptick in RevPAR, et cetera. Are you and the lenders getting more optimistic that resolutions will be maybe in the next 6 months to 12 months, or is the sense that you guys from the lenders it's going to take longer than that to get these resolved?

[Dave Folsom:]

Alex, it's Dave here. I mean, I think, we have forbearance agreements on our mortgages that we inked over the past year. And we're in the process right now of simply repaying the deferred interest in principal and that's going to take us to the end of next year. In terms of additional terms or additional modifications, I don't think the lender community is looking to do any such modification. So we are where we are with respect to our forbearance and we have a schedule of repayment of deferred interest and principal that's in our forecast model and that we know what it is and we've accounted for it.

[Alexander Goldfarb:]

Okay. Dave, listen. Thank you very much.

[Dave Folsom:]

Yes. Thanks, Alex.

[Scott Kucinski:]

Thank you, Alex. Appreciate it.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Dave Folsom, CEO for any closing remarks.

[Dave Folsom:]

Thank you for joining us on the call this morning. We look forward to speaking with everyone on the next quarterly call.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.