Sotherly Hotels Inc.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Good morning, and welcome to the Sotherly Hotels First Quarter 2021 Earnings Call. All participants will be in 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, Vice President of Operations. 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.

[Scott Kucinski:]

Thanks, Mack. Good morning, everyone. I'll start off today's call with review of our portfolios key operating metrics for the quarter which we are pleased to report exceeded our expectations and provide us some initial confidence that sustained recovery is now underway for our industry. Looking at results for the composite portfolio, RevPAR decreased 26% over prior year reflecting a 21.1% decrease in occupancy and a 6.1% decrease in ADR. Looking at RevPAR versus the comparable period in 2019, RevPAR decreased 45.7% over Q1 2019 reflecting a 40.2% decrease in occupancy and a 9.1% decrease in ADR. These metrics were ahead of the U.S. lodging industry, the upper upscale segments and most of our REIT peers that have reported thus far from the quarter. The results were also better than our market competitors. As our portfolio gained 630 basis points in RevPAR share from their competitive sets in the quarter with a solid mix of occupancy in ADR share capture at most hotels. Despite the lingering impact from the pandemic on our industry, we are pleased to see that leisure travel business and group demand all demonstrated steady improvement throughout the quarter. Examining RevPAR results on an absolute basis for our composite portfolio highlights the quarter's continuous improvement. As RevPAR in January increased 39.9% month-over-months to $50.38. February RevPAR increased 25.8% month-over-month to $63.38. And then March RevPAR increased 33.4% month-over-month to $84.52. January results finished stronger than expected fueled by leisure demand in our warm weather locations and the significant government contract in our two Washington DC area properties. Moving into February, the Super Bowl and Tampa provide a boost for Hotel Alba. But that was just the beginning of the improved results as several of our coastal leisure destinations showed strong pickup and some properties start to see small pockets of group and business travel return. March results exhibited similar improvement as more of our portfolio began to benefit from warmer spring weather throughout the Southern U.S., which further fueled leisure travel.

[Tony Domalski:]

Thank you, Scott. Reviewing performance for the period ended March 31 2021. For the first quarter total revenue was approximately $22.6 million, representing a decrease of approximately $14.6 million or 39.2% over the same quarter a year ago. Hotel EBITDA for the quarter was approximately $4.2 million, representing a decrease of approximately $0.9 million or 17% over the same quarter a year ago. And adjusted FFO for the quarter was a deficit of approximately $5.2 million, a decrease of approximately $1.5 million or 42.7% over the same quarter a year ago. 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 offering, 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, the current portion of our income tax provision, and other items as well. 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 million consisting of unrestricted cash and cash equivalents of approximately $21.1 million as well as approximately $11.9 million which was reserved for real estate taxes, capital improvements and certain other items. Looking at cash burn, for the first quarter, the company's total cash burn was approximately $2.3 million compared to the forecast on our call in February of approximately $4.5 million. The sizable outperformance driven by stronger than expected cash flow at the property level.

[Dave Folsom:]

Thank you, Tony. And good morning, everyone. We're pleased to report that our operating results for the quarter far exceeded expectations and believe that the lodging industry has entered a sustained recovery period, as demand increases across all segments of our business. Our Q1 results represent an important milestone for the company, as our portfolio had positive Hotel EBITDA for the first time since the first quarter of 2020. While we continue to face the lingering impacts of the pandemic, since we last spoke a little over two months ago, we've experienced a number of positive trends from a health economic and travel industry standpoint.

[Operator:]

Our first question today comes from Tyler Batory with Janney.

[Jonathan Jenkins:]

Hi, good morning. This is Jonathan on for Tyler. Thanks for taking our questions. First one for me very helpful commentary on the labor pressures. But I was wondering if you could provide some additional color there, in terms of what you're seeing and how hiring has been as ramps? And also, how are you thinking about the staffing needs given such a short booking window?

[Dave Folsom:]

Yes, that's a good question. I mean, what we're doing is we're accessing every available source of labor we can, including multiple Temp labor agencies, at every hotel and every location. We're trying to provide some near term benefits that normally we wouldn't, while still try to maintain margin control of the properties. It is a challenge. We're trying to match the increase in revenues appropriately with margin control. And unfortunately, it's just difficult right now. And I think that these problems will begin to abate, as some of the government stimulus programs start to wind down. In some cases, though, it's allowed us to flow a lot more to the bottom line simply because we're having to be more creative with respect to the day-to-day operations of the asset.

[Jonathan Jenkins:]

Okay, great. I appreciate that color. And then just wanted to follow-up, Dave you gave some helpful color in your prepared remarks. But I'm wondering if you could provide some additional color on the corporate and also group demand in the back half the year. And, Dave, I believe you said 32% of revenue compared to 2019 is on the books. I'm curious as the cadence on that and how that compares to a normal year?

[Dave Folsom:]

Yes, I mean, that's, that was for the second quarter. And what I was trying to do in my prepared remarks is show the increase in the booking pace. So in the second quarter, we're probably looking at about 30% 35% of where we were in 2019, second quarter. Third quarter, I believe the number…

[Tony Domalski:]

63%.

[Dave Folsom:]

Yes, it was 60 plus percent of where we were in the third quarter of 2019. And our booking pace is above 80%, of where we were in the fourth quarter of 2019. So, I mean, what we're looking at is an interest from our typical different demand segments on the group key, coming back to the hotels in the aggregate.

[Tony Domalski:]

And it's important to know, Jonathan, I mean, that's what's on the books right now. And typically, a lot of our hotels are booking in the year for the year, still at this point; we're early in May, for the latter half of the year. So to have 82%, of the group business on the books that we had in 2019 and still have, seven months to go to book business for the fourth quarter. I mean, that's pretty impressive number. Just step aside, I think I might have said this, on our last call; we have a couple hotels that are typical big group hotels that simply don't have any more space to book, large group business in the back half of the year. So all these groups continue to show up, which is now occurring, we're simply full on group.

[Jonathan Jenkins:]

Okay, great, that's extremely helpful. And then turning to ADR, held up quite nicely in the quarter, I believe Scott you said down only 9% versus 2019. Can you talk about your revenue management strategy broadly? And how you're thinking about driving rate as we go into the summer months?

[Scott Kucinski:]

Yes, it's certainly it's a delicate line to walk on rate management right now, you're seeing certain markets, being a little more sensitive to rate, has having to play some more games against our competitors to make sure we don't drop too far. But the leisure markets that have been very strong rate has held and, in some cases, been extremely positive South Florida, for example, our rates are far in excess of what we had previously been doing down there pre-pandemic. So it really is a multiple, Tyler two different stories on when you look at some of our markets compared to the leisure markets, but it's a focus on driving length to stay on the weekends for one, is our first goal, to try to get those three and four day leisure travelers and extend out their stays at high rates for the weekends, versus what typically pre-pandemic would be a two day stay. That's one of the biggest focuses from a revenue management standpoint.

[Jonathan Jenkins:]

Okay, that's very helpful. And then last one for me, if I could just. Turning to the second quarter burn in the United States you anticipate, just curious if you could talk about what's implied in some of those assumptions, especially in the property level cash flow that you're expected to see. I mean, is it seeing an environment that's similar to today, or you're assuming a ramp into this summer?

[Dave Folsom:]

In terms of property level operations, what we're forecasting is just a continued ramp. I mean, at this point we have pretty good look at the second quarter. So as I noted, in my remarks, April, RevPAR is up about almost 9% of March. So that's already in the books and it's our forecast going forward. Kind of a similar trend, what we've seen thus far this year, we do believe that we're in a recovery, and we're seeing that, that booking pays prove that out. And that's what we're forecasting when we look at our cash burn numbers.

[Jonathan Jenkins:]

Okay, great. Thank you for all the detail. That's all for me.

[Dave Folsom:]

Thanks.

[Operator:]

Our next question comes from Daniel Santos with Piper Sandler.

[Daniel Santos:]

Hey, good morning. Thank you for taking my questions. So my first one is on the dividend. Based on the release, it sounds like you can't pay the common dividend until you make the preferred owners though you get them caught up. So maybe first, is that accurate? And then if so, perhaps, walk us through the numbers, how far behind are you and what the timeline looks like to maybe get caught up and reinstate the common dividend?

[Dave Folsom:]

Yes, you are correct. The cumulative preferred that we carry on our balance sheet has a prohibition statutory prohibition where we can't pay a common until we are current on the preferred. So that is consistent with similar securities. The practically every hotel REIT or REIT in general has with respect to how or when we will get current on the common and reinstated, I just don't have a timeline for you now. As Tony mentioned in his remarks, in 2021 we have a significant amount of forbearance that requires our attention. And we have to work through that. And we have some other unsecured debt that you are aware of on our balance sheet that we took in 2020. That was basically rescue capital that provided needed liquidity for us to get through the tail end of the pandemic. Those are our first priorities. And we're concerned about the common as well as everyone because we're all shareholders. But right now, I just can't give you a forecast of when we could be looking at a resumption of common dividends.

[Daniel Santos:]

Okay, that that is fair and helpful. My next question would be if you could sort of go into maybe more of the nuances on specific markets. I know, you mentioned that on the last call, you talked about how certain hotels you just sort of alluded to in your last answer, don't have space. Just wondering if you can maybe remind us what those hotels are, why you think those hotels or those markets in particular are outperforming and what you see the rest of the year looking like for them?

[Dave Folsom:]

Yes, I mean, our Florida assets in general have performed very well. If you go to Miami or Tampa or Jacksonville, it's pretty wide open. The restrictions have been lifted, the F&B restrictions have been lifted, and things are generally back to normal. And that's resulting in a significant amount of bookings near term and group. Some of our other markets are not doing as well; Houston Texas is one of those which are still suffering from government restrictions and other economic conditions. Washington DC is a market that still generally underperforming, our market in Raleigh, North Carolina, is challenged due to the location of the hotel next to NC State University, which had its own issues with respect to student attendance and the restrictions due to the Corona virus and the state government being closed. So there's kind of a bookend here, we have several assets in markets like Florida and some of our drive markets, in Wilmington, North Carolina and in Savannah, Georgia, which have performed very well in the leisure segment. And then we have some assets that I just mentioned that are not doing well. And it's mostly a function of market dynamics and government restrictions, and overall corporate activity.

[Daniel Santos:]

Okay, that is helpful. And then I guess just one last quick one, if I may. Can you remind us a bit on the terms of the DC government contracts? How long did that last? And should we expect that sort of - that revenue to sort of go away anytime soon?

[Dave Folsom:]

Yes, that was really isolated to the month of January. And it was revenue that we received at our Hyatt Centric and our Laurel Maryland Doubletree hotel, and it was government business, and that pretty much burned off by February.

[Daniel Santos:]

Thank you. Go ahead.

[Tony Domalski:]

It was just surrounding the inauguration.

[Daniel Santos:]

Okay, awesome. Thank you for taking my questions.

[Operator:]

This concludes our question-and-answer session. I'd like to turn the call back over to Dave Folsom for any closing remarks.

[Dave Folsom:]

Thank you for joining us today and we look forward to speaking with everyone on the next call.

[Operator:]

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