Sotherly Hotels Inc.
Q1 2019 Earnings Call Transcript

Published: 7 May 2019

[Operator:]

Good morning everyone and welcome to the Sotherly Hotels Inc.'s First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Kucinski, Vice President. Please go ahead.

[Scott Kucinski:]

Thank you, and good morning, everyone. Welcome to Sotherly Hotels' first quarter earnings call and webcast. Dave Folsom, our President and COO, will begin today's call with a review of the company's quarterly activities and review portfolio performance. Tony Domalski, our CFO, will provide our key financial results for the quarter and review our 2019 guidance. Drew Sims, our Chairman and CEO, will conclude with an update on our strategic objectives. We will then take questions. If you have not received 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 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 a duty to update or revise any forward-looking statements. With that, I'll turn the call over to Dave.

[David Folsom:]

Thank you, Scott. Good morning everyone. I'll start off today's call with a review of our portfolios key operating metrics for what turned out to be an exceptional quarter for the company. Looking at results for the composite portfolio, which represents the company's wholly-owned properties, and the participating condominium hotel rooms from the Hyatt resort and residences. For the quarter, portfolio RevPAR increased 8.8% over prior year to $121.86 reflecting a 5.2% increase in occupancy and a 3.5% increase in ADRrate. For the year, portfolio RevPAR increased 7.4% over prior year to $109.20 with a 0.4% increase in occupancy and a 6.9% increase in rate. Hotel EBITDA margins expanded 20 basis points for the year. For the quarter, portfolio report increased 8.8% of prior year to $121.86 reflecting a 5.2% increase in occupancy and a 3.5% increase in ADR. Looking at individual property level activity and highlights in the quarter, a year after its conversion to a bid to a boutique concept hotel Dallas and Wilmington continues to improve its performance, gaining 27.4% in RevPAR for the quarter, driven by a 21.4% increase in occupancy and a 4.9% increase in rate. DeSoto and Savannah steadily continued its ramp up efforts following a 2017 repositioning, increasing RevPAR by 13.4% to $114.97 with a 12.5% increase in occupancy and a 0.9% increase in rate, while gaining 10.7% in RevPAR share against its competitive set. The Hyatt Centric Arlington grew RevPAR 6.9% in the quarter and continues to outperform the market as it captured 5.4% from its competitive share, from its competitive set, and RevPAR’s fair share. In Atlanta, the Georgian Terrace continued its exceptional performance by taking share from the competition during a strong quarter for the market, which was fueled by the Super Bowl during February. The property increased its RevPAR 54.5% to $187.75 driven by an 18.4% increase in occupancy and a 30.5% increase in rate during the quarter, achieving a RevPAR index of $118.9 an increase in share of 26.6%. Looking at our recent corporate activity, in April, we closed on the offering of a million 80,000 shares of our eight and a quarter percent Series D Cumulative Redeemable Perpetual Preferred Stock for total gross proceeds of $27 million. Last week, the underwriters exercised their option on 120,000 shares for additional gross proceeds of $3 million. The company intends to use the net proceeds to redeem in full the operating partnership's seven and a quarter percent senior unsecured notes due 2021, and to the extent there are any remaining net proceeds for general corporate purposes including potential future acquisitions of hotel properties. Strategically, the Preferred Issuance provides flexibility and reduces risk by replacing short term bonds with a permanent source of capital, while providing the company a mechanism to call that same preferred in five years if so desired. In addition, during April, we announced that the company amended the original $19 million mortgage secured by the Crowne Plaza, Tampa Westshore with its existing lender, Fifth Third Bank. With the amendment, the loans principal amount remains at approximately $18.2 million with a new three year term with two, one year extension periods. The mortgages interest rate will remain equal to the 30-day LIBOR plus 375 basis points and will reduce to 30 day LIBOR plus 300 if the property achieves certain performance hurdles. The loan amortizes on a 25-year schedule. Finally last month, we announced an increase to our quarterly dividend to $0.13 per share representing an annualized dividend of $0.52 per share and a yield of 7.3% based on yesterday's closing price. This dividend marks the 11th increase over the last 16 quarters. And with that, I'll turn the call over to our Chief Financial Officer, Tony Damascus.

[Anthony Domalski:]

Thank you, Dave. Reviewing performance for the period ended March 31, 2019 total revenue for the quarter was approximately $47.4 million representing an increase of 13.5% over the same quarter a year ago. For the quarter, Hotel EBITDA that was approximately $13.2 million representing an increase of 10.9% over the same quarter a year ago, and adjusted FFO was approximately $4.8 million for the quarter, a slight increase 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 a boarded or abandoned offering costs, and 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 and interest income, corporate, general and administrative expenses, 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 March 31st 2019, the total book value of our assets was approximately $495.8 million which includes net investment and hotel properties approximately $441.3 million. The company had total cash of $33.4 million consisting of unrestricted cash and cash equivalents of approximately $29 million as well as approximately $4.4 million which was reserved for real estate taxes, capital improvements and certain other expenses. As of the end of the quarter, the company had principal balances of approximately $366.3 million in outstanding debt at a weighted average interest rate of 5.13%. Approximately 85% of the company's debt carries a fixed rate of interest. As of the end of the quarter, there were approximately 14.2 million common shares outstanding of which approximately 600,000 shares were owned by the company's employee stock ownership plan and there were approximately 1.8 million limited partnership units outstanding. At the end of the first quarter, the principal balance on our interest bearing debt was approximately $123,800 per room. Also the ratio of debt to total asset value as defined in the adventure agreement to our senior unsecured notes was 59% based on the total asset value of approximately $661 million at the end of the quarter. Turning to guidance; we are revising our guidance for 2019 solely to account for the recent issuance of preferred stock and the anticipated redemption of the operating partnership's unsecured notes later this month. For the year we are projecting total revenue in the range of $184.2 million to $187.1 million at the midpoint of the range, this represents a 4.2% increase over last year's total revenue. Hotel EBITDA is projected in the range of $49.2 million to $50.2 million, and at the midpoint of the range this represents a 4.2% increase over last year's hotel EBITDA, and adjusted FFO is projected in the range of $15.8 million to $16.8 million or $1.2 to a $1.08 per share. At the midpoint of the range, this represents a 1% increase over last year's adjusted FFO per share. Additional details can be found in the Outlook Section of our earnings release and I will now turn the call over to Drew Sims.

[Andrew Sims:]

Thank you, Tony. While the industry experienced the volatile business environment at the end of 2018 the New Year brought life with U.S. economy growing a solid 3.2% during the first quarter. In our view we see many reasons to be cautiously optimistic as the macro economic environment appears to be stable and corporate profits continue a steady growth trend. This has translated to a promising forecast for the second quarter and the balance of 2019 for our portfolio. Our composite portfolio outpaces U.S. lodging industry during the first quarter which experienced a modest 1.5% growth in RevPAR. We grew RevPAR at 8.8% gaining 4.8% in share from our competitive set drop driven primarily by occupancy growth. As Dave mentioned during the first quarter our portfolio experienced steady growth highlighted by strong performances at our Arlington, Wilmington Savannah and Atlanta assets. The Hyatt Centric in Arlington continue its solid performance in the quarter by capitalizing on rate growth opportunities and benefiting from a number of corporate relocations to the Northern Virginia market including Amazon, Nestle and Gerber. The DeSoto and Savannah and the Hotel Ballast in Wilmington continued to gain traction in their markets following successful repositioning to boutique concepts. And finally the Georgian Terrace which grew RevPAR, 54.5% in the quarter outperformed its competitive set during an extremely strong core for the Atlanta market. Looking at the balance sheet of our portfolio, in Hollywood we are approaching the end of our impactful construction activity of the 40-storey Hyde beach house condo hotel adjacent to our DoubleTree resort property. The Hyde Beach House is expected to open in the fourth quarter of this year and our interests in the building will provide with as many as 700 hotel rooms in the Hollywood market either through our fee simple interests in the DoubleTree or through rental program operations of both the Hyde Beach House and the Hyde Resort and Residences. This has been a two and a half year process that we are glad to see come to a conclusion in the near term. We are pleased with the progress at our Tampa property which is on schedule to relaunch its hotel Alba part of Hilton's Tapestry Collection in June following an $11.3 million renovation. This is the only remaining major renovation project planned for the next 18 months for the company. The completion of this project marks the culmination of four years of portfolio strengthening initiatives during which approximately 90% of the guest rooms and our wholly-owned portfolio were renovated. We look forward to an extended period without significant renovation disruption across the portfolio and believe our assets are poised to outperform the market moving forward. We continue to focus on improving our balance sheet as evidenced by the recent Tampa loan modification as well as the preferred stock issuance and bond redemption, Dave mentioned earlier. We will endeavor to fix interest rates and extend maturities wherever possible and we'll take advantage of the capital markets when opportunities become available. And lastly we maintain a disciplined and consistent dividend strategy with a bias towards prudent growth as evidenced by the increased announced last week. We will now open the call up for questions.

[Operator:]

[Operator Instructions] Our first question comes from Tyler Batory with Janney Capital Markets. Please go ahead.

[Tyler Batory:]

Good morning, thank you. Congratulations on a nice quarter of the year. Just a couple of questions from me. On the prepared remarks you highlighted a number of properties that are outperforming on markets and city market share. You know, when you look generally at some of those assets, can you talk a little bit more about what's exactly driving some of those share gains?

[Andrew Sims:]

Sure, in Atlanta I think the overall concept of our boutique hotels is taken hold. And I think that probably would include Atlanta, that would include Wilmington and that would include Savannah. It has taken us a little longer for us to tackle that task over time and I think that as these concepts get experienced for guests, we're finding that they really like the experience that they're having there. And as a result topline growth continues to grow.

[Tyler Batory:]

Okay, got it. That's helpful. And then, just another general question for the portfolio too, any comments on group bookings for 2019?

[Andrew Sims:]

I think the balance of the year is strong. We're seeing good grip bookings and that's kind of part-and-parcel of your previous question is taking us a while when we drill down on why our group bookings kind of got a little softer on us for a while there. I think a lot of it was our group customers who are little apprehensive about booking our projects or properties until they saw the completed project. And so, it's taken a little bit longer than we thought for them to warm up to our product offering.

[Tyler Batory:]

Okay, got it. And I also wanted to ask about the Hyatt Centric and then in Laurel as well. I mean, obviously D.C. is a little bit soft in the first quarter and you guys performed quite well at both of those properties in the first quarter. So, if you can talk about it a bit more about what's driving the strength of those two assets too?

[Andrew Sims:]

Well, the Rosslyn sub-market is on fire right now and it's just it's got a lot going forward and as a result I know across the river they were they didn’t have a great quarter. But northern Virginia has been a beneficiary of several large free locations. And business travel has been extremely strong. In the Rosslyn market and in generally in northern Virginia market. In terms of Laurel, we feel it's done an excellent job of delivering great service to our guests. That's one of the top ranked double trees in the system and again we made that conversion about 2.5 years ago. It's just taking us a little longer to get our guests acclimated to our service levels on our product offering. And now that they're experiencing what we have at the properties. They like it and we're getting repeat guests and so we think that its Laurel in particular offers a very good value in terms of pricing for the government groups that we rely on heavily there.

[Tyler Batory:]

Okay, perfect. Then I also want to ask about acquisitions, dispositions as well. Now you guys are on the right, any potential deals in the first quarter, put out any bids and any comments on which you're seeing with respect to pricing out there for potential acquisitions?

[Andrew Sims:]

I think we underwrote what they four property or four properties in the quarter, we didn’t win any of them. I will tell you that I'm not going to name our facilities but we were disciplined in what we're doing and we're not going to over pay and it's as you will where tower its pretty heated markets so it's hard to get value. But we'll continue to work towards growing our portfolio. That's certainly one of our top missions here.

[Tyler Batory:]

Okay, got it. That's helpful. And then, just the last question from me. You're obviously you guys increased the dividend recently which is great. Any general thoughts as far as capital allocation priorities as we move through 2019?

[Andrew Sims:]

Well, as we said in our remarks, we're kind of coming to the end of our renovation cycle on most of our portfolio. So, in terms of capital allocation, that's where a lot of a money spend going. We will continue to underwrite deals and try and find the right acquisition that meets our long-term goals. And in the event we find something, then we will applying capital, if we don’t we'll just keep doing what we're doing. Because I think we're we've had a great quarter and we feel like 2019 is going to be a little bit better than what we originally thought.

[Tyler Batory:]

Okay, got it. That's all from me, very helpful. Thank you.

[Operator:]

The next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.

[Alexander Goldfarb:]

Hey, good morning down there. Just a few quick questions. First I'll just on insurance, not sure where you guys stand in your insurance renewals or not but yes just given last years whether that you had, have you noticed any changes as you are talking about insurance costs across your assets. Just curious what you're hearing or what may be helpful then to our guidance?

[Andrew Sims:]

Yes, we just renewed that and I'll let Dave tackle that question because he managed that process. Alex, I mean for the property and cash, we'll be pleased I think where you looked it at an overall maybe a 5% increase. We had no real negligible increase on our workman's comp and our other insurance line there we talked about especially our general liability line. So, all in I think we are maybe at 4%. I mean, I understand your comment about the weather and our portfolio. The good thing is we managed through those weather events pretty well here at the company and our carriers are usually pretty happy that we don’t have large claims against the policy which is reflected in pretty decent pricing. I will say that overall on a macro basis, the insurance market did see some substantial increases well above what we saw. So, I think we did pretty well on the renewal.

[Anthony Domalski:]

So, you changed carrier, you might want to mention that.

[Andrew Sims:]

Yes. We changed the carrier namely for a couple of reasons that we just get better pricing. So yes, I mean we shut their account and we that throughout and maintain a smaller increase as we could.

[Alexander Goldfarb:]

Okay. And then, to the other another question is, obviously have a Kentucky Derby this past weekend. We won't talk about the outcome but as far as your hotel is concerned, is there any impact. Was this a normal Kentucky Derby year or was it better than or worse than meaning, is it something that we're going to see when you guys report second quarter numbers that there was you know whether there were fewer bookings, more bookings, more freebies, more freight, whatever. Just trying to better understand because obviously you said Super Bowl was a huge impact for you in Atlanta but Kentucky Derby I know in the past it's been initiated. So, just curious if anything we should look for?

[Andrew Sims:]

We can't really give you that information quite yet. We will next earnings call we'll be glad to share all that with you Alex but can't get ahead myself here.

[Alexander Goldfarb:]

Okay. And then just final question, going back to the prior analyst. A few years ago you guys have been, it seem like a bit more vocal about wanting to recycle assets, trade, so some assets buy different ones, try to get more boutique etcetera. But your comments to the prior analyst seemed to dial back from that. And I don’t know maybe it was just where maybe just the way you responded but was that your intent that you sort of dialing back from the desired recycle assets or you're still looking to do that but it's just a matter of being able to find the right hotels to sell and buy?

[Andrew Sims:]

Well, I know we talked about at length about selling Philadelphia on prior calls and I think I thought we made it clear that we marketed that hotel and didn’t get us the pricing that we wanted. So, as a result of that we decided to refinance that asset and take those take the equity out of the asset, the debt and then we reinvested that those proceeds into the Arlington asset when we bought it. So I mean, so right now we’re pretty square in terms of what we’re doing there and Philadelphia hotels doing reasonably well, and we’re happy with the performance and so we don’t seen any reason to rush out, sell it. When we get an opportunity we would certainly consider that. There are couple of other assets in the portfolio that we’ll look at marketing at some point in the future. Right now we’re not actively selling any assets.

[Alexander Goldfarb:]

Okay. Thank you.

[Operator:]

The next question comes from Mike Davis with College Street Advisors. Please go ahead.

[Mike Davis:]

Thank you very much. It’s Cottage Street Advisors. But my question is, I like very much the fact that the operating metrics seem to be improving, but I need greater clarity on why net income guidance going up. EBITDA is going down and funds available for shareholders is flat. So could you define that little bit for me?

[Andrew Sims:]

Sure. Mike, we had -- for one thing, we had some hedging activity in the quarter which is a non-cash charge, but we still have to -- we have to make an adjustment to our FFO based on that. So, because interest rates didn't increase and we had a hedge, we have to mark-to-market. And so, we have this non-cash charge of about almost about $450,000.

[Anthony Domalski:]

About half a million dollars.

[Andrew Sims:]

Yes, about a half of million dollars that we have to take. So that's the first side. The other item that, yes, it looks like top line sales are going up appreciably, but it's not flowing through to the bottom line. We have some seasonal issues with our Arlington acquisition because we didn't own the Arlington hotel in January and February in 2018. We bought that on March 1st 2018. So that hotel will -- it has a very positive influence on the top line sales, but it's a very high RevPAR Hotel, but January and February are the two worst months of the year for the Washington D.C. submarket. So the hotel doesn't create a lot of excess cash flow during those two months. So because we're not – we don’t really have an apples-to-apples comparison here. So the Arlington hotel actually has a negative influence on our EBITDA line, but it has a positive influence on our top line revenue. So that's a fairly significant change in our metrics. And then finally, I would say that on a go forward basis and the revised guidance that Tony put out just a few minutes ago, we've also got some more non-cash charges that we have to book related to the extinguishment and the repayment of the baby bonds. That's about $1.1 million. So when you add all these things up we have non-cash charges for the year of almost $1.6 million. For us that's a pretty big number. It's like $0.10 in FFO. And then we've got the seasonal issue in Arlington. So I hope that brings some clarity. I think the short answer is we've got these special events that don't really affect our cash flow, but they affect the presentation of our financials.

[Mike Davis:]

Thank you very much. I appreciate it.

[Andrew Sims:]

Thank you.

[Operator:]

This concludes our question and answer session. I would like to turn the conference back over to Mr. Drew Sims for any closing remarks.

[Andrew Sims:]

Thank you all for joining us today. Look forward to positive report in July. And thank you.

[Operator:]

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.