Sotherly Hotels Inc.
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Good morning and welcome to the Sotherly Hotels First Quarter Earnings Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please also note that today’s event is being recorded. At this time, I would like to turn the conference call over to Mr. Mack Sims. Sir, please go ahead.

[Mack Sims:]

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 a review of portfolio performance. Tony Domalski, our CFO is unable to join the call with us. Therefore, Scott Kucinski, Vice President of Operations and Investor Relations will provide our key financial results for the quarter and review our 2018 guidance. Drew Sims, our Chairman and CEO will conclude with an update of 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 measures 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 in the SEC. The company does not undertake a duty to update or revise any forward-looking statements. With that, I will turn the call over to Dave.

[Dave Folsom:]

Thank you, Mack and good morning everyone. I will start off the call with a review of our portfolio’s key operating metrics in the quarter. Looking at results for the composite portfolio, which represents the company’s wholly-owned properties and the participating condominium hotel rooms from the Hyde Resort & Residences. For the quarter, portfolio RevPAR increased 6.6% over prior year to $112.03, with a 4.6% decrease in occupancy and an 11.8% increase in ADR. On a same-store basis, which excludes the Hyatt Centric Arlington, the Hyde Resort & Residences and the Crowne Plaza Hampton Marina RevPAR decreased 0.9% over prior year, with a 4.4% decrease in occupancy and a 3.6% increase in rate. The first quarter comparisons for our portfolio included a few one-time events to distribute the year-over-year results namely the President’s inauguration of January 2017 that impacted the DC market, the Houston Super Bowl in February 2017 as well as the renovation or conversion impact at our Wilmington, North Carolina hotel, which converted to Hotel Ballast in April. Excluding these three properties, same-store RevPAR increased 2.4%, with a 2.4% decrease in occupancy and a 4.9% increase in rate. Looking at property level activity and highlights in the quarter, the DoubleTree Jacksonville Riverfront Hotel continues its stellar performance, with RevPAR up 13.8% in the quarter, while the market was up a strong 10.3% thus taking another 3% sharing and remaining in its position as the market leader. In Philadelphia, following a difficult 2017, the market rebounded with the comp set up 10.2%, while our hotel was up 10.5% taking 30 basis points in fair share. Forecast for the balance of the year looks strong and we are confident that this market is now back on track. In Wilmington, North Carolina last month we completed the $10 million renovation and conversion to the Hotel Ballast, a member of the Tapestry Collection by Hilton. Hotel’s new product offering includes two new food and beverage outlets, a curated art collection, local flair and southern hospitality patches similar to other Sotherly conversions. Hotel Ballast has been well received by the market and our guests thus far. Looking at our recent corporate activity in February, our operating partnership completed the sale and issuance of an aggregate $25 million of 7.25% senior unsecured notes. On March 1, we acquired the Hyatt Centric Arlington Hotel located in Rosslyn, Virginia for an aggregate purchase price of $79.7 million or approximately $250,000 for Key. The acquisition was funded through a combination of net proceeds from the recently closed unsecured note offering and a $57 million new mortgage financing. Drew will provide additional color on the details of this new addition to our portfolio later on the call. Finally, last month we announced an increase to our quarterly dividend to $0.12 per share, which represents an annualized dividend of $0.48 per share and the yield of 7% based on yesterday’s closing price. I would now – I will turn the call over to Scott who is filling in for Tony today.

[Scott Kucinski:]

Thank you, Dave. Reviewing performance for the period ended March 31, 2018 total revenue for the quarter was approximately $41.7 million representing an increase of 7.9% over the same quarter a year ago. For the quarter hotel EBITDA was approximately $11.9 million representing an increase of 3.5% over the same quarter a year ago. For the quarter adjusted FFO was approximately $4.7 million representing a decrease of 7.5% 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 offering costs, 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 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 31, 2019, the total book value of our assets was approximately $495.4 million, which includes net investment in hotel properties of approximately $438.6 million. The company had total cash of approximately $35.6 million consisting unrestricted cash and cash equivalents of approximately $30.7 million as well as approximately $4.9 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 $380.7 million and outstanding debt at a rated average interest rate of 4.94%. Approximately 70% of the company’s debt carries a fixed rate of interest. Total stockholder and unit holder equity was approximately $92.3 million at the end of the quarter of which stockholder equity was approximately $91.4 million and unit holders’ equity was approximately $0.9 million. At the end of the quarter there were approximately 14.1 million common shares outstanding, of which approximately0.6 million shares are owned by the ESOP and approximately 1.8 million limited partnership units outstanding. At the end of the first quarter, the principal balance of our interest bearing debt was approximately $121,813 per room. Also the ratio of debt to total asset value as defined in the indenture agreement to our senior unsecured notes was 55.4% based on the total asset value of approximately $694.5 million at the end of the quarter. Turning to guidance, we are reiterating our guidance for 2018 which counts for current and expected performance within our portfolio, the acquisition of the Hyatt Centric Arlington as well as other factors. For the year we are projecting total revenue in the range of $167.8 million to $169.1 million. At the midpoint of range, this represents a 9.2% increase over last year’s total revenue. Hotel EBITDA is projected in the range of $47 million to $47.6 million. At the midpoint of the range, this represents a 15.4% increase over last year’s hotel EBITDA. And adjusted FFO was projected in the range of $15.9 million to $16.5 million or $1.04 to $1.08 per share. At the midpoint of the range this represents a 6% increase over last year’s AFFO per share. Additional details can be found on the outlook section of our earnings release. I will now turn the call over to Drew.

[Drew Sims:]

Thank you, Scott. The first quarter same-store results were lackluster. As Dave mentioned, we had significant one-time anomalies within the portfolio that skewed for us first quarter year-over-year comparisons. Combining this with the Easter holiday shift to March from April and we believe it is instructive look deeper to understand how the portfolio performed and the prospects going forward. In our view, we see many reasons to be cautiously optimistic as the macroeconomic environment appears to be stable and corporate profits are on the upswing. This is translated into a promising forecast for the second quarter and the balance of 2018 for our portfolio. Our biggest news for the quarter was the acquisition of the Hyatt Centric located in Rosslyn, Virginia. Acquiring a hotel near the nexus of the National Mall has been a goal of ours for many years and we are pleased to add this asset to our portfolio. The Rosslyn submarket is experiencing tremendous growth with low office vacancies as major corporations such as Nestlé and Gerber relocate their corporate headquarters to business-friendly Virginia, while current occupants such as Deloitte and Grant Thornton expand their current footprint. The Hyatt Centric is located in the heart of this activity adjacent to the Rosslyn Metro station and a 10-minute walk across Key Bridge to Georgetown. The location is excellent and improving. The hotel was renovated in 2016 to convert to Hyatt’s new Centric brand which focuses on localized experiences in the next generation of traveler. Therefore, minimal additional capital is required above the acquisition price. We believe there is substantial operational upside present. The market opportunity given the previously described growth and activity, the hotel’s great opportunity is to drive ADR, the hotel’s 5-storey parking garage has been underutilized as an extensive renovation was executed, including replacing the elevators. We believe the hotel’s food and beverage retail outlets need to be re-concepted and marketed to the local community to drive revenues. We believe SOHO’s managerial focus will provide cost savings and operational efficiencies to drive margin and profits. All that said, the hotel has a history of being a strong performer with 2017 RevPAR of $148.13 and hotel EBITDA of $5.9 million. We believe the hotel will be immediately accretive to our shareholders. Looking at the balance of our portfolio, we are focused on ramping up our recently repositioned hotels in Savannah, Hollywood and Wilmington to capitalize on the investment made in these projects. We will also benefit from the first full year results from the Hyde Resort & Residences. We are commencing the renovation of our Tampa Hotel next month as we work towards conversion to a Boutique upscale concept, Hotel Alba. Conversion is scheduled for the first half of 2019. This is the only renovation activity planned for the next 18 months and we look forward to an extended period without significant renovation destruction across the portfolio. We continue to be focused on diligently managing our balance sheet and we will endeavor to fixed interest rates and extend maturities whenever possible as well as take advantage of the capital markets if an opportunity arises. Lastly, we will maintain a disciplined and consistent dividend strategy with the 5-star proven growth. We will now open the call up for questions.

[Drew Sims:]

We thank you very much for joining us today. We look forward to reporting great results in the next quarter. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.