Sotherly Hotels Inc.
Q4 2018 Earnings Call Transcript

Published: 26 Feb 2019

[Operator:]

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

[Scott Kucinski:]

Thank you, and good morning, everyone. Welcome to Sotherly Hotels' fourth 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 issue 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 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% over prior year to $100.10 reflecting a 3.8% increase in occupancy and a 2.2% increase in rate. 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. Looking at some of the highlights across our portfolio, the DoubleTree by Hilton in lower Maryland grew RevPAR 14.4% in the quarter driven by a 14.9% increase in occupancy, taking 15.4 percentage points and fair share from its competitive set which had flat RevPAR in the quarter. The Hyde Resort & Residences continues to stabilize as it completed its first full calendar year of operation. The property grew RevPAR of 16.8% in the quarter fueled by a 12.9% increase in occupancy and a 3.4% increase in rate. Market RevPAR was up 1%. Hotel Ballast in Wilmington, North Carolina continued its ramp up since conversion last April, growing RevPAR 15.2% in the quarter fueled by a 4% increase in occupancy and a 10.8% increase in rate. The property is on its way to stabilization and retaining its place as the market leader. At our Tampa Hotel, we continue the estimated $11.3 million renovation to convert the property to the Hotel Alba in June of this year. Thus far, approximately 90% of the room renovations have been completed while 75% of the public space renovations are also now complete, including our new lobby and lounge which has already received rave reviews from our guests. In Hollywood, Florida, we are nearing the end of the impact for multiyear activities that saw the construction of the new 40 story high beach house condo hotel building adjacent to our Hilton Doubletree, marine and seawall construction on the inner coastal waterway and major changes to the main road way in front of our hotel. The High Beach House is expected to open in the fourth quarter of this year and our interest in the building will provide Sotherly with as many as 700 hotel rooms in the Hollywood market, either through our fee simple interest in the Doubletree or through rental program operations at both the High Beach House and Hyde Resort. Lastly, this past month, we announced our quarterly dividend of $12.5 per share, representing an annualized dividend of $0.50 per share at a yield of approximately 6.9% based on yesterday's close. With that, I'll turn it over to our CFO Tony Domalski.

[Anthony Domalski:]

Thank you, Dave. Reviewing performance for the period ended December 31, 2018; total revenue for the quarter was approximately $43.5 million, representing an increase of 13.9% over the same quarter a year ago. For the year total revenue was approximately $178.2 million, representing a 15.5% increase over the prior period. For the quarter, hotel EBITDA was approximately $10.2 million, representing an increase of 2.4% over the same quarter a year ago and for the year hotel EBITDA was approximately $47.7 million, representing an increase of 16.3% over the prior period. For the quarter adjusted FFO per share was $0.12, representing a decrease of 45.5% over the same quarter a year ago and for the year adjusted FFO per share was $1.04 representing a 4% increase over the prior period. 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 differed 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 to current portion of our income tax provision, as well as other items, please refer to our earnings release for additional detail. On December 12, 2018, the company authorized the extension of the company's stock repurchase program, which was originally announced in December 2016. It authorizes the company to purchase up to $10 million worth of its outstanding common stock at prevailing prices on the open market or in privately negotiated transactions at the discretion of management. As of December 31, the company had repurchased in aggregate amount of approximately $5.9 million of the company's common stock pursuant to the stock repurchase program, leaving a balance of approximately $4.1 million of its common stock that maybe repurchased in the future. Looking at our balance sheet, as of December 31, 2018, the total book value of our assets was approximately $493.3 million, which includes net investment in hotel properties of approximately $435.7 million. The company had total cash of approximately $37.9 million consisting of unrestricted cash and cash equivalents of approximately $33.8 million, as well as approximately $4.1 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 $392.6 million in outstanding debt at a weighted average interest rate of 5.13%. Approximately 87% of the company's debt carries a fixed rate of interest. As of December 31, there were approximately 14.2 million common shares outstanding, of which approximately 0.7 million shares are owned by the ESOP and approximately 1.8 million limited partnership units upstanding. At the end of the fourth quarter, the principal balance on our interest bearing debt was approximately $124,400 per room. Also the ratio of debt to total asset value as defined in the indenture agreement to our senior unsecured notes was 57.2% based on the total asset value of approximately $686.6 billion at the end of the year. Turning to guidance, we are issuing initial guidance for 2019, which accounts for current and expected performance within our portfolio as well as other factors. 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 4.25% increase over last year's hotel EBITDA. And adjusted FFO is projected in the range of $15.9 million to $16.9 million or $1.02 to $1.08 per share. At the midpoint of the range, this represents a 3.1% increase over last year's adjusted FFO per share. Additional details can be found in the outlook section of our earnings release. And I'll now turn the call over to Drew.

[Andrew Sims:]

Thank you, Tony. In review of 2018, while we dealt with a number of challenges, we also experienced significant progress as a company. Weather related events again posed a considerable challenge for our company during the third quarter. In addition, economic slowdown peers resulted in a volatile business environment and reduced consumer confidence at the end of 2018. Despite these factors, our portfolio experienced outsize performance compared to its peers. For our combined portfolio RevPAR increased 7.4% and we took 100 basis points and share from our competitors, primarily by executing on our strategy of driving rate. We produced earnings growth of 4% over 2017 and achieved AFFO within our initial guidance provided a year ago. We remain steadfast in our commitment to our key strategic initiatives and goals for the year. We maintain balance sheet discipline by executing a number of capital markets transactions during the year, including refinancing $110.5 million in mortgage debt in order to fixed interest rates at historically low levels while extending maturities. We continue to display a commitment to our shareholders as we once again increased the dividend three out of four quarters, a trend we have maintained for the past four years. During the year, we also delivered on key hotel repositioning projects including the brand conversion of our Wilmington asset and the renovation of our Tampa property. We believe that our refreshed portfolio was poised to outperform the market moving forward. During the first quarter of 2018, we completed the acquisition of the 318 room Hyatt Centric, located in the Rosslyn submarket of Arlington, Virginia. Upon closing, we implemented several strategic changes to its operations in addition to minor physical improvements to the property. With these changes to the property, the property is well positioned to take advantage of the growing Rosslyn market, which has experienced a seemingly endless string of positive news as capped by the recent Amazon HQ2 announcement. Looking ahead, we believe that 2019 will be a good, but not great year for the hotel industry, with industry analysts projecting a slight decline and occupancy and a modest 2% increase in rate. As a result, expense management and margin control will be the primary focus for the company. Despite these factors, we remain cautiously optimistic due to a strong group booking space and a competitive portfolio that is positioned to outperform the market. Moving forward, we will maintain a disciplined investment strategy and focus on value added investment opportunities to present long-term value for our shareholders. We will now open the call up to questions.

[Operator:]

Ladies and gentlemen, at this time, we'll begin the question answer session. [Operator Instructions] And our first question today comes from Tyler Batory from Janney Capital Markets. Please go ahead with your question.

[Tyler Batory:]

Hey good morning. Thanks for taking my questions. I wanted to start on the 2019 guidance if I could. Yeah, you guys gave a little more color on market maybe which markets your most positive on, in which should be showing the most RevPAR growth in 2019

[Andrew Sims:]

Yeah. Sure Tyler. We're very positive on Atlanta as a result of the Super Bowl obviously that got us off to an amazing start this year and that trend has continued not only did the hotel experienced great results in and around the Super Bowl, but the whole month of January and the entire month of February have been well above expectations. So Atlanta seems to be a market that's really is on fire right now. The DC market troubles us a little bit, we've seen weakness in that market although our Arlington and Laurel Maryland assets continue to outperform the competition, so while the market seem to be struggling a little bit, our hotels are doing pretty well. Philadelphia has experienced a kind of negative growth at the beginning of the year, especially in the airport market, so we're a little concerned about that. Dave, you got anything you want to add in there?

[David Folsom:]

The South Florida market is sputtered for the last couple of calendar years with weather events. Even the strength of the US dollar drove a lot of international travelers out and I think we're trying to - I think what we can see going forward in that market is some degree of turnaround with respect to those factors and in the absence of those factors we think the markets probably perform better.

[Andrew Sims:]

Yeah and also to that point Tyler, we've kind of done it to ourselves a little bit we've been under construction phase for the last two and a half years there. We renovated our hotel, we finished that then we started - our related group started the 40 story tower that's right next to us and that was very disruptive in the fourth quarter of this year, actually the third and fourth quarters of this year. The worst is behind us now. We received pretty decent results in our Doubletree there and Hyde is actually doing better than we expected, so now we're seeing some positive signs there as well. Tampa is another market that we've seen - that's on the rise. Again, we've done it to ourselves. We have a major renovation going on in Tampa since June. And it's been disruptive - is very disruptive in the fourth quarter of this last year, but we're seeing positive signs. We think we're going to get a significantly more rate once we get the hotel repositioned. And Savannah has seen some positive results as well. Even though there's a lot of new product in that market our hotels continues to take share has its ramping up from change it from a Hilton affiliated product to turn independent.

[Tyler Batory:]

Okay, I appreciate that level of detail. It's very helpful. And then on the margin side of things, obviously it's a tough expense environment out there. What sorts of things can you guys do to offset some of the wage and expense pressure?

[Andrew Sims:]

Well, we've not experienced that I can tell you today. We have been very fortunate in our managers have been able to maintain our salaries and wages that are almost at constant level. We do offer a caller every year. So that obviously adds to our burden. But they've done actually a very strong job of maintaining wages where they should be. And we're not seeing a huge upward pressure on our wages of present.

[Tyler Batory:]

Okay. Got it and then you guys have a number of CapEx spending in 2019 and I guess now as you got a little bit of finishing up here with the Tampa project, but anything else that's on the horizon for the portfolio?

[Andrew Sims:]

The only project that we have on the on the drawing board now is our Raleigh asset, which is one of our smaller assets and that's not going to be this year, that's next year. So we're actually going to have a really nice quiet year for a change in terms of CapEx. So we're looking forward to that where we're going to sit back and make some money this year and we think it's going to be a good year for us.

[Tyler Batory:]

Okay great and then last question for me, any updated thoughts on capital recycling? I'm curious what you're seeing out there, any change in the acquisition market and then also any thoughts on possible asset sales as well?

[Andrew Sims:]

Yeah, on the acquisition side we underwrote several projects in the fourth quarter. Put out this on what three projects and around the Southland and we were not successful. I will tell you that it's still very, very hyper competitive in terms of trying to buy assets. And I have not seen cap rates increase. Every project we bid on, there were dozens of bidders and it's a very, very competitive process. So I don't think that things have cooled off at all. And in terms of disposition, we continue to look at a couple of our assets that we'd like to trade and we're going to do that on a one off soft sell quiet marketing effort.

[Tyler Batory:]

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

[Operator:]

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

[Alexander Goldfarb:]

Hey, good morning. Good morning down there. Hey, just following up on the market questions, if I - just looking down your hotel occupancy is the beyond the 8k, there are number of hotels De Soto, Georgian Terrace, the Louisville, Whitehall and you mentioned the Hyde Park had some specific issues. But a number of the hotels are sort of in the around 60 or below and just sort of curious just given how strong the overall hotel cycle has been where you think these hotels –what do you think is specific that these hotels are below your portfolio average? And then also on the margin standpoint if these are sort of a hotel occupancy rates, does that mean that you need to sort of change how you run it from a full service basis to try and maybe less full service to try and improve margin or maybe just your color on this?

[Andrew Sims:]

Sure. Dave you're free to jump in here. Several of the hotels that you're talking about are projects that we converted from national brands to our independent status and so we're still building up our business even it's going to take probably up to three years to get back to the stabilized occupancy level. So and quite frankly there's a new normal there for us because if we don't have all the franchise cost that we have under a Hilton or Marriott franchise, which are upwards of 70% of your top line revenue, we can still run a lower occupancy and maintain a good healthy rate and still make the same dollars we were making before on the bottom line. So it's a different way to look at it as Alex. And we feel like there's a lot of upside there. So we're still working through that process. In terms of Louisville, that market is just absolutely devastated as a result of several new hotels being built that - we've got probably about seven or eight new full service hotels in downtown Louisville, which was capped by the new Omni, which is upwards of 600 rooms and wouldn't have been built but for City Properties [ph] and certainly there's no need in the market for another 600 rooms there, but because they got they got public funding the project got built. And it's been - it's a challenge and it's a long-term challenge. That market is going to be a long time before it is back to any kind of stabilized levels.

[David Folsom:]

Let me add, Alex. This is Dave, just a couple of items with respect to occupancy. So when you look at some of these numbers they don't appear what you might expect. So at the Hyde, but that's a condo hotel building and we have a certain amount of inventory inside that hotel that we manage. We don't manage all the units, we manage some of the units and then owners from overseas come and occupy their hotel rooms during the owner stay over period for a significant amount of time during the year. And during that time, we cannot rent those rooms. And at the same time, we wanted to establish a rate level there and establishing rate integrity and maybe take some lower occupancy so we can condition the market understand the value proposition at that property. That's sort of the same thing at the Whitehall in Houston. You see some low numbers there. One thing you need to remember is back in the fourth quarter of 2017, the property was closed. It was shut down by the city because we had a casualty electrical casualty that we were fully insured on, but then you have to ramp that hotel back up, but the same conditions apply. We have repositioned the hotel and we want to put the rate equation out there first and build the occupancy later. And the same thing is that the De Soto. That was a Hilton hotel for I don't know how many decades and we took the flag off and we have to sacrifice a little bit of transient occupancy, build the group business and then build the reputation of the hotel from the rate perspective as an independent. And there's been a De Soto property there for 110 years. So the market knows the hotel as the De Soto. We just have to make sure that the value proposition is right. So that hopefully answers a little bit of the occupancy question. It is sometimes out of our control, like the number of owners at the Hyde, who come to visit from Argentina or from Brazil or Ecuador, or it's simply something out of our control, like the casualty we had and in Houston, but those things hopefully can explain a little bit of the occupancy numbers.

[Alexander Goldfarb:]

Okay. No, that's, that's helpful. Then just going back to the margin point, I mean, your point on franchise fees is really helpful. So what is - like is there some sort of example that you can give us on like a margin that - like a hotel, like, Philly or Jacksonville where those are sort of in the upper 70s versus like Georgian Terrace, which is in the sort of mid 60s Can you give sort of like a margin differential, so that we can see the impact of that because I assume it's not just straight 17%, it's better on the boutique brand versus a flagged, so just want to sort of get a sort of real time comparison.

[Andrew Sims:]

The issue there is how big a food beverage component you have. Because in a hotel like the Georgian Terrace where we're doing some is going to help me with - millions and millions and millions of dollars in F&B, it's a bigger percentage of our overall revenue and as a result your margins going to decrease even though you're doing your rooms department. So maybe what I need to do is show you - I don't think that there's a way for us to show you the rooms department versus - and of course all the franchise fees goes in the marketing section. So it's kind of hard for us to dissect that, but let us see if we can come up with something that can show you why we think what we're doing is a good idea because we know it to be true and it's just - yeah, the problem is we would have to find an example where F&B is the exact same percentage of total sales and I don't know that I have any of those where I could help you with that. But that is another part of our overall plan when we go from Hilton or Marriott brand, a National branded product to the independent, we've seen significant increases in our F&B income and we refocus our efforts on our internal food and beverage outlets and rebranded those and completely change them and appeal to the community at large as opposed to just star hotel guests. So we've made a major effort to increase the food and beverage revenues. Obviously, the margin on that is significantly less than the rooms department, but it's still profitable.

[David Folsom:]

Alex, it's Dave, one more thing on the margin front. It goes the opposite direction too. For instance, at Louisville, we've had a branded hotel there since we purchased the asset and renovated it 12, 13 years ago. So this past November was the final switchover date between Starwood and Marriott. The hotel was a Sheraton. It's still a Sheraton. But we went from being one of three properties in the Starwood system in the market to now being one of 30 properties in the Marriott system in the same market. So the brand affiliation has killed the margins at that hotel because now we're sharing the same transit revenue base with 30 other hotels and I don't know how many hotel rooms that is, but it's thousands and that just in our minds is just another example of how margins can be affected in this strategy. If you're in the right market with the right hotel and you decide not to affiliate with a major brand. I'm not saying our hotel in Louisville would be suitable for that. But you can see what happens.

[Andrew Sims:]

Yeah, the frequent traveler revenue for that hotel data center announces force went down like $1.5 million in one year as a result of the merger. So it's - you got all these factors that we can't control. And so we think that there's room in our portfolio from some independents that are not subject to some of these factors. There's always going to be room in our portfolio for nationally branded properties as well. And so yeah, we're probably going to have a nice mix as we go forward. That's always been what we've focused on.

[Alexander Goldfarb:]

Okay and then just an easy one. I appreciate your time. The Tampa $18 million mortgage that matures this summer, obviously, coinciding with the rebranding. From a modeling perspective what should we be thinking about from amount and rate on a refinanced?

[David Folsom:]

I don't think it's going to be significantly higher than what it is now. And we expected last time we walked in it was in the low fives, right.

[Andrew Sims:]

Yeah, you often have to extensions on that one. So we may be extending that one and taking advantage of those extensions while we rent the property. So if your [indiscernible]

[Alexander Goldfarb:]

Okay.

[David Folsom:]

Yeah, we've got two years, right. So we got another two years which was kind of part of the plan there to get the hotel repositioned and then go back and refinance it.

[Alexander Goldfarb:]

Great, thank you.

[Operator:]

Our next question comes from Mike Davis from Cottage Street Advisors. Please go ahead with your question.

[Mike Davis:]

Thank you very much. I noticed that you lost about $800,000 from hedging activities. Could you explain what that is?

[Tony Domalski:]

Sure, Mike. This is Tony Domalski. We have - two of our loans required - one requires an interest rate cap. The other one requires an interest rate swap. Those derivatives have to be mark-to-market every quarter. And as you probably recall, the credit markets just went into a tailspin there during the month of December probably hit their lowest point right around 31st of December, at which time all those products had their lowest pricing of the last six months. So when we mark them to market at the end of the quarter, it reflected the big unrealized loss. I'm expecting that two thirds to 90% of that will be reversed and the first or second quarter of this year. So that's just a transitory thing.

[Andrew Sims:]

And Mike it's not cash. It's just a book entry.

[Mike Davis:]

Okay, thank you very much that's helpful and the second question is do you have any dividend guidance for us for the coming year?

[Andrew Sims:]

We don't, we'll tell you that - you can look at what our past performance is. We are getting a little more hesitant I guess would be the word to get too far out of our worst skews. We feel like we're in the eighth inning of this cycle and we need to start thinking about what happens in a recession. We've been spending a lot of time modeling that out. We will have an increase or two this year and we're still working on that and don't have an exact number for you at present.

[Mike Davis:]

Okay. I didn't think you would, but I thought I'd ask anyway and just the - the third question, actually it's a comment. You guys put your financial results up pretty late this morning and it's hard for us to get through the release before the earnings call. In the future you need to try to make sure we get that at least a couple of hours before the conference call. That will be helpful for us to push the numbers with and ask more intelligent questions.

[David Folsom:]

We will do that. We're sorry for that. When do we - don't we usually -

[Tony Domalski:]

Hey, Mark. Mark for at least our ten years, we've been years in public company and 14 years we put it out at 9 AM for a 10 AM call. We can certainly analyze that and see if that's so industry practice and now we can change that.

[Mike Davis:]

Okay, thank you very much. I appreciate the update.

[Tony Domalski:]

Thank you.

[Operator:]

And ladies and gentlemen, that will conclude today's question-and-answer session. I would now like to turn the conference back over to Drew Sims for closing remarks.

[Andrew Sims:]

Well, thank you all for joining us today. I look forward to reporting to you in April - in May excuse me. And we'd like to invite you all to our Annual Meeting which is in late April. Thank you.

[Operator:]

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