Sotherly Hotels Inc.
Q1 2017 Earnings Call Transcript

Published: 12 May 2017

[Operator:]

Good day, and welcome to the Sotherly Hotels Inc's First Quarter 2017 Earnings Conference Call and Webcast. All participants will be in listen only mode. [Operator Instructions] After today's presentation there'll be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Mr. Scott Kucinski, Vice President, Operations and Investor Relations. Please go ahead.

[Scott Kucinski:]

Thank you. Good morning, everyone. Welcome to Sotherly Hotels first quarter earnings call and webcast. Dave Folsom, our President and CEO will begin today's call with a review of the company's quarterly activities, and a review of portfolio performance. Tony Domalski, our CFO, will provide our key financial results for the quarter and update our 2017 guidance. Drew Sims, our Chairman and CEO, will conclude and update on our strategic objectives. We will then take questions. If you 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 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, 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.

[Dave Folsom:]

Thank you, Scott. Good morning, everyone. I'd like to start today's call by discussing some of the portfolios' key operating metrics, looking at quarterly results for the composite portfolio which represents the company's wholly owned properties, and the participating condominium hotel rooms from Hyde Resort & Residences. RevPAR was $105.03, an increase of 5.3% over prior year, with a 3.6% increase in ADR and a 1.6% increase in occupancy. Hotel EBITDA for the portfolio increased 14.1% to approximately $11.5 million for the quarter. Hotel EBITDA margins increased 310 basis points to 29.7% for the quarter. Now looking at some of our individual property and market highlights. In Houston, we saw the market improve 4.1% due to the strong results from this year's Super Bowl. The Whitehall outperformed the market and captured nearly 500 basis points in share, with a 9% gain in RevPAR for the quarter, as the hotel continues to improve after its conversion to an independent last April. Our Jacksonville DoubleTree continues its stretch of strong growth, with RevPAR increasing 13.7% in the quarter against the market's decrease of 4.3%. This hotel now ranks as the market leader amongst its competitive set. Our Laurel, Maryland, DoubleTree showed similarly strong results, with RevPAR increasing 27.6% in the quarter compared to the market's decrease of 2.1%. The end of March marked the 13th straight month where the hotel has gained share against its comp set. The Georgian Terrace in Atlanta had a great quarter, with RevPAR increasing 13.3% compared to the market's increase of 4.6%, resulting in an 840 basis point capture of fair share from the competitive set. In Savannah, the $8.2 million renovation is nearing completion at this hotel, as it is scheduled to convert in July as the DeSoto by Sotherly, an independent boutique associated with preferred hotels and resorts. And in Hollywood, Florida, the $6.9 million renovation of the Crowne Plaza is now under way, as we work towards conversion to the DoubleTree Resort by Hilton flag in the fourth quarter of this year. In Wilmington, we have commenced an $8.4 million renovation of that hotel, which is scheduled to be completed in March 2018 and includes a rebranding of the asset. Now looking at some of our corporate activity in the quarter. As discussed on our last call, in January, we closed on the purchase of the commercial unit of the Hyde Resort & Residences, a condominium hotel in the Hollywood, Florida market for a price of approximately $4.8 million, including some inventory and closing fees. In addition to the commercial unit, the company also entered into a lease agreement for the parking garage and meeting rooms associated with the hotel and a management agreement relating to the operation and management of the hotel condominium association. The company also operates a rental management program of all participating unit owners. As of the end of the quarter, there were 100 units in the program. This number continues to grow every week, as the developer completes construction on the upper floors and closes on the condo unit sales. Also as discussed on our last call, in February, we closed on the sale of the Crowne Plaza Hampton Marina for a price of approximately 5.6 million. In April, we announced that we increased our quarterly dividend of $10.50 per share, representing an annualized dividend of $0.42 per share and yield of approximately 6.8%, based on yesterday's closing price. Lastly, at the end of last year, the company formed an ESOP, or Employee Stock Ownership Plan. The ESOP is a qualified plan and trust, which holds shares of Sotherly stock, which are periodically allocated to the employees of the company. During the first quarter, the ESOP purchased approximately 682,000 shares of common stock for approximately $4.9 million of an average price of $7.09 per share. And with that, I'll turn it over to our CFO, Tony Domalski.

[Tony Domalski:]

Thank you, Dave. Reviewing performance for the period ended March 31, 2017. Total revenue was approximately $38.7 million, representing an increase of 2.3% over the same quarter a year ago. For the quarter, hotel. [technical difficulty] 14.1% over the same quarter a year ago. And for the quarter, adjusted FFO was approximately $5.1 million, representing an increase of 35.9% 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, acquisition 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 G&A 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, 2017, the total book value of our assets was approximately $401 million, which includes net investment in hotel properties of approximately $356 million. The company had total cash of approximately $26.4 million, consisting of unrestricted cash and cash equivalents of approximately $21.8 million as well as approximately $4.6 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 $303.6 million in outstanding debt at a weighted average interest rate of 4.71%, which is a 53 basis point improvement over the same period a year ago. Approximately three fourth of the company's debt carries a fixed rate of interest. Total stockholder and unitholder activity was approximately $77.1 million at the end of the quarter, of which stockholder equity was approximately $74.7 million and unitholder equity was approximately $2.4 million. At the end of the quarter, there were approximately 13.8 million common shares outstanding and approximately 1.8 million limited partnership units outstanding. At the end of the first quarter, the principal balance in our interest bearing debt was approximately $107,900 per room. Also, the ratio of debt to total asset value, as defined in the indenture agreement, to our senior unsecured notes was 52.5%, based on a total asset value of approximately $583.6 million at the end of the quarter. Turning to guidance. We are reiterating our previous guidance for 2017, which accounts for current and expected performance within our portfolio as well as other factors. For the year, we're projecting total revenue in the range of $156 million to $158.5 million. At the midpoint of the range, this represents a 3% increase over last year's total revenue. Hotel EBITDA is projected in the range of $41.6 million to $42.4 million, and at the midpoint of the range, this represents a 5% increase over last year's hotel EBITDA. And adjusted FFO was projected at a range of $16.3 million to $17.5 million or $1.02 to $1.10 per share. At the midpoint of the range, this represents a 17.8% increase over last year's adjusted FFO per share. Additional details can be found on the Outlook section of our earnings release. And I'll now turn the call over to Drew.

[Drew Sims:]

Thank you, Tony. We are pleased with the portfolio's performance in the first quarter as the majority of our hotels delivered exceptional results that outpace their markets and the lodging industries as a whole. Group business proved to be a large contributor to this performance, with that segment up 12% for the portfolio, proving that our group-up strategy implemented last year has delivered the right result. Group ADR for the portfolio was up nearly 7%. Group pace for the balance of the year remains similarly strong, which leads us to be cautiously optimistic with our outlook for the year, despite the continued choppiness of the transient segment in many markets. As Dave mentioned, we successfully sold off the Crowne Plaza Hampton Marina in the quarter, an asset we had identified as having limited upside for our shareholders and no longer fitting our long-term strategy. While we are disappointed that this investment never produced the results we anticipated, we are pleased with the execution of the sale, which resulted in net cash to our balance sheet that we reinvested into the Hyde Resort. For the summer of 2015, when the company issued common stock to purchase the Crowne Plaza Hollywood Beach Resort, some of our shareholders voiced concern. We believe that the value-add strategic we recognized then in the deep South Florida market is now been realized. By bringing the Hyde Resort & Residences under our control, we have complex of approximately 600 guestrooms in the South Florida market. Without a presence in the Hollywood market, we would not have had the opportunity to purchase the Hyde Resort. We believe this acquisition will yield high returns on invested capital for the benefit of our shareholders. Management also recognized the opportunity to convert the Crowne Plaza to the much stronger DoubleTree by Hilton brand. You all have seen the results we've produced with our DoubleTree conversions in Raleigh, Jacksonville and Laurel. We believe this brand change will deliver high performance and increased cash flow for our wholly owned hotel. Combining these two properties provides the opportunity to gain operational efficiencies and economies of scale, some of which has already been realized in the hotel's first quarter EBITDA margins. As we look back 18 months, we are convinced we made the right call to stretch to acquire Carlyle's interest in the Crowne Plaza Hollywood Beach Resort. Without these two hotels in our portfolio, our operating results would be in a much different place. Looking ahead to our strategic objectives for the balance of the year. We remain focused on our organic value creation through our reinvestment in up-branding plans for Savannah, Hollywood and Wilmington, which are going well, and we are excited to see the finished results. We continue to seek out acquisition opportunities that fit of our long-term strategy and present attractive value creation opportunities. There are several hotels in the market that we are actively analyzing to determine if the product and location are a good fit for our strategy and if pricing is appropriate. We intend to improve the company's cost of capital with the financing opportunities available in the year. And lastly, the company continued to execute on its policy to maintain a competitive and sustainable dividend with a bias towards growth. The company has now increased its dividend 11 out of the past 15 quarters and 31% in the past 18 months. With that, we'll open the call up for questions.

[Operator:]

[Operator Instructions] Our first question comes from Carol Kemple with Hilliard Lyons. Please go ahead.

[Carol Kemple:]

On your new property, the Hyde Resort & Residences, where does that income show up on the income statement? Is it in other operating departments? Or is it in all three room departments, food and beverage and other operating?

[Tony Domalski:]

Carol, it's Tony Domalski. No, the revenue that we make is a sort of a management and operations fees that we collect out of the unit owner's room revenue, and that would show up into the other operating revenue if not in rooms revenue.

[Carol Kemple:]

Okay. And then I may have missed it. Can you all talk a little bit about what you did as far as share buybacks in the quarter and your thoughts going on that going forward?

[Drew Sims:]

We had very little activity in share buybacks in the quarter mostly because we have our proxy out that precluded us from entering the market. Our thoughts, as we go forward are, I think we used about $3 million -- and maybe a little more than $3 million of over $10 million capacity, and we will enter the market when we think it's to the benefit of our shareholders.

[Carol Kemple:]

And then your overall expenses were down in the quarter. Was there anything one timer in there? Should we just continue you all are getting better at controlling expenses and that should be a trend going forward?

[Tony Domalski:]

I think, that's just pretty indicative of what we would expect to run for a typical quarter.

[Operator:]

[Operator Instructions] Our next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.

[Alexander Goldfarb:]

Just a few questions here. You guys spoke about, potentially, acquiring some assets, some hotels up market. You have $21 million in cash, I think, on the books. So can you just comment on, as you guys take a look at cash, yes, for the remaining -- maybe you max out your stock buyback program buying hotels versus funding hotels by selling more hotels. Can you just walk us through how you're thinking about using your capital and where it's going to come from?

[Tony Domalski:]

Right. I mean, the existing capital we have on the balance sheet is more or less dedicated to operations, and so we wouldn't use any of the existing cash. We would have to fund it via -- yes, I think we've talked in the past about how we would -- we've got some assets that we'd like to sell, and we would like to do that via 1031 exchanges. Well, what we may do is to reverse 1031 exchanges so we take the execution risk out. We also are looking -- the capital markets are available to us to maybe reopen our preferred issuances if we wanted to do that. So it's an opportunity for us to look at that. And we've got a refinancing of our Jacksonville asset that's under way that's going to produce an fair amount of cash.

[Alexander Goldfarb:]

But just so I'm clear, so the $21 million that's on your books, all of that is earmarked for capital plans for the existing portfolio, not for acquisitions, correct?

[Tony Domalski:]

It's not really capital plans, it's for operating capital, and we feel like we've grown to the point where we need to maintain at least $20 million in cash.

[Alexander Goldfarb:]

And then can we just go back to the ESOP for a moment? I think you said in the quarter you thought at $7.09. The stock is $6.08. So two questions. If you could remind us of, one, how many employees participated in the ESOP? Were other shares bought up? And then did the company that market risk or the shares were bought and immediately sold to employees who are buying at the market price?

[Dave Folsom:]

Tony -- Alex, this is Dave. Tony, I can answer that. It's a trust. The trust purchased the shares and they used cash from a loan from the company to do that. $7.09, that probably represented some of the residual stock pop we got from the conventional buyback in the fourth quarter. So there were about 680,000 shares that were purchased by the trust. Those aren't delivered to the employees. We have about 12 employees on the payroll. There's an allocation made consistent with the law governing the ESOP trust, and allocations are made to the employees on a pro rata basis as a percentage of their income, as a percentage of their salary. So there are still quite a few shares that are -- remain unallocated in the trust, but it's not as if those shares have been delivered to the employees. That only happens if they leave the company.

[Drew Sims:]

So, Alex, this is Drew. Let me explain what we're trying to accomplish here. Ever since we went public, if we were to issue shares to our employees, they would immediately be taxed on the value of their shares, which means they would sell the shares to pay the tax, or sell a portion of the shares to pay the tax. And as a result, a lot of our employees haven't been able to afford to accumulate a large number of shares in the company because they had to keep selling their shares to pay their taxes. And so we tried to set up a program that allows them the opportunity to, basically, take their bonus payments via shares in the company without being taxed at the time that they're issued. And so that is the plan. That's why we're trying to execute on them.

[Alexander Goldfarb:]

Okay, that makes sense. When you guys grant the shares, is the basis where the shares are bought in the market. So when you issue out the shares, then people think that is $7.09, so if they went to sell shares today, they'd effectively have no tax because it's below where the stock is breakeven? Or how does that differ from where it's granted versus where the company bought it in the market?

[Tony Domalski:]

Alex, the shares are in a retirement plan. The ESOP is a retirement plan. So they can't really sell those shares until they either separate from the company and then have to roll the funds over into an IRA or take an early distribution. And the shares that they earn, they earn over the course of their employment. That lump of shares that we have is put for last 15 to 20 years before they're fully allocated. So we expect that over the next 15 to 20 years that they'll be able to maintain that $7 basis in the stock and the stock will appreciate.

[Alexander Goldfarb:]

Okay. So the basis is where you guys bought it in the market, in other words?

[Drew Sims:]

Exactly.

[Operator:]

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

[Drew Sims:]

Thank you all for joining us today. I look forward to seeing you at NAREIT and next quarter's call. Thank you.

[Operator:]

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