Sotherly Hotels Inc.
Q3 2017 Earnings Call Transcript

Published: 7 Nov 2017

[Operator:]

Good morning. And welcome to the Sotherly Hotels Incorporated Third Quarter Earnings Call and Webcast. All participants will be in a 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 would now like to turn the conference over to Scott Kucinski. Please go ahead.

[Scott Kucinski:]

Thank you, and good morning, everyone. Welcome to Sotherly Hotels' third 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 will provide our key financial results for the quarter and update our 2017 guidance. Drew Sims, our Chairman and CEO will conclude with an update on our strategic objectives. We will then take questions. If you've not received a copy of the earnings release, you may access it on our Web site 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 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.

[Dave Folsom:]

Thank you, Scott and good morning everyone. First, I want to review the hurricanes that impacted our portfolio in the quarter. Hurricanes Harvey and Irma were serious storms that affected much on the Southern United States. Preliminary damage estimates for Harvey classified as the costliest hurricane on record, eclipsing Katrina in 2005. Irma was the strongest windstorm to hit the U.S. since Katrina and caused significant damage in the Caribbean and later in Florida and the eastern seaboard. The majority of our portfolio was affected by these storms. We did experience physical damage at our hotels, as well as lost some inventories and we incurred the expense of immediate cleanup and recovery. Luckily, the physical damage to our hotels was not severe and for the most part, our hotels remained open and functioning for the duration of the storms, excluding periods where electrical power was lost. We were very fortunate that we did not suffer any long term ill effects from these storms. However, we did experience significant business interruption due to the storms, not only at hotels that were directly in the path of the hurricanes, but at other hotels where guest travel was cancelled over the uncertainty of the storm's path, duration and severity. For instance, we witnessed business interruption in North Carolina at our Wilmington Hilton in the form of significant group cancellations, following the governor declaring state of emergency, even though hurricane Irma ultimately did not threaten the region. We are currently working with our insurance partners on the claims resulting from these hurricanes. Unfortunately, the losses we experienced will be taken in the quarter and reflected in our earnings and revised guidance. Insurance claim proceeds, whatever they may ultimately be, will be recovered at a later date; hopefully, in the fourth quarter but potentially not until the first quarter of next year. Drew and Tony will discuss the financial impact of this event shortly. With that said, I'll turn now to review of our 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 in the Hyde Resort & Residences, RevPAR was $97.56, an increase of 1.4% over prior period with a 4.2% increase in ADR and 2.8% decrease in occupancy. Year-to-date, RevPAR was $104.29, an increase of 2.6% over prior year with 3.9% increase in ADR and 1.3% decrease in occupancy. Excluding our hotels in Hollywood, Savannah and Wilmington, which were all under renovation in the period and negatively impacted results, particularly to our occupancy due to rooms being out of service, composite RevPAR increased 6.9% for the quarter with 5.9% increase in ADR and a slight 0.9 % increase in occupancy. Year-to-date, RevPAR increased 7.1%, driven by 6.3% increase in ADR and 0.8% increase in occupancy. Hotel EBITDA for the portfolio decreased 12% to approximately $8 million for the quarter, primarily a result of both hurricanes and to a lesser degree the renovation impact within the portfolio. Looking at some of our individual property highlights, particularly at our renovation activity. In August, we completed $9.5 million renovation of our Savannah hotel and converted to the DeSoto, an independent boutique associated with preferred hotels and resorts. The new product offering, which includes three new food and beverage outlets and a reimage roof top pool and sundeck, it's been well received in the marketplace and with our guests. In Hollywood Florida, we completed the $7.1 million renovation of the Crown Plaza converted to the Double Tree resort by Hilton Flag on October 25th. While there will be typical ramp-up period as the hotel transitions to the Hilton system, we believe this hotel will benefit from the Hilton booking engine in the near-future as we head into South Florida’s high season. In Wilmington, North Carolina, we continue to progress with $8.6 million renovation of that hotel, which is scheduled to be completed in March 2018 and includes a rebranding of the asset to the Hotel Ballast. The guest room floors are nearing completion and the impact for public space work is scheduled during our slower months of December through February. And lastly, we continue to ramp-up operations with the Hyde Resort & Residence with approximately 250 units now in our rental program. We anticipate a stabilized inventory pool and continued ramp-up of operations heading into the high season. And looking at some of our corporate activity, last month, we completed the sale and issuance of 1.3 million shares of our 7.875% series C cumulative redeemable preferred stock for net proceeds of approximately $30.4 million, including the overallotment option. We intend to use the net proceeds to redeem in full our operating partnerships’ outstanding 7% senior unsecured notes maturing in 2019. We are pleased with the results of these combined transactions as they replace turnable corporate debt with perpetual preferred equity. Thus, eliminating the near term maturity risk from our balance sheet. Finally, last months, we announced our quarterly dividend of $0.11 per share, representing an annualized dividend of $0.44 per share and the yield of approximately 6.5% based on yesterday's closing price. And with that, I will turn the call over to our CFO, Tony Domalski.

[Tony Domalski:]

Thank you, Dave. Reviewing performance for the period ended September 30, 2017. Total revenue for the quarter was approximately $36.8 million, representing 1.4% decrease over the same quarter a year ago. Year-to-date, total revenue was approximately $115.1 million, a 0.7% decrease over the same period a year ago. And as Dave said for the quarter, hotel EBITDA was approximately $8 million or 12% decrease over the same period a year ago. And year-to-date, hotel EBITDA was approximately $31 million or a slight 2% decrease over the same period a year ago. For the quarter, adjusted FFO was $1.7 million, representing a decrease of 38.6% over the same quarter a year ago. And year-to-date, adjusted FFO was approximately $12.3 million, a decrease of 5.3% over the same period 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 in 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 and 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 September 30, 2017, the total book value of our assets was approximately $416.4 million, which includes net investment in hotel properties of approximately $357.6 million. The Company had total cash of $38.8 million, consisting of unrestricted cash and cash equivalents of $32.7 million, as well as approximately $6.1 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 $325.6 million in outstanding debt at a weighted average interest rate of 4.78%. With the refinance of our mortgage on the Jacksonville property back in June, approximately 80% of the Company's debt carries a fixed rate of interest. Total stockholder and unitholder equity was approximately $72.5 million at the end of the quarter, of which stockholder equity was approximately $70.7 million and unitholder equity was approximately $1.8 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 third quarter, the principal balance on our interest-bearing debt was approximately $114,725 per room. Also, the ratio of debt to total asset value, as defined in the indenture agreement to our senior unsecured notes, was 55.9% based on a total asset value of approximately $582.3 million at the end of the quarter. Turning to guidance. We're updating 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 $152.3 million to $153 million. Hotel EBITDA is projected in the range of $39.6 million to $40.3 million. And adjusted FFO is projected in the range of $14.1 million to $14.7 million or $0.90 to $0.94 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.

[Drew Sims:]

Thank you, Tony. As Dave and Tony have outlined throughout this call, there are several non-recurring factors that impacted our financial results in the quarter. I would like to start by providing additional details. First, we estimate that the hurricanes impacted earnings by approximately $0.06 in the quarter. While transient room bookings were impacted, the most significant impact came through group and catering cancellations where food and beverage revenue, as well as other revenue sources were also negatively impacted at many of our properties. There was also tremendous impact on our expense margins as we staffed up in advance of during and after hurricanes in order to protect and preserve our assets and ensure comfort and service to our guest that we’re weathering the storm with us. We hope to recoup some of these losses to our insurance claims, but that was result will not be known for some time. While impact to Q3 earnings was not welcome, we are fortunate to survive these storms as well as we did. Second, our preferred issuance and scheduled bond redemption will result in earnings impact of approximately $0.02 as a result of having the combined payment burden for a month and a half, as well as the higher coupon on the preferred. We believe the 88 basis point rate difference between the bonds and the preferred is a small and acceptable price to pay in order to eliminate the bond maturity risk by replacing debt with perpetual preferred equity. We’re pleased that we were able to take advantage of this market opportunity. Another non-recurring negative in the quarter relates to our property in Philadelphia where we had a tough comparable against 2016 when a Democratic National Convention took place. The Philadelphia market was down 28.5% in the quarter. Our hotel’s RevPar was down 24.3% and took share, but still suffered a large setback. For the year, this market has been softer than anticipated with RevPar down 12.6% for our comps driven by 9% decrease in ADR. We believe the year-to-date decline is due to a combination of factors that includes a weak citywide calendar, new supply impact and lower than forecasted inbound travel at the airport. We have continued to experience negative impact in the quarter, resulting from our renovation and ramp-up activity. The DeSoto conversion is now complete with all renovation impact behind us, and the operational ramp-up underway. In the quarter, we incurred significant expenses associated with our new food and beverage outlets as we reopen to the public with new chef driven concepts and the standard training, marketing and other operating cost weighing down any profitability in the near term. We do not anticipate this impact will continue for more than a few months. In Hollywood, the renovation was highly impacted in the quarter as we were in the final push to complete and convert in October. The hurricane shutdown the renovation activity for nearly a week during the home stretch. Therefore, when the renovation resumed, we were forced to increase the number of rooms we took out of service to get back on-schedule, negatively impacting hotel occupancy. In addition, our operational expenses were temporarily increased as we rush to get the rooms cleaned, appointed and back in service. That said, this pain is now behind us and as Dave mentioned, we look forward to seeing the benefit of the Double Tree flag and Hilton System. With the Savannah and Hollywood convergence complete, we are solely focused on our Wilmington renovation for the balance of the year and into the first quarter of 2018. It is important to note that these three hotels encompass 30% of the rooms in our portfolio, and even a larger portion of the portfolio's revenue and hotel EBITDA. Having all three properties under renovation in the same year was unavoidable due to the franchise renewal cycles of each coinciding. We are pleased to have this heavy lift behind us. Including the Wilmington hotel, we have now completed the renovation and repositioning of nearly 70% of our portfolio in terms of guest rooms over the past 24 months. We believe that our refreshed portfolio is poised to outperform the market, going forward. We continue to seek out new investment opportunities that fit our long term strategy. We remain dedicated to our strict and conservative underwriting principles and will act if and when we believe we have found a compelling opportunity that will benefit our shareholders over the long term. Lastly, we have capacity remaining under our stock repurchase program that is authorized through the end of the year. While we have not been active with this program thus far this year, primarily due to the absence of sufficient buying windows, we continue to evaluate the use of this program. We will now open the call up for questions.

[Operator:]

We'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Carol Kemple with Hilliard Lyons. Please go ahead.

[Carol Kemple:]

Do you expect any impact from the hurricane to carry over into the fourth quarter?

[Drew Sims:]

Carol, I would say net it was a benefit in the fourth quarter, because in Houston for instance, we had to close for a few days in Houston. And then once they reopened downtown, we were basically 100% occupancy. But that occupancy was relatively low rate, because we were trying to be a good neighbor and we leased most of our rooms to the local hospital for a very reasonable rate. Those folks were working basically -- if they want to sleep, they were working. So we didn't have any food and beverage or other revenue sources coming into the hotel during the month of September. At the end of September, we opened up the hotel to the general public and we just -- we had a great-great month of October. So it was actually a very-very positive thing because there was a lot of hotel rooms that were out of service in the hour, for instance the Houston. And so it allowed the business to got focus downtown. Additionally, it didn't hurt that we had the World Series in town, which also was a huge factor. But that would be one example. But to answer your question, I think it's actually probably a net positive for us. We had a very, very strong outflow. And so we're very pleased that we had a bounce back after an extremely difficult third quarter.

[Carol Kemple:]

And then your G&A expense was down from the second quarter. Was there anything one-time in that, or is that a good run rate going forward?

[Tony Domalski:]

Our G&A expenses do tend to fluctuate. They're not flat from quarter-to-quarter. So they're a little higher at the beginning of the year, a lot of that was the audit and tax prep costs that seem to hit at the beginning of the year, not the end of the year. But also in the second quarter, we had about $0.5 million hit to G&A expenses, related to the burn off of our S3 and ATM offering that was attached to that. So I think if you go back to Q2 and track $0.5 million, in both Q3 and average the two, that's a good run rate.

[Operator:]

[Operator Instructions] The next question comes from Daniel Santos with Sandler O'Neill. Please go ahead.

[Daniel Santos:]

My first question is on insurance deductibles and any recoveries related to the hurricane. Could you just give us a sense of timing or any business interruption recovery that you might get?

[Drew Sims:]

I think the question was -- let me repeat the question just to make sure that we heard it correctly. We were breaking up a little bit here. So you were asking us about the deductibles and also what our recovery might be for business interruption?

[Daniel Santos:]

Yes.

[Tony Domalski:]

Each of our hotels, we have a typical master policy, which unfortunately carry very high deductibles. We have a strategy to buy those down with the three insurance carriers, and the London every year. So we have very manageable deductibles, so they’re different for every hotel. For instance I could tell you, I think, in Jacksonville our total deductible is $140,000 and we have a claim that eclipses that. There is also a flood, which is a separate claim and we buy down those deductibles down about $10,000 and we did have at least one hotel and it has a flood claim. So it's a, I could tell you it's a complicated equation. But as it sits right now, we have claims that eclipse our deductible levels at these hotels depending on what the claims is. Now, you get to that point and then we have to negotiate these claims for property losses for business interruption. And frankly, it gets down to a large loss negotiation with a carrier. I can tell you, I think we're going to make some recovery. I can't really tell you right now what I think that's going to be from a business interruption standpoint, because we still really haven't heard back from the carrier within the initial thoughts.

[Daniel Santos:]

And then if we could just refresh us on your thinking on using capital just on stock buybacks versus maybe un-encumbering assets. Are you using the money to acquire more assets? And further related to that, did you buyback any shares in the quarter?

[Tony Domalski:]

We did not buyback any shares in the quarter, mainly because we had the public offering out there that precluded us from doing that. We've had -- unfortunately, most of the year has been closed to us to buy-back shares. I will say the window opens after this call or 72 hours after this call. We’ve got a clear sale through the end of the year.

[Operator:]

The next question comes from Mark Tremba, Private Investor. Please go ahead.

[Unidentified Analyst:]

You've talked a little bit about I think last question about properties. Any properties you’re thinking of putting up for disposition and maybe using some of that capital to reward shareholders?

[Drew Sims:]

Well, we would consider selling some assets, which we are continue to investigate. In terms of rewarding shareholders, I don’t think that's the strategy that we have in mind because of our relatively small size, we feel like it's important for us to continue to grow the Company at a measured rate. And in any event, the assets that we're considering selling have a very low basis in them, because we're doing them for a long time. And it would be very, very expensive for us to just sell the asset and not execute a temporary one exchange within the -- in order and amount of the proceeds of taxes. And we just still think that’s the wise thing to do, selling asset and pay a huge chunk in taxes. So our view is that we're going -- any asset that we sell will be traded for an asset that we think has more upside than the hotel that we're selling.

[Unidentified Analyst:]

What's your thoughts on dividend increases for the next year. Do you continue to -- I know, you didn't increase it this quarter you had been increasing at a pretty regular base? And also, what do you attribute the divergence between all the other hotel REITs pretty much that have been doing really well, their stock prices are near the high. And until basically yesterday, SOHO's stock has been languishing?

[Drew Sims:]

I'll take a couple of those. So the first part of the question was dividend. Mark, we only have bias to increase our dividend. I think I know you come to our annual meeting and that's important to us. We feel like we have a safe dividend. We want to continue to grow that. I think for the last three years at least may be four, we've increased three out of four quarters every year. And we've done that again this year. I think you can anticipate that we'll be looking at something like that next year. And that's the way that we conducted ourselves in the past and we will conduct ourselves in the future. Part B to the question was -- I lost it…

[Unidentified Analyst:]

It was regarding the stock -- had been doing relatively well compared to lot of the hotel REITs. As you know, I've been a long term shareholder. But this year you've seen a pretty good move up recently in Pebblebrook, in Host and some of the other REITs, and also was like 26, it's moved up to the high 29s, whether other than yesterday I mean we've been languishing between $5.80 and $6 for like too much straighten. But just wondering what's going on there, or do you see the stock still undervalued? And why not crank up the buyback? I think, we still have over roughly $7 million left in the buyback and only seven weeks left in the year. So do you guys intend to buy back stock over the rest of the year? What's your plan regarding that money that's been set aside or allocated towards the buyback? Are you going to execute that? Is that still your plan?

[Drew Sims:]

I was trying to give you a hint earlier that that's our plan. So we can't really say that so we're not -- we can't come out and say that we're going to buy back stock, because that's -- it's not permitted in the SEC rank. But we certainly have that capacity. We will look and consider that in the future as we push to get our stock price up. We're very competitive here. We watch our competing REITs every day. We're very aware of what's happening to them versus what's happening to us, and it's important that we at least compete at a same level that they compete at. So we are focused on that between now and the end of the year, we think it's important.

[Operator:]

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

[Drew Sims:]

Well, we thank you all for joining us today. We look forward to reporting better results in the next quarter. Thank you very much.

[Operator:]

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