Sotherly Hotels Inc.
Q4 2017 Earnings Call Transcript

Published: 27 Feb 2018

[Operator:]

Good morning, and welcome to the Sotherly Hotels Fourth Quarter Earnings Conference 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, Vice President. 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 to review the Company's quarterly activities and review the portfolio performance. Tony Domalski, our CFO will provide our key financial results for the quarter and review our initial 2018 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 website at sotherlyhotels.com. In the release, the Company has reconciled 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 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. I am pleased to report that we had a very strong fourth quarter as many of the hotels previously under renovation have begun to reap the economic benefits of enhanced product and service. In addition, we saw encouraging growth in many of our markets. Looking at results for the composite portfolio, which represents the Company's wholly-owned properties and the participating condominium hotel rooms in the Hyde Resort & Residences. For the quarter, portfolio RevPAR increased 7.6% over prior year to $94.42 with an 8.9% increase in ADR and a 1.2% decrease in occupancy. For the year, portfolio RevPAR increased 3.6% over prior year to $101.70 with 5.1% increase in rate, and a 1.4% decrease in occupancy. Hotel EBITDA margins expanded by 280 basis points in the quarter to 26.2%, for the year margins expanded 50 basis points to finish at 26.6%. Looking now at property level activity and highlights in the quarter. The Whitehall in Houston was closed for approximately 30 days due to the hotel being without power as the result of a significant electrical casualty. The hotel reopened in mid-December with all repairs completed and the operation ramping back up. The casualty was an insured event and we anticipate the claim to substantially cover all repair costs and business interruption incurred. In Hollywood, Florida, we completed the $7 million renovation of the Crowne Plaza, converting to the DoubleTree Resort by Hilton Flag on October 25. The hotel continues to ramp up and gain traction within the Hilton system as we enter South Florida's high season. In Wilmington, we continue to progress with a $10 million renovation of that hotel which is scheduled to be completed in March 2018 and includes a re-branding of the asset to the Hotel Ballast. As announced in November, we have entered into a 10-year franchise agreement with Hilton Worldwide for the Hotel Ballast to join the Tapestry Collection. We believe this change provides the hotel with the best of both worlds as it retains the power of the Hilton reservations system while modifying our product and service offering to emphasize a unique local experience for our guests. Now looking at our recent corporate activity in the quarter. In October, 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 use the net proceeds of this offering to redeem in full our operating partnerships’ outstanding 7% senior unsecured notes and this was completed on November 15. In early December, we entered into a hotel purchase and sale agreement to acquire the Hyatt Centric Arlington hotel located in Arlington, Virginia for an aggregate purchase price of approximately $79.7 million, which includes a $1.3 million sale of credit that was agreed upon in January. We anticipate the closing to occur no later than April 2018 and we expect to fund the purchase through a combination of net proceeds from our recently closed unsecured note offering and approximately $57 million of new mortgage financing. Drew will provide additional color on the spending acquisition later in the call. Last month, our operating partnership completed the sale and issuance of an aggregate $25 million of our 7.25% senior unsecured notes. As previously stated, we intend to use the net proceeds to partially fund the acquisition of the Hyatt Centric Arlington. As previously discussed, the Company's Board of Directors authorized a stock repurchase program under which the company may purchase up to $10 million of its outstanding common stock. As of December 31, 2017, the Company has repurchased approximately 883,000 shares of common stock at an average purchase price of $6.68 per share, totaling approximately $5.9 million. And finally last month, we announced an increase to our quarterly dividend to $0.115 per share, representing an annualized dividend of $0.46 per share and a yield of approximately 7.5% based on the yesterday's closing price. With that, I’ll turn the call over to our CFO, Tony Domalski.

[Anthony Domalski:]

Thank you, Dave. Reviewing performance for the period ended December 31, 2017 total revenue for the quarter was approximately $38.2 million, representing an increase of 6.2% over the same quarter a year-ago. For the year, total revenue was approximately $154.3 million, an increase 0.9% over the prior year. For the quarter, hotel EBITDA was approximately $10 million representing an increase of 19.2% over the same quarter a year-ago and for the year, hotel EBITDA was approximately $41 million, an increase of 2.4% over the prior year. For the quarter, adjusted FFO was approximately $3.3 million, representing an increase of 60.5% over the same quarter a year-ago and for the year, adjusted FFO was approximately $15.7 million, an increase of 3.7% over the prior year. 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 and deferred offerings, 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 December 31, 2017, the total book value of our assets was approximately $410 million, which includes net investment in hotel properties of approximately $357.8 million. The Company had total cash of approximately $33.4 million, consisting of unrestricted cash and cash equivalents of approximately $29.8 million as well as approximately $3.6 million, which was reserved to real estate taxes capital improvements and certain other expenses. As of the end of the quarter, the Company had principal balances of approximately $298.9 million and outstanding debt at a weighted average interest rate of 4.66%, approximately 80% of the Company’s debt carries a fixed rate of interest. Total stockholder and unitholder equity was approximately $94.2 million at the end of the quarter, of which stockholder equity was approximately $93 million and unitholder equity approximately $1.2 million. At the end of the quarter, there were approximately 14 million shares of common stock outstanding, including approximately 0.6 million shares owned by the Company's [Isa] [ph]. In addition there were approximately 1.8 million limited partnership units outstanding. At the end of the fourth quarter, the principal balance in our interest-bearing debt was approximately $105,330 per room. Also, the ratio of debt to total asset value, as defined in the indenture agreement to our senior unsecured notes was 49% based on the total asset value of approximately $610.3 million at the end of the quarter. Turning to guidance, we are issuing our initial guidance for 2018 which accounts 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 the range, this represents a 9.2% increase over the last year's hotel revenue. Hotel EBITDA is projected in the range of $47.0 million to $47.6 million, and at the midpoint of the range, this represents a 15.4% increase over 2017 total 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 years adjusted FFO per share. Additional details can be found in the outlook section of our earnings release. I will now turn the call over to Drew, our Chief Executive Officer.

[Andrew Sims:]

Thank you, Tony. In review of 2017, I see a year full of challenges, but also great progress for our Company. In the year, we experienced two hurricanes of historic proportions that directly impacted our portfolio. The Houston electrical casualty and related closing was unlike anything I've seen in my 39-year career. We had three of our largest hotels encompassing 30% of our total room count under renovation in the same calendar year resulting in substantial plan disruption. Individual market performance was spotty with some up and some down. Despite these challenges, our portfolio produced commendable results with outsized growth compared to the industry and our peers. In aggregate, our portfolio took 240 basis points of RevPAR share from our competitors and finished the year over 100% fair shares. We produce earnings growth of 11% over 2016 and beat our revised guidance, which we issued after the hurricanes, ending the year just shy of the initial guidance provided a year-ago. We also succeeded in nearly all key strategic initiatives and goals for the year. We maintained balance sheet discipline, executing on a number of capital markets transactions in the year, investing in our undervalued stock for our stock repurchase program, and finishing the year with a strong cash position that will enable us to continue to grow the Company. We continued to display a commitment to our shareholders as we once again increase the dividend three out of four quarters, a trend we have now maintained for the past three years. We delivered on key hotel repositioning projects as we completed renovations and conversions at Savannah and Hollywood and are nearing completion of our Wilmington project. Including the Wilmington hotel, we have now completed the renovation and repositioning of nearly 70% of the Company’s 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 completed the acquisition of the Hyde Resort & Residences and ramped up the resort throughout the year. We believe we will be seeing outsized returns from this investment going forward. At year end, the Hyatt Centric Arlington opportunity materialized. We believe we have found an acquisition opportunity that fits our strategy and will benefit our shareholders over the long-term. The 318 room hotel is ideally located in the Rosslyn submarket of Arlington, Virginia, a short walk across the Potomac River from Washington D.C. and the luxury Georgetown shopping district. The hotel is across the street from the Rosslyn Metro station and one block from Nestle's new North American headquarters, which was recently located from California. The seller completed a $6.2 million renovation of the hotel in 2016 as part of its conversion to the Hyatt Centric brand. This is a performing asset that we believe will immediately be accretive to the Company’s shareholders and also represents considerable operational upside that will be realized through our asset management practices. We anticipate that the hotel will remain franchised with the Hyatt Centric brand and third-party management of the hotel will be disclosed if and when we close the transaction. The Arlington acquisition also presents a larger opportunity for the Company to sell a non-core asset and recycle deferred capital via a reversed 1031 exchange. Additional detail on that potential transaction will be provided at a later date if and when it is executed. Looking ahead, we believe 2018 will be a year of tepid growth for the industry. However, we believe our portfolio was poised to outperform given the Company's recently renovated product. We will focus on ramping up our reposition properties to their full potential. We expect 2018 to be a welcome break from the extensive disruptive renovation activity. The only planned renovation activity is at our Tampa Crowne Plaza, which is set to start in June with conversion to the Tapestry Collection by Hilton brand planned for the spring of 2019. We will maintain a disciplined balance management strategy. We remain focused on identifying further investment opportunities that fit our strategy and present attractive growth catalyst for the Company and our shareholders, while maintaining a focus on excellence at the point of guest contact. We will now open the call up for questions.

[Operator:]

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

[Carol Kemple:]

Good morning.

[Andrew Sims:]

Good morning, Carol.

[Carol Kemple:]

On the Arlington acquisition, was that widely marketed and if so how did you all win the deal?

[Andrew Sims:]

The answer to that is yes, it was widely marketed. I believe the seller which is Fortress provided us some priority as a result of our public company standing. So I believe that – they believe that we would close the transaction and that's our reputation in the marketplace. We have never put a property under contract and not closed in the 60-year history of our company.

[Carol Kemple:]

Okay. And then looking at that property, if you all would have owned that entirely in 2017, can you talk about how that would have changed your occupancy ADR RevPAR numbers or can you give us those stats for that hotel in 2017?

[Andrew Sims:]

We are not going to be able to provide you with that data at this time. We'll be able to do that at the next call.

[Carol Kemple:]

Okay. Thanks.

[Andrew Sims:]

All right.

[Operator:]

The next question comes from Tyler Batory of Janney Capital. Please go ahead.

[Tyler Batory:]

Thanks. Good morning, everyone.

[Andrew Sims:]

Good morning, Tyler.

[Tyler Batory:]

Congratulations on a strong quarter and productive 2017. Maybe the first question I wanted to ask just about Hollywood, I'm not sure if you are willing to give any specific numbers here two months through the first quarter. But anecdotally just wondering what you're seeing at that property post the conversion, how the ramp up is going and maybe any other general trends you're able to call out for the Hollywood market?

[Andrew Sims:]

Sure. I think the Hollywood market has been – on a come back here, but it's been a little bit on the slow side in terms of what we anticipated originally. But I would say that the ramp up of the Hollywood DoubleTree is about as planned. We had a rush at the end right in October to get the project finished, and we did finish on-time, and we converted on-time which is great. But as always, we have to become reconnected to the Internet and it takes some time to check all those boxes. So we had a decent December that closed the year out; January there weren’t all the special events in South Florida that we've seen in years past, Super Bowl or National Championship game or those kind of things. So I think the market was good, but not great. And February is ramping up pretty nicely and we're anticipating going into the real meat of the season which is in that market March and April. We thought we are positioned really nicely.

[Tyler Batory:]

Okay. Great. That's helpful. And then moving on to Houston, can you talk a little bit about the ramp back up at that property post the closure and then I’m not sure if you have any general thoughts on how the Huston market is shaping up for 2018?

[Andrew Sims:]

Well, I mean 2018 is going to be, in my view, a little bit of a challenge that – don't have the Super Bowl like they had in 2017. I don't know if they’ll have the World Series, but I suspect probably not and so you've got some huge events that filled up to Downtown floor. But having said that, I think that – I think the calendar for the Convention Center is a little bit better than it was last year. So I think we’re looking for a little more contribution. In terms of ramp up, we still have business interruption insurance claim that we have to make for the variance between what we would have been at and where we are I guess our view on that is that that's probably going to be contained to the first quarter. And once we get to the end of the first quarter, we'll make a claim, like a make whole claims. So I think that we're not overly concerned about that. We have seen good progress in the ramp up in the last I'd say six weeks. So we feel like we're getting there. It's like opening anew hotel. I mean we had to close all the channels down and restart and it's been a shocker. So we’re glad to be back and open and we're glad to see occupancy ramp it up and probably the most encouraging thing is that the transient revenue is building back again that - that was a concern because we chased away 100% of our transient guest and then we had to get them back. So it's been building.

[Tyler Batory:]

Okay, great. That’s very helpful. And then shifting gears to the Arlington acquisition here, looks like a great asset, already performing at a pretty high level. I mean can you talk a little about potential upside here, I mean how do you think about your maybe improvements to operations? How do you think about maybe the potential return long-term from buying this property?

[Andrew Sims:]

Well, we're going to save the return hurdles to the next fall, once we get the property closed. We just feel like it's inappropriate to make those projections at this point. But the upside there is they've had some issues with the parking garage, which are being [indiscernible] before closing now are getting close to completing that project, which has taken a good portion of the parking revenue away from the hotel for almost a year. So we feel like there's a lot of upside in the parking revenue. We're located right next to the metro station and so the – and you're in a very high densely populated office market. So parking is a premium and there's certainly demand for parking and so we just need to reorganize that and rethink what we're doing there to create some additional dollars to the bottom line. Food and beverage is an opportunity here, we feel like it's not been a primary focus of the existing management team and we'd like to make it a primary focus. So I think you've seen in our hotels that's something that we think we're good at and we think that it's a value builder for our guest and we want to focus on that. Dave, anything else you want to…?

[David Folsom:]

Yes, strategically this is the closest market to Washington D.C. in Northern Virginia. So the barrier to entry are massive to get into Arlington, specifically to get into Rosslyn where this hotel is located. There are only two hotels closer to the D.C. line than ours, so both of them are in poor shape or one of them is going to go out of the system and be raised for a multi-use site. But that said, not only is it got great barriers to entry it behaves a lot like the D.C. market in general without a lot of the risks of being in Downtown D.C., meaning we are not subject to the umbrella labor union contract that will cover so many full service hotels in the District of Columbia. Texas are lower in Virginia and if anybody understands that market I mean Arlington, Rosslyn market is just as Drew said it's very dense from a mixed use perspective with multiple demand generators. It's just going to be a very, very good solid market for us that is not subject to only one type of demand generator. We've got government business. We've got transient business. We've got leisure business. We can capture a group business. It's very attractive for our strategy. So it's just really good and like Drew said in his remarks, Nestle just moved their global North American headquarters from California and they can be located right next to the hotel. There are rumors of other large public companies that are going to try to locate in Northern Virginia in this market near Washington because of its proximity to the district. So we think it's going to be just a very, very solid acquisition. It's a big hotel and we found it very favorable. We think there's a lot of operational improvements that can be made, and hopefully on our next earnings call, we can delve into that a little more in detail from a financial perspective.

[Tyler Batory:]

Okay. That’s very helpful. Appreciate the color there. And then just wondering generally what you're seeing out there on the disposition front I know you’re trying to want to get too specific, just wondering maybe what you're seeing in the marketplace and just has to look at the potential for asset sales here?

[Andrew Sims:]

Well, we said in the past that's something that we want to accomplish. We've identified some non-core assets and that’s one of the thing we really like about the Arlington transaction because it sets us up for a reverse 1031 exchange if we can execute on the sale timely and at a price that we find acceptable. So this is step one of that process and we'll see if we proceed past that one.

[Tyler Batory:]

Okay, great. And then maybe last question here, just on Wilmington, where that conversion coming up here? Could you just remind us a little bit more in the rationale behind doing that? And then also wonder your opinion here on the Tapestry soft brand and what you guys think about that?

[Andrew Sims:]

Yes. Sure. So in the Wilmington market, we have a new Hilton product that it was built almost a block away from us. It’s a new Embassy Suites. And their target market is upper-upscale, Hyatt, I mean Hilton core brand is upper-upscale. We thought we needed a differentiator to maintain our command in the market we felt like and you see what we're doing in other markets where we originally contemplated just dropping the flag all together, but the size of this hotel and the size of Wilmington, which is a pretty small market, we felt like we wanted to maintain the Hilton reservation system, but at the same time create a unique service offering for our guests. So this allows us to do both. So we're creating a lot of the same kind of guest touch points that we have for instance on our Savannah hotel with all these unique kind of features and because of the Tapestry brand, brand standards they give you a lot more leeway to do things the way you want to do and as opposed to this strict adherence to Hilton's core brands 550 page brand standards, which we like because we feel like we have a good handle on what our guests want in that market and if we can deliver on that.

[Tyler Batory:]

Okay, great. That’s really helpful. That’s all for me. Thanks guys.

[Andrew Sims:]

Thanks.

[Operator:]

The next question comes from Daniel Santos of Sandler O'Neill. Please go ahead.

[Daniel Santos:]

Hey, good morning.

[Andrew Sims:]

Good morning.

[Daniel Santos:]

Few questions for me. The first one is on 2018 guidance. Could you let us know how much if any impact tax reform and dispositions have on your 2018 guidance?

[Anthony Domalski:]

This is Tony. The impact of tax reform is pretty much captured in 2017 statement. So we're not really going to see too much impact of tax reform in 2018. We will have a lower corporate tax rates that’s applied to the profits at our TRS, but that's really about it as far as tax reform goes. And what was the second part of the question, disposition?

[Daniel Santos:]

Yes, disposition.

[Anthony Domalski:]

We are not factored in the impact of any dispositions in 2018. As Drew said, we’ll explore the possibilities of those, but trying to forecast, which assets that would be and what’s the timing would be in the impact. We just going to wait until that happen before we update guidance to the effect of that – of any disposition.

[Daniel Santos:]

Got it. And then on the Arlington acquisition, obviously you guys decided to renew the national flag. Just wondering if you guys could walk through your thought process when you're considering an opportunity, as to whether you keep a national flag or try to rebrand it as a boutique hotel?

[Andrew Sims:]

Right. So in this situation, the hotel was recently re-flagged from a Hyatt core brand to a Hyatt Centric, which is the Hyatt equivalent of the go-local theme. So to a certain extent, they've already made that jump or a leap of faith to the space that we're trying to occupy. In this instance, it was not an option to jettison of the Hyatt system. The previous owner or the current owner had executed a long-term agreement with Hyatt and they really – the only way to get out of that agreement is very, very expensive. So given that the hotel is performing at a high level close to a very high numbers. We felt like it’s a good acquisition, as good hotels performing well, we didn’t really need to remake the pie here.

[Daniel Santos:]

Just one last one. It seems like debt and asset sales that are your preferred funding source, and I'm wondering if you had any tangible steps that you might take this year to improve your equity multiple given it's a bit below peers?

[Andrew Sims:]

Equity multiple. [Indiscernible] Tony.

[Anthony Domalski:]

I think we’re going to have to get back to you on that.

[Andrew Sims:]

You got us stopped on that. Maybe you could help us.

[Daniel Santos:]

We can follow-up offline.

[Andrew Sims:]

Okay. Let us follow-up on that. We don't have it at our fingertips for sure.

[Daniel Santos:]

Thanks.

[Andrew Sims:]

All right. Thank you.

[Operator:]

[Operator Instructions] The next question comes from [Mike Tofias], a Private Investor. Please go ahead.

[Unidentified Analyst:]

Hey, guys. First, I want to thank you guys for the hard work in 2017. It sounds like it was a challenging environment and I also appreciate a strong fourth quarter. I also want to thank you guys, if I did my math right, it looks like you guys bought back about 400,000 shares in the fourth quarter, is that right?

[Andrew Sims:]

Now, it would be that correct.

[Unidentified Analyst:]

Yes. So thank you for that. I definitely appreciate it. One question I have for you, if I'm doing my math right. Is the total asset value I think you guys said was a little over $600 million and if I take the debt and the other liabilities and I back out some of the cash, if I'm doing my math right, do I get high-teens for sort of a total – for total net value per share, does that sound about right?

[Andrew Sims:]

You said high-teens.

[Unidentified Analyst:]

Right.

[Andrew Sims:]

It might be close for the mid-teens, but the math would be about correct.

[Unidentified Analyst:]

Okay. I'm just kind of reiterate that, I love that you're buying back stock and if the stock is trading in the 6’s and there's a mid-teen or mid to high-teen valuation. I hope you guys continue to consider that relative value as you compare it to new acquisitions.

[Andrew Sims:]

We most absolutely will.

[Unidentified Analyst:]

Great. Thank you.

[Andrew Sims:]

Sure. End of Q&A

[Operator:]

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

[Andrew Sims:]

Thank you all for participating in today's call. We invite you to come to our annual meeting here in Williamsburg in April and look for an invite coming out from Scott. Have a good day everybody.

[Operator:]

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