Sotherly Hotels Inc.
Q3 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Good morning and welcome to the Sotherly Hotels Inc. Third Quarter 2014 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Scott Kucinski. Please go ahead sir.

[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 view of the Company’s quarterly activities, review portfolio performance. [Technical Difficulty] If you have not received a copy of the earnings release, you may access it on our Web site at www.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 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.

[Andrew Sims:]

Apparently gentlemen – ladies and gentlemen, we’ve lost Dave. He is in California, the conference – looks like we’ve lost communication with him. So I am going to take his script and present it for the group. This is Drew Sims. Thank you, Scott. I’d like to begin today’s call by reviewing our portfolio’s performance for the quarter, which once again produced substantial growth across all metrics. For the quarter, consolidated RevPAR for the portfolio was $89.60, an increase of 13.9% over the prior year, with a 7.5% increase in ADR and occupancy up 5.9%. Hotel EBITDA increased 53.9% with hotel EBITDA margins expanding 96 basis points, excluding the negative impact of the Jacksonville Crown Plaza early termination fee accrual. For the quarter, our market share considerable [ph] growth with RevPAR increasing 10.4% driven by a 6.6% increase in occupancy and 3.6% increase in rate. We continue to focus on capturing ADR share from our competitors while maintaining healthy occupancy levels in markets where occupancy has stabilized. Thus far this year, we have been able to successfully execute on this strategy across most of the portfolio. Looking at the highlights across the portfolio. Atlanta continues to achieve exceptional results since our acquisition earlier this year. For the quarter, the Georgian Terrace gained over 200 basis points of share as it achieved RevPAR growth of 80% while the competitive set experienced a healthy 15.8% RevPAR increase. The trends in the greater Atlanta market are highly positive and we’re very pleased with the prospects of this asset moving forward. The Tampa market continues to enjoy a strong recovery following a lackluster 2013. For the quarter our hotel achieved 22.8% RevPAR growth while the market saw a 12.8% increase, representing an 890 basis point share capture. The Jacksonville market has turned the corner and it has now produced several consecutive quarters of positive growth. For the quarter, our hotel produced RevPAR growth of 19.1% compared to our competitive set’s growth of 8.1%, equalling 1100 basis points of share capture. These are just a few examples of the assets and markets that stood out among our portfolio but they are representative of what we saw as a whole as the quarter produced some attractive numbers across the majority of our assets. Turning to other corporate developments and activity. In the quarter, the company announced that we have entered into a 10-year franchise license agreement to rebrand our Jacksonville Florida hotel with the Doubletree by Hilton Flag. Simultaneous to entering into the Doubletree agreement, we voluntarily terminated our existing license a few months early. In October, we also announced that we will be operating the Holiday Inn, Laurel Maryland to the Doubletree Flag by Hilton. Both of these brand changes will occur in the second half of 2015 following the completion of product improvement plans. Also, in October, we completed the conversion of our Hilton Airport Hotel to the Doubletree by Hilton Flag. We've substantially completed a $3.2 million renovation of the hotel and expected to continue its history of strong performance within the Hilton system. In the quarter, we filed the Form S-3 and were declared effective in the amount of $23.4 million in support of the company's intention to participate at the market equity offering program. We subsequently entered into a sales agency and distribution agreement with Sandler O'Neill and Partners in New York to act as our selling agent for the ATM. In the quarter, we acted cautiously and beta tested the ATM program selling just 17,000 shares of stock and receiving approximately $130,000 in net proceeds. Last month the company announced a quarterly dividend of $0.065 per share which equates to a dividend yield of approximately 3.3% based on our current average stock price. This ranks us in the middle of our REIT peer set. We continue to have a bias to raise our dividend in measured and sustained way going forward. With that, I'll now turn the call over to Tony.

[Anthony Domalski:]

Thank you, Drew. Reviewing performance for the period ended September 30, 2014, total revenue for the quarter was approximately $31.8 million, representing an increase of 48% over the same quarter a year ago. Adjusted EBITDA was approximately $6.8 million for the quarter, representing an increase of 51.1% over the same quarter a year ago. Adjusted FFO was approximately $3 million for the quarter or $0.23 per share, representing an increase of 42.7% over the same quarter a year ago. The company reported a consolidated net loss of approximately $0.2 million for the quarter, a decrease from a large net loss in the same quarter a year ago of approximately 87%. Please note that both our adjusted FFO and adjusted EBITDA excludes unrealized gains or losses on hedging activities and derivatives, charges related to the early extinguishment of debt, acquisition charges, changes to the deferred portion of our income tax provision as well as other items. Adjusted FFO also excludes voluntary franchise termination fees. Please refer to our earnings release for additional detail. Looking at our balance sheet, as of September 30, 2014 the total book value of our assets was approximately $300 million. This includes net investment in hotel properties of approximately $260 million and approximately $2 million for the company's joint venture investment in the Crown Plaza, Hollywood Beach Resort. The company had total cash of approximately $24.1 million, consisting of cash and cash equivalents of approximately $16.9 million, as well as $7.2 million which was reserved for real estate taxes, capital improvements and certain other expenses. As of September 30, the company had approximately $250.2 million in outstanding debt at a weighted average interest rate of 5.47%. Total stockholder and unit holder equity was approximately $32.9 million at the end of the quarter of which stockholder equity was approximately 27.1 million with approximately 10.4 million shares outstanding and unitholder equity was approximately $5.8 million with approximately 2.8 million limited partnership units outstanding. At the end of the third quarter, our interest-bearing debt was approximately $92,720 per room. Also at the end of the third quarter, the ratio of debt to total asset value as defined in the indenture agreement to our senior unsecured notes was 54.1%. Turning to guidance. We’re updating our prior guidance for 2014 which accounts for current and expected performance within our portfolio. For the year we’re projecting total revenue in the range of $120.4 million to 123 million. At the midpoint of range this represents a 36.2% increase over last year's revenue. Hotel EBITDA is projected in the range of $31.2 million to $32.4 million and at the midpoint of this range, represents a 36.5% increase over last year’s hotel EBITDA. Adjusted FFO is projected in the range of $14.4 million to $15.7 million or $1.10 to $1.20 per share. At the midpoint of the range, it represents a 37% increase over last year's adjusted FFO. Additional details can be found in the outlook section of our earnings release. I will now turn the call back over to Drew.

[Andrew Sims:]

Thank you, Tony. We're pleased with the results our portfolio has produced thus far this year and are optimistic that those trends will continue as the macroeconomic environment improves. Lodging demand remains positive with group business continuing its return to form and pricing power presenting a soft [ph] across all segments. While plans for new supply have started to rise with the service, we don't expect to see any major impact for a few years and only in select markets. While these trends have helped to drive our results, we continue to look for additional ways to accelerate growth and unlock value for our shareholders. As I mentioned earlier in the call, we’ve executed license agreements with Hilton Worldwide to rebrand our Jacksonville Laurel assets to the Doubletree by Hilton Flag. We continue to look inward to maximize the value of our existing portfolio through smart asset management. In Jacksonville, we believe the change of flag coupled with renovated product, will help capture rate share in an improving market and brings this property in line with its new competitive set. The new competitive set has a $25 ADR premium to the current peer set. In Laurel, the shift from the Holiday Inn flag represents our company's exit from the midscale hotel business, a strategic objective we set in place several years ago. Similar to our Raleigh conversion we expect an upbranding and change to Hilton’s stronger reservation system to produce improved operating results that will drive the asset value up. Looking outside the portfolio, we continue to monitor high priority target markets and track several assets. We made two offers in the Washington DC market in the past two months. Negotiations continue. We remain focused on managing our capital structure with the goal of lowering our level of outstanding debt. Repayment of the $19 million bridge loan used to purchase the Atlanta asset is a high priority for us. For the quarter, our total return was flat, however, we still ranked among the top lodging REITs as most of the space experienced the effects of the September sell-off. We remain the top-performing lodging REIT on a trailing 12 month basis with a total return of nearly 70%. I would also like to note that the last month – in the last month we gained the first new research coverage in several years with Dan Donlan of Ladenburg Thalmann placing a buy rating on SOHO with a price target of $10. All in all, this was another exceptional quarter for the quarter and we remain optimistic that we will continue to see similar results. We will open the call up for questions.

[Operator:]

(Operator Instructions) Our first question comes from Carol Kemple with Hilliard Lyons.

[Carol Kemple:]

Where does the franchise termination fee show up on the income statement?

[Anthony Domalski:]

In the income statement, Carol - this is Tony by the way. That would be in the indirect expenses with all other franchise fees.

[Carol Kemple:]

And then you mentioned a few minutes ago a couple of acquisitions that you made offers on in the DC area. Can you talk a little bit about those and when do you expect the negotiations to be done?

[Andrew Sims:]

Well, Carol, obviously I can’t divulge which properties they are. So I can’t give you but so many details. I will tell you in a general sense we’re looking for a smaller boutique type hotel to represent Sotherly in that market with a total investment in the $40 million range.

[Carol Kemple:]

Is that 40 million [indiscernible] valued at that or combined?

[Andrew Sims:]

I am sorry, could you repeat your questions? No, we would only purchase one asset. So currently we made an offer on asset – negotiation on that asset ceased, we’re now on to a second asset. And that is in active negotiation.

[Operator:]

Our next question comes from Daniel Donlan with Ladenburg Thalmann.

[Daniel Donlan:]

Drew, you talked a little bit about new supply in some of your markets. Could you maybe delve a little bit further into which markets specifically that you're seeing that and how concerned you are about that?

[Andrew Sims:]

Well, I am really not that concerned about it right now. I mean if you look across Florida we don't really have any new supply coming in any of those markets. Savannah, we do have some new supply coming, Hilton keeps launching new brands. Every time they launch a new brand, they put a new hotel into Savannah. So apparently we have a Canopy coming in the next few years but that’s probably at least two years down the road, they’re going to be building an historic district, it’s very difficult to build an historic district, so it’s going to take quite a bit of time. Two years at least maybe longer. So that one, we’re not too concerned about. Raleigh, we’ve got a little bit of new supply coming in downtown but the Raleigh market is just so healthy right now, that we’re not concerned there at all. Wilmington, we did have a brand new courtyard opened at our front door which has had little bit of an effect on our performance there. They’ve probably taken about 10 room-nights a day from us and we’re just going to have to work through that. Hampton, no new supply; Phily airport, no new supply to speak off, out in Louisville, there are several projects announced but they were all on the Kentucky side. We don't really have a new supply on the Indiana side. We are basically the only full-service hotel on Indiana side. The Indiana side is growing quite quickly. So we’re pretty optimistic about that market. Houston, we do have a new hotel that’s going to open probably in the next year, that is a Holiday Inn product, given our plans for that asset, Dan, we don't see that as a direct competitor, they won’t be in our competitive set because we’re going to try and take that property of scale at the end of the Crown franchise. So all in all, not a lot of huge concern at this point.

[Daniel Donlan:]

And then you talked a little bit about the reservation systems of Hilton being maybe a little bit better than IHG, can you maybe delve a little bit further into that? Are there more members with the Hilton franchise -- with the Hilton reservation system, I thought that’s somewhat even but there might be maybe more participation or loyalty amongst the Hilton reward members in your experience?

[Andrew Sims:]

Well, it’s not so much the rewards program, it’s the rate. The Hilton brands are commanding higher rate than IHG brands. And if you look at the – what the Hilton product is doing in our market, especially the Jacksonville and the Laurel markets, there is a huge rate premium that we're not experiencing by being with IHG. So as we look at that, we thought, well, we need to capture that – because if we can capture that rate premium, let me just give you – for an instance in Jacksonville, we’re looking better for $20 is what we pro forma – on a pro forma basis looking forward and we think that’s going to bring us upwards of $800,000, $900,000 in GOP, additional GOP that will flow through even with the additional expenses that you incur as being the Hilton versus IHG product. And that has a tremendous amount of value to the asset. We think that there is probably $10 million of upside both in – with the Doubletree flag both in Laurel and Jacksonville. So we can add $20 million to the value of our portfolio just by changing brands and doing the product improvement plans.

[Daniel Donlan:]

And then kind of back to Carol’s question little bit on DC acquisition. Your leverage is higher than the peer set for the hotel sector. So I'm just kind of wondering how you’re going to look to potentially finance this transaction or are we just really in the preliminary stages here? So any commentary on that would be helpful.

[Andrew Sims:]

Right now we are in the preliminary stages as you say and at some point we have said repeatedly over the last several calls that at some point we’re going to have to raise some equity, some common equity. And so that’s obviously one option for us. There is other options out there and we’re investigating those as well. So we understand your concern regarding leverage, and we want to bring ourselves back in line with our peer set so that we can capture a similar multiple and value for our stock. And that’s obviously a goal of ours as we move forward here, Dan.

[Daniel Donlan:]

And then as it pertains to kind of the lodging cycle, I know nobody knows necessarily when it will end. But at what point of time do you start to say maybe it's best that we start to pull back on potential acquisitions just given the high degree of cyclicality associated with the lodging market?

[Andrew Sims:]

Right. I think that’s a valid concern. One of the things we’re looking at doing, Dan, is to recycle some capital out of non-core assets. So when we look at – taking on additional debt, or taking on additional properties that’s certainly a factor in our thinking over here, if we can sell at the top of the market in one location and invest in another location that is we think it's long-term where we want to be. That’s kind of where we’re trying to get to.

[Daniel Donlan:]

Okay and then lastly on the renovations that you guys have planned kind of fourth quarter and into next year, are you thinking there’s going to be any major disruption, how should we think about maybe the impact to RevPAR or margins from some of these projects that you're doing?

[Andrew Sims:]

So Philadelphia, we just finished, so over an 18, 20 month period we very quietly and efficiently renovated all the guest rooms in the hotel. And in the last quarter -- the third quarter we jumped on the public space and so any impact there has already been seen and there has been a little bit of impact. We’ve had 13, 14 rooms out of service this last – the month of October. So we did have a little bit of impact but that’s over. In terms of Jacksonville, we started about 15 months ago and we are now on the last guest room floor. So once again we’ve been doing it floor by floor, actually half a floor at a time and trying to minimize the impact on the hotel. So we’re moving towards our last guest room floor and that should be done pretty close to the end of this year, maybe January. So at that point we’re not going to really affect [peace dream], or our revenue stream that much. And then we will take – attack different areas of the hotel in terms of public space as we go forward. The conversion date that we are looking at is at the end of August, 1st of September. So we’ve got plenty of time to execute on our public space renovation and do it in a smart and non-invasive way.

[Daniel Donlan:]

And so the Crown Plaza in Jacksonville, do you keep the reservation system for IHG right up until you switch it over to IHG?

[Andrew Sims:]

Yeah, it’s going to go one day it will be Crown, the next day it’s going to be Doubletree. And then Laurel, there will be a little bit impact there but their occupancy hasn’t been as high as some of the other assets in any way. So we don’t really think there’s going to be a whole lot of impact. We will isolate it by floor. So that it’s not going to be disruptive to our existing customers.

[Operator:]

The next question comes from Dan Luchansky with DCL Holdings.

[Daniel Luchansky:]

A lot of my questions has been answered but I want to start just by saying what a great job you guys have done over the last five years, cleaning the balance sheet, getting the dividend reinstated and taking the stock up some 800%. And so that’s the place for me to start since a lot of the details have been covered. But I do want to thank you for all the efforts you’ve put in. That’s been very rewarding for me as a shareholder to participate and to watch you execute through what – admittedly some tough times.

[Andrew Sims:]

Dan, we always appreciate -- the fact that you guys appreciate us and we are working hard on this end of the phone.

[Daniel Luchansky:]

One of the questions that I had was relating to -- I know you have a universal self out there now that let you accomplish some of your financing needs with regard to the bridge or other activities you’ve discussed, potentially doing some acquisitions, maybe you sell assets, to buy assets, but the assets that you buy get sold first and I can see that you have put some thought into the capital structure. But I am wanting to backup just a little bit because when I look at this company its stock, even where it sits today strikes me that versus its peers, it's still quite inexpensive on most metrics. And I was wondering if you could just walk me through per key basis -- in general how much debt to further on these rooms, what do you think these rooms are worth? Just to see if I'm anywhere close on my analysis. It seems to me -- $12 or $13 based on the kind of analysis I'm doing. Any help you can give me regarding what your view of that is, I’d be much obliged.

[Andrew Sims:]

Well, first, I would say that we agree with you. I think that our analysts agree with you as well. I think the one concern that – and the reason that our stock is still not at the level that you support is because our relatively small size, although we’re getting bigger and the fact that we have – when you compare us to our peer set, we have a little more debt than some of our peers. And right now we’ve got about $90,000 in debt across our portfolio, we think our portfolio is worth somewhere around $0.5 billion. If you look at the valuation metrics that are in the bond indenture, our value is going to be somewhere around $450 million to $460 million at the end of the quarter and that's going up because on a trailing 12 basis every month that goes by we’re creating value for our shareholders. I think Atlanta, and Houston are great examples of making good decisions with regard to acquisitions. We bought the Houston asset for about $31 million, it’s under right now north of $50 million and it’s not even a year yet. So we created a tremendous amount of value for our shareholders in that location. On that asset we’ve got $21 million, $21 million loan. So maybe last year looked like that was slightly over levered, now it looks like it’s slightly under-levered. Atlanta is kind of the same thing. Because the hotel was not operated as efficiently as we knew we could operate it, we came in and – when we get to the end of this year we think that we’re going to have created probably $20 million to $25 million in additional value for our shareholders in the first nine months of ownership. So those are the kind of assets we want to continue to make obviously. We don't get credit for that as you have noted, yet as you said, we’ve come a very long way, we expect that our stock price will continue to grow. And so all we can do is keep our heads down, work real hard, do the right thing and the market sooner or later will recognize that we’re making smart investments and running the company in ways it should be run.

[Daniel Luchansky:]

I sure appreciate what you’ve been doing and I guess no one has asked about the dividend. I know what your general intentions are, through the kinds of increases you're seeing over the next – you anticipate over the next six months to a year, lend one to believe that there will be room for further dividend growth?

[Andrew Sims:]

I think you can look at our past dividend performance and project that into the future. We took a pause this quarter because we had a very large increase in our dividend last quarter. So we just thought we’d take a little pause but our intention and our bias is to continue to increase our dividend.

[Operator:]

The next question comes from Matthew Dodson with JWest, LLC.

[Matthew Dodson:]

Hey, I was hoping maybe to talk to you a little bit more about the Georgian Terrace and can you help us understand – you’ve done a great job there -- can you help us understand kind of where you are in the renovation, what you've done with the restaurant? And then what you've done relative to capturing share in Atlanta?

[Andrew Sims:]

Okay. Well let me address the renovation first. We bought the hotel, the previous owner which was mezzanine lender who had taken possession of the hotel, had spent about $15 million to $16 million on the public space and they had rented approximately one-third of the guest rooms. So that’s a condition that we inherited when we bought the hotel. Since then we have completed all our planning, public – all of our design work, issued all our purchase orders received, a good amount of the goods that we needed, we started the renovation in second week of September, and we’ve completed one guest room floor, we’re probably halfway through the second guest room floor. We are isolating the renovation so that you can see the results that we are getting even with renovation in prior process is pretty strong, and it will get better because once we finish the renovation, we’re going to be able to increase our rates. The product that we are building is awesome. We’ve got some really kind of different brand standards that we are implementing in terms of interior designing and I think that it’s going to be very well received in the marketplace. So in terms of renovation, it’s where we are. Restaurant, originally, our intention was to lease the space out. We hired a broker, we’ve gotten a few nibbles, we didn’t really like the concepts that were being presented to us in terms of what the restaurant would be on an ongoing basis. In the interim, we changed the menu on our own, and it’s been very well received. Sales were up significantly, I don’t have the number in front of me but both are retail, food and beverage outlets are screaming right now. Our burger bar and our full service restaurant are just doing exceptionally well. So we’re kind of rethinking that, John, we like where we are going, we are making a lot of money. It’s actually easier than having a tenant onsite and right now things are going pretty well. So we are rethinking that, we haven’t completely made a decision in that regard but that’s kind of where we are. In terms of capturing market, there were some low hanging fruit initially when we got there. I mean there were just some significant mistakes being made by previous management with regard to entering that penetration. So we corrected those errors. We also have -- previous management had zeroed in on the movie crews as a source for business and it's a good source for business but they were under pricing themselves in the market. The rates were in the 70s and we’ve moved that to 115 to 125, and we’ve had no pushback from our customer base. So I think we’ve got probably five, or six crews in right now. So we’re looking for – and that’s our base business, it’s a pretty big hotel, so we need to build a base and that is our base and it's working out real well. It's a nice group of people we have in the hotel, got an eclectic group – they like come to the restaurant, come to the bar and it kind of creates a fun atmosphere. So it seems to all be working.

[Matthew Dodson:]

So you’ve increased in the nine months occupancy about 10 points -- I guess when you think about that longer-term, I assume can you get a lot better in occupancy? I mean when do you start to push rate there when I googled the other other hotels of that quality around there, it seems like you have the ability to push rate. Is that more of a first quarter, or when does that start to happen?

[Andrew Sims:]

That’s kind of a phase 2 and right now we will push that one when we get – when the product matches the rate. Right now we’ve got 220 rooms that are renovated, that are okay but they’re certainly not competitive with the upscale luxury hotels the we have to compete with them in the town market. So we want the product to match their rates so that there is a value proposition for our customers. And if we try to over-price too early, John, then they will come once and they won’t come back, and then we won’t get them again. So we want to maintain the value proposition and so as we get more rooms in the inventory that are renovated, those rooms will be priced at a different level than the un-renovated rooms.

[Matthew Dodson:]

And then the last question I have for you is Philadelphia has been a workhorse for you over the years. This year that the city Whites were not very good in Philadelphia just in general, you’ve done the renovation etc. How do the city Whites look next year in Philadelphia, and several other people about that they should improve pretty dramatically from ---

[Andrew Sims:]

I don’t have that information in front of me. Operator? – I don’t have that information in front of me, our projections for next year are we’re going to be up slightly, I think is -- we don't – haven’t established our budgets, we’re still working through that process, but I think we’re going to be up slightly. We have had some negative effects from the renovation. As I said we probably had 40 rooms out of service since the beginning of September. So we saw some of that in the month of September and we saw some of that in the month of October. Hotel looks great, looks as good as it’s ever looked, since we’ve owned it, and the change from the Hilton core brand to Hilton Doubletree was seamless. One day it was one thing, next day it was another and so we have – we didn’t lose any momentum there and I think that next year should be up from this year for sure.

[Operator:]

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

[Andrew Sims:]

Thank you all for participating today's call. We will be heading to Atlanta for NAREIT conference later this week and invite everyone to our reception at the Georgian Terrace on Thursday evening. If you’ve not received an invite and would like to attend, please contact Scott Kucinski. We hope to see you all there and if not, we will talk to you next quarter.

[Operator:]

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