Sotherly Hotels Inc.
Q4 2014 Earnings Call Transcript

Published: 24 Feb 2015

[Operator:]

Good day and welcome to the Sotherly Hotels Incorporated Fourth Quarter 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 Mr. Scott Kucinski, Vice President. Mr. Kucinski, the floor is yours sir.

[Scott Kucinski:]

Thank you, and good morning, everyone. Welcome to Sotherly Hotels’ fourth quarter earnings call and webcast. Dave Folsom, our President and COO, will begin today’s call with a view of the company’s quarterly activities and a review of portfolio performance. Turning to Domalski, our CFO, will provide our key financial results for the quarter and issue our 2015 guidance. Drew Sims, our Chairman and CEO, will conclude with an update on strategic objectives. We’ll then take questions. If you have not received a copy of the earnings release, you may access it on our website at sotherlyhotels.com. In the release, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Any statements made during this conference call, which are not historical, may constitute forward-looking statements. Although, we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained. Factors and risks that can cause actual result 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. I’d like to begin today’s call by reviewing our portfolio’s performance for the fourth quarter and for year-end, which was once again another solid year growth for the company. For the quarter, RevPAR for the portfolio was $78.60, an increase of 7.5% over the prior year, with a 4.6% increase in rate and occupancy was up 2.8%. Hotel EBITDA increased 27.7%. For the year, RevPAR was $88.42, an increase of 10.3% over the prior year driven by a 5.8% increase in rate and a 4.3% increase in occupancy. For the quarter, we saw growth in 10 out of 11 of our markets with over half of our portfolio gaining share on the competitive sets. Notable performers were Raleigh, where our DoubleTree property had RevPAR growth of nearly 20%, compared to a very healthy market, which grew over 14%, resulting in a gain of over 500 basis points in share. In Jacksonville, our the market had RevPAR growth of 11.2% for the quarter with our hotel gaining 13.6%, a gain of over 240 basis points in share. And in Hampton, our property produced RevPAR growth of 14% against the market’s respectable 4.5% growth. For the year, we saw strong growth across the majority of our portfolio with the largest contributors being Raleigh, Tampa, Jacksonville, and Louisville, all of which recorded double-digit RevPAR growth. We experienced challenges at both our hotels in Philadelphia and Wilmington in the quarter. The overall Philadelphia market saw a considerable weakness being flat to prior year and with the December that was off nearly 17%. Layered on top of that weak market performance was the fact that the fourth quarter marked the conversion of the hotel from our core brand Hilton to a Doubletree, wherein we suffered some non-recurring setbacks due to challenges with Hilton’s internal changeover and placement of the new Doubletree Flag on the various market channels. We believe these issues have been addressed as of Q1. And the share loss experienced with this hotel in the fourth quarter will reverse and our fair share will return to more historic levels. In Wilmington, we had a disappointing fourth quarter on the back of several large group bookings that did not materialize. We continue to monitor the property’s performance closely and we’re encouraged by the pace of its bookings headed into 2015 and expect that the year-end 2014 softness was something of an anomaly. Despite a few exceptions that muted these results, we are pleased with the gains made across the portfolio during the year and are encouraged by what we’re seeing thus far in 2015. Turing to a few of our other corporate developments and activities, in November, the company completed the issuance of sale of $25.3 million of our 7% senior unsecured notes carrying a five-year term. A portion of those net proceeds from the transaction were used to repay in full the one-year, 12%, $19 million secured bridge loan with Richmond Hill and Essex Equity. This was the bridge loan that we used to purchase the Atlanta asset last March. In December, the company secured $3 million additional proceeds on its mortgage loan on the Crowne Plaza Jacksonville Riverfront property as part of an earn-out pursuant to the terms of the existing loan. Also in December, the company entered into a master agreement and a series of individual hotel management agreements with MHI Hotel Services to address the scheduled expiration of the existing master management agreement and strategic alliance agreement and provide ongoing uninterrupted management of each of the company’s wholly-owned hotels. This new series of agreements lowered the overall fees paid for the management of the hotels and provides for terms consistent with those we see throughout the industry. Last month, the company announced an increase to its quarterly dividend of $0.07 per share, equating to a dividend yield of approximately 3.8% based on our current average stock price. This ranks in the top quartile of our REIT peer set. With that, I’ll turn the call over to our CFO, Tony Domalski.

[Tony Domalski:]

Thank you, Dave. Reviewing performance for the period ended December 31, 2014. Total revenue for the quarter was approximately $29.8 million, representing an increase of 32.7% over the same quarter a year ago. For the year, total revenue was approximately $122.9 million, representing a 37.6% increase over a year ago. Adjusted EBITDA was approximately $6 million for the quarter, representing an increase of 30.2% over the same quarter a year-ago. And for the year, adjusted EBITDA was approximately $29.3 million, an increase of 39.6% over 2013. Adjusted FFO was approximately $2 million for the quarter or $0.15 per share, representing an increase of 8.3% over the same quarter a year-ago. And for the year, adjusted FFO was approximately $14.3 million or $1.09 per share, representing an increase of 30.8% over our AFFO per share a year-ago. Please note that both our adjusted FFO and adjusted EBITDA exclude 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 franchise termination fees. Please refer to our earnings release for additional detail. Looking at our balance sheet, as of December 31, 2014, the total book value of our assets was approximately $303.2 million, an increase of 33% over year-end 2013. This includes net investment in hotel properties of approximately $263.3 million and approximately $2 million for the company’s joint venture investment in the Crowne Plaza Hollywood Beach Resort. The company had total cash of approximately $23.3 million, consisting of unrestricted cash and cash equivalent of approximately $16.6 million, as well as approximately $6.7 million, which was reserved for real estate taxes, capital improvements, and certain other expenses. As of December 31, 2014, the company had $258.2 million in outstanding debt at a weighted average interest rate of 5.26%, a 21 basis point reduction over a quarter ago. Total stockholder and unit holder equity was approximately $31.3 million at the end of the quarter of which stockholder equity was $26.4 million with approximately 10.6 million shares outstanding and unit holder equity was approximately $4.9 million with approximately 2.6 million limited partner units outstanding. At the end of the fourth quarter, our interest-bearing debt was approximately $95,700 per room. And also at the end of the 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 issuing our guidance for 2015, which accounts for current and expected performance within our portfolio and is predicated on RevPAR growth of 5.5% to 7.5% for the consolidated portfolio. For the year, we’re projecting total revenue in the range of $132.2 million to $135.5 million. And at the midpoint of the range, this represents an 8.9% increase over last year’s total revenue. Hotel EBITDA is projected in the range of $35.9 million to $36.8 million. And at the midpoint of the range, this represents a 13.2% increase over last year’s hotel EBITDA. And adjusted FFO is projected in the range of $15.9 million to $16.8 million or $1.20 to $1.28 per share. At the midpoint of the range, this represents a 13.8% increase over last year’s adjusted FFO per share. Additional details can be found in the outlook section of our earnings release. I will now turn the call back over to Drew.

[Drew Sims:]

Thank you, Tony. With double-digit growth across all metrics in 2014, we were pleased with our annual results as we continue to see strength across the majority of our markets. Rates continue to expand across all segments and demand growth remains steady while new supply remains limited in most markets. We expect 2015 to be another healthy year for the lodging industry, our markets, and our hotels. As we conclude several asset repositioning in Philadelphia, Jacksonville, Atlanta, Laurel, and Huston, we expect these hotels to reap the benefits of our capital investments. We are already seeing a significant impact in Jacksonville and Atlanta and expect similar results as we upgrade our brand affiliations and move our hotels up market. Regarding changes to our portfolio, we continue to monitor acquisition opportunities and high-priority target markets and are tracing several assets. We also continue to consider the appropriate time to sell certain assets in the portfolio and will execute when we believe we can create the most value for our shareholders. We remain focused on managing our capital structure and intend for lock-in fixed rate mortgages and extend debt maturities throughout the year. Last month, we increased our dividend to $0.07 per share. This marks the sixth increase in the last nine quarters. We’ve increased our dividend nearly 56% in the past 12 months and continue to have a bias towards future increases in a steady and measured fashion. In the quarter, we gained research coverage from two analysts and we’ll be hitting the road with these groups in the next month to provide additional exposure for SOHO to the investment community. Both the analysts initiated coverage with a buy rating. We continue to believe that there is a disconnect between our current stock price and the inherent value of our company, making SOHO an attractive investment opportunity. We will now open the call up for questions.

[Operator:]

Thank you, sir. [Operator Instructions] The first question we have will come from Carol Kemple of Hilliard Lyons. Please go head.

[Carol Kemple:]

Good morning.

[Drew Sims:]

Good morning, Carol.

[Carol Kemple:]

In your 2015 guidance, can you talk about why your interest expense assumptions would be to get to those numbers?

[Drew Sims:]

We would be looking at – I think the big variance between last year’s number and this year’s number is that we have a full year’s worth debt on Atlanta, full year’s worth of mortgage interest. We also have a full year’s worth of interest on the 7% unsecured notes that we issued in November, and we don’t have the interest on the bridge loan. Also, I think you noticed in the schedule there, AFFO in the back of the earnings release, we had a significant prepayment penalty associated with those repayment of the bridge loans and so that would be non-recurring in 2015 as well.

[Carol Kemple:]

Okay, and --

[Drew Sims:]

If that doesn’t get you, Carol, just give me a call back.

[Carol Kemple:]

Okay, thanks. That’s all my question.

[Drew Sims:]

Okay.

[Operator:]

Next, we have Daniel Donlan of Ladenburg Thalmann.

[Daniel Donlan:]

Thank you and good morning.

[Drew Sims:]

Good morning, Dan.

[Daniel Donlan:]

Just want to talk a little bit about the guidance. If I run the math on the hotel EBITDA and divide it by the revenues, you are looking at a hotel EBITDA margin of 27.2% amidst the high and the low end. So I’m just curious as to why the EBTIDA margins aren’t actually increasing if you hit the high-end of your revenue guidance?

[Drew Sims:]

That’s a good question, Dan. We’re kind of backed into that number. In terms of looking at the margins per se that’s probably not something we consider that closely. We look at it from a different angle, which is from our perception as to what we think the hotel EBITDA is going to be and then we built on that and then took a high and low margin from there building more towards – being conservative in our view as to what we think – where we might end up. So we’ve certainly left ourselves some room to the upside and that’s how we’ve always manage our company.

[Daniel Donlan:]

Sure. I thought that’s what you might say. And then as we think about Houston, lots been talked about in the press about low oil prices and what that may do to the market and we’ve already seen some weakness in that market, especially relative to the other top 25. Can you maybe talk about what you see there, I think when your big corporate clients was not oil-related, but I wasn’t positive on that, so can you talk about your outlook there? And have you tempered your outlook versus your underwriting when you bought the asset call it a year ago?

[Drew Sims:]

Actually, the hotel outperformed our underwriting almost immediately. So from that perspective, I think it’s been a very positive investment for us. In terms of on a go forward basis, in 2015, we are dependent on some of the major oil players there, Chevron is one of our big customers, Kellogg Brown & Root is an engineering company that focuses on the oil and gas industry, that’s a big customer of ours, but we haven’t seen a massive deterioration in the market yet. What we read and what we see with our group business is fairly consistent with last year. Transient? Hard to say. So far, transient is holding up okay. We had kind of a soft February, January was pretty good actually. So it’s been a little bit of a mix bag. Oil prices are coming back a little bit. So it’s – again, are we exposed there? Could be. But we’ve also got larger clients that aren’t related to the oil business. Our sister building next to us houses United Airlines operations center. And they give us a tremendous amount of business and they’re actually benefiting from the oil prices. So it’s a mix bag there.

[Daniel Donlan:]

So, I guess, when you look at your RevPAR growth outlook of 5.5% to 7.5%, that’s probably coming in inline, may be a little bit better than where most of the hotel REITs have come in. Can you maybe give us who kind of your leaders and then maybe who your laggards are in terms of your portfolio?

[Drew Sims:]

Well, I think our clear leader will be Atlanta. We’ve got a lot of upside there. We finished about five floors of renovations now. As we continue to roll through the building and improve our prior rooms product, there is a lot of upside on the ADR there and we’re going to continue to see that push forward. So I think that that’s the clear leader. Savannah has gotten off to a great start this year as well. We’ve got a lot of upside in rate there as well, I think. So I think, those are probably the two major leaders. Raleigh has just been a solid performer year-in and year-out since we made the brand change to Hilton Doubletree Flag. So, I’d say those are the top three. As far as the laggers, the Phily market is getting – being up pretty good right now. We took a step backwards when we converted from Hilton to Doubletree. We thought that would be a seamless types of conversion. Some said, it was within the confines of Hilton family of brands. Nothing could be further from the truth. It was more difficult making a change from a Hilton to a Doubletree than it would be from doing a Hilton to a Starwood product or an IHG product. The internal workings within the Hilton family were less than ideal. So we had lots of problems. We actually got dropped off the internet on many, many channels and so our customers couldn’t find us and so that was the problem. We’ve cured all that. Took us a couple of months to get it all straighten out, but the hotel doing fine. I think, first couple of months this year we’ve been okay, obviously the weather has been helping, thanks there because most of our business comes from the Northeast corridor and we’re not seeing a lot of trouble out of Boston. It’s been a little impair, but we think that that’s probably a lagger market. We’ve got our eye on Huston, but so for so good on Huston, it’s not real bad.

[Daniel Donlan:]

Okay. And then as for as the conversions that you are anticipating to Doubletree, do you think you could potentially run into same type of issues call it in the third or I think fourth quarters when some of those assets convert or just because you’re going for IHG to Hilton, it’s a completely different process?

[Drew Sims:]

It is a completely different process. And I think quite frankly, it will be smoother with a lot outside.

[Dave Folsom:]

Yeah, it’s Dave. I mean, when we transfer the Holiday Inn flag from Raleigh to Doubletree, it was an immediate vertical balance for us. Its one day IHG strips the entire system the GDS, the third-party sites, the internet placement and then Hilton picks it up and it’s pretty seamless and you get a better reservation system. It’s just that Philly, it was inside the family of brands and the left hand at Hilton didn’t know what the right hand at Hilton was doing and it really forced us to suffer quite a bit during the quarter. But those two hotels you mentioned, that’s an IHG switch to Hilton and it should reflect more in line with what we saw in the mechanisms that how we did the Raleigh deal.

[Daniel Donlan:]

Okay. And then lastly, could you maybe expand upon the cost savings that you mentioned with renegotiating the operating agreement with MHI Hotel Services?

[Drew Sims:]

Yeah. So, as you know, that was a ten-year agreement, it was coming up for expiration. Essentially, we took all the existing hotels and we’ve lowered their fees to 2.65% for the next few years and then that fee rate will go down to 2.5% thereafter.

[Tony Domalski:]

That’s from 3% net.

[Drew Sims:]

Yeah, from 3%. And then, all new hotels which for purposes of this renegotiation included the Atlanta Hotel and the Houston Hotel, which are fairly significant for us. We started out at 2% and that ramps up to 2.5%, not to 3%. So if you just model it out, just call it 50 basis points, that’s really the pick up we get from an economic perspective going forward.

[Daniel Donlan:]

Okay. Alright, thank you so much. Appreciate it.

[Operator:]

The next question we have comes from Scott Williams of [indiscernible].

[Unidentified Analyst:]

Hey guys, thanks for taking my call.

[Drew Sims:]

Good morning, Scott.

[Unidentified Analyst:]

Good morning. Atlanta is that – on a comparison basis for 2014, is that – did we miss the first quarter of results in our year-ended number in 2014. I guess where I’m headed is kindly just get what was the full year’s – if you included Atlanta, what would our hotel EBITDA been for the year?

[Drew Sims:]

You’d add about another $0.5 million, that’s about it right?

[Tony Domalski:]

Yeah, that will be about right. We par [ph] that property on March 27 last year. So we had about six days worth of financial performance included in the first quarter of 2014 result.

[Unidentified Analyst:]

Okay. So the lift on a year-to-year comparisons, it is not just an inclusion of either Houston or Atlanta, it’s the majority of expanding growth RevPAR margin, okay.

[Tony Domalski:]

Yeah, there was some pick up for having a full quarter of Atlanta this year in the first quarter and then the rest of that will be internal growth.

[Unidentified Analyst:]

Drew I know – sorry, go head.

[Drew Sims:]

I was just got to say, that both top line growth and margin growth.

[Tony Domalski:]

Right, it’s both.

[Unidentified Analyst:]

Okay, fantastic. And I know you spend a lot of time talking about on every call and it is something we just continue to talk about. On the dividend, I know you have been steadily growing it. But when you look, just kind of rough math would suggest that the market is somewhere around 40% of FFO and at the midpoint of your guidance, it’s something lower than that. How do you personally think about the Board about how – what the appropriate level is when they raise it?

[Drew Sims:]

Well, we try to rate it every quarter. So that’s – we want a steady growth in our dividend and no one like that more than me, because I’m the larger shareholder. So I’d like to see the dividend grow. And in terms of what percentage of our overall revenue we pay out, that’s less of an issue with us than to make sure that we have a steady strong growth. We obviously wanted to be safe and we want to make sure that we don’t repeat like we did in the last major recession that all of a sudden we had to make changes and go the opposite direction because we think that that’s not well received by the market. And so, that’s another consideration. And quite frankly this year, we’re reinvesting a lot of money back into our hotels this year

[Unidentified Analyst:]

Yeah.

[Drew Sims:]

We’ve listed them all well and most of that reinvestment is going to be through cash flow. So we’re not going out borrowing a whole lot of money to make these improvements and that we think that at the end of the year, we’re going to have four, five properties that are going to be moving up market that we’ll be able to charge higher rates and increase our profit margins and all that will flow through to our shareholders and drive our stock price, so…

[Unidentified Analyst:]

Yeah, that makes complete sense. On kind of a go forward EBITDA basis through your – my math suggest about nine times on hotel EBITDA to where the market values of the company? Are you seeing any transactions that offer nine times stabilized EBITDA on our acquisition?

[Drew Sims:]

I mean, we looked at our Houston asset was very accretive. That multiple we completely eclipsed. So that dropped a lot of money to the bottom line and we created all that value in about six months in Atlanta. I mean on an ongoing basis, I mean, I think we see things that are probably competitive. Sometimes we have to weave our magic at the asset level…

[Unidentified Analyst:]

Yeah.

[Drew Sims:]

To get those kind of returns, the way we did in Atlanta. So there is still things out there, not on a look back basis, Scott but we’ve been at this for a long term and see value in some of these assets where other folks don’t, so.

[Unidentified Analyst:]

Yeah look – Atlanta and Houston seem to be great transactions. I mean it’s almost more of a – just referencing how the valuation of the current stock price really more…

[Drew Sims:]

Yeah, and I think to your point, we’ve been very reluctant to issue comp stock at our current stock – share price.

[Unidentified Analyst:]

Yeah. You guys have –did a great job.

[Drew Sims:]

And that’s I think – ultimately that’s what you’re asking about I think that we’ll continue to take that view. Will we issue common stock one day? Yeah, well will and we’ll probably do it in concert with an accretive acquisition. And so that it lessens everybody’s pain. But we still feel like our stock is undervalue and we need to get above 10% before we start thing about that and so we’re trying to continue to grow the company, we’ll recycle some capital out of some assets that we have today and use that capital to continue to grow. And we’ll also – if we see the right deal, yeah, we might pull the trigger on, on a common issue and Scott, we’ve been very reluctant to do that for today.

[Unidentified Analyst:]

Okay, last question. The part when you referenced the refinancings and trying to extend debt and potentially lower right side, looks like to me, Savannah and Wilmington would be properties that were seemingly under-levered? Are there others or are those the ones that offer you the opportunity or within the portfolio what probability should we be thinking?

[Drew Sims:]

Unfortunately, those two were have lock-outs on, so we can’t really take those off.

[Unidentified Analyst:]

Okay.

[Drew Sims:]

The day will come and we’ll do that, but right now, it’s not the time. And we’re going to refinance the Atlanta asset and lock in rates around 4% for the next 10 years that something we really want to do and so we’re looking at that. And I think also probably our Jacksonville asset is an asset that is performing much better and we can lock-in low rates for extended period of time that would also make sure that hotel is cash flow positive for the next decade. So those are the things we’re looking at and the more debt that we can lock-in and 4% level is – as far as I’m concerned is – that’s the best thing we can do, that’s cheat money and we paying a 3.5% dividend, so if we get 4% debt, it’s a pretty good thing.

[Unidentified Analyst:]

Yeah. Well, fantastic. Congratulations on all of your success and thanks for taking my questions.

[Drew Sims:]

All right, thank you.

[Operator:]

[Operator Instructions] The next question we have comes from Mike Davies, Investor.

[Unidentified Analyst:]

Hey, guys. First of, thanks for the call and thanks to your great efforts in 2014, that was a terrific year and you guys are doing a great job.

[Drew Sims:]

Thanks

[Unidentified Analyst:]

Secondly, I appreciate your reluctance to issue stock at these prices and I hope you are able to hold firm on that. I had two quick questions. The first one is, is there an opportunity and/or would consider borrowing money and terming out your debt even further at slightly above market rates than sort of the conventional market price. And then the second question was, I think on this call and possibly others call you’ve mentioned that you think that stock is an attractive investment opportunity and it’s possibly the disconnect with the investment community. And I was wondering roughly when you have internal discussions what you think the stock is worth.

[Dave Folsom:]

Well let me, this is Dave. I’ll address the debt question I mean we’re always looking at ways to lower our cost of capital and make good decisions for the overall capital structure. We did issue public debt twice in the last 18 months. So we’ve gone back to the capital markets to basically turn out debt or put additional debt on the balance sheet and get rid of some of short term debts. So we have done that. If your question revolves more about getting preferences in sort of a facility, conventional bank facility, I don’t think we’re there right now, I mean all of our hotels are encumbered with individual mortgages and that’s the way we like it right now. We’re just not looking for that typical source, secured facility from a bank loan– from a bank credit facility type of deal. So I don’t think we’re looking for any additional type of debt instrument right now. So I think that’s may be the answer to question one. Question two, on our NAV calculation, I think that probably can be calculated by any of the analyst or by any investor or us. I mean we think our assets on a gross basis, at least if you use our bond covenants as a gauge, probably put this close to $500 million in gross assets, you can strip out some debt and look at our units and our flow and we are probably in low-to-mid teens in terms of an NAV that’s all sort of somewhat subjective, I guess NAV by its nature subjective. But we think the stock is discounted to its NAV. We are small cap, micro cap company we understand there is a discount associated with that. We just think the discount is too big and as Drew mentioned we need to be a double-digit stock, we think, to be appropriately valued with a discount to our NAV and that gives us the opportunity to grow out of that discount. But right now, it just too deep.

[Unidentified Analyst:]

Yeah. Great. Thanks a lot and keep up the great effort.

[Drew Sims:]

Thank you.

[Dave Folsom:]

Thanks.

[Operator:]

Well at this time, we’re showing no further questions. We’ll go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

[Drew Sims:]

Thank you all for joining us. We look forward to a great year and talk to you next quarter. Thanks.

[Operator:]

And we thank you sir and to the rest of time for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and have a great day everyone.