Sotherly Hotels Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good day and welcome to the Sotherly Hotels Incorporated first-quarter earnings conference call and webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Scott Kucinski, Vice President, Operations and Investor Relations. Mr. Kucinski, the floor is your, sir.

[Scott Kucinski:]

Good morning, everyone. Welcome to Sotherly Hotels' first-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 2016 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 the 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 results to differ materially from these expressed or implied by forward-looking statements are detailed in today's press release and from time to time the company's filing 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 would like to start today's call by discussing some of the portfolio’s key operating metrics. For the quarter, portfolio RevPAR was $99.72, an increase of 13.5% over prior year, with a 13% increase in rate and occupancy increasing 40 basis points. Hotel EBITDA for the portfolio increased 28.7% to approximately $10.1 million. Hotel EBITDA margin expanded by 140 basis points in the quarter. To review some of our individual property and market highlights, at our Jacksonville, Florida hotel, which converted to the DoubleTree by Hilton Flag last September, it turned in another stellar quarter as the hotel continues to ramp up towards stabilization under the new brand. RevPAR increased 26.4% for the quarter compared to the comp sets healthy 7.9% increase, with the hotel gaining 1,850 basis points in share. At our Laurel Maryland hotel, which converted to the DoubleTree Flag last November, RevPAR was up 7%, driven by a 14.1% increase in rate. The market’s RevPAR grew 10.6% in the quarter. This was the first full quarter following the completion of the renovation and the impact to operations that accompanied the final transition to the new flag. We are seeing positive trends in the hotel, as we continue to look to attract those guests within the Hilton system who traditionally pay higher rates. We expect our momentum to continue. Our Tampa hotel produced a strong first quarter with RevPAR up 8.5%, driven by a mix of 7.3% in rate growth and 1.1% in occupancy growth. The competitive set RevPAR was up a healthy 4.3% for the quarter, resulting in share gain of 420 basis point for our hotels. While the majority of our properties and their respective markets continue to see positive momentum in the quarter, there were few laggards that have shown negative trends as a result of new supply impact and weaker than anticipated transient travel. The Houston market continues to show negative trends, but it is important to note that the first quarter of last year was a tough comp, as the downward shift resulting from the oil and gas industry did not occur until the second quarter last year. We believe though that the worst is behind us in this market. The Laurel market has also struggled to absorb some new supply coming on line. Further, our hotels have been impacted by a major bridge construction project that has temporarily disrupted the accessibility of our hotel from Interstate 65. That project is scheduled for completion later this year. As a whole, our southern and mid-Atlantic markets saw RevPAR growth of 2% on a combined basis, driven by a 3.5% increase in rate and a 1.5% decrease in total occupancy. Looking at some of our renovation activity across the portfolio, in April, we completed the $5 million renovation of our Houston hotel, which was converted to the Whitehall by Sotherly Hotels. Drew will speak more to this conversion and how it fits into our strategy later on the call. In Atlanta, we are nearing completion of our $7 million guestroom renovation, with impactful work scheduled for completion by the end of May and full completion by November. We also kicked off an $8 million renovation of our Savannah hotel with guestroom work scheduled to commence after Memorial Day. This project will last approximately 12 months. Looking at our corporate activity in the quarter, in March, we extended the maturity on our Houston hotel until November 2017 with the existing lender. In April, we announced the change in auditors with the engagement of Dixon Hughes Goodman. The change came following a competitive bid process and we believe this decision provides the company with a quality service provider at a lower cost than our previous firm. Also in April, we announced an increase to our dividend to $0.09 per share, marking our tenth increase in the last fifteen quarters and an 80% increase over the past 24 months. Based on current pricing, this represents a yield of over 6.5%. And finally, last week, we announced the company has entered into a purchase and sale agreement to sell the Crowne Plaza Hampton Marina hotel for purchase price of $5.8 million. The closing of this sale on our non-core asset is subject to various customary due diligence and closing conditions. We anticipate a closing if successful to occur on the third quarter of this year. And with that, I'll turn the call over to our Chief Financial Officer, Tony Domalski.

[Tony Domalski:]

Thank you, Drew. Reviewing performance for the period ended March 31, 2016, total revenue for the quarter was approximately $37.8 million, representing an increase of 22% over the same quarter a year ago. Adjusted EBITDA was approximately $8.4 million for the quarter, representing an increase of 16.4% over the same quarter a year ago and adjusted FFO was approximately $3.8 million for the quarter, or an increase of 16.9% over the same quarter a year ago. Please note that both our adjusted FFO and adjusted EBITDA exclude charges related to the early extinguishment of debt, gains and losses on derivative instruments, acquisition costs, changes to the deferred portion of our income tax provision, as well as other items. Please refer to our earnings release for additional detail. Looking at our balance sheet, as of March 31, 2016, the total book value of our assets was approximately $389.5 million, which includes net investment in hotel properties of approximately $356.3 million. The company had total cash of approximately $18.6 million, consisting of unrestricted cash and cash equivalents of approximately $15 million, as well as approximately $3.6 million, which was reserved for real estate taxes, capital improvements and certain other expenses. As of March 31st, the company had approximately $319.4 million in outstanding debt at a weighted average interest rate of 5.24%. Approximately, 85% of the company's debt carries a fixed rate of interest. Total stockholder and unitholder equity was approximately $52.2 million at the end of the quarter, of which stockholders’ equity was approximately $49.3 million with approximately 14.5 million shares outstanding. And unitholders’ equity was approximately $2.9 million with approximately 1.8 million limited partnership units outstanding. At the end of the first quarter, our interest-bearing debt was approximately $106,000 per room. Also, the ratio of debt to total asset value as defined in our indenture agreements to our senior unsecured notes was 55.5% based on a total asset value of approximately $582.1 million at the end of the quarter. Turning to guidance. We are reiterating our previous guidance for 2016, which accounts for current and expected performance within our portfolio as well as other factors. For the year, we are projecting total revenue in a range of $151.6 million to $154.3 million. At the midpoint of the range, this represents a 10.4% increase over last year's total revenue. Hotel EBITDA is projected in the range of $44.7 million to $45.7 million. And at the midpoint of this range, this represents a 24% increase over last year’s hotel EBITDA and adjusted FFO is projected in the range of $20.2 million to $21.6 million, or a $1.21 to a $1.29 per share. And at the midpoint of the range, this represents a 25% 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 over to Drew.

[Drew Sims:]

Thank you, Tony. As we discussed on our last earnings call, due to substantial renovation activity and the acquisition of the Hollywood hotel, 2015 was a year of transition for the company which we believe has positioned us well for 2016 and beyond. We're starting to see the fruits of these efforts, as we experienced notable growth in the core across all major metrics. The Hollywood asset was a major driver of the positive trends as high hotel RevPAR had a meaningful effect on the topline and bottom-line profitability of the company. The Hollywood market experienced moderate negative trends in the quarter following several years of strong growth. But this was generally expected as new product was being absorbed. The benefits of this hotel to the portfolio over the long-term are positive in our view. Our conversions in Jacksonville and Laurel where we upgraded to the Hilton brand are proving to be successful endeavors, as both of those properties are seeing the RevPAR growth we anticipated and forward booking pace is very strong. As Dave mentioned, last month, we launched our Houston hotel as the Whitehall by Sotherly Hotels, an independent boutique associated with Preferred Hotels and Resorts. The $5 million renovation of this hotel included many of the same southern hospitability hallmarks we implemented at the Georgian Terrace in Atlanta last year, including an enhanced food and beverage offering with the creation of two unique high-quality venues. While the Houston market is currently underperforming and positive trends at this hotel may be muted in the near-term, we expect this conversion will allow us to capture more market share, especially in terms of rate. The repositioning has been well received in the market and among our corporate client base. We have discussed the possibility of non-core asset dispositions for several quarters and are now nearing execution, in part with the announcement of our pending sale of the Hampton hotel. This property is the smallest asset and the lowest RevPAR producer among our portfolio and is not consistent with our long-term strategy. Other potential non-core asset dispositions are possible in the near-term, but we will most likely only occur in the event we find an acquisition opportunity to act as a suitable exchange property and that we believe will add value to the portfolio. We will be very selective in our efforts to find the right hotel that fits our boutique concept. In terms of industry trends, while in the first quarter we have experienced some new supply impact and a weaker than expected transient travel segment in the larger gateway markets, the balance of our markets continue to show positive trends. We have increased our focus on group bookings, which is a benefit of the full service product offering of our portfolio. Group pace continues to be strong for the second half of 2016 and into 2017. Looking forward, we are optimistic yet mindful of the shifting trends. We will continue to aggressively manage our portfolio with the goal of producing ever improving results and creating value for our shareholders. 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 with Hilliard Lyons. Please go ahead.

[Carol Kemple:]

Good morning. Can you talk a little bit about the Hampton asset sale, kind of what you saw with the bidders out there, kind of the cap rate on the property and if you think that will be accretive or dilutive to earnings and also, I’m not sure if you all have any debt on that property or not? Any information on that would be great.

[Drew Sims:]

Yes. Carol, we do have a little bit of debt on that property. It’s not a lot. It’s about $3 million. We are going to pay that note off when we sell the property. I would say the performance of that hotel is obviously not near our expectations over time and it’s a non-core asset. Given our strategy moving forward, we are going to realize some of that cash proceeds on the sale. The cap rate convention, I would have to look back on where we are right now given the property’s performance. It’s actually doing better this year than it’s done a long time. But I can get you more of the discrete info.

[Tony Domalski:]

I can say about the cap rates because we haven’t -- from a cash flow perspective, this hotel has not created any benefit for the company for quite some time. So it’s an infinite cap rate because it doesn’t have a positive NOI after reserve.

[Tony Domalski:]

Yes. You go through our FS, any reserve on our debt service in principal payments and our loan has accelerated principal payments. It’s just not providing any cash flow dollars.

[Dave Folsom:]

So in terms of how it’s going to affect the performance of the company overall, it will effect -- it will be a negative in terms of our topline sales but in terms of bottom line profitability, it’s going to help us increase our profit margins and actually increase our cash flow by getting rid of it.

[Carol Kemple:]

Okay. And then when you all went to markets, did you just approach this buyer, or was it a competitive process and what were you hearing back from other buyers?

[Drew Sims:]

It was a formal marketing process. We used the regional broker to approach many buyers and this was the best buyer we could get.

[Carol Kemple:]

Okay. Thanks.

[Operator:]

Next, we have Dan Donlan of Ladenburg.

[Dan Donlan:]

Thank you and good morning.

[Drew Sims:]

Good morning, Dan.

[Dan Donlan:]

Good morning. Just two questions for me. Drew or Dave, just curious on any future conversions and when maybe some flags coming up for renewal, do you have the ability to kind of upbrand any of your existing hotels? Do you have any plans to move to the independent strategy like you did with the Houston asset?

[Drew Sims:]

Well, we do. I think you can look in our K and see that we’ve got some license agreements that are terminating last year due to expire. Hollywood would be a good example. We don’t think the Crowne Plaza brand adds a whole lot to that asset and so our highest performing asset we think it can perform better. So, we see that as a huge value add for that asset. And in terms of Savannah, we also have a maturity next year on that license agreement midyear. So, we’ve started that process already, completed all the planning for the new product that we are going to create there. It’s a great product. It’s very much in line with what we see in Atlanta in terms of quality. And we think that it’s going to be a successful relaunch for us there.

[Dan Donlan:]

Okay. Appreciate it. And then as far as RevPAR growth goes for the remaining three quarters, it looks like on a weighted average basis your RevPAR growth was flat. Just kind of curious what you are expecting kind of in the balance of the year?

[Drew Sims:]

Well, I think that we are in these competitive markets and some of them are up and some of them are down. You’ve got Houston that is obviously down. We feel like that hits the bottom and is going to start crawling its way back up. We feel like Miami is probably -- has gotten beat up as much as any market in the country and Hollywood has not really experienced the same kind of reduction in overall market RevPAR that Miami has, even though it’s right there our close competitor and actually part of the MSA. We feel like we are going to be up probably 3%, somewhere in that neighborhood on a same-store basis as we go forward, maybe higher than that. It’s just going to depend on each market. Like Laurel Maryland, it’s starting to screen. Jacksonville obviously is doing really well. Tampa has been really strong. So, it’s just -- it's kind of hard to tell you the truth. And I think some of our other management teams of some of the other REITs here that don’t even want to give out any guidance. That’s how it kind of scarily has been but we are pretty confident given what we’ve done with our -- repositioning our product in the last 12 months that we are going to see RevPAR growth.

[Dan Donlan:]

I guess any directionally, do you think the second and the third quarters will be your strongest growth quarters and then fourth quarter weaker, or your portfolio little bit different given that you are more starting to get?

[Drew Sims:]

I think that’s right, Dan. I think we are going to have a second quarter. We are going to have a good quarter and then we get to the fourth quarter, we owned Hollywood in the fourth last year. So then we will kind of -- we are going to start flattening out a little bit I think.

[Dan Donlan:]

Okay. Thanks. Appreciate it.

[Drew Sims:]

Okay.

[Operator:]

[Operator Instructions] The next question we have comes from Ryan Vardeman of Palogic.

[Ryan Vardeman:]

Hey guys.

[Drew Sims:]

Good morning, Ryan.

[Ryan Vardeman:]

On Savannah DeSoto, in the last quarter looks like one of the best RevPAR performers and doing the renovation and brand conversion, how do you think about that from an ROI perspective? You’ve kind of given us some metrics around the DoubleTree conversions and it’s starting to show up in the numbers. But how much of an ADR bump you might expect from this soft branded southerly products?

[Drew Sims:]

What we are looking forward is probably a reduction in occupancy and an increase -- a significant increase in the rate because we are going to change our comp set basically, Ryan. We won’t be competing with all of the other 14 Hilton products in the market and because we won’t get such an equipment. I would say conservatively somewhere around 10% would be a good number once we stabilize. There is going to be a transition period. And you can look at any of the hotels where we’ve changed the brands whether that’s from IC, to Hilton or from Hilton to other Hilton brand within the family or whether we are going from IC to all brand, there just is -- because look, the way things are -- the way rooms are booked these days it’s all Internet based. And for us to get the visibility on the Internet, it just takes some time. There is nothing we can do about it because we are the home to all the OTAs and so there is just a process that we have to go through. Once you go through the process then you’ve got to just basically sit back and wait. But we are really encouraged about what’s going on at the Georgian Terrace. We are encouraged about what’s going on Houston. And if you have a good hotel, a great location and you give great service, the customer will find you and so that’s kind of our strategy. And we are proactive too -- we know that there is going to be the downtime with the transient travel that comes through the OTA. So, we go out there and market the group business pretty heavily during that transition period.

[Tony Domalski:]

We will take some lower rated group that we would normally take once we are stabilized but we will do that during the transition and we’ve done that in Houston quite correctly. We’ve been loading up on our group for the next few months.

[Ryan Vardeman:]

Great. Seems like marketing spin that pays for itself.

[Drew Sims:]

Yes.

[Ryan Vardeman:]

And congrats on getting the Hampton under contract. It seems like a good start in getting the rainy day fine closer to where you would like it?

[Drew Sims:]

Yes.

[Ryan Vardeman:]

And buying assets in these select markets that you are looking for and disposing non-core assets, we hope that in purchasing these new properties that an equity raise is not contemplated. It is our understanding.

[Drew Sims:]

It is absolutely not contemplated.

[Ryan Vardeman:]

Okay. Fantastic. Well, thank you guys very much and best of luck.

[Drew Sims:]

Good. Thank you.

[Operator:]

Well, at this time we have no further questions. We’ll go ahead and conclude the question-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 calling in today. We look forward to reporting next quarter. Thank you.

[Operator:]

And we thank you, sir and to the rest of management team for time also today. The conference call is now concluded.