Sotherly Hotels Inc.
Q3 2016 Earnings Call Transcript

Published: 8 Nov 2016

[Operator:]

Good morning and welcome to the Sotherly Hotels’ Third Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mack Sims [ph]. Please go ahead.

[Mack Sims:]

Thank you and good morning everyone. Welcome to Sotherly Hotels’ third quarter earnings call and webcast. Scott Kucinski, our Vice President of Operations 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 of our strategic objectives. We will then take questions. If you did not receive a copy of the earnings release, you may access it on our website 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 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 will turn the call over to Scott.

[Scott Kucinski:]

Thanks, Mack. Good morning, everyone. I feeling infer today who is under the weather and losses who is. I would like to start today’s call by discussing some of the portfolio’s key operating metrics. For the quarter, portfolio RevPAR was $96.26 an increase of 6.6% over prior year with a 1.5% increase in occupancy and a 5% increase in rate. For the year-to-date portfolio RevPAR was $101.69 an increase of 7% over prior year. Hotel EBITDA for the portfolio increased 14.1% to approximately $9.1 million for the quarter. Year-to-date, hotel EBITDA increased 14.3%. Hotel EBITDA margins expanded 100 basis points in the quarter. Our portfolio performance as a whole outpaced our markets in aggregate taking 500 basis points in share in the quarter. Half of our markets were falter down in the quarter, while the balance were up 7% on average driven by strong growth in Philadelphia and Hollywood. Looking at some individual property highlights, our Laurel, Maryland hotel which converted to the DoubleTree by Hilton flag last November has continued on its path of a successful ramp-up achieving a 55.6% RevPAR increase in the quarter. The hotel is nearing fair share in occupancy and beginning to close the rate gap against the contended set. We expect this trend to continue for few more quarters and reach civilization and fair share by mid-2017. Our Jacksonville, Florida hotel which converted to the DoubleTree by Hilton flag last September, now has a full year of operating history on the books and continue to show signs of strength in the market reflected by a 35.5% RevPAR increase in the quarter and a 28.2% RevPAR increase over the past 12 months. In the quarter, the hotel achieved a RevPAR share index of 121% becoming the market leader by this measure. In Houston, the Whitehall ramp up continues to move at a slower pace than we hope and the Houston market has struggled to reverse the negative trends caused by the oil and gas crisis, with our compounded set RevPAR down 11.5% for the quarter. However, we have seen some positive momentum on at the property since early September with weekday transient travel beginning to show of life and we can lead the business outpacing what we have previously achieved at the Crowne Plaza giving credence to the convergence strategy and appeal of a new independent boutique product offering. [indiscernible] rankings as the Whitehall is currently the number three hotel in the entire Houston market an achievement we are proud of as we believe that providing the right guest experience, provides royalty to bode well for the success of the property over the long term. In Savannah, $8.2 million renovation has been underway since June 1 with approximately 50% of the guest room inventory fully renovated at this point. The displaced room inventory has had negative impact on the property given its high occupancy levels. We expect the room renovations to be substantially complete in Q1, 2017 prior to the busy spring season. This hotel was schedule to convert next July to the DeSoto, an independent boutique associated with preferred hotels and resorts. Looking at our corporate activity in the quarter, in August the company sold 1.6 million shares of 8% perpetual preferred stock for net proceeds of approximately $37.8 million. A majority of these proceeds were used to redeem the company’s outstanding 8% senior unsecured notes with an aggregate principal amount of $27.6 million. This combined transaction replaced a terminable debt security with perpetual preferred equity which is callable in five years. This provides us additional flexibility in our capital structure and also provides additional liquidity to the balance sheet. In September, the company entered into an agreement to purchase the commercial unit of the Hyde Resort and Residences, a condo hotel under development in Hollywood, Florida for a price of $4.25 million which includes turnkey rental program. The luxury ocean front condo hotel consists of 367 use-restricted units and 40 residences that feature one, two and three bedroom layout, gourmet kitchens, floor-to-ceiling glass doors with private terraces and Atlantic Ocean views. We will provide additional detail, projections and commentary on its acquisition once it closes which we expect to occur in the first quarter of 2017. After the close of the quarter, we announced several refinancing that address our near-term maturities and lowered our cost of capital. In October, we refinanced the Whitehall in Houston with a new $15 million first mortgage. This loan carries a 5 year term of floating interest rate of LIBOR plus 3.5% with a 4% floor. The loan also includes a $5.5 million earn out revision that we make take advantage of as the market recovers from its recent downturn and the hotel ramps up to stabilization from its conversion. Yesterday, we announced the refinancing of our Luohu Hotel, with the $12 million first mortgage. This loan carries a 10-year term and a 4.27% fixed interest rate, a rate reduction of nearly 200 basis points from the previous loan and lastly, we expanded the loan on our Hampton hotel for an additional three years. As previously announced, this hotel is currently under contract to be sold. The original contract was terminated as that buyer failed to perform under the terms of the agreement resulting in the surrender of $200,000 that will deposit to us. The company has since successfully negotiated the new contract with the different buyer under similar terms, we hope to close on this disposition with the next 30 to 60 days. And lastly in October, we announced our quarter dividend of $0.095 per share representing an annualized yield of nearly 8% based on our current stock price of $4.80 per share. I will now turn the call over to Tony Domalski, our CFO.

[Tony Domalski:]

Thank you, Scott. Reviewing performance for the period ended September 30, 2016, total revenue for the quarter was approximately $37.3 million representing an increase of 9.8% over the same quarter a year ago. For the nine months ended September 30, total revenue was $116.9 million representing an increase of 14.9% over the same period a year ago. For the quarter, hotel EBITDA was approximately $9.1 million representing an increase of 14.1% over the same period a year ago and for the nine months ended September 30, hotel EBITDA was approximately $31.6 million which is a 14.3% increase over the same period a year ago. Adjusted FFO for the quarter was approximately $2.7 million representing an increase of 63.1% over the same quarter a year ago and for the nine months ended September 30 adjusted FFO was approximately $13 million representing an increase of 11.8% over that same period last year. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt gains and losses on derivative instruments, acquisition cost, changes to the preferred portion of our income tax provision as well as other items. Hotel EBITDA excludes these charges as well as interest expense, interest income, corporate G&A, the current portion of our income tax provision and other items as well. Please refer to our earnings release for additional detail. Looking at our balance sheet, As of September 30, 2016, the total book value of our assets was approximately $402 million which includes net investment and hotel properties of approximately $354.1 million. The company had total cash of approximately $32.3 million consisting of unrestricted cash and cash equivalents of approximately $26.4 million as well as $5.9 million which was reserved for real estate taxes, capital improvements and certain other expenses. As of September 30, the company had principal balances of approximately $298.3 million in outstanding debt, at a weighted average interest rate of 4.83%. Approximately 77% of the company's debt carries a fixed rate of interest. Total stockholder and unitholder equity was approximately $86.9 million at the end of the quarter, of which stockholder equity was approximately $84.3 million and unitholder equity was approximately $2.6 million. At the end of the quarter, there were approximately 14.9 million common shares and approximately 1.8 million limited partnership unit outstanding. At the end of the third quarter, the principal balance on our interest bearing debt was approximately $99,100 per room also the ratio of debt to total asset value as defined in the indenture agreement to our senior unsecured notes was 51.8%, based on a total asset value of approximately $575.5 million at the end of the quarter. Turning to guidance, we're revising our previous guidance for 2016 which accounts for current and expected performance within our portfolio, as well as other factors. For the year, we're projecting total revenue in the range of $152.3 million to $153.8 million. At the midpoint of the range, this represents a 10.5% increase over last year's total revenue. Hotel EBITDA is projected in the range of $41.2 million to $41.8 million. And at the midpoint of the range, this represents a 13.9% increase over last year's hotel EBITDA and adjusted FFO is projected in the range of $16.7 million to $17.4 million or $1 to $1.04 per share. At the midpoint of the range, this represents a 2% increase over last year's adjusted FFO per share. Additional details can be found in the outlook section of our earnings release. And I will now turn the call over to Drew.

[Drew Sims:]

Thank you, Tony. Our portfolio had a relatively strong quarter of growth compared to our markets, peers and industry averages in general. However, Scott, mentioned we have seen some deceleration and fundamental and headwinds are likely in certain markets. New supply in Louisville and Raleigh have contributed to the softening in those markets. Houston continues to suffer from the deteriorating fortunes of the oil and gas industry. The Zika virus impacted on South Florida, impact on South Florida materialized late in the quarter and heading into that market’s high winter season, we’re unsure what the effects may be. The impact of hurricane Matthew on our portfolio in early October was significant. At this point, we are estimating a $0.06 to $0.08 per share negative effect to FFO for the fourth quarter and the year. Speaking on hurricane Matthew for the moment, this was a very destructive storm whose path directly affected six of our hotels as it transitioned out of the Caribbean and moved towards Florida and the eastern seaboard. We began seeing room reservation, cancellation as early as five days before the hurricane reached its first land pound [ph] in Florida. Bookings for the days after the hurricane passed were also impacted as guest remained vary of traveling for business or leisure until the storm’s resolves were clearly known. Even though the winds of the hurricane spared our assets from many catastrophic damage, the real story with Matthew for us was wind driven rain which increased in severity as the storm moved into the Carolinas and Virginia. In short, our forecast for October performance were materially influenced by the storm. We have adjusted our guidance to reflect this outcome. We remain focused on executing on our core strategic objectives, a focused asset management practice making prudent and optimistic, opportunistic capital investments and building a secure balance sheet to win our venture into the condo hotel model in Hollywood, we believe will provide outsize returns on invested capitals we ramp up stabilization. Our asset management practices have resulted in market and is industry outperformance with top line growth and profit margin expansion continuing. We have unlocked substantial upside at recently reflagged assets and plan to continue to execute on our repositioning plans for our Savannah, Hollywood and Wilmington hotels over the next 18 months. We believe that today, our balance sheet is in the best condition in the history of the company in terms of cost of capital, maturity duration, risk profile and cash liquidity. We feel confident that we have positioned ourselves to percolate to not only weather any deceleration in the economy and industry fundamentals but to be able to take advantage of opportunities that may present themselves as a result. We believe that the best course of action to realize long term shareholder value is to execute on our core strategic objectives, remain focused on maintaining a conservative and secure balance sheet, making improvements to operations and capital investments to improve the value of our assets, be positioned to take advantage of organic and opportunistic growth opportunities and continue to offer a safe dividend at an attractive yield to the investment community. With that, we’ll now open up the call for questions.

[Operator:]

[Operator Instructions] And our first question will come from Carol Kemple of Hilliard Lyons.

[Carol Kemple:]

Good morning.

[Drew Sims:]

Good morning, Carol.

[Carol Kemple:]

Related to hurricane Matthew, did you have any damage to any of your properties or was it just you lost visitors?

[Drew Sims:]

We had both, unfortunately. We had significant damage in Savannah, we had a problem with a roof at almost 100 an hour wind in that location, so we lost some significant amount of revenue obviously but we also had some damage. We probably had about, I think about 25 rooms out of service for what got almost 10 days in addition to the floor that we had under renovation which is another 30 rooms plus or minus. So we had almost 50 rooms out of service for a period of 10 days in addition to all the cancellations and the other pain that we suffered. The Hampton hotel also suffered fairly significant damage from the wind driven rain and we are still in the midst on both of those claims of trying to nail down exactly what the – our claim will do with our insurance company.

[Carol Kemple:]

So at this point, you don’t know any out of pocket expense you all could could have in the four quarter that you deductable – to meet your deductable on those?

[Drew Sims:]

No, I mean, we are still working through that process and it’s not going to be monumental either way, we think that we are in position pretty well.

[Carol Kemple:]

Okay and then with the Louisville and Raleigh market especially with – I work in, well I have seen all the health hotels coming up here. How do you plan to compete in Louisville and Raleigh with the new construction?

[Drew Sims:]

Well let me take Raleigh first, Raleigh we had a new aloft built almost directly across the street from us and that was done almost a year ago and we’ve kind of absorbed that now, the effect of that was pretty severe right out of the gate but over time had – it has lessened and I will tell you that you know the third quarter of this year was, we had a fairly significant impact but the fourth quarter was seeing almost no impact. So we’re seeing some very positive signs there. The market has adjusted and we are pulling more business out of Downtown than we were before. So we’re pretty optimistic that Raleigh is back on the right track. So we’re pretty happy with that. Louisville is you know a different story. Downtown market is in free fall as a result of the closure of the convention center for renovation in addition to which you have I think four or five new hotels built in the last 18 months and another large one planned. So down to the Downtown market is in dire straits right now at least that’s my view. We really play to the South Indiana market, so we are the only full service upper upscale hotel on the north side of the Ohio river and so our plans to compete are to seek out the business that’s on side of the river where we have less amount of new product, in fact no new product is that we compete with head-to-head. And so we put in a plan and I think you know, we are going to do everything we can to minimize the negative effects of the Downtown distress.

[Carol Kemple:]

Okay, thank you very much.

[Drew Sims:]

Okay.

[Operator:]

And the next question will come from Alexander Goldfarb of Sandler O'Neill.

[Alexander Goldfarb:]

Hi, good morning.

[Drew Sims:]

Good morning, Alex.

[Alexander Goldfarb:]

Good morning, few questions here. First, on Houston, would you describe, so based on what’s going on with your hotel down there and the market, would you say the market is still declining or it’s starting to plateau or stabilize, I should say?

[Drew Sims:]

Yes, the market itself is still in decline. But our hotel is making great progress in the months of July and August there, which is terrible for us. I mean, we just did very poorly. We were I think somewhere in the neighborhood of a 50% fair share of the market and the market was in free fall. So, it was not good and since the last 10 weeks have been much more encouraging, we have been running, we went from 50% to almost 80% fair share almost immediately the first week of September and had maintained that fair share since then and we’ve seen positive results in our food and beverage operations which are kind of been the key to driving business into the hotel. We’ve got three food and beverage outlets that appeal to the local community, and we’re getting a lot of traction there. So, we are pretty optimistic that we’ve seen the worst by far for us, the market I think is, the major impact of the market I think has been incurred but we are going to continue to see new product coming in the market and that’s going to add to the pain a little bit. Our part of Downtown, we’re kind of over in a corner by ourselves where we are surrounded by 40 and 50 storey building, I think you’ve been there Alex, so our part of Downtown is doing okay. And we think that we’ll survive the next couple of year but the real positive in Houston for us has been our guest reaction to the product and service that we put into the marketplace, and the fact that we are the number three hotel in all of Houston which is over 500 hotels is a very, very positive thing and even though we haven’t got the financial results we wanted to in the third quarter, we’re getting much improved financial result in the fourth quarter and the fact that you know the hotel is so well thought out of we think is certainly going to pay dividends in the future for us

[Alexander Goldfarb:]

Okay. But as far as when you say, your hotel is doing better, are there – do you expect the hotel, the room NOI to continue to decline or you’re expecting that to stabilize even though the market is continuing to decline?

[Drew Sims:]

We think it’s going to increase substantially over where we’ve been in the last six months.

[Alexander Goldfarb:]

Okay, okay. And then on the new buyer Westhampton Rods [ph], assume they have hard money down is that similar to what the original buyer had or is it more, can you just detail that?

[Drew Sims:]

It’s similar to what they had before. We are days away from the money going hard, they are in their due diligence period.

[Alexander Goldfarb:]

Okay. And then on any of your debt metrics for your unsecured, because I doubt the mortgage has any corporate measures maybe it does but are any of the covenants impacted by stock price performance or stock based you know debt to market cap type valuations?

[Drew Sims:]

No, we learnt our lesson in the 2007, 2008 on that metrics. So no, we do not. The only thing we have is a coverage ratio on our senior secured notes and we gave you that information in the release just now. So we’re only leveraged at 51% and the covenant is 65.

[Alexander Goldfarb:]

Okay. And then just the final question and yes new to the story so forgive but you know looking this year, you guys have missed analyst estimates, I think all three quarters and revised down guidance twice. You know the Kentucky Derby was something that you know, you guys knew about it beginning of the year, obviously hurricane Matthew was after the quarter closed. But do you think is driving the disconnect and is there something you know is there any additional guidance that you want to provide right now to help get the Street more in line but because it’s, you know, I will just leave it there, I will let you guys respond?

[Drew Sims:]

Well as you know, we issued guidance at the beginning of the year before we knew about the Kentucky Derby issue. So that was massive. I mean, that was a huge hit to our earnings, I think we suffered $0.08 a share that in turn, yes and it was a big number and of course it was an unwelcome change in our performance but not a whole lot we can do about it. In terms of the hurricane, you are right about that. I mean, we do have to revise based on that event and it is what it is. I would say that the balance of the adjustment has to do with general market conditions seen. We just talked about Houston where we certainly underperformed in the month of July and August and you know that certainly had an effect on us. And then you know, we revised down significantly in the fourth quarter for Hollywood based on the Zika situation. We are in a major meeting market, we work very closely with the Diplomat Hotel and they have had massive cancellations which are not well received, which means we had to reposition our strategy to go after you have the online travel agency business and in the leisure business and is at a much, much lower rate, has much higher commissions and is much less profitable. So these are events that have happened during the course of the year, we wish we didn't have to incur a Zika virus and hurricanes and on the franchise orders but that’s just the – part of the hotel business

[Alexander Goldfarb:]

Okay, thank you.

[Tony Domalski:]

This is Tony. I would like to just followup. I think a lot of our forecasting was based upon the strong group business and the strong group bookings that we saw as early as last fall looking into 2016 and you know seeing those really strong bookings gave us a lot of confidence and the forecast that we were giving out, you know, we saw a little ripple in the stock market back in January which sort of shook business confidence and we just seen the economy soft and or that the demand softened over the course of the year.

[Alexander Goldfarb:]

Thank you.

[Operator:]

And the next question comes from Ryan Vardeman of Palogic.

[Ryan Vardeman:]

Hi, guys. Thanks for taking the question.

[Drew Sims:]

Yes, good morning.

[Ryan Vardeman:]

Hi, back to the Hollywood and the Hyde deal, I know, you didn’t sound like you’re willing to talk a whole lot about the economics there but would you expect that the income stream to come in is qualified re-income or?

[Tony Domalski:]

Yes.

[Drew Sims:]

Yes, the answer will be yes.

[Ryan Vardeman:]

And then and so far as the parking situation and us renting the parking spots, would you bridge kind of the new arrangement with the old parking arrangement just so we can ge a sense for kind of where the cost might be on that property going forward?

[Drew Sims:]

Well the old parking arrangement was no cost. We paid the real estate tax for the property that’s located contiguous to the south of our Hollywood hotel, so it doesn’t really have a whole lot to do with the new parking arrangement. The new parking arrangement, we’ve leased their parking garage which is nine stories for the next 20 years. And we think we leased it at a rate that allows us to make a profit. And we will give you detail to follow.

[Ryan Vardeman:]

Okay, has Laurel stabilized your point, we would consider that market back out to market?

[Drew Sims:]

It is not, we are still working to get that to fair share. It has taken a little longer. We’re pretty much where we want to be on the occupancy side. We are still not getting the rate, still got about a $15 rate gap which over the course of the year, we’re probably equal, I don’t know, $800,000 in GOP maybe, so we don’t want to leave that money on the table. So about, right Tony?

[Tony Domalski:]

What did you say?

[Drew Sims:]

$800,000?

[Tony Domalski:]

Yes, that’s pretty close, yes. So that’s, I mean, you can do the math. That’s a lot of money. We don’t want to do that money on the table.

[Ryan Vardeman:]

And then one of the reasons you said is not paying out a higher percentage of your FFO and dividends is because of the large acquired amortization. Between restriking Alonium [ph] and relieving our self to the Hampton burden in the next quarter, would you consider increasing the dividend commensurate with this newfound discretionary cash flow?

[Drew Sims:]

We are always looking to increase our dividend, I think, you are aware of that. We have been pretty good about continuing to increase our dividend, we will consider that obviously at our January board meeting. We have, I think we’ve increased three out of the last four quarter and we did that the year before and the year before. So you know, that’s been our mode of operating as long as we can support a healthy dividend with good operations, that’s always our plan and I think you are aware of that, we want to do that. We think that that—we think that’s good for our shareholders and we that’s how we get credibility on the Street.

[Ryan Vardeman:]

And then – and so far as the Hollywood property net years, have you given, or we are any closer end of deciding how that’s going to be flagged?

[Drew Sims:]

It is an almost done deal, but I cant’ tell you quite yet. You will probably see an announcement in the next day or two.

[Ryan Vardeman:]

Okay great, okay great. And congrats on getting your perpetual preferred done this quarter? The roadship….

[Drew Sims:]

Ryan, you put us all on that back when and so we appreciate that and we were just waiting for the right time.

[Ryan Vardeman:]

Congrats. I think it’s a big deal. In the roadshow presentation, you, kind of stated that NAV is around 14.3 a share, stocks is now below 5 bucks. Is there anything outside the normal course that you think we could do over the next couple of years to narrow that gap?

[Drew Sims:]

We are looking at some things, we are looking at some things now and I just, I can’t comment on right at this moment but Ryan, but we will keep you in the loop as soon as we can.

[Ryan Vardeman:]

Okay, thank you very much and best of luck.

[Drew Sims:]

Alright, thank you.

[Operator:]

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

[Drew Sims:]

We thank you all for joining us today, look forward to reporting our yearend results in January, thank you.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.