Sotherly Hotels Inc.
Q4 2016 Earnings Call Transcript

Published: 21 Feb 2017

[Operator:]

Good morning and welcome to the Sotherly Hotels' Fourth Quarter Earnings Webcast and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask question. [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Mr. Scott Kucinski. Please go ahead.

[Scott Kucinski:]

Thank you and good morning everyone. Welcome to Sotherly Hotels' fourth quarter earnings call and webcast. Dave Folsom, our President and COO will begin today's call 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 issue our initial 2017 guidance. Drew Sims, our Chairman and CEO will conclude with an update on 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 Web site 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 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 Dave.

[Dave Folsom:]

Thank you, Scott. Good morning everyone. I would like to start today's call by discussing some of the portfolios, key operating metrics for the quarter, portfolio RevPAR was $87.73, a decrease of 2.9% over prior year with a 4% decrease in occupancy and 1.2% increase in REIT. This negative result was significantly driven by several factors, the impact of which I will elaborate on in a moment. For the portfolio RevPAR was $98.18, an increase of 4.7% over prior year driven by a 4.8% increase in rate. Hotel EBITDA for the portfolio decreased 4.4% to approximately $8.4 million for the quarter. For the year Hotel EBITDA increased 9.8% to $40 million. In the quarter, we experienced several events which impacted the portfolio, the most important of which was Hurricane Matthew. As we discussed on last quarter's earnings call, Hurricane Matthew which hit the Eastern Seaboard in early October directly affected six of our hotels, half of our portfolio. The impact on bookings stretched well beyond the storms duration as cancellations began as early as a week prior to the storm reaching landfall and remained stagnant for many days as the storm moved slowly at the East Coast impacting Florida through Virginia. The storm did cause physical damage at two of our hotels. Unfortunately Hurricane Matthew came during one of the busiest times of the year for this portion of our portfolio. Further, we had anticipated recouping a portion of these losses through a claim against our business interruption insurance. While this is still anticipated the claims process is a slow one and we were not able to settle the insurance matters prior to year end. And therefore, we were unable to account for this benefit in the fourth quarter hotel EBITDA to help offset the losses as we had originally forecasted. Instead, we will see the benefit in the first half of 2017, when the claim is finally settled. In addition to the hurricane, in the quarter we continued to see the Houston market experience performance influenced by conditions in the oil and gas markets and by the advent of new supply; Houston's quarterly market RevPAR was down nearly 10%. These conditions impacted to ramp up of our Whitehall Hotel in Houston. Lastly, the Florida tourism market was materially impacted in the quarter by the ongoing threat of the Zika virus. And Drew is going to elaborate on these factors further in a moment. Looking at some individual property and market highlights, our Jacksonville, Florida Hotel completed its first full year as a DoubleTree on another high note, with RevPAR increasing 34.5% in the quarter against the markets increase of 12.8%. The hotel achieved a RevPAR share index of nearly 125% for the quarter and was once again the market leader. For the year, RevPAR was up 33.3% compared to the markets healthy 6.7% increase. Our Laurel, Maryland Hotel also completed its first full year as a DoubleTree since converting in November 2015 and continues to ramp up to stabilization. For the quarter RevPAR increased 43.7% compared to the markets increase of 4.5%. And for the year, RevPAR for this hotel increased 37.8% versus the market 6.6% increase. In Atlanta, at our Georgian Terrace hotel, we had a strong quarter as it benefited from the completion of the guestroom renovation that wrapped up in the third quarter. RevPAR increased to 11.3% in the quarter against the markets increase of 1.4%, with the hotel gaining nearly a 1000 basis points in market share. For the year, RevPAR was up 4.8% compared to the markets 3.81%. In Savannah, the $8.2 million renovation is over half way complete with all guest room inventory fully renovated as well as the majority of our meeting space and pool area. The remaining public space would be renovated over the next five months including the introduction of two new food and beverage concepts. This hotel is scheduled to convert in July to the DeSoto, an independent boutique associated with Preferred Hotels & Resorts. In Hollywood, Florida, the $6.9 million renovation of the Crowne Plaza is getting underway as we work towards the conversion to the DoubleTree Resort by Hilton Flag in the fourth quarter of 2017. Looking now at some of our corporate activity in the quarter; in the quarter we refinanced three of our hotels which addressed any near term maturities remaining for the company. And also locked-in favorable interest rates prior to any substantial increase you may see in the future. In October, we refinanced the Whitehall in Houston with a new $20.5 million first mortgage with International Bank of Commerce. This loan provides initial proceeds of $15 million with an additional $5.5 million available upon satisfaction of certain conditions as well as having provision, it allows us to rebalance the loan with no penalty. It has a term of five years. It's a floating rate note with a 30-day LIBOR plus 350 basis points subject to a 4% floor and it amortizes on a 18-year schedule after a two-year interest-only period. In November, we refinanced the Sheraton Louisville, Riverside with a new $12 million first mortgage with Symetra Life. This covenant like non-recourse loan has a term of 10 years, there is a fixed rate of interest of 4.27% for the first five years of the loan with an option for the lender to reset that rate after five years and it amortizes on a 25-year schedule. In December, we refinanced the Hilton Wilmington Riverside Hotel with a new $35 million, one non-recourse first mortgage with Mutual New York Life, the loan has a term of 10 years. There is a fixed interest rate of 4.25% and amortizes on a 25 year schedule after a one-year interest only period. Also in December, the company's Board of Directors authorize the stock repurchase program under which the company may purchase up to $10 million of its outstanding common stock at prevailing prices on the open market on a privately negotiated transactions at the discretion of management. The company has used and expects to continue to use available working capital to fund purchases under the stock repurchase program and intends to complete the repurchase program prior to December 31, 2017 unless extended by the Board of Directors. Through year end, the company repurchased 481,100 shares of common stock for cost of approximately $3.2 million and these repurchased shares have been retired. Also in December, the company initiated an employee stock ownership plan, the ESOP and agreed to loan up to $5 million to the ESOP trust that implements and forms a part of the trust in order to allow for purchases of shares of the company's common stock. In other recent events, in January, we closed on the purchase of the commercial unit, the Hyde Resort & Residences, a condominium hotel in the Hollywood, Florida market for price of approximately $4.5 million including inventory and closing fees. In addition of the commercial unit, the company also entered into a lease agreement for the parking garage and meeting rooms associated with the hotel and a management agreement relating to the operation and managing the hotel condominium association. The company will also operate a rental management program of all participating unit owners. This project was recently developed and opened to the public on February 8. Earlier this month, we closed on the sale of the Crowne Plaza Hampton Marina for price approximately $5.6 million. And lastly, in January we announced that we increased our quarterly dividend of $0.10 per share representing an annualized yield of approximately 5.4% based on the recent stock price. And I will now turn over the call to our Chief Financial Officer, Tony Domalski.

[Tony Domalski:]

Thank you, Dave. Reviewing performance for the period ended December 31, 2016; total revenue for the quarter was approximately $35.9 million representing decrease of 2.2% over the same quarter a year ago. For the 12 months ended December 31, total revenue was approximately $152.8 million representing a 10.3% increase over the same period a year ago. For the quarter, hotel EBITDA was approximately $8.4 million, a decrease of 4.4% over the same quarter a year ago. But, for the year ended December 31, hotel EBITDA was approximately $40 million representing a 9.8% increase over the same period a year ago. For the quarter, adjusted FFO was approximately $2.1 million representing a decrease of 36.2% over the same period a year ago. And for the 12 months ended December 31, adjusted FFO was approximately $15.1 million or 1.3% increase over the same period a year ago. Please note that our adjusted FFO excludes 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. Hotel EBITDA excludes these charges as well as interest expense, interest income, corporate general and administrative expenses and the current portion of our income tax provision as well as other items. Please refer to our earnings release for additional detail. Looking at our balance sheet, as of December 31, 2016, the total book value of our assets was approximately $406 million which includes net investment in hotel properties of approximately $348.6 million. The company had total cash of approximately $36.4 million consisting of unrestricted cash and cash equivalents of approximately $31.8 million as well as approximately $4.6 million, which was reserved for real estate taxes, capital improvement and certain other expenses. As of year end, the company had principal balances of approximately $309.8 million in outstanding debt, at a weighted average interest rate of 4.66%, which is 58 basis points lower than at year end 2015. Approximately three quarters of the company's debt carries fixed rate of interest. Total stockholder and unit holder equity was approximately $81.3 million at the end of the quarter, of which stockholder equity was approximately $79 million and unit holder equity was approximately $2.3 million. At the end of the year, there were approximately 14.5 million common shares outstanding and approximately 1.8 million limited partnership unit outstanding as well. At the end of the fourth quarter, the principal balance on our interest bearing debt was approximately $102,900 per room also the ratio of debt to total asset value as defined in the indenture agreement to our senior unsecured notes was 53.3%, based on a total asset value of approximately $580.8 million at the end of the quarter. Turning to guidance, we're issuing initial guidance for 2017 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 $156 million to $158.5 million. At the midpoint of the range, this represents a 3% increase over last year's total revenue. Hotel EBITDA is projected in the range of $41.6 million to $42.4 million. And at the midpoint of the range, this represents a 5% increase over last year's hotel EBITDA. And adjusted FFO was projected in the range of $16.3 million to $17.5 million or $1.02 to $1.10 per share. At the midpoint of the range, this represents a 17.8% increase over 2016'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. As Dave mentioned several factors contributed to a disappointing performance in the fourth quarter muting an otherwise solid year for the portfolio. First, the impact from Hurricane Matthew was substantial. We estimate this event to cost us approximately $0.07 in FFO per share for the quarter. Second, in 2016, we refinanced five hotels and prepaid corporate bonds resulting in substantial non-cash charges due to the early extinguishment of debt. This equated to a total FFO impact of $0.02 per share in the quarter and nearly $0.09 per share for the year. Third, the Zika virus scare had a monumental negative impact on South Florida as we entered the high season. Domestic travelers were hesitant to visit the area causing massive group cancellations and transient leisure travel to pace far below historic levels and our forecast. We estimate this had an impact of approximately $0.08 per share in FFO. We also faced substantial headwinds in two other markets that we believe will continue to impact the operating results in the near-term. The Houston market has been down 16 of the last 18 months. The market mirrors the fortunes of the oil and gas industry and there have been several new hotels built in the central business district. Regardless of these factors, our hotel is taking share and even though the market is soft, we expect much improved results in 2017. The Louisville market has seen a dramatic drop due to an abundance of new supply hitting that market simultaneous to the convention center closing for a two-year renovation, restricted demand and additional supply makes market prospects bleak. Notwithstanding the negative market factors, we have continued to reshape the company's balance sheet and hotel product for future success. In the year, we've refinanced over a $118 million in debt. We have five new first mortgage loans, extending the maturities and substantially lowering the aggregate interest rate. We also completed a perpetual preferred stock issuance replacing corporate bonds that carried a new term maturity with perpetual preferred equity at the same cost. We invested over $14 million into our assets via capital improvement projects completing major conversion projects in Houston and Atlanta while commencing up branding projects in Savannah, Hollywood and Wilmington. We successfully sold the Crowne Plaza Hampton Marina an asset we identified as having limited upside for shareholders and no longer fitting our long-term strategy. This capital recycle into the purchase of the commercial unit of the Hyde Resort Condo Hotel. We believe this project will produce upsides returns once stabilized and provide a boutique hotel in the South Florida market were limited real-estate opportunities of this magnitude exist. Total return for the quarter was second among all lodging REIT peers at 30.5%. For 2017, year-to-date SOHO was ranked first with a total return of approximately 10% as of February 20. And lastly, the company continued to execute on its policy to maintain a competitive and sustainable dividend with a biased towards growth. The company increased its dividend three times in 2016, and has now increased the dividend a 11 out of the past 17 quarters. Our biased increase in dividend continues into 2017. Also in 2017, we intend to continue our reinvestment and up branding plans for our existing portfolio with the conversion of the DeSoto and Savannah and DoubleTree Resort by Hilton Hollywood Beach, both scheduled for the second half of the year. We intend to recycle capital from non-core assets and invest in hotels that fit out long-term strategy and present attractive value creation opportunities. In the year, we intend to improve the company's cost of capital with the few remaining refinancing opportunities available to us. We believe that executing on these goals as well as our core strategic objectives will produce long-term value for our shareholders. We'll now open the call up for questions.

[Operator:]

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

[Carol Kemple:]

Good morning.

[Drew Sims:]

Good morning, Carol.

[Carol Kemple:]

Can you talk a little bit more about your recent acquisition, how you all expect to get revenue from that property and any impact that might have on our 2017 FFO per share estimate?

[Drew Sims:]

Sure. It's a complicated model, I'll give you that. It is a situation where we have a 400 room plus or minus condominium hotel, ocean front, Hollywood Beach. This hotel is definitely up or upscale tending towards luxury product, all suites, condominiums are individually owned and we have rental agreements with the individual owners as they close on their unit which today I think we've closed maybe 50 units than we've [heard] [ph] about joining our own program. Some units will join our rental programs, some will not join our rental program, but we expect that the majority of the unit owners will join our rental program. So what we did was we bought the public space in the hotel and all the back of house space. So we owned the front desk, we owned all the executive offices, parts of the lobby. All storage space in the hotel, we have back to house space that supports our laundry and maintenance facilities and accounting. So we'd actually own real-estate in the building and then we have an agreement to operate the homeowner's association via management contract. And then, we have these individual agreements with each unit owner to renter unit for them. And long short, I can't give you any projections today, but because of the slow pace of the closings, the first half of the year is probably going to be inconsequential one way or the other, second half of the year, I would think fourth quarter will have a very positive impact on our operations. We've invested upwards of $5 million in this project and we are going to -- we expect to get upsize returns. So I don't know if I could tell you any here in more than that, I can't really give you any projections, but you can take that $5 million and calculate an IRR on that. I think it's fair to expect that it will be higher than what we would normally get on one of our investments because it's so management intensive and a little more complicated.

[Carol Kemple:]

Okay. Is that something maybe as we approach third quarter or you might give us a little more guidance on once you start to see some upside there?

[Drew Sims:]

We absolutely can do that. We are at the mercy right now of the pace of closings on the units and until that pace picks up and we get more inventory it's hard for us to project exactly what our cash flow is going to be.

[Carol Kemple:]

Okay. And then at this point, it looks like the share buyback has been pretty successful for the stock price. Are there any hotels that you would look to sell so you could redeploy some of your capital into another asset or for share buybacks?

[Drew Sims:]

We have identified two hotels, I'd rather not to say which ones are right this minute, but the answer is yes to that. We've also identified a hotel that we'd like to purchase and we're working on that as well.

[Carol Kemple:]

Are the two that you would like to sell, are you actively marketing those at this point?

[Drew Sims:]

No. Both are those are going to be reversed 10/31 exchanges, so we need to go up and buy something first and then we will sell and then exchange.

[Carol Kemple:]

Okay, great. Thank you very much.

[Drew Sims:]

Okay.

[Operator:]

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

[Tyler Batory:]

Thanks. Good morning everyone. Just a couple of questions from me here. Just on the fourth quarter, I appreciate the commentary on the impact to AFFO, but you will call out the impact through RevPAR from Zika or the Hurricane?

[Drew Sims:]

Can we identify that?

[Tyler Batory:]

Yes. Can you call any impacts, what the impact was to your RevPAR just given Zika and then the Hurricane as well, what the RevPAR growth would be maybe if you x-up those two issues?

[Drew Sims:]

I think, Tony, you're going to have to do a reverse calculate.

[Tony Domalski:]

Yes. We did figure out the overall effect on FFO, but to go back and calculate RevPAR we haven't done that. So we can do that and get back to you there, Tyler.

[Tyler Batory:]

Okay. That's great. And then, on the guidance, does that include any sustained impact from Zika and the 2017? And then, also one thing that maybe you can comment on international travel trends into South Florida?

[Drew Sims:]

Sure. It does -- we have guided down in South Florida for the first half of the year. And so I think to that end, yes, we have taken that as a factor. I would say -- I was just there this weekend. I think the trend is lessening. The impact of the Zika scare is lessening and the travel warnings have been lifted. So, and I think there has been very little activity in terms of additional health impact on residence or visitors. So I think we're getting past it looks like to me. And we're hopeful. But to answer your question, we did revise our numbers down a little bit in the first quarter over what we had seen in previous first quarters. So does that answer your question?

[Tyler Batory:]

Yes. And then, maybe any update on the international travel trends as well?

[Drew Sims:]

Yes. International travel, we've seen a decrease there as a result of really the strength of the dollar as much as anything else. And so that's how it got to be filled with domestic travel although I can tell you the hotel I stayed in this weekend was completely full with Argentineans and Venezuelans. So it's a very, very desirable market and I think long-term South Florida is always going to be a major component of travel in the South.

[Tyler Batory:]

Okay. That's very helpful. Thank you. And then, maybe on Atlanta, obviously, it looks like an asset that's performed pretty well, but maybe any general comments on how that renovation has been received. But, I don't know if you have maybe some comments you can make in your outlook for that market in 2017 especially related to new supply?

[Drew Sims:]

Well, we're not really getting any new supply in our comp set this year. There was a project that we had announced and now it's been delayed. So I'm not sure that -- probably won't be any for the next couple of years, best I can tell. Yes, we're very pleased with the way the hotel is performing. One of the things that we don't report on as much as the food and beverage component and that's been extremely strong in that hotel and we see that as kind of part of our overall product offering that adds value, so the people won't stay at the hotel. We had two great retail food and beverage operations there, but mostly service the local community, not the hotel. So when our guests come into the restaurant, it's not your typical hotel restaurant, there is tons of activity, lots of people there and they are mostly locals. So it's kind of a fun place to hangout and enjoy yourself. I think the Atlanta market is going to be as strong as it has been. Our core business there kind of our base business there is the movie crews. We've got good bookings for the balance of the year.

[Tyler Batory:]

Okay, great. And then maybe just a more general question across the portfolio. I'm heard some in the industry talk about their optimism related to short-term group bookings and then corporate travel as well post the election. So that's something that you are seeing in your portfolio, I mean, you are seeing concrete evidence that corporate transient or group trends actually improved in the fourth quarter and maybe continued into the first quarter here.

[Drew Sims:]

We actually didn't see that. We saw the opposite in the fourth quarter and first quarter. Actually I didn't see any strong evidence that those segments are making a big comeback. We fill rooms with other segments, but not those segments.

[Tyler Batory:]

Okay. That's helpful. And then, last just on capital allocation, obviously, you did share repurchase and I think was well received by the market, and we still have about $7 million left on that. But can you maybe just give us an update on your priorities now especially just given the stock price performance over the past three months.

[Drew Sims:]

Yes. We're very pleased, Dave kind of executed on that and I think we did a great job and we put that place very quickly and executed very quickly and I do think it's been well received. And we want to continue to buyback shares when the market tells us this is the right time to do that. I'm not going to give you any price points, but we've said for long-time that we think our shares are greatly undervalued and so to that end, we will continue to support this stock price, when we have the opportunity. We have a lot of closed windows, so we have to pick and choose when we can do that.

[Tyler Batory:]

Okay. That's great. Thanks.

[Operator:]

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

[Daniel Santos:]

Hi, good morning guys. How is it going?

[Drew Sims:]

Good morning.

[Daniel Santos:]

Just two quick questions for me, the first one is on guidance and I was just wondering if you could walk us through what's driving the difference in FFO versus AFFO in 2017?

[Drew Sims:]

Tony, I'm going to let you answer that.

[Tony Domalski:]

That's the differences between FFO mostly it's just the change in our deferred income tax provision. Usually we have host of other items in our guidance as if right now it would just be the current portion of our income tax provision.

[Daniel Santos:]

Got it. And my second question is on the ESOP that you guys announced in December. Could you give us a little bit more detail on that and why you sort of lend the $5 million versus just letting the employees directly purchase from treasury shares?

[Drew Sims:]

Well, the stock was in the force in terms of pricing when we came up with those ideas. And we thought it would be great for our employees to be able to take -- get the benefit of the low price to stock price. So that's what kind of started the process. And for the last -- we've been public now for 12 years. We've always strived to provide a vehicle for our employees to invest in the company. The problem is when we tender a stock as a bonus to your employees they have to pay -- immediately pay tax on it. And so it's never been -- it's bigger part of our operation as we wanted it to be. So it seems like given where the stock price was and given this desire to have our employees invest in the company long-term. We thought that this was a great time to jump in and implement an ESOP program. We had the cash to do it, which in past year is not always the case, so we went into the fourth quarter of this year with more cash than the company had ever had and which gave us a little more flexibility to do some things like this.

[Daniel Santos:]

Got it. That's all from me. Thanks.

[Drew Sims:]

Good. Thank you.

[Operator:]

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

[Drew Sims:]

Thank you all for participating in the call today. We love to have you all join us here in Williamsburg in April for the annual meeting and look forward to talking to you all at the end of the quarter. Thank you.

[Operator:]

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