Sotherly Hotels Inc.
Q2 2015 Earnings Call Transcript

Published: 11 Aug 2015

[Operator:]

Good morning everyone, and welcome to the Sotherly Hotels Second Quarter Earnings Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. At this time, I would like to turn the conference call over to Mr. Scott Kucinski. Sir, please go ahead, sir.

[Scott Kucinski:]

Thank you, and good morning, everyone. Welcome to Sotherly Hotels second 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 review portfolio performance. Tony Domalski, our CFO, will provide our key financial results for the quarter and review our 2015 guidance. Drew Sims, our Chairman and CEO, will conclude with an update on our 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 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 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.

[David Folsom:]

Thank you, Scott, and good morning everyone. We suddenly had a very busy quarter. In July, the company issued 3.44 million shares of common stock in an underwritten equity offering that provided $22.6 million in net proceeds, including proceeds from the underwriters over a lot in the option. These proceeds were used to purchase with 75% majority equity interest in the Hollywood Crowne Plaza hotel that was owned by The Carlyele Group. Sotherly and the Carlyele Group had jointly owned the hotel since August 2007. We announced last week the successful completion of the purchase from Carlyele was Sotherly purchasing Carlyele’s interest for $26.25 million in cash and the assumption of the $57 million mortgage. The imputed hotel value equates to 7.4% cap rate on 2015 estimated income, with the valuation of approximately $288,000 per key. This underwritten equity raised the company’s first since its 2004 IPO and it’s simultaneous purchase of the 311 room Hollywood Crowne Plaza, mark it important milestone for Sotherly as we continue to execute on our strategic vision of growing our asset base, accessing the capital markets and building a unique and viable hotel company centered on key markets in the Southern United States. As part of our ongoing strategy, we continue to execute renovations and repositions at many of our hotels. In the quarter we saw some short-term impact due to these efforts. In total, portfolio RevPAR for the quarter was $107.33, an increase of 3.7% of the prior year with the 6.1% increase in rate and occupancy decline 2.3%. Excluding the impact of the ongoing guest room renovations in Atlanta, Houston and Laurel, RevPAR increased 7.4% driven by a 4.6% increase in rate and 2.7% increase in occupancy. Hotel EBITDA for the portfolio increased 4.6% to approximately $12 million for the quarter. To review our renovation projects in further detail, in Jacksonville the conversion of the existing Crowne Plaza to a Doubletree by Hilton is scheduled for early September. Nearly all renovation work is complete. The public spaces have been under renovation for the past several months, impacting hotel operations during the period. That work has been recently completed and the property is in stellar condition. The finished product has been well received by our guests. Upon conversion of the Doubletree flag, we believe we will see a material increase in the hotel’s market share and RevPAR. In Laurel, we continue with the repositioning of the hotel from a holiday end to a Doubletree. Hilton has scheduled a conversion for early October. The property currently has some majority of its public space on the renovation. The guest room work is substantially complete and we expect the recent impact occupancy due to room displacement to being the subside as we move into the back half of the year. This asset should benefit tremendously from the renovation and much stronger Hilton reservation system moving forward. And finally in Houston, our hotel is feeling both the affects of the decline in local market as well as the impact from ongoing renovations. We’re currently refreshing all the guest rooms at the hotel and making other improvements to the property as we prepare to convert the property next spring from its current Crowne Plaza flag to an independent hotel affiliated with preferred hotels group. We expect the guest room impact to be completed by October with no other material impact with the hotel at this point going forward. A few other property highlights I’d like to give the group, Doubletree by Hilton at Philadelphia gained a 11% in RevPAR for the quarter as the property produced excellent results with its new flag. In Louisville, the Sheraton Louisville Riverside hotel gained 17.6% in RevPAR for the quarter, driven by a 13.3% increase in rate as the property benefited from another strong Kentucky Derby season. And in Tampa, the Crowne Plaza of Tampa Westshore gained 9% in RevPAR with a 3.2% increase in rate and 5.5% in occupancy, taking 480 points in share from the competitive set. In May we announced that the company closed on the refinancing of the Georgian Terrance in Atlanta, the $47 million first mortgage with Bank of America carries a 4.42% interest rate, a 10-year term and advertises on a 30-year schedule. The proceeds from the loan we’re used to repay the existing first mortgage, partially from the ongoing guest room renovation project and for general corporate purposes. In July we announced the company closed on the refinancing of our Jacksonville hotel, the $18.5 million first mortgage with bank of [indiscernible] carries an interest of LIBOR plus 350 basis points, a 4% floor, four year term with a one year extension option and principle amortization on a 25 year schedule. The proceeds from the loan we’re used to repay the existing first mortgage, partially fund the renovation and for other general corporate purposes. Subsequent to the loan closing we’ve purchased a LIBOR cap shows to minimize our interest rate risk going forward. And finally, last month the company announced a 6.7% increase to our quarterly dividend to $0.08 per share which equates to a current yield of approximately 4.5%, based on our current average stock price. And with that, I’ll turn the call over to our CFO, Tony Domalski.

[Anthony Domalski:]

Thank you, Dave. Reviewing performance for the period ended June 30, 2015. Total revenue for the quarter was approximately $36.9 million, representing an increase of 1.4% over the same quarter a year ago. Adjusted EBITDA was approximately $10.8 million for the quarter, representing an increase of 2.4% over the same quarter a year-ago. An adjusted FFO was approximately $6.7 million for the quarter or $0.52 per share, representing an increase of 6.9% 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, acquisition charges, 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 June 30, 2015, the total book value of our assets was approximately $307.9 million. This includes net investment in hotel properties of approximately $263.8 million and approximately $1.9 million for the company's joint venture investment in the Crowne Plaza Hollywood Beach Resort. The company had total cash of approximately $24.1 million, consisting of unrestricted cash and cash equivalents of approximately $17.3 million, as well as approximately $6.8 million, which was reserved for real estate taxes, capital improvements, and certain other expenses. As of June 30, 2015, the company had approximately $261.3 million in outstanding debt at a weighted average interest rate of 5.31%. With the Jacksonville refinance in early July approximately 87.5% of the company’s debt is fixed. Total stockholder and unitholder equity was approximately $29 million at the end of the quarter, of which stockholder equity was approximately $25 million, with approximately 10.9 million shares outstanding. And unitholders equity was approximately $4 million, with approximately 2.4 million limited partnership units outstanding. At the end of the second quarter, our interest-bearing debt was approximately $96,850 per room. Also the ratio of debt to total asset value as defined in the indenture agreements to our senior unsecured notes was 52.8% that’s based on total asset value of approximately $494.9 million at the end of the quarter and total debt of approximately $261.3 million. Turning to guidance. We’re updating our previous guidance for 2015, which accounts for current and expected performance within our portfolio including the acquisition of the Crowne Plaza Hollywood Beach and the recent borrow on offering. For the year, we're projecting total revenue in the range of $137.7 million to $142.7 million. At the midpoint of the range, this represents an 14% increase over last year's total revenue. Hotel EBITDA is projected in the range of $38.7 million to $39.6 million. And at the midpoint of the range, this represents a 21.5% increase over last year's hotel EBITDA. And adjusted FFO is projected in the range of $16.8 million to $17.9 million or $1.13 to $1.20 per share. At the midpoint of the range, this represents a 22.9% increase over last year's adjusted FFO per share and a 7.9% 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.

[Andrew Sims:]

Thank you, Tony. I’d like to start by discussing the recent Hollywood acquisition and common stock offering that the company completed last month. We’ve been involved in the Hollywood hotel for nearly a decade with soul ownership of the asset being the ultimate goal from the beginning. Not only do we know the hotel intimately, but we have seen the Hollywood submarket of South Florida mature over the past decade to build strongly and is long-term prospects. Coupling these factors with the fair purchase price we’ve negotiated with our JV partner, we felt this was the ideal acquisition for the company at this point, and a good fit to pair with our first equity offering since the IPO. We’ve repeatedly represented to the investment community that in order to continue to grow the portfolio, we would need to raise equity and our intent was to do so with an appropriately sized offering paired with an acquisition. We had launched the equity offering shortly after our stock at a seven year high, and structured the offering so as to minimize share holder dilution, capping the shares offer at $3 million plus the underwriters that are overwhelming. Out stock price experienced significant pressure during the marketing period resulting in a larger discount than we would have hoped but all-in-all the transaction was successful. Management met with dozens of new institutional investors and continue to spread our story and gain interest. One of our secondary goals was to increase trading bribe. These two transactions are win for the company. The company stopped offering was the first step for growing our equity base, increasing liquidity and gaining more institutional long-term shareholders. The Hollywood asset is a perfect fit for SOHO’s long-term strategy. It’s a full service asset with a prime or front location in the top five southern markets. The property is in excellent condition and is in a good candidate to be converted to an independent boutique in the future. The property’s RevPAR is accretive to portfolio RevPAR and it will produce the highest percentage of hotel EBITDA to the company. The Hollywood hotel is highly seasonal with nearly 45% of hotel EBITDA being generated in the first quarter. Given the timing of the acquisition, it will have a diluted reflect on 2015 earnings, but on annualized basis will be accretive to our shareholders. Obviously we managed the company for long-term results and value, and we believe the Hollywood asset will deliver in this regard. Looking at other objectives across the company, we are focused on completing the renovation and upgrading projects currently in process across the portfolio in Jacksonville, Laurel, Atlanta and Houston. While we have felt some near term payment to set these projects, the long-term value creation will far out way any short-term negatives. When you look at the results from our asset is not currently under renovation, we are seeing strong aggregate performance and expect these trends to continue. All-in-all solid quarter for the company followed by some milestone transactions [indiscernible] have made a successful summer for Sotherly. We will open the call up for questions.

[Operator:]

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Daniel Donlan from Ladenburg Balman. Please go ahead with your question.

[Daniel Donlan:]

Thank you, and good morning.

[David Folsom:]

Good morning, Dan.

[Daniel Donlan:]

When you guys contemplated your guidance, you obviously knew that you had some of these are portfolio repositioning projects going on. So, was just kind curious, with the acquisition it seems like you’re ruining your expectations for FFO and just curious, how much of that is related to maybe more disruption than anticipated at some of these assets and how much of it is related to maybe some greater softness than expected in maybe Houston or maybe some other markets?

[David Folsom:]

Yeah, thanks for the question Dan. Vast majority of the impact is from the Hollywood acquisition. The seasonality of the property is such that it’s a really strong in the first four months of the year and then the summer and soft were obviously is the low rated, lower occupancy period. So we’re seeing a – we’re going to see some impact just as a result of that. And we didn’t have that luxury of deciding exactly what date we were going to buy the asset, it was a negotiation with our JV partners. So, the date is what it is and we had to act on that. So to answer your question, most of the impact is a result of the seasonality of the Hollywood acquisition. Secondarily, we have seen a little more impact in Houston than we thought and I would say that’s maybe a penny, so we’re not looking at maybe a penny, many two pennies but it’s not lot. We’re actually doing okay there but for – we have a bunch rooms out of service. We made a conscious decision to accelerate the renovation process and just get it over with. So, we’ve taken as many as 60 rooms out of service at one time. And we didn’t make that decision until really I guess April, so we didn’t – we had already getting guidance back when that happened and so that – it had a little bit of an effect on us. And then we’ve seen some softness, the main impact has been our Laurel asset, we had to go through an approval process with Hilton to do the conversion and we didn’t get an application until last October. Hilton had not approved any of our design concepts, even though we had submitted in November in late January. So, if you understand how the process works, we’re in late January, we have 90 to 120 days to get product once we order it, so we’re now looking at midsummer before we can get any product, and we still haven’t been approved. So, we actually made a decision to go ahead and order the goods without Hilton approval with the anticipation that they’d like our design which they did. And so, we’ve had the compact all that’s work into a very, very short period of time, basically five months. And to renovate a hotel from top to bottom in five months is a monumental effort, and it is very, very disruptive. And so, you could probably add that’s probably a $0.02 or $0.03 FFO adjustment right there. But what we’re really excited about is that the January, I mean the Jacksonville asset is basically compete, we’re going to convert on September 1, we think that that’s going to be a homerun for us in terms of the change in the performance of that asset. We’re very confident that the Laurel asset is also going to experience a monumental change in this performance and that might take a little longer to ramp up we can maybe first quarter next year, but we’re expecting some fairly good numbers late this year out of that asset on a comparable basis to prior year. So, we think both of those are going to give us a short in the arm. And then Atlanta asset we should be finished up our room renovations nearly end of the year. So, we look for some really good results from us, I think fourth quarter will be good and I think first quarter next year will be – we should have a really good performance, so we’re looking forward to that.

[Daniel Donlan:]

Okay. So outside of the hotel is impacted by renovations. You really haven’t seen any type of softness in your markets relative to your expectations maybe outside of Houston, obviously given what’s going on with the oil markets.

[David Folsom:]

We really haven’t, we think we had a greater than 7% RevPAR increase and they’re not in the properties that are not under renovation, as a subcategory of our portfolio. And we think that that’s pretty good. So, and when we start at on these other upper endings and repositioning we should see real good RevPAR growth.

[Daniel Donlan:]

Okay. And then as far as the Hilton [indiscernible], I think I just read somewhere it is a spring hill sweets going up somewhere in the city. Was just curious that market hasn’t seen too much supply over the last couple of years, is that a hotel near you guys and what impact do you think that may have?

[David Folsom:]

It is near us and I don’t think it’s going to have any impact on us. We did hit a new comfort, I mean a new courtyard last year that has had a little bit of impact on the [indiscernible] but we have not seen – we have not seen any impact and I don’t anticipate revenue impact from that kind of property. As I understand that’s out, it may fair in that category and I think there is – it’s just a different part of you see.

[Daniel Donlan:]

Okay. And then as far as the Crowne Plaza you mentioned potentially or Crowne Plaza in Hollywood you mentioned potentially going to a boutique brand there or an independent brand, when did that flag up again if you can remind us?

[David Folsom:]

Its two years from now.

[Daniel Donlan:]

Okay, okay. Okay, that’s it from me, I’ll circle back in the queue if I have anything else.

[David Folsom:]

Okay, thank you Dan.

[Operator:]

And our next question comes from Carol Kemple from Hilliard Lyons. Please go ahead with your question.

[Carol Kemple:]

Good morning.

[David Folsom:]

Hey Carol.

[Carol Kemple:]

Hey. Are there any nonrecurring items that you all will have in the third quarter associated with the Hollywood acquisition?

[David Folsom:]

Nonrecurring items…

[Anthony Domalski:]

There’ll be some acquisition – Carol, this is Tony Domalski. There’ll be some acquisition costs associated with that.

[Carol Kemple:]

Does that included in your net income in guidance?

[Anthony Domalski:]

Yes it is. It’s in net income, it’s in FFO and its reversed out for the adjusted FFO.

[Carol Kemple:]

Can you give us an idea of why you think those expenses will be?

[Anthony Domalski:]

Well it should be roughly about a $0.5 million.

[Carol Kemple:]

And then it looks like your food and beverage sales were down, was that just based on lower occupancy or is there anything else going on there?

[David Folsom:]

It’s a little bit of both, we only had major – major renovations going on at Jacksonville which basically shutdown the ballroom. Same thing at Laurel, we basically had all our meeting space in our ballroom shutdown. So that’s 2 of 10 properties that are shutdown that’s fits up. And yeah, in Houston as well, I’m sorry, we were renovating the public space there so…

[Anthony Domalski:]

[Indiscernible]

[David Folsom:]

Right. Now I will say that the catering is Houston is falling off the cliff, we have seen a mark to decrease in the catering in that market as a result of what’s going on with the oil business.

[Carol Kemple:]

Okay. And then I didn’t see in the press release, can you give me your weighted average share and unit count for the quarter?

[David Folsom:]

Let’s see, for shares and units it is the average for the quarter will be about $13 million.

[Carol Kemple:]

Okay, thanks.

[David Folsom:]

We’ll be – Carol, we’ll be filing the 10-Q here the next couple of days you can get the exact number out of there.

[Carol Kemple:]

Okay, great. Thank you.

[Operator:]

[Operator Instructions] And our next question comes from Scott Williams from Palogic. Please go ahead with your question.

[Scott Williams:]

Good morning, couple of questions. The Hampton property I know it’s a smaller piece of the overall pie, but the lender seems to, the ads gone down substantially. Is that property Drew, is there – it could impaired sort of long-term or is there – how do you envision that asset in the portfolios going forward?

[Andrew Sims:]

Yeah, Scott it’s an assets that we would like to dispose off but we were not going to give it away. And it’s actually a very key piece of real estate of the city, and we eventually dominate the [indiscernible] and we believe there is an opportunity for someone to buy this hotel for not in use, and we’re waiting and negotiating with different parties, we haven’t been able to come to a conclusion yet but we do believe that there is an opportunity to convert this to student housing, there is an opportunity for the hotel be torn down and maybe into a city park which is what’s in the master plan. So there is lots of moving parts here. We believe that the market is impaired and probably for the foreseeable future given what’s going on with military funding in the federal government, the fact that Fort Monroe was closed under Barrack completely changed the market for us. We’ve had a tremendous amount of product was built in the market right before the Fort Monroe closing in the 2007, 2008 timeframe. And then on top of that in the city, the city has actually invested about $0.5 billion in a very large mall and kind of moved the city center out near the interstate. So things have really moved away from this property, long-term is in a viable hotel market, probably not but in the interim we have a license agreement with Crowne Plaza, we have to operate the hotel. We will do that and continue to negotiate with the various parties that we’re trying to dispose in that delta.

[Scott Williams:]

Okay. And did you finish your the largest renovations and conversions, how do you think about maintenance CapEx as a percentage of revenues for the portfolio that you have?

[David Folsom:]

I mean internally speaking with 4% of our total sales has an ongoing basis.

[Scott Williams:]

And you think that that’s generally the number that it works out to?

[David Folsom:]

I mean it generally works out for that number once we do the major renovation. So every – so generally how that cycle works is about every 10 years you’re going to do a major renovation and then that 4% will carry you between those benchmarks.

[Scott Williams:]

Okay. And I know you’re sensitive to this, you discussed in your opening remarks but prior to the offering you had portfolio at the midpoint that was trading at somewhere less than 10 times EBITDA and we talked about value being north of $10 a share, we felt that was in that range. And you’ve did discuss your desire to grow, how do you match that against when you do a dilution at roughly 60% of NEV to acquire an asset and is that an – do you foresee opportunities to acquire assets and utilize equity kind of end this range in the future?

[David Folsom:]

Yeah, I mean are we pleased with where we priced this, no, we’re not pleased with where we pleased the secondary. None of us were happy with the execution that we got. So, we were surprised that we got hit with the discount of the size and magnitude, we thought we have a discount but not the discount, it’s like twice what we thought. In terms of dilution, the timing of this acquisition was not of our making, [indiscernible] I was going to sell the asset and we actually negotiated after the second round of offers that coming in and negotiated a deal. So, we felt like it was important to keep this asset in our portfolio and we looked at what is do if the asset goes away and goes out of the portfolio versus what happens if we keep it in the portfolio and the delta on that was about $0.07 in FFO. So, we didn’t like the fact that we’d be taking a giant step backwards both in the size of our portfolio and the metrics that it caused. So we thought we needed to do some sort of small equity offering, we hadn’t been in the market for over a decade. We felt like it was something we needed to do and we only tried to size it appropriately, make it as small as we can make it and still provide the funding that we needed to make the acquisition at halt. And so, as the biggest shareholder, do I like diluting myself, no I don’t but ultimately I don’t think this is going to dilute us. I think that that we’re going to be very happy with the performance of Hollywood asset on a go forward basis. I think when you – just wait until the first quarter of next year and I think you’ll be very pleased with what you see as a result of this whole transaction.

[Scott Williams:]

Okay, thank you for the time.

[David Folsom:]

Okay.

[Operator:]

Ladies and gentlemen, at this time we reached the end of the allotted of time for today’s question-and-answer session. And I’d like to turn the conference call back over to management for any closing remarks.

[Andrew Sims:]

Well, we thank you all for you time and participating our call today. And we look forward to talking to you next quarter. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.