Sotherly Hotels Inc.
Q4 2021 Earnings Call Transcript

Published: 3 Mar 2022

[Operator:]

Welcome to today's the Sotherly Hotels Fourth Quarter 2021 Earnings Call and Webcast. My name is Jordan, and I will be coordinating your call today. I'm now going to hand you over to Mack Sims, Vice President of Operations to begin. Mack, please go ahead.

[Mack Sims:]

Thank you and good morning everyone. 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 the duty to update or revise any forward-looking statements. With that, I'll turn the call over to Scott.

[Scott Kucinski:]

Thanks Mack. Good morning everyone. I'll start off today's call with a review of our portfolio's key operating metrics for the quarter, which reflect another strong step forward in the recovery of our industry. Looking at the fourth quarter results for the composite portfolio, RevPAR was $85.80, driven by an occupancy of 53% and an ADR of $162. Fourth quarter RevPAR performance represents an increase of 122.6% over 2020. Looking at these figures versus the fourth quarter of 2019, RevPAR was down 16.1% with occupancy down 19.3%, but ADR increasing 4.1%. For the year RevPAR for the composite portfolio was $84.29, with occupancy of 52.5% and an ADR of $160.51. 2021's full year RevPAR performance represents an increase of 90.4% over 2020. Looking at these figures versus the comparable period in 2019, RevPAR was down 25.4% with occupancy down 25.1%, but ADR essentially flat. These operating metrics were ahead of the majority of our lodging repairs that have reported thus far for the quarter and for the year. Overall, we are pleased with the fourth quarter results and believe the improvement throughout the quarter demonstrates that our portfolio is heading in the right direction despite headwinds faced during the period. Examining composite portfolio results on a monthly basis benchmarked against 2019 highlights the quarter's continuous improvement. October RevPAR was 78% of October 2019 RevPAR. November RevPAR grew to 82% of November 2019, while December RevPAR climbed further to 96% of December 2019 RevPAR. During October, our portfolio continued to experience impacts on the Delta variant that started in the third quarter as group meeting planners showed hesitancy and major corporations push back returned to the workplace dates, and extended travel restrictions. Regardless of this impact, we saw an encouraging amount of business and group travel at our hotels during the month of October, the most in any month since the outset of the pandemic. November also saw a solid pickup from the segments as case counts from the Delta variant declined and demand increased at our group heavy hotels such as Wilmington and Savannah. Despite the impact of group and business travel demand caused by the emergence of the Omicron variant in early December, this impact was offset by the healthy leisure demand at our coastal drive-to markets such as Tampa, Jacksonville, and Savannah and close out the year. The strong leisure demand in December helped our portfolio outperform December 2019 total EBITDA by more than 51%. Our portfolios best performing hotels during the quarter were fueled by strong leisure travel and boosted by the return of group and business travel. Looking at some highlights across the portfolio. Hotel Alba in Tampa continue to be a standout among our portfolio and its competitive set. During the period, it produced RevPAR nearly 40% greater than fourth quarter 2019 with ADR growing over 12% and occupancy of more than 19%. This hotel achieved a RevPAR index of 126.3% in the quarter, strongly positioning itself as a leader in its comp set. The DeSoto Savannah continued its excellent performance during the quarter, again outpacing 2019 metrics with a 17.3% gain in RevPAR, fueled by strong rate growth of 14.2%. The hotel also continue to outperform its comp set gaining more than 2,100 basis points in RevPAR share during the quarter. Hotel Ballast in Wilmington saw excellent results during the quarter, as RevPAR surpassed 2019 levels by 12.6%, driven by substantial rate growth of over 34%. The property gained more than 6,000 basis points in share during the quarter, as an encouraging level of group business return to the hotel. Although the Delta and Omicron variants had a moderate impact on the group and business travel segments during the fourth quarter, we are witnessing continual improvement in these segments, as national and regional companies steadily return to the workplace and continue to lessen travel restrictions. Examining recent booking trends demonstrate the steady acceleration in group and business travel at our hotels. In terms of group business, the fourth quarter producing 11% improvement over the third quarter, while business travel improved more than 10%. Thus far during 2022, we have experienced further improvement to the segments and are projecting this trend to continue as the first quarter shaping up nicely with citywide events, in-house meetings and corresponding group room blocks holding strong. While still plenty of room to grow compared to 2019, this trajectory of group and business demand recovery is a promising indicator for our company. During the quarter, our managers combined prudent revenue management strategies with excellent expense controls to achieve strong follow-through and profit margins for the portfolio. Despite rising costs of goods and labor, our management teams achieve strong margins during the quarter exhibited by hotels EBITDA margins more than 200 basis points above the fourth quarter of 2019. Many cost savings initiatives such as clustered regional sales and HR positions, cross training, just in time deliveries and simplified F&B offerings are expected to become permanent SOPs for our properties moving forward. Meanwhile, our managers have been carefully ramping up staffing levels in relation to the return and travel demands. We expect that our ability to achieve strong rates will continue to offset the increase in labor and other rising costs associated with an inflationary environment. Turning to corporate activity. During the fourth quarter, the company enter into a purchase -- hotel purchase and sale agreement to sell the Sheraton Louisville Riverside. The company recently announced the completion of the sale for a purchase price of $11.5 million. As we stated before, the hotel no longer fit the long-term strategic objectives of the company. We believe the company garnered an attractive valuation for this asset in the current market, and this disposition will be immediately accretive to our cash flow. Also, during the quarter, we execute an agreement to exchange 85,000 shares preferred stock for approximately 690,000 common shares. The execution of these exchanges fit with -- fits with our long-term strategy to shore up our balance sheet, while also preserving liquidity. This transaction eliminated approximately $335,000 of deferred dividend payments, as well as approximately 170,000 in annual preferred dividend payments going forward. And lastly, during the quarter, we entered into an agreement to sell the DoubleTree by Hilton Raleigh Brownstone Hotel for a purchase price of $42 million. We anticipate a closing date no longer than June 1. The company intends to use the net proceeds from the sale of the hotel to repay the existing mortgage of the property, repay a portion of the secured notes with Kemmons Wilson, to make any required distribution on the company's preferred stock related to maintaining the company's REIT status, and for general corporate purposes. I will now turn the call over to Tony.

[Tony Domalski:]

Thank you, Scott. Reviewing performance for the period ended December 31. For the fourth quarter, total revenue was approximately $35.1 million, representing an increase of 140.5% over the same quarter in 2020. For the year, total revenue was approximately $127.6 million, representing an increase of 78.4% over the full year 2020 -- over the same period in 2020. Comparing fourth quarter results to the same period in 2019. Total revenue fell short by approximately $9.2 million or 20.8% and comparing full year 2021 results to the full year 2019. Total revenue fell short by $58.2 million, or 31.3%. Hotel EBITDA for the quarter was approximately $8.1 million, compared to a deficit of approximately $1.9 million for the same quarter in 2020. And for the year, hotel EBITDA was approximately $30.9 million, compared to a deficit of approximately $3.2 million in the same period 2020. Comparing fourth quarter results to the same period in 2019, hotel EBITDA decreased by approximately $1.2 million to 12.7% and comparing full year 2021 results to the full year 2019, hotel EBITDA fell short by approximately $16 million or 34.2%. For the quarter, adjusted FFO was a deficit of approximately $1.5 million, a vast improvement over the deficit of approximately $10.2 million in the same quarter 2020. Year-to-date adjusted FFO was a deficit of approximately $5 million, representing an improvement of 85.8% over the same period in 2020. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, gains and losses on derivative instruments, charges related to aborted or abandoned securities offerings, changes in the deferred portion of our income tax provision as well as other items. Hotel EBITDA exclude these charges as well as interest expense, interest income, corporate, general and administrative expenses, 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 December 31, 2021, the company had total cash of approximately $25.6 million, consisting of unrestricted cash and cash equivalents of approximately $13.2 million, as well as approximately $12.4 million, which was reserved for real estate taxes, capital improvements and certain other items. Looking ahead to the first quarter, the company estimates the average monthly cash generated at the hotel level to range between $2.7 million and $2.9 million. We expect corporate level G&A expenses of approximately $0.5 million per month, and capital expenditures of approximately $0.5 million per month and outlays for scheduled payments of principal and interest are expected to be approximately $2.35 million per month. Overall, we're expecting a total cash burn of between $450,000 and $600,000 per month. In the first quarter, as seasonally adjusted levels of hotel level profitability slightly exceed our ability to meet debt service obligations, it's important to note that a portion of our current debt service includes scheduled repayment to deferred interest and principle originating from forbearance received during the pandemic. At the end of the year, we had principal balances of approximately $382.7 million at a weighted average interest rate of 4.66%. Approximately 87% of the company’s debt carries a fixed rate of interest. At the outset of the pandemic, we significantly scaled back our capital projects. We anticipate the capital expenditures will consists primarily of the replacement of systems critical to the operation of our hotels. As we move forward towards a normalized operating environment, we anticipate capital expenditures to be more inline with historical norms, and estimate capital expenditures will amount to approximately $6.5 million for calendar 2022. In March of 2020, we announced the suspension of our dividend and deferral of payment for dividends on our common stock announced two months previous, the suspension in deferral eliminated draw on the company's cash reserves of approximately $4.4 million per quarter. I will now turn the call over to Dave.

[Dave Folsom:]

Thank you and good morning, everyone. We were pleased with the continued progress of our portfolio during the fourth quarter and the overall progress we made as a company over the course of the year. Although 2021 recovery followed an uneven trajectory, the year brought a better than expected rebound in hotel demand. And our portfolios results far exceeded our expectations. The first half of 2021 saw hotel fundamentals improved dramatically across many of our markets as the traveling public returned to more normalized travel patterns. During the summer months as pandemic restrictions were lifted across the nation, leisure travel dominated the landscape, as a number of our resort and leisure hotels exceeded 2019 revenue production levels. Although the Delta variant moderately impacted the return of group and business travel, during the fall months, we only witnessed these effects in hotels heavily oriented toward business travel. In general, the impact of business and group travel that occurred as a result of the Delta and Omicron variants were offset by robust leisure travel, which finished the year strong despite these disruptions. During the year, I was especially proud of our team's ability to navigate the challenging environment with quick and decisive decision making. We surpass both top and bottom-line budgeted expectations for the year, with bottom-line results outstripping expectations by a substantial margin. We achieved this goal by working closely with our management team to reconfigure the operating models at our hotels. We were able to streamline operations by simplifying guest amenities and staffing models, while utilizing dynamic revenue management strategies, with a focus on driving strong rates. As a result of these measures, we were able to achieve significant improved flow through. And in addition, our hotels performed well against their competitive sets. With the portfolio gaining nearly 800 basis points in RevPAR share for the year, our ability to adapt to the new and changing lodging environment was pivotal in achieving our financial goals for the year. As we navigate the recovery, our industry continues to face challenges. Rising costs have been particularly difficult for our industry. Our management teams are focused on minimizing the impact of inflation on our operations by diligently controlling costs, while focusing on driving rate. As a result of these efforts, hotel EBITDA margins exceeded the fourth quarter of 2019 by more than 200 basis points, while ADR increased more than 4% over the same period. We expect this pricing power and ADR to continue as consumer balance sheets remain strong despite ongoing inflationary pressures. We've seen labor shortages ease in many of our markets and our managers have worked diligently to adopt staffing models that match not only demand for hotel rooms, but also a demand for other guest amenities. In January, the Supreme Court blocked the much discussed vaccine mandate for private sector companies with over 100 employees, which helped us avoid significant disruption at our hotels. With the impact of the Omicron variant fading in recent weeks, most experts agree, we are exiting the pandemic and entering a more manageable phase of the virus that allows a return to a level of normalcy we have not seen in over two years. With that change, we are experiencing a positive shift of momentum in the logic markets, as booking trends along with rising average daily rates provide for a positive outlook for the remainder of 2022. Most markets have seen a complete reversal of COVID restrictions, which bodes well for travel. As pent up leisure, demand and returning group and business travel is evident in forward bookings. The positive momentum is especially evident in the booking trends that are urban business and group centered markets such as Arlington, Virginia, Atlanta, Georgia and Houston, Texas, with these segments have lagged for much of the pandemic due to restrictive government mandates and stringent corporate travel restrictions. In addition, return to workplace rates have climbed significantly in recent weeks, indicating post-Omicron efforts to get employees back to the office, evaluating the portfolio's group bookings for the year validates the shift in traveler behavior. Currently, our portfolios group booking pace for 2022 is approximately 79% of the same booking pace in 2019. This is a significant improvement over last year, when our group booking pace for 2021 was approximately half of the group booking pace in 2019. Meantime, we have 45% more tentative group bookings for 2022 than we did at the same time in 2019. In recent weeks, we've seen a meaningful increase in transient bookings, which were up nearly 20% over 2019 levels for the month of February. These encouraging trends combined with rapidly declining case counts, steady improvement in the return to office rate and continue pent-up leisure demand bring optimism for sustained recovery of our business. We believe our portfolios high quality product, diversified mix of business and ideal locations concentrated in southern coastal markets position the company well among its peer set. In addition, we remain optimistic that the US is pressing beyond the pandemic, and are hopeful that the high infection rates of the Omicron variant will accelerate the shift of post-pandemic travel norms. As a result of these factors, we're confident on our growth prospects through the remainder of the year and beyond. We may dedicate the proactive investment strategies and making sound operational decisions to deliver long-term value for our shareholders. And with that, we can open up the call to questions.

[Operator:]

Our first question comes from Tyler Batory with Janney Montgomery Scott. Tyler, the line is yours.

[Unidentified Analyst:]

Good morning. This is Jonathan on for Tyler. Thanks for taking our questions. First one from me, I was wondering if you could provide some additional color on your RevPAR assumptions for the first quarter? And I'm curious, if that 20% estimate includes or necessitates any meaningful further recovery in March or if that is just a continuation of the current trends that you're seeing?

[Scott Kucinski:]

Yeah. Good morning, Jonathan, it's Scott. Thanks for the question. So, that estimates based on the most recent forecasts we have, which includes a pretty good draft number for February, and updated forecasts for March. So, as we – as we stated in our notes, had a pretty rough start to the year with Omicron, mid-January and the first part of February, were not good compared to what we were hoping for, especially in our Southern markets – Southern most markets, I mean, Hollywood, Jacksonville, Madison in those markets were really impacted by it. But things in February really started to pick up now. So that's – as good of a estimates we can give at this point.

[Unidentified Analyst:]

Okay. Great. I appreciate all the detail. And then can you just remind us, what a normalized mix of leisure versus corporate is and where that was in the fourth quarter? And maybe discuss the opportunity in the recovery there for the overall portfolio?

[Scott Kucinski:]

Well, I think the – on the mix basis, our transient is a combination of leisure, and corporate business. And it really depends on hotel-to-hotel, some of our more urban hotels, like Arlington, which is in the suburban, or in the urban DC area versus a hotel like Savannah, Georgia, which is a leisure market. So it's really dependent hotel to hotel. What we saw last year, including the fourth quarter, was a continued sustained leisure demand picture, what we thought we were going to see in the fourth quarter was a return to more business – to see the emergence of more business travel, corporate travel and group. And there was a lot of that in the – on the books in the fourth quarters as we started. But as the Delta variant kind of took hold at the end of September. And then later the Omicron that those bookings got stretched out into this year. I don't know, if that necessarily answers your question to total or not, but it's a mix where it's really by property dependent.

[Unidentified Analyst:]

Okay. Got it very helpful. And then turning – turning to the labor discussion, you guys walk through the costs that are running through the business and they're well. But I'm curious what the – what the hiring market has been like how many FTEs that you are currently running versus normal. And more broadly, on the cost side, any potential that you see there for long-term cost savings, I know you said that, that rate should you think will remain elevated, but long term cost savings in the business anything issue there?

[Scott Kucinski:]

Well, I think some of the brands have highlighted that there maybe some long term changes in operational standards, which may reflect and some cost savings for us. At the same time, you're seeing a more touch less guest impact environment, which will probably survive the pandemic, that in parts, some cost savings for us. The labor markets have eased of late. So we're seeing more people back in the hotels, and we're able to staff the hotels more appropriately as amenities are reintroduced with the assets. I think you're going to see costs continue to climb. There are things that are, the variable cost structure at the hotel with respect to paying your utilities, and all the other things you have to pay to operate the hotel. Those costs are not fixed. They will go up, rate will go up. It's just a measurement of prudent management, that's going to allow us to continue to drop dollars to the bottom line and sustain our margins. And we've been successful so far in doing that, and I think, it's 2022 unfolds, we're continuing that trend.

[Unidentified Analyst:]

Great. I appreciate all that detail. And then last one for me, on the KW loan, any updated thoughts on the exit there? And what would you need to see to get more aggressive on accessing the loan maybe later this year? Do additional asset sales make sense at the right price, any color there?

[Tony Domalski:]

Well, as Scott mentioned in his remarks, we entered into a purchase and sale agreement to sell our asset in Raleigh. And if that is successful, later in the year and the next few months, that will go towards a significant pay down that loan. Not complete. But the vast majority of it will be take back through the sale of Raleigh. And let me pause just by, that's a broader balance sheet strategy. We've sold a linkable asset. We intend to sell the Raleigh asset. And if we're successful on those counts, we will pay off the majority of that KWC liquidity node. And that will go towards really the removal of about $55 million worth of leverage on our balance sheet. And at the same time, selling those two hotels will allow us not to spend upwards of $22 million on required lifecycle CapEx that we would otherwise have to pay to re-license both of those hotels. So by mid year for successful on those strategic points, we'll remove about $55 million with a debt and save about $22 million with a CapEx. And that was a total amount of well over $75 million, which will really help us put our balance sheet in a better condition and have a more healthy balance sheet going forward.

[Unidentified Analyst:]

Okay. Great. Thank you for all the color this morning. That's all for me.

[Tony Domalski:]

Thank you.

[Scott Kucinski:]

Thank you.

[Operator:]

Our next question comes from Alexander Goldfarb with Piper Sandler. Alexander, please go ahead.

[Alexander Goldfarb:]

Oh, thank you, and good morning. Just continuing on that -- on the KWC. Can you remind us of what the current balance is including the end additional kicker at the end? So what the current balance is on that note, including the full payout kick?

[Scott Kucinski:]

The face amount is $20 million.

[Tony Domalski:]

Yes.

[Scott Kucinski:]

The factor on the back end is 9.7.

[Tony Domalski:]

9.4.

[Scott Kucinski:]

9.4, excuse me.

[Tony Domalski:]

Yes. So, Alex, it’s Tony here. So it’s about $23 million as of the end of December.

[Alexander Goldfarb:]

And Tony that $23 million, that includes the kicker or that’s – that include the kicker…

[Tony Domalski:]

Approximately the amount of the kicker that's been expensed. So, I mean, the kicker is payable, whether we execute it today or a year from now. So the amount of exit to loan is still 29 points, the full exit price of the loan is 29.4 million.

[Alexander Goldfarb:]

Okay, yes, yes, so the 23 is not, so what you would – so to the prior fellows question, the proceeds from these hotel sales really has to pay down that basically 30 – 30 million in round numbers itself.

[Dave Folsom:]

Right. Exactly.

[Tony Domalski:]

That’s right, Alex. Yes, 29.4 is the number and the Raleigh sale is successful, we will pay off, about two-thirds of that total.

[Alexander Goldfarb:]

Okay. Okay. In addition to the mortgage on the Raleigh?

[Tony Domalski:]

In addition to – exactly, addition to the mortgage on the Raleigh and closing costs and yes.

[Alexander Goldfarb:]

Okay. And then as far as the hotels go, you mentioned Raleigh, there's Louisville. Are there other hotels sales that are planned or other hotels where Dave, as you mentioned, future branding cutbacks, what have you where it just doesn't make economic sense. Try to get a sense for where the portfolio will be sort of a year from now, on your holdings versus know these hotels that you've announced so far. That's it. There's nothing else in planning?

[Dave Folsom:]

Well, I think I can better answer that we consummate the sale of Raleigh. That's probably the way I would best answer that question. I don't foresee us selling any assets in the next two or three or four quarters. If we're successful on all those fronts. With sell Raleigh, we've completed the sale of Louisville as planned, we've saved $21 million, $22 million in CapEx would otherwise have needed to be paid over the next 36 months. Pay down all that debt. I don't foresee us liquidating any more assets. In fact, I think the equity component of a lot of our hotels is going up right now. And if we have to refinance or do some other financing activity, to pay-off the final amount of the KWC loan, I think we'll be able to do that organically without having to sell a hotel, go back to the markets.

[Alexander Goldfarb:]

Okay, and then just can you remind us, is there a shot clock on the KWC, is there like a fixed due date or that's open ended at your discretion?

[Dave Folsom:]

The end of 2023

[Alexander Goldfarb:]

End of 2023, okay. And then the final question is you mentioned, additional proceeds could pay the preferred. You had the exchange on the preferred to comments that alleviate some. But I think you have about 14.5 million or 15 million of accrued dividends so far. How realistically, how soon or when do you think you'd be in a sort of positive tax position that you would start to have to pay those dividends? Do you think that that's something in 2023, or is that beyond, based on what you see currently in your budgets?

[Mack Sims:]

Yeah, I can't really give you a projection on that Alex. What I would tell you is the KWC Loan is the first priority for us, getting our debt paid down, deleveraging the company and watching the portfolio respond to the recovery. We get demand back. We get flow through. We get additional EBITDA recovery. And start to approximate those types of EBITDA levels we have pre-pandemic. That's when we -- I think we would start to look at commencing the preferred dividend repayment and stripping away at that accrual. But I can't give you a date on, when we think that will start right now.

[Alexander Goldfarb:]

Okay. And just -- and one final, forgive me, can you just -- Scott, can you just remind the preferred to comment conversion? Can you just go over the how much preferred was exchanged for how much common? And then, what the existing share count is that we should be using for modeling on the common shares?

[Scott Kucinski:]

Sure. We did 85,000 preferred shares for 690,000 common shares in December, and terms of the share count a different accounting on that one is pulling up this numbers.

[Mack Sims:]

Yeah. I have figure. We got about $17.4 million -- 17.4 million shares a common outstanding right now. And then, we've got another done 1000,001 units. So, on a combined basis, it's about 18.5.

[Alexander Goldfarb:]

Okay, so 18.5 should be what we use for the first quarter.

[Mack Sims:]

Yeah.

[Alexander Goldfarb:]

Great. Okay. Listen, thank you very much.

[Scott Kucinski:]

Thanks, Alex.

[Mack Sims:]

Thanks, Alex.

[Operator:]

We have no further questions on the phone line. So I'll hand back for any closing remarks.

[Mack Sims:]

None here. Thank you everyone for joining us. And we'll speak next quarter. Thanks.

[Operator:]

This concludes today's call. Thank you for joining. You may now disconnect your lines.