Sotherly Hotels Inc (SOHO) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen, thank you for standing by. Welcome to the MHI Hospitality Corporation second quarter 2005 earnings conference call. Today's call is being recorded.

At this time, all participants are in a listen only mode. Following the presentation, we'll conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. I'd like to remind everyone this conference is being recorded.

And now I'd like to turn the call over to Mr. Georganne Palffy of the Financial Relations Board. Please go ahead, ma'am.

Good morning everyone and thank you for joining us for the MHI Hospitality Corporation Second Quarter Conference Call. The press release was distributed this morning and if you did not receive a copy, you may access it via the company's website at www.mhihospitality.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.

Additionally, we are hosting a live web cast of today's call, which you can access in the same section. Following this live call, an audio web cast will be available for one month on the company's website again at www.mhihospitality.com in the section web casts and presentations.

At this time, management would like me to inform you that certain statements made during this conference call which are not historical may constitute forward looking statements within the meaning of the private securities litigation reform act of 1995.

Although MHI Hospitality Corporation believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be obtained.

Factors and risks that could 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 current and periodic filings with the SEC. The company does not undertake the duty to any forward-looking statements.

And having said all of that, I would like to introduce management that is with us today. We have Drew Sims, Chief Executive Officer and Bill Zaiser, Chief Financial Officer. And now, I'd like to turn the call over to Drew for his opening remarks, please go ahead.

Thank you Georganne, good morning everyone. We appreciate your participation in our call today to discuss our second quarter results and outlook for the remainder of the year. I will first provide a brief overview of the current dynamics in the lodging industry as they relate to our portfolio and touch upon our strategy for growth and recent strides in that area.

Bill Zaiser will then comment on our operating results for the quarter. I'll finish with an update regarding our properties and guidance for the year. Then we'll open it up for questions. The lodging recovery continues. Based on the most recent Smith Travel Research reports for the markets we operate in, it is clear that the lodging recovery continues.

Although the national numbers are not available, the trends we see in our geographic market continues to be one of growth. Our operating strategy includes both internal growth derived from improving the performance of our original hotels and external growth from accretive acquisitions. Most of the increase in our operating performance this quarter was the result of improved performance from our original hotels.

Our acquisition pipeline; we currently see a solid acquisition pipeline, albeit with increased competition. There's a tremendous amount of capital chasing deals in our industry right now. The competition is most keen for performing full service access. As a rule, this is not where our focus is.

As a result of the increased competition, cap rates in the markets for performing full service properties are trading in the range of 7.5 to 9%. We believe most buyers are overpaying. As a general policy, we currently look to achieve average cash on cash return on our investments of 12 to 14% and a minimum internal rate of return of 20%.

We are currently looking at two properties in the eastern half of the U.S. that align us with the rest of our criteria. We continue to look for assets located in this region that meet one of the following three investment criterion. First, the acquisition of an operating, under performing hotel with opportunities for repositioning and rebranding.

Second, the acquisition of properties similar to the leased sell island condominium model where we control the public space in the hotel and operate a rental program. And thirdly, joint venture opportunities with development partners for a major renovation of a closed hotel and or new construction. We are not presently negotiating for any hotels in this asset class.

Aligned with this strategy for growth, we announced during the quarter the acquisition of the Hilton Jacksonville. We acquired the 292 room hotel for $22 million. We believe there are several reasons to be excited about our Jacksonville purchase. The Hilton Jacksonville represents a shallow turn opportunity in line with our investment objectives. With a $3 million renovation to the property, this hotel will be an additional full service performing asset to our portfolio.

This hotel is an attractive location compared to other hotels in the market given its waterfront location in downtown on the preferred south bank. Since the Super Bowl, the market has seen strong growth in rev par. Based on the trailing 12 performance of the hotel, we acquired this asset at a 10.6% cap rate.

Because of our long standing relationship with the seller, we believe the 10.6% cap rate represents an excellent buy in today's competitive environment. In short, the price is right, at $74,000 per key. We used a portion of the under writers' over allotment option for our initial public offering that needed to be invested to create a return of the capital that we raised.

Finally, given the high leverage at 70%, we expect this asset will perform well in the future. We believe this asset will meet the minimum 12 to 14% current cash on cash return and 20% IRR investment hurls. I will now turn the call over to Bill, our CFO.

Thank you, Drew. For the quarter ended June 30, 2005, our FFO totaled $3.2 million or $0.31 a share. The company's consolidated total revenues were $15.2 million with a total operating expense of $12.5 million. The consolidated net income for the quarter was $1.4 million which is approximately $0.21 a share.

Our overall portfolio rev par was $80.68. That's a 7.9% increase for the same properties over the second quarter of 2004. This rev par growth was driven primarily by a 12% increase in our average daily rate. It's up to $105.52. On the year to date basis, we have an FFO of $0.39 a share. Our rev par for the initial six hotels is up 9.7% or $6.32. Our ADR is up 10.2% or $9.23. That's compared to the same period in 2004.

Typically our second and third quarters are the strongest operationally. The slow periods traditionally for us have been between Thanksgiving and St. Patrick's Day. One of the advantages of the recent Jacksonville acquisition is that the hotel provides strong operational performances in the months of January, February and March.

We recently announced our third quarter cash dividends, $0.17, which equates to an annualized dividend of $0.68 a share. And an effective yield of 6.68% at Friday's closing price. According to Stifel Nicolaus, REIT's score card, that's approximately 180 basis points higher than the lodging mean.

At quarter's end, we had $9.0 million in cash and cash equivalents and a $23 million line of credit. Our total debt to market cap was 26% which is substantially below our peer group, which averages 57.7%. We believe our balance sheet will give us the ability and flexibility to grow our company.

Renovation work continues at the properties in Laurel, Philadelphia and Williamsburg. We anticipate a Fall 2005 completion with costs coming within the budgeted figures originally submitted which was $7.9 million. An additional announcement, MHI was included in the initial compilation of stocks that form the recently launched Russell Microcap Index.

We believe this inclusion will increase the awareness of our company and broaden our shareholder base.

Thank you and Drew?

Thank you Bill, I will go through each of our hotel properties and give you a brief overview of the quarterly results. Our hotel in Raleigh, after having extremely strong first quarter flattened out a little bit in the second quarter. We saw ADR increases of 5.4% and a rev par increase of 7.4%. Total room sales increase 0.8%.

However, we did a great job of managing the bottom line. Our NOI for the quarter increased 15.1% from the prior year. Our hotel in Williamsburg continues to struggle. The market at large is depressed and as such, we made a decision to sell the hotel. We are presently listing the hotel with Jones, Lang, Lasalle and the hotel is being marketed for sale.

Hotel will be subject to a temporary one transaction and it's our intent to redeploy the capital that we raise from the sale into accretive investments. Our Philadelphia hotel had a great quarter. Notwithstanding the fact that we had 46 rooms out of service during the entire quarter because of the renovation.

ADR increased 24.9% from the previous year, rev par increased 17.3% from the previous year and root sales increased 17.3% from the previous year. A lot of that increase in sales flow to the bottom line. Our NOI for the quarter increased a dramatic 33.9% from previous year.

Hotel in Savannah had a solid quarter again, ADR increased 3.1% from previous year and rev par was up 8.5% from previous year. Room sales were also up 8.5% from previous year. Again, good flow to the bottom line, our NOI for the quarter increased 16.7% from previous year.

Our hotel in Wilmington, after having a fairly soft first quarter had a very good second quarter. ADR increased 7.5% from the previous year and rev par increased 12.3% from the previous year. Room sales increased also 12.3% from the previous year. A tremendous flow to the bottom line, our NOI for the quarter increased 37.3% from the previous year.

The Laurel Hotel suffered a little bit in the quarter as a result of the renovation. We had delays from our vendors related to the strong demand for product in our industry. There's a lot of hotels that are being renovated presently and a lot of the vendors are backed up.

And so as a result, they didn't deliver on time and what we have suffered with is had to increase the number of rooms out of service to try to catch up once the deliveries were made. So as a result, we had about 60 rooms out of service for the month of June and we lost about 1,750 room nights in actual sales. Those are rooms that we could have sold that we didn't sell because we didn't have the inventory.

So, as a result to all that, total room sales were down about 10.5% to prior year, while the market at large continued a strong recovery increasing quarterly room sales of 12.3%. During the quarter we completed the Outback lease and executed that. We expect to have a building permit in the next few weeks and the restaurant should open in late fall. Built in Jacksonville, just to touch on what our plans our with that asset, we will begin a renovation, a capital improvement plan in the fourth quarter of this year that will include all the public spaces of the hotels.

The hotel has recently had all the guest rooms and guest room bathrooms renovated so we're really dealing with just the public space and the front entry. We're going to spend a substantial amount of money to renovate the entry area to enhance the sense of arrival at that hotel.

And all this work will be accomplished in anticipation of changing the brand to crown plaza on or about April 1, 2006. As we go forward, just to give a little guidance here, we are reaffirming our previous guidance and anticipate that rev par growth for 2005 will be in the 5 to 6% range compared to the predecessor group, which is the accounting group comprised of the three of our initial six hotels identified in our IPO prospectus.

And we expect a 9 to 12% increase in the six initial hotels as compared to prior year. We continue to expect FFO per share will be in the range of $0.90 to $0.95 per share. Our assumptions include increased costs associated with Sarbanes Oxley compliance in the range of $200,000 to $250,000. This represents an approximate $50,000 increase from last quarter's estimates.

In conclusion, we believe the lodging recovery continues to pick up steam and most industry analysts call for growth at least through 2007. We continue to execute our business plan. We acquired the Laurel assets and executed on a lease for an Outback Steakhouse. We told you we would have an additional acquisition in 2005 and we recently announced the closing of the Hilton Jacksonville.

We also continue to see advantageous opportunities in the marketplace and with our low leverage of ample drive power to capitalize on these potential investments. We currently pay a dividend that is 180 basis points higher than the industry mean.

With that, I think we've completed our formal remarks and we're going to open it up for questions.

Thank you gentlemen, today's question and answer session will be conducted electronically. If you'd like to ask a question please do so by pressing the star key followed by the digit one on your touch-tone telephone. Again, that's star one on your touch-tone phone if you'd like to ask a question.

If you are using a speakerphone, please pick up your handset or check your mute button. With your mute button depressed, we will not be able to receive your signal. One moment. We'll take our first question from Marty Ferananzi (ph) with Ferris Baker Watts.

Good morning.

Good morning, Marty.

Congratulations on a very good quarter, this is excellent, I love to be proven wrong. I just had a few questions that would help improve my projections for the quarter and for the year. In looking at the Hilton Jacksonville, there is a lot of work being done on that property. When will you begin to recognize revenues from that property?

We believe that the Jacksonville assets are going to be accretive immediately.

OK.

We think that's a positive thing and we have built into our model some return on the underwriters' overallottment that was originally procured back in January. So, essentially, we're acting on that, we're taking that money and putting it to work. And so, we already kind of built in that for this year. But we do believe that Jacksonville is going to give us an excellent return immediately.

Is that the 10.6% that you mentioned in your formal remarks?

Well, no, that's the cap rate, really, that's the capitalization rate that we thought the asset based on its current performance or trailing 12 performance. But I guess we're not going to give you any specific numbers on what we think it's going to do. But what we do believe is that it will be accretive and that we can talk about a per share increases later.

OK.

I think we're going to want to take a little bit of time to make sure that we understand where the capital expenditures, where they are going to be expensed or they'll end up on the balance sheet, is really the issue here.

OK, I have a couple other questions and I'll let somebody else talk. On the Outback lease, you mentioned that that lease is going to be completed and you'll begin to recognize revenue from that lease. Did you say, late fall, is that a fourth quarter event?

We think it's either going to be late October or early November.

OK, OK, and one other question, I guess I was surprised to hear that you have plans to sell the Williamsburg property and I'm interested in knowing what decisions - how you arrive to that. You mentioned the market is currently depressed. What was it that got you to arrive at that decision and I guess, second of all, what is the price of that property relative to its contribution value to the portfolio when you initiated the company?

OK, I think the decision was made as a result of the continued deterioration of the marketplace. We, about a year ago, there was a new tax that was added in the city of Williamsburg and surrounding counties that was to be used as a marking fund to promote Williamsburg as a destination location.

And essentially was a $2.00 per room night tax that created, I think between $4 and $6 million worth of revenue, was to be used to promote Williamsburg. They started that program at the beginning of the year and we thought that was going to be really helpful in turning this market around.

Well, what's happened, happened. What's happened is not withstanding the fact that all this advertising is being done in the feeder markets, the market occupancy has actually declined from prior year. It was at about, a tad less than 50% on a trailing 12 basis, it's now a little bit below 47%.

A healthy market is 62%, plus or minus and we're just not seeing any kind of positive momentum here or movement. And now is a great time to sell a hotel. And the way this hotel is going to be valued is based on its top line. A lot of smaller hotels, holiday and pipe hotels will be valued based on top line instead of bottom line, interestingly enough. So, we think, we've lifted it for sale at $6.2 million, $6.25 million and it was contributed to the REIT at $5 million.

OK, excellent. Thank you.

We'll take our next question from Stephanie Krewson with BB&T.

Hey Drew, great quarter. I have a couple - three questions. First, relating to Williamsburg. Any thoughts on closing your office there and consolidating into an (inaudible) location and perhaps save some G&A?

Well, Stephanie, I don't know that we'd really save any G&A. I don't think I'll be moving to Greenbelt but, right now, there's only three of us in our office here in Williamsburg. There's Scott Kaczynsky (ph), who's actually out on the road all the time and Rhonda and myself. And right now, because we're in the hotel, there's very little overhead costs if any.

But no, I don't think, there's probably no significant savings regardless. If we moved up to Greenbelt, we'd have to lease additional office space. So we're pretty compact up in Greenbelt right now so I don't know if there'd be any savings there.

OK, second question is related to your vendor contracts, pardon me, related to your vendor contracts, did you structure your contracts with your vendors such that you have any sort of a price break or rebate because of their inability to deliver the raw materials on time?

Unfortunately, that's not industry practice. They give you a best effort, not a promise and no, we're not going to be able to get any of that money back. It was about, in the quarter, it was probably about $140,000 in lost income that we should have had that we didn't get. It's unfortunate but it's just the way it is.

That's life?

That's the way we operate, yeah.

Third question. Crown Plaza, I only have one very bad example of a Crown Plaza in my life here in lovely downtown Richmond. Can you please, but I know that you never do anything without thinking long and hard about it. Could you go through your rationale for picking the Crown Plaza flag and perhaps dissipate my bias against the flag as evidenced by the beautiful pink buildings that I'm looking at.

We've operated the hotel, the management company, prior to the IPO, leased the Jacksonville Hotel from the AFL CIO building investment trust and there was about a 10 year history there. And the license agreement with Hilton is coming up. And when we execute, we originally executed the license with Hilton, we had an area protection agreement which basically precluded Hilton from putting any other brands in about 10 mile radius of the hotel.

Once Hilton bought Promise, they essentially decided that that didn't apply anymore. And they built three new Hilton Garden Inns, one at the airport, one just south of us and one out at the beach. And then they added a Hampton Inn Suites literally at our front door, not 50 feet away.

And they just announced to us that they were going to convert an existing Radisson which was a block away, which is a 300 plus room hotel to a Double Tree and that they were considering putting in 150 room, a fourth Hampton Inn and Suites about a block away. So essentially we were going to have about a thousand Hilton rooms on the Hilton system within a block.

And we just don't think, that dilutes the value of the system having all these other sister brands right on top of you. And so we made the decision that we would approach Inter Continental Hotels and talk to them about giving us a lock on downtown. Currently, Inter Continental does not have any product in downtown Jacksonville.

So we negotiated an area protection agreement that's good for five years that precludes Inter Continental from putting a Holiday Inn or any other brands in the downtown core for a period of five years. And we think that's going to be a very positive thing. Our management company has operated, the Crown Plaza Houston, our experience out there has actually been very positive in terms of contribution.

What we're really paying for Stephanie is what do you get over the holidex (ph) machine, what are the number of reservations, what is the room dollar volume that's being sent to you by the computer. And our experience with Inter Continental is that they are equally as strong in terms of delivering on their promise as Hilton.

So we've also negotiated, ramped up royalties so that we will not be paying full fare on the royalties for three years. So there was some considerations there and so that's the rationale behind the decision.

Excellent, I always know you have a good answer for anything and I can ask you and I appreciate that. And who knows, maybe some day down the road you can buy this asset here in Richmond and fix it up.

Yeah, there you go.

Once again, ladies and gentlemen, that's star one on your touchtone telephone if you would like to ask a question. We do have a follow up question from Marty Ferananzi with Ferris Baker Watts.

Yes, just one more question, I think. FFO per share, your projections, I think this may be a question for Bill Zaiser, FFO per share, $0.90 to $0.95, does that take into account maybe any additional acquisitions that you'll have here on out from the company or is that just the Jacksonville property?

We don't, go ahead Bill.

The way I have calculated it does not include any additional. It's based on our initial six plus Jacksonville.

OK, and you mentioned Drew that you do not at this point have any properties in the pipeline, is that correct?

No, that's not correct but, yeah, based on my last conference call, the compliance host put the muzzle on me. I'm talking about what we're working on until we have an executed contract. So we're hopeful that in the next few weeks we'll have a positive announcement.

OK, that you may very well be adding property to your portfolio between now and the end of the year?

We would hope so.

OK, thank you.

And at this time, there are no further questions in our queue. I'd like to turn the call over to our speakers for any closing comments.

I think we're ready to wrap it up. I want to thank everybody for participating and we look forward to next quarter's call.

This has concluded today's conference call. We appreciate your participation, you may disconnect at this time.