Sotherly Hotels Inc (SOHO) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the MHI Hospitality Corporation third quarter 2005 earnings conference call.

(Operator Instructions).

Now I'd like to turn the conference over to 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's third 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 webcast of today's call which you can access in the same section.

Following this live call, an audio webcast will be available for one month on the Company's website, again at www.mhihospitality.com in the section Webcasts 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 attained. 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 filings with the SEC. The Company does not undertake a duty to update any forward-looking statement.

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 will 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. I plan to begin by discussing the macro conditions in our industry as they relate to our portfolio and then Bill Zaiser, our CFO, will go over our operating results for the quarter. I'll finish with an update of our properties and our guidance for the year then we'll open the call up for questions.

We continue to feel confident with regard to the lodging recovery as demand continues to outpace supply and business remains robust. In the third quarter the domestic lodging industry reported occupancy of 69%, a 2.7% increase over the prior year, ADR of $91.08, a 5.6% increase over the prior year and RevPAR growth of 8.3%. Most of our market saw similar growth. We anticipate seeing solid operating results from our portfolio for the next several quarters.

We experienced a significant increase in energy costs in the third quarter and anticipate this increase will continue for the foreseeable future, perhaps increasing as much as 20% during the next year. To put things in perspective, a 20% increase in energy costs represents approximately 1% of our operating expenses and will require us to increase our ADR by approximately 1% to maintain our current margins.

With regard to our acquisition pipeline, during the third quarter we acquired the Hilton Jacksonville for $22 million. The hotel includes 292 rooms and is located on the South bank of the St. Johns River in downtown Jacksonville. The hotel features a Ruth Chris Steakhouse and 12,000 square feet of meeting space. A $3 million renovation is slated to commence in the fourth quarter.

Also during the quarter we announced the signing of an agreement to purchase an interest in a hotel condominium property in Hollywood, Florida. The developer, MCZ/Centrum Florida, will renovate two existing properties to include a hotel condo conversion at which point we will close on the commercial space of the hotel and operate a rental program for the unit owners. Work has already begun on the property and we anticipate that it will be completed in the fall of 2006.

We are really excited about this acquisition and the opportunities the conversion of the property presents. The Hollywood area is in a period of rejuvenation with both the addition of the Westin Diplomat Resort and numerous high rise residential condominiums have been and continue to be built. The location of the property is idyllic, bordered by the Atlantic to the East and the Intercoastal Waterway to the West.

We continue to see a very competitive market for purchasing performing hotels. Cap rates for performing upscale or upper upscale properties are trading in the 8 to 9.5% range. During the quarter we made an unsuccessful offer on a hotel in suburban Richmond that ended up trading at an 8% cap. The types of deals we're interested in, such as repositioning of assets and condominium hotel assets don't fall within the range that I previously discussed. We continue to seek out opportunities that will yield us a minimum 12 to 14% cash on cash return at a stabilized operation and a terminal -- internal rate of return north of 20%. We continue to be disciplined and patient.

During the quarter we performed preliminary underwriting on approximately 10 properties and we have narrowed down our interest to two potential opportunities, one on the West coast of Florida and the other in North Carolina.

I will now turn the call over to Bill, our CFO.

Thank you, Drew. For the quarter FFO totaled $2.1 million or approximately $0.19 a share. The Company's consolidated total revenues were $14.6 million with total operating expenses of $13.1 million. The consolidated net income for the quarter was approximately $600,000 which is approximately $0.09 a share.

Our average daily room rate increased by 10.8% to $101.25 during the quarter. Our overall portfolio RevPAR was 67.62 cents, an increase of $0.03 over the same -- for the same properties over the same period in 2004. Performance for the quarter was negatively impacted by the 40 to 80 rooms per night that were out of service due to renovations in Laurel and Philadelphia. In addition, the public spaces of these hotels were also under construction which further impacted occupancy.

Year-to-date we have an FFO of $0.59 per share. Our RevPAR is up 6% to $69.86 and our ADR rose to $100.35, an increase of 10.4% for the nine-month period as compared to the same period in 2004. The national averages for the same period were RevPAR of $58.49, and ADR of $90.65. The ADR growth was 5.1% on the national average. Our performances compare favorably to the national averages in occupancy and average daily rate. However, our rate of growth for RevPAR and occupancy has been impaired by the negative operations in Laurel.

We recently announced our fourth quarter cash dividend of $0.17 a share which equates to an annualized dividend of $0.68 and an effective yield of 7.5% as of the October 28th closing price of $9.10. At quarter's end we had approximately $200,000 in unrestricted cash and cash equivalents. We had drawn $2 million on our $23 million line of credit. Our total debt to market cap was 36.8% which is substantially below our peer group average which is 47%.

Renovation work has been completed at the properties in Laurel, Philadelphia and Williamsburg and we are now completing the final punch lists (ph).

Drew?

Thank you, Bill. I would now like to go over the quarterly results on a property by property basis. Our hotel in Raleigh had a solid quarter again, the hotel continues to perform at plan. ADR increased 4.1% from the previous year. RevPAR increased 3% from the previous year and occupancy decreased slightly.

Our hotel in Williamsburg is being marketed for sale by Jones Lang LaSalle. The market continues to struggle. The average market occupancy in Williamsburg has fallen to a rate -- an annualized rate of 47%. Our operating results for this hotel suffered accordingly. However, to put things in perspective, because this is our smallest hotel the negative variance from plan represents approximately $0.03 of FFO.

In Philadelphia we just completed our renovation during the quarter. We've had approximately 30 rooms per night out of service, resulting in a 9.8% decrease in occupancy. In spite of that the hotel performed very well. ADR increased 21.4% from the previous year. RevPAR increased 9.5% from the previous year and the hotel is significantly ahead of plan, despite the renovation activity.

Savannah's performance for the quarter was flat, showing no significant changes from prior year. Nonetheless, it was a strong quarter. The hotel performed at an occupancy of 72.9%. ADR was $112.22. RevPAR was $81.84. The hotel is performing at plan.

Our hotel in Wilmington, not withstanding the effects of Hurricane Ophelia and tropical storm Tammy, we saw a solid increase in occupancy of 9.9% from prior year. ADR increased 2.9% from prior year and RevPAR was up 13.1% from prior year. The hotel is exceeding plan.

In Laurel our renovations finished during the quarter. We successfully re-branded the property to a Holiday Inn in the first week of October and yesterday the Outback Steakhouse opened. Our troubled quarterly results are due to the compressed renovation schedule. In order for us to have renovations completed in time for the previously planned Holiday Inn conversion inspection we had more rooms out of service during the quarter than originally anticipated. The compression of our construction schedule was caused by our vendor's inability to deliver furniture, carpet and other equipment in a timely manner.

During the quarter there were between 40 and 60 rooms out of service nightly and the public spaces and exterior of the building were receiving extensive renovations. We achieved an occupancy rate of 41% in the quarter while the competitive set in the Laurel market achieved 64% occupancy. Our RevPAR was only 46.6% of fair share.

Our corporate guests left us and found other lodging during that 100 to 120-day period the hotel was under extensive renovations. However, our guests have been returning in recent weeks and we're seeing positive increases in occupancy each week since the hotel has been re-branded. The opening of the Outback yesterday is the final component in the repositioning plan.

We have established an aggressive sales and marketing campaign in tandem with the national Holiday Inn reservations system. We are already seeing an uptake in bookings. We are pleased with our new product and believe that we will be competitive in the marketplace. Our goal is to at least bring this hotel up to market averages which in the past 12 months were 68% occupancy and an ADR of $97.55.

Our new property that we acquired in the quarter, the Hilton Jacksonville, we closed on that deal July 22nd. Traditionally the third quarter is a slow season for this property. However, the hotel in the past 12 months has performed at a high level achieving occupancy of 70.8% and ADR of $111.53 and RevPAR of $78.97. We will begin a $3 million product improvement plan in the fourth quarter that will entail renovating the public spaces and will renovate the exterior entry area to enhance the sense of arrival. We anticipate re-branding the property to a Crowne Plaza on April 1, 2006.

We are reaffirming our previous guidance and anticipate that RevPAR growth for 2005 will be in the range of 5 to 6% compared to the predecessor group which is the defined accounting group in the I.P.O. and in the range of 6 to 9% for the entire portfolio. FFO per share will be in the range of $0.80 to $0.86. Our assumptions include costs in excess of plan associated with Sarbanes-Oxley compliance in the range of $250,000 to $300,000.

We would now like to open up the call for questions.

Thank you, sir.

(Operator Instructions).

We will go to Charlie Place (ph) with Ferris Baker Watts.

Good morning.

Good morning, Charlie.

I have a number of kind of quick questions for you. When looking at, in no particular order of significance -- when looking at the margins for the different revenue line items of rooms, food and other operations, it seems that the first and third quarter had a relatively high percentage of costs relative to the second quarter. Is that -- is there some seasonality or something that I should understand as I look to the fourth quarter? For example, cost of rooms were 29-plus percent in the first and third quarters and less than 26% in the second, and same with the cost of food and things of that nature.

Bill, do you want to handle that one?

Sure. I think there's two things to look at here, Charlie. The first one is as the ADR and occupancy and just the general revenues rise, your margins will be improved. In other words the fixed cost component will be smaller relative to the total revenue. So I think you're seeing a little bit of that.

And really the second component there would be that in cases where you have things, say the renovations in Laurel and so forth, the room expenses there were impacted by the fact that there was a lot of additional cleaning and additional expense generated to keep the hotel in as good a condition as we could for the guests.

Okay.

And let me just add that Laurel's NOI for the quarter was almost zero.

Okay.

So it skews our results tremendously -- even though it's not, obviously it's not one of our biggest properties but when you have a cost factor that's double what it should be --

Yes.

And that's all a result of the impaired sales.

Okay.

That's really what is throwing this thing out of whack, I think.

Yes, I think you'll see it return to a more normalized number in the fourth quarter.

Okay. The SG&A looks like it has declined over the course of the year. What -- and there was no renovation expense, at least in the press release. Is that -- how is that --?

The renovation expense line was simply another component of repairs and maintenance. There was simply the component of repairs and maintenance having to do with product improvement plans and we felt on an ongoing basis that was not going to be something that was going to be in every single report so we put it back -- we essentially rolled it back into the repairs and maintenance.

Is that an indirect --

Yes.

-- line item? Okay. And so, again, excluding the renovating -- renovation expenses, again the SG&A appears to have declined quarter over quarter. Is that because there was more, I don't know, one-time costs in the first or second quarter, whether its (inaudible) or something of that --?

Well, yes. There was the whole setup of the Reed corporate staff and corporate offices and there were some one-time expenses there. Also we had -- there were accounting and legal costs that were in the first and second quarter that have gradually tapered off.

Is your $428,000, is that a good number for next quarter, a little bit of growth on top of that, what --?

I would say that's in the right ballpark. Possibly slightly larger.

Okay, and just for clarification purposes, the minority interests, that's your Shell Island and now your Hollywood investments?

No. The minority interest represents the unit holders, the original unit holders.

Oh, okay. Sorry about that.

No problem.

And your income taxes on your taxable subsidiary, you got a benefit this quarter. What -- is there any way for me to anticipate either an expense or a benefit going forward?

Well if you can tell me how the fourth quarter's going to turn out exactly then I can give you the answer. Basically what happened there was that the results of the second quarter created some taxable -- potential taxable events in some individual states and that was the tax expense. And the benefit came back when the third quarter brought those down a little bit.

Okay. So it's an adjustment based on previous quarters?

Exactly.

When you talk of RevPAR growth in '05 over '06, are you using -- or I have a RevPAR for '04 of $63.73 and I can't recall if I got that from the prospectus or whether it's your predecessor companies or how you define it here.

Well off hand, I don't know where you got your number.

Charlie Place. Yes. When you talk about 5 to 6% growth, what's your base number?

The 5 to 6% is the predecessor group. That's Savannah, Wilmington and Williamsburg. That was the defined predecessor group in the I.P.O.

Which isn't very helpful, I would add. That's just a --

It's one of those things that just -- because of the I.P.O. process, for this one year we have to include that piece of information.

Okay.

But the other number, the 6 to 9 --

Yes.

That is the -- if you take the original 6, or the portfolio, the now 7 hotels and compare it to the prior year.

Okay and Jacksonville, are you -- is that just added?

We're adding Jacksonville effective the 22nd of July.

Okay. Alrighty let's see here, on your guidance, your FFO guidance of $0.80 to $0.86, would it be reasonable to look at depreciation and minority interest adjustments kind of collectively as between 6.5 and $6.7 million instead of the specific line items? Because I kind of have depreciation north of $3.4 million for the year. You're almost at $3 million through three quarters.

Right.

And would assume, again, on a million run rate that's closer to $4 million and minority interests --

They really do not impact FFO in that they get added back in.

Right, understood. But I'm just trying to reconcile the 6.5 to $6.7 million of debt.

Oh yes, right, I see what you're doing. Okay, yes.

That's reasonable to look at it that way, then?

Yes, it is.

Can you also just talk briefly -- I'll get off shortly, I promise -- the restricted cash, the big increase, is that primarily because you've earmarked that for the Jacksonville renovation?

That's right.

And is that going to take rooms out of service? You'd mentioned that you were renovating the common areas and up front, I just was double checking that.

The rooms were renovated last year.

Okay. That shouldn't affect your (inaudible).

That (inaudible) has been taken.

Okay.

This is basically going to be the public space and the sense of arrival for the hotel. We're trying to create a new entryway and we don't think that it's going to be too awful. The only thing that's going on in the guest rooms is we have to add the Crowne Plaza bedding plan which is dust ruffles and coverlets and pillows and that kind of thing and it's not going to take any rooms out of service.

Okay. I think that -- and this is one of your earlier points or comments, Drew, that I just wanted to make sure I understood -- is that you were commenting on the current transaction rates for hotels, I think you said that you're either looking for or the hotels have been trading at between 8 and 9% cap rates. Is that what you were saying? I might have misheard it.

Yes. We've put out several offers this year and at the end of the day hotels that are performing fairly well are trading at an 8 to 9.5% cap rate.

Okay.

And recently on the lower end of that scale, closer to the 8%, so --

So you're just waiting for the market to get a little bit more realistic in their -- well maybe realistic isn't the right word -- but more attractive pricing for your purposes.

Right. I don't see us going out and just buying performing assets. That's not what our -- that was never our intention.

Right.

But when the prices are right we may step in and buy some performing assets. I guess what I'm saying is that prices are pretty high right now and that's not something we're going to do. We'll throw out an offer here and there and if we find something that we can buy that fits our investment criterion then we'll do it but if we don't, we won't.

Okay, great. That's all my questions for now, thank you.

Thank you.

(Operator Instructions).

Gentlemen, there are no further questions.

Actually I apologize, someone just signaled. We'll go to Jerry Kahn (ph) of William Harris Investors.

Hello, everybody, and a good quarter.

Good morning, Jerry.

Good morning. With regard to RevPAR -- which was, for the quarter I'll call it flat, three pennies -- what was the main thing that held that down? I guess Williamsburg must be one, right?

Really the biggest issue was Laurel. The Laurel hotel performed very poorly.

Okay.

And Williamsburg would be the other. So those --

Laurel had lower rates than they had been having?

Well not rates, occupancy. RevPAR is a function, is a yield measurement of rate and occupancy.

And occupancy, of the available -- so they still had enough that were available but they weren't occupied. So Laurel dragged it down more.

Yes, we really didn't even -- we didn't change our RevPAR. Bill, correct me if I'm wrong here. I don't think we changed our available rooms, we just used the total number of rooms that are in the hotel, is that right?

That's right, that's correct. So Jerry, we didn't really --

You don't take out the ones that are being fixed up?

Oh no, we usually don't do that.

Okay, I thought you did that, okay.

No, that's why it really drove the number down because we had all these rooms out of service and the way you measure RevPAR is the rooms available regardless of whether you can rent them or not.

Okay so Philadelphia must have hurt some too, then?

Well curiously enough our rate was up 21%. So our RevPAR was up even though we had rooms out of service and our occupancy was down nine and change, we ended up with a RevPAR increase of almost a double digit number.

Yes but it still was held down by the rooms that weren't available.

That's right and we could have done better. I mean, we probably -- if we had a 21% increase in rate, if we had held the same occupancy we would have had a 21% increase in RevPAR. We didn't get that but I think that both will for the future.

And with regard to Jacksonville, there are a lot of new hotels planned there and some under construction. Can you update me to that market?

Well we are on the South bank of the St. Johns River which, in my estimation, is where you want to be. We are the only hotel on the riverfront on the South bank so we have a waterfront location. Right now on the South bank you have a Hampton Inn and Suites which is basically out our front door, that was built about four years ago and there is another limited service hotel, I think it's a Wellesley Inn, which doesn't really -- the price points on that don't really compete with the Hilton or Crowne Plaza product.

So they're not really competitive. Nearby there is a, what is now a Radisson hotel, that's 360 rooms and has been there I guess a good 25 years or so and we just found out Monday, or it was announced Monday -- and we've had all kinds of different announcements -- the announcement we had three months ago was that that was going to be made into a Doubletree hotel and then they were going to go next door to that and build a Hilton Garden Inn.

So we became fairly upset with Hilton because all of those are Hilton brands. We were going to have a Hampton Inn and Suites, a Hilton Garden Inn and a Doubletree conversion, and if you add in our hotel that would be 1,000 rooms within two blocks of one another. That's why we made a decision to change brands.

Right.

But since then apparently the Doubletree is not going to happen. The South bank of Jacksonville has become a very hot condo market and there's presently four projects under construction, all of which are pre-sold out. I would say total, that represents 700 to 800 new condominium units and apparently the developer has come in -- a developer has come in and bought the Radisson and he's going to tear that down and build high end residential condos there. It's a very large site, I'd say it's probably seven, eight, maybe nine acres so it's a big site.

So that will take rooms out of the area.

Exactly. So it's been a very positive change in the last few days that we've heard --

So how many rooms will be in the area now?

Well we've got a lot of rooms on the other side of the bank. On the South bank we'll be losing 360 rooms out of the market and then you're going to have the Garden Inn built so that's about 180 rooms. So basically we'll have about 180 room net reduction in rooms available on the South bank. Now on the North bank you have a very large Hyatt which is almost 1,000 rooms and you have an Omni that's approximately 300 rooms and that's basically it over there on that side of the water.

So right now, right now the net new construction is minus.

Right now it's minus, right.

Well that's a pleasant change. But you are still going to stick with your Crowne Plaza?

Well we've committed, you know we've committed. We didn't really, I mean -- they said they were going to do all that and we said well we don't like that idea and you're diluting the value of our brand and we're going to have four properties within a stone throw of each other and you're going to essentially take a good share of what we get through the reservations system, it's not going to be shared with somebody else.

Okay.

And so what we've done is we've actually negotiated an area protection with InterContinental Hotels so that they won't locate any other hotels in Downtown for a five-year period.

Okay and one more thing I was going to ask you -- when you go to do some of this work, in all of your properties you're doing a lot of stuff -- what's happening to you with regard to construction costs and how can you compensate for the (inaudible), for example?

Well you know we're not doing any heavy duty construction. Most of what we do is renovation and yes, we've seen an increase in the goods that we're buying just because there's so much demand for them. But it's less than, I would have to say between a 5 and 10% increase in the last 18 months so it's not a huge number and as I say, we're not anticipating doing any ground up construction. That's not what we do. So we won't be taking that kind of construction risk.

So it's not too bad as far as you're concerned?

No. It really hasn't been a big factor. The energy cost has been a bigger factor.

Yes, you mentioned that earlier so I wasn't going to repeat it. I assume labor so far isn't --?

No, labor's behaving itself so far, we're doing okay there.

Alright. Keep up the good work.

Alright, thank you.

At this time there are no further questions. I would like to turn the call back over to management for any additional or closing comments.

I'd just like to thank everybody for participating and we look forward to a good fourth quarter and we will be giving FFO guidance for 2006 during our next call. So thank you and we'll talk to you all in three months.

That does conclude today's teleconference. Again, thank you for your participation. You may disconnect at this time.