Sotherly Hotels Inc (SOHO) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the MHI Hospitality Corporation's fourth quarter 2005 earnings conference call.

[Operator Instructions]

I would now like to turn the conference over to Georganne Palffy of the Financial Relations Board. Please go ahead, ma'am.

Thank you. Good morning everyone and thanks for joining us for MHI Hospitality Corporation's fourth quarter and year-end conference call. If you did not receive a copy of the earnings release, you may access it via the company's web site, 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.

We are hosting a live webcast of today's call, which you may access on the website, and an audio webcast, which will be available for one month at the company's web site in the section entitled '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 can cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in today's press release and from time to time in the Company's filings with the SEC. The Company does not undertake a duty to update any forward-looking statement.

I would now like to introduce management that is with us today. Joining us Drew Sims, Chief Executive Officer, and Bill Zaiser, Chief Financial Officer. And I would now like to turn the call over to Drew for his opening remarks. Please go ahead, sir.

Thank you, Georgeanne. Good morning, everyone and thank you for listening in on our call today. I will begin by talking about current trends we are seeing in the industry, and the impact of those trends on our portfolio. I'll then turn the call over to Bill Zaiser, our CFO, who will go over our operating results for the quarter and full year 2005. Our COO, Dave Folsom, will provide a brief overview of the individual hotels operating results, and I'll finish with a discussion of our guidance for 2006. Then we will open the call up for questions.

We continue to field the positive impact of the lodging recovery, as demonstrated by our strong operational results for the quarter, highlighted by an 11.3% increase in RevPAR, which was predominantly attributable to a 17.2% growth in ADR. Our rooms renovations in Laurel in Philadelphia were completed at the end of the third quarter, resulting in full availability of inventory for the fourth quarter. We also benefited from strong market activity.

Last quarter we told you that several of our bookings for the third quarter had been postponed or pushed to the fourth quarter due to the hurricane activity, and indeed we saw a rescheduling of the business. All of our properties performed very well, with one exception.

For the calendar year our hotels increased RevPAR by 17.4%, as compared to an industry average of 8.4%. Although the first quarter is historically our weakest from an operational standpoint, we believe our Jacksonville Hilton acquisition will mitigate some of this seasonality and the property has had a good start in 2006. We anticipate solid operating results from our portfolio or the next several quarters.

We continue to see strong competition in the acquisition environment. As cap rate for performing full-service properties that we've been looking at our training in the range of 5% to 8%, in the types of deals we look at, the main competition or repositioning opportunities comes from private money as opposed to institutions. We continue to investigate condominium hotel opportunities as a means of obtaining an interest in an operating hotel at a lower cost than the purchase of a traditional hotel. We have experience with condo Hotel structures, with our interest in Shell Island resorts, and as previously reported expect to close on the purchase of an interest in a condo Hotel in Hollywood Florida in the fourth quarter of this year.

Of course our acquisition of an interest in this project is subject to the satisfaction of a variety of conditions, and we cannot provide assurances that all those conditions will be satisfied.

As we have stated in the past, the hotel condominium conversion is one of the types of opportunities we will pursue, particularly due to the current market and costs associated with acquisitions, renovations, and new construction. We will continue to examine acquisition opportunities and will make offers where we believe we can achieve average cash on cash returns of 10 to 14%, and an internal rate of return of 20%.

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

Thank you, Drew. For the quarter, FFO totaled $2.3 million or $.22 a share. The company's consolidated total revenues were 16.6 million, with total operating expenses of 14.8 million. The consolidated net income for the quarter was .53 million, which is approximately eight cents a share.

For the fourth quarter, our total portfolio RevPAR was $66.63, an 11.3% increase over 2004 of the same properties. RevPAR growth was primarily attributable to the completion of our renovations at Laurel in Philadelphia, as well as our strong 17.2% average daily room rate increase over the comparable period in 2004. The new ADR was $106.36.

We reported FFO of $.80 per share for the full year 2005, with RevPAR up 7.4%, to $68.96, fueled by a 12.1% growth in ADR over the same period for 2004.

We recently announced our first quarter 2006 Cash dividend of $.17 a share, which equates to an annualized dividend of $.68 a share, and an effective yield of 7% at a price of $9.66 per share.

At year end we had $4.8 million in cash and cash equivalents, of which approximately 4 .3 million is reserved for capital improvements and tax escrows. We have 3.5 million drawn on our $23 million line of credit. Our total debt to growth assets is 39.0 percent, which is substantially below our peer group median of 56.6%. Drew?

Thank you, Bill. Now I'd like to introduce to you our new Chief Operating Officer, Dave Folsom, and have him update you on the operating performance of our individual properties. Dave joined our company in January and we are pleased to have someone of his caliber on our executive team. Dave will join me in the execution of our companies strategic business model, focused on accretive acquisitions and selective dispositions while spearheading the funding efforts of this growth to the commercial lending and capital markets.

Thank you, Drew. Our portfolio of hotels experienced solid gains in 2005, mirroring the continuing nationwide recovering in the lodging industry. Also in 2005, we saw dynamic growth in our Philadelphia and Laurel hotels predominantly due to the completion of our renovation and repositioning efforts and due to the strong markets in which these properties are located. With the exception of our hotel in Williamsburg Virginia, all of our markets demonstrated solid gains.

I would like to review now by property highlights of our hotels performance in Q4 and for the year in 2005.

The Holiday Inn Brownstone in Raleigh, North Carolina remains a very stable performer for us. ADR increased 10.5% over the prior year's fourth quarter, and 7% for the year. RevPAR increased 6.2% from the previous year and rim sales were up 5.9% from the previous year.

Total sales for Brownstone were up 4.4% for the quarter and 3.9% for the year. Williamsburg Virginia continues to be a challenging market for us due to an abundance of traditional hotel product, and time-share units. For our Holiday Inn in Williamsburg, RevPAR of $38.64 and in ADR of $80.73, were down 3.6% and up 3.1% respectively for the year. As we have previously disclosed, this property is being marketed for sale by Jones Lang LaSalle and we have seen recent interest in the property.

The Philadelphia Airport Hilton had a very good year in 2005. We completed renovations of slightly over $3 million and immediately saw strong gains in the hotel's performance.

ADR increased 24.2% from the previous year, RevPAR was up 15.8% from the previous year, and room sales increased 15.5% from the previous year. Total sales for the Philadelphia Airport Hilton were up 19.7% for the quarter, and 14% for the year.

In Savannah, Georgia, our De Soto Hilton property continues to be one of our strongest performers due to occupancy rates that ran approximately 10 percentage points ahead of the rest of our portfolio. Even with such strong occupancy, the hotel showed improvements as evidenced by ADR increasing 3.6% from the previous year, RevPAR increasing 5.4% from the previous year and room sales being up 5.1% from the previous year. For the De Soto Hilton in Savanna, total sales were up 4.2% for the quarter, and 6.1% for the year.

In Wilmington, North Carolina, at our Hilton Riverside Hotel, ADR was up 4.0% from the previous year and RevPAR increased 11.8%. Room sales for the year were up 11.5% from the previous year and total sales were up over 20% for the quarter at 11.4% for the year.

In December 2004, we purchased what was the Best Western Hotel in Laurel, Maryland, located along the Baltimore/Washington, DC corridor. We committed over $4.4 million in capital to renovations to this property, making substantial capital improvements to a property suffering from deferred maintenance and overdue capital expenditures. Having completed our renovations, rebranding the property to a Holiday Inn, and attracting in Outback Steakhouse franchise within the hotel, which opened in November 2005, we have witnessed solid ADR fourth quarter growth of 51.2% over the same period in 2004. For the year, the property experienced a 23% growth in ADR.

We were a little disappointed that the occupancy did not rebound more quickly at the end of the year as we completed our renovations. However, the fourth quarter was a slow period in that market, and we do solid bookings for the end of the first quarter of 06 and on into the second quarter thanks to the effort of our sales and marketing team. The Outback Steakhouse franchise is performing very well and is a compelling addition to the property.

In July 2005, we also purchased the Hilton in Jacksonville, Florida on the south bank of the St. Johns River. We began a $3 million capital improvement program in the beginning of January '06, and we anticipate this will be completed by the end of the third quarter.

We plan to rebrand the property to a Crown Plaza in April of '06. As all the guest rooms were renovated last year prior to our acquisition, our improvements are focused on the front facade in the public space. This property has already reported a strong January.

In Hollywood, Florida, as Drew mentioned earlier, we remain very excited about this condominium hotel opportunity. We anticipate the hotels' initial opening in the fourth quarter of 06, and we expect to close on our acquisition of the public space a few months prior to that subject to a variety of factors, including our ability to secure franchise for the hotel. Drew?

Thanks Dave. We are reaffirming our previous full-year 2006 guidance, and anticipate that RevPAR growth will be in the range of 5% to 8%. FFO per share will be in the range of $.95 to $1.05, a projected increase of 18% to 31% over the prior year. Earnings per share will be in the range of $.56 to $.65, a projected increase of 51% to 76% over the prior year.

For the first quarter of 2005, we are expecting to report FFO per share in the range of $.14 to $.16. Included in our guidance, we are assuming total sales will exceed $67 million for the year, based on our expectation that the recovery of the lodging industry and the growth trends experienced in 2005 continue in 2006. Included in our 2006 FFO range is a contribution of $0.05 per share attributable to new projects. Approximately one quarter of this is derived from our Hollywood project, and the balance to one identified additional acquisition that we expect to make during the year.

We are very happy with our first full year as a public company. We have acquired solid properties with Jacksonville being immediately accretive to earnings. We successfully repositioned our Philadelphia and Laurel properties, and with the renovations complete, the ramp-up in our quarterly ADR at these properties has demonstrated our ability to add value. In 2005, we paid a very attractive dividend, yielding 7% based on our initial public offering price.

As we look ahead, we feel confident in our continued ability to unlock value from our existing portfolio, in addition to acquiring accretive deals from a healthy pipeline.

I would like to reiterate that our strategy has always been disciplined with regard to our underwriting pricing and forecasting. We have access to deal flow and many acquisition opportunities, but we will not chase those deals that we feel are overpriced and from which we cannot achieve our stated minimum risk-adjusted returns. We will underwrite and make offers on those deals that meet our investment criterion of 10 to 14% cash on cash return, and we are also not in a position where we feel compelled to acquire properties at any price in order to grow. Our existing portfolio can support our attractive yet safe dividend.

Also, as we wait for the buy side demand to abate, we may be able to identify and execute on other types of lodging investments that require less of a capital outlay. We believe that we are starting to see the effect of rising interest rates on an overheated market, and that the acquisition market may begin to cool off during 2006.

Before I open it up to questions, I'd like to make one comment. An article came out this morning, by Dow Jones Newswires that had an error in it, and we wanted to make sure before we were deluged with questions about this publication's article. Specifically, in the third paragraph, they have made a comparison of $16.6 million compared to 57.9 million a year ago, and they're talking about revenue. And that is an error. They just miss read our release. Basically what it says is that we're making a comparable of 16.6 million for the quarter and 57.9 million was the annual revenue for the company. So there is just an error there and we expect that to be corrected by Dow Jones later today.

With that, I'll open it up for questions.

[Operator Instructions]

And we will go first to David Long with Robert W. Baird.

Hi guys.

Good morning, David. How are you?

Doing well, thank you. I just wanted to drill into the guidance a little bit, and do that by looking back at the occupancy change for this year. Just in hearing Dave, your review of the seven hotels, you gave some ADR numbers for the quarter, and clearly, the occupancy at Laurel and it sounds like at Raleigh it was going in the wrong direction in the fourth quarter, but it sounds like, as you mature recently completed renovations, that you may see some occupancy pickup as well as ADR. Is that a fair assumption?

This is Drew Sims. We believe that the reduced occupancy in 2005, most of which is directly attributable to the number of rooms out of inventory during off of the year, David, we had about 25,000 room nights out of inventory during the renovations in Philadelphia and Laurel. With regard to Laurel's occupancy-- I know you are new to our company and we appreciate you participating. We had-- last summer, we had a problem getting materials from our vendors. And as a result of that, we had to compact our renovations that we had planned to take eight to 10 months to accomplish into a four-month period, which required us to attack all areas of the hotel at once, which sent our guests out the door in droves. And as a result of that, our occupancy dropped significantly.

And so we're building that occupancy back at a significantly higher rate. We really have turned over the clientele in the hotel. We have different customers than we had before. And so we're building that back. But the second half of this quarter and the next quarter look extremely strong; we are getting the rate we want, we are going to get the occupancy and we believe we will be at 100% fair share in the market by the end of calendar 2006.

Well given that, Drew, with an expected occupancy pickup at those two hotels, and continued modest gains at some of the other hotels, and great pricing in a number of hotels, isn't 5% to 8% RevPAR growth pretty conservative?

I would agree with that statement.

OK. Can you give us a little bit of an idea about how an additional point or some metric on how increased RevPAR would translate to increased FFO?

Bill, do you want to tackle that one?

Well, the reason we are probably a little more conservative, we are showing a rather large increase in our FFO. For example, in Laurel, to add to Drew's statement on the occupancy percent, we are projecting by the end of '06 to be at around 69%, whereas in '05 we were at about 53%. So that's almost a 30% increase overall in the occupancy. So we are expecting that to drive the FFO.

Now as far as the RevPAR, overall, if I -- hang on one second, I can get you the number. We're projecting that the overall occupancy for the company will go up modestly. Part of it is that Jacksonville, relative to last year, will probably show a slight decline, at least in the first half of the year. But with a brand change going on, with the fact that the Super Bowl is not in Jacksonville, there are some other circumstances not related to the increase that are going to mitigate the effect of the jump at Laurel. And that's why we're a little more conservative.

And just to go a little further on that, as you look at the ADR momentum that you have from the fourth quarter, when did those comparisons get significantly harder?

I would say this quarter will be a difficult quarter for us, just because of the comparables in terms of rate. We saw a significant rate growth that most of the hotels, but for the ones that were under construction last year. So yes, it is going to get a little more difficult. Maybe this is the third year of the recovery, which is probably where we're being a little more conservative, in terms of our RevPAR projections. I'm not sure we ever addressed the question you had, if we increased RevPAR by some increment, what does that do to the FFO, but we will probably have to get back to you on that, David, because I'm not sure we have that information here at our fingertips.

OK, I guess -- and it also sounds like you've got slightly less conservative assumptions about FFO looking at properties specific factors that I can't see or don't know yet, but it does sound like your conservatism is not borne out on the RevPAR side, that you could be a bit higher than the high-end of your range on the FFO numbers. Is that fair?

We would love to exceed your expectations.

Well, it always helps when you set the expectations realistically though.

No, I think they are realistic.

OK.

I think if we grow our FFO by 20 to 30%, we are having a pretty good year.

I agree with that. It's just that looking at the moment than you're coming off of in the fourth quarter, it's hard to see that 5 to 8% is realistic, as opposed to really harshly conservative. That's all.

Well, our concern is the change in Jacksonville, the brand change in the fact that the Super Bowl had a big impact there last year, and it obviously isn't there this year.

Yes, that's as much as $.10 a ride there, Dave.

Got it, OK. That's the big thing.

If Jacksonville holds up, then we will be fine. But it may exceed our number, but we are -- we want to make sure we cover all our vices here.

OK. That's great. Thanks very much.

[Operator Instructions]

And we will go next to [Jim Phelps] with William Harris Investors.

Jim Phelps,: Hi, Drew.

Hello Jim. How are you?

OK. In trying to get a feel for where you're going with occupancy. If you took out Jacksonville, and if you took out Williamsburg, what would your occupancy be for 06?

You are going to have to give me a few minutes to figure this out so that [inaudible] top of my head.

OK then. :et me put it another way. What do you think your occupancy could be for '07, assuming there is no more acquisitions.

I'm sorry. Can you ask that question again?

What could your occupancy be for 07, once Jacksonville is stabilized or finished, and you've gotten rid of Williamsburg?

OK. Can I play the second part of my response to you? I'm going to have to figure that one out too, these are mathematical questions that common Bill, if you can't answer them, I can't answer them right off the top. I can't answer them off the top of my head, I can give you an approximate range.

OK.

I would say we are going to be in the high 60s by -- now, you are assuming that we are eliminating Williamsburg from the picture, and Jacksonville is stabilized. I would say on an annualized basis, that would -- actually, I was looking at the first quarter. The first quarter would be in the high 60s. For the year, would be in the low 70s. Somewhere in the 70 to 75% range. It's a pretty big range, but obviously are occupancy is healthy. You know, our hotels are doing very well right now.

That's a very good sign. Any feel as to when you might be able to finalize Williamsburg?

I'd love to give you that information, I can't. I can tell you that there is a lot of activity. I guess that's all I'm allowed to say right now, Jim.

OK. Thank you.

There are no further questions at this time.

Well, I'd like to thank everybody for participating and I think we had a good first year and look forward to talking to you all three months from now. Thanks very much.

That does conclude today's conference, ladies and gentlemen. Thank you for your participation and you may disconnect your lines at this time.