Sotherly Hotels Inc (SOHO) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the MHI Hospitality Corporation First Quarter 2006 Earnings Conference Call. Today's call is been recorded. At this time, all participants are in a listen-only-mode. Following the presentation we will conduct a question and answer session, instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded.

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

Good morning everyone and thanks for joining us for MHI Hospitality Corporation's first quarter conference call. If you did not receive a copy of the earnings release this morning, 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 more 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 www.mhihospitality.com in section entitled webcast and presentations.

At this time, management would like to inform you that certain statements made during this 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 expectation 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 statements.

I would now like to introduce the members of management with us today. Joining us is Drew Sims, Chief Executive Officer, and Bill Zaiser, Chief Financial Officer, as well as David Folsom, Chief Operating Officer.

And having said all of that, I would now like to turn the call over to Drew for his opening remarks. Please go ahead sir.

Thank you, Georganne. Good morning everyone and thank you for listening in to our first quarter 2006 call. I will begin by talking about what we are seeing as far as our current industry trends as they relate to our portfolio. I will then turn the call over to Bill Zaiser, our CFO who will go over our financial results for the quarter. Dave Folsom will then go through an update of our properties, and I will finish up with the discussion on our guidance for the reminder of 2006. Then we will open the call up for questions.

Our strong first quarter results were positively impacted by the continued strength in the lodging industry and particularly in our core markets. The current dynamics contributing to this strength include the limited supply growth of hotel rooms in the US which is flat at an increase of only 0.1%, and some analysts forecast supply growth of less than 2% for [inaudible - background noise] five years.

In comparison with the industry averages of RevPAR growth of 8 to 10% for the quarter, our portfolio outperformed dramatically registering a 14.6% increase in RevPAR which was predominately attributable to fantastic 19.5% growth in ADR. First quarter of 2006 over 2005 room sales were up 39%.

I'll now turn the call over to our CFO, Bill Zaiser.

Thank you, Drew. For the quarter, FFO totaled $1.46 million, or $0.14 a share. This is a 75% increase over the $0.08 a share we reported for the first quarter of 2005 and is primarily attributable to our acquisition of Jacksonville and the repositioning of the properties in Laurel and Philadelphia. Quarter-over-quarter we increased our total assets by approximately 20%. The company's consolidated total revenues were 5.9 million, an increase of 38% over last year's first quarter with total operating expenses of 15 million. The consolidated net income for the quarter was approximately $143,000, which is $0.02 a share.

For the first quarter our overall portfolio RevPAR was $70.59, a 14.6% increase over the first quarter of 2005. The RevPAR growth was primarily attributable to our robust 19.5 average daily room rate increase during the quarter, which brought it to a total of $110.19. We recently announced our second quarter cash dividend of $0.17 a share which equates to an annualized dividend of $0.68 a share, and an effective yield of 7.5% at a stock price of $9.

At quarter end we had $4.9 million in cash and cash equivalents, of which approximately 3.7 million is reserved for capital improvements and other expenses. Yesterday we announced the expansion of our line of credit from 23 million to 60 million with an additional $15 million accordion, and we currently have 6.2 million outstanding. We are excited about the additional flexibility and liquidity this expansion provides for us, in addition to the support we have received from our banking group. Our total debt to total assets is 40%, which is substantially below our peer group average of 52.4%.

At this time, I would like to turn it over to Dave Folsom, our Chief Operating Officer.

Thank you, Bill. Now, I would like to update everyone on our properties operating performance. In general we still see evidence of our ability to increase daily rates in most of our properties and we believe this mirrors consistently with trends experienced nationally in the lodging sector, as Drew mentioned in his opening remarks. On the occupancy side of the equation the first quarter is usually a slow period for most of the hotels in our portfolio and our properties generally performed in line with our budget estimates for this period.

Of note though, in 2006 the Easter holiday weekend occurred in the second quarter, while last year in 2005 our properties benefited economically from Easter falling in the first quarter. This is reflected in our properties performance, but not withstanding we still believe we saw improvement over the previous year's first quarter, as our financial results evidence.

To illustrate some of these trends, first at our Raleigh Holiday Inn property in Brownstone, our average rates for the first three months either reached or exceeded $83 per room, which is ahead of our budget and is greater than our rate figures for the same period in 2004 and 2005.

To demonstrate how strong the rate pressure is at this property, each month's ADR in the first quarter either equaled or exceeded every month's ADR in 2005. Our GOP margins at this asset are ahead of our budget for the period and ahead of the same period in 2005. Specifically ADR increased 6.2% over the prior year's first quarter and RevPAR decreased 1.3% from the quarter '05. Room sales were up 1.3% from the comparable period. Our NOI at the Raleigh property for the quarter increased 32.5% from the previous year.

Our Williamsburg, Virginian Holiday Inn continues to participate in a weak market in the mid-scale hotel segment. Although, there may be opportunities for certain unique assets in the Williamsburg market, we have as we disclosed previously, decide to sell this hotel and redeploy our capital elsewhere. We would like to maintain a presence in this market, but we find the buying opportunities very limited. Operationally, there is very little rate pressure in this market, as even the upscale brands continue to discount room nights and we find at the same time this hotel competing with limited service hotels.

Occupancy, which sees its lowest level in Williamsburg during this period, was well below our estimates. We have seen multiple parties interested in acquiring the asset with a verity of lodging or alternative uses considered for the property. Specifically, occupancy decreased 15.5%, RevPAR decreased 24.7%, and ADR decreased 10.9% for this hotel. NOI had an overall decrease of 46.7% from the same period last year.

In Philadelphia and our Airport Hilton, the largest asset in our portfolio, we continue to see outstanding performance, which we attributed to the strength of the local market, the position in the hotel and our renovation efforts.Our occupancy RevPAR and ADR are all in line with or exceeding our budget and are well ahead at 2005 numbers for the same period.

For example, in 2005 for the first quarter, RevPAR never exceeded $75, but already in 2006 we are seeing RevPAR close to our exceeding $85 for the two of the three months in the first quarter. Specifically, ADR increased 17.6% from the first quarter of '05, RevPAR increased 9.8% from the last year's first quarter, and room sales increased 9.8%. Our NOI for the quarter increased 16.4% from the comparable period.

Our Hilton DeSoto property in Savannah, Georgia continues to be one of our strongest performers. The hotel's GOP margins outperform on average the rest of our portfolio and have done so for sometime. The market in Savannah remains strong and our ADR reflect this. In the first quarter, we saw on a month-to-month basis, ADR figures that outperformed our budget and outperformed the previous two years similar periods. Our RevPAR is head of budget and it's also ahead of 2004 and 2005, which indicates strong and stable occupancy for this asset.

The Savannah market continues to see growth from a demographic and economic standpoint, as we continue to see development in the region including new hotel inventory that has been placed into service and is forecasted to come on line in the near feature. The market has appeared to absorb this inventory as evidenced by our hotel's continued strong performance. Specifically in Savannah, ADR increased 9.5% from the previous year, RevPAR increased 5% from Q1 last year, and room sales were up 5%. Our NOI for the quarter saw a slight decrease of 6.8% over the last year's first quarter.

Our Wilmington, North Caroline Hilton continues to perform well. Our occupancy, ADR and RevPAR figures have generally outperformed our budgets and remained above 2005 levels for the same period. ADR increased 18% from the previous year, RevPAR increased 14.9% from the previous year, and room sales were up 14.9% from Q1 '05. Our NOI for the quarter increased 292% of this property from Q1 last year.

In Laurel, Maryland we continue to see the benefits, reap the benefits of our acquisition, renovation, and repositioning efforts at the Holiday Inn. Our GOP and expense margins are all tracking within our budgeted figures, occupancy is beginning to rebound as we had anticipated and our rate is running ahead of budget and well ahead of 2005. For example, each month in the first quarter saw rates above $90 at our Maryland property, while in 2005 rates on average were below 70 bucks for the same period. As we proceed into the more busy months of the year, we expect occupancy to continue to expand and as we continue to shift the guest profile and pursue group business, we expect this property to continue its strong performance.

With our renovations, rebranding to a Holiday Inn and opening of the Outback Steakhouse completed, we have witnessed solid RevPAR growth of 14.3% and outstanding ADR growth of 31.5% quarter-over-quarter at this property.

In Jacksonville, Florida we recently, as you saw from our previous press releases, have reflagged the Hilton to a Crowne Plaza effective April 1. This strategic decision centered on the advantages licensing agreement we achieved with Intercontinental Hotels Group, which gives us certain exclusives rights in the market. Furthermore, we felt that continuing with the Hilton flag would be somewhat brand dilutive, as we anticipate considerable amount of Hilton product will enter the market in the coming years.

The property is performing in line with our expectations, and as the market digest the new flag we believe that the hotel's performance will continue to trend the budget and be ahead of last year's figures. Our $3 million TIP on the assets will be completed by year end. Currently ADR is $126.87, occupancy is 72.3%, and RevPAR is $91.69 for the quarter at this property.

Finally, we continue to be excited about our pending condo hotel investment in Hollywood, Florida, know as the Shell Island Resort. The Hollywood market just north of Miami and south of Fort Lauderdale is a very attractive market that it's undergoing significant changes, older hotel assets have been torn down and replaced with residential condos. Furthermore, the City of Hollywood recently placed a moratorium on condo hotel development, other than three projects already approved including the project in which we are involved. The developer of the project [MCC Centrum] has contracts to sell approximately 200 of the 309 units in the condo hotel, which is the assets that concerns MHI.

As we have mentioned on our previous calls and in previous press releases, we are under contract to purchase the common space of the redeveloped condo hotel. We are working on pre-opening ramp up activities including obtaining a license for the national brand for the hotel. Subject to MCC's completion of the renovations to the hotel, we plan to open in the fourth quarter of 2006.

Now, I will turn it back to Drew.

Thank you, 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 $0.95 to $1.05 and earnings per share will be in the range of $0.56 to $0.65.

For the second quarter of 2006, we are expecting to report FFO per share in the range of $0.27 to $0.32. Included in our guidance, we are assuming total sales will exceed $67 million, which assumes a continuation in the lodging recovery trends through 2006. Our guidance also assumes the Hollywood project opens at the end of the year and an additional acquisition during the year will contribute the sum total of $0.05 per share to full year FFO.

We are quite pleased with this quarter's performance and we remain optimistic that we will see continued organic growth from our portfolio. In the first quarter we saw our first opportunity to show quarter-to-quarter comparables as a public company and we believe the results are impressive. RevPAR increased 14.6%, total sales increased 38.6%, FFO increased 75%, net income increased 67.1%, and total assets grew by 20%. That said, as prior year comparables become more difficult, we anticipate a slowdown in the exponential growth we witnessed in the first quarter.

With cap rates at an all-time low and see any competition for deals, we remain focused on our disciplined strategy to underwrite and make offers on deals that meet our investment criterion of a 10% to 14% cash-on-cash stabilized yield.

Our acquisition efforts remained intent and in the first quarter we made offers on hotels in Atlanta, Miami and Louisville. We believe that the hotel training market may start to slowdown a bit towards the end of the year, given rising interest rates and its impact on the overall economy. We remain mildly frustrated that our growth rate and acquisitions has not been higher.

However, 20% increase in total assets over the same period of 2005 is respectable. We have positioned the company for future growth by expanding our line of credit and by increasing our staffing with the hiring of a Chief Operating Officer, all in anticipation of a sea change in the acquisition market. Right now, we can afford to be selective as we evaluate transactions given our internal growth component.

And with that, I would like to open up the call for questions.

[OPERATOR INSTRUCTIONS]

And we will take our first question comes from David Loeb with Robert W. Baird.

Hi, Drew, just a just a follow up on the acquisition market. Did I hear you right that you made offers in Atlanta, Miami, and St. Louis?

Louisville.

Oh, Louisville, okay.

Yes, David good morning.

Good morning. And, I gathered what you are telling is this you are unsuccessful in those?

We were unsuccessful and, you know, again came down to price and, you know, in our opinion it overheated but we were close but no cigar.

Can you give us a little bit of feel for what else is in the pipeline?

We don't have anything announced, so I don't think I can just talk about it right now.

I guess, what I am looking for is, you know, the quantity of things that you are looking at, are you looking at another you know, three hotels, t10 hotels, not that you necessarily bid on all those, but just to get an ideal or feel for --?

You know probably in a quarter we look at about, I will say 30 properties, and I mean, it's not a matter of us not having access to the market, we've got good relationships with all the major brokerage outfits. But, you know, in almost every instance, and I guess we've probably made, I don't know, 10 or 15 offers in the last year that are been rejected on price.

We just have been unable to compete with price, given, I guess the underwriting criterion that some of the other buyers. We are just, , we feel like people are paying too much for these assets.

Well, I have to tell you as frustrating as it must be for you do not be able to put that capital to work, your discipline in that is definitely commendable. I think most investors will probably agree that it's better to be underinvested than to overpay?

Okay, I thank you for that.

No problem. If you go back to the Hollywood acquisition, what's the capital commitment for that and how much will that acquisition be.

Capital commitment for that project all in is about $3 million.

Great. And, any -- can you give us a little bit of idea about when that will stabilize, what do you expect the cash flow to you will be.

I can't, I'd love to give you that information, but I can't give it out, I am sorry.

Okay. And final question on Hollywood, on everything, do you have any exposure to the developer's sales process. In other word, if any of those 200 units under contract fall through or its difficulty selling the other 190, does that affect your investment profile once you close?

Just a quick correction, there is 309 units.

309.

They've got approximately 200 contracts that have gone through recision and have got a significant deposit. Now, if they were to fall out, we have a backup and that is that the developer will provide us with 240 units of inventory minimal given certain benchmark dates regardless of whether sold or not.

In other words, we would take it out of his new inventory, so that we would have his units we would be putting in the rental program as opposed to the individual unit owner units.

So, regardless of who owns the units, you will be renting 309 hotel rooms?

We will be renting 240 to begin with.

240, okay.

Right, and that ramps up over time.

Okay. So you will have essentially, most to a full hotel over time to be able to rent. So, your cut from the rental pool should be relatively unchanged regardless of whether he sells the remaining 109 or closes the first 200?

That's right.

Okay, great. Very helpful. Thank you.

We'll take our next question from Charlie Place with Ferris Baker Watts.

Good morning.

Good morning Charles.

One of the things that I wanted to get a better understanding on was the decline in occupancy quarter-over-quarter, can you help me understand that better? I mean, there wasn't a significant number rooms out of service here in the first quarter, so which markets kind of had the declining occupancy you know, relative to last year?

Well, it's really an overall strategy that we implemented I think to change our customer base and move out a lot of the lower rated business that we had and trying to replace it with transient high rate business. And so, what you are seeing is a significant increased in rate and a slight decrease in occupancy.

Let me just give you a for instance - and then in addition to that for instance, in Laurel where we had the inauguration, a special situation that comes every four years, it's a pretty tough comparable so we - saw some decrease in the occupancy in Laurel because in January, we had two weeks where we were completely full last year and this year more typically we were running about 50% or 60% occupancy.

So, you've got a couple of tough comparables, that and the Super Bowl and some other things, but more importantly, I think it's related to our strategy to try to drive rate in this very, very, the market that we are in right now will allow us, we have great pricing power. And so, for instance, in Savannah, for years we have taken the Gulfstream business and the Flight Services business, where the pilots come in to retrain and it's relatively low rated business.

We pushed that out the door. We essentially, you know, raised their rate $25 and said if you want a big room, you are going to have to pay a higher rate and of course they downgraded in the type of hotel that they're in and they moved out. Similar in Philadelphia, we now have no airline business in the hotel at all and that's the first time in 12 years we have been in that situation.

And we quite frankly don't see [inaudible - technical difficulty] though instead of taking rooms at $49 we are not doing that anymore, we are, , we don't have to do that anymore. So, you are seeing a slight decrease in the occupancy rate, but we are -- in terms of yield, we've obviously made it up, I mean we are...

Yes.

I think that it's showing that we have got the right strategy.

Right. In the - that the G&A expense increase, is there anything in there besides, we got an increase in headcount and in compensation costs. Any, -- how does the Sarbanes-Oxley fees if they were in there, you know, can you give a little bit of color on the G&A breakdown year-over-year?

Let me give you some color. Number one, our staff, the entire staff including me and everybody else took a 4% raise this year that was it.

Yes.

And so, there is no significant increase in the salaries related to, you know, same person like ours. But we didn't take any significant increase in dollars.

Yes.

We did, we have added Dave Folsom, so obviously, so that's, significant increase there, but Bill you might want to speak to the Sarbanes-Oxley compliance?

Yes. One other thing just for a comparison with the G&A, [Tony Domalski] who is on my staff, he's the Chief Accounting Officer; he was not on board in the first quarter last year. So his salary and Dave's are both new to the quarter.

Yes.

As far as Sarbanes-Oxley, there are no - the expenses for the accounting expenses just in general have run approximately at budget, at what we had budgeted, they are probably a little more in the first quarter then they were last year, that just is really just a shift.

I am sorry, to interrupt you Bill. Is the rate that you had in the first quarter here, is that a good run rate for the rest of the year?

No that's high. That's what I am trying - on the accounting side, for example, last year all the taxes and everything wound up being in the third quarter - really in the third quarter, because we did an extension to file. This year everything was completed by March 31.

So, as a result we did have the - all of the fees that were spread out in the first through the third quarters all round up in the first quarter this time. So I think you will actually see the G&A number go down.

Okay. If I am looking at, see here is 790 is 650 to 700 a reasonable --?

Yes, I mean, I think 650 would be very safe.

Okay, thank you for that. And Drew, I don't want to read too much into this, increasing your line of credit, do you think that -- I mean were there hotel opportunities that, that the seller was, that maybe was a little bit higher than your available cash on your balance sheet, and the seller was a little bit hesitant to commit to you as a buyer. That now with the expanded line of credit you now are - you feel you are on a better position to negotiate with maybe, , some attractive hotel properties that you weren't before?

That really hadn't been an issue. Charlie, I think that the fact that we are a public company, we actually get moved to the front of the line on a lot of these opportunities. We just think, we think there is going to be opportunities later this year; we want to be teed up and ready to go.

Our original strategy was to use the $23 million line, part of that line as our equity into deals, and so, we would, so maybe that represents 25% of project costs, then we would go out and get a permanent loan for the other 75%.

Okay.

Now it's one stop shopping, we can just write a check for the whole project. So, essentially we have about $60 million or the capacity to write checks for deals.

Okay. And when we you say that your FFO guidance for '06 includes around $0.05 of from an acquisition, is that dependent upon, in your modeling, what quarter that occurs in?

Well the way we had it set up was we had a couple of pennies coming from Hollywood and probably $0.03 coming from some other deal that we hadn't identified yet and all of that showing up in the fourth quarter.

Okay, great. Okay, that was - those were my questions. Thank you very much.

Okay.

[OPERATOR INSTRUCTIONS]

We will take our next question from Carol Crum with Hilliard Lyons.

Good morning.

Good morning.

I was listening earlier and you talked about making offers in Atlanta, Miami and Volvo, Volvo seems to be a new part of the country for you all to make offers and as most of your company, your facilities are on the Coast. Are you looking in the new market now or where are you looking at - look for properties?

Our main focus is the Atlantic States and the Southeast.

Okay.

And - but we seem to be drawn to the Coast, but that's not a - that's usually just as a result of the opportunities not by any mandate that we have.

Okay. So if you see good opportunities out where you are going to go for it?

Well, yes, I mean we are not real thrilled about the Midwest, trying not to spend a lot of time up in the Midwest making offers up there just because we are concerned about the overall economy in that area of the country.

Okay, that makes sense. Thank you.

All right.

[OPERATOR INSTRUCTIONS]

We will take our next question from Jerry Kahn with William Harris Investors.

Good morning and congratulations on the good numbers.

Thank you.

I was curious, are you running into extra costs over and above budget in doing your refurbishing or what not with - I've heard a lot of talk about increasing offer to labor and material and what not?

Well, I mean last year we came in at budget on the major projects that we had going on in Philadelphia, Laurel and then the minor project we had going on in Williamsburg. This year we are currently working on the Jacksonville project. Most of that expenditure is related to the front door renovation and exterior and we are seeing a little bit of expense creep there, but we are still within budget. You know, we don't have any construction risk component out, really hanging out there this year right now. But, you know, that works both ways.

And we are also seeing that the new construction costs are increasing at a very high rate, which is causing a lot of the new projects that were on the drawing board, the new hotel projects, they are going back and they are either not underwriting or there are just not qualifying for loans or it causes some significant problems with, with the new bill. So that's a good thing for us because it's going to hold down new supply in the markets that we operate in.

I had another question, which has to do with NOIs. Philadelphia had gangbuster numbers and NOI was up quite a bit, but it didn't seem particularly high at 16, roughly 16% compared to those numbers, and then Savannah. I think you said, if I got it right, I think you said NOI was down?

Well let me talk about Philadelphia first...

And even though...

And let Dave talk about Savannah. Philadelphia we had our final Hilton inspection at the end of the quarter and we had to - which was related to the product improvement plan when it was done a year before, they come in and do a final inspection.

And so all of T's had to be crossed and the I's dotted and we'd spent a fairly significant amount of money, trying to get, you know, trying to get the hotel with the final push to get the product improvement plan completed. And, I would say we probably spent - Bill you can help me here $150,000 of which it could not be put on the balance sheet and that is we put on the income statement.

I got you.

So...

I mean you probably would have seen an NOI, possibly even in the 25% range.

Okay. That is making more sense to me, I just wondered why was those [inaudible]?

Yes, that was the one. And then as far as Savannah goes, in Savannah I mean, I understand your question about, the marginal performance of the hotel is always good. It doesn't seem that the -- that the NOI numbers.

I can tell you what a big component of it is Jerry, that is, we use a of lot of natural gas and we have seen the price of the natural gas in that market go up almost 50% in a year. So, our energy cost is through the roof.

Yes, let me give you some margin examples on that in the first quarter all three months in Savannah, our energy costs were a lot higher than we had budgeted to, you know...

I got you.

So, very high 20%, 30% above budget for our energies and that's simply because of the, you know, the natural gas equation that Drew had just mentioned, but they have trended back down in March to below our budget.

So we are hoping that we can get some relief on that as the summer months come by, but they were extremely high in January and February.

Well it's related to the heat, hotel's heated with - we actually have an alternate system there, you can either run diesel fuel or natural gas, so pick your poison, you know, I mean there is no cheap way to heat the hotel in that market.

So we are not losing a lot, the heating season is over, we are seeing it return to a more normal trend. But we got clobbered with the energy costs.

And more so than you did in other places obviously.

Yes.

Heating, is that's all you too?

I understand but that's all electric.

I got you.

The electric rates have been, have not gone up yet, although they were about to in a lot of the major markets, I know Laurel, I know that Maryland has just passed some ordinance there, that it's going to let them increase the rates, electric rates by 50%. And I heard the same things coming in Philadelphia, so we haven't seen the increase yet but we will.

Okay. Thank you.

Everyone there appears to be no further questions at this time. I will like to turn the call back over to our speakers for additional comments or closing remarks.

Well, I would like to thank everybody for joining us for our first quarter call and I look forward to talking to you in about three months.

And this does conclude today's conference call. At this time you may disconnect.