Sotherly Hotels Inc (SOHO) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by for today's MHI Hospitality Corporation second quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

I would like to turn the call over to Ms. Georganne Pulffy of the Financial Relations Board. Please go ahead, ma'am.

Thank you. Good morning, everyone, and thank you for joining us for MHI Hospitality Corporation's second quarter conference call. If you did not receive a copy of the earnings release this morning, you may access 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. We are hosting a live webcast of today's call, which you can access on the website and an audio webcast will be available for one month at www.mhihospitality.com in the section entitled webcast 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 statements.

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

And I would now like to turn the call over to Drew for his opening remarks. Please go ahead, Drew.

Thank you, Georganne. Good morning, everyone, and thank you for listening in to our second quarter 2006 call. I will start our call this morning with a discussion of some of our recent announcements and turn the call over to Bill Zaiser, our CFO, who will go over our financial results for the quarter. Dave Folsom, our COO, will then go through an update on our properties. After that, we'll open the call up for questions.

In general, the second quarter met our expectations. We continue to see rate expansion on our properties and in the hotel industry. We concur with most industry analysts and consultants who forecast continued positive expansion and rate through 2008, albeit at a slower rate. Our growth in RevPAR is due mainly to rate expansion. In the second quarter, we've been busy on several fronts, initiating the Crowne Plaza conversion and product improvement plan at our Jacksonville property, entering into a contract to sell the Williamsburg Holiday Inn and recently announcing the signed agreement to purchase the Ramada Riverfront Inn, a waterfront hotel in the Louisville-Kentucky market, which we are buying for $7.6 million or $40,000 per room.

In addition, we increased our credit facility to $60 million with an additional $15 million accordion feature. We also instituted a dividend reinvestment plan that became effective in June. We continue to pursue accretive acquisitions for our shareholders. Our pipeline continues to provide us a host of opportunities. During the quarter, we made several formal offers for hotels with aggregate purchase prices of $200 million. Our efforts in seeking and making offers on attractive properties represent the most extensive growth activity we have undertaken to date as a public company. We still find the acquisition market to be overheated and continue to see a tremendous amount of liquidity chasing ever lower yield spreads. We were rewarded for our efforts and we are very excited with our contract to purchase the hotel in the Louisville market.

As we have told you in the past, we are adamant about not overpaying for assets in this climate. MHI and its predecessors have been in existence for 50 years and our company has experienced the cycles that occur in the hospitality industry. We will maintain our discipline and keep our interests aligned with those of our shareholders so that, as the market turns, MHI will be positioned to be an acquirer on terms that we hope will provide consistently strong returns on invested capital.

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

Thank you, Drew. For the quarter, the company's consolidated total revenues were $18.6 million, 30% increase over the second quarter of last year, with total operating expenses of $15.5 million. Our top-line revenues continue to show solid growth, but they are not uniformly translated into comparable FFO and earnings per share growth. Increased expenses, some of which are expected to be nonrecurring, include the extinguishment of our old line of credit, the booking of tax accounting fees in the first half of the year, ongoing Sarbanes-Oxley work, increased interest expense associated with the Jacksonville acquisition, heavier-than-expected repairs and maintenance at some of our properties as well as increased corporate staffing and acquisition activity as compared to 2005. These were the causes of the shortfalls.

In aggregate, these items reduced our FFO by approximately $0.03. For the quarter, FFO totaled $3.08 million or $0.29 a share, which is the midpoint of our guidance range. The consolidated net income for the quarter was $1.1 million or approximately $0.16 a share versus $0.20 a share for 2005. Net operating income for the quarter was $3.1 million, an 18% increase over the $2.6 million reported in the second quarter of 2005.

For the six-month period ended June 30, 2006, NOI totaled $4.4 million, representing a 33% increase over the comparable period in 2005. For the second quarter, our overall portfolio RevPAR was $85.68, a 6.2% increase over the comparable period in 2005, driven by 5.4% increase in ADR during the quarter to $112.32. For the six-month period ending June 30, RevPAR was up 9.8% with ADR up 10.1% over the comparable period in 2005.

Room sales were up 28.6% over the second quarter of 2005 and are up 33% year-to-date over the comparable six-month period in '05. This marks the sixth consecutive quarter exhibiting quarter-over-quarter growth in both RevPAR and ADR. 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 approximately 7.7% at the share price of $8.90. During the quarter, we instituted a dividend reinvestment plan. Effective June 1, shareholders may elect to participate in our investors choice program through the American Stock Transfer Company - AST. On the dividend payable date, AST will directly acquire shares of stock for the stockholders who have elected to invest their dividends. Once fully implemented, we feel this plan will provide some quarterly upward pressure on our stock price by creating retail demand. Additional information about the plan is available on our newly redesigned website as well as from AST.

At quarter end, we had $5.9 million in cash and cash equivalents, of which approximately $3.5 million is reserved for capital improvements and other expenses. We recently announced the expansion of our line of credit from $23 million to $60 million and we currently have $7.6 million outstanding. We are excited about the additional flexibility and liquidity this expansion provides in addition to the support we receive from our banking group. We believe our leverage ratios are competitive to our peer group. At quarter end, our interest-bearing debt to total capitalization, which we're defining as gross market value of our properties plus any cash or other current assets, is a conservative 32.5%.

I will now turn over the call to our chief operating officer, Dave Folsom.

Thank you, Bill. Now, I'd like to update you on our operating performance on an individual property basis. In Philadelphia, at our Airport Hilton, our hotel continues to demonstrate strong performance. For the quarter, rooms sales were up 19.8%, RevPAR increased 19.8% and ADR was up 15.8% from the comparable period in 2005. This solid performance validates our strategic repositioning model. We are now reaping the rewards of the renovation of this hotel that was conducted in 2005. The Philadelphia market remains strong right now and, with the renewed license agreement with Hilton and our completed renovation, we believe this hotel should remain a strong, core asset for us for many years to come.

In Savanna, Georgia, at our DeSoto Hilton property, RevPAR decreased 5% from last year's second quarter, primarily as a result of a 9.8 decrease in occupancy, which was offset somewhat by a corresponding 5.3% increase in ADR. The decrease in RevPAR is directly related to the occurrence of Easter in the middle of April. This hotel is very group dependent in the month of April and we saw very limited group revenue for the two-week period before and after the Easter weekend.

In Wilmington, North Carolina, at our Hilton property, RevPAR increased 5.1% over the second quarter of 2005 and room sales increased 5.1% as well. Year to date, RevPAR is up 8.7% at this property over the comparable six-month period in 2005. It is important to note that, although strong, we believe these performance figures at Wilmington will improve. The Wilmington Hilton is nearing the end of its license agreement with Hilton Hotels and will benefit, much like our Philadelphia Hilton with an extensive renovation. We are currently pursuing strategic plans to this end and will commence with formal design and renovation at the end of 2006. The renovation at the Wilmington Hilton will last approximately 12 months and we should see only moderate impact to guest experience during this period.

In Jacksonville, Florida during the quarter we completed the rebranding of the Jacksonville Hilton property to a Crowne Plaza brand. We have received very attractive terms from Crowne Plaza with this franchise and we think it will ultimately benefit us. The second quarter, though, saw a reduction in transient guest occupancy as the brand change went into full effect. The property had been a Hilton for over 10 years and it will take at least 24 months for the market to fully absorb the new brand. We are also in the midst of renovating the lobby entry and the front of the building to enhance the hotel's sense of arrival.

Unfortunately, the construction activity presents a negative image to the traveling public. Occupancy of this property was down 16% over last year's second quarter. ADR was flat and, as a result, RevPAR was also down 16%. We believe these are unwelcomed, but unavoidable short-term results due to the brand change and the renovations.

In Laurel, Maryland, at our Holiday Inn property, we continue to find the Holiday Inn and Laurel to be our shining star with RevPAR growth of 57.4% driven by tremendous ADR growth of 22.7% as well as a rise in occupancy, quarter over quarter, of 28.3%. This property, like the Philadelphia Hilton, validates our strategic model. We believe that we should reach full stabilization at this property by the end of the year.

In Raleigh, North Carolina, at our Holiday Inn property, RevPAR increased 13.5% over the prior year second quarter with a corresponding 10.3% increase in occupancy. Gross operating margin were 28.2% for the quarter, up over both the second quarter of '05 and for budget for '06. Raleigh continues to be a long-term winner for our company. The barriers to entry in the market where this hotel is located are many and we consistently receive good performance from the hotel in rate, occupancy and in the operational management of the hotel.

In Williamsburg, Virginia, during the quarter, we announced a signed agreement for the sale of our Williamsburg Holiday Inn for a price of $4.75 million. Subject to customary conditions, we anticipate closing this transaction in the third quarter. We will deploy the proceeds for the sale into future projects via a 1031 like-kind exchange. Williamsburg is a distressed market and as we pursue larger full service hotels in growth areas, neither this hotel nor the market fits the long-term strategy for our company.

In Hollywood, Florida, at our hotel condominium conversion project, subject to the completion of the developers renovations, we are on track to open the first phase late in the fourth quarter of 2006. We are in close negotiations to rebrand this property with a major flag. The 310-room hotel will be part of a large project to be named the Sian Resort, which will include many amenities, such as a beach club, restaurants, a residential component and a planned high rise hotel where we have retained a right of first offer for the common space.

In the Louisville market, we recently entered into a contract to purchase the Waterfront Ramada Inn located across the river in Jeffersonville, Indiana. The hotel has unimpeded views of the Louisville skyline and is in close proximity to the two major bridges that lead into downtown Louisville. We've purchased the hotel at what we consider to be an attractive price of $7.6 million. We intend, in keeping with our strategy, to make extensive renovations to the property, up-brand it and install new management. The hotel includes a 20,000 square foot semi-freestanding building that will house three to four restaurant tenants once the repositioning phase is complete. We hope to achieve the same results in Louisville that we have witnessed at our Laurel property. We hope to close on this asset at the end of the third quarter and will spend the following 12 months in renovation.

Thank you, Dave. The second quarter was solid with FFO at $0.29. And but for some extraordinary one-time expenses, we would have made $0.31. In short, our hotels are performing at or above plan. We are reaffirming our previous full year 2006 guidance and anticipate that RevPAR growth will be in the range of 5% to 8%. We also expect that 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 third quarter, we are expecting to report FFO per share in the range of $0.22 to $0.28, assuming no significant interruptions due to hurricane activity and a continuation in the lodging recovery trends through the end of the year.

With the Louisville and Hollywood closings, we will meet our planned acquisition targets for 2006, adding approximately 400 rooms to our rental inventory. We will, however, continue to seek out additional accretive acquisitions that will allow us to exceed this goal.

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

Thank you, sir.

[OPERATOR INSTRUCTIONS]

And we'll go first to Tony Howard with Hilliard Lyons.

Good morning, everyone.

Good morning, Tony.

Several questions. Indirect operating expenses were significant. Can you kind of go over what some of things that we're driving at and also if you can kind of give guidance as far as where you expect that line item to go.

Bill, I'm going to defer to you, if you don't mind.

All right. Okay. The indirect operating - but that was some of what I was referring to in - when I was speaking. Basically, the indirect expenses are those that aren't specific departmental expenses. They will not - they don't include the interest, but they would include things like energy, repairs and maintenance, franchise fees, sales and marketing. Those would all appear in that indirect number. And as I had mentioned in my section, we did run higher-than-expected repairs and maintenance at a few properties for the quarter. I think, in terms of an annualized number, we're showing, for the first six months in the indirect column, $12.6 million. I expect that will decline somewhat in the second half of the year because, generally speaking, our repairs and maintenance occur when the rooms are available and, for a lot of the properties, the periods, particularly in the early part of the fall, will be fairly full so that we won't be able to access the rooms.

Okay. Second question is the last several quarters you've had a tax benefit, whereas this quarter you had a tax provision. What happened there?

We made money at the TRS level. The tax benefit or the tax - where you have a tax paid would be on the net income of the TRS. And in this - in the second quarter and I believe also in the second quarter last year, we had a tax. Basically, it wipes out the tax benefit from the first quarter. It was a little more, I think, this time.

Okay.

It doesn't represent cash going out. It simply reflects a reduction in the tax benefit on the balance sheet.

Bill, what would our year end tax accrual that we've got or estimate for the year end would be? It's not very significant, right?

It's probably 250,000. And that, again, will not be cash going out. It will simply be a reduction of the tax benefit that's sitting on the balance sheet ...

Okay.

... from the original IPO period and last year.

Okay. Final question. Obviously, we have some interests in the Louisville Ramada acquisition. David, that hotel has gone through several owners in the past and I believe that with the price you're paying, it's almost, quite significantly from what the prior buyer paid for. I was wondering if you can give a little bit more details why you feel confident that you can turn that around?

Well, I think, from a very general perspective over the last several years, you've seen asset prices increase dramatically. And I don't think this one is much different than that, if you look at it market-wide. But in particular, with this asset, the way we underwrote this property was first, we examined very closely what they're net operating income is and the components thereof. And just so you understand that there is an appraisal that's actually dated on this property. And as we all know, most appraisers are somewhat conservative in their basis. And the appraisal is very close to the amount that we're paying for the hotel about two years later.

The - but at the net operating income level, we underwrote this specifically to make an accretive acquisition for our shareholders. And I believe, in so doing, that the price of $7.6 million made sense for - at the asset level. But more importantly, just like in Philadelphia and at Laurel and the other assets we undertake is we price the deal not so much because we want to keep it a Ramada and keep running it almost like a limited service hotel, but we've priced it and then, in conjunction with that, estimated what our renovations will cost and the 12-year renovation cycle and where we think we will be able to place the hotel in the market subsequent to that.

That's really the key for us. And I understand your point that it seems like the price went up. But I think in a couple of years, we'll be able to see that, once renovated, this is going to provide a very nice stream of cash flow to the shareholders at both the price and the capital that we're going to place into it.

And I'd like to jump in a little bit. I think the view from, I guess, 60,000 feet would be that we're buying this asset for $40,000 a key. We're getting an entire city block of riverfront property. We're - also included in that is a 20,000 square-foot semi-freestanding building that currently has two restaurant tenants in it and has room for two more. We think that building by itself - it's currently - that building currently is generating about $300,000 in net rent.

If you underwrite that at an 8% level or even a 10% level and deduct that from the price that we're paying for the hotel asset, we're coming in at less than $30,000 per key on an acquisition side. Now, we think that we can renovate this hotel, put a major brand on it that, I think, everyone will be happy with - and we can't disclose what that is right now - and relaunch that into the marketplace at $80,000 to $90,000 a key. And you can't touch the acquisition of real estate along with the hard construction cost and end up with a 10-story, 190-unit hotel for anywhere close to less than $125,000 to $150,000 a key in a market like Louisville. And so, it's very similar to the Laurel deal that we did last year in that our basis is going to be at a fraction of replacement cost and we think that that gives us a lot of room to grow the value of the asset for the benefit of the shareholders.

The only think I'll add to that, Tony, is, in our due diligence, it's our understanding - as an example, on a total project basis, Drew just said, will be in at about $80,000 all in. The 21-seat boutique hotel that opened in downtown Louisville was in excess of about $270,000 to build. And the courtyard - the large property - was in excess of $225,000 to build. So, we have a definite basis advantage in the property and I think you'll see it perform and provide some value to the shareholders similar to what we saw in Laurel.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]

Next, to Charlie Place with Ferris, Baker Watts.

Good morning.

Hey, Charlie.

Real quickly, the - kind of a follow-on question. You mentioned the cost in [inaudible] the cost with your - in Louisville with renovations. What's the dollar estimate on the renovating cost of Louisville?

I think we're going to be in the range of $8 million, which, for 186 - I think we're in 188 keys - so, what's that? That's about $42,000 a key.

Okay. And you - and that's something that you would expect that would - simply asking, it looks to me like between Louisville and what's your other market that you talked about that ...

Hollywood?

Well, Wilmington, North Carolina. So, '07 for both those properties are pretty much going to be under renovations. Was that kind of how you - did I hear that right?

Yes, that's right. I mean, the scope of renovation in Wilmington will be not nearly the scope of renovation that was going to be going on in Louisville.

In Louisville.

Louisville's a semi-gut out. It's - there's just very, very expensive renovations [to] replace all the ...

How much - do you have a sense of how much Wilmington would be or how much Wilmington would be or how much have you budgeted or haven't you got that far yet?

Well, we haven't because we ordered up the product improvement plan from Hilton and we just got confirmation that we're going to be relicensed by Hilton. So, that's good news. But we don't know what the product improvement plan is yet.

Okay.

So, we're - we ordered that. We should get that in the next 30 days. We can talk to you about that, probably, on the next quarterly call and we will have priced it by then.

Okay.

But just to give you some comfort, our thought there is that we currently have - Bill, what's our loan there, about $12.5 million? Is that right? $13 ...

I'm sorry. The balance of the loan is probably about $14 million.

So, we have $14 million and it's got a pretty high interest rate on it that's fixed. It was - we're locked out from prepaying until this winter. So, we think that we can do a significant amount of renovations and not increase our debt burden with regard to the payments by a significant amount of money. So, I think we've got a good opportunity here to move the product up a couple of notches and we're seeing no rate resistance, by the way, in that location and increase our rates. And at the same time, not significantly impair our ability to add to the FFO. Now, there will be some pain next year while we're under renovation. But we don't think it's going to be a showstopper.

Okay. And Bill, just to circle back on the - what you would classify as nonrecurring expenses incurred in the second quarter here. Just a ballpark dollar amount of - Sarbanes-Oxley, I would assume, is going to be with us for awhile, but as far as the refinancing costs of the credit line, that seemed to be - then maybe - well, the other things - energy, repair, maintenance, things of that nature, I guess, are ongoing, but that's one in particular. How much - what was the dollar amount of ...

Of the ...

What you would say - view as nonrecurring.

Oh, the extinguishment of the old line was probably in the neighborhood of $70,000. The more extensive than normally budgeted repairs and maintenance probably came in closer to $150,000.

Okay.

Those are the two primary ones that I would say were increases ...

That are nonrecurring.

... in nonrecurring.

Okay. Yes, that's all I have right now. Thank you.

And at this time, there are no further questions. I would like to turn the conference back for any closing or additional comments.

Well, we'd like to think you all for listening again and we look forward to talking to you next quarter. Thank very much, everybody.

This does conclude today's conference. We do thank you for your participation. You may disconnect at this time.