Sotherly Hotels Inc (SOHO) 2010 Q1 法說會逐字稿

Good morning and welcome to the MHI Hospitality Corporation first-quarter 2010 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Victoria Baker. Please go ahead.

Good morning, everyone, and thank you for joining us for MHI Hospitality Corporation's first-quarter 2010 conference call. If you did not receive a copy of the earnings release, you may access it 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.

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 the members of management with us today. Joining us are Drew Sims, Chief Executive Officer; Dave Folsom, Chief Operating Officer; and Bill Zaiser, Chief Financial Officer. I would now like to turn the call over to Drew Sims for his opening remarks.

Thank you, Vicki. Good morning, everyone, and thank you for joining us on our call today. I will address the highlights for the quarter, outline our near-term objectives, and provide some perspective on the hotel environment. Bill Zaiser, our CFO, will then provide our financial report. Following that Dave Folsom, our COO, will update us on the portfolio. Then we'll be happy to take your questions.

In the first quarter we continued to build upon a record of improving operating results. Performance for the period included year-over-year gains in room revenue, total revenue, revenue per available room, gross operating profit, gross operating profit margin, as well as nearly a 45% increase in adjusted operating income. All major operating metrics showed significant improvement.

This growing record of stronger performance is a result of the following key factors. First, the culmination in 2009 of three years of major portfolio improvements. Today our portfolio is in the best physical condition in the history of the Company.

Second, the accelerated ramp up of our most recently repositioned assets. These are our hotels in Savannah, Georgia; Louisville, Kentucky; Hampton, Virginia; and Tampa, Florida.

Third, effective cost containment strategies. We have lowered the cost structures at our hotels without sacrificing quality or service. The cost-cutting measures put in place last year have improved our GOP margins.

Fourth, aggressive sales management techniques. We have fine-tuned our customer mix to capitalize on shifting travel trends while deploying a variety of resourceful Internet-based marketing tactics which are contributing to improving fair share metrics.

We are encouraged by what appears to be the beginning of a recovery within the hotel industry this quarter, or what one research firm has called key rays of light. March 2010 was the first month the industry experienced positive RevPAR growth since the third quarter of 2007.

Our portfolio RevPAR compares very favorably with this metric. Within both the consolidated and same-store portfolios our RevPAR growth significantly outperformed the national average for the quarter. With improving occupancy levels over time we believe that average daily rates will follow.

In addition, as the employment picture brightens and GNP growth rate accelerates consumer discretionary spending should pick up which directly benefits the lodging industry. We believe our company is well positioned to benefit from improving industry fundamentals.

I want to focus now for a moment on our near-term objectives to further strengthen the Company. As communicated on the last call, with the conclusion of our portfolio improvement program last year there are no major physical plant capital needs in front of us for the next six to seven years. Within our peer group we continue to have the lowest debt per room currently at $70,000 per key. That being said, we are taking steps to improve our balance sheet.

Raising capital may permit us to pay down and extend debt maturities, increase our liquidity and restart our dividend. Based on market opportunities that may arise during the year it is our intention to raise additional capital when we can achieve the goals previously stated. In line with the conservative growth strategy, once we have achieved sufficient liquidity goals we will pursue additional acquisitions.

We believe that compelling hotel asset buying opportunities are beginning to surface -- what I would call once in a generation investments. In the latter part of this year we intend to target hotel acquisitions that fit our portfolio model, have a low basis and immediate shareholder accretion.

Before turning the call over to Bill I'd like to provide some additional perspective on the hotel environment. The industry we believe hit bottom this past winter in terms of performance and we anticipate a very soft recovery in 2010. We think the industry will experience flat RevPAR in 2010. In the first half of the year we will experience slightly negative results and slightly positive results in the second half of the year.

The positive domestic industry RevPAR in March is encouraging. All of the reduction in 2010 RevPAR will be rate driven. We believe occupancy is going to rebound slightly.

When you look at the demand side of our business it is going to stay fairly weak until 2011 and then we believe we'll start to see a significant recovery. On the supply side the industry has run through most of the projects that were started pre-2008. For the full-service, upscale and upper upscale segments the pipeline is nearly empty. We believe the industry will experience a favorable supply outlook for the next several years.

Since the lodging industry is a consumer driven business, US unemployment levels and GDP growth are among the greatest challenges we face. In addition, political issues and uncertainty regarding government regulations and mandates are creating a lack of confidence in the corporate community which is hindering employment growth and therefore lodging demand. I will now turn the call over to Bill to provide a financial update.

Thank you, Drew. In reviewing performance for the Company, the Company reported consolidated total revenue of approximately $17.5 million for the quarter ended March 31, 2010, an increase of 13% over the first quarter of 2009. RevPAR for the quarter was $63.69, up 7.1% from the same period in 2009.

The gross operating profit, or GOP, generated by our hotels was $4.4 million, up $921,000 from Q1 2010 or a 21% increase in GOP. The corresponding GOP margins improved 23.5% to 28.2% for the quarter as compared to the comparable period in 2009, an overall improvement of 470 basis points.

We reported net operating income for the first quarter of approximately $0.4 million versus a net operating loss of approximately $2 million for the first quarter of 2009. Our adjusted operating income, which measures the NOI contribution of our hotel operations, rose 44.7% to $3.4 million.

FFO, or funds from operations, were approximately $1.2 million or $0.09 a share. This compares to the approximately $1.1 million of FFO or $0.10 a share one year ago. This comparison is distorted by a large income tax benefit that we booked in Q1 of 2009. Adjusting both numbers by removing the income tax benefits the 2010 year-over-year increase in FFO was approximately $0.07 a share.

For the first quarter the Company reported a consolidated net loss of approximately $0.8 million or $0.08 a share. This compares to a consolidated net loss of approximately $0.6 million or $0.09 a share for the comparable period in 2009. During the first quarter the Company reported an unrealized gain on the value of its interest rate swap of approximately $0.4 million as compared to an unrealized gain on the value of its interest rate swap of approximately $0.2 million for the comparable period in 2009.

As of March 31, 2010 total assets were approximately $212.6 million, this includes approximately $187 million of net investment in hotel properties plus approximately $9.9 million for the Company's joint venture investment in the Crowne Plaza Hollywood Beach Resort.

Pursuant to the Company's credit facility, the methodology used to determine the value of several hotel assets that were renovated over the last two years, and the percentage of the aggregate value of the Company's hotel properties in the borrowing base used to determine the level of the borrowing available under the line changed commencing April 1, 2010. The Company is currently considering a number of alternatives to address this issue and is in discussions with lenders under its credit facility with respect to a potential amendment to the facility.

The Company has no debt with a scheduled maturity before May 2011 other than the mortgage on the Jacksonville property which matures in July of this year, but may be extended for one year subject to certain conditions. The loans coming due in 2011 are a mixture of variable and fixed-rate debt. These were locked in before the market collapse and all carry favorable terms.

On March 31 our total mortgage debt was approximately $72.6 million. Unitholder equity was $12.5 million with approximately 3.7 million limited partnership units outstanding. Shareholder equity was $40.4 million with approximately 9.5 million shares outstanding.

At December 31, 2009 the Company had approximately $3.4 million of available cash and cash equivalents, of which approximately $1 million is reserved for capital improvements and other expenses. During the quarter we also paid down our line of credit by $325,000.

The Company has approximately $75.2 million outstanding on our credit facility; the outstanding balance was deployed primarily to fund the acquisition and renovation of the Company's most recently acquired assets, the Sheraton Louisville Riverside, the Crowne Plaza Hampton Marina and the Crowne Plaza Tampa Westshore, as well as the Company's equity contribution to its joint venture with the Carlyle Group for the purchase of the Crowne Plaza Hollywood Beach Resort.

At the end of the first quarter our interest-bearing debt to total capitalization, which we define as the gross market value of our properties plus cash and other current assets, was approximately 56%, or approximately $69,700 per room.

In light of current economic conditions we are reaffirming our decision to suspend guidance for the time being and with that I'll turn the call over to Dave. Dave?

Thank you, Bill. For everyone's reference a summary of individual property performance can be viewed on our website within the Investor Relations sections at MHIHospitality.com. Overall our portfolio had an excellent first quarter.

As Drew mentioned in his opening remarks, we continue to see substantial operating improvements from our transitional properties that are emerging from renovation, capturing share and are moving to [full] stabilization. We are understandably excited about these results, as we are with our core portfolio of performing hotels which have during this down market shown margin enhancement and share increases.

Total portfolio of rooms' revenues, including our joint venture asset in Hollywood, Florida, increased approximately $2.4 million from $13.6 million in the first quarter of last year to $16.1 million in the first quarter this year an improvement of 17.8%.

Total portfolio GOP, including the joint venture property, was up 32.6% for the quarter from $5.1 million last year to $6.7 million this year. And total portfolio operating margins, including the Hollywood property, increased from 26.9% to 33.3% in the first quarter this year, an overall improvement of 640 basis points.

For the total portfolio, including our joint venture asset in Hollywood, RevPAR increased 10.2% compared to an average 7.4% loss for our competitive set properties in the quarter according to the Smith Travel Research reports.

I'm going to give you some individual asset highlights at certain of our properties. First at our Crowne Plaza Hollywood Beach Resort in Hollywood, Florida, our RevPAR for the quarter was $142.14, an increase of 24.7% over last year while the market saw a corresponding 3.1% loss for the same period.

We achieved 103% of fair share during the quarter which was the first full quarter where we have seen sustained share over 100% for this property. We are beginning to see small yet distinct signs of a market recovery in certain rate segments in the South Florida market as unexpected in-the-month for-the-month revenue pickup continues to emerge and group overflow business is returned in limited amounts. We consider this to be all good news.

At the Sheraton Louisville Riverside Hotel our RevPAR was $56.07 for the quarter, an increase of 27.1% over last year, while the market saw an increase of just 1.6%. We achieved 72.8% of fair share during the quarter and 2009 marked the first full calendar year of operations for the hotel.

Recently the Louisville Sheraton was awarded the coveted Tiffany Crystal Trophy from Starwood which made it the number one rated Sheraton in all of North America in customer satisfaction. And we're very proud of that award.

At the Hilton Wilmington Riverside in Wilmington, North Carolina we showed $66.40 in RevPAR for the quarter and achieved 169% of fair share. The market was off 11.6% while our hotel was down just 10.1%. This hotel remains the market leader and has been for some time. Wilmington's outstanding share index in this market demonstrates the beneficial impact of the recent $11 million upgrade that we made to the hotel.

In Savannah, Georgia at the Hilton DeSoto property we continue to see the results of the renovation reflected in the hotel's operating results. For the quarter RevPAR was $83.60, a 19.2% improvement over last year. The hotel finished the quarter at 94.5% of fair share while the market suffered a quarterly loss of 10.2% in RevPAR. We expect continued gains in Savannah as the market absorbs the impact of the extensive $11 million renovation we recently completed.

In summary, our properties had a breakout first quarter and are well positioned in their markets to take advantage of the nascent lodging recovery that we believe will gain momentum in the coming quarters. Our portfolio remains in the best physical condition since inception of our ownership, remains licensed with top-quality franchise awards, and has exhibited exceptional operating performance in the down market.

Other than typical recurring CapEx, our portfolio will not require extensive capital improvements in the coming years, which we believe will not be the case with other similar assets that have suffered from considerable deferred maintenance over this down market period in years prior. With that I will turn the call back over to Drew.

Thank you, Dave. We are pleased with the continuing improvements in our operating performance. The first quarter of 2010 was very strong. We are becoming more optimistic about a slow but steady recovery within our industry. With our repositioned, lean and competitive hotel platform we should be able to capitalize on the improvements taking place both within the greater economy and the hotel market.

While there remains a disconnect between the value of our assets and our current stock price we did see significant improvement in the first quarter as our stock price moved approximately 25%. And since the end of March the stock price has moved another 30%. Our stockholders who participated in the rights offering last December have seen their shares increase approximately 115% in a little over five months.

Looking ahead over the next several quarters we will continue to focus on taking share from our competitors in our respective markets. We will improve our liquidity position as we work to extend and reduce the principal balance of near-term debt obligations. Or primary goal in the next two quarters will be to identify the most efficient means to raise equity. With that we will open the call up for questions.

(Operator Instructions). Carol Kemple, Hilliard Lyons.

Good morning. I just had a question on the credit line. I know you all have been in talks with the banks and information you gave in the press release was pretty much what you all said last quarter. Are there any updates on how those conversations are going or how close you're getting to a resolution?

Carol, our intention was to announce a modification concurrent with this call. Unfortunately the paperwork didn't get done as quickly as we wanted it to. We have an agreement principal, a term sheet agreed to and a document agreed to and we're now in the process of getting all the syndicate credit committees to approve the document and it hasn't happened as quickly as we wanted it to.

So, I can't give any details out on what the modification is. I think that you can expect to see a release from us in the next several weeks, hopefully next week, but it may be a couple of weeks from now, detailing what the modification terms are.

Okay. And at this point can you tell us if the principal paydown that you all have in the press release between $20 million and $25.5 million, is that realistic with what you all are thinking at this point?

The modification does not require any paydown.

Okay. Okay, great. Thank you.

Dan Donlan, Janney Capital Markets.

Good morning, guys. Bill, just a quick housekeeping item. It looks like your G&A went up quite a bit since the first quarter of last year. Was there any type of one-time items in there? And maybe what's a run rate going forward for the last three quarters of the year?

I think you'll see the run rate decline as it has in the past years. Our first quarter tends to be our big quarter for expenses; we have all the accounting and audit information in there. And we've had a lot of legal as well in there related to the modifications with the bank and so forth.

In addition, we have had some salaries that in the past have been capitalized because they were involved with the construction that hit here. And all of this will tail off as it has in past years. So the run rate will decline. But that's why it's up about I believe it's about $150,000 from the year before.

Okay. So you think it will decline sequentially ease quarter like it did in 2009 you believe?

Yes, that is traditionally the way it works. It's simply we have -- invariably we seem to have a lot of legal and accounting, more than any other quarter, and it's usually in that first quarter.

Okay, thank you. And then Drew, I guess moving forward, why are you guys so hesitant to provide guidance for 2010? Most other Hotel REITs have provided guidance. We are just curious if we might see guidance out of you maybe going forward or what's your hesitancy?

The hesitancy revolves around the capital raise that we're working on, Dan.

Okay, okay, okay. Well understood. And then maybe just moving on to the Sheraton. Are you guys starting to see the Starwood brand really start to make a presence there? Or how are your clients reacting to that?

It's very positive. We're still the only Starwood product in the market and that is a huge plus and will be, but it's taken time to sign up the local corporate community to their frequent traveler program. Since there was no Starwood product nobody belonged to the frequent traveler program. So we've kind of had to build that base ourselves. And it's building nicely, I would say. And so we're making steady progress over time. And Starwood's contribution is growing.

And then just as we look at this potential capital raise, is it going to be a little bit of -- obviously you guys need to reduce your leverage a little bit, but do you think you're going to be able to raise enough to also be more offensive in nature?

That's our goal. Our goal is to go back on offense, to restart our dividend, to restructure our balance sheet with adequate cash and some paydowns on the debt.

Okay. And then as we look at potential acquisitions going forward, what type of loan to value are you guys looking to do on some of these acquisitions?

Well it's going to depend on who the seller is. If we take it out of CMBS pools we'll have built in financing. And in that instance we're thinking it's going to be about 50% leveraged.

Okay.

That's where we think most of the product is going to come from initially -- even though we haven't gotten any asset management assignments we haven't stopped working on that. We've got several irons in the fire here and we hope to get into that business here shortly. But we're talking to the special servicers and there is a lot of product coming and we think it's going to be opportunities for us to start buying again.

Right. Well I mean, if you were to buy at 50% loan to value you guys would reduce your leverage just in and of itself by acquiring assets at that level.

Right, yes, that's our goals too. We'll have some initial paydowns on our debt and then we will -- going forward it will be 50% leverage.

And then I guess going forward on the ADR, what's your general sense? I mean, your ADR was down about 7% for the year. Is that any particular hotel? I wasn't able to get the supplemental off the website. Are there any hotels that are driving that and how do you look at rate going forward?

Well, I mean, we've been very aggressive in our Internet marketing and it's highly discounted business. There will come a time when we start turning that spigot off or cutting it back and we want to -- we've been trying to drive occupancy, which is the first step to rebuilding your RevPAR. And we saw good progress with our occupancy.

And so slowly over time, as we see the economy in the US recover and market specific action, obviously, we'll start to turn -- we'll change our mix and back away from the highly discounted Internet business and hopefully see some of the higher rated IBT travel come back. Which we're seeing a little bit of that but we haven't seen enough to give us the confidence to turn off the discounted business yet.

It's going to be -- it's all occupancy driven as far as we're concerned and we want to see that occupancy at a high and respectable level before we start trying to raise rates. But obviously we're going to do it segment by segment and we'll try and tweak that as we can.

And then how about operating expense? Is there still room to cut out some expenses at the hotel level going forward? And then what's your anticipation for some of these expenses that you've cut out in the recession coming back online? Or do you think a lot of these operational cuts will be made permanent?

(Inaudible).

Dan, this is Dave. I think to answer your question, I think what we've discovered in this down market is you can restructure the cost at the hotel without sacrificing guest service or quality. When rate comes back to the market a good chunk of that will fall to the bottom line. I think that's what all participants are looking towards.

In terms of maintenance and capital, as we mentioned on a couple of the points in this call, I mean the portfolio is in such good condition there's really no deferred maintenance or significant capital that we have to apply. I don't know if there's a whole lot of room left to cut additional expenses, but we're not going to see any huge bow wave of expenses coming back at us.

Okay, all right, thank you, guys.

Thanks, Dan.

Jon Evans, Edmund White Partners.

Can you talk a little bit about just if you think about going on the offensive from an acquisition strategy you've made some unique acquisitions in the past. Are you looking for a geography that you want to be in, or is it primarily these hotels that you think need some love and you can fix? Or -- help us understand the strategy going forward.

Well, Jon, we're focused on full-service hotels. We like -- secondary markets in the Southland has kind of been our forte. And that's probably where we're going to continue to focus our efforts. Top markets for us right now -- Atlanta is probably number one and there's been a lot of distress in Atlanta, so we believe that there should be some opportunities for us to buy there.

We like Nashville, we like DC, which is obviously -- it's going to be an expensive market to get into, but we'd like to get in the CBD and the District of Columbia if we can. We're also looking at Charleston, South Carolina which we think is a good fit for us, and Charlotte, North Carolina. Those are kind of our top five right now. And several of those markets have been highly distressed. And so as a result there are opportunities.

Okay, great, thank you. And the other question I have for you is can you just tell me -- I know you want to deleverage and there are lots of reasons for that. But you cited in the call that you guys had the lowest debt per key of any of the comparable REITs. So, would you deleverage first before you have a transaction or do you simultaneously do it? Because it just -- it seems like if you deleverage and then you don't get a transaction you kind of screw shareholders a little bit. But I'm just curious your thoughts.

Well, yes, I mean, I'm the biggest shareholder so I'm very sensitive to that. And quite frankly, we would prefer not to delever from where we are today. Unfortunately all lenders are extremely conservative in today's world. And we do have some debt maturities that we're faced with. And we don't want to get caught where refinancing becomes an issue. So what we're trying to do is clean up our balance sheet, put all our debt maturities to bed and raise sufficient equity capital to go on offense and do that all in one fell swoop.

Okay. So you have a deal, you come in, that's accretive and then you do an equity offering, bring it down and then it's a deal that you think you can accelerate their business, right?

Yes.

Okay, great. Hey, thank you.

All right, thank you.

There are no further questions at this time. I would like to turn the conference back over to Andrew Sims for any closing remarks.

I'd just like to thank everyone for participating in today's call and for your interest in the Company. Those of you that will be attending REIT Week in Chicago, we look forward to seeing you all out there. And you all have a good day. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.