Sotherly Hotels Inc (SOHO) 2010 Q2 法說會逐字稿

Good morning and welcome to the MHI Hospitality Corporation second-quarter 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. 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 second-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 the 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 statements.

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 for his opening remarks.

Thank you, Vicki. Good morning, everyone, and thank you for joining us on our call today. This is a strong reporting period for us in terms of our performance.

I will present the highlights for the period and our view on the current industry environment. Bill Zaiser, our CFO, will then provide a financial report. Following that, Dave Folsom, our COO, will update us on the portfolio. I will then outline our near-term objectives, and then we would be happy to take your questions.

As we conclude the first half of 2010, we believe a recovery is underway within the lodging sector. It also appears that the recovery is occupancy-led.

A compelling fact supporting this is that hotel room demand, according to Smith Travel Research, increased nearly 9% in the second quarter from the prior year. This is the largest quarterly increase in rooms sold in 23 years, when this data was first compiled.

The recovery within the hotel space also appears to be top-down in that higher-end hotel segments are rebounding more quickly. Although the greater economy remains sluggish, business travel is picking up, both group and individuals.

Historically, this segment has favored higher-end full-service hotels which can accommodate corporate group meetings and provide a wide range of amenities. Our upscale to upper-upscale full-service hotels cater directly to the strengthening business segment.

In terms of segmentation and product type, we believe we are in the sweet spot of the industry recovery. Combine the improving fundamentals with the newness of our portfolio, and the result is compelling. We are benefiting from a rising tide for the industry, and we are steadily taking market share from our competitors as our newer hotels become entrenched in their respective markets.

For the second quarter, we have posted our fourth consecutive quarter of improved performance. As compared to the prior year, we experienced growth of nearly 9% in funds from operations as well as a 5.5% increase in room sales, a 69% increase in net income, and a 10 basis point increase in GOP margin.

We also outpaced the greater hotel industry in occupancy. In the second quarter, we delivered an 8.1% gain in portfolio occupancy. This compares to a 6.2% gain for the industry at large. Overall occupancy for our portfolio was 72.2% versus a 60.7% for the industry at large.

Looking at the first six months, occupancy increased 11.1% for our portfolio versus the hotel sector gain of 4.4%. Overall occupancy for the first six months for our hotel platform was 67.5% versus 56.4% for hotels on average.

This demonstrates growing demand for our hotel product type as well as the success of our efforts to capture additional share within our markets. We believe improved occupancy is a positive indicator for future ADR increases.

We also delivered solid RevPAR results for this time frame. Dave will speak to this and to other portfolio performance a little later in the call.

Looking ahead, we believe that demand for our hotels will continue to build through the remainder of this year and into 2011. In particular, we anticipate strong year-over-year growth in the third and fourth quarters.

As the recovery for our industry moves forward, we are uniquely positioned to benefit. We believe our real estate platform is in top physical condition and efficiently operated. We do not anticipate any major capital expenditures for the next six to seven years that cannot be funded out of our recurring reserve. We continue to have the lowest debt per room among our peers, currently under $70,000 per key.

We believe our product type and the markets that we operate in will continue to outperform the industry at large. And we believe that our portfolio has significant unrealized value. At a stock price of $2.30, our assets are valued at approximately $82,000 per key. Recent market transactions for upper-upscale hotel product have far exceeded this room valuation.

As of this call, we are reinstating guidance. Bill will provide the specifics. With that, I will now turn the call over to Bill to provide a financial update.

Thank you, Drew. Reviewing performance for the Company, the Company reported consolidated total revenue of approximately $21.5 million for the quarter ended June 30, 2010, an increase of 4.8% over the second quarter of 2009. For the first six months of the year, revenues were $39 million, which was up 8.3% over the comparable period in 2009.

RevPAR for the quarter was $77.88, up 5.5% from the same period in 2009. For the first half of the year, RevPAR for all hotels was up 5.8% as compared to the first half of 2009.

The gross operating profit or GOP generated by our hotels was $7.1 million, representing a 5% increase over the second quarter of 2009. For the first six months of the year, GOP was $11.4 million, representing a 12.6% increase over the prior year.

We reported net operating income for the second quarter of approximately $3.2 million, which is an increase of 8.2% over the second-quarter 2009. For the first half of the year our increase in net operating income was 29.5%, when compared to the comparable period in 2009.

Our adjusted operating income for the quarter, which measures the NOI contribution of our hotel operations, rose 4.9% to $6 million. For the six-month period the adjusted operating income was $9.4 million, an increase of 16.4% as compared to the comparable period in 2009.

Funds from operations or FFO for the quarter was approximately $2.6 million or $0.20 a share. This compares to approximately $2.4 million of FFO or $0.23 a share last year.

FFO for the six months ended June 30 increased 8.3% or approximately $0.3 million to approximately $3.8 million, which is $0.30 a share. This compares to approximately $3.5 million or $0.33 a share for the comparable period in 2009.

For the second quarter, net income increased 69% over the second quarter of 2009 to approximately $0.2 million. During the second quarter the Company reported an unrealized gain on the value of our interest rate swap of approximately $263,000, as compared to an unrealized gain on the value of our interest rate swap of approximately $300,000 for the comparable period in 2009.

As of June 30, 2010, total assets were approximately $213.9 million. This includes approximately $185.5 million in net investment in hotel properties plus approximately $9.8 million for the Company's joint venture investment in the Crowne Plaza Hollywood Beach Resort.

On June 7 we announced that the Company entered into a fifth amendment to our credit agreement with BB&T. During the quarter we exercised our option to extend the scheduled maturity of the $18 million mortgage on the Crowne Plaza Jacksonville Riverfront Hotel to July 22, 2011.

The Company has no debt with a scheduled maturity before May 2011. The loans coming due in 2011 are a mix of variable and fixed rate debt. As we have mentioned in earlier calls, these were locked in before the market collapsed and all carry favorable terms.

On June 30 our total mortgage debt was approximately $72.5 million, and unit holder equity was $12.6 million, with approximately $3.7 million Limited Partnership units outstanding. Shareholder equity was $40.7 million with approximately 9.5 million shares outstanding.

At June 30, the Company had approximately $6.5 million of available cash and cash equivalents, of which approximately $1.6 million is reserved for real estate taxes, insurance, capital improvements, and other expenses.

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 Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore, the Company's equity contribution to the joint venture with The Carlyle Group for the purchase of the Crowne Plaza Hollywood Beach Resort, as well as the acquisition of the Crowne Plaza Hampton Marina.

At the end of the second 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 55.9% or approximately $69,700 per room.

Our guidance for 2010 is predicated on continued strengthening of the economy and expected improvements in the hotel lodging industry fundamentals. For the year 2010 we expect our FFO to range between $7.4 million and $8.2 million, or $0.57 to $0.64 per share.

These projections are based on occupancy and rate estimates that are consistent with the 2010 trend forecast by Smith Travel Research for our market segments. Our FFO forecast also reflects our expectation that the recently renovated and opened properties, including the Hilton Savannah DeSoto and the Crowne Plaza Tampa Westshore, will continue to experience increased demand and improved operations and that there will be a continued slow expansion (technical difficulty) the lodging industry through 2010.

With that, I will turn the call over to Dave.

Thanks, Bill. For everyone's reference a summary of individual property performance can be viewed on our website within the investor relations section at mhihospitality.com.

The second quarter saw our portfolio continue the positive trends we have witnessed over the past several quarters, resulting from the nascent lodging recovery coupled with the ramp-up of our transitional properties. Total portfolio rooms revenue, including our joint venture asset in Hollywood with The Carlyle Group, increased approximately $1 million from $16.3 million in the second quarter of '09 to $17.3 million in the second quarter of this year, an improvement of 6.5%. Year-to-date, total rooms revenue was up 11.7% over the prior year.

Portfolio GOP including the Hollywood Hotel was up 6% for the quarter and 20.4% year to date. Operating margin showed another quarter of improvement, with a 10 basis point gain. This marks the fifth consecutive quarter we have shown improvements in year-over-year GOP margin for the entire portfolio, including the joint venture hotel.

For the total portfolio including the Hollywood asset, RevPAR increased 6.5% compared to an average 1.2% loss for our competitive set properties in the quarter, according to Smith Travel Research.

Turning to select individual asset highlights, at our Sheraton in Louisville, at the Sheraton Louisville Riverside Hotel, RevPAR was (technical difficulty) for the quarter, an increase of 11.3% over last year, while the market saw an increase of 7.7%. This represents an increase of 16.2% in share over the prior year. Year to date, this property has seen a 20.7% increase in share against its competitive set.

At our Crowne Plaza Tampa Westshore property, the second quarter marks this property's first full year of operation and we are beginning to see remarkable improvement in the hotel's performance as well as a rebound in the Tampa market as a whole. RevPAR was $49.78 for the quarter, an increase of 20.5% over last year, while the market saw a healthy increase of 7.1%.

We achieved 83.1% of fair share during the quarter, a 69.2% increase over last year. We believe this speaks clearly to our management team's successful ramp-up efforts and ability to gain a large amount of market share in a short period of time.

At the Hilton Savannah DeSoto Hotel, we continue to see the results of our $11 million renovation reflected in the hotel's operating results. For the quarter, RevPAR was $103.13, an 11% improvement over last year. The hotel finished the quarter at 89.6% of fair share, a 12% increase over the second quarter of last year, while the market was up just 0.6%.

Year-to-date the hotel's RevPAR was up 15% while the market was down 4.4%. We expect continued gains in Savannah as the market absorbs the beneficial impact of the renovation.

Finally, at the Crowne Plaza Hollywood Beach Resort, which is our joint venture asset with The Carlyle Group, RevPAR was $78.46 for the quarter, an increase of 12.6% over last year, while the market saw a corresponding 4.3% loss for the same period.

We achieved 90.7% of fair share during the quarter and 90% year-to-date. These are increases of 15.5% and 21.2%, respectively, over 2009 comparables.

In summary, our properties had a strong second quarter as the portfolio continues to benefit from its excellent physical condition, our aggressive ramp-up efforts at those properties brought back online over the past 36 months, and, finally, the ongoing recovery in the lodging market.

With that, I will turn the call back to Drew.

Thank you, Dave. We are very optimistic about the strengthening hotel fundamentals and where our Company is positioned. We're also pleased with our record of improved performance as our new hotel assets continue to mature and capture share in their respective markets.

While we are mindful of the issues that continue to impact the greater economy, we are confident that our portfolio will continue to benefit from recovering hotel fundamentals. Within this improving environment, we will take steps to strengthen our financial position and cost of growth. We will take these actions only under terms and conditions that are beneficial to the shareholders.

It is our stated goal to continue to improve our liquidity position and delever the balance sheet. With that, we will open up for questions.

(Operator Instructions) Carol Kemple, Hilliard Lyons.

Good morning. On your guidance this year, how much do you all have figured in for unrealized gains or losses on hedging activity for the remainder of the year?

Bill can you answer that question?

I would say going forward, Carol, we expect the swap to have about a $10,000 a month impact. Probably -- our feeling is it is going to be pretty much negligible, because it will be offset by the interest.

But what we have factored in for the swap, to answer your question specifically, is $10,000 a month.

Okay, so $30,000 for the third and fourth quarter, then?

Correct.

Okay. And then, where are you all at on the equity offering?

This is Drew speaking. Carol, you know we're in an open registration, and we are just not permitted to talk about the S-11 process at all. The documents speak for themselves, and we just can't speak about it. We can't speak to that.

Okay. Is it something you still expect to get done this year, since it is not in guidance? Or do you plan to update guidance when it is complete?

I just can't talk to that; I'm sorry.

Okay, sorry. Thank you.

Dan Donlan, Janney.

Thank you. Going back to the guidance, Bill, what do you have in the guidance for your provision for income tax? Do you have -- I assume you have a benefit going forward there.

No, actually, from the point of view of the FFO we expect that income tax will be an expense for the year of about $0.5 million.

Okay.

And that the -- but from a cash flow point of view, because of our prior year's losses in that regard, the positive provision, there will be no cash going out as a result.

Okay, but -- I'm sorry, let me just backtrack. You said that you expect $0.5 million for the full?

About $0.5 million is what we expect as far as the --

For the full year or for the second half?

For the full year.

Okay. Well, then that is going to imply definitely some increase in that provision for the third and fourth quarter, though.

Yes, compared to what it is now, yes.

Right, right. Okay. Then I guess, Drew, looking at this guidance, it would imply that you guys foresee pretty substantial RevPAR growth in the second half. Is that a fair assumption?

It looks like you're going to -- just to get to the midpoint of your guidance; you have already recognized $0.29. Could you maybe talk about RevPAR growth?

Is it going to be more occupancy driven in the second half do you think? Or can you maybe talk about group nights as well?

Our strategy the first half of the year was to put heads in beds, and about May we kind of changed our strategy and we are starting to move rate a little bit. That was really the result of the returning business traveler was giving us the opportunity to do that.

Here before that for the, whatever, 20 months of pain that we had in our industry, we didn't have that opportunity. But it seems to be presenting itself now.

So we think we're going to see a little -- at very least, Dan, see -- we won't see a reduction in rate to prior year like we have for the last, whatever, 20 months.

Right.

So we think that that is going to subside and hopefully we might even see a little birth in rate. But we had some issues last year in the third and fourth quarter. Our hotel in Hampton was closed as a result of a hurricane and some other issues like that.

So we do believe that we are going to have a strong third and fourth quarter; and comparatively it's going to be very strong to prior year.

Okay. That's it for me. I will circle back if I have anything more.

Dan Luchansky, DCL Holdings.

My question has been answered. Thank you.

Jon Evans, Edmunds White Partners.

Can you talk a little bit or maybe give us a little bit more granularity in the quarter from the standpoint of -- did you actually see in the month of June rates start to move?

And can you give us any insight into what you have seen so far in your July numbers?

Our July numbers were good. They trended up, consistent with what we saw in -- really April was a weak month for us. It was just -- it was one of those months where several of our hotels, the group just didn't materialize. Or it had booked and they ended up canceling at the last minute. So we struggled a little bit in April.

But May was strong; June was strong; July has been even a little stronger than what May and June ended up being on the top-line growth. So we have seen a stabilization, as I said before, in terms of rate and the loss of rate.

We have actually -- our rates have been going down for quite a long time, and that has now stabilized. Certainly it is a market-by-market phenomenon. I mean in some markets we can raise rates; in some we still can't.

But we think overall that we should start seeing a little growth in rate here in this quarter.

Okay. Can you give us a sense at all, if you're able to push rate, maybe help us understand what kind of margin expansion you think you can potentially get? And how much of that rate you guys can drive to the bottom line.

Yes, give me one second. I have got -- we have got projections for this quarter, and we believe that there is going to be significant margin improvements for the third and fourth quarter.

Yes, I am actually showing margin increase in the third quarter in the range of 15% to 17%, somewhere in there.

Yes, in terms of basis points, let me look at this thing real quick here. Looks like it's about in the range of 400 basis points for the third quarter.

I'm sorry, you said how many basis points?

400.

400, okay. Got it. Then I am sorry if this is a silly question, but do you guys do much from a group standpoint at all? And if you do, can you talk about potential negotiations for price increases as you go into 2011?

We do a lot of group. Our hotels are all full service, so we do a good portion. Probably 40% of our overall business is group.

In terms of rate growth for next year, what we have seen -- again this is segment specific. Like the tour and travel business we're not getting any rate growth; but we are not reducing our rates either in most locations.

In terms of the business groups we are getting rate increases from what we have done the last couple years. And those are probably going to be in the 5% to 8% range is what we're looking at.

Okay, 5% to 8%. So when you mentioned that you said group is about 40% of your business. So the piece that is going to be up 5% to 8% roughly, how much is that of the 40%?

Can you understand that question? Could you ask that question again? I'm not sure we understood what the question is.

Yes. So you talked about there's two different pieces to your group business. And you send your group business was about 40%.

You said one piece of your group business should be up close to 5% to 8% in rate in 2011. I guess what I was asking you is, what percentage of the group business is that piece that is going to be up 5% to 8%?

Yes, I was just giving examples. There's many, many more segments than two. We have some in-state association and various other groups that we cater to.

There are probably 20 or 30 group segments that are classified (technical difficulty) perspective.

So it would be hard for me to give you off the top of my head a percentage. But we would be glad to try to provide that information to you after the call. We're just going to have to do some math and try and help you out with that number.

Sure. Then I guess the last question that I have is, you guys have done a good job of buying these assets, fixing them up. And you can see that you're really getting momentum as the hotel cycle is starting to turn.

Can you help us understand better, though, maybe your guys' thought process of how you hope to get a fair value for the Company over time? It's the cheapest in the industry. I guess at some point if you don't get that, do you just potentially put the hotels up for sale? Or help us understand that.

Well, I think that our strategy at this point was to try to grow the Company and to try to change our shareholder base through the public offering, such that we would have more institutional support. We are almost -- I think 85% or 90% of our stock is held by retail.

And we don't trade very efficiently, and so we're trying to change the dynamics of the marketplace such that we can get institutional support. So that is our strategy right now.

In terms of -- do we sell the Company at some point in the future? I am not going to speculate on that. We certainly are not going to sell at the bottom of the market. We think there is no wisdom in that.

So when we sell we want to sell at the top of the market when hotels are an in-favor asset class. We have certainly been an out-of-favor asset class for the last three years, and at some point that will change.

Okay. Then can you also talk about just -- if we assume you don't do your equity offering, since you can't talk about it, what has to happen before you can start to reinstitute a dividend?

We need to have some sort of capital-raising transaction. I mean specifically we need $10 million worth of liquidity, if that is the question. That is the threshold that we need to meet to comply with our line of credit covenants.

However, in our minds, what we would like to do is to provide some sort of capital transaction that will enable us to raise equity -- either preferred equity or common equity -- such that we can have the liquidity and some sort of growth mechanism built in for our Company so we can go forward and take advantage of what we believe to be compelling market opportunities in terms of distressed hotels coming to the market.

As you noted, that has really been our value-add for our Company. We focus on taking distressed hotels and fixing them, and we have done a good job of that.

So that is really -- that is the challenge for our team this year, is to come up with some sort of capital-raising strategy or transaction.

Okay. Thank you so much.

(Operator Instructions) Having no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Drew Sims for any closing remarks.

I would just like to thank everyone for their participation today, and we look forward to presenting a good quarter next quarter. Thank you.

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