Sotherly Hotels Inc (SOHO) 2010 Q4 法說會逐字稿

Good day and welcome to the MHI Hospitality Corporation Announces Its Fourth-Quarter Earnings conference call and webcast. All participants will be in a 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. Ms. Baker, the floor is yours, ma'am.

Good morning, everyone, and thank you for joining us for MHI Hospitality Corporation's fourth-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 statements.

I would now like to turn the call over to Dave Folsom, the Company's President and COO.

Thank you, Vicki. Good morning, everyone, and thank you for joining us on our call today.

We are pleased to report our fourth-quarter results. I will first provide a review of our asset performance, followed by a discussion of other material developments for the quarter. Tony Domalski, our Chief Accounting Officer, will then provide a review of the Company's financial results. Drew Sims, our Chairman and CEO, will conclude today's call with his summary comments, a review of the current state of the lodging industry and the Company's strategic objectives moving forward. We would then be happy to take your questions.

The fourth-quarter saw our portfolio continue the positive trends we have witnessed over the past several quarters. For the portfolio, including our joint venture asset in Hollywood, Florida, RevPAR increased 6.3% compared to an average 4.9% increase for our competitive set properties according to Smith Travel Research. For the year, RevPAR for all hotels, including the JV asset, was up 7.4% compared to the same period in 2009. Our competitive [set] properties were, on average, flat. RevPAR increases were driven mainly by strong gains in occupancy.

For the quarter, occupancy for the portfolio increased 6.4% over the same period in 2009. For the year, occupancy increased 9.8% over prior year results. In the quarter, total rooms revenue including the JV asset increased approximately $900,000, an improvement of 6.3% over the same period in 2009. For the year, total rooms revenue was up 9.2% over prior period.

GOP generated by our hotels was $6.2 million, representing a 17.6% increase over the fourth quarter of 2009. For the year, GOP was $26.8 million, representing a 16.8% increase over 2009. GOP margin showed another quarter of improvement with a 270 basis point gain over the fourth quarter of 2009. This marks the seventh consecutive quarter we have shown improvements in year-over-year GOP margin.

For the year, our portfolio achieved a margin of 29.5%, a 200 basis point gain over 2009.

I would like to provide some highlights on a few individual assets, starting first with our Crowne Plaza Tampa Westshore property in Tampa, Florida. This hotel had another strong quarter as it continued its ramp up to stabilization. RevPAR was $51.11 for the quarter, up 23.9% over last year while the market was up 4.7%.

In just its first full calendar year of business, the hotel achieved 85% of fair share among its competitive set. We are optimistic that this hotel will benefit both from a continued gain in share as it concludes its ramp-up while also benefiting from a recovery in the Tampa lodging market. This market, which saw a nearly 25% loss in RevPAR over the two-year period from 2008 to 2009, turned positive in the second quarter of 2010 led by considerable gains in occupancy. The hotel's GOP margins in the quarter increased 1676 basis points, a 260% increase over the fourth quarter of last year.

In Georgia at our Hilton Savannah DeSoto property, the Hilton saw a 13.6% increase in RevPAR for the quarter as it continues its recovery from the transformational renovation completed in 2009. For the year, the hotel was up 14.1% in RevPAR. The Savannah market, while having lagged behind the initial recovery in the first part of 2010, is now seeing a strong rebound as evidenced by the 6.3% RevPAR growth by our properties competitive set during the fourth quarter.

GOP margins for the quarter increased 450 basis points, a 20% increase over the fourth quarter of 2009.

In Virginia at our Crowne Plaza Hampton Marina Hotel, we had a strong fourth quarter, having increased RevPAR [of] 53.7% over the prior year. For the year, RevPAR increased 9.8% while the market, which has lagged the overall lodging recovery, was down 5.4%. Like the Tampa hotel, 2010 March marked a first full calendar year of operations for the Hampton Hotel post-renovation with a new Crowne Plaza flag. It concluded 2010 at nearly 84% of fair share, a 14% increase in share over 2009.

In North Carolina at our Holiday Inn in Raleigh, as we reported last quarter, we executed a 10-year licensing agreement with Hilton worldwide to reflag the hotel with a Doubletree brand. The conversion, consisting of approximately $3.6 million, is approximately 50% complete and will conclude in the fourth quarter of 2011.

We believe that there is significant benefit with respect to upbranding this asset. And consistent with our strategy and past results, we think that once the new hotel is stabilized, we should see a significant RevPAR premium over what was achieved with the Holiday Inn flag. It is worthwhile to note that even in the midst of the renovation impact, the hotel's RevPAR remain unchanged and its share was still flat but a very agreeable 133%.

In summary, our properties had a strong fourth quarter as the portfolio continues to benefit from its excellent physical condition, aggressive ramp-up efforts that those properties brought back online over the past three years and, finally, the ongoing recovery of the lodging market. We saw most of our markets turn positive in the second and third quarter of 2010, led by occupancy gains. And we continue to see the recovery as a whole gain traction.

For your reference, a summary of individual property performance stats can be viewed on our website.

I will conclude my portion of the call with the discussion of certain corporate highlights. Balance sheet restructuring remains our first priority. We continue to retain an open S 11 filing with the SEC and we are pursuing strategic initiatives to address near-term debt maturities, liquidity and the opportunity to resume the payment of common dividends in the future.

To date, we have remained very patient with respect to executing a transaction. Shareholder dilution remains an extremely important consideration with respect to any capital event. We believe our patience has been and will be further awarded as our stock price has shown recent recovery in the credit markets are moving in our favor as evidenced by the resurgence of CMBS lending activity.

I will now turn the call over to Tony.

Thank you, Dave. Reviewing performance for the Company, the Company reported consolidated total revenue of approximately $18.8 million for the quarter ended December 31, 2010 -- an increase of 7.5% over the fourth quarter of 2009.

For the full 12 months of the year, revenues were approximately $77.4 million, which was 8.2% over the comparable period in 2009

We reported net operating income for the fourth quarter of approximately $1.3 million, which is an increase of more than 420% over the fourth-quarter 2009. For the full 12 months of the year, we increased net operating income 65.8% over the comparable period in 2009.

Our adjusted operating income for the quarter, which measures the contributions to net operating income from our hotel operations, rose 32.4% to approximately $4 million. For the 12 month period, the adjusted operating income was approximately $17.6 million, an increase of 19.4% when compared to the same period in 2009.

Funds from operations or FFO was approximately $1.2 million or $0.09 per share compared to approximately $1.2 million or $0.11 per share for the fourth quarter of 2009. FFO for the 12 months ended December 31, 2010 was approximately $6 million or $0.46 per share compared to $6 million or $0.55 per share for the comparable 2009 period.

If we look at the quality of FFO by stripping out other non-cash items, specifically the income tax benefit and the change in the value of our industry swap, the adjusted FFO for 2010 was approximately $2.5 million better than 2009, which represents an improvement of approximately 70%.

For the fourth-quarter 2010, we reported a net -- consolidated net loss of approximately $0.9 million or $0.10 per share as compared to a consolidated net loss of approximately $0.8 million or $0.10 per share as well for the comparable 2009 period.

As of December 31, 2010, total assets were approximately $209.6 million. This includes approximately $183.9 million of net investment in hotel properties plus approximately $9.5 million for the Company's joint venture investment in the Crowne Plaza Hollywood Beach resort. The Company has no scheduled debt maturities before May 2011. The loans coming due later this year are a mix of variable and fixed rate debt.

As of December 31, 2010, our total mortgage debt was approximately $72.2 million and unitholders' equity was approximately $11.9 million with approximately 3.4 million limited partnership units outstanding. Shareholder equity was approximately $38.9 million with approximately 9.5 million shares outstanding.

At December 31, 2010, the Company had approximately $5.2 million of available cash and cash equivalents of which approximately $2.2 million -- reserved for real estate taxes, insurance, capital improvement, and certain other expenses. The Company has approximately $75.2 million outstanding on its line of credit.

At the end of the fourth 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 64.2% or approximately $69,500 per room.

Turning to guidance, our guidance for 2011 is predicated on continued strengthening of the economy and expected improvements in lodging industry fundamentals in our specific markets. While fundamentals for the industry in our portfolio showed continued improvement in 2010, pace of growth was less than what we had anticipated. Therefore, we are tempering our guidance for 2011 accordingly.

For the year 2011, we expect FFO to range between $6.5 million and $7.8 million or $0.50 to $0.60 per share. These projections are based on occupancy and rate estimates but are consistent with 2011 trends forecast by Smith Travel Research for our market segment. Our FFO forecast also reflects our expectations that recently renovated and recently opened properties will experience increased demand and improved operations, and that there will be continued albeit slow expansion in the lodging industry in our markets through 2011.

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

Thank you, Tony. In the fourth quarter, our portfolio of upper upscale and upscale hotels performed well as we reported year-over-year gains in occupancy, rate, RevPAR, GOP, NOI, and adjusted FFO. FFO adjusted to remove non-cash items showed a 77% increase in the fourth quarter compared to prior year. For the year, our hotels made great progress making significant gains over 2009 and outperforming the US hotel industry at large in all three key metrics.

RevPAR increased industry averages by 22.1%. Occupancy outperformed the industry by 14.6% and ADR was 6.5% higher than the industry. We believe this building record of strong performance proves that our revitalized hotel assets are gaining traction within an improving hotel environment.

Most analysts and hoteliers would agree that 2010 will go down as the year of demand recovery. Looking ahead, demand as well as stagnant supply, should drive continued improvements within our industry, the return of pricing power and increases in occupancy. As we plan our great strategy, group business is expected to have the most upside potential.

Our portfolio is well-positioned to benefit from a return of the business traveler. Our full-service assets are in urban locations that service the business community. Our properties offer a range of services, including extensive and modern meeting facilities.

I want to now turn to our objectives for the year. It is important to note that we continued to address balance sheet restructuring and that the execution of any major capital transaction will have the shareholder's best interest in mind.

As the single largest shareholder with tenure of over 30 years with MHI, I am very attuned to the impact that any capital event will have on our shareholder base. Management retains a long-term view of asset value; and we have avoided making hasty decisions during the recession, such as issuing dilutive equity and relinquishing assets to lenders.

With any capital event, we hope to remove maturity risks, pave the way for dividend reinstatement, enhance our liquidity and position ourselves for growth.

We have systematically moved our portfolio to upper upscale and upscale product, and our current Raleigh Hotel rebranding is another step in that direction. As capital rates continue their cyclical decline, and our hotels ramp up to peak performance, our asset values will increase at a quickened pace.

At a share price of $2.90, our total enterprise value is approximately $85,000 per key. We believe the quality and location of our assets is greatly understated compared to our [REIT] peers, whose current asset values are around $150,000 per key which equates to a stock price of around $13 per share. We believe this discount represents a compelling investment opportunity with significant upside potential as our properties continue to ramp up and the industry continues to recover.

We believe that there will be a number of interesting acquisition opportunities coming to the market over the next 18 to 24 months. Once we complete our balance sheet objective, we intend to restart an accretive growth strategy. We will continue to focus on acquisition opportunities in our geographic footprint.

Atlanta is the prime market that we would like to enter as this is one of the major feeder markets for our hotels in Raleigh, Wilmington, Savannah, Jacksonville, Tampa, and Fort Lauderdale. Also high on our list are Charleston, South Carolina, Nashville, Charlotte, and Washington, DC.

We are optimistic about the strengthening hotel environment as well as signs that the greater economy is stabilizing. Although jobs growth remains an issue, we are encouraged by rising consumer confidence as well as a 21-month low in unemployment for January.

Before we conclude, I would like to take a moment and recognize the recent promotion of David Folsom to President of MHI. Dave has served MHI for over five years, playing an instrumental role in the growth of our Company and the execution of our business plan. I look forward to having Dave's leadership remain intact at MHI for the foreseeable future. With that, we will open up the call for questions.

(Operator Instructions). Dan Luchansky of DCL Holdings.

Good morning. I wanted to question you a little bit about some facts that I noted that there were a couple of 13 deeds filed recently by various parties who had approximately 4.9% position sizes in your Company. And specifically wanted you to comment with regard to previous ideas you have floated in the past about reversing the common stock in an effort to broaden the number of players who would look at it. And you know, the angle I'm trying to get to is that I think reversals have universally been negative events, reversals of common stock.

And here is sort of proof that small institutions are perfectly willing to purchase your stock at these levels without a reverse. So I thought maybe you could comment a little bit about your new shareholders, what you know about them, as well as whether or not the reversing of the common, which would run counter to increasing liquidity is still part of your game plan? Thank you.

Let me address that. It's Dave Folsom. We did have some new investors coming on the scene as evidenced by the 13D filings that you reference. I believe that those shareholders simply bought in the open market. That's obviously a good thing for us. I think our share price reflects that.

In terms of doing a reverse split, frankly, I don't think we can really comment too much upon that right now as we have an open S11 with the SEC. And as I mentioned in my remarks, we are reviewing initiatives that would help our balance sheet situation and remove near-term debt maturity risks, enhance our liquidity, pave the way for us to reinstate the dividend, etc.

But as Drew mentioned in his closing remarks, shareholder dilution is very important to us as management and insiders own approximately 40% of the common stock base.

So then, you wouldn't want to -- you know if it turns out that reversing would ultimately hurt the shareholder, then potentially as you move forward with your plans, it's possible the reversal would be you will rethink that [nuance]?

Well, I think any reverse is predicated on what type of capital transaction we make and frankly what would be required of us at some point in the future if we -- if and when we issue equity.

Dan Donlan with Janney Capital Markets.

Thank you. Could you run through what assumptions you are making for your guidance from maybe a RevPAR growth standpoint and kind of a margin growth standpoint as well?

Yes. We can do that. Give us one second. We are pulling our comparables out here. As you know, we've got a mix of properties. We've got some stabilized properties and we've got some that are still ramping up. The ramp-up properties, we think, are going to benefit from the recent renovations and the fact that they haven't gotten to fair share in many of the markets, although we are marching towards that goal quickly.

I would say that on the stabilized properties we've got data from the various markets that we operate that shows what the Smith Travel Research projections are for those markets. And that's what we've used as a basis for those markets.

On the non-stabilized, we -- I guess we've taken a view that we are going to continue to take market share, so we are using the Smith Travel Research data that we have for those markets. And we are growing our share to certain targets. Some of the targets are in the 90s. Some of them are at 100. But you know, it's a market-based approach that really starts at the top line sales number.

Yes, Dan. You know, we looked at the projections from the consulting companies like Smith Travel, PKF. And basically we've sort of circled on the 65 to 8% RevPAR growth number. Some of our markets we don't think are going to be that good. Some will be better. And as Drew mentioned, some of our properties are still ramping up.

So our growth is going to be along two parallel paths. Obviously, we will get the lift from the market that's going to occur industrywide. At least we think it will occur industrywide. Maybe a little bit of variation between markets.

And then, at the same time our properties that are not yet stabilized, but that are in ramp-up should achieve above average growth in that respect. So 6% to 8% is where we started the assumptions and we think we will probably be on the high end of that.

And on the GOP side, on the margin as I mentioned, we've had several -- seven consecutive quarters of margin growth. And that's really a result of half the portfolio being in renovation. You get this magnified drop to the bottom line, with especially the initial stages of ramp-up. I think what you'll find going forward is the pace of GOP margin expansion will abate as these hotels reach stabilization.

Now granted, the Raleigh asset, for instance, will probably go through a period of pronounced expansion as well once we get the new flag installed. But I think overall, the portfolio should see as it reaches stabilization, you'll see a more normalized margin performance.

Well, a normalized margin performance, but enhanced with rate growth. You know, we are expecting to see some rate growth this year, Dan, and that makes it much, much easier to grow your margins, as you know. We haven't had that benefit for a couple of years. In fact, we've had the opposite.

So, as Dave said, we've kind of bucked the trend in terms of GOP margin improvement all through the recession. But now we are going to benefit from the recovery and increased rates.

And then I also read in the release that you guys think you might -- you anticipate a payment somewhere between I think it was $18 million and $22 million. Could you maybe talk about --? Can you do that with all debt? Is it going to be maybe a mix of preferred and equity? And kind of where do you stand on the credit facility from a standpoint, do you think you could potentially break up some of those properties and kind of do some one-off financing? Just in the last -- call it two or three months, the credit markets have really gotten stronger and I would imagine that the appetite for some of your assets has increased amongst lenders.

It has. And that has been our goal all along to try to wait out the negative market conditions so that we could, we could benefit from that and that's a little bit why our FFO suffered a little bit this year. I mean we had a lot of costs associated with extending our credit line and we had some cost associated with the S11 that all kind of hit in the third and fourth quarters of this year. So we had to pay those expenses.

But to get back to your question, we can't give you specifics on any transaction, but generally speaking, we are looking at trying to pay down our debt through an equity raise. And as we -- as you've noted, in the press release, that we've targeted $18 million to $22 million. We are working with our existing lender group to extend our credit facility and that's really the first step to solving our balance sheet issues.

The second step would be to do exactly what you said which is, we are working with some of the national brokerage firms to put one-off loans on our assets that would be more permanent in nature and lock in the good rates that are available today. So we are doing all of those things right now and we would expect that we'll have some good news to share with you hopefully in the near future.

And then I guess lastly, and maybe I might have missed this, but I guess what's going on with the asset management group that you guys formed in the TRS? Is that still ongoing? Or what updates do you have on that front?

You know, we've looked at that repeatedly. We haven't been as successful as we wanted to be. The asset assignments that we -- were being tendered to us, the fee income was minimal. It was much more competitive than we thought it was going to be.

And we just came to the conclusion it wasn't really worth our time and effort to work on limited service assets that weren't going to provide much fee income. So we've kind of backed off of that and we are more focused on our own portfolio at this point.

Okay. Understood. I'll go back in the queue. Thank you.

Eric Holmes of Fifth Third Asset Management.

Good morning. You just answered my question about managing the other properties. Thank you.

Jon Evans of Edmunds White Partners.

Can you talk a little bit about rates? And I guess you alluded to the Smith Travel numbers, but I guess in your assumption for your FFO, what do you assume that you get for rate kind of on a blended property basis issue?

I will probably have to give you an off-line call on that from a budget perspective. I mean we are looking at increased rate across the portfolio. It is really market-specific, given whether we are talking about the Raleigh market, given the renovation hotel or state of the Miami market where we have our Hollywood asset.

But rate is a component that we are expecting to see this year where we have not seen it over the past several years. But we are still looking for occupancy gains as well. And at the same time, we have several properties that are still in ramp-up that have sort of an abnormal look to them with respect to growth.

Looking at last year, I mean we -- all of our growth was occupancy. Almost.

Right but it (multiple speakers) the fourth quarter, right? I mean in the fourth quarter you had rates (multiple speakers).

Started to turn around a little bit. I mean this year I think we are looking at and just in general terms, probably half of our growth is going to be in rate and half of our growth is going to be continued increase in occupancy.

So if you are looking for 6 to 8 kind of RevPAR growth and it should be 3 to 4 kind of rate?

Yes, I think that's right.

So keep you get 3 to 4 rates, how much of that close to the margins? Do you get 80% of that?

That's probably about right. I mean we have to we have to pay a franchise fee, we have to pay management fees and you'll have some increase in taxes, but other than that, it is going to flow through pretty nicely. So yes, you are looking at about an 80% flow-through.

So can you help me understand and -- maybe I just didn't understand this right, but you talked about how your margins would kind of maybe level off a little bit this year. But it seems like the pace ought to accelerate because you are getting rate this year, right? Or what am I missing?

What we're missing is that we've had a huge ramp-up in our profitability margins as a result of starting at a low point because we had so many properties under renovation. So we have seen tremendous growth. I think Dave's point was the pace of growth is probably going to slow a little bit and will be more in keeping with the industry averages as you see with some of our other REITs.

So, we should see -- we should benefit from the rate growth absolutely, positively. And that will happen. We will still see GOP margin growth as a result of our ramp-up properties continuing to move north. And we, yes, we are expecting to see good GOP margin growth in the first and second quarters of this year. I mean, we are pretty sure that that is going to happen.

Can you talk a little bit about what you've seen in January from the standpoint of RevPAR growth? Did you see rate turn in January and then can you also talk a little bit about what you expect group pricing to be up this year?

January --? Yes we did see some RevPAR growth and it was almost all rate. Occupancy was pretty flat actually. And some of that was just in -- special events in certain markets. For instance last year we had the Pro Bowl and the Super Bowl and Miami and we didn't have that this year. So we didn't see that bountiful 2 1/2 weeks of sales at triple rates. So that hurt us a little bit.

And that's not unlike some of the other markets that we had in the fourth quarter. Actually in Philadelphia we had -- last year we had the World Series and it went on for an extended period of time because we had three rainout days and that kind of thing. So, but general -- January was pretty good. We met all of our sales goals and we met our profit goals in January.

At this time, management would like to invite all participants to contact them directly for any further questions. With that, I would like to turn the conference back over to Mr. Sims.

I would like to thank everyone for participating in today's call and your interest in our Company and look forward to talking to you next quarter. Thank you.

We thank you, everyone, for your time. The conference is now concluded. Again, we thank you all for attending today's presentation. At this time, you may disconnect your lines.