Sotherly Hotels Inc (SOHO) 2011 Q4 法說會逐字稿

Good morning and welcome to the MHI Hospitality Corporation announces fourth-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. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Scott Kucinski, please go ahead.

Thank you and good morning, everyone. Welcome to MHI Hospitality Corporation's fourth-quarter earnings call and webcast.

Dave Folson, our President and COO will begin today's call with a review of the Company's quarterly activities and a review of portfolio performance. Bill Zaiser, our CFO, will provide our key financial results for the quarter and provide 2012 guidance. Drew Sims, our Chairman and CEO, will conclude with his perspectives on the industry and an update on our strategic objectives, we will then take your questions.

If you did not receive a copy of the earnings release you may access it on our 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.

Any statements made during this conference call which are not historical may Institute may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions. we can give no assurance that these 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 duty to update or revise any forward-looking statements. With that I'll turn the call over to Dave.

Thank you, Scott. Good morning, everyone. We ended 2011 on a high note by ranking as the top-performing lodging REIT in terms of total return for the year according to SNL Financial, based on our share price appreciation and reinstated dividend. While we still believe our stock is significantly undervalued, we are happy to see the positive reaction to our efforts and accomplishments throughout the year.

We reinstated our common dividend midyear and declared two quarterly dividends during 2011. We also recently announced the approval of a $0.02 per share quarterly dividend for the first quarter of 2012. On an annualized basis our $0.08 per share dividend, based on a $2.50 share price, represents a 3.2% common dividend yield ranking us in the top quartile of lodging REITs.

In the quarter we continued to make progress with our balance sheet restructuring as we closed loans on our Raleigh and Louisville assets. The Raleigh loan closed in October, carries an interest rate of 5.25% with a 25 year amortization and the loan has a five-year term with a five-year extension option. The Louisville nonrecourse CMBS loan closed in December, carries an interest rate of 6.25% with a 25 year AM schedule; the loan has a five-year term.

These two loans combined with the loan on our Laurel, Maryland Hotel, the extensions of our Jacksonville and Hampton loans and our preferred stock issuance all completed earlier in the year represent great strides towards our ultimate goal of balance sheet restructuring which includes extinguishing our syndicated credit facility and lowering our overall cost of capital.

We have also agreed to terms on a loan for our Hilton Philadelphia Airport Hotel. This $30 million one will carry an interest rate of LIBOR plus 300 with a 50 basis point floor and it will amortize on a 25 year schedule. We are scheduled to close this loan later this quarter. This transaction will allow us to repay and extinguish our syndicated credit facility, unencumber our Tampa Crowne Plaza asset and will provide additional funds that will be used to partially repay the investments made by Essex and Richmond Hill.

Moving on to our portfolio's performance, for the year RevPAR growth for our total portfolio was 6.5%, which includes a 6.2% increase in rate and a 0.2% increase in occupancy. For the quarter RevPAR growth was 7.8% including a 7.6% increase in rate and a 0.1% increase in occupancy. For our wholly-owned portfolio we saw annual RevPAR growth of 5.8% over 2010 which includes a 5.6% increase in rate and a 0.2% increase in occupancy. For the quarter RevPAR growth was 5.3% driven by a 5.1% increase in ADR.

Occupancy for the year was 67.9% for our total portfolio and 66.2% for our wholly-owned portfolio. For a wholly-owned portfolio GOP margins increased 50 basis points for the year and 30 basis points for the quarter.

At year end we saw most of our market show year-over-year RevPAR expansion. Our markets in Tampa, Raleigh and Philadelphia led the way with annual RevPAR gains of 10% or better. For all of our markets average RevPAR growth was approximately 4.5% over 2010.

Many of our markets have just recently turned positive which bodes well for us as we believe this will lead to an extended period of growth for the portfolio. The median share increase for our portfolio was 235 basis points for the year. All of our properties except two gained market share.

Lastly, we concluded two renovation projects in the quarter which will add substantial value to our portfolio. First we successfully completed the renovation and conversion of our Holiday Inn in Raleigh, North Carolina to the Doubletree by Hilton flag.

This hotel underwent a $4.5 million 18-month renovation that included the replacement of all FF&E throughout the building, reconfiguration of the lobby and F&B outlets, exterior enhancements and improvements to the building's physical plant. This hotel was the last in our portfolio to be fully renovated and we believe it will greatly benefit from a fresh new look and superior flag.

We also completed the buildup of a new Tampa style restaurant and lounge at our Tampa Crowne Plaza Hotel. The new restaurant, Mojito, occupies the previously vacant restaurant space that was built during the hotel's renovation in 2008.

Mojito is a Latin inspired concept that caters to both our hotel guests and the Tampa residents. It opened on New Year's Eve to a large crowd and has garnered rave reviews in the local publications. We are already seeing substantial F&B revenue improvements at the hotel and expect that trend to continue. I will now turn the call over to Bill.

Thank you, Dave. Reviewing performance for the quarter ended December 31, 2011, total revenue was $19.5 million for the quarter bringing our annual total to $81.2 million, an increase of 4.9% for the year. Adjusted EBITDA was $3.6 million for the quarter and $17.1 million for the year, an increase of 9% annually. Adjusted FFO was $0.6 million for the quarter or $0.05 a share bringing our AFFO to $5.6 million for the year and $0.43 per share, an increase of 4.9% over 2010.

Please note that both our adjusted FFO and adjusted EBITDA exclude unrealized gains or losses on hedging activities, unrealized gains or losses on warrant derivatives and changes to our deferred income tax provision, as well as expenses related to aborted operating costs. You should refer to our earnings release for additional detail.

The Company recorded a consolidated net loss of $2.6 million or $0.26 a share for the quarter. The primary driver for this loss was a one-time non-cash expense of $1.6 million related to the warrant derivative. Excluding this charge the loss was $1 million as compared with $900,000 in 2010.

As of December 31, 2010 total assets were approximately $209.3 million. This includes approximately $181.5 million of net investment in hotel properties plus approximately $9 million for the Company's joint venture investment in the Crowne Plaza Hollywood Beach resort.

The Company had approximately $7.1 million of available cash and cash equivalents of which approximately $2.7 million was reserved for real estate taxes, insurance, capital improvements and other expenses. The Company had $5 million available on its credit line under its Essex/Richmond Hill bridge loan, bringing total liquidity to $12.1 million as of the end of the quarter.

As of December 31, the Company had approximately $154.3 million in outstanding debt at a weighted average interest rate of 6.73%. This includes $94.2 million in mortgage debt, $25.5 million on our credit facility, $25.4 million in Series A cumulative redeemable preferred stock, as well as $4.3 million in a loan related to the joint venture with the Carlyle Group and $5 million on our line of credit with Essex/Richmond Hill.

As mentioned by Dave, in the quarter we refinanced our Raleigh and Louisville assets and used those proceeds to pay down the credit facility, which now has an outstanding balance of $25.5 million.

Total shareholder and unitholder equity was approximately $43.8 million at the end of the quarter. Shareholder equity was $35.1 million with approximately 9.7 million shares outstanding. Unitholder equity was $8.8 million with approximately $3.2 million limited partnership units outstanding.

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 57.9% or approximately $69,800 per room. Excluding the preferred stock, debt to total capitalization is currently 48.4% or approximately $158,300 per room.

Turning to guidance, we are issuing our initial forecast for 2012 financial performance. Due to the distortions created by previously mentioned non-cash charges such as swaps and warrants, we continue to present a wider range of metrics, both in our quarterly earnings and in our forward-looking projections, that focuses more on the metrics that, in our opinion, more accurately reflect the Company's operating performance.

For the year we are projecting adjusted FFO in the range of $5.8 million to $8.6 million or $0.45 a share to $0.67 a share. Additional details can be found in the outlook section of our earnings release. I will now turn the call over to Drew.

Thank you, Bill. I would like to start by reviewing our accomplishments over the past year. Our portfolio performance landed within our expected range, albeit near the low end, with RevPAR growth of 6.5% for our entire portfolio and 5.8% for our wholly-owned portfolio.

It should be noted that the upper upscale segment as a whole underperformed the industry in 2011 which obviously flowed through to our portfolio which consists almost primarily of upper upscale assets. Further, the impact of Hurricane Irene on our third-quarter performance had a dramatic effect on our annual numbers.

All in all we are pleased with the progress made across our portfolio in 2011 and are encouraged by the improvement in those markets that have seemed to lag the overall recovery.

2011 was the second year of an anticipated five- to six-year recovery for the industry and our Company. The patience and good judgment exhibited in the two prior years to keep shareholder dilution to a minimum became apparent during 2011 as the debt markets loosened and our balance sheet restructuring showed favorable results.

As Dave previously mentioned, we were able to refinance three hotels during the course of 2011 and, when combined with the proceeds from our preferred stock transaction, we were able to pay our syndicated credit facility down to $[25.5] million from approximately $78 million at the beginning of 2011. The new loans carry historically low interest rates and five- to 10-year terms. We are pleased with this result as it provides our balance sheet with good long-term stability.

While we are not pleased with our current stock price, 2011 was a good year for the stock's performance, especially when compared to our REIT peers. For the year our total return was 12.1%, this ranks us as the top-performing lodging REIT for 2011 with the pure average being a negative 17%.

As we look forward to 2012 we've established the following goals and objectives to further enhance the share price and grow our business. We will refocus our efforts on asset management to enhance the guest experience to raise our customer service scores because our business begins with loyal guests.

We will continue a three-year trend of taking market share from our competitors. The industry recovery will float all boats, but we will continue to outperform our peers in most of the markets in which we operate.

We will endeavor to continue the payment of a common dividend with a goal of growing the dividend in the second half of 2012.

We will continue refinancing our hotels with property specific mortgages, the proceeds of which will be used to pay off the Company's syndicated credit facility, retire the high-interest line of credit with Essex and repurchase some of the preferred stock issued to Essex in 2011.

We endeavor to restart the Company's growth by purchasing at least one full service hotel in a major southern market during calendar 2012. With that we will now open the call up for questions.

(Operator Instructions). Carol Kemple, Hilliard Lions.

On your loan that you all are anticipating closing it sounds like towards the end of this quarter on the Philadelphia asset, can you tell us what the total loan amount is?

It's $30 million.

Okay. So with that you would completely pay off the line?

Yes.

Okay. And then you've talked about buying another hotel in the southern market. How would you anticipate paying for that? Would you get a mortgage first or would you expect to have enough cash sitting around by then?

Well, one of the assets that we're looking at, Carol, is a party that's what I would deem to be a friendly seller. And we would probably end up issuing some shares or units to that party to consolidate the asset into the REIT.

Okay, so would it be where you would pay for part of it with units and shares and the rest in cash or would it be an all units and shares transaction?

It would be three parts. We'd have a conventional first mortgage that's specific to that asset, we would end up with some issuance on shares and units and some small cash contribution to the seller.

Okay. And then what are your capital expenditures for 2012?

Bill, can you -- you've got that information.

Carol, are you asking just what the total is going to be or what --?

Yes, I know you don't -- you shouldn't have anything big, I don't think, this year, but what's your total --?

No, our routine CapEx, I believe we're aiming at something around $2.7 million. We're planning on reserving approximately 4% and this falls more like in the 3% range. We're actually going to spend [3%].

I would add that, Bill, -- we have reserved that amount of money. We actually only have projects for about $1.9 million that are slated. So we've got funds that we're earmarking to go in the FF&E reserve that aren't -- they're not tagged for any specific purpose at this point.

And then I just had one other question. On page 5 of your press release when it shows the weighted average numbers of shares outstanding, it looks like the diluted amount is less than the basic. Is that a misprint or is there something to that?

Bill, can you address that?

Hang on, I'm looking at it.

Okay.

What page were you on, I'm sorry?

Page 5 of the press release in the consolidated statement of operations.

Okay, it looks like it may be a misprint. We're going to check on it and I'll either get back to you off-line or a little later in the call.

Okay, great. Thank you, that's all my questions.

Jon Evans, Edmunds White Partners.

Could you address a little bit your thoughts -- you mentioned potentially raising the dividend in the back half. I guess if you're able to achieve the guidance that you've put out there either for the low end or the high end -- could you help us understand what potentially you would think about raising the dividend to and the time frame of that (multiple speakers) the fourth quarter or --?

Yes, Jon, what I would say is that we are planning to raise our dividend, our third-quarter dividend at this point, as long as the markets continue to behave as we hope they will and that our businesses continue to grow as it has in the past 18 months. So, all things point toward that. Obviously it requires Board approval on a quarterly basis. So I can't absolutely positively tell you that we're going to do that at this point, but that is surely our intention -- to raise our dividend in the third and fourth quarters for this year.

Can you talk a little bit about I guess over time what you are looking to from a standpoint of maybe a range or percent of the EBITDA or adjusted EBITDA that you would pay out? I know you have a decent yield relative to your peers, you mentioned that. But if you look at the amount of EBITDA you guys produce and what you pay out in your dividend, it is relatively small.

So I'm just curious, is there a target ratio that you're trying to get to over time or what -- is there any kind of metrics that we can think about the growth or the trajectory of the dividend if you're successful in continuing to grow the business?

Yes, I mean I guess we look at the dividend more on a cash flow basis, not so much on an EBITDA basis, because we do have considerable debt and obligations to our preferred holder. And so all those things have to be calculated into the equation when we're trying to figure out what our payout ratio is going to be.

I would just point, historically we were in the range of 7% for five years. And so, that was where we were before the 2008, 2009 and early half of 2010 recession. Will we return to that level? At this point I don't know that, but it is our intention to have our dividend be a major contributor to an increase in our share price.

I mean, we get that. We want the dividend to be an enhancement to the share price. So we watch what our peer group is doing, we want to be at the higher end of our peer group and we will continue to monitor that and hopefully put some upward pressure on stock price. Dave, feel free to jump in here.

Yes, I think, just, John, to echo what Drew was saying, we've got a couple of opportunities with respect to the dividend. One is obviously that the cash flow growth that comes not only from the core business but also from our -- lowering our cost of capital, which we continue to do, we think there's going to be more of that this year.

But generally from a strategic view, we wanted to be very conservative out of the gate by re-establishing a dividend that's sustainable. You'll notice a lot of the lodging peers have not even reinstated their dividends let alone their preferred dividends.

So we're pretty happy with what we've done to date and we have a bias to grow that. We need to be careful with respect to where the core business is and eventually where our cost of capital goes as we continue to refinance our assets and pay off some of the high cost of debt that we have with Essex and Richmond Hill both in their line of credit and their preferred stock.

Yes, I mean, John, Drew again, it's just a balancing act. We need to have certain liquidity hurdles that we need to maintain within the Company, we need to have some growth in the Company. But as a major shareholder, just like you are, dividends are near and dear to my heart too. That certainly affects my standard of living. So it's something that we will continue to focus on.

Got it. Can you talk just a little bit relative to if you think about this acquisition, if you're successful to achieving it, will it be instantly accretive to EBITDA? Will it be accretive to EBITDA or hotel margins and would it be accretive to cash flow?

I think it would be all of those things. It's a performing hotel that's stabilized, doesn't require a turnaround and is just a unique transaction in that it's a friendly seller and someone who has done business with us for over 20 years. So, I think that it's -- this is kind of a one-off transaction and it would definitely be an increase to our overall cash flow at the Company.

And I think our view at this point is having done a lot of deep turns within the REIT structure, any deep turn opportunities that present themselves to us from this point forward are going to be done in a JV structure off-balance-sheet and then brought back into the REIT once they're stabilized.

So that's our view at this point that I think we've learned our lesson about there's just not a lot of patience. When you do a deep turn opportunity it's really a five-year process and the market just doesn't have the patience for us to do those kinds of deals within the REIT structure.

Okay. And then just a question on your press release, on the statement that you made about highlights. On December 21 you did this amendment to the outstanding warrants. Could you explain that transaction and does that reduce dilution then over time?

There are two parts to that. We modified the warrant agreement and at the same time we extended the commitment on the Essex line of credit. I think from a non-cash perspective, and I'd probably ask -- Bill might be the better guy to answer this. But from a non-cash perspective the warrant modification in December does create a drag on FFO over time. So that's the dilution question. I think the answer is from a non-cash perspective it does have an impact on FFO.

But it doesn't dilute -- it doesn't --.

It doesn't create more warrants if that's your question.

Yes, that was my question.

Right.

And then the other question I would have for you is if you look at your hotel EBITDA margins, I guess -- or your adjusted [EBITDA] margins, whichever one you want to focus on. Can you talk a little bit about the opportunity to improve them from here?

You have pretty high margins and I guess I'm curious to understand that especially since we see more in an environment that is probably going to be driven more by price going forward as opposed to occupancy. And I want to try to understand the flow-through of the leverage. I know this last year you got hurt by increases in your affiliates, etc., and I wanted to try to understand that relative to your guidance.

Well, I think the margin grew -- well, you're right on one respect. I mean, some of the franchise companies are -- in fact all the franchise companies are taking the recovery -- taking the opportunity of the recovery to raise fees incrementally, that's something we can't avoid as a franchise -- a franchisee of the major flags, all hotel owners are saddled with that.

More importantly though, we see our margin opportunity predicated on growth. Obviously top-line growth driven by rate obviously has a better flow-through down to the bottom-line, which has a better impact on our margins. We also have some assets like the Raleigh Hotel coming out of renovation which are going to see vast improvements to margin -- to the GOP margins, and we have some hotels that frankly are not yet fully stabilized, fully ramped up and we've made some changes and we think those are going to take effect here in 2012 and beyond.

So I think the answer is we do have some increases from the franchise partners, but at the same time the market is recovering. That translates to -- we're at the stage of the recovery that translates to greater rate dropping to the bottom line and we have some hotels that frankly are not stabilized due to renovations and the like and we're going to see above average margin expansion on those hotels.

So, I think as you noticed, the ADR component of our RevPAR growth is substantial and that's a very high-quality earnings that reflect greater margin and expenditure.

And just to understand your adjusted EBITDA guidance -- from the low end to the high end, what's the difference in the RevPAR?

I don't know, we'd probably have to get back to you on that, Jon.

Bill, do you have that -- Bill, or Tony, do you have the --?

Hang on a second.

I'm not sure we --.

I don't believe we calculated that as part of it. So that would be something we'd have to --.

We can calculate that for you, John, and get it back to you. But --.

Got it. So just to understand, if you hit the low end your margins increase about 71 basis point year over year in adjusted EBITDA? And if you hit the high end they'll increase to 140 basis points roughly, is that right?

That's probably about right, yes.

Yes, that sounds about right.

And then the last question that I have for you and then I'll get off your thing is can you just talk a little bit about the expenses on the derivative side and the unrealized gains or losses as they go through? Do they go through the G&A aspect of the P&L? And if they don't can you help us understand why G&A or corporate, general and administrative expenses increased so dramatically year over year? I assume it's either that or it's the quitting of the secondary that you were going to do?

The big jump in the G&A was the termination of the S-11, that is about $600,000.

Okay. So it looks like for the year it was $636,000 increase, so basically you would've had a $36,000 increase without the S-11?

That sounds about right, right.

We'd like to say it's our salaries but it's not, John.

So I assume then that that -- I mean right there you should get a pickup of about $600,000 in adjusted EBITDA just alone just from -- unless you file another S, right?

Well, even if we've file an S-11, unless we abort it we would get that increase.

Yes, that filing stayed open for over a year. And so, we had to expense it at the end of this year -- at the end of 2011.

And I apologize, I'm sorry, I did have one more question. So your dividend now, the total expense, since you don't have the cash flow statement yet -- and maybe you can't do this until the K files -- what roughly percent of the cash flow last year did you spent or what is the pro forma of the current dividend on the cash flow, does that make sense?

We'll get back to you on that one. I don't have it right here at my fingertips. But we can certainly calculate that and shoot it to you in an e-mail. Scott will take care of that in a few minutes.

Thanks. Thank you so much.

(Operator Instructions). Dan Luchansky, DCL Holdings.

I was just curious, I may have missed it, but you talked about -- you alluded to a transaction, a potential transaction and you talked pretty explicitly about how it will be financed. But I'm just curious if I missed whether or not that would be initially dilutive or anti-dilutive. And if so, how much and for how long?

It would not be dilutive, it would be accretive and we believe it will be immediately accretive if we get the transaction completed.

Thank you.

(Operator Instructions). Seeing no further questions, I would like to turn the conference back over to management for any closing remarks.

We'd just like to thank everyone for participating in today's call and we look forward to talking to you in the next quarter. Thank you.

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