Sotherly Hotels Inc (SOHO) 2012 Q1 法說會逐字稿

Good morning, and welcome to the MHI Hospitality Corporation first-quarter earnings call and webcast. All participants will be in a listen-only mode. (Operator Instructions). Please note this event is being recorded.

Now I would like to turn the conference over to Mr. Scott Kucinski, Director, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to MHI Hospitality Corporation's first-quarter earnings call and webcast. Dave Folsom, 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 update our 2012 guidance. Drew Sims, our Chairman and CEO, will conclude with his perspectives on the industry and update on our strategic objectives. We will then take questions.

If you have not received 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 note] directly comparable GAAP measure in accordance with Reg G requirements.

Any statements made during this conference call which are not historical 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 a duty to update or revise any forward-looking statements.

With that, I'll turn the call over to Dave.

Thanks, Scott. Good morning, everyone. I'd like to start today by covering our portfolio's performance for the quarter. We were pleased with the Q1 results, as our portfolio's RevPAR growth and margin expansion continued the positive trends we saw in 2011. We experienced an 8.7% RevPAR growth for the quarter. For our wholly owned portfolio, RevPAR was up 6.7%. This growth was driven by a 4.8% increase in occupancy, which rose to 66.1%, and a 1.8% increase in ADR, which rose to $109.71.

Hotel EBITDA margins expanded by 140 basis points in the quarter. Our Raleigh asset, which re-flagged from Holiday Inn to the upscale Doubletree franchise in the fourth quarter of last year, executed on its new pricing strategy and saw an 18.5% rate increase in the first quarter, while also picking up approximately 12% in RevPAR share from its new upscale competitive set. On average, our portfolio gained 7.5% of RevPAR market share during the first quarter.

Turning now to our other achievements during the quarter, we continued to execute on our balance sheet restructuring, with the refinancing of our Hilton Philadelphia Airport hotel. This loan closed in early March with TD Bank; carries a floating interest rate of LIBOR plus 300, with a 25-year principal amortization. It is five-year term, contingent upon our renewal or replacement of the Hilton franchise in 2014. The proceeds of this loan were used to pay off our cumbersome syndicated credit facility and also pay down our Essex Richmond Hill facility.

The repayment and extinguishment of the syndicated credit facility represents a major milestone for the Company. Over the past 12 months we have refinanced $57.7 million of mortgage debt, replacing the corporate level, covenant-heavy facility with four separate asset-level mortgages with 5- to 10-year terms at historically low interest rates, including options to renew. We are pleased with these results.

According to SNL Financial, the Company's stock provided the total return of 24% for the first quarter. This ranked second in the sector amongst public hotel REITs. Last month, the Company also announced our fourth consecutive quarterly dividend since reinstatement last year.

And with that, I'll turn the call over Bill, our CFO.

Thank you, Dave. Reviewing performance for the quarter ended March 31, 2012, total revenue was $20 million, an increase of 8% over the same period in 2011. Adjusted EBITDA was $4 million for the quarter, an increase of 12% over the first quarter in 2011. Adjusted FFO was $1.2 million for the first quarter, or $0.09 per share, an increase of 45.4% over the same period in 2011.

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 provisions, as well as expenses related to aborted offering costs. You should refer to our earnings release for additional details.

The Company recorded a consolidated net loss of $2.3 million, or $0.23 a share for the quarter. The primary drivers for this loss were depreciation, up $2.2 million; and an unrealized loss on the warrant derivative of $1.2 million. As of March 31, 2012, total assets were approximately $211.2 million. This includes approximately $180.4 million of net assets in hotel properties, plus approximately $9.2 million for the Company's joint venture investment in the Crowne Plaza Hollywood Beach Resort.

The Company had approximately $8.1 million of available cash and cash equivalents, of which approximately $2.1 million was reserved for real estate taxes, insurance, capital improvements, and certain other expenses. The Company had $5 million of available credit under its Essex Richmond Hill facility, bringing total liquidity to $13.1 million as of the end of the quarter. As of March 31, the Company had approximately $155 million in outstanding debt at a weighted average interest rate of 6.57%. This includes $123.8 million in mortgage debt; $25.5 million in Series A cumulative redeemable preferred stock; $1.5 million outstanding on the Essex Richmond Hill facility; as well as a $4.3 million loan, related to our joint ventured with The Carlyle Group.

As mentioned by Dave, in the quarter we refinanced our Philadelphia asset, and those proceeds were used to pay off the syndicated credit facility and to pay down the Essex Richmond Hill facility. Total shareholder and unitholder equity was approximately $40.8 million at the end of the quarter. Shareholder equity was $32.6 million, with approximately 10 million shares outstanding. And unitholder equity was $8.2 million, with approximately 3 million limited partnership units outstanding.

At the end of the first quarter, interest-bearing debt to total capitalization, which we define as the gross market value of our properties plus cash and other current assets, was 51.8%, or approximately $70,100 per room. If we exclude the preferred stock, debt to total capitalization is currently 43.3%, or approximately $58,600 per room.

Turning to guidance -- we are reiterating our initial forecast for 2012 financial performance. Due to the distortion 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 to $0.67 per share. Additional details can be found in the outlook section of our earnings release.

I will now turn the call over to Drew Sims.

Thank you, Bill. Much like the increasingly positive trends we've seen across our portfolio and their respective markets, the macroeconomic trends appeared to be heading the same direction. Unemployment is at a three-year low and continues to improve. Inflation has ticked up slightly, and the Federal Reserve raised their economic growth forecast for the year. While much uncertainty remains in our country and abroad, we are cautiously optimistic that the macro trends will continue to move in our favor.

As Dave mentioned, we have completed the first and most important phase of our balance sheet restructuring, as we replace the cumbersome syndicated credit facility with asset-level mortgages on four of our assets. This also resulted in the release of our Tampa asset from any encumbrances.

Moving forward, our strategy in this regard is as follows. We plan to place a fixed rate mortgage on our Tampa asset, using the proceeds to pay off our Essex Richmond Hill line of credit in the approximate amount of $1.5 million, and allocate the remaining net proceeds of approximately $12.2 million to buy back a portion of our outstanding preferred stock. This buyback will significantly lower our cost of capital from 12% to 5.6%. We are working to complete this transaction within the next few months.

We are also working to lower our cost of capital on our Jacksonville asset. Our intent is to refinance this loan as soon as possible, as it carries an 8% interest rate. We have received terms for the replacement loan and, if successfully executed, the loan will lower our cost of capital by approximately 400 basis points. We hope to close on this transaction in the second quarter.

We have one near-term debt maturity approaching, the mortgage on our Hampton, Virginia, hotel. We are working with the current lender, and they have agreed in principle to offer a one-year extension. We believe this is the best option, as it gives the Norfolk market additional time to catch up to the overall recovery.

Beyond our balance sheet efforts, we continue to focus on the aggressive management of our portfolio, with a heightened focus on the guest experience. In a growing rate environment, the guests' expectations also increase, and we seek to be proactive by giving our guests the value they seek while prudently managing our bottom line.

Lastly, I would like to mention that the total return for our Company's stock has ranked at or among the top of all hospitality REITs for the past 15 months. Despite this growth, our Company remains significantly undervalued when compared to the value of our assets or to the value of our peers. We remain among the lowest in the sector, in terms of enterprise value per key and enterprise value to EBITDA multiple.

We continue to believe that by diligently pursuing our balance sheet, dividend, and operational initiatives, the investment community will take note of the highly discounted metrics in resulting valuation.

We will now open the call up for questions.

(Operator Instructions) Carol Kemple, Hilliard Lyons.

Good morning. Looking at income statement, going forward, should we not see that line item about hedging activity, the gains or losses since we've got -- since you all have got rid of the credit line?

That's correct.

Okay. And then, G&A was a little higher than I expected. Was there anything one-time in there, or is that a good run rate?

There are some one-time legal expenses and so forth in this quarter. So the run rate should return more to normal.

Okay. And then, in interest expense on income statement, did that include that loss on the early extinguishment of debt?

Yes, it did.

And then, I noticed in this quarter, it looks like more of the gains in RevPAR was from occupancy rather than rate. And I think you all talked about, in the past, you would expect it to be more rate going forward. How do you feel about that for the remainder of the year?

I think our view on that, Carol, is it will be more rate-driven. The first quarter is our lowest occupancy quarter, so that's when we have the least amount of pricing power. So our view hasn't really changed. We still believe that we're going to have some pricing power as our occupancy -- the quarters with high occupancy approach here.

Okay. Thank you.

Dan Luchanski, DCL Capital.

Yes, congratulations on all the work you've done over the last several years. You've really done a great job of strengthening the balance sheet and turning the operation around. And reinstating the dividend, of course, was a big part of that. And I was curious what the dividend policy is going forward? And whether or not you thought over the next year or two, maybe, that dividend might be able to increase. Thank you very much and congratulations.

Thank you for your comments. We appreciate that. Our bias is to increase our dividend. And that will be a point of discussion in our next Board meeting. So as we continue to get our balance sheet restructured, increase our liquidity, certainly we believe that there is some room to look towards increasing our dividend in the future.

Thank you.

Dan Donlan, Janney Capital Management.

Thank you. Good morning, guys. I had to step off the call for a quick second, so I'm not sure if you mentioned this. But I'm just curious, your thoughts on any type of cap recycling that you guys might do within the portfolio, and take advantage of maybe some of the pricing you've seen out there in the market.

That is on our radar screen, Dan. We are looking to put up some good numbers this year across the portfolio; and, more specifically, a couple of targeted assets that we think don't fit our long-term goals. So we will be looking to recycle some capital next year, early in the year. But at this point, what we're trying to do is get some nice trailing 12 numbers in those assets so that we'll maximize the valuation in terms of sales price.

Okay. And then, in terms of your balance sheet, any type of issues with some upcoming debt maturities? How are you guys are doing that? And then -- sorry, again, if you mentioned this -- but I think you have some preferred stock out there which is pretty high-coupon. What are your thought processes there, with (inaudible) trying to pay that down?

Yes. We did mention that on the call. Dave will give you that answer real quick here.

Yes, Dan, you might have dropped off, but when we paid off the syndicate with the bank group, we unencumbered our Tampa Crowne Plaza Hotel. And we're in the process now of refinancing that asset, the proceeds of which will pay down the facility with Richmond Hill. And it will also pay down a portion of the preferred stock at 12%. So we're going to take down 12% preferred, and 9.25% LSE money, and replace it with 5.6% mortgage debt.

Yes, more specifically, the numbers are -- we're going to pay off $1.5 million on the line of credit with Richmond Hill. So that will be, basically, the balance of it is $0. So we'll have no interest accrual there. And we'll have about $12.2 million or $12.3 million of net proceeds to apply towards the preferred.

That basically will cut that almost in half.

Okay.

On a couple of other questions -- you maybe didn't hear us -- we also have our Jacksonville asset, and we're renegotiating a loan there. You probably remember that we had an 8% handle on that instrument. And the market is a lot more competitive than that. So we're going to get a little more capital cost for that mortgage. And we have one maturity this year. And we've already agreed in principle with the lender for an extension. It's on our smallest asset, so it's probably the least impactful to our earnings and our balance sheet. But we are going to be able to extend that loan for a year.

Okay.

If we get those three things done, which we think we're going to get done in this quarter, we won't have any debt maturities until three or four years from now.

Okay. Excellent. And, just curious, with those -- specifically, the Tampa loan, could you maybe talk a little bit about the, I guess -- sorry if you said this, but I did have to jump off. Can you talk a little about the LTV and the debt yield that you're seeing there? And how active lenders were, in terms of going after the asset to loan against?

I'll let Dave give you the specifics, but this strategy has been that we are -- we've been placed in individual loans with small lenders. I don't know if you've noticed.

Sure.

I mean, with Bank of Georgetown, a lot of small lenders -- and this is a community bank. So we're getting very competitive terms. They are aggressive, in terms of wanting to do business with us. And they're single asset loans.

Yes, Dan, I can't give you too many of the particulars until we actually close the loan.

Okay.

But I can tell you what we're seeing, as Drew said, we are seeing more of the smaller lending community be probably the best lenders, the most aggressive lenders. More of the money center lenders are still opting out of these type of loans, I guess because they have a lot of cash on their balance sheets, they don't have to lend money; that they don't feel they'd like to lend.

But we're seeing, maybe, the smaller lenders move away from the debt yield metrics. And they're moving back to an LPV calculation. And they're obviously relying on an appraisal to do that, and those numbers are working for us and they're working for the lender. So I think we're meeting everybody's needs, and we're getting good market-driven coupons, and it just works. We're getting a more efficient market, with respect to the lending environment.

Okay. Excellent. Thank you, guys.

Carol Kemple, Hilliard Lyons.

I know on the last quarter's call you all talked about a potential acquisition, a hotel in the Southeast that you were talking to the owners on. Is there any update on that?

Carol, we went down the road on an asset in Atlanta. We've kind of stepped back from that right now. And we're looking at a different hotel. But we are pursuing that. It is one of our goals for this calendar year, is to make an acquisition in the Southeast. And we hope to execute on that. So we're working diligently. We don't have anything to report at this point, I'm sorry to tell you.

Okay. Thanks.

[Tim Long], Paradigm Capital.

Thank you very much. Could you just, on the Tampa property, give us a little bit of help and insight; maybe what the Republican convention could do there? What kind of pickup you might see, in terms of pricing and occupancy?

Yes, it's going to be a big shot in the arm, Tim. We're kind of looking at that like a 13th month for this calendar year. It's going to be that impactful. We should be full for about seven to eight days. And our rate is north of $300. And I think our current ADR there is about, what -- right around $100, $104. So we get triple rates and 100% occupancies. So you can do the math. It's like adding a month. It's pretty exciting for us.

And I would assume you are basically fully booked at this point?

We are part of the consortium that has booked rooms with the party. So we expect to be full, yes.

And also, on that extra number that was in the SG&A, how much was that?

Bill?

What extra number were we talking about here?

Here, hold on. I think it was the legal expenses.

It's from the legal costs, Bill.

Oh. It's probably in the range of $70,000 to $100,000.

And that's one-time?

Yes.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Drew Sims for any closing remarks.

Thank you all for participating in today's call. We look forward to having you all next month. Thank you.

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