Sotherly Hotels Inc (SOHO) 2012 Q2 法說會逐字稿

Good morning and welcome to the MHI Hospitality Corporation second-quarter 2012 earnings conference call.

All participants will be 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 now like to turn the conference over to Scott Kucinski. Please go ahead.

Thank you and good morning, everyone. Welcome to MHI Hospitality Corporations's second-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 Garden. 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 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 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 will turn the call over to Dave.

Thank you, Scott. Good morning, everyone. I would like to start the call today by discussing our portfolio's performance for the quarter.

The second quarter was the strongest period in performance our company has experienced since going public in 2004. Our portfolio experienced 9.7% RevPAR growth for the quarter. This growth was driven by a 4.8% increase in occupancy which rose to 76.4% and ADR increased by 4.7% to $120.88. Hotel EBITDA margins expanded by 200 basis points in the quarter to 30.9%.

In our markets our competitive set properties saw an average RevPAR growth of 8.3% for the quarter. Now compared to our portfolio's 9.7% growth this reflects a 143 basis point capture in RevPAR fair share. All of our markets showed positive RevPAR growth in the quarter except our submarket of the Norfolk MSA, which was down less than 1%.

Some markets showed extraordinary growth. The Tampa market was up 16.8% and the Wilmington market increased 15.8%. RevPAR growth for our competitive set properties was split between growth in ADR, which increased approximately 3.2% for the quarter, and occupancy, which increased approximately 4.3%. We gained share in both of these metrics.

I would like to further highlight one property in particular, our Doubletree by Hilton in Raleigh, North Carolina, which we converted from the Holiday Inn flag at the end of last year. This property continues to experience an accelerated ramp up and it has produced extraordinary results. It's RevPAR growth for the quarter was up over 35% compared to the market which grew just 1%, and it attained nearly 100% of fair share. This property grew ADR by 22% for the quarter.

Overall, we are very pleased with the performance of not only our hotels but also with our markets which continue to enjoy the effects of the lodging recovery. With our growth in rate compared to our competitive set properties, we achieved a higher quality revenue dollar which is reflected in our margin expansion.

Turning now to recent corporate events, in June we closed on the $14 million mortgage financing of our Crowne Plaza Tampa West Shore hotel. The loan has a five-year term, carries a fixed interest rate of 5.6%, and amortizes on a 25-year schedule. Proceeds from the loan were used to redeem nearly half of our outstanding preferred stock, which carries a 12% dividend, and also to repay the outstanding balance on our line of credit, which carried a 9.25% interest rate.

In July we closed on the $14.3 million refinancing of our Crowne Plaza Jacksonville Riverfront Hotel. This loan has a three-year term with a one-year extension. It carries a floating rate of LIBOR plus 300 basis points and amortizes on a 25-year schedule. It also has a $3 million earn out provision whereby we can access additional proceeds plus the hotel meets certain performance evaluation criteria.

Proceeds from this loan were used to repay the existing mortgage which carried an 8% interest rate and was maturing in January of 2013. These two transactions combined to save the Company approximately $1.4 million in annualized interest expense.

In June we also extended the maturity date of the mortgage on our Crowne Plaza Hampton Marina for one year until June 2013. We also amended our warrant agreement with the initial holders for the sole purpose of granting them the ability to purchase common shares on the open market. And, lastly, on July 24 the Company announced that we were increasing our dividend by 50% to a quarterly payout of $0.03 per share.

With that I will turn the call over to Bill.

Thank you, Dave. Reviewing performance for the quarter ended June 30, 2012, total revenue was $25.1 million for the second quarter, an increase of 8.6% over the same period in 2011. Adjusted EBITDA was $7.1 million for the second quarter, an increase of 16.1% over our comparable period in 2011. Adjusted FFO was $4.2 million for the second quarter, or $0.33 a share, an increase of 28.4% 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 provision, 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 $1.4 million, or $0.17 a share, for the quarter. The primary drivers for this loss where a depreciation of $2.2 million, an unrealized loss on the warrant derivative of $1.5 million, as well as a prepaid preferred premium of $781,000 and $729,000 in unamortized issuance losses. Both of these were associated with the early retirement of the preferred shares.

As of June 30, 2012, total assets were approximately $208.8 million. This includes approximately $178.9 million of investments in hotel properties, plus approximately $8.9 million for the Company's joint venture investment in the Crowne Plaza Hollywood Beach resort.

The Company had approximately $9.3 million of available cash and cash equivalents, of which approximately $2.3 million was reserved for real estate taxes, insurance, capital improvement, and certain other expenses. The Company had $7 million of available credit under its Essex Richmond Hill facility bringing total liquidity to $16.3 million as of the end of the quarter.

As of June 30, the Company had approximately $155.5 million in outstanding debt at a weighted average interest rate of 6.07%. This includes $137.3 million in mortgage debt at a weighted average interest rate of 5.54%, $14.1 million in Series A cumulative redeemable preferred stock at 12%, as well as $4.2 million in a loan which is related to our joint venture with the Carlyle Group at LIBOR plus 3%, which currently is 3.25% as of June 30.

As mentioned by Dave, subsequent to the close of the quarter we refinanced our Jacksonville asset with Fifth Third Bank. When including this transaction in our mortgage-weighted average interest rate it lowers it to 5.05% and our overall weighted interest rate is lowered to 5.63%.

Total shareholder and unitholder equity was approximately $38.3 million at the end of the quarter. Shareholder equity was $30.7 million with approximately 10 million shares outstanding. Unitholder equity was $7.6 million with approximately 3 million limited partnership units outstanding.

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 approximately 51.4%, or $71,000 per room. Excluding the preferred stock, total debt to capitalization is currently 46.8% or approximately $65,000 per room.

Turning to guidance, we are revising and narrowing our 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 $7.7 million to $9.1 million, or $0.60 to $0.70 per 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. As Dave previously stated, the second quarter was the best period of performance that the Company has enjoyed since our IPO in 2004. Perhaps the greatest accomplishment of the quarter was the completion of our balance sheet restructuring initiative.

Including the Jacksonville refinancing, which closed in July, we completed six new mortgage loans for a combined proceeds of $86 million at a current weighted average interest rate of approximately 4.5%. We accomplished all this in just over 11 months.

While securing these mortgages we have significantly lowered our cost of capital and cleared our portfolio of all debt maturities for the next several years with the exception of our Hampton asset which will be addressed next June. We are very pleased with the results.

Given our portfolio's strong performance in the second half of the year, coupled with the successful completion of our balance sheet restructuring efforts, we elected to raise and tighten our guidance to reflect these positive results. The industry continues to experience an upward recovery that began in the second quarter of 2010. For the quarter, public companies have reported strong RevPAR growth with pricing power building as industry occupancies reach healthy levels.

While we see these positive trends continuing, we remain conservative in our view of the second half of the year giving proper consideration to the softening macroeconomic trends and the continuing turbulence in the Eurozone.

We also continue to take a conservative approach to our dividend policy. After reinstating the dividend in July 2011 and paying $0.02 per share for four consecutive quarters, our Board approved a 50% increase. This increase is reflective of our improved financial performance and allows us to maintain a competitive yield among our peers. We intend to continue our prudent dividend policy moving forward with a balanced goal of creating and returning value to our shareholders.

Lastly, I would like to mention that the Company's total return for the quarter and for the last 12 months ranks first among all lodging REITs. While our company remains significantly undervalued, we believe that the common share price growth will accelerate as the investment community continues to recognize the valuation discount and takes note of our fundamentals.

Our strategy to not issue dilutive common shares but instead find alternate sources of capital through debt financings and limited preferred stock issuance have proven to be the correct path to protect our shareholders and their long-term interests.

We will now open the call up for questions.

(Operator Instructions) Carol Kemple, Hilliard Lyons.

Good morning. The last couple of quarters you all have talked about making an acquisition. Where are you all on that stage and what does the acquisition market look like at this time?

Well, we continue to work on an acquisition. That is a goal that we have for this year, Carol, and presently we are focused on the Houston market and working diligently to try to bring something to bear. It is a little too early in the process to give you any details, unfortunately.

Is there an asset there for sale that you're looking at or are all you just trying to find something?

It is a related party -- it is a hotel there that has an interest in the REIT so that we would work out some sort of either a trade or a swap for shares. The details aren't really evident at this point, so I really can't give you any more information than that I am sorry to say.

That is okay. Where do you all expect your income tax benefit to be for the remainder of the year?

Bill, I'm going to let that one go to you.

Where do we expect it to end up?

Yes, or the amount for the year. Any color on that.

We figure the current year will be about $1.1 million, so that would reduce the benefit by $1.1 million from the start of the year.

Okay, thanks.

Dan Luchansky, DCL Holdings.

I want to congratulate you guys on just doing tremendous balance sheet restructuring. Of course, the 50% boost in the dividend, basically doing everything you said you would do over at the last couple of years, two or three years. I note the margin expansion is really strong, excellent flow-through. And I am also seeing that you are guidance on the low end for adjusted FFO looks like it have gone up pretty nicely, $0.45 to $0.60.

I guess what I am wondering is do you anticipate that the margin expansion and positive flow-through can continue over the next several quarters? I just want to confirm that there is no acquisitions in the new guidance. Thank you.

Well, first off, thank you for the compliment. We appreciate that very much. We have worked hard to get these results and anytime we hear from our shareholders positive comments we certainly appreciate it very much.

I think that we expect that our margins will continue to grow as long as the economy stays at about its present growth rate. As long as we don't have some sort of external event that causes problems for us that would significantly impact occupancy in a negative way, then I think our view is that the top-line growth is going to continue as we have seen it. As long as we get our top-line growth as we have projected, we will most definitely see continued growth on the GOP line that generates the income from the hotel level. So that we are pretty sure of.

In terms of whether or not the Houston or any other acquisition is in our forward projections, the answer is no. We have not projected anything. I will say that our goal is to make an acquisition that is immediately accretive so that if we do make an acquisition it will be an add-on to our projections and not a subtraction from.

Great. Thank you very much and continued success.

Okay, thank you.

Jon Evans, Edmunds White Partners.

Thanks for your time. I just had a couple of questions for you. Can you talk a little bit about what you think your CapEx is going to be this year, first of all?

I think our budget is right at $3 million and we have spent probably at this -- spent and committed, Jon, probably about half of that. So it is going to be right in that ballpark, which is pretty consistent with -- exactly consistent with what our expectations were going into the year. We generally are reserving and spending around 3% to 4% of our top-line revenue.

Got it. Then can you talk a little bit about -- so you refinanced all the properties. There is not another major refinancing coming. Can you give me what your run rate is that you believe on interest expense on a 12-month look forward? Is that possible?

Or maybe another way is can you give me the total savings that you will have and maybe what you think your projected interest expense will be this year?

I think what we announced was the two transactions we did in the quarter are going to save us about, on an annualized basis, $1.4 million on a go-forward basis. I don't have the number. Bill, I don't know if you could help me out with that?

The run rate for the year is a little muddy by the deferred and (inaudible) that are tossed in there and the warrant number. But I can --

Or can you help us just understand kind of what is going to be the run rate for next year? Because I had you at interest expense of about $10.3 million or $10.4 million this year.

That is about right. We figure it is about $10.2 million to $10.3 million.

Okay. And so basically we can take about $1.4 million off of that kind of for a run rate for next year, is that right?

We have got savings built into the second half of this year, Jon, so I don't think that would be right. I think we are going to be probably closer to probably $800,000 off of that. But let Bill do the math and we will send it to you but (multiple speakers).

I would say it is [probably about $900,000].

Okay, that sounds great. Then can you talk about just a little bit about from the standpoint what you have seen in July? Obviously, your RevPAR was extremely strong. It was greater than the Smith Travel numbers for the quarter. What have you seen in July and then can you talk about the bookings pace that you have seen?

Our revenue for July was on plan, so it was about what we expected. Couple hotels were a little less, couple hotels were a little more, but on average we were basically on plan. So we feel pretty good about that.

On a look-forward basis the rest of the third quarter is looking -- from a bookings perspective is looking like it is on plan as well. So we feel like, at least through the third quarter unless we get -- we don't get a hurricane or something like that that comes up the East Coast and blasts our hotels we are feeling pretty good about the third quarter.

Balance of the year a little too early to tell because some of our hotels have less -- we don't have long-term bookings in some of the hotels that we have. But the hotels that do rely on long-term bookings we are looking pretty solid through the end of the year for group business.

Can you talk then a little bit too about the Republican Convention and how you think that is going to skew your results? And will that skew them in Q3 or Q4?

That is actually this month. In terms of skewing our results in a positive way, probably our GOP increase from the property is going to be about $150,000 to $175,000 positive for this one-time even. But what I would say, Jon, is that Tampa has one-time events like that. They host the Super Bowl; they host all these different events.

So, yes, it is a big shot in the arm and it happens, but it is rare that Tampa doesn't have one of those events. We didn't have one last year, so we didn't have one, but they will have these special events on and off. So I wouldn't put too much faith or --

Then the other question, just relative to that, you are going to be able to push price pretty significantly. I assume the flow-through there is going to be just pretty darn good, right?

Right. That is the net increased profit that we are going to get from that hotel for that month is about [$150,000 to] $170,000, something like that.

Got it. Obviously you raised the dividend; that is great. Can you talk a little bit about potentially what you are looking at to continue to push the dividend up? Because you basically got -- with your interest savings you saved about $0.02 a quarter and you gave us one.

I am just curious; is it just you want to have more cash? What do you want to see, because it looks like your EBITDA is going to be better than you projected earlier in the year, too? So can you just help us understand that?

Yes. We need to continue to build our cash because come next March or April, I guess it is April, our line of credit, if we don't draw the line down, then the line is not available to us anymore. We would rather not draw that line down at 9.5% interest because it is a big interest burden.

So what we would like to do is accumulate enough cash that we could meet all of our liquidity tests under the preferred documents without drawing down any money on the line. And so that is our goal. As soon as we build up enough cash then we will look at increasing the dividend again.

Okay. Then just the last question, you have done a great job paying back some of these preferreds early. What is your strategy to continue to repay that because obviously that is your highest cost of debt that is out there, plus it is tied to the equity?

Right. Scott talked about we have got a -- the term I'm looking for in the Jacksonville loan, Dave -- the accordion, excuse me, in Jacksonville, so that is $3 million. We have got an opportunity to do the same thing in Tampa.

And if the markets stay where they are today we think we should take another big chunk out of that probably a year from now, that is our goal anyway, so that we can retire the preferred as quickly as we can.

Okay, great. Thanks, hope you have a great day.

Thanks very much. I believe we don't have any other questions. Is that correct?

Yes, there is no further questions at this time.

Well, I would like to thank, everyone, for participating in the call today and we will talk to you next quarter. Good day.

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