Sotherly Hotels Inc (SOHO) 2014 Q4 法說會逐字稿

Good day, and welcome to the Sotherly Hotels Inc. fourth-quarter earnings conference call and webcast. 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 call over to Mr. Scott Kucinski, Vice President. Mr. Kucinski, the floor is yours, sir.

Thank you, and good morning, everyone. Welcome to Sotherly Hotels' fourth-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. Tony Domalski, our CFO, will provide our key financial results for the quarter, and issue our 2015 guidance. Drew Sims, our Chairman and CEO, will conclude with an update on 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 sotherlyhotels.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, and good morning, everyone. I'd like to begin today's call by reviewing our portfolio's performance for the fourth-quarter and for year-end, which was, once again, another solid year of growth for the Company.

For the quarter RevPAR for the portfolio was $78.60, an increase of 7.5% over prior-year, with a 4.6% increase in rate, and occupancy was up 2.8%. Hotel EBITDA increased 27.7%. For the year, RevPAR was $88.42, an increase of 10.3% over the prior-year, driven by a 5.8% increase in rate and a 4.3% increase in occupancy.

For the quarter, we saw growth in 10 out of 11 of our markets, with over half of our portfolio gaining share on their competitive sets. Notable performers were Raleigh, where our DoubleTree property had RevPAR growth of nearly 20%, compared to a very healthy market, which grew over 14%, resulting in a gain of over 500 basis points in share. In Jacksonville, our hotel had RevPAR -- the market had RevPAR growth of 11.2% for the quarter, with our hotel gaining 13.6%, a gain of over 240 basis points in share. And in Hampton, our property produced RevPAR growth of 14% against the market's respectable 4.5% growth.

For the year, we saw strong growth across the majority of our portfolio, with the largest contributors being Raleigh, Tampa, Jacksonville and Louisville, all of which recorded double-digit RevPAR growth. We experienced challenges at both our hotels in Philadelphia and Wilmington in the quarter. The overall Philadelphia market saw considerable weakness being flat to prior-year, and with a December that was off nearly 17%.

Layered on top of that weak market performance was the fact that the fourth-quarter marked the conversion of the hotel from a core brand Hilton to a DoubleTree, wherein we suffered some nonrecurring setbacks due to challenges with Hilton's internal changeover and placement of the new DoubleTree flag on the various market channels. We believe these issues have been addressed as of Q1, and the share loss experienced at this hotel in the fourth-quarter will reverse, and our fair share will return to more historic levels.

In Wilmington, we had a disappointing fourth-quarter on the back of several large group bookings that did not materialize. We continue to monitor the property's performance closely, and we are encouraged by the pace of its bookings headed into 2015, and expect that the year-end 2014 softness was something of an anomaly. Despite a few exceptions that muted these results, we are pleased with the gains made across the portfolio during the year, and are encouraged by what we are seeing thus far in 2015.

Turning to a few of our other corporate development and activities, in November, the Company completed the issuance and sale of $25.3 million of our 7% senior unsecured notes carrying a five-year term. A portion of those net proceeds from the transaction were used to repay in full the one-year 12%/$19 million secured bridge loan with Richmond Hill and Essex Equity. This was the bridge loan we used to purchase the Atlanta asset last March. In December, the Company secured $3 million of additional proceeds on its mortgage loan on the Crowne Plaza Jacksonville Riverfront property as part of an earnout pursuant to the terms of the existing loan.

Also, in December, the Company entered into a master agreement and a series of individual hotel management agreements with MHI Hotels Services to address the scheduled expiration of the existing master management agreement and strategic alliance agreement, and provide ongoing uninterrupted management of each of the Company's wholly-owned hotels. This new series of agreements lowered the overall fees paid for the management of the hotels and provides for terms consistent with those we see throughout the industry.

Last month, the Company announced an increase to its quarterly dividend of $0.07 per share, equating to a dividend yield of approximately 3.8% based on our current average stock price. This ranks in the top quartile of our REIT peer set.

And with that, I will turn the call over to our CFO, Tony Domalski.

Thank you, Dave. Due to the performance for the period ended December 31, 2014, total revenue for the quarter was approximately $29.8 million, representing an increase of 32.7% over the same quarter a year ago. For the year, total revenue was approximately $122.9 million, representing a 37.6% increase over a year ago.

Adjusted EBITDA was approximately $6 million for the quarter, representing an increase of 30.2% over the same quarter a year ago. And for the year, adjusted EBITDA was approximately $29.3 million, an increase of 39.6% over 2013.

Adjusted FFO was approximately $2 million for the quarter or $0.15 per share, representing an increase of 8.3% over the same quarter a year ago. And for the year, adjusted FFO was approximately $14.3 million or $1.09 per share, representing an increase of 30.8% over a AFFO per share a year ago.

Please note that both our adjusted FFO and adjusted EBITDA exclude unrealized gains or losses on hedging activities and derivatives, charges related to the early extinguishment of debt, acquisition charges, changes to the deferred portion of our income tax provision, as well as other items. Adjusted FFO also excludes franchise termination fees. Please refer to our earnings release for additional detail.

Looking at our balance sheet, as of December 31, 2014, the total book value of our assets was approximately $303.2 million -- an increase of 33% over year-end 2013. This includes net investment in hotel properties of approximately $263.3 million, and approximately $2 million for the Company's joint venture investment in the Crowne Plaza Hollywood Beach Resort.

The Company had total cash of approximately $23.3 million consisting of unrestricted cash and cash equivalents of approximately $16.6 million, as well as approximately $6.7 million, which was reserved for real estate taxes, capital improvements, and certain other expenses. As of December 31, 2014, the Company had $258.2 million in outstanding debt at a weighted average interest rate of 5.26%, a 21 basis point reduction over a year ago -- or quarter ago.

Total stockholder and unitholder equity was approximately $31.3 million at the end of the quarter, of which stockholder equity was $26.4 million with approximately 10.6 million shares outstanding, and unitholders equity was approximately $4.9 million with approximately 2.6 million Limited Partner units outstanding.

At the end of the fourth quarter, our interest-bearing debt was approximately $95,700 per room. And, also, at the end of the quarter, the ratio of debt to total asset value, as defined in the indenture agreement to our senior unsecured notes, was 54.1%.

Turning to guidance. We are issuing our guidance for 2015, which accounts for current and expected performance within our portfolio, and is predicated on RevPAR growth of 5.5% to 7.5% for the consolidated portfolio. For the year, we are projecting total revenue in the range of $132.2 million to $135.5 million. And at the midpoint of the range, this represents an 8.9% increase over last year's total revenue.

Hotel EBITDA is projected in the range of $35.9 million to $36.8 million. And at the midpoint of the range, this represents a 13.2% increase over last year's hotel EBITDA. And adjusted FFO is projected in the range of $15.9 million to $16.8 million or $1.20 to $1.28 per share. At the midpoint of the range, this represents a 13.8% increase over last year's adjusted FFO 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, Tony. With double-digit growth across all metrics in 2014, we were pleased with our annual results as we continue to see strength across the majority of our markets. Rates continue to expand across all segments, and demand growth remains steady, while new supply remains limited in most markets.

We expect 2015 to be another healthy year for the lodging industry, our markets, and our hotels. As we conclude several asset repositionings in Philadelphia, Jacksonville, Atlanta, Laurel, and Houston, we expect these hotels to reap the benefits of our capital investments. We are already seeing a significant impact in Jacksonville and Atlanta, and expect similar results as we upgrade our brand affiliations and move our hotels upmarket.

Regarding changes to our portfolio, we continue to monitor acquisition opportunities in high-priority target markets, and are tracking several assets. We also continue to consider the appropriate time to sell certain assets in the portfolio. And we will execute when we believe we can create the most value for our shareholders.

We remain focused on managing our capital structure and endeavor to lock-in fixed-rate mortgages and extend debt maturities throughout the year. Last month, we increased our dividend to $0.07 per share. This marks the sixth increase in the last nine quarters. We have increased our dividend nearly 56% in the past 12 months, and continue to have a bias towards future increases in a steady and measured fashion.

In the quarter, we gained research coverage from two analysts, and we will be hitting the road with these groups in the next month to provide additional exposure for SOHO to the investment community. Both analysts initiated coverage with a buy rating. We continue to believe that there is a disconnect between our current stock price and the inherent value of our Company, making SOHO an attractive investment opportunity.

We will now open the call up for questions.

(Operator Instructions). Carol Kemple, Hilliard Lyons.

In your 2015 guidance, can you talk about why your interest expense assumptions would be to get to those numbers?

We would be looking at -- I think the big variance between last year's number and this year's number is that we have a full year's worth of debt on Atlanta, full year's worth of mortgage interest. We also have a full year's worth of interest on the 7% unsecured notes that we issued in November, and we don't have the interest on the --

Bridge loan.

-- on the bridge loan. Also, I think you'll notice in the schedules there of the AFFO in the back of the earnings release, we had a significant prepayment penalty associated with those repayment of the bridge loans. And so, that would be nonrecurring in 2015 as well.

Okay, and --

If that doesn't get you there, Carol, just give me a holler back.

Okay, thanks. That's all of my questions.

Okay.

Daniel Donlan, Ladenburg Thalmann.

Just want to talk a little bit about the guidance. If I run the math on the hotel EBITDA and divide it by the revenues, you're looking at a hotel EBITDA margin of 27.2% at both the high and the low-end. So, I am just curious as to why the EBITDA margins aren't actually increasing if you hit the high-end of your revenue guidance?

That's a good question, Dan. We have kind of backed into that number. So we, in terms of looking at the margins per se, that's probably not something we considered that closely. We have looked at it from a different angle, which is, from our perception as to what we think the hotel EBITDA is going to be and then we built on that, and then took a high and low margin from there, building more towards -- being conservative, in our view, as to what we think -- where we might end up.

So, we've certainly left ourselves some room to the upside. And that's how we have always managed our Company.

Sure. I thought that's what you might say, so --. So, and then as we think about Houston, a lot has been talked about in the press about lower oil prices and what that may do to the market. And we have already seen some weakness in that market, especially relative to the other top 25.

Can you maybe talk about what you see there? I think one of your big corporate clients was not oil-related, but I wasn't positive on that. So, can you talk about your outlook there? And have you tempered your outlook versus your underwriting when you bought the asset, call it a year ago?

Actually, the hotel outperformed our underwriting almost immediately. So, from that perspective, I think it's been a very positive investment for us.

In terms of on a go-forward basis in 2015, we are dependent on some of the major oil players there. Chevron is one of our big customers. Kellogg Brown & Root is an engineering company that focuses on the oil and gas industry that is a big customer of ours. But we haven't seen a massive deterioration in the market yet. What we read and what we see with our group business is fairly consistent with last year.

Transient, hard to say. So far transient is holding up okay. We had kind of a soft February. January was pretty good, actually. So, it's been a little bit of a mixed bag.

Oil prices are coming back a little bit, so it's -- are we exposed there? It could be, but we have also got larger clients that aren't related to the oil business. Our sister building next to us houses United Airlines Operations Center, and they give us a tremendous amount of business. And they are actually benefiting from the oil prices. So it's a mixed bag there.

Okay. So, I guess when you look at your RevPAR growth out, like a 5.5% to 7.5%, that's probably coming in, in line, maybe a little bit better than where most of the hotel REITs have come in. Maybe -- can you maybe give us who kind of your leaders and then maybe who your laggards are in terms of your portfolio?

Well, I think our clear leader will be Atlanta. We have got a lot of upside there. We have finished about, what, five floors of renovations now. As we continue to roll through the building and improve our rooms product, there is a lot of upside on the ADR there. And we're going to continue to see that push forward.

So, I think that that's the clear leader. Savannah has gotten off to a great start this year as well. We have got a lot of upside in rate there as well, I think. So, I think those are probably the two major leaders. Raleigh has just been a solid performer year in and year out since we made the brand change to the Hilton DoubleTree flag.

So, I would say those are the top three. As far as the laggards, the filling market is getting beat up pretty good right now. We took a step backwards when we converted from Hilton to DoubleTree. We thought that would be a seamless type of conversion, since it was within the confines of the Hilton family of brands. Nothing could be further from the truth.

It was more difficult making a change from a Hilton to a DoubleTree than it would be from doing a Hilton to a Starwood product or an IHG product. The internal workings within the Hilton family were less than ideal, so we had lots of problems. We actually got dropped off the Internet on many, many channels. And, so, our customers couldn't find us. And so that was a problem.

We have cured all that; took us a couple of months to get it all straightened out. But the hotel is doing fine. I think first couple of months this year, we have been okay. Obviously, the weather isn't helping things there, because most of our business comes from the Northeast corridor. And we are not seeing a lot of travel out of Boston and New York these days, as you well know.

So, it's been a little impaired, but it's -- we think that that's probably a laggard market.

That and -- you know, we have got our eye on Houston, but so far, so good on Houston. It's not real bad.

Okay. And then as far as the conversions you are anticipating to a DoubleTree, do you think you could potentially run into the same type of issues, call it in the third -- or I think fourth quarter is when some of those assets convert? Or is it just because you're going from IHG to Hilton, it's a completely different process?

It is a completely different process. And, I think, quite frankly, it will be smoother --

Yes, Dan --

-- with a lot of upside.

Yes, it's Dave. I mean, when we transferred to the Holiday Inn flag from Raleigh to DoubleTree, it was an immediate vertical bounce for us. It's one day IHG strips the entire system, the GDS, the third-party sites, the Internet placement, and then Hilton picks it up and it's pretty seamless, and you get a better reservation system.

It's just at Philly, it was inside the family of brands, and the left-hand at Hilton didn't know what the right hand at Hilton was doing, and it really forced us to suffer quite a bit during the quarter. But those two hotels you mentioned, that's an IHG switched to Hilton, and it should reflect more in line with what we saw in the mechanisms that -- how we did the Raleigh deal.

Okay. And then, lastly, could you maybe expand upon the cost savings that you mentioned with renegotiating the operating agreement with MHI Hotels Services?

Yes. So, as you know -- yes, that was a 10-year agreement. It was coming up for expiration. Essentially, we took all the existing hotels and we lowered their fees to 2.65% for the next few years. And then that fee rate will go down to 2.5% thereafter.

That's from 3%, Dan.

Yes, from 3%. And then all new hotels, which, for purposes of this renegotiation, included the Atlanta hotel and the Houston Hotel, which are fairly significant for us, we started out at 2%. And that ramps up to 2.5%, not to 3%. So, if you just model it out, just call it 50 basis points, that's really the pickup we get from an economic perspective going forward.

Okay. All right, thank you so much. Appreciate it.

Scott Williams, Palogic.

Thanks for taking my call. Atlanta, is that -- on a comparison basis to 2014, is that -- did we miss the first quarter of results in our year ended number in 2014? I guess where I am headed is trying to just get what was the full year's -- if you included Atlanta, what would our hotel EBITDA have been for the year?

You would add about another $0.5 million, that's about what -- right?

Yes, that would be about right. We acquired that property the 27th of March last year, so we had about six days' worth of financial performance included in the first quarter of 2014 results.

Okay. So, the lift on a year-to-year compare -- it is not just an inclusion of either Houston or Atlanta; it's just a majority of expanded growth, RevPAR and margin? Okay.

Yes, there is some pickup, but for having a full quarter of Atlanta this year in the first quarter, and then the rest of it would be internal growth.

Drew, (multiple speakers) I know -- sorry, go ahead.

I was just going to say that's both topline growth and margin growth.

Right.

It's both.

Okay, fantastic. And I know you have spent a lot of time talking about it on every call, and it's something we just continue to talk about. On the dividend, you have been just steadily growing it. But when you look -- just kind of rough math would suggest that the market is somewhere around 40% of FFO. And at the midpoint of your guidance, it's something lower than that. How do you personally think about it at the Board, about how to -- what the appropriate level is? When to raise it?

Well, we try to raise it every quarter. (laughter). So, that's -- we want a steady growth in our dividend. And no -- this isn't -- no one likes that more than me, because I am the largest shareholder. So, I like to see the dividend grow.

And in terms of what percentage of our overall revenue we pay out, that's less of an issue with us than to make sure that we have a steady, strong growth. We obviously want it to be safe. And we want to make sure that we don't repeat, like we did in the last major recession, that all of a sudden we had to make changes and go the opposite direction, because we think that that's not well-received by the market.

And, so, that's another consideration. And, quite frankly, this year, we are reinvesting a lot of money back into our hotels this year.

Yes.

We have listed them all out. And all -- most of that reinvestment is going to be through cash flow. So we're not going out and borrowing a whole lot of money to make these improvements in it. We think that the end of the year, we are going to have four or five properties that are going to be moving upmarket that we will be able to charge higher rates. And it will increase our profit margins, and all that will flow through to our shareholders and drive our stock price. So --

Yes, that makes complete sense. On a kind of a go-forward EBITDA basis, Drew, you are -- my math suggests about 9 times on hotel EBITDA to where the market values the Company. Are you seeing any transactions that offer 9 times stabilized EBITDA on an acquisition?

Well, I mean, we looked at -- our Houston asset was very accretive. That multiple we completely eclipsed. So that dropped a lot of money to the bottom line, and we created all that value in about six months in Atlanta.

I mean, on a going basis, I mean, I think we see things that probably competitive. Sometimes we have to weave our magic at the asset level to get those kind of returns the way we did in Atlanta. So, there is still things out there. Not on a look-back basis, Scott, but we have been at this for a long time, and we see value in some of these assets where other folks don't, so.

Yes. And, look, Atlanta and Houston seem to be great transactions. It's almost more of a just referencing how the valuation of the current stock price really more than anything.

Yes. And I think to your point, we have been very reluctant to issue common stock at our current share price. And that's I think (multiple speakers) --

Yes, you guys have done a great job.

-- ultimately that's what you are asking about, and I think that we will continue to take that view. You know? Will we issue common stock one day? Yes, we will. And we will probably do it in concert with an accretive acquisition. And, so that it lessons everybody's pain.

And -- but we still feel like our stock is undervalued and we need to get above [$0.10] before we start thinking about that. And, so, we are trying to continue to grow the Company. We will recycle some capital out of some assets that we have today, and use that capital to continue to grow. And we will also -- if we see the right deal, yes, we might pull the trigger on a common issuance. But we have been very reluctant to do that to date.

Okay. Last question. The part when you referenced the refinancings, and trying to extend debt and potentially lower rates, it looks like to me Savannah and Wilmington would be properties that were seemingly underlevered. Are there others? Or are those the ones that offer you the opportunity? Or, within the portfolio, what properties should we be thinking?

Well, unfortunately, those two have lockouts on them, so we can't really pay those off. The day will come when we will do that, but right now is not the time.

We're going to refinance the Atlanta asset, and lock in rates around 4% for the next 10 years. That's something we really want to do, and so we are looking at that. And I think, also, probably our Jacksonville asset is an asset that is performing much better. And we can lock in low rates for an extended period of time, that would also make sure that that hotel is cash flow positive for the next decade.

So, those are the things we are looking at. And the more debt that we can lock in, in 4% level is, as far as I am concerned, is -- that's the best thing we can do. That's cheap money. And we are paying a 3.5% dividend, so if you can get 4% debt, that's a pretty good thing.

Yes. Well, fantastic. Congratulations on all your success and thank you for taking my questions.

All right, thank you.

(Operator Instructions). [Mike Tovias], Investor.

First off, thanks for the call, and thanks to your great efforts in 2014. That was a terrific year and you guys are doing a great job.

Secondly, I appreciate your reluctance to issue stock at these prices, and I hope you are able to hold firm on that. I had two quick questions. The first one is, is there an opportunity and/or would you consider borrowing money and terming out your debt even further at slightly above market rates in sort of the conventional marketplace?

And then the second question was, I think on this call and possibly other calls, you have mentioned that you think the stock is an attractive investment opportunity, and there is possibly a disconnect with the investment community. And I was wondering roughly, when you have internal discussions, what you think the stock is worth?

Well, let me -- this is Dave. I will address the debt question. I mean, we are always looking at ways to lower our cost of capital and make good decisions for the overall capital structure. We did issue public debt twice in the last 18 months, so we have gone back to the capital markets to basically term-out debt, or we'll put additional debt on the balance sheet and get rid of some short-term debt. So, we have done that.

If your question revolves more about getting, for instance, sort of a facility, a conventional bank facility, I don't think we are there right now. I mean, all of our hotels are encumbered with individual mortgages. That's the way we like it right now. We're just not looking for that typical sort of secured facility from a bank loan -- from a bank credit facility type of deal.

So, I don't think we are looking for any additional type of debt instrument right now. So, I think that's maybe the answer to question one.

Question two on our NAV calculation, I mean, I think that's probably can be calculated by any of the analysts or by any investor of us. I mean, we think our assets on a gross basis, at least if you use our bond covenants as a gauge, probably puts us close to $500 million in gross assets. You could strip out some debt, and look at our units and our float, and we are probably in the low to mid-teens in terms of an NAV. That's all sort of somewhat subjective, I guess. NAV by its nature is objective.

But we think the stock is discounted to its NAV. We are a small-cap microcap company. We understand there is a discount associated with that. We just think the discount is too big. And, as Drew mentioned, we need to -- we could be a double-digit stock, we think, to be appropriately valued with a discount to our NAV. And that gives us the opportunity to grow out of that discount. But right now, it's just too deep.

Yes. Great. Thanks a lot and keep up the great effort.

Thank you.

Thanks.

Well, at this time, we are showing no further questions. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

Thank you all for joining us. We look forward to a great year, and talk to you next quarter. Thanks.

And we thank you, sir, and to the rest of the team for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and have a great day, everyone.