Sotherly Hotels Inc (SOHO) 2015 Q2 法說會逐字稿

Good morning, everyone and welcome to the Sotherly Hotels second-quarter earnings call and webcast. (Operator Instructions). Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Scott Kucinski. Sir, please go ahead.

Thank you and good morning, everyone. Welcome to Sotherly Hotels' 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. Tony Domalski, our CFO, will provide our key financial results for the quarter and update our 2015 guidance. Drew Sims, our Chairman and CEO, will conclude with 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.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 treatments 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.

Thank you, Scott and good morning, everyone. Sotherly had a very busy quarter. In July, the Company issued 3.44 million shares of common stock and an underwritten equity offering that provided $22.6 million in net proceeds, including proceeds from the underwriters' overallotment option. These proceeds were used to purchase the 75% majority equity interest in the Hollywood Crowne Plaza Hotel that was owned by the Carlyle Group. Sotherly and the Carlyle Group had jointly owned the hotel since August 2007. We announced last week the successful completion of the purchase from Carlyle with Sotherly purchasing Carlyle's interest for $26.25 million in cash and the assumption of the existing $57 million mortgage.

The imputed hotel value equates to a 7.4% cap rate on 2015 estimated income with a valuation of approximately $288,000 per key. This underwritten equity raise, the Company's first since its 2004 IPO and its simultaneous purchase of the 311 room Hollywood Crowne Plaza, marked an important milestone for Sotherly as we continue to execute on our strategic vision of growing our asset base, accessing the capital markets and building a unique and vibrant hotel company centered on key markets in the southern United States.

As part of our ongoing strategy, we continue to execute renovations and repositionings at many of our hotels and in the quarter, we saw some short-term impact due to these efforts. In total, portfolio RevPar for the quarter was $107.33, an increase of 3.7% over prior year, with a 6.1% increase in rate and occupancy declined 2.3%. Excluding the impact of the ongoing guestroom renovations in Atlanta, Houston and Laurel, RevPar increased 7.4% driven by a 4.6% increase in rate and 2.7% increase in occupancy. Hotel EBITDA for the portfolio increased 4.6% to approximately $12 million for the quarter.

To review our renovation projects in greater detail, in Jacksonville, the conversion of the existing Crowne Plaza to a Doubletree by Hilton is scheduled for early September. Nearly all renovation work is complete. The public spaces have been under renovation for the past several months, impacting hotel operations during the period. That work has been recently completed and the property is in stellar condition. The finished product has been well-received by our guests. Upon conversion of the Doubletree flag, we believe we will see a material increase in the hotel's marketshare and RevPar.

In Laurel, we continue with the repositioning of the hotel from a Holiday Inn to a Doubletree. Hilton has scheduled the conversion for early October. The property currently has the majority of its public space under renovation. The guestroom work is substantially complete and we expect the recent impact to occupancy due to room displacement to begin to subside as we move into the back half of the year. This asset should benefit tremendously from the renovation and much stronger Hilton reservation system moving forward.

And finally, in Houston, our hotel is feeling both the effects of the decline in the local market, as well as the impact from ongoing renovations. We are currently refreshing all the guestrooms at the hotel and making other improvements to the property as we prepare to convert the property next spring from its current Crowne Plaza flag to an independent hotel affiliated with Preferred Hotels Group. We expect the guestroom impact to be completed by October with no other material impact to the hotel at this point going forward.

A few other property highlights I'd like to give the group. Doubletree by Hilton in Philadelphia gained 11% in RevPar for the quarter as the property produced excellent results with its new flag. In Louisville, the Sheraton Louisville Riverside Hotel gained 17.6% in RevPar for the quarter driven by a 13.3% increase in rate as the property benefited from another strong Kentucky Derby season. And in Tampa, the Crowne Plaza Tampa Westshore gained 9% in RevPar with a 3.2% increase in rate and 5.5% in occupancy taking 480 basis points in share from the competitive set.

In May, we announced that the Company closed on the refinancing of the Georgian Terrace in Atlanta. The $47 million first mortgage with Bank of America carries a 4.42% interest rate, a 10-year term and amortizes on a 30-year schedule. The proceeds from the loan were used to repay the existing first mortgage, partially fund the ongoing guestroom renovation project and for general corporate purposes.

In July, we announced that the Company closed on the refinancing of our Jacksonville hotel. The $18.5 million first mortgage with Bank of the Ozarks carries an interest rate of LIBOR plus 350 basis points, a 4% floor, four-year term with a one-year extension option and principal amortizes on a 25-year schedule. The proceeds from the loan were used to repay the existing first mortgage, partially fund the renovation and for other general corporate purposes.

Subsequent to the loan closing, we purchased a LIBOR cap so as to minimize our interest rate risk going forward. And finally, last month, the Company announced a 6.7% increase to our quarterly dividend to $0.08 per share, which equates to a current yield of approximately 4.5% based on our current average stock price. And with that, I'll turn the call over to our CFO, Tony Domalski.

Thank you, Dave. Reviewing performance for the period ending June 30, 2015, total revenue for the quarter was approximately $36.9 million representing an increase of 1.4% over the same quarter a year ago. Adjusted EBITDA was approximately $10.8 million for the quarter representing an increase of 2.4% over the same quarter a year ago and adjusted FFO was approximately $6.7 million for the quarter, or $0.52 per share representing an increase of 6.9% over the same quarter a year ago.

Please note that both our adjusted FFO and adjusted EBITDA exclude charges related to the early extinguishment of debt, acquisition charges, changes to the differed portion of our income tax provision, as well as other items. Please refer to our earnings release for additional detail.

Looking at our balance sheet as of June 30, 2015, the total book value of our assets was approximately $307.9 million. This includes net investment in hotel properties of approximately $263.8 million and approximately $1.9 million for the Company's joint venture investment in the Crowne Plaza Hollywood Beach Resort. The Company had total cash of approximately $24.1 million consisting of unrestricted cash and cash equivalents of approximately $17.3 million, as well as $6.8 million, which was reserved for real estate taxes, capital improvements and certain other expenses.

As of June 30, the Company had approximately $261.3 million in outstanding debt at a weighted average interest rate of 5.31%. With the Jacksonville refinance in early July, approximately 87.5% of the Company's debt is fixed. Total stockholder and unitholder equity was approximately $29 million at the end of the quarter, of which stockholder equity was approximately $25 million with approximately 10.9 million shares outstanding and unitholders' equity was approximately $4 million with approximately 2.4 million limited partnership units outstanding.

At the end of the second quarter, our interest-bearing debt was approximately $96,850 per room. Also the ratio of debt to total asset value as defined in the indenture agreements to our senior unsecured notes was 52.8%. That's based on total asset value of approximately $494.9 million at the end of the quarter and total debt of approximately $261.3 million.

Turning to guidance. We're updating our previous guidance for 2015, which accounts for current and expected performance within our portfolio, including the acquisition of the Crowne Plaza Hollywood Beach and the recent follow-on offering. For the year, we are projecting total revenue in the range of $137.7 million to $142.7 million. At the midpoint of the range, this represents a 14% increase over last year's total revenue.

Hotel EBITDA is protected in the range of $38.7 million to $39.6 million and at the midpoint of the range, this represents a 21.5% increase over last year's hotel EBITDA. And adjusted FFO is projected in the range of $16.8 million to $17.9 million or $1.13 to $1.20 per share. At the midpoint of the range, this represents a 22.9% increase in last year's adjusted FFO and a 7.9% increase over last year's adjusted FFO per share. Additional details can be found in the outlook section of our earnings release. And I'll now turn the call over to Drew.

Thank you, Tony. I'd like to start by discussing the recent Hollywood acquisition and common stock offering that the Company completed last month. We have been involved in the Hollywood Hotel for nearly a decade with soul ownership of the asset being the ultimate goal from the beginning. Not only do we know the hotel intimately, but we have seen the Hollywood submarket of South Florida mature over the past decade and feel strongly in its long-term prospects.

Coupling these factors with the fair purchase price we negotiated with our JV partner, we felt this was the ideal acquisition for the Company at this point and a good fit to pair with our first equity offering since the IPO. We have repeatedly represented to the investment community that in order to continue to grow the portfolio, we would need to raise equity and our intent was to do so with an appropriately sized offering paired with an acquisition. We launched the equity offering shortly after our stock hit a seven-year high and structured the offering so as to minimize shareholder dilution capping the shares offered at 3 million plus the underwriters' overallotment.

Our stock price experienced significant pressure during the marketing period resulting in a larger discount than we would have hoped, but, all in all, the transaction was successful. Management met with dozens of new institutional investors and continued to spread our story and gain interest. One of our secondary goals was to increase trading volume.

These two transactions are a win for the Company. The Company's stock offering was a firm step forward growing our equity base, increasing liquidity and gaining more institutional long-term shareholders. The Hollywood asset is a perfect fit for SOHO's long-term strategy. It's a full-service asset with a prime waterfront location in a top-five Southern market. The property is in excellent condition and is a good candidate to be converted to an independent boutique in the future.

The property's RevPar is accretive to portfolio RevPar and it will produce the highest percentage of hotel EBITDA to the Company. The Hollywood Hotel is highly seasonal with nearly 45% of hotel EBITDA being generated in the first quarter. Given the timing of the acquisition, it will have a dilutive effect on 2015 earnings, but, on an annualized basis, will be accretive to all shareholders. Obviously we manage the Company for long-term results and value and we believe the Hollywood asset will deliver in this regard.

Looking at our other objectives across the Company, we are focused on completing the renovation and upbranding projects currently in process across the portfolio in Jacksonville, Laurel, Atlanta and Houston. While we have felt some near-term pain at these projects, the long-term value creation will far outweigh any short-term negatives. When you look at the results from our assets not currently under renovation, we are seeing strong aggregate performance and expect these trends to continue.

All in all, a solid quarter for the Company followed by some milestone transactions in July have made a successful summer for Sotherly. We will now open the call up for questions.

(Operator Instructions). Dan Donlan, Ladenburg Thalmann.

When you guys contemplated your guidance, you obviously knew that you had some of these portfolio repositioning projects going on. So was just kind of curious, with the acquisition, it seems like you're lowering your expectations for FFO and just curious how much of that is related to maybe more disruption than you anticipated at some of these assets and how much of it is related to maybe some greater softness than expected in maybe Houston or maybe some other markets?

Yes, the vast majority of the impact is from the Hollywood acquisition. The seasonality of the property is such that it's really strong in the first four months of the year and then the summer in South Florida, obviously, is the lower rated, lower occupancy period. So we're going to see some impact just as a result of that and we didn't have the luxury of deciding exactly what date we were going to buy the asset. It was a negotiation with our JV partner, so the date is what it is and we had to act on that. So to answer your question, most of the impact is the result of the seasonality of the Hollywood acquisition.

Secondary, we have seen a little more impact in Houston than we thought and I would say that's maybe a penny, so we're not looking at maybe a penny, maybe two pennies, but it's not a lot. We're actually doing okay there, but for -- we have a bunch of rooms out of service. We made a conscious decision to accelerate the renovation process and just get it over with. So we've taken as many as 60 rooms out of service at one time and we didn't make that decision until really I guess it was April. So we had already given guidance back when that happened and so that had a little bit of an effect on us.

And then we've seen some softness -- the main impact has been our Laurel asset. We had to go through an approval process with Hilton to do the conversion and we didn't get an application in until last October. Hilton had not approved any of our design concepts even though we had submitted them in November in late January. So if you understand how the process works, we're in late January. We have 90 to 120 days to get product once we order it, so we're now looking at midsummer before we can get any product and we still haven't been approved. So we actually made a decision to go ahead and order the goods without Hilton approval with the anticipation that they would like our design, which they did.

And so we've had to compact all this work into a very, very short period of time, basically five months, and to renovate a hotel from top to bottom in five months is a monumental effort and it is very, very disruptive. And so you can probably add -- that's probably a $0.02 or $0.03 FFO adjustment right there, but what we're really excited about is that the January -- the Jacksonville asset is basically complete. We're going to convert on September 1. We think that that's going to be a home run for us in terms of the change in the performance of that asset. We're very confident that the Laurel asset is also going to experience a monumental change in its performance. Now it may take a little longer to ramp up, maybe first quarter next year, but we're expecting some fairly good numbers late this year out of that asset on a comparable basis to prior year.

So we think both of those are going to give us a shot in the arm and then the Atlanta asset we should finish up our room renovations near the end of the year. So look for some really good results from us. I think fourth quarter will be good and I think first quarter next year will be -- we should have a really good performance, so we are looking forward to that.

Okay. So outside of the hotels impacted by renovations, you really haven't seen any type of softness in your markets relative to your expectations maybe outside of Houston obviously given what's going on with the oil markets?

We really haven't. We think we were -- had a greater than 7% RevPar increase in the properties that are not under renovation as a subcategory of our portfolio and we think that that's pretty good. And when we start adding on these other upbrandings and repositionings, we should see real good RevPar growth.

Okay. And then as far as the Hilton Wilmington, I think I just read somewhere that there's a Springhill Suites going up somewhere in the city. Was just kind of curious, that market hasn't seen too much supply over the last couple years, is that hotel near you guys and what impact do you think that may have?

It is not near us and I don't think it's going to have any impact on us. We did get a new Courtyard last year that has had a little bit of impact on us on the transient business traveler, but we have not seen any impact and I don't anticipate we will have an impact from that kind of property. As I understand it, that's out at Mayfair in that category and it's just a different part of the city.

Okay. And then as far as the Crowne Plaza, you mentioned potentially, Crowne Plaza in Hollywood, you mentioned potentially going to a boutique brand there or an independent brand. When does that flag up again? If you could remind us?

It's two years from now.

Okay, okay. That's it for me. I'll circle back in the queue if I have anything else.

Carol Kemple, Hilliard Lyons.

Are there any nonrecurring items that you all will have in the third quarter associated with the Hollywood acquisition?

Nonrecurring items?

There will be some acquisition costs associated with that.

Was that included in your net income in guidance?

Yes, it is. It's in net income. It's in FFO and it's reversed out for the adjusted FFO.

Can you give us any idea what you think those expenses will be?

They should be roughly about $0.5 million.

It looks like your food and beverage sales were down. Was that just based on lower occupancy, or is there anything else going on there?

It's a little bit of both. We had major renovations going on in Jacksonville, which basically shut down the ballroom. Same thing in Laurel. We basically had all our meeting space and our ballrooms shut down, so that's 2 of 10 properties that are shut down. What's that?

(Inaudible - microphone inaccessible)

And oh yes, and Houston as well, I'm sorry, we were renovating the public space there so --.

Some of our catering has fallen off.

Right. Now I will say that the catering in Houston has fallen off a cliff. We have seen a marked decrease in the catering in that market as a result of what's going on with the oil business.

Okay. And then I didn't see it in the press release. Can you give me your weighted average share and unit count for the quarter?

For shares and units, (multiple speakers) the average for the quarter would be about 13 million.

Okay. Thanks.

Carol, we'll be filing the 10-Q here in the next couple of days. You can get the exact number out of there.

Okay, great. Thank you.

(Operator Instructions). Scott Williams, Palogic.

A couple questions. The Hampton property -- I know it's a smaller piece of the overall pie -- but the lender seems to -- the debt has gone down substantially. Is that property, Drew, is there -- is it impaired sort of long term or is there -- how do you envision that asset in the portfolio going forward?

Scott, it's an asset that we would like to dispose of, but we're not going to give it away and it's actually a very key piece of real estate for the city. We basically dominate the waterfront and we believe that there's an opportunity for someone to buy this hotel for an alternate use and we are waiting and negotiating with different parties. We haven't been able to come to a conclusion yet, but we do believe that there's an opportunity to convert this to student housing. There's an opportunity for the hotel to be torn down and made into a city park, which is what's in the master plan.

So there's lots of moving parts here. We believe that the market is impaired and probably for the foreseeable future given what's going on with military funding and the federal government, the fact that Fort Monroe was closed under BRAC completely changed the market for us. We've had a tremendous amount of product was built in the market right before the Fort Monroe closing in the 2007, 2008 timeframe. And on top of that, then the city has actually invested about $0.5 billion in a very large mall and kind of moved the city center out near the interstate. So things have really moved away from this property. Long term, is it a viable hotel market? Probably not. But in the interim, we have a license agreement with Crowne Plaza. We have to operate the hotel. We will do that and continue to negotiate with the various parties that we are trying to dispose of the hotel to.

Okay. As you finish your large renovations and conversions, how do you think about maintenance CapEx as a percentage of revenues for the portfolio that you have?

Generally speaking, it's 4% of our total sales as an ongoing basis.

And you think that that's generally the number that works out to?

It generally works out to that number once we do the major renovation. So generally how that cycle works is about every 10 years, you're going to do a major renovation and then the 4% will carry you between those benchmarks.

Okay. And I know you are sensitive to this, you discussed it in your opening remarks, but prior to the offering, you had a portfolio at the midpoint that was trading at somewhere less than 10 times EBITDA and we've talked about value being north of $10 per share. We felt it was in that range. And you've discussed your desire to grow, but how do you match that against, when you do a dilution at roughly 60% of NAV to acquire an asset and do you foresee opportunities to acquire assets and utilize equity kind of in this range in the future?

Yes, are we pleased with where we priced this? No, we're not pleased with where we priced the secondary. None of us were happy with the execution that we got. Though we were surprised that we got hit with a discount of the size and magnitude -- we thought we'd have a discount, but not the discount -- it's probably twice what we thought.

In terms of dilution, the timing of this acquisition was not of our making. Carlyle was going to sell the asset and we actually negotiated after the second round of offers had come in and negotiated a deal. So we felt like it was important to keep this asset in our portfolio. We looked at what does it do if the asset goes away and goes out of the portfolio versus what happens if we keep it in the portfolio. And the delta on that was about $0.07 in FFO. So we didn't like the fact that we would be taking a giant step backwards both in the size of our portfolio and the metrics that it caused. So we thought that we needed to do some sort of small equity offering. We hadn't been in the market for over a decade and we felt like it was something we needed to do and we tried to size it appropriately, make it as small as we could make it and still provide the funding that we needed to make the acquisition in Hollywood.

And so as the biggest shareholder, do I like diluting myself? No, I don't, but ultimately I don't think this is going to dilute us. I think that we are going to be very happy with the performance of the Hollywood asset on a go-forward basis. I think just wait until the first quarter next year and I think you'll be very pleased with what you see as a result of this whole transaction.

Okay. Thank you for the time.

Ladies and gentlemen, at this time, we have reached the end of the allotted time for today's question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

We thank you all for your time and participating in our call today and we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.