Sotherly Hotels Inc (SOHO) 2015 Q4 法說會逐字稿

Good day, and welcome to the Sotherly Hotels Inc. fourth-quarter earnings call and webcast.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Scott Kucinski, Vice President of Operations and Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Sotherly Hotels' fourth-quarter earnings conference call. Dave Folsom, our President and COO, will begin today's call to review 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 on our 2016 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 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 these expressed or implied by forward-looking statements are detailed in today's press release and from time to time the Company's filing 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 everybody. I would like to start today's call by discussing some of the key operating metrics for the quarter, where our portfolio finished out well for the year. For the quarter, portfolio RevPAR was $90.37, an increase of 15% over prior year with a 10.7% increase in rate and occupancy increasing 3.9%.

Hotel EBITDA for the portfolio increased 28.3% to approximately $8.8 million for the quarter. If not for some nonrecurring charges related to a litigation settlement, as well as our real estate tax assessments currently under appeal, hotel EBITDA would have been $9.6 million for the quarter, representing an increase of 40.4% over prior year. Hotel EBITDA margins expanded by 95 basis points in the quarter. Again adjusting hotel EBITDA to account for the aforementioned nonrecurring charges, margins expanded by 320 basis points in the quarter. This expansion is primarily driven by rate within the portfolio and it's also important to note that our Hollywood asset was highly accretive to our overall portfolio margins in the quarter.

In terms of relative market performance, our Southern and mid-Atlantic markets performed well with a combined 5.2% RevPAR growth. Our portfolio outperformed as a whole gaining 210 basis points in share on a combined basis points.

To review some individual property highlights, our Jacksonville hotel has gotten off to a strong start following its conversion to the DoubleTree by Hilton flag in September. For the quarter our hotel achieved RevPAR growth of 13.8% driven by a 17% increase in rate. We are pleased to see this property getting this level of market penetration this quickly following conversion. We expect this momentum to continue as the asset ramps up under the new flag.

In Atlanta, with the guest room renovation is nearing completion, the hotel saw RevPAR growth of 8.1% in the quarter driven by a 9.3% rate gain. The competitive set saw RevPAR increase 6% with the property gaining 200 basis point in share. With a high quality and more consistent rooms product now in the mix as a result of our renovation, we are able to move more aggressively on rate against our competitors that resulted in the share capture.

Our Tampa Hotel produced a strong fourth quarter with RevPAR up 15%, driven by a mix of 8.1% rate growth and 6.4% occupancy growth. The competitive set RevPAR was up a healthy 14.3% for the quarter in this market resulting in our share gain of 70 basis points for our hotel.

Looking at our renovation activity across the portfolio, the majority of our impactful renovation work wrapped up in the third quarter. However, we continue to have plenty of activity in progress. As I previously noted, our Jacksonville hotel successfully converted to the DoubleTree flag in September with all renovations now 100% complete. And our Laurel hotel converted to the DoubleTree flag in late October and we wrapped up those renovations prior to the year end.

In Atlanta, our guest room renovations at the Georgian Terrace are nearing completion and will conclude by May. In Houston, the final public space renovations are underway with an April completion date in preparation for the conversion to the Whitehall by Sotherly, an independent boutique and member of preferred hotels and resorts. Lastly, we are preparing to commence renovations of our hotels in Savannah and Hollywood later this year in anticipation of their conversions in the third quarter of 2017.

Now looking at some of our corporate activity in the quarter. In October, we took advantage of a $2 million earnout provision on our Jacksonville loan as a means of partially funding the CapEx spent on that renovation. And in December, we modified our existing mortgage in Laurel which generated an additional $2.6 million in net proceeds, which was used to partially fund the CapEx spent on the renovation of that hotel. Finally in January, we recently announced an increase to our dividend to $0.085 per share which represents a dividend yield over 6% based on current stock price.

With that, I will now turn it over to our CFO, Tony Domalski.

Thank you, Dave. Reviewing performance for the period ended December 31, 2015, total revenue for the quarter was approximately $36.8 million representing an increase of 23.2% over the same quarter a year ago. For the year, total revenue was approximately $138.5 million representing an increase of 12.7% over the prior-year.

Adjusted EBITDA was approximately $7.1 million for the quarter representing an increase of 12.9% over the same quarter a year ago. And for the year, adjusted EBITDA was approximately $37.7 million representing a 27.8 % increase over the prior-year.

Adjusted FFO was approximately $3.3 million for the quarter representing a 73% increase over the same quarter a year ago. And for the year, adjusted FFO was approximately $14.9 million representing a 5.4% increase over the prior-year. Please note that both our adjusted FFO and adjusted EBITDA exclude charges related to the early extinguishment of debt, gains and losses on derivative instruments, acquisition costs, changes in the preferred deferred 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 December 31, 2015, the total book value of our assets was approximately $393.1 million which includes net investment in hotel properties of approximately $355 million. The company had total cash of approximately $17.3 million consisting of unrestricted cash and cash equivalents of approximately $11.5 million, as well as approximately $5.8 million which was reserved for real estate taxes, capital improvements and certain other expenses.

As of December 31, the company had approximately $324.9 million in outstanding debt at a weighted average interest rate of 5.24%. Approximately 85% of the Company's debt carries a fixed rate of interest. Total stockholder and unit holder equity was approximately $52.9 million at the end of the quarter of which stockholder equity was approximately $49 million with 14.5 million shares outstanding. And unit holders' equity was approximately $3.8 million with approximately 2.2 million limited partnership units outstanding.

At the end of the fourth quarter, our interest-bearing debt was approximately $104,370 per room. Also, the ratio of debt to total asset value as defined in the indenture agreements to our senior unsecured notes was 54.3% based on a total asset value of approximately $598 million at the end of the quarter and total debt as previously stated, at $324.9 million.

Turning to guidance. We are reiterating our previous guidance for 2016 which accounts for current and expected performance within our portfolio as well as other factors. For the year, we are projecting total revenue in a range of $151.6 million to $154.3 million. At the midpoint of the range, this represents a [10.4%] increase over last year's total revenue.

Hotel EBITDA is projected in the range of $44.7 million to $45.7 million. And at the midpoint of this range, it represents a 24% increase over last year's hotel EBITDA and adjusted FFO is projected in the range of $20.2 million to $21.6 million or $1.21 to $1.29 per share. At the midpoint of the range, this represents 25% increase over last year's adjusted FFO per share. Additional details can be found in the outlook section of our Earnings Release. And I will now turn the call over to Drew.

Thank you, Tony. In many respects, 2015 was a transitional year for our portfolio. We completed the most capital improvement projects our Company has undertaken since 2008. Over a third of our guest rooms were renovated in the year, two hotels were up branded and we launched our independent collection with the Georgian Terrace in Atlanta last September. Additionally, we added the Hollywood Hotel to our portfolio, which is our largest asset in terms of asset value and EBITDA production. The hotel is highly accretive to the portfolio's RevPAR and profit margins.

While this activity muted near-term results in the third quarter, we now have the highest quality portfolio in our Company's history and we believe we are poised for outperformance going forward. This was evident in our strong fourth-quarter operating metrics. We expect similar results heading into 2016.

We remain cognizant of the signs of a slowing economy, global market disruptions and the threat of a recession. That said, we still see positive trends in most of our markets and remain cautiously optimistic that we have some runway left in this recovery. While the top Gateway markets of the US have experienced sizable supply growth this cycle, the majority of our markets continue to track well below the long run average adding tangentially competitive product mostly in the upscale select service segment. We've experienced very little new build, full-service upper upscale hotel product in our competitive sets this cycle.

Along the same lines, Airbnb has been a hot topic of late. While we don't disagree that Airbnb presents a new alternative to the traditional hotel model, we have not seen any disruption in our markets to date. We believe the negative Airbnb effect will be experienced primarily in the top five high rate Gateway markets where low-cost alternative is an attractive option. We do not expect material impact within our footprint.

While the top Gateway markets are reliant on inbound international travel, which is slow due to the global economic disruptions and foreign currency weakness, most of our markets are primarily driven by domestic travel. All of this said, we believe our markets are positioned to outperform the industry average and our portfolio is poised to outperform our competitive sets. As Dave mentioned, the majority of our markets showed strength to finish up the year with over half of our markets turning in RevPAR gains in excess of 8% in the fourth quarter.

Another key metric is group pace, for 2016 and into 2017 our bookings are the strongest this cycle. This bodes well for our full service portfolio. While we cannot control the larger macroeconomic forces, we can and will continue to aggressively manage our portfolio with a goal of producing ever improving results and creating value for our shareholders.

We will now open the call up for questions.

(Operator Instructions)

Carol Kemple, Hilliard Lyons.

Good morning.

You all had several one-time items that separated FFO from adjusted FFO, can you talk about those? And then talk about where those items impacted the income statement, whether it was G&A or another expense item?

I'm going to defer to Tony on that.

Generally speaking, we had some litigation that we settled. We've got some litigation in the form of appeals on some tax, real estate tax assessments that we think are unfair.

I think the last item is the loan modification fees during the year. We modified our loans on our asset in Hollywood and on our asset in Laurel and not all of those costs are deferred. Some of those have to be expensed, so that was about $250,000 there. And that was an increase to G&A expense. And I think as Drew alluded, the settlement with Starwood, that hit hotel EBITDA, as did the real estate taxes.

Was the Starwood expense, was that in G& A or where was that found on the income statement?

That would be found in the indirect expenses.

And then, you all had the impairment of investment hotels properties. What was that from?

That was Hampton.

What are your thoughts, I know you already increased the dividend once this year but what are your thoughts on the dividend going forward?

Our view on dividends has not changed. Our view is that a steadily increasing dividend at a moderate pace that creates a sustainable level of payout is what's best for our Company. I think we've shown you that's what we've done in the last four or five years, and we will continue on that path, unless of course there is some you know major event that would disrupt our whole industry.

And then one final thing, the over assessed real estate taxes under appeal can that be found on the income statement anywhere?

Those are indirect expenses with the other real estate taxes.

Thank you.

Whitney Stevenson, JMP Securities.

Good morning, Whitney.

Whitney, you may have your phone muted on your end.

Can you hear me.

Yes.

Good morning. I have a question about your RevPAR growth guidance range. And you know you talked a little bit, Drew, about how your markets were strong in fourth quarter. I think you said a handful of them came in at 8% RevPAR growth. You're obviously taking share at this year post renovation and rebranding, but can you talk a little bit about the underlying market growth assumptions contemplated in your portfolio RevPAR growth guidance for 2016?

We would be glad to do that. On a apples to apples basis we are looking at an increase of somewhere in the 4% to 4.5% range. However, because we have remixed our portfolio and we got different properties, some coming in and some going out, we're looking more at our headline number, which is closer to 10%.

So we think the markets are going to stay, in general -- there are some exceptions. Some are a little higher and some are a little lower. We are somewhere on an apples to apples basis, somewhere in the 4.5% range. We have markets like Houston that have suffered as a result of the oil industry being slapped around pretty good. And then, you know with markets like Miami where the international travel is off some. That's impacted us there. But all in all, you know we are pretty optimistic going into 2016.

So is it fair to say that your industry view is in you know, relatively in line with the 3% to 5% range that we have seen from a lot of your peers?

I think that is fair.

Okay. And then one question on Houston. Do you have a market wide RevPAR growth outlook that you are taking into consideration for 2016?

In Houston, specifically?

Yes.

Specifically I think we are slightly negative.

Yes. I think, with this stage, that was a difficult market to budget in terms of RevPAR outlook just because of the uncertainty with the oil and gas business and the location of our hotel and the comp set. I think we were slightly under zero. I mean, so we were looking at RevPAR growth in that market being somewhat negative, but you know the first month out of the gate here in January in Houston comps that we had was down about 7%. And that's pretty volatile with respect to the bookings pace on the group side in that market.

February has been flat. So it's hard. And what further complicates our budgeting there is that you know we are going out of the IT system in mid-April and joining the preferred with the Whitehall launch. And so, that's just makes it harder to put our finger on the pulse of what's going on there.

I will say that our strategy there has been to really load up on group business. We've got tremendous bookings for the first four or five months after the conversion to transition us into being the more independent boutique style hotel. So we really load it up, and I think our sales office has done a commendable job. So I don't expect to see some monumental falloff in our business. We have also gone to great lengths to reach out to our major customers in that market and let them know what we're doing. And the reaction we've gotten from them has been very, very positive.

Great that's it for me.

Scott Williams, Palogic Capital Management.

Good morning.

Good morning.

Continuing on Houston directionally. So, when we bought it, it was running at roughly $3.2 million of EBITDA. And I know it's moving around as you transition to the independent brand. What is the budget for the asset this year?

Hold on a minute. I'm going to have to look that up. I've got the numbers here.

Do you plan on extending that debt maturity later this year, to just push it out with your extension options?

I'm sorry, I was looking for the answer. What was the second question, Scott?

On your debit maturity on Houston this year, do you plan on extending it?

Right. We've pretty much executed that, so we got an extension there. We are out shopping a loan right now. We've got a fair amount of interest, surprisingly, given what's going on there. So I'm pretty confident that we will probably end up putting a new loan on there within the next quarter, before the first half of the year.

There is certainly no huge rush to run out and do something. I think that you know it will be, it's already been extended 18 months. So we've got plenty of time to do what we have to do. I don't think we have a pre-payment penalty at this point?

No.

It's an open door. Our goal was to maybe get a few more million dollars to help partially fund part of the renovation dollars that we put in there, which were upwards of $5 million.

This is Dave. When you ask about the income for the asset. What we try to do this year was budget it flat to last year, flat to 2015. Probably, we can't give you the exact number, just because I don't think that's what we need to do on our earnings call. We don't do that with any other assets.

But what we try to account for was the renovation, the actual transition to the Sotherly flag in April, and right around the transition time we have a lot of capital expenses which, unfortunately, cannot be capitalized. So we have some expenses that kept the income statement and we tried to forecast the group business that Drew alluded to.

And the fact that the crown flag puts a lid on what we can charge. An upscale, upper upscale boutique, has a far different rate profile than a Crown Plaza in that market, especially in newly renovated boutique hotels. So we tried to take into account the market conditions, the renovation expenses, the new hotel, the April transition date, and put that all into the mix and stir it out at the bottom. We came up with a GOP figure that is essentially flat to 2015. And we think that is a good estimate of where we should be this year, given all those various factors.

One other thing that entered into our thinking about Houston, is that 2 1/2 years ago IHG went out and approved a new fully renovated Holiday Inn 200 rooms about two blocks from us. And you know that was pretty infuriating.

You know they are only marginally contributing to our overall success as a Crown and then they come in a put in another competing product that quite frankly, has underpriced us right out of the gate. They opened about three months ago. And they've got $99 rates over there. And it's, so it's you know I think we made the right choice. You look back and you say that was absolutely the right choice is to get away from a Crown flag.

The Crown brand. Okay. Does running the Atlanta property independently allow for any knowledge gain as you transition the Houston property and look towards maybe the Fort Lauderdale asset and some of these other assets that could stand alone. Or does each asset and location have unique features that as you get to them the knowledge base does not transfer over?

It absolutely does. We have gotten some very sophisticated systems put in the hotel to track our guests. And we are building all of our service standards so that we've got a real strong set of service that we are going to provide to our guests. And that goes throughout the entire hotel. And it includes signage and the product and what our guests, what our employees are expected what's expected of them and the staffing levels and everything else.

We've pretty much gone through a process with the Atlanta hotel, so that it's now the model for everything that were going to do as we go forward. You know that has cost some money. You know, but as we go forward it's going to make this process much easier and more efficient.

Okay. Circling back on just portfolio values: since late, we talk about this on the call, is we have had a large valuation gap between what the market tells us and what we think the underlying value of the portfolio is. Why do you think this disconnect has persisted for so long?

Well it used to be worse, I will say that. You know we were closing the gap at a pretty nice pace until we bought the Hollywood asset and issued some stock. And since then we've opened the gap up again. I think that the markets did not understand how impactful the Hollywood asset is going to be.

If you look at our earnings report and you look at our guidance, we are head and shoulders above any other REIT. I would ask for you to be just a little bit patient and let us show you what we are doing. I think we are making the right moves here. And ultimately, we are going to recognize that value. And that can come in many forms, and so I've said it before, I am the largest shareholder and I want to recognize the value just like you want to recognize the value of your holdings and we are going to do that.

And I certainly appreciate that at. You are the largest and you are incentivized along with us. But we have an equity that trades at just over four times over FFO. What gives you confidence that remaining public is the best way to deliver value? And is what, as being the largest shareholder what if anything, would trigger a view that is different from just status quo?

Well, no, we are always open Scott, to any offers. But our view is we are not going to give the Company away. If someone wants come in and pay what our assets are worth, then that is something. We have a fiduciary duty to our shareholders that we would obviously take that very seriously and pursue that. But what we're not going to do is sell it at a fraction of what the assets are worth. That does not make any sense for you or for me or for anybody else.

So we're going to continue to keep our head down and work hard, create value. And one of the things that I put in my cover letter that's coming out on our annual report is we created over $30 million in NAV last year for our shareholders. And that is significant, and that's because of all the hard work and the transactional activity that we did that's going to ultimately benefit you and me and all the other shareholders.

So are we just going to stay status quo. No. Status quo is not the ultimate goal. We are always listening, learning and trying to find out what opportunities are out there. That is part of our jobs, is to continue to pursue an ultimate valuation that increases for the benefit of our shareholders.

Okay. Thank you for your time, and we appreciate all your hard work.

Thank you.

(Operator Instructions).

Daniel Donlan, Landenburg Thalmann & Company.

Thank you, and good morning.

Good morning.

Good morning.

Most of my questions have been answered. I wanted to walk through it, and I'm sorry if I missed this in the prepared remarks, I am a little late transferring from another call. I was curious how you are going to tackle the debt maturities between 2016 and 2018, and how you feel about where you are on an LTV basis. And if you think given where current interest rates are, do you think you can potentially get better rates than what is expiring?

This is Dave.

We are looking at that right now. You heard my remarks. We did quite a few debt transactions at the end of last year. We've got a couple that were teeing up right now where we have the opportunity to refinance assets at very good levels with really good proceeds amounts and very good interest rates. So I can't spell that out, although you can probably look at the debt maturities that appear on our reports.

I think you would find our Savannah asset and our Wilmington asset are both highly under levered and there is a very significant amount of capital that could be extracted in terms of the equity that we have created over the last 10 years at those hotels. That's a very good opportunity for us to tap into that equity and look at the look at refinancing those assets and use those proceeds judiciously be that, renovations, providing additional liquidity for the company, paying down the series or so and the public bonds that will be callable at the end of this year.

So we do have some flexibility with respect to the debt numbers that you see. And these assets are not financeable? They are very financeable and there is a lot of equity in untapped value for some of our assets that we frankly look forward to tapping into this year and beginning of next year.

Thank you.

Mike Tofias, Private Investor

Can you hear me okay.

Yes. Good morning.

Can you tell me what your thoughts and philosophy are as it relates to stock or share buyback, especially with what you view as a valuation gap?

Yes. It is Dave here, again. What the market has told us consistently over the last, I would say two to three years, is that what we need is more stock liquidity not less stock liquidity. More stock liquidity equals more margin expansion and better stock price. And that's what we did last year with respect to raising a very small amount of equity and coupled it with a very accretive acquisition, the results of which we are seeing right now in our fourth-quarter numbers, and will see more of in 2016.

So just from a strategic standpoint, our investors have told us you need to grow, you need to provide, you need to buy good assets and you need to couple that with smart judicious additional liquidity at the right time and the right price. That's what we did last July.

From a more what I will call an academic look, we don't really think stock buybacks do that much over the long-term. They are very good interim pieces, but they don't add value in the long-term. And the more data we see from the consulting firms that is publicly available and sent to us. It's not a very good use of our capital.

And we do have requirements and needs for our cash that you see on our balance sheet. We renovate our hotels, we amortize our debt, we finance our Company, not with interest-only lines of credit with the bank syndicate. We put individual mortgages on our properties and we amortize our debt down, which has a beneficial impact to our shareholders vis-a-vis what I just told Dan on the phone, is we create a lot of equity value by paying that debt down over time, whether it is a few years or 10 years. That is a long answer to your question. But we don't really have any bias towards stock buybacks right now.

This is just one person's point of view, and I am a small private investor. But I don't care about your liquidity. I don't care if you grow. If you have the opportunity to take a dollar and buy a real estate asset at half of what it's worth, let's just hypothetically say the stock is trading at half of what the company is worth, it is concerning to me and disappointing that you don't recognize or agree that's an exceptional value.

I would just reiterate I don't care about liquidity. I am a long-term holder and I'm not going anywhere. I don't care if you grow. And if the stock is trading at half of what the real estate is worth, am I missing something? You have an opportunity to buy real estate at half-price. What am I missing?

What I would tell you is I think we have a disagreement on where we are headed with the Company. But our cash is spoken for and we have requirements for it. And it's just not, it's just not something we sit around and it's not idle cash that we can buyback our own stock with.

This is Drew Sims. The other issue is critical mass and we're still working toward that. We are a micro cap company. You say you don't care if we grow. The market cares if we grow. And we need to continue to add some bulk to our asset base.

And we started out in 2004 with about $200 million worth of assets may be a little bit more than that. And you know, we are up to $600 million in assets. We continue to add some bulk and ultimately it's going to take, it's going to accrue to all of our shareholders. I'm sure that in the meantime we pay you a very healthy dividend to wait. And you know we think it's a fair return on your capital. And I would hope that you understand that what David said, I think, is our view.

And if I could just follow up on that. I appreciate what you're saying about the studies and what share buybacks do, but I think the missing piece to it and I think the studies involved large companies. I think what the study is missing is what the valuation is.

The idea that there is not a price where you don't think the marginal dollar is well spent on buying back stock. I don't think buying back stock is an endeavor to boost the price. I view it as a phenomenal investment opportunity for the Company.

Let me finish one thing. It's concerning to me that you would consider buying a real estate at a fair market value to grow the Company rather than buyback your own stock which in essence is buying back real estate at $0.50 on the dollar. I would much prefer you make smart investments as opposed to investments for growing, because the market does not recognize the value of the stock.

The market will eventually evaluate it. I would just like you to allocate your capital as smartly as possible, and to me buying real estate at $0.50 on the dollar is much better than buying real estate at 100%. Does that make sense or not really?

We've heard your argument and we've heard this argument before. We just disagree that is the best way for us to use our capital.

Okay. Thank you.

Ryan Vardeman, Palogic.

Good morning. I just heard the last callers comments, and we tend to agree with some of the points that he made. I don't know that buying stock back is the end-all be-all, but as a marginal investment we tend to agree. We are not searching for you know more liquidity. The stocks traded at 4000 trades today on an earnings date, so I don't know that anybody that owns it is clamoring necessarily for additional shares to be issued.

So anyway, we can discuss this more off-line. I appreciate all the hard work you are doing and sounds like we've got an exciting 2016.

Thank you.

Brian Rohman, Boston Partners.

Thank you for taking my question; or, actually some comments, too. The last two callers we are not, I am not on the sell side. I am not an investment banker. We own your stock. I don't care about liquidity.

You are so far below book value in NAV as to be almost sad. And I don't think you need to buy back large amounts of stock. At this point the idea of saying that you are more focused on growth for growth's sake when you have a portfolio that is underperforming and to say that you are interested in acquiring assets for 100 cents on the dollar when yours is at $0.50, it does not make a lot of sense.

I strongly endorse what the other questioners, the issue they raised. But there is a question here, which is if you're interested in growth how are will you fund it with your stock so far below NAV and book value?

Our growth plans include recycling some of our assets.

Okay. Would you at all be interested in issuing stock?

No.

Would you at all be interested in issuing the OP units?

If the valuation was proper and when I say that I mean, and we've had these discussions with some sellers of hotels. If they value their asset based on, let's grab a number 7% cap rate and we're going to value our assets based on a 7% cap rate, we're not going to use the stock prices as the valuation.

So there would have to be a, a calculation made that would allocate the proper number of units to be traded. Using units as a currency on a 50% discounted basis makes no sense. We don't intend to do that.

I would say I have never understood the logic of some real estate people who somehow think there is something different about issuing OP units versus common shares in the marketplace. Because as far as we are concerned, it all flows into the denominator of any calculation on NAV, FFO, anything on a per-share basis.

We agree with you.

ATM, would you be at all interested in an ATM?

No. We have an ATM, but it has been inactive since last July.

It really sounds like the core of any new financing would be from recycling of assets?

Yes.

Thank you, very much for listening to me and taking my question.

Absolutely. Thank you for calling.

Mark Tremba, Private Investor.

Good morning, guys.

Good morning.

I definitely have some comments about the stock buyback, and I disagree. I think there was a comment made about buybacks being ineffective on the situation. In other words, if you are buying back stock at $8.00 a share that is not a good deployment of capital. But buying back at $5.00 a share in my opinion would be a good deployment of capital.

A lot of what we saw back in the tech boom back in the late 90s, Cisco and a lot of GE were buying back stock at 40 to 50 times earnings. So that is why I think if you actually delve into the details of these studies, it's going to be like anything in life; it depends on the situation. And I think in the situation buybacks are at least selective buybacks not just buying back randomly, but saying we are going to put a floor under the stock anytime it goes under $5.00 we are going to buy reasonably. And maybe selling some of the assets and just taking that money for a buyback might be a better use of capital.

I agree growth for growth's sake is not necessarily a good use of capital, especially if you are paying like one of the other callers said 90% or 100%, or getting a slight value when you can get if your market to stock is 50% undervalued that is a better use of capital in my opinion. I have been a long-term shareholder with you. I think you are a bunch of great managers, but right now the market is not recognizing the value. So something needs to be done to get the stock price up.

One thing I would point out is that you need to look at things on a relative basis. We actually performed better than most of the REIT universe.

I understand that and I appreciate all you have done. That is why I'm sticking with you, because I know the fundamentals and your management team has done an excellent job and I really appreciate that.

The second issue, is we are a micro cap company with 12 hotels. If we start selling hotels we have an overhead that we have to cover to operate as a publicly traded company.

What about an idea, possibly of selective buybacks. Like I said, you don't want to buy back willy-nilly like a lot of companies do. And I think buybacks have been misused in the past, or just reduce the stock options offered. But I think if you look at it a little more carefully, just consider it. I'm not saying I'm definitely right, but those studies are incorrect, or they give you the wrong conclusion based on there have been a lot of buybacks.

And Warren Buffett, if you read what he said about stock buybacks, he would come to a similar conclusion. In some situations they can be very effective and in other situations they cannot. I don't know the details of your situation. I am just talking more in general. But once again I reiterate, I appreciate the great job you have done. In fact I stayed at the hotel in Wilmington. The staff was well-trained, the hotel was excellent. I had no complaints. It was one of the best hotel stays I have had.

So like I said I really appreciate all you have done. And hopefully at some point the market will come to its senses and recognize the value. That is all I have to say.

Thank you so much, guys.

Thank you for that comment and just to expand a little bit. The availability of cash is not there. We don't have a big pile of cash waiting that we can use to for stock buybacks. The only way to do that would be to either issue stock, which makes no sense if you are going to buy back stock. Or we can go out and lever of the company. And that is something you know we have covenants under certain debt instruments that we have to comply with, and so it's a complicated situation and were trying to keep things in balance.

So we go on to the next.

Let me add one thing, Mark. This is Dave. I appreciate your comments. You have been a long-term shareholder and your comments are always welcome.

I just want to make sure there is a theme in some of these comments this morning about how we are trying to grow for growth's sake. If that were really the strategy here at Sotherly we would be a billion-dollar plus market company, cap company now since we have been public for almost 12 years. That has never been the strategy.

We have a very reasoned approach toward hotel underwriting. Prior to the recession, we passed, let me put it we did not pass, we bid on over $1 billion worth of assets and we missed on all of those because we were not willing to pay the overpriced, the massive prices that were asked of the market. So we do have a disciplined approach towards growth. I've been in this business a while and I've seen companies formed whose only strategic intent is to grow so they can pay themselves more from a managerial perspective. And we've never done that.

But as Drew said, you know we have cash on our balance sheet. Optically it may look like it would be good, it would be the best use of that cash to go out and buy back stock. I think we have a difference of opinion on a variety of fronts on that, but the fact is that the cash that you see is cash that we need as a company to do the things that we have set out to do.

So there is not a lot of excess cash floating around, and we don't finance ourselves with a line of credit like a lot of REITs because we learned over the recession that if things go sideways those types of financing vehicles put the entire company at risk. And so we have not financed our company that way. We paid principal amortization every month, every quarter, every year. We've been very reluctant to be raise equity. We have done it once in 12 years.

I am just here to tell you that I think that a stock buyback would be just a very snapshot. It would be a snapshot of value, and as soon as we finished buying back stock or putting a floor under the stock or driving the price up, as soon as that artificial demand for the stock is released the price will fall back down. In the long-term it really does not have any impact on our Company and it drains our liquidity. It drains our cash reserves.

Or we will have to borrow more money.

The other things investors have told us is you need to tell us our deleveraging strategy. I get all these comments we have heard them before and I think we've told the market what we think about our capital and the best use for it. But I think it's important for the market to know that this is not a willy-nilly approach toward buying massive amounts of assets. If we wanted to do that we would have done that over the last 12 years and we have not done that.

Is that it.

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

Thank you, for joining us for the call. We appreciate the questions and you know we are always here to assist. We look forward to talking to you all.

We invite you to our annual meeting which is in the last week of April. And we'd love to have some of you all join us here in Williamsburg. Thank you.

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