Sotherly Hotels Inc (SOHO) 2016 Q1 法說會逐字稿

Good day, and welcome to the Sotherly Hotels Incorporated first-quarter earnings conference 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, Operations and Investor Relations. Mr. Kucinski, the floor is yours, sir.

Good morning, everyone. Welcome to Sotherly Hotels first-quarter earnings call and webcast.

Dave Folsom, our President and COO, will begin today's call with a review of the Company's quarterly activities and a review of portfolio performance. Tony Domalski, our CFO, will provide our key financial results for the quarter and update 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 have not received 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 measures 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 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. I'd like to start today's call by discussing some of the portfolio's key operating metrics. For the quarter portfolio RevPAR was $99.72, an increase of 13.5% over prior year with a 13% increase in rate and occupancy increasing 40 basis points. Hotel EBITDA for the portfolio increased 28.7% to approximately $10.1 million. Hotel EBITDA margins expanded by 140 basis points in the quarter.

To review some of our individual property and market highlights, at our Jacksonville, Florida hotel, which converted to the DoubleTree by Hilton flag last September, it turned in another stellar quarter as the hotel continues to ramp up towards stabilization under the new brand. RevPAR increased 26.4% for the quarter compared to the comp sets healthy 7.9% increase, with the hotel gaining 1,850 basis points in share.

At our Laurel, Maryland hotel, which converted to the DoubleTree flag last November, RevPAR was up 7% driven by a 14.1% increase in rate. The market's RevPAR grew 10.6% in the quarter. This was the first full quarter following the completion of the renovation and the impact to operations that accompanied the final transition to the new flag. We are seeing positive trends at the hotel as we continue to look to attract those guests within the Hilton system who traditionally pay higher rates. We expect our momentum to continue.

Our Tampa hotel produced a strong first quarter with RevPAR up 8.5% driven by a mix of 7.3% in rate growth and 1.1% in occupancy growth. The competitive set RevPAR was up a healthy 4.3% for the quarter resulting in share gain of 420 basis points for our hotel.

While the majority of our properties in their respective markets continue to see positive momentum in the quarter, there are a few laggards that have shown negative trends as the result of new supply impact and weaker than anticipated transient travel. The Houston market continues to show negative trends, but it is important to note that the first quarter of last year was a tough comp as the downward shift resulting from the oil and gas industry did not occur until the second quarter of last year. We believe, though, that the worst is behind us in this market.

The Louisville market has also struggled to absorb some new supply coming online. Further, our hotel has been impacted by a major bridge construction project that has temporarily disrupted the accessibility of our hotel from Interstate 65. That project is scheduled for completion later this year. As a whole, our southern and mid-Atlantic markets saw RevPAR growth of 2% on a combined basis, driven by a 3.5% increase in rate and a 1.5% decrease in total occupancy.

Looking at some of our renovation activity across the portfolio, in April we completed the $5 million renovation of our Houston hotel, which was converted to the Whitehall by Sotherly Hotels. Drew will speak more to this conversion and how it fits into our strategy later on the call. In Atlanta we are nearing completion of our $7 million guest room renovation, with impactful work scheduled for completion by the end of May and full completion by November. We also kicked off an $8 million renovation of our Savannah hotel, with guest room work scheduled to commence after Memorial Day. This project will last approximately 12 months.

Looking at our corporate activity in the quarter, in March we extended the maturity on our Houston hotel until November 2017 with the existing lender. In April we announced a change in auditors with the engagement of Dixon Hughes Goodman. The change came following a competitive bid process, and we believe this decision provides the Company with a quality service provider at a lower cost than our previous firm.

Also in April we announced an increase to our dividend to $0.09 per share, marking our 10th increase in the last 15 quarters and an 80% increase over the past 24 months. Based on current pricing, this represents a yield over 6.5%.

Finally, last week we announced the Company has entered into a purchase-and-sale agreement to sell the Crowne Plaza Hampton Marina hotel for a purchase price of $5.8 million. The closing of this sale on a non-core asset is subject to various customary due diligence and closing conditions. We anticipate a closing, if successful, to occur in the third quarter of this year.

With that, I will turn the call over to our Chief Financial Officer, Tony Domalski.

Thank you, Dave. Reviewing performance for the period ended March 31, 2016. Total revenue for the quarter was approximately $37.8 million, representing an increase of 22% over the same quarter a year ago. Adjusted EBITDA was approximately $8.4 million for the quarter, representing an increase of 16.4% over the same quarter a year ago. Adjusted FFO was approximately $3.8 million for the quarter, or an increase of 16.9% 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, gains and losses on derivative instruments, acquisition costs, changes to the 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 March 31, 2016, the total book value of our assets was approximately $389.5 million, which includes net investment in hotel properties of approximately $356.3 million. The Company had total cash of approximately $18.6 million consisting of unrestricted cash and cash equivalents of approximately $15 million as well as approximately $3.6 million which was reserved for real estate taxes, capital improvements, and certain other expenses.

As of March 31, the Company had approximately $319.4 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 unitholder equity was approximately $52.2 million at the end of the quarter, of which stockholders' equity was approximately $49.3 million with approximately 14.9 million shares outstanding. And unitholders' equity was approximately $2.9 million with approximately 1.8 million limited partnership units outstanding.

At the end of the first quarter our interest-bearing debt was approximately $106,000 per room. Also, the ratio of debt to total asset value, as defined in our indenture agreement for our senior unsecured notes, was 55.5% based on a total asset value of approximately $582.1 million at the end of the quarter.

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 the 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. At the midpoint of the range, this represents a 24% increase over last year's hotel EBITDA. 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 a 25% increase over last year's adjusted FFO per share. Additional details can be found in the outlook section of our earnings release.

I'll now turn the call over to Drew.

Thank you, Tony. As we discussed on our last earnings call, due to substantial renovation activity and the acquisition of the Hollywood hotel, 2015 was a year of transition for the Company, which we believe has positioned us well for 2016 and beyond. We are starting to see the fruits of these efforts as we experienced notable growth in the quarter across all major metrics. The Hollywood asset was a major driver of the positive trends as high hotel RevPAR had a meaningful effect on the top-line and bottom-line profitability of the Company. The Hollywood market experienced moderate negative trends in the quarter following several years of strong growth, but this was generally expected as new product was being absorbed. The benefits of this hotel to the portfolio over the long-term are positive in our view.

Our conversions in Jacksonville and Laurel, where we up-branded the Hilton brands, are proving to be successful endeavors as both of those properties are seeing the RevPAR growth we anticipated and forward booking pace is very strong.

As Dave mentioned, last month we launched our Houston hotel as the Whitehall by Sotherly Hotels, an independent boutique associated with Preferred Hotels & Resorts. The $5 million renovation of this hotel included many of the same southern hospitality hallmarks we implemented at the Georgian Terrace in Atlanta last year, including an enhanced food and beverage offering, with the creation of two unique high-quality venues. While the Houston market is currently underperforming and positive trends at this hotel may be muted in the near term, we expect this conversion will allow us to capture more market share, especially in terms of rate. The repositioning has been well received in the market and among our corporate client base.

We have discussed the possibility of non-core asset dispositions for several quarters and are now nearing execution, in part, with the announcement of our pending sale of the Hampton hotel. This property is the smallest asset and the lowest RevPAR producer among our portfolio, and it's not consistent with our long-term strategy. Other potential non-core asset dispositions are possible in the near-term, but we will most likely only occur in the event we find an acquisition opportunity to act as a suitable exchange property and that we believe will add value to the portfolio. We will be very selective in our efforts to find the right hotel that fits our boutique concept.

In terms of industry trends, while in the first quarter we have experienced some new supply impact and a weaker than expected transient travel segment in the larger gateway markets, the balance of our markets continue to show positive trend. We have increased our focus on group bookings, which is a benefit of the full-service product offering of our portfolio. Group pace continues to be strong for the second half of 2016 and into 2017.

Looking forward, we are optimistic yet mindful of the shifting trends. We will continue to aggressively manage our portfolio with the goal of producing ever improving results and creating value for our shareholders.

We will now open the call up for questions.

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

Carol Kemple, Hilliard Lyons.

Good morning. Can you all talk a little bit about the Hampton asset sale? What you saw with the bidders out there, the cap rate on the property, and if you think that will be accretive or dilutive to earnings? And also, I'm not sure if you all have any debt on that property or not; any information on that would be great.

Yes, Carol, we do have a little bit of debt on that property. It's not a lot. It's about $3 million. We're going to pay that note off when we sell the property.

I would say the performance of that hotel has obviously not met our expectations over time, and it's a non-core asset, given our strategy moving forward. We're going to realize some net-cash proceeds on the sale.

The cap rate convention, I'd have to look back on where we are right now given the property's performance. It's actually doing better this year than it's done in a long time. I can get you more discreet information --

I can tell you about the cap rate, because we have it. From a cash flow perspective, this hotel has not created any benefit for the Company for quite some time, so it's an infinite cap rate because it doesn't have a positive NOI after reserve.

Yes, you go through our FF&E reserve and our debt service and principal payments and our loan has accelerated principal payments. It's just not providing any cash flow at all.

So in terms of how it's going to affect the performance of the Company overall, it will affect -- it will be a negative in terms of our top-line sales. But in terms of bottom-line profitability, it's going to help us increase our profit margins and actually increase our cash flow by getting rid of it.

Okay. When you all went to market this, did you just approach this buyer or were there -- was it a competitive process, and what were you hearing back from other buyers?

It was a formal marketing process.

We used a regional broker to approach many buyers, and this is the best buyer we could get.

Okay. Thanks.

Daniel Donlan, Ladenburg.

Thank you, and good morning.

Morning, Dan.

Good morning, just two questions from me, Drew or Dave. Just curious on any strategic conversions and when maybe some flags could coming up for renewal? Do you have the ability to up-brand any of your existing hotels? Do you have any plans to move to the independent strategy like you did with the Houston asset?

We do. I think you can look in our -- yes, our K, and see that we've got some license agreements that are terminating next year due to expire. Hollywood would be a good example. We don't think the Crowne Plaza brand adds a whole lot to that asset. It's our highest performing asset. We think it can perform better. So we see that as a huge value add for that asset.

In terms of Savannah, we also have a maturity next year on that license agreement mid-year. So we've started that process already, completed all the planning for the new product that we're going to create there. It's a great product. It's very much in line with what you see in Atlanta, in terms of quality, and we think that it's going to be a successful relaunch for us there.

Okay. Appreciate it. And then as far as RevPAR growth goes for the remaining three quarters, it looks like on a weighted-average basis your RevPAR growth was flat. Just curious what you're expecting in the balance of the year.

Well, I think that -- we're in these competitive markets, and some of them are up and some of them are down. You got Houston that obviously is down, but we feel like that's at the bottom and it's going to start crawling its way back up. We feel like Miami is probably the -- has gotten beat up as much as any market in the country. Hollywood has not really experienced the same kind of reduction in overall market RevPAR that Miami has, even though it's -- right there a close competitor and actually part of the MSA.

We feel like we're going to be up probably 3%, somewhere in that neighborhood, on a same-store basis as we go forward, maybe higher than that. It's just going to depend on each market. Like Laurel, Maryland, it's starting to scream. Jacksonville, obviously, is doing really well. Tampa's been really strong.

So it's just -- it's kind of hard to tell to tell you the truth. And I think some of our other management teams of some of the other REITs here don't even want to give out any guidance. That's how squirrelly it's been. We're pretty confident given what we have done with our -- repositioning our product in last 12 months, that we're going to see RevPAR growth.

Sure. I mean directionally, do you think the second and the third quarters will be your strongest growth quarters and then fourth quarter weaker, or is your portfolio a little different given that you're in a more southern (multiple speakers) --?

I think that's right, Dan. I think we're going to have a good second quarter. We're going to have a good third quarter. Then, we get to the fourth quarter -- we owned Hollywood in the fourth quarter last year, so then we're -- we'll -- we're going to start flattening out a little bit I think.

Okay. Thanks. I appreciate it.

(Operator Instructions)

Ryan Vardeman, Palogic.

The Hilton Savannah, DeSoto in the last quarter looks like one of the best RevPAR performers. In doing the renovation and rate conversion, how do you think about that from an ROI perspective? You've kind of given us some metrics around the DoubleTree conversions and it's starting to show up in the numbers. How much of an ADR bump might you expect from these soft branded Sotherly products?

What we're looking for is probably a reduction in occupancy and an increase, a significant increase, in the rate because we're going to change our comp set, basically, Ryan. We won't be competing with all the other 14 Hilton products in the market because we won't -- and it won't be associated with Hilton anymore. I would say conservatively somewhere around 10% would be a good number -- once we stabilize.

It's going to -- there's going to be a transition period, and you can look at any of the hotels where we've changed the brand whether that's from IC to Hilton or from Hilton to another Hilton brand within the family or whether we're going from IC to our brand. There is -- there just is because, look, the way things are -- the way rooms are booked these days, it's all internet-based. And for us to get the visibility on the internet takes -- it just takes some time. There's nothing we can do about it because we're the home to all the OTAs. So there's just a process that we have go through, and once you go through the process, then you got to just basically sit back and wait.

But we're really encouraged about what's going on at the Georgian Terrace. We're encouraged about what's going on in Houston. If you have a good hotel and a great location and you give great service, the customer will find you. That's our strategy.

And we're proactive, too. We know when there's going to be the downtime with the transient travel that comes through the OTA, so we go out there and market the group business pretty heavily during that transition period.

Yes, we'll take some lower rated group that we wouldn't normally take once we're stabilized, but we'll do that during the transition. And we've done that in Houston. Quite frankly, we've got -- we've been loading up on group for the next few months.

All right. Great. Seems like marketing spin that pays for itself.

Yes.

And congrats on getting the Hampton under contract. This seems like a good start in getting the rainy-day fund closer to where you'd like it.

Yes.

Buying assets, any select markets that you're looking for in disposing non-core assets? We hope that in purchasing this new properties that an equity raise is not contemplated.

It is not. It is not contemplated. It is absolutely not contemplated.

Okay. Fantastic. Thank you, guys, very much and best of luck.

Yes, thank you.

At this time we have no further questions. We'll go ahead and conclude the 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 calling in today. We look forward to reporting next quarter. Thank you.

We thank you, sir, and to the rest of the management team for your time also today. The conference call is now concluded. At this time you may disconnect your lines. Thank you, take care and have a great day, everybody.