Sotherly Hotels Inc (SOHO) 2016 Q3 法說會逐字稿

Good morning and welcome to the Sotherly Hotels, third-quarter earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Max Sims. Please go ahead.

Thank you, and good morning, everyone. Welcome to Sotherly Hotels third-quarter earnings call and webcast.

Scott Kucinski, our Vice President of Operations 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 CEO and Chairman will conclude with an update of 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 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 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'll turn the call over to Scott.

Thanks, Matt. Good morning everyone. I am filling in for Dave today who is under the weather and lost his voice.

Like to start today's call by discussing the portfolio's key operating metrics. For the quarter, portfolio RevPAR was $96.26 an increase of 6.6% over prior year, with a 1.5% increase in occupancy and a 5% increase in rate. For the year to date, portfolio RevPAR was $101.69 an increase of 7% over prior year.

Hotel EBITDA for the portfolio increased 14.1%, to approximately $9.1 million for the quarter. Year to date hotel EBITDA increased 14.3%. Hotel EBITDA margins expanded 100 basis points in the quarter.

Our portfolio performance as a whole outpace or markets in aggregate, taking 500 basis points in share in the quarter. Half of our markets were flat or down a quarter while the balance were up 7% on average driven by strong growth in Philadelphia and Hollywood.

Looking at some individual property highlights, our Laurel, Maryland hotel which converted to the DoubleTree by Hilton flag last November, has continued on its path of a successful ramp up achieving 55.6% RevPAR increase in the quarter. The hotel is nearing [fair share] and occupancy, and beginning to close the rate gap against the competitive set. We expect this trend to continue for a few more quarters and eventually reach stabilization fair share by mid-2017.

Our Jacksonville, Florida hotel which converted to the DoubleTree by Hilton flag last September, now has a full year of operating history on the books. And continues to show signs of strength in the market. Reflected by a 35.5% RevPAR increase in the quarter and a 28.2% RevPAR increase over the past 12 months. In the quarter the hotel achieved a RevPAR share index of 121%. Becoming the market leader by this measure.

In Houston, the Whitehall ramp up continues to move at a slower pace than we had hoped. As the Houston market has struggled to reverse the negative trends caused by the oil and gas prices. With our competitive set RevPAR down was up 11.5% for the quarter. However, we've seen positive momentum at the property since early September, with weekday transient travel beginning to show signs of life and weekend leisure business outpacing what we have previously achieved at the Crowne Plaza.

Giving credence to the conversion strategy and appeal of a new independent boutique product offering. This appeal has shown through on TripAdvisor rankings, as The Whitehall is currently the number three hotel in entire Houston market. An achievement we are proud of, as we believe that providing the right guest experience promotes loyalty and will bode well for the success of the property over the long-term.

In Savannah, the $8.2 million renovation has been underway since June 1. With approximately 50% of the guest room inventory fully renovated at this point. The displaced room inventory has had negative impact on the property, given its high occupancy levels. We expect the room renovations to be substantially complete in Q1 2017 prior to the busy spring season.

This hotel is scheduled to convert next July 2 to the DeSoto an independent boutique associated with Preferred Hotels and Resorts. Looking at our corporate activity in the quarter, in August the Company sold 1.6 million shares of 8% perpetual preferred stock for net proceeds of approximately $37.8 million. The majority of these proceeds were used to redeem the Company's outstanding 8% senior unsecured notes with an aggregate principle amount of $27.6 million.

This combined transaction replaces [terminable] debt security with perpetual preferred equity which is callable in five years. This provides additional flexibility in our capital structure, and also provides additional liquidity to the balance sheet.

In September, the Company entered into an agreement to purchase the commercial unit of the Hyde Resort and Residences. A condo hotel under development in Hollywood, Florida for a price of $4.25 million which includes a turnkey rental program. The luxury oceanfront condo hotel consists of 367 use restricted units and 40 residencies that feature one- and two- and three-bedroom layouts, gourmet kitchens, floor to ceiling glass doors with private terraces, and Atlantic ocean views.

We will provide additional details projections and commentary on the acquisition once it closes. Which we expect to occur in the first quarter 2017. After the close of the quarter, we announced several refinancings that address our near-term maturities and lowered our cost of capital.

In October, we refinanced the Whitehall in Houston with a new $15 million first mortgage. This loan carries a five-year term of floating interest rate of LIBOR-plus 3.5% with 4% floor. The loan also includes a $5.5 million earn out provision that we may take advantage of as the market recovers from the recent downturn and the hotel ramped up to stabilization from its conversion.

Yesterday, we announced refinancing of our Louisville hotel with a new $12 million first mortgage. This loan carries a 10 year term, and a 4.27% fixed interest rate a rate reduction of nearly 200 basis points from the previous loan.

Lastly, we extended the loan on our Hampton hotel for additional three years. As previously announced, this hotel is under contract to be sold. The original contract was terminated as that buyer fell to perform under the terms of the agreement resulting in a surrender of a $200,000 non refundable deposit to us. The Company has since successfully negotiated a new contract with a different buyer under similar terms.

We hope to close on this disposition with the next 30 or 60 days. And lastly, in October, we announced our quarterly dividend of $0.095 per share representing an annualized yield of nearly 8% based on our current stock price of [$4.80] per share. I will now turn the call over to Tony Domalski our CFO.

Thank you, Scott. Reviewing performance for the period ended September 30, 2016. Total revenue for the quarter was approximately $37.3 million, representing an increase of 9.8% over the same quarter a year ago.

For the nine months ended September 30, the total revenue was approximately $116.9 million, representing an increase of 14.9% over the same period a year ago. For the quarter, hotel EBITDA was approximately $9.1 million, representing an increase of 14.1% over the same period a year ago. For the nine months ended September 30, hotel EBITDA was approximately $31.6 million which is a 14.3% increase over the same period a year ago.

Adjusted FFO for the quarter was approximately $2.7 million, representing an increase of 63.1% over the same quarter a year ago. For the nine months ended September 30, adjusted FFO was approximately $13 million, representing an increase of 11.8% over that same period last year.

Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, gains and losses on derivative instruments, acquisition costs, changes to the preferred portion of our income tax provision as well as other items. Hotel EBITDA excludes these charges as well as interest expense, interest income, corporate G&A, the current portion of our income tax provision, and other items as well. Please refer to our earnings release for additional detail.

Looking at our balance sheet. As of September 30, 2016, the total book value of our assets was approximately $402 million which includes net investment in hotel property of approximately $354.1 million. The Company had total cash of approximately $32.3 million, consisting of unrestricted cash and cash equivalents of approximately $26.4 million, as well as $5.9 million, which was reserved for real estate taxes, capital improvements, and certain other expenses.

As of September 30, the Company had principal balances of approximately $298.3 million in outstanding debt, at a weighted average interest rate of 4.83%. Approximately 77% of the Company's debt carries a fixed rate of interest.

Total stockholder and unit holder equity was approximately $86.9 million at the end of the quarter. Of which stock order equity was approximately $84.3 million and unit holder equity was approximately $2.6 million. At the end of the quarter, there were approximately 14.9 million common shares and approximately 1.8 million limited partnership units outstanding.

At the end of the third quarter, the principal balance on our interest-bearing debt was approximately $99,100 per room. Also, the ratio of debt to total asset value, as defined in the [venture] agreement to our senior unsecured notes, was 51.8%. Based on a total asset value of approximately $575.5 million at the end of the quarter.

Turning to guidance, we are revising 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 $152.3 million to $153.8 million. At the midpoint of the range this represents a 10.5% increase over last year's total revenue.

Hotel EBITDA is projected in the range of $41.2 million to $41.8 million. At the midpoint of the range, this represents a 13.9% increase over last years hotel EBITDA.

Adjusted FFO is projected in the range of $16.7 million to $17.4 million or $1 to $1.04 per share. At the midpoint of the range, this represented 2% 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. Our portfolio had a relatively strong quarter of growth compared to our markets, peers, and industry averages in general. However, as Scott mentioned, we have seen some deceleration and fundamentals and headwinds are likely in certain markets.

New supply in Louisville and Raleigh have contributed to the softening in those markets. Houston continues to suffer from the deteriorating fortunes of the oil and gas industry. The Zika virus impact on South Florida materialized late in the quarter and heading into that markets' high winter season we are unsure what the effects may be.

The impact of hurricane Matthew on our portfolio in early October was significant. At this point, we are estimating a $0.06 to $0.08 per share of negative affect to FFO for the fourth quarter and the year. Speaking on hurricane Matthew for a moment, this was a very destructive storm whose path directly affect six of our hotels as it transitioned out of the Caribbean and moved toward Florida and the Eastern Seaboard.

We began seeing room reservation cancellation as early as five days before the hurricane reached its first landfall in Florida. Bookings for the days after the hurricane passed were also impacted. As guests remained wary of traveling for business or leisure until the storm's results were clearly known.

Even though the winds of the hurricane spared our assets from any catastrophic damage, the real story with Matthew for us, was wind driven rain which increased in severity of moved into the Carolinas in Virginia. In short, our forecast for October performance were materially influenced by the storm. And we have adjusted our guidance to reflect this outcome.

We remain focused on executing our core strategic objectives. A focused asset management practice, making prudent and opportunistic capital investments, and building a secure balance sheet. To wit, our venture into the condo hotel model in Hollywood, we believe will provide outsized returns on invested capital as we ramp up to stabilization.

Our asset management practices have resulted in market and industry outperformance with top line growth and profit margin expansion continuing. We have unlocked substantial upside at recently reflect assets and plan to continue to execute on our repositioning plans for our Savannah, Hollywood and Wilmington hotels over the next 18 months.

We believe that today, our balance sheet is in the best condition in the history of the Company. In terms of cost of capital, maturity duration, risk profile, and cash liquidity. We feel confident we have positioned ourselves appropriately to not only weather any deceleration in the economy and industry fundamentals, but to be able to take advantage of opportunities that may present themselves as a result.

We believe the best course of action to realize long-term shareholder value is to execute on our core strategic objectives. Remain focused on maintaining a conservative and secure balance sheet, and making improvements to operations and capital investments to improve the value of our assets, be positioned to take advantage of organic and opportunistic growth opportunities, and continue to offer a safe dividend and an attractive yield to the investment community.

With that will now open up the call for questions.

(Operator Instructions)

Carol Kemple with Hilliard Lyons.

Good morning.

Good morning, Carol.

Related to hurricane Matthew, did you have any damage to any of your properties or was it just you lost visitors?

We had both, unfortunately. We had significant damage in Savannah. We had a problem with a roof. We had almost a 100 mile an hour wind in that location. So we lost a significant amount of revenue was a but we also had some damage.

We probably have about, I think about 25 rooms out of service for almost 10 days. In addition to the floor we had under renovation, which is another 30 rooms plus or minus so we had almost 50 rooms out of service for a period of 10 days. In addition to all to all the cancellations and other pain that we suffered.

The Hampton Hotel also suffered fairly significant damage from wind driven rain. And we are still in the midst, on both of the claims, of trying to nail down exactly what our claim will be with our insurance Company.

At this point you do not know any out-of-pocket expense you all could have in the fourth quarter to meet your deductible on those?

No. We are still working through that process. It is not going to be monumental either way. We think we are in position pretty well.

Okay. With the Louisville and Raleigh market especially with, I work in Louisville, I'm seeing all the new hotels coming up here. How do you plan to compete in Louisville and Raleigh with the new construction?

Let me take Raleigh first. Raleigh we had a new A Loft built almost directly across the street from us and that was done almost a year ago. We have absorbed that now. The effect of that was pretty severe right out of the gate, but over time it has lessened.

I will tell you the third quarter of this year, we had a fairly significant impact, but the fourth quarter we are seeing almost no impact. We are seeing some very positive signs there. The market has adjusted. We are pulling more business out of downtown than we were before. We are pretty optimistic that Raleigh is back on the right track and we are happy with that.

In Louisville, as you know it is a different story. The downtown market is in free fall as result of the closure of the convention center for renovation. In addition to which you have I think four or five new hotels built in the last 18 months and another large one planned. The downtown market is in dire straits right now, at least that is my view.

We really play to the South Indiana market. We are the only full-service upper upscale hotel on the north side of the Ohio River. And our plans to compete are to seek out the business that's on our side of the river where we have less amount of new product, in fact no new product that we compete with head to head. We have put in a plan and I think we are going to do everything we can to minimize the negative effects of the downtown distress.

Okay. Thank you very much.

Alexander Goldfarb of Sandler O'Neill.

Good morning.

Good morning Alex.

A few questions. First on Houston, would you describe, based on what is going on with your hotel down there and the market, would you say the market is still declining or it is starting to plateau or stabilize, I should say?

Yes. The market itself is still in decline. But, our hotel is making great progress. The month of July and August, they were terrible for us. We did very poorly. I think we were somewhere in the neighborhood of a 50% fair of the market, and the market as in free fall so it was not good.

Since the last 10 weeks have been much more encouraging. We went from 50% to almost 80% fair share almost immediately the first week of September and have maintained that fair share since then. And we have seen positive results in our food and beverage operations. Which have been the key to driving business into the hotel. We have three food and beverage outlets that appeal to the local community and we are getting a lot of traction there.

We are pretty optimistic that we have seen the worst by far for us. The market, I think, as far as the major impact to the market, I think has been incurred. But we are going to continue to see new product coming in the market and that will add to the pain a little bit.

Our part of downtown, we are in a corner by ourselves and we are surrounded by 40 and 50 story buildings. I think you have been there, Alex. So our part of downtown is doing okay and we think we will survive the next couple of years.

The real positive in Houston, for us, has been our guests reaction to the product and service that we put into the marketplace. And the fact we are the number three hotel in all of Houston which is over 500 hotels is a very, very positive thing.

Even though we have not gotten the financial results we wanted to in the third quarter, we are getting much improved financial results in the fourth quarter. And the fact the hotel is so well thought of, we think is certainly going to pay dividends in the future for us.

Okay. As far as when you say your hotel is doing better, do you expect the hotel, the room NOI to continue to decline? Or you are expecting that to stabilize even though the market is continuing to decline?

We think it will increase substantially over where we have been over the last six months.

Okay. Okay. On the new buyer, with Hampton Roads, assume they have hard money down, is that similar to what the original buyer had or is it more, can you detail that?

It is similar to what they had before. We are days away from the money going hard and they are in their due diligence period.

Okay. On any of your debt metrics for your unsecured, because I doubt the mortgage has any corporate metrics or maybe it does. But are there any covenants impacted by stock price performance or stock based debt to market cap type evaluations?

No. No. We learned our lesson in the 2007 and 2008 on that metrics. No. We do not. The only thing we have is a coverage ratio on the senior secured notes, and we gave you that information in the release just now. We are only levered at 51% and the covenant is 65%.

Okay. The final question, new to the story, so forgive. Looking this year, you guys have missed analyst assessments all three quarters and revised down guidance twice. The Kentucky Derby was something you knew about at the beginning of the year, and obviously hurricane Matthew was after the quarter close.

But what do you think is driving the disconnect? And is there any additional guidance that you want to provide now to help get the street more in line? I will leave it there and let you respond.

As you know, we issued guidance at the beginning of the before we knew about the Kentucky Derby issue. That was massive. That was a huge hit to our earnings. I think it was upwards of $0.08 per share. It was a big number. It was an unwelcome change in our performance, but not a whole lot we could do about it.

In terms of the hurricane, you are right about that. We do have to revise based on that event and it is what it is. I would say that the balance of the adjustment has to do with general market conditions that we have seen and we just talked about Houston, where we certainly underperformed in the month of July and August. And that is certainly had an effect on us.

We have revised down significantly in the fourth quarter for Hollywood based on the Zika situation. We are in a major meeting market. We work closely with the Diplomat Hotel and they have had massive cancellations. Which are not well received which means we had to reposition our strategy to go after the online travel agency business, and the leisure business and it is at a much lower rate has much higher commissions and is much less profitable.

These are events that have happened during the course of the year, and we wish we did not have to incur the Zika virus and hurricanes and ornery franchisors. But that is part of the hotel business and we will try to do better, in terms of future (inaudible). Thank you.

This is Tony, Alex, to follow up. I think, a lot of our forecasting was based upon the strong group business and the strong group bookings that we saw as early as last fall looking into 2016. And seeing those really strong bookings gave us a lot of confidence in the forecast that we were giving out. We saw a little ripple in the stock market back in January which shook business confidence. And we have seen the economy and the demand soften over the course of the year.

Thank you.

Ryan Vardeman, Palogic.

Hello guys and thank you for taking the question. Back to Hollywood and Hyde deal. It did not sound like you were willing to talk about the economics there. But would you expect the income stream to come in as qualified [REIT] income?

Yes.

Yes. The answer would be yes.

And as far as the parking situation and us renting the parking spots, would you bridge the new arrangement with the old parking arrangement so we can get a sense for where the cost might be on that property going forward?

The old parking arrangement was no cost. We paid the real estate tax for the property that is located contiguous to the south of our Hollywood hotel. It does not really have a whole lot to do with the new parking arrangement.

The new parking arrangement, we have leased their parking garage which is nine stories for the next 20 years. We think we leased it at a rate that will allow us to make a profit. We will give you details to follow.

Okay. Is Laurel stabilized to a point we would consider taking that back out to market?

It is not. We are still working to get that to fair share. It has taken a little longer. We are pretty much where we want to be on the occupancy side. We are not getting the rate. We have about a $15.00 rate gap. Which, over the course of the year would probably equal about $800,000 in GOP maybe. We don't want to leave that money on the table.

Does that sound about right Tony? Would you say $800,000?

Yes.

That is pretty close. You can do the math and that is a lot of money. We do not want to leave that many on the table.

One of the reasons you stated in not paying a higher percentage of your FFO in dividends is because of the large required amortizations. Between restricting the loan [amps] in relieving ourselves of the Hampton burden, here in the next quarter, would you consider increasing the dividend commiserate with a newfound discretionary cash flow?

We are always looking to increase our dividend. I think you are aware of that. We have been pretty good about continuing to increase our dividend. We will consider that, obviously, at our January board meeting.

We have, I think we have increased three out of the last four quarters. And we did that the year before and the year before. That has been our mode of operating as long as we can support a healthy dividend with good operations, that is always our plan, and I think you are aware of that. We want to do that. We think that is good for our shareholders and we think that is how we get credibility on the street.

In so far as the Hollywood property next year, have you given or are we closer in deciding how that will be flagged?

It is almost a done deal, but I can't tell you quite yet. You will probably see an announcement in the next day or two. Or within a week.

Great. Congratulations on getting your prefectural preferred done this quarter.

Ryan, you put us on that track back when and so we appreciate that. And we are waiting for the right time.

Congrats. I think it is a big deal. In the road show presentation you state the NAV is around 14 3/4% a share. Stock is now below $5. Is there anything outside of the normal course you think we could do over the next couple of years to narrow that gap?

We are looking at some things. We are looking at some things now. And I just cannot comment right at this moment, Ryan. But we will keep you in the loop as soon as we can.

Okay. Thank you very much and best of luck.

Thank you.

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

We thank you for joining us today. We look forward to reporting our year-end results in January. Thank you.

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