Sotherly Hotels Inc (SOHO) 2016 Q4 法說會逐字稿

Good morning and welcome to the Sotherly Hotels' fourth quarter earnings webcast and conference call. All participants will be in listen-only mode.

(Operator Instructions)

This event is being recorded. I would now like to turn the conference over to Mr. Scott Kucinski, please go ahead.

Thank you, and good morning everyone. Welcome to Sotherly Hotels' fourth quarter earnings call and webcast. Dave Folsom, our President and COO, will begin today's call with a view of the Company's quarterly activities and review portfolio performance. Tony Domalski, our CFO will provide our key financial results for the quarter and issue our initial 2017 guidance.

Drew Sims, our Chairman and CEO, 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 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 Dave.

Thanks, Scott, 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 $87.73, a decrease of 2.9% over prior year with a 4% decrease in occupancy and a 1.2% increase in rate. This negative result was significantly driven by several factors, the impact of which I will elaborate on in a moment.

For the year, portfolio RevPAR was $98.18, an increase of 4.7% over prior-year, driven by a 4.8% increase in rate. Hotel EBITDA for the portfolio decreased 4.4% to approximately $8.4 million for the quarter. For the year, hotel EBITDA increased 9.8% to $40 million.

In the quarter we experienced several events which impacted the portfolio, the most important of which was Hurricane Matthew. As we discussed on last quarter's earnings call, Hurricane Matthew, which hit the eastern seaboard in early October, directly affected six of our hotels -- half of our portfolio.

The impact on bookings stretched well beyond the storm's duration, as cancellations began as early as a week prior to the storm reaching landfall and remained stagnant for many days as the storm moved slowly up the East Coast, impacting Florida through Virginia. The storm did cause physical damage at two of our hotels. Unfortunately, Hurricane Matthew came during one of the busiest times of the year for this portion of our portfolio.

Further, we had anticipated recouping a portion of these losses through a claim against our business interruption insurance. While this is still anticipated, the claims process is a slow one, and we were not able to settle the insurance matters prior to year-end and therefore we were unable to account for this benefit in fourth quarter hotel EBITDA to help offset the losses, as we had originally forecasted. Instead, we will see the benefit in the first half of 2017 when the claim is finally settled.

In addition to the hurricane, in the quarter we continued to see the Houston market experience performance influenced by conditions in the oil and gas markets and by the advent of new supply. Houston's quarterly market RevPAR was down nearly 10%. These conditions impacted the ramp-up of our Whitehall Hotel in Houston. Lastly, the Florida tourism market was materially impacted in the quarter by the ongoing threat of the Zika virus. Drew is going to elaborate on these factors further in a moment.

Looking at some individual property and market highlights, our Jacksonville, Florida hotel completed its first full year as a DoubleTree on another high note, with RevPAR increasing 34.5% in the quarter against the market's increase at 12.8%. The hotel achieved a RevPAR share index of nearly 125% for the quarter and was once again the market leader.

For the year, RevPAR was up to 33.3%, compared to the market's healthy 6.7% increase. Our Laurel, Maryland hotel also completed its first full year as a DoubleTree, since converting in November 2015 and continues to ramp up to stabilization. For the quarter, RevPAR increased 43.7% compared to the market's increase of 4.5%. For the year, RevPAR at this hotel increased 37.8% versus the market's 6.6% increase.

In Atlanta, at our Georgian Terrace Hotel, we had a strong quarter as it benefited from the completion of the guest room renovations that wrapped up in the third quarter. RevPAR increased 11.3% on the quarter, against the market's increase of 1.4%, with the hotel gaining nearly 1000 basis points in market share. For the year, RevPAR was up 4.8% compared to the market's 3.1%.

In Savannah, the $8.2 million renovation is over halfway complete, with all guest room inventory fully renovated as well as the majority of our meeting space and pool area. The remaining public space will be renovated over the next five months, including the introduction of two new food and beverage concepts. This hotel is scheduled to convert in July to the DeSoto -- an independent boutique associated with Preferred Hotels and Resorts.

In Hollywood, Florida, the $6.9 million renovation of the Crowne Plaza is getting underway, as we work toward the conversion to the DoubleTree Resort by Hilton flag in the fourth quarter of 2017.

Looking at some of our corporate activity in the quarter, in the quarter we refinanced three of our hotels which addressed any near-term maturities remaining for the Company, and also locked in favorable interest rates prior to any substantial increase you may see in the future.

In October, we refinanced the Whitehall in Houston with a new $20.5 million first mortgage with International Bank of Commerce. This loan provides initial proceeds of $15 million with additional $5.5 million available upon satisfaction of certain conditions, as well as having provision that allows us to rebalance the loan with no penalty. It has a term of five years. It has a floating rate note with a 30-day LIBOR plus 350 basis points, subject to a 4% floor and it amortizes on an 18-year schedule after a two-year interest-only period.

In November, we refinanced the Sheraton Louisville Riverside with a new $12 million first mortgage with Symetra Life. This covenant-like non-recourse loan has a term of 10 years, there's a fixed rate of interest of 4.27% for the first five years of the loan, with an option for the lender to reset that rate after five years, and it amortizes on a 25-year schedule.

In December, we refinanced the Hilton Wilmington Riverside Hotel with a new $35 million non-recourse first mortgage with Mutual New York Life. The loan has term of 10 years, bears a fixed interest rate of 4.25%, and amortizes on a 25-year schedule after a one year interest-only period.

Also in December, the Company's Board of Directors authorized a stock repurchase program, under which the Company may purchase up to $10 million of its outstanding common stock at prevailing prices on the open market, or in privately negotiated transactions at the discretion of Management. The Company has used, and expects to continue to use, available working capital to fund purchases under the stock repurchase program.

Our intent is to complete the repurchase program prior to December 31, 2017, unless extended by the Board of Directors. Through year-end, the Company repurchased 481,100 shares of common stock for a cost of approximately $3.2 million, and these repurchased shares had been retired.

Also in December, the Company initiated an employee stock ownership plan -- the ESOP -- and agreed to loan up to $5 million to the ESOP trust [and implements] and forms a part of the trust in order to allow for purchases of shares of the Company's common stock.

In other recent events, in January we closed on the purchase of the commercial unit The Hyatt Resort and Residences -- a condominium hotel in the Hollywood, Florida market -- for a price of approximately $4.5 million including inventory and closing fees.

In addition to the commercial unit, the Company also entered into a lease agreement for the parking garage and meeting rooms associated with the hotel, and a management agreement related to the operation and management of the Hotel Condominium Association. The Company will also operate a rental management program of all participating unit owners. This project was recently developed, and opened to the public on February 8.

Earlier this month, we closed on the sale of Crowne Plaza Hampton Marina for a price of approximately $5.6 million. Lastly in January, we announced that we increased our quarterly dividend to $0.10 per share, representing an annualized yield of approximately 5.4% based on the recent stock price. I will now turn the call to our Chief Financial Officer, Tony Domalski.

Thank you, Dave. Reviewing performance for the period ended December 31, 2016. Total revenue for the quarter was approximately $35.9 million, representing a decrease of 2.2% over the same quarter a year ago. For the 12 months ended December 31, total revenue was approximately $152.8 million, representing a 10.3% increase over the same period a year ago.

For the quarter, hotel EBITDA was approximately $8.4 million, a decrease of 4.4% over the same quarter a year ago. But for the year ended December 31, hotel EBITDA was approximately $40 million, representing a 9.8% increase over the same period a year ago. For the quarter, adjusted FFO was approximately $2.1 million, representing a decrease of 36.2% over the same period a year ago. And for the 12 months ended December 31, adjusted FFO was approximately $15.1 million, or a 1.3% increase over the same period a year ago.

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 deferred portion of our income tax provision, as well as other items. Hotel EBITDA excludes these charges as well as interest expense, interest income, corporate (technical difficulty) expenses, and the current 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, 2016, the total book value of our assets was approximately $406 million, which includes net investment in hotel properties of approximately $348.6 million. The Company had total cash of approximately $36.4 million, consisting of unrestricted cash and cash equivalents of approximately $31.8 million, as well as approximately $4.6 million which was reserved for real estate taxes, capital improvements, and certain other expenses.

As of year-end, the Company had principal balances of approximately $309.8 million in outstanding debt at a weighted average interest rate of 4.66%, which is 58 basis points lower than at year-end 2015. Approximately three quarters of the Company's debt carries a fixed rate of interest.

Total stockholder and unit holder equity was approximately $81.3 million at the end of the quarter, of which stockholder equity was approximately $79 million and unit holder equity was approximately $2.3 million. At the end of the year there were approximately $14.5 million common shares outstanding and approximately $1.8 million limited partnership units outstanding as well.

At the end of the fourth quarter, the principal balance on our interest-bearing debt was approximately $102,900 per room. Also the ratio of debt to total asset value, as defined in the indenture agreement to our senior unsecured notes, was 53.3% based on a total asset value of approximately $580.8 million at the end of the quarter.

Turning to guidance. We are issuing initial guidance for 2017 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 $156 million to $158.5 million. At the midpoint of the range, this represents a 3% increase over last year's total revenue.

Hotel EBITDA is projected in the range of $41.6 million to $42.4 million, and at the midpoint of the range, this represents a 5% increase over last year's hotel EBITDA. Adjusted FFO was projected in the range of $16.3 million to $17.5 million, or $1.02 to $1.10 per share. At the midpoint of the range, this represents a 17.8% increase over 2016'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. As Dave mentioned, several factors contributed to a disappointing performance in the fourth quarter, muting an otherwise solid year for the portfolio. First, the impact from Hurricane Matthew was substantial. We estimate this event to have cost us approximately $0.07 in FFO per share for the quarter.

Second, in 2016, we refinanced five hotels and prepaid corporate bonds resulting in substantial non-cash charges due to the early extinguishment of debt. This equated to a total FFO impact of $0.02 per share in the quarter and nearly $0.09 per share for the year. Third, the Zika virus scare had monumental negative impact in South Florida as we entered the high season. Domestic travelers were hesitant to visit the area, causing massive group cancellations and transient leisure travel to pace far below historic levels and our forecast. We estimate this had an impact of approximately $0.08 per share in FFO.

We also faced substantial headwinds in two other markets that we believe will continue to impact operating results in the near term. The Houston market has been down 16 of the last 18 months. The market nearest the fortunes of the oil and gas industry -- and there have been several new hotels built in the central business district. Regardless of these factors, our hotel is taking share and even though the market is soft, we expect much improved results in 2017.

The Louisville market has seen a dramatic drop, due to an abundance of new supply hitting that market simultaneous to the convention center closing for a two-year renovation. Restricted demand and additional supply makes market prospects bleak.

Notwithstanding the negative market factors, we have continued to reshape the Company's balance sheet and hotel product for future success. In the year, we refinanced over $118 million in debt, via five new first mortgage loans, extending their maturities and substantially lowering the aggregate interest rate. We also completed a perpetual preferred stock issuance, replacing corporate bonds that carried a near-term maturity with perpetual preferred equity at the same cost.

We invested over $14 million into our assets via capital improvement projects, completing major convergent projects in Houston and Atlanta while commencing upbranding projects in Savannah, Hollywood, and Wilmington. We successfully sold the Crowne Plaza Hampton Marina, an asset we identified as having limited upside for shareholders and no longer fitting our long-term strategy. This capital was recycled into the purchase of the commercial unit of the Hyde Resort Condo Hotel. We believe this project will produce upsized returns once stabilized, and provide a boutique hotel in the South Florida market, where limited real estate opportunities of this magnitude exist.

Total return for the quarter was second among all lodging REIT peers at 30.5%. For 2017 year-to-date, SOHO has ranked first for the total return of approximately 10% as of February 20.

Lastly, the Company continued to execute on its policy to maintain a competitive and sustainable dividend with a bias towards growth. The Company increased its dividend three times in 2016 and has now increased the dividend 11 out of the past 17 quarters. Our biased to increase the dividend continues in 2017.

Also in 2017, we intend to continue our reinvestment in upbranding plans for our existing portfolio with the conversion of the DeSoto in Savannah and DoubleTree Resort By Hilton Hollywood Beach both scheduled for the second half of the year. We intend to recycle capital from non-core assets and invest in hotels that fit our long-term strategy and present attractive value creation opportunities.

In the year, we intend to improve the Company's cost of capital with the few remaining refinancing opportunities available to us. We believe that executing on these goals, as well as our core strategic objectives, will produce long-term value for our shareholders.

We will now open up the call for your questions.

(Operator Instructions)

Our first question comes from Carol Kemple of Hilliard Lyons. Please go ahead.

Good morning.

Can you all talk a little bit more about your recent acquisition? How you all expect to get revenue from that property? And any impact that might have on our 2017 FFO per share estimate?

Sure. It's a complicated model, I will give you that. It is a situation where we have a 400-room, plus or minus, condominium hotel, oceanfront, Hollywood Beach -- this hotel is definitely upper upscale, tending towards luxury product. All suites; condominiums are individually owned and we have rental agreements with the individual owners as they close on their unit -- which today I think we closed maybe 50 units -- then we approach them about joining our rental program. Some units will join our rental program, some will not join our rental program, but we expect that the majority of the unit owners will join our rental program.

So what we did was, we bought the public space in the hotel and all the back-of-house space. We own the front desk. We own all the executive offices, parts of the lobby, all storage space in the hotel; we have back of house space that supports our laundry and maintenance facilities and accounting. So we actually own real estate in the building, and then we have an agreement to operate a homeowners association via management contract. And then we have these individual agreements with each unit owner to rent their unit for them.

And long and short, I can't give you any projections today because of the slow pace of the closings, the first half of the year is probably going to be inconsequential one way or the other. Second half of the year, I would think fourth quarter will have a very positive impact on our operations. We've invested upwards of $5 million in this project and we expect to get upsized returns. I don't know if I can tell you anything more than that. I can't really give you any projections, but you can take that $5 million and calculate an IRR on that. I think it's fair to expect it would be higher than what we would normally get on one of our investments, because it's so management-intensive and a little more complicated.

Okay. Is that something, as we approach third-quarter earnings, you might give us a little more guidance on, once you start to see some upside there?

We absolutely can do that. We are at the mercy right now of the pace of closings on the units, and until that pace picks up and we get more inventory, it's hard for us to project exactly what our cash flow is going to be.

Okay. And then at this point it looks like the share buyback has been pretty successful for the stock price. Are there any hotels that you would look to sell so you can redeploy some of your capital into another asset or for share buybacks?

We have identified two hotels; I'd rather not say which ones those are right this minute, but the answer is yes to that. We have also identified a hotel that we'd like to purchase, and we are working on that as well.

Are the two that you would like to sell, are you actively marketing those at this point?

No. Both of those are going to be reverse-1031 exchanges. We need to go out and buy something first, and then we will sell and exchange.

Okay. Great. Thank you very much.

Okay.

Tyler Batory of Janney Capital Markets. Go ahead.

Thanks, good morning everyone. Just a couple of questions from me here.

On the fourth quarter, I appreciate the commentary on the impact to AFFO, but are you going to call out the impact to RevPAR from Zika or the hurricane?

Can we identify that?

Yes, can you call out any impact, what the impact was to your RevPAR, just given Zika and then the hurricane as well? What RevPAR growth would be, if you X out those two issues?

I think, Tony, you're going to have to reverse-calculate.

We did figure out the overall effect on FFO. But to go back and calculate RevPAR -- we haven't done that. So we can do that and get back to you there, Tyler.

Okay. That's great.

And then, on the guidance, does that include any sustained impact from Zika into 2017? And also wondering if you can comment on international travel trends into South Florida?

Sure. It does. We have guided down in South Florida for this first half of the year. And so I think to that end, yes, we have taken that as a factor. I would say -- I was just there this weekend. I think that the trend is lessening, or the impact of the Zika scare is lessening. The travel warnings have been lifted. I think there's been very little activity in terms of the additional health impact on residents or visitors. I think we are getting past it, looks like to me. And we are hopeful. But to answer your question, we did revise our numbers down a little bit on the first quarter over what we have seen in previous first quarters.

Does that answer your question?

Yes, and maybe any update on the international travel trends as well?

International travel, we've seen a decrease there, as a result of, really, the strength of the dollar, as much as anything else. And so that void has got to be filled with domestic travel. Although I can tell you the hotel I stayed in this weekend was completely full with Argentineans and Venezuelans. So, it's a very desirable market; and I think long term South Florida is always going to be a major component of travel in the Southland.

Great. That's very helpful, thank you.

Atlanta, obviously that looks like an asset that's performing pretty well. But maybe any general comments on how that renovation has been received? I don't know if you have some comments that you can make in your outlook for that market mid-2017, especially related to new supply?

Well, we're not really getting any new supply in our comp set this year. There was a project that had been announced and has now been delayed. I'm not sure, there probably won't be any for the next couple of years, as best as I can tell.

Yes, we're very pleased with the way the hotel is performing. One of the things that we don't report on as much, is the food and beverage component, and that's been extremely strong in that hotel. We see that as part of our overall product offering, that adds value so that people want to stay in the hotel. We have two great retail food and beverage operations there that mostly service the local community, not the hotel. So when our guests come into the restaurant, it's not your typical hotel restaurant. There's tons of activity, lots of people there, and they're mostly locals. It's kind of a fun place to hang out and enjoy yourself.

I think the Atlanta market is going to be the strongest it has been. Our core business there, our base business there is the movie crews; we've got good bookings for the balance of the year.

Okay, great.

And then maybe just a more general question across the portfolio? I've heard some in the industry talk about their optimism related to short-term group bookings, and then corporate travel as well, post the election? Is that something you are seeing in your portfolio? You are seeing concrete evidence that corporate transients or group trans actually improved in the fourth quarter? And maybe continued into the first quarter here?

We actually didn't see that. We saw the opposite in the fourth quarter. First quarter, I'm not seeing any strong evidence that those segments are making a big comeback. We fill rooms with other segments, but not those segments.

Okay, that's helpful.

Last, on capital allocation. The share repurchase trend was well received by the markets, you still have about $7 million left on that. Can you give us an update on your priorities now, especially given the stock price performance of the past three months?

We're very pleased. Dave executed on that and I think we did a great job. We put that in place very quickly and executed very quickly. And I do think it's been well received, and we want to continue to buy back shares when the market tells us it's the right time to do that. I'm not going to give you any price points, but we've said for a long time that we think our shares are greatly undervalued, and so to that end we will continue to support the stock price when we have the opportunity. We have a lot of closed windows, so we have to pick and choose when we can do that.

Okay that's great. Thanks.

Our next question comes from Daniel Santos of Sandler O'Neill. Please go ahead.

Hey, good morning, how's it going?

Good morning.

Just two quick questions for me: the first one is on guidance, and I was just wondering if you could walk us through what's driving the difference in FFO versus AFFO in 2017?

Tony, I'm going to let you answer that one.

Let's see. The difference between FFO -- mostly its just a change in our deferred income tax provision. Usually we have a host of other items, but in our guidance as of right now it would just be the current portion of our income tax provision.

Got it.

And my second question is on the ESOP that you guys announced in December. Can you give us a little more detail on that? And why you lended the $5 million versus just letting the employees directly purchase from Treasury shares?

Well, the stock was in the force, in terms of pricing, when we came up with this idea, and we thought it would be great for our employees to be able to get the benefit of the low price, the stock price. That is what started the process. And for the last -- we've been public now for 12 years. We've always strived to provide a vehicle for our employees to invest in the Company. The problem is, when we tender stock, its a bonus to our employees. They have to immediately pay tax on it. So it's never been as big a part of our operation as we wanted it to be.

This seems like, given where the stock price was, and given this desire to have our employees invest in our Company in the long-term, we thought that this was a great time to jump in and implement an ESOP program. We had the cash to do it, which in past years is not always the case. We went into the fourth quarter this year with more cash than the Company had ever had, which gave us a little more flexibility to do some things like this.

Got it. That's all for me, thanks.

Thank you.

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

Thank you all for participating in the call today. We'd love to have you all join us here in Williamsburg in April for the Annual Meeting, and I look forward to talking to you all at the end of the quarter. Thank you.

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