Sotherly Hotels Inc (SOHO) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Sotherly Hotels Inc. third quarter earnings call and webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Scott Kucinski. Please go ahead.

Thank you and good morning, everyone. Welcome to Sotherly Hotels third quarter earnings call and webcast. Dave Folsom, our President and CEO, 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 2017 guidance. Drew Sims, our Chairman and CEO, will conclude with an update on our strategic objectives. We will then take questions. If you've 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 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 give no assurance that these expectations will be obtained. 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. First, I want to review the hurricanes that impacted our portfolio in the quarter, hurricanes Harvey and Irma were serious storms that affected much of the Southern United States. Preliminary damage estimates for Harvey classified as the costliest hurricane on record, eclipsing Katrina in 2005. Irma was the strongest, wind storm to hit the U.S. since Katrina and caused significant damage in the Caribbean and later in Florida and the Eastern Seaboard. The majority of our portfolio was affected by these storms. We did experience physical damage in our hotels as well as lost some inventories, and we incurred the expense of immediate cleanup and recovery. Luckily, the physical damage to our hotels was not severe, and for the most part our hotels remained open and functioning for the duration of the storms, excluding periods where electrical power was lost. We were very fortunate that we did not suffer any long term ill-effects from these storms. However, we did experience significant business interruption due to the storms not only in hotels that were directly in the path of the hurricanes but in other hotels where guest travel was canceled over of the uncertainty of the storm's path, duration and severity. For instance, we witnessed business interruption in North Carolina at our Wilmington, Hilton in the form of significant group cancellations following the governor declaring a state of emergency, even though Hurricane Irma ultimately did not threaten the region. We're currently working with our insurance partners on the claims resulting from these hurricanes. Unfortunately, the losses we experience will be taken in the quarter and reflected in our earnings and revised guidance. Insurance claim proceeds whatever they may ultimately be would be recovered at a later late. Hopefully, in the fourth quarter, but potentially not until the first quarter of next year. Drew and Tony will discuss the financial impact of this event shortly. With that said, I'll turn now to review our portfolio's key operating metrics. Looking at quarterly results for the composite portfolio, which represents the company's wholly-owned properties; and the participating condominium hotel rooms in the Hyde Resort & Residence. RevPAR was $97.50 -- $97.56, an increase of 1.4% over prior period with a 4.2% increase in ADR and a 2.8% decrease in occupancy. Year-to-date, RevPAR was $104.29, an increase of 2.6% over the prior year with a 3.9% increase in ADR and a 1.3% decrease in occupancy. Excluding our hotels in Hollywood, Savannah and Wilmington, which were all under renovation in the period and negatively impacted results, particularly to our occupancy due to rooms being out of service. Composite RevPAR increased 6.9% for the quarter with a 5.9% increase in ADR and a slight 0.9% increase in occupancy. Year-to-date, RevPAR increased 7.1%, driven by a 6.3% increase in ADR and 0.8% increase in occupancy. Hotel EBITDA for the portfolio decreased 12% to approximately $8 million for the quarter, primarily result of both the hurricanes and to a lesser degree of the renovation impact within the portfolio.

Looking at some of our individual property highlights, particularly at our renovation activity. In August, we completed the $9.5 million renovation of our Savannah Hotel and converted to The DeSoto, an independent boutique associated with Preferred Hotels and Resorts. The new product offering, which includes 3 new food and beverage outlets, and a reimaged rooftop pool and sundeck has been well received in the marketplace and with our guests. In Hollywood, Florida, we completed the $7.1 million renovation of the Crowne Plaza, converting to the DoubleTree Resort by Hilton flag on October 25. While there will be typical ramp-up period as the hotel transitions to the Hilton system. We believe, this hotel will benefit from the Hilton booking engine in the near future as we head into South Florida's high season. In Wilmington, North Carolina, we continue to progress with the $8.6 million renovation of that hotel, which is scheduled to be completed in March 2018, and includes a rebranding of the asset to the Hotel Ballast. The guestroom floors are nearing completion and the impact for public space work is scheduled during our slower months of December through February.

And lastly, we continue to ramp-up operations at the Hyde Resort & Residences with approximately 250 units now in our rental program. We anticipate a stabilized inventory pool and continued ramp-up of operations heading into the high season. And looking at some of our corporate activity, last month we completed the sale and issuance of $1.3 million shares of our 7.875% Series C Cumulative Redeemable Preferred Stock for net proceeds of approximately $30.4 million, including the overallotment option. We intend to use the net proceeds to redeem in full our operating partnership's outstanding 7% senior unsecured notes maturing in 2019. We're pleased with the results of these combined transactions as they replace termable corporate debt with perpetual preferred equity. Thus eliminating the near term maturity risk from our balance sheet. Finally, last month we announced our quarterly dividend of $0.11 per share representing an annualized dividend of $0.44 per share and a yield of approximately 6.5% based on yesterday's closing price. And with that, I will turn the call over to our CFO, Tony Domalski.

Thank you, Dave. Reviewing performance for the period ended September 30, 2017. Total revenue for the quarter was approximately $36.8 million, representing a 1.4% decrease over the same quarter a year-ago. Year-to-date, total revenue was approximately $116.1 million, a 0.7% decrease over the same period a year ago. And as Dave said, for the quarter, hotel EBITDA was approximately $8 million or 12% decrease over the same period a year ago. And year-to-date, hotel EBITDA was approximately $31 million, or slight 2% decrease over the same period a year ago. For the quarter, adjusted FFO was $1.7 million, representing a decrease of 38.6% over the same quarter a year ago. And year-to-date, adjusted FFO was approximately $12.3 million, a decrease of 5.3% over the same period year-ago. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, gains and losses on derivative instruments, charges related to aborted or abandoned offering costs, changes in 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, general and administrative 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 September 30, 2017, the total book value of our assets was approximately $416.4 million, which includes net investment in hotel properties of approximately $357.6 million. The company had total cash of $38.8 million, consisting of unrestricted cash and cash equivalents of $32.7 million as well as approximately $6.1 million, which was reserved for the real estate taxes, capital improvements and certain other expenses. As of the end of the quarter, the company had principal balances of approximately $325.6 million in outstanding debt at a weighted average interest rate of 4.78%. With the refinance of our mortgage on the Jacksonville property back in June, approximately 80% of the company's debt carries a fixed rate of interest. Total stockholder and unitholder equity was approximately $72.5 million. At the end of the quarter, of which stockholder equity was approximately $70.7 million, and unitholder equity was approximately $1.8 million. At the end of the quarter, there were approximately 13.8 million common shares outstanding 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 $114,725 per room. Also, the ratio of debt to total asset value, as defined in the indenture agreement to our senior unsecured notes was 55.9%, based on a total asset value of approximately $582.3 million at the end of the quarter.

Turning to guidance. We're updating our previous guidance for 2017, which accounts for current and expected performance within our portfolio as well as other factors. For the year, we're projecting total revenue in the range of $152.3 million to $153 million. Hotel EBITDA is projected in the range of $39.6 million to $40.3 million, and adjusted FFO is projected in the range of $14.1 million to $14.7 million or $0.90 to $0.94 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. As Dave and Tony have outlined throughout this call, there are several nonrecurring factors that impacted our financial results in the quarter. I would like to start by providing additional detail. First, we estimate that the hurricanes impacted earnings by approximately $0.06 in the quarter, while transient room bookings were impacted, the most significant impact came from group and catering cancellations. Our food and beverage revenue as well as other revenue sources were also negatively impacted at many of our properties. There was also a tremendous impact on our expense margins, as we staffed up in advance of during and after the hurricanes in order to protect, and preserve our assets and ensure the comfort and service to our guests that were weathering the storm with us. We hope to recoup some of these losses through our insurance claims, but that result will not be known for some time. While impact of the Q3 earnings was not welcome, we are fortunate to survive these storms as well as we did. Second, our preferred stock issuance and schedule bond redemption, will result in earnings impact of approximately $0.02, as a result of having the combined payment burden for a month and a half, as well as the higher coupon on the preferred. We believe, the 88 basis point rate difference between the bonds and the preferred is a small and acceptable price to pay in order to eliminate the bond maturity risk by replacing debt with perpetual preferred equity. We're pleased that we were able to take advantage of this market opportunity. Another nonrecurring negative in the quarter relates to our property in Philadelphia, where we had a tough comparable against 2016 when a Democratic National Convention took place. The Philadelphia market was down 28.5% in the quarter, our hotels REVPAR was down 24.3% and took share, but still suffered a large setback. For the year, this market has been softer than anticipated with RevPAR down 12.6% for our comp set, driven by a 9% decrease in ADR. We believe the year-to-date decline is due to a combination of factors that includes a weak citywide calendar, new supply impact, and lower than forecasted in bound travel at the airport. We have continued to experience negative impact in the quarter resulting from our renovation and ramp up activity. The DeSoto conversion is now complete with all renovations -- renovation impact behind us, and the operational ramp-up underway. In the quarter, we incurred significant expenses associated with our new food and beverage outlets as we reopen to the public with new chef-driven concepts and the standard training, marketing and other operating costs weighing down any profitability in the near term. We do not anticipate this impact will continue for more than a few months.

In Hollywood, the renovation was highly impact within the quarter as we were in the final push to complete and convert in October. The hurricane shut down the renovation activity for nearly a week, during the home stretch. Therefore, when the renovation resumed, we were forced to increase the number of rooms we took out of service to get back on schedule, negatively impacting hotel occupancy. In addition, our operational expenses were temporarily increased as we rush to get the rooms cleaned, appointed and back in service. That's -- this pain is now behind us, and as Dave mentioned, we look forward to seeing the benefit of the DoubleTree flag and Hilton system. With the Savannah and Hollywood conversions complete, we are solely focused on our Wilmington renovation for the balance of the year and into the first quarter of 2018. It is important to note, that these 3 hotels encompass 30% of the rooms in our portfolio, and even a larger portion of the portfolio's revenue and hotel EBITDA. Having all 3 properties under renovation in the same year, was unavoidable due to the franchise renewal cycles of each coinciding. We are pleased to have this heavy lift behind us. Including the Wilmington Hotel, we have now completed the renovation and repositioning of nearly 70% of our portfolio, in terms of guest rooms over the past 24 months. We believe that our refresh portfolio is poised to outperform the market going forward. We continue to seek out new investment opportunities that fit our long-term strategy. We remain dedicated to our strict and conservative underwriting principles, and we'll act if and when, we believe we have found a compelling opportunity that will benefit our shareholders over the long term.

Lastly, we have capacity remaining under our stock repurchase program that is authorized through the end of the year. While we have not been active with this program thus far this year, primarily due to the absence of sufficient buying windows. We continue to evaluate the use of this program. We will now open the call up for questions.

(Operator Instructions) Our first question comes from Carol Kemple with Hilliard Lyons.

Do you all expect any impact from the hurricane to carry over into the fourth quarter?

Carol, I would say, net it was a benefit in the fourth quarter, because in Houston for instance, we had to close for a few days in Houston, and once they reopened downtown, we were basically at 100% occupancy. But that occupancy was relatively low rate because we were trying to be a good neighbor and we leased most of our rooms to the local hospital for a very reasonable rate. Those folks were working, basically, if they weren't asleep, they were working. So we didn't have any food and beverage or other revenues sources coming into the hotel during the month of September. At the end of September, we opened up the hotel to the general public, and we just -- had a great, great month of October. So it was actually a very, very positive thing because there was a lot of hotel rooms that were out of service in the outer fringes of Houston, and so a lot of the businesses got focused downtown. Additionally, it didn't hurt that we had World Series in town, which also was a huge benefit. So that will be one example. But to answer your question, I think, it's actually probably a net positive for us. We had a very, very strong October. And so we're very pleased that we had a bounce back after an extremely difficult third quarter.

Okay, and then on your G&A expenses down from the second quarter, was there anything one time in that or is that a good run rate going forward?

Carol, this is Tony. Our G&A expenses do intend to fluctuate. They are not flat from quarter-to-quarter, so they are little higher in the beginning of the year, a lot of that is the audit and tax prep cost that seem to hit in the beginning of the year not the end of the year. But also in the second quarter, we had about $0.5 million hit to G&A expenses related to the burn-off of our S-3 and the ATM offering that was attached to that. So I think if you go back to Q2, we tracked a $0.5 million booked in Q3 and average the 2, that's a good run rate.

(Operator Instructions) The next question comes up from Daniel Santos with Sandler O'Neill.

My first question is on, insurance deductibles and any recoveries related to the hurricane. Could you just give us a sense of timing, or any business interruption recoveries that we might get?

Yes, I think, the question was, let me repeat the question just to make sure that we heard it correctly. We were breaking up a little bit here. So you are asking us about the deductibles and also what our recovery might be for business interruption?

Yes.

Okay. Yes, in each of our hotel, we have a typical master policy, which unfortunately carry very high deductibles, we have a strategy to buy those down with reinsurance carriers and Lloyd's of London every year. So we have very manageable deductibles, they are different for every hotel, for instance, I can tell you, I think, the Jacksonville our total deductible is $140,000, and we have a claim eclipses that. There is also flood, which is a separate claim. And we buy down those deductibles down to about $10,000, and we did have at least one hotel that has a flood claim. So I tell you, it's a complicated equation, but as it sits right now, we had claims that eclipse our deductible levels at these hotels, depending on what the claim is. Now you get to that point, and then we have to negotiate these claims for property losses, for business interruption, and frankly, it gets down to a large loss negotiation with the carrier, I can tell you, I think, we're going to make some recovery I can't really tell you right now but I think is going to be from a business interruption standpoint. Because we still really haven't heard back from the carrier with any initial thoughts.

Got it, that's helpful. And then -- and we could just kind of refresh us on your thinking of using capital to fund stock buybacks, versus maybe unencumbered assets, and using the money to acquire more assets? And further related to that, did you buy back any shares in the quarter?

We did not buyback any shares in the quarter, mainly because we had that public offering out there that precluded us from doing that. We have -- unfortunately, most of the year has been closed to us to buy back shares. I will say the windows opens after this call was or 72 hours after this call, we got to a clear sales through the end of the year.

The next question comes up from [Mark Themba], private investor.

Talked a little bit about, I think, I'll ask the question about properties. Any properties you're thinking of putting up for disposition, and maybe using some of that capital to reward shareholders?

Well, we would consider selling some assets, which we are continue to investigate. In terms of rewarding shareholders, I don't think that's the strategy that we have in mind because of our relatively small size, we feel like it's important for us to continue to growth the company at a measured rate. And in any event, the assets that we are considering selling have a very low basis in them, because we have to own them for a long time, and it would be very, very expensive for us to just to sell the asset and not execute at 1031 exchange. We end up paying an inordinate amount of the proceeds in taxes. And we don't think that is a wise thing to do, sell an asset and pay a huge chunk in taxes. So our view is that we're going, any asset that we sell will be traded for an asset that we think has more upside than the hotel that we're selling.

And what's your thought on dividend increases for the next year, do you continue to -- I know you didn't increase it this quarter, you had been increasing at a pretty regular base. And also what do you attribute to divergence, between all the other hotel REITs, pretty much that have been doing really very well, their stock prices are near the high and until basically yesterday, SOHO stock has been languishing?

Craig, I'll take a couple of those. So the first part of this question was about the dividend. Yes, Mark, we always have a bias increase our dividend. And I know you come to our annual meeting and that's important to us, we feel like we have a safe dividend. We want to continue to grow that. I think for the last 3 years at least maybe 4, we have increased 3 out of 4 quarters every year, and we've done that again this year. I think, you can anticipate that we'll be looking at something like that next year. And that's the way that we've conducted ourselves in the past, and we will conduct ourselves in the future. Part B of the question was, I am sorry I lost.

It was regarding the stock had been doing relatively well compared to a lot of hotel REITs you know I have been a long-term shareholder, but this year you've seen a pretty good move up recently in Pebblebrook and Host and some of the other REIT's; including Park also was 26, it's moved up to high 29s, whether other than yesterday, I mean, we've been kind of like languishing between $5.80 and $6.00 for like 2 months straight. So just wondering, what's going on there? If you see the stock still undervalued and why not crank up the buyback. I think we have still have over roughly $7 million left in the buyback and only 7 weeks left in the year. So you guys intend to buy back stock over the rest of the year, what's your plan regarding that money that's have been set aside or allocated toward the buyback? Are you going to execute that, is still your plan?

I was trying to give you a hint earlier, that, that's our plan. So we can't really say that, but we can't come out and to say that we're going to buy back stock it's not permitted under the SEC regs. So we certainly have that capacity, we will look and consider that in the future as we push to get our stock price up. We have -- we are very competitive here, we watch our competing REITs every day. We're very aware what's happening to them versus what's happening to us. And it's important that we at least compete at the same level that they compete at. So we are -- we are focused on that between now and the end of the year. We think it's important.

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

Well, we thank you all for joining us today. We look forward to reporting better results in the next quarter. Thank you, very much.

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