Sotherly Hotels Inc (SOHO) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Sotherly Hotels Fourth 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 Scott Kucinski, Vice President. Please go ahead.

Thank you, and good morning, everyone. Welcome to Sotherly Hotel's Fourth Quarter Earnings Call and Webcast. Dave Folsom, our President and COO, will begin today's call to review the company's quarterly activities and review the portfolio of performance. Tony Domalski, our CFO, will provide our key financial results for the quarter and review our financial 2018 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.

And with that, I'll turn the call to Dave.

Thank you, Scott. Good morning, everyone. I'll start of today's call with a review of our portfolio's key operating metrics.

I'm pleased to report that we had a very strong fourth quarter, as many of the hotels previously under renovation had begun to reap the economic benefits of enhanced product and service. In addition, we saw encouraging growth in many of our markets.

Looking at results for the composite portfolio, which represents the company's wholly owned properties and the participating condominium hotel rooms from the Hyde Resort & Residences. For the quarter, portfolio RevPAR increased 7.6% over prior year to $94.42, with an 8.9% increase in ADR and a 1.2% decrease in occupancy.

For the year, portfolio RevPAR increased 3.6% over prior year to $101.70, with a 5.1% increase in rate and a 1.4% decrease in occupancy. Hotel EBITDA margins expanded by 280 basis points in the quarter to 26.2%. For the year, margins expanded 50 basis points to finish at 26.6%.

Looking now at property level activity and highlights in the quarter. The Whitehall in Houston was closed for approximately 30 days due to the hotel being without power as the result of a significant electrical casualty. The hotel reopened in the mid-December with all repairs completed and the operation ramping back up. The casualty was an insured event, and we anticipate the claim to substantially cover all repair costs and business interruption incurred.

In Hollywood, Florida, we completed the $7 million renovation of the Crowne Plaza, converting to the DoubleTree Resort by Hilton flag on October 25. The hotel continues to ramp up and gain traction within the Hilton system as we enter South Florida's high season.

In Wilmington, we continue to progress with the $10 million renovation of that hotel, which is scheduled to be completed in March 2018 and includes a re-branding of the asset to the Hotel Ballast. As announced in November, we have entered into a 10-year franchise agreement with Hilton worldwide for the Hotel Ballast to join their tapestry collection. We believe this change provides the hotel with the best of both worlds as it retains the power of the Hilton reservation system, while modifying our product and service offering to emphasize a unique local experience for our guests.

Now looking at our recent corporate activity in the quarter. In October, 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 over-allotment option. We use the net proceeds of this offering to redeem in full our operating partnership's outstanding 7% senior unsecured notes, and this was completed in November 15 -- on November 15. In early December, we entered into a hotel purchase and sale agreement to acquire the Hyatt Arlington -- the Hyatt Centric Arlington hotel located in Arlington, Virginia for an aggregate purchase price of approximately $79.7 million, which includes a $1.3 million sale of credit that was agreed upon in January. We anticipate the closing to occur no later than April of 2018, and we expect to fund the purchase through a combination of net proceeds from our recently closed unsecured note offering and approximately $57 million of new mortgage financing. Drew will provide additional color on this pending acquisition later in the call.

Last month, our operating partnership completed the sale and issuance of an aggregate $25 million of our 7 1/4% senior unsecured notes. As previously stated, we intend to use the net proceeds to partially fund the acquisition of the Hyatt Centric Arlington.

As previously discussed, 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. As of December 31, 2017, the company has repurchased approximately 883,000 shares of common stock at an average purchase price of $6.68 per share, totaling approximately $5.9 million. And finally, last month, we announced an increase to our quarterly dividend to $0.115 per share, representing an annualized dividend of $0.46 per share and a yield of approximately 7.5% based on yesterday's closing price.

With that, I'll turn the call over to our CFO, Tony Domalski.

Thank you, Dave. Reviewing performance for the period ended December 31, 2017. Total revenue for the quarter was approximately $38.2 million, representing an increase of 6.2% over the same quarter a year ago. For the year, total revenue was approximately $154.3 million, an increase of 0.9% over the prior year.

For the quarter, hotel EBITDA was approximately $10 million, representing an increase of 19.2% over the same quarter a year ago. And for the year, hotel EBITDA was approximately $41 million, an increase of 2.4% over the prior year.

For the quarter, adjusted FFO was approximately $3.3 million, representing an increase of 60.5% over the same quarter a year ago. And for the year, adjusted FFO was approximately $15.7 million, an increase of 3.7% over the prior year.

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 and deferred offerings, 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, general and administrative expenses, 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, 2017, the total book value of our assets was approximately $410 million, which includes net investment in hotel properties of approximately $357.8 million. The company had total cash of approximately $33.4 million, consisting of unrestricted cash and cash equivalents of approximately $29.8 million as well as approximately $3.6 million, which was reserved for real estate taxes, capital improvements and certain other expenses.

As of the end of the quarter, the company had principal balances of approximately $298.9 million and outstanding debt at a weighted average interest rate of 4.66%. Approximately 80% of the company's debt carries a fixed rate of interest.

Total stockholder and unitholder equity was approximately $94.2 million at the end of the quarter, of which stockholder equity was approximately $93 million and unitholder equity, approximately $1.2 million. At the end of the quarter, there were approximately 14 million shares of common stock outstanding, including approximately 0.6 million shares owned by the company's ESOP. In addition, there were approximately 1.8 million limited partnership units outstanding.

At the end of the fourth quarter, the principal balance on our interest-bearing debt was approximately $105,330 per room. Also, the ratio of debt to total asset value, as defined in the indenture agreement to our senior unsecured notes, was 49% based on a total asset value of approximately $610.3 million at the end of the quarter.

Turning to guidance. We're issuing our initial guidance for 2018, which accounts for current and expected performance within our portfolio, the acquisition of the Hyatt Centric Arlington as well as other factors. For the year, we're projecting total revenue in the range of $167.8 million to $169.1 million. At the midpoint of the range this represents a 9.2% increase over last year's hotel revenue.

Hotel EBITDA is projected in the range of $47.0 million to $47.6 million, and at the midpoint of the range, this represents a 15.4% increase over 2017's hotel EBITDA. And adjusted FFO is projected in the range of $15.9 million to $16.5 million or $1.04 to $1.08 per share. At the midpoint of the range, this represents a 6% 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, our Chief Executive Officer.

Thank you, Tony. In review of 2017, I see a year full of challenges, but also great progress for our company. In the year, we experienced 2 hurricanes of historic proportions that directly impacted our portfolio. The Houston electrical casualty and related closing was unlike anything I've seen in my 39-year career. We had 3 of our largest hotels, encompassing 30% of our total room count, under renovation in the same calendar year, resulting in substantial plan disruption. Individual market performance was spotty, with some up and some down. Despite these challenges, our portfolio produced commendable results without size growth compared to the industry and our peers. In aggregate, our portfolio took 240 basis points in RevPAR share from our competitors and finished the year over 100% fair share. We produced earnings growth of 11% over 2016 and beat our revised guidance, which we issued after the hurricanes, ending the year just shy of the initial guidance provided a year ago.

We also succeeded in nearly all key strategic initiatives and goals for the year. We maintained balance sheet discipline, executing on a number of capital markets transactions in the year, investing in our undervalued stock for our stock repurchase program and finishing the year with a strong cash position that will enable us to continue to grow the company.

We continue to display our commitment to our shareholders as we once again increased the dividend 3 out of 4 quarters, a trend we have now maintained for the past 3 years. We delivered on key hotel repositioning projects as we completed renovations and conversions at Savannah and Hollywood, and are nearing completion of our Wilmington project. Including the Wilmington hotel, we have now completed the renovation or repositioning of nearly 70% of the company's portfolio in terms of guest rooms over the past 24 months.

We believe that our refreshed portfolio is poised to outperform the market, going forward.

We completed the acquisition of the Hyde Resort & Residences and ramped up the resort throughout the year. We believe we will be seeing outsized returns from this investment, going forward. At year-end, the Hyatt Centric Arlington opportunity materialized. We believe we have found an acquisition opportunity that fits our strategy and will benefit our shareholders over the long term.

The 318-room hotel is ideally located in the Rosslyn submarket of Arlington, Virginia, a short walk across the Potomac River from Washington, D.C. and the luxury Georgetown shopping district. The hotel is across the street from the Rosslyn Metro station and one block from Nestlé's new North American headquarters, which was recently located from California. The seller completed a $6.2 million renovation of the hotel in 2016 as part of its conversion to the Hyatt-centric brand. This is a performing asset that we believe will immediately be accretive to the company's shareholders and also presents considerable operational upside that will be realized through our asset management practices.

We anticipate that the hotel will remain franchised with the Hyatt-centric brand, and third-party management of the hotel will be disclosed if and when we close the transaction.

The Arlington acquisition also presents a larger opportunity for the company to sell a noncore asset and recycle deferred capital via a reverse 1031 exchange. Additional detail on that potential transaction will be provided at a later date if and when it is executed.

Looking ahead, we believe 2018 will be a year of tepid growth for the industry. However, we believe our portfolio is poised to outperform given the company's recently renovated product. We will focus on ramping up our repositioned properties to their full potential.

We expect 2018 to be a welcomed break from the extensive disruptive renovation activity. The only planned renovation activity is at our Tampa Crowne Plaza, which is set to start in June with conversion to the tapestry collection by Hilton brand planned for the spring of 2019. We will maintain a disciplined balance -- we will maintain a disciplined balance management strategy, remain focused on identifying further investment opportunities that fit our strategy and present attractive growth catalysts for the company and our shareholders, while maintaining a focus on excellence at the point of guest contact.

We will now open the call up for questions.

(Operator Instructions) The first question comes from Carol Kemple of Hilliard Lyons.

On the Arlington acquisition, was that widely marketed? And if so, how did you all win the deal?

The answer to that is yes, it was widely marketed. I believe that the seller, which is Fortress, provided us some priority as a result of our public company standing. So I believe that -- they believe that we would close the transaction, and that's our reputation in the marketplace. We have never put a property under contract and not closed in the 60-year history of our company.

Okay. And then looking at that property, if you all would have owned that entirely in 2017, can you talk about how that would have changed your occupancy ADR and RevPAR numbers? Or can you give us those stats for that hotel in 2017?

We are not going to be able to provide you with that data at this time. We will be able to do that at the next call.

The next question comes from Tyler Batory of Janney Capital.

So maybe the first question I wanted to ask is just about Hollywood. I'm not sure if you're willing to give any specific numbers here, you were 2 months through the first quarter. But anecdotally, just wondering what you're seeing at the property post the conversion, how the ramp-up is going, and maybe any other general trends you're able to call out for the Hollywood market?

Sure. I think the Hollywood market has been on a come back here, but it's been a little bit on the slow side in terms of what we anticipated originally. But I would say that the ramp-up of the Hollywood DoubleTree is about as planned. We had a rush at the end, right in October, to get the project finished. And we did finish on time and we converted on time, which is great. But as always, you have to become reconnected to the Internet and it takes some time to check all those boxes. So we had a decent December that closed the year out. January, there weren't all the special events in South Florida that we've seen in years past, Super Bowl, or our national championship game or those kinds of things. So I think the market was good but not great. And February is ramping up pretty nicely, and we're anticipating going into the real meat of the season, which is, in that market, March and April. And we thought we're positioned really nicely.

Okay, great, that's helpful. And then moving on to Houston, can you talk a little bit about the ramp back up at that property post the closure? And then, I'm not sure if you have any general thoughts on how this Houston market is shaping up for 2018?

Well, I mean, 2018 is going to be, in my view, a little bit of a challenge. They didn't have -- don't have the Super Bowl like they had in '17. They didn't -- I don't know if they'll have the World Series, but I suspect probably not. And so you've got some huge events that filled up the downtown floor. But having said that, I think that the calendar for the convention center is a little bit better than it was last year. So I think we're looking for a little more contribution. In terms of ramp up, we still have a business interruption insurance claim that we have to make for the variance between what we would have been at and where we are. I guess, our view on that is that's probably going to be contained to the first quarter and once we get to the end of the first quarter, we'll make the claim like I make all claim. So I think that we're not overly concerned about that. We have seen good progress in the ramp-up in the last, I'd say, 6 weeks, so we feel like we're getting there. It was -- it's like opening a new hotel. I mean, we had to close all channels down and restart, and it's been a shocker. So we're glad to be back and open, and we're glad to see occupancy ramping up. And probably the most encouraging thing is that transient revenue is building back again. That was a concern because we chased away 100% of our transient guests and we had to get them back. So it's been building.

Okay, great, that's very helpful. And then just shifting gears to the Arlington acquisition here. It looks like a great asset, it's already performing at a pretty high level. I mean, could you talk a little bit about potential upside here? I mean, how do you think about maybe improvements to operations. And how do you think about maybe the potential return, long term, for buying this property?

Well, we're going to see the return hurdles until the next call once we get the property closed. We just feel like it's inappropriate to make those projections at this point. But the upside there is they've had some issues with the parking garage, which are being cured before closing now or getting close to completing that project, which has taken a good portion of the parking revenue away from the hotel for almost a year. So we feel like there's a lot of upside in the parking revenue. We're located right next to the Metro station, and so -- and you're in a very high densely populated office market. So parking is a premium, and there's certainly demand for parking. And so we just need to reorganize that and rethink what we're doing there to create some additional dollars to the bottom line. Food and beverage is an opportunity here. We feel like it's not been a primary focus of the existing management team, and we'd like to make it a primary focus. So I think you've seen in our hotels that, that's something that we think we're good at and we think that it's a value builder for our guests, and we want to focus on that. Dave, you've got anything else you want to add?

Strategically, this is the closest market to Washington, D.C. in Northern Virginia. So the barriers to entry are massive to get into Arlington, specifically to get into Rosslyn, where this hotel is located. There are only 2 hotels closer to the D.C. line than ours, and both of them are in poor shape, and one of them is going to go out of the system and be raised for a multiuse site. But that said, not only does it got great barriers to entry, it behaves a lot like the D.C. market, in general, without a lot of the risks of being in downtown D.C., meaning, we are not subject to the umbrella labor union contract that encumbers so many full-service hotels in the district of Columbia. Taxes are lower in Virginia. And if anybody understands that market, I mean, the Arlington Rosslyn market is just, as Drew said, it's very dense from a mixed use perspective, with multiple demand generators. It's just going to be a very, very good solid market for us that this is not subject to only one type of demand generator. We've got government business, we've got transient business, we've got leisure business, we could capture group business. It's very attractive for our strategy. So it's just really good. And like Drew said in his remarks, Nestlé just moved their global North American headquarters from California, and they're going to be located right next to the hotel. There are rumors of other large public companies that are going to try to locate in Northern Virginia, in this market near Washington, because of its proximity to the district. So we think it's going to be just a very, very solid acquisition. It's a big hotel, and we found it very favorable. We think there's a lot of operational improvements that can be made, and hopefully, on our next earnings call, we can delve into that a little more in detail from a financial perspective.

Okay, that's very helpful, appreciate the color there. And then just wondering, generally, what you're seeing out there, on the disposition front. I know you probably don't want to get too specific, but just wondering maybe what you're seeing in the marketplace, just to look at the potential for asset sales here.

Well, we said in the past that, that's something that we want to accomplish. We've had identified some noncore assets, and that's one of the things I really like about the Arlington transaction is that it sets us up for a reverse 1031 exchange if we can execute on a sale timely and at a price that we find acceptable. So this is step 1 of that process, and we'll see if we'd proceed past step 1.

Okay, great. Then maybe last question here, just on Wilmington, with that conversion coming up here. Could you just remind us a little bit more on the rationale behind doing that? And then also, wondering your opinion here on the tapestry software and then what you guys think about that.

Yes, sure. So in the Wilmington market, we have a new Hilton product that, it was built almost a block away from us. It's a new Embassy Suites. And their target market is upper upscale, Hyatt -- I mean, Hilton core brand is upper upscale. We felt we needed a differentiator to maintain our command of that market. We felt like -- and we've seen what we're doing in other markets where we originally contemplated just dropping the flag altogether. But the size of this hotel and the size of Wilmington, which is a pretty small market, we felt like we wanted to maintain the Hilton reservation system, but at the same time creating a unique service offering for our guests. So this allows us to do both, okay? So we're creating a lot of the same kind of guest touch points that we have, for instance, in our Savannah hotel, with all these unique kind of features. And because of the tapestry brand, brand standards, they give you a lot more leeway to do things the way you want to and as opposed to this strict adherence to Hilton's core brands, 550-page brand standards. So which we like because we feel like we have a good handle on what our guests want in that market and we can deliver on that.

The next question comes from Daniel Santos of Sandler O'Neill.

A few questions for me. The first one is on 2018 guidance. Could you let us know how much, if any, impact tax reform and dispositions have on your 2018 guidance?

This is Tony. The impact of tax reform is pretty much captured in 2017 statements. So we're not really going to see too much impact of tax reform in 2018. We'll have a lower corporate tax rate that's applied to the profits at our TRS, but that's really about it as far as tax reform goes. What was the second part of the question? Dispositions?

Impact from -- yes, dispositions.

We have not factored in the impact of any dispositions in 2018. As Drew said, we'll explore the possibilities of those, but try to forecast when -- which asset that would be and what the timing would be and the impact, we're just going to wait until that happens before we update guidance, effect of any disposition.

Got it. And then on the Arlington acquisition, obviously, you guys decided to renew the national flag. Just wondering if you good guys could walk through your thought process when you're considering an opportunity as to whether you keep a national flag or try to re-brand it as a boutique hotel?

Right. So in this situation, the hotel was recently reflagged from a Hyatt core brand to a Hyatt-centric, which is the Hyatt-equivalent of the go local theme. So to a certain extent, they've already made that jump, a leap of faith to the space that we're trying to occupy. In this instance, it was not an option to get us in the Hyatt system. The previous owner -- or the current owner have executed a long-term agreement with Hyatt, and they really -- the only way to get out of that agreement is very, very expensive. So given that the hotel is performing at a high level, close to very high numbers, we felt like it was -- it's a good acquisition, it's a good hotel, it's performing well. We didn't really need to remake the pie here.

And just one last one. It seems like debt and asset sales are your preferred funding source. I'm wondering if you had any tangible steps that you might take this year to improve your equity multiple, given it's a bit below peers?

Equity multiple. Can you help me with that one, Tony?

I think we're going to have to get back to you on that.

You've got to stomp on that. Maybe you could help us.

We can follow-up off-line.

Okay, let us follow up on that. That one, we haven't -- we don't have at our fingertips, for sure.

(Operator Instructions) The next question comes from [Mike Tobias], a private investor.

It sounds like it was a challenging environment, and I also appreciate the strong fourth quarter. I also want to thank you guys, if I did my math right, it looks like you guys bought back about 400,000 shares in the fourth quarter, is that right?

That will be about correct.

Yes, thank you for that. I definitely appreciate it. One question I had for you, if I'm doing my math right, the total asset value, I think you guys said, was a little over $600 million. And if I take the debt and the other liabilities and I back out some of the cash, if I'm doing my math right, do I get high teens for sort of a total net value per share? Does that sound about right?

You said high teens?

Right.

It might be closer to the mid-teens, but the math would be about correct.

Okay. So I'm just kind of reiterating that I love that you're buying back stock. And if the stock is trading in the 6s and there's a mid-teen or mid- to high-teen valuation, I hope you guys continue to consider that relative value as you compare it to new acquisitions.

We most absolutely will.

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

Thank you, all, for participating in today's call. We invite you to come to our annual meeting in here in Williamsburg in April, and look for an invite coming out from Scott. Have a good day, everybody.

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