Sotherly Hotels Inc (SOHO) 2020 Q2 法說會逐字稿

Good morning, and welcome to the Sotherly Hotels Second Quarter 2020 Earnings Call and Webcast.

(Operator Instructions)

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

Thank you, and good morning, everyone. If you did not receive 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 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, Mack. Good morning, everyone. I'll start off today's call with a review of our portfolio's key operating metrics in the quarter, which, as we all know, was the worst quarter on record for our industry due to the COVID-19 pandemic. All the company's hotels remained open during the quarter, with the exception of our 2 rental programs in the Hyde Resort and Hyde Beach House Condo Hotels, which were temporarily suspended during the month of April and May as a result of government mandates.

Looking at results for the wholly owned portfolio, RevPAR decreased 89.3% over prior year, reflecting an 85.1% decrease in occupancy and a 28.1% decrease in ADR. Year-to-date, portfolio RevPAR decreased 58.9% over prior year with a 55.3% decrease in occupancy and an 8.1% decrease in ADR. These metrics were in line with our comp sets and the upper upscale U.S. lodging segment and appear to be ahead of the majority of our REIT peers that have reported thus far. Our portfolio's performance was clearly driven by COVID-19's impact on travel demand and the uphill battle we're now fighting as our industry tries to gain some traction. While our operators have worked to maintain rate integrity as demand returns, pricing wars are inevitable in some markets where noninstitutional owner operators are simply trying to put heads in beds at any cost. Our operators have done a commendable job of staying the course.

The full-service segment, which all of our hotels sit in, currently has some added headwinds due to our reliance on group and catering revenues, which events severely limited due to social distancing measures, group gathering size limitations and corporate travel restrictions. Until these restrictions on events are further lifted, this portion of our business will be in question. It is important to note that our reliance on the road warrior, individual business traveler has been reduced over the past few years as we transitioned our properties to lifestyle concepts. This should be a benefit to us during the recovery as we don't see that segment coming back for some time.

Lastly, our property is located in CBD locations of more densely populated urban markets, such as Washington, D.C., Raleigh, Atlanta and Houston have underperformed national averages as consumers have understandably been avoiding travel to more densely populated areas. If you dissect the quarter month by month, you can see solid incremental improvement as the quarter went on and Phase 3 openings commenced. Like most, our portfolio bottomed out in April with a 95.7% decline in RevPAR over prior year. This ticked up slightly in May, with the portfolio RevPAR decline of 90.1% from last year. The result of government restrictions starting to be lifted in the latter half of the month around the Memorial Day holiday. As the phased reopenings continued through June, we saw RevPAR further improve with a decline of 80.5% year-over-year.

Highlighting this relative improvement in performance were our leisure drive to locations, such as Wilmington, Jacksonville and Savannah. These properties were able to outperform their competitive sets in the broader U.S. market, particularly in terms of ADR, primarily driven by weekend leisure business. Unfortunately, we have seen these trends of improvement begin to stall following coronavirus case surges in some southern states, in the latter half of June, with several of our markets reimplementing restrictions in an effort to gain -- again, flatten the curve. Specifically, relating to our portfolio, Florida, Texas and the city of Atlanta, have taken actions to pause the reopening, which have directly impacted the operations at our properties located in those destinations. As we continue on our path to recovery, we expect the government's response to the trajectory of the virus to be a primary driver in shaping demand in the industry. I will now turn the call over to Tony.

Thank you, Scott. Reviewing performance for the period ended June 30, 2020. For the second quarter, which represents the first full quarter since the pandemic began. Total revenue was approximately $5.3 million, representing a decrease of approximately $46.2 million or 89.7% over the same quarter a year ago. Hotel EBITDA for the quarter was a deficit of approximately $5.2 million, representing a decrease of $20.8 million or 133.4% over the same quarter a year ago. And adjusted FFO for the quarter was a deficit of approximately $11.1 million, a decrease of $18.3 million or 254.8% over the same quarter a year ago. The company had total cash of approximately $24.9 million, consisting of unrestricted cash and cash equivalents of approximately $18.5 million as well as approximately $6.4 million, which was reserved for real estate taxes, capital improvements and certain other items.

At the end of the quarter, we had principal balances of approximately $369.9 million in outstanding debt at a weighted average interest rate of 4.59%, approximately 86% of the company's debt carries a fixed rate of interest. As previously mentioned, with the onset of the pandemic, we reacted swiftly in coordination with our management companies to reduce hotel operating expenses and mitigate the impact of the loss of business. Although we reduced hotel operating expenses, approximately 71% from the same quarter a year ago, hotel operating expenses exceeded hotel revenue by approximately $5.2 million. Due to the anticipated increase in customer traffic and continued cost containment, we expect a narrowing of that gap in the third quarter with hotel operating expenses exceeding hotel revenue by no more than $1.2 million per month and an achievement of breakeven performance before the end of the quarter. We have also reduced capital projects and anticipate the capital expenditures for the remainder of the year will only relate to the replacement of critical systems reaching the end of their useful life. We estimate total capital expenditures will amount to approximately $4.4 million for the calendar year 2020. Most of those were already completed or well underway at the onset of the pandemic.

With the majority of our wholly owned guestrooms undergoing renovation over the last 5 years, we feel our portfolio is in a good position with no required renovations for the balance of the end -- of the year. At the corporate level, we reduced expenses by approximately 25% to a range of $1.1 million to $1.3 million per quarter. The savings resulted primarily from reductions in regular compensation, anticipated bonuses and benefits for the members of the Board, the company's executive officers and employees as well as an elimination of discretionary expenses.

In March, we announced the suspension of our dividend and a deferral of payment for dividends announced in January. The suspension and deferral eliminate a draw on the company's cash reserves of approximately $4.25 million per quarter.

Since the onset of the pandemic, we have had continuing discussions with our lenders regarding forbearance of current payments of principal and interest required under our loan agreements. Existing and contemplated agreements provide for the deferral of current payments of approximately $4.7 million that would have been payable in the second quarter and approximately $3.1 million that would have been payable in the third quarter. While some deferrals are required to be repaid or caught up in subsequent quarters, most of the deferrals will be repaid upon maturity of the loans.

Notwithstanding, the company has been in discussion with its lenders regarding anticipated noncompliance with the financial covenants under the agreements that include them. Based on these discussions, the company believes it will obtain waivers from its lenders under agreements that articulate noncompliance as an event of default. However, no guarantee can be made that we will obtain such waivers. Neither can we guarantee that obtaining such waivers will not come without incurring additional costs, increased interest rates or additional restrictive covenants and other lender protections related to such loans.

As previously stated, during the second quarter, the company made applications through its banks under the SBA's Paycheck Protection Program and received proceeds of approximately $10.7 million. Pursuant to the terms of the CARES Act, the proceeds of each PPP loan may be used for payroll costs, mortgage interest, rent or utility costs, and the company anticipates a significant portion of the loan to qualify for loan forgiveness. I will now turn the call over to Dave.

Thank you, Tony. Good morning, everyone. First, I'd like to recognize our hotel associates for their dedication and resilience during this unprecedented time. Their efforts have been integral in preserving the company's liquidity and protecting the health and safety of guests in our hotels. The second quarter operating environment was unlike anything we have experienced in the company's 63 years in business. As the COVID-19 pandemic resulted in government-mandated closures and severe travel restrictions, causing significant cancellations and revenue declines for the lodging industry. To put things in context, the lodging industry is tied very closely to GDP and general economic conditions. In the second quarter, the U.S. Commerce Department reported GDP plunging, 32.9% on an annualized basis. This is the most severe economic contraction over such a short period of time ever recorded. Including the financial crisis of a decade ago, the great depression and any number of other economic recessions or downturns over the past century.

Challenged with this environment, we took immediate action to cut costs and preserve liquidity. As described on our first quarter earnings call, our action plan contains several key objectives, including prioritizing the safety of our staff and guests, mitigating the pandemic's financial impact with stringent property and corporate level cost reduction initiatives, strengthening our balance sheet with alternative sources of capital and capitalizing on new opportunities presented by the industry's evolving landscape.

We believe the progress we have made on each of these key objectives has positioned the company to persevere as demand recovers in the months and years ahead. More specifically, during the second quarter, we addressed the concerns surrounding the safety of our staff and guests by implementing extensive hygiene protocols at every property in our portfolio. These standard operating procedures encompass changes to service standards at every level of the guest experience.

During the quarter, we were successful in working with our management partners to optimize our operations to achieve maximum property level efficiency. We effectively manage property staffing levels by implementing cross-training programs and layering on personnel relative to the growth in demand. We believe our stay-open strategy proved successful, as revenue exceeded variable expenses for the quarter and it enabled a quicker ramp-up process as demand grew in the latter part of the quarter. In addition, we bolstered our balance sheet during the quarter by securing proceeds through the SBA's Paycheck Protection Program. We continue to evaluate alternative sources of capital, whether through government-sponsored programs or private equity partners, to provide immediate liquidity to the company. The macroeconomic environment has shown mixed indicators in recent weeks, as increased case counts across a number of states are shifting market sentiment and could negatively impact summer travel demand. While the uptick of cases is concerning, an uneven recovery was not unexpected due to the inconsistent reopening plans among state and local jurisdictions. Questions remain about the pace of reopening, the election, the fall school calendar and a return to the workplace, all of which directly impact the travel industry and our portfolio's performance.

On the positive side, data from the U.S. Department of Labor shows the economy added combined 6.6 million jobs during June and July, dropping the unemployment rate to 10.2%. News surrounding a potential vaccine has been encouraging, although the timeline for its rollout is still uncertain. While we continue to see some green shoots of recovery, including reasonably solid leisure demand and consumer spending, the pace of the recovery moderated from the spike over the July 4 holiday week. We do not believe, however, that our industry will retrace the gains made since the early April mid-year of revenue losses. We have seen slow and gradual demand increases since that time.

Regardless of macroeconomic factors, we believe our diversified portfolio, which includes in-demand leisure and drive-to destinations, along with our renewed focus on streamlined operations have positioned the company to withstand the current environment. We remain dedicated to making sound operational decisions to reduce losses and conserve liquidity, while delivering long-term value for our shareholders.

And with that, operator, we can open the call up for questions.

(Operator Instructions) Our first question will come from Tyler Batory with Janney.

This is Jonathan on for Tyler. First one from me is just wondering if you guys could provide some additional color on your revenue management strategy broadly. How much competitive discounting are you seeing in some of your markets currently?

Yes. I mean we're seeing a lot of that, especially in some of the CBD locations. But I think many hotels, including ours in those locations, we're trying to retain some rate integrity. It really doesn't serve a purpose to drop the rate down to a point where you're simply trying to get occupancy that's very limited in the first place. So we've actually been able to maintain some rate, as you can see from Scott's comments that he made. Rate has gone down, but it has not gone down as significantly as occupancy in these markets. So there are travelers, albeit a few in the second quarter, and they were willing to pay rates that were not rock bottom rates. But nonetheless, we think as demand reemerges, we'll get both the rate back and the occupancy. But there has been some of that, Tyler -- Jon.

Okay. Great. That's very helpful. And then turning to the markets, Louisville seems to have quite strong occupancy. Can you just provide some color on what you've seen there in the second quarter and what was driving that?

Yes. We have a large UPS contract counterparty in the hotel, which has actually been very fortunate, and their consumption of room demand -- their consumption of rooms has actually increased during the second quarter because the UPS schedules out of the air hub in Louisville actually increased. So that's been a good outcome for us. I mean, our index of fair share is over 200% in that market, our fair share index. So it's all contract business.

(Operator Instructions) Our next question will come from Alexander Goldfarb with Piper Sandler.

Just some quick questions here really around cash management. One, if you can just give us an update on how the forbearance and mortgage restructuring conversations are going? Are lenders being accommodative or do you feel like they're not being reasonable in how they're looking at the recovery and the ability for you guys to once again become current on the properties?

Yes. Let me generally speak to that, Alex, and then we can probably give you some more detailed data now or if you want to talk to Scott later. But generally speaking, our lenders have been very accommodating. I think we all understand the situation we're in. So it sort of went in phases. The initial phase that we saw was in March and April when we got out in front of this, and the entire market just basically gave every lender -- every borrower sort of a 90-day standstill. It was kind of a Phase 1 event. And then everybody was hoping to see the smoke clear a little bit, and we entered what we call sort of Phase 2 of our forbearance and modifications. And we've essentially been able to get pretty decent terms from balance sheet lenders, life company lenders and even in some instances, some terms from the CMBS guys, even though they're constrained by the structure of that loan type. So those results were good, and that will take us pretty much into the fourth quarter, generally speaking.

And then if the demand returns in the marketplace, then we'll probably see a sort of a catch-up period where we're going to have to stay current on loans and deal with the forbearance measures. And if things don't recover, I think pretty much most of the lenders that we've talked to will be -- they will accommodate us additionally as borrowers because they have to. So that's the landscape we're seeing. Scott, if you want to add anything to that?

Yes, Alex, I just would add, of our individual loans that we're dealing with, really, everybody is -- we either have agreements in place or we are in active negotiations and pending approvals for forbearance or for some modification to take us through that have been noted as in default or Hollywood, which we're in active conversations with the special servicer and approval is pending their committee. And I think Philadelphia is mainly noted that that's -- we're in -- we got initial forbearance from them out of the gate, and now we've just been in kind of ongoing conversations and working on finalizing the documents for additional terms there. So basically, we expect every loan to continue to be addressed with our lenders going forward for the time being.

Okay. And then just looking at your cash needs, and we appreciate the color in the press release, it looks like basically, you have 9 months of cash on your balance sheet based on just under $2 million a month, I think you said and basically $18 million of cash. So really, is it fair to say that through year-end, you guys are fine, but really, you need the markets to improve in the first quarter. And then with regards to the deferred preferred dividend, that's accruing at, if my math is right, $900,000 a quarter. So that's something additional that would also have to be caught up on. So am I thinking about it right that basically, you guys are fine for the balance of this year and really beginning of 2021 is when, I guess, sort of rubber needs to hit the road, is that a fair way to think about it, both from an operations as well as from a debt agreement restructuring, what have you?

Yes. I think that's fair to say it's a worst-case scenario. I mean, we're seeing improvement just in the last 2 weeks across our portfolio. And I understand the news that we all see is tempered by a variety of factors. But I saw just last week that the State Department and the CDC lifted the 4-month old Level 4 travel ban, internationally. So I think with negative news that you see, we're also seeing some other good things. And the things we're seeing are black and white on our financials and changes to forecasts and some results. So your statement is true as a worst-case scenario that this market doesn't move. I think if we get some rational level of recovery here in the fourth quarter and the first half of next year, you can push that number out further, Alex.

But at the same time, I think we're all -- I think we all understand that a company like ours with the amount of real estate that we own and the operations that we have, we're going to need some additional liquidity. So we're in the marketplace trying to find that right now.

Okay. So maybe I'll just finish with that last question there. Can you just fill us in on what you guys are thinking as far as additional capital? Was that equity? Is that a private investment? Is that a joint venture? Maybe just share a little bit about what you guys are thinking?

I think the answer to that is yes to all. I mean we continue to look at government programs. Version 2.0, of the PPP, excludes public companies, but that may not be the end of the SBA PPP program. The Main Street program was really not suitable to real estate investors. But that may change and if you watch some of the news out of Congress, there's this whole private equity line that was being sponsored by a congressman out of Texas, which is geared for the CMBS universe and real estate lenders, and that's a very good program. I don't know if any of those are going to come to pass or not, but we continue to monitor those. We already took advantage of one of them, the PPP program back in the quarter. On the private side, the answer is yes, we're looking at solutions that would provide liquidity to the company. We're looking at joint venture partners because we think there's a once-in-a-century opportunity here. So we're looking at partnering with some capital provisioner to take advantage of buying opportunities. The nature of that structure, the nature of the capital, we're just not there yet. So I really can't comment on what it would look like. But we all know the need and we all know what the opportunity is and so does the investment community. So everyone is trying to work out some transaction terms, and we think there's something we can do in the future to alleviate some of these issues and position us to buy properties in the future.

This will conclude our question-and-answer session. I would like to turn the conference back over to Dave Folsom for any closing remarks.

Thanks, everyone, for participating in our call, and we look forward to speaking with everyone again in our next quarter. Thanks.

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