Sotherly Hotels Inc (SOHO) 2020 Q1 法說會逐字稿

Hello, and welcome to the Sotherly Hotels First Quarter 2020 Earnings Conference Call Webcast. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Mack Sims. Mr. 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. Heading into 2020, we believed the company was well positioned for a great year. We had a solid balance sheet, our asset condition was the best it has ever been, and we had a renewed managerial focus on executing our strategy. This belief proved true with commendable RevPAR growth in January and February. Excluding the Georgian Terrace due to the 2019 Super Bowl comp, our portfolio experienced RevPAR increases in January and February of 5.8% and 4.3%, respectively. Compare this to the total U.S. lodging market RevPAR increases of 2.2% in January and 1.7% in February. That's a sizable outperformance for our portfolio. Unfortunately, as we all know, that is when the world was changed by the COVID-19 pandemic. As the concerns surrounding the pandemic escalated, U.S. hotels experienced unprecedented declines in top line performance in March with RevPAR dropping 51.9% from the same month last year. Despite our strong start to the quarter, all of Sotherly's markets finished the quarter with RevPAR declines.

Characterized by the unprecedented events surrounding the COVID-19 pandemic, we believe the first quarter of this year will shape the future of the lodging industry for some time. The impact was immediately felt across all sectors of the economy as government-mandated closures of nonessential businesses and social distancing requirements took place. Furthermore, state and local government issued travel restrictions in early March sent shock waves through the lodging industry, resulting in a rapid increase in group and transient cancellations and sharp revenue declines. As the situation unfolded, Sotherly's leadership team recognized that, due to the speed and severity of the pandemic's impact, swift action was required.

Sotherly's action plan to limit this impact to operations and preserve long-term value for our shareholders consisted of several key objectives. The company gave first priority to the safety of its staff and guests by implementing a number of standard operating procedures at its properties in order to maintain an elevated level of sanitization. Second, the company focused on mitigating the pandemic's financial impact by quickly implementing stringent property and corporate level cost reduction initiatives. At the property level, the company's relationship with its dedicated manager, Our Town Hospitality, enabled the swift rollout of a retrenchment plan. Action items included the closure of food and beverage outlets and other nonessential guest amenities in order to shrink the cost structure of the properties; the downsizing of staffing levels and benefits, including the layoff of 90% of hotel staff with reductions in salary for staff not subject to layoff; and the deferral of all nonessential capital expenditures. The company also worked with its management partners to seek out alternative resources of revenue and renegotiate all service and vendor contracts.

At the corporate level, the company implemented several cost containment initiatives, which included a layoff of over 20% of staff, a reduction in salaries and benefits for all remaining staff, and a waiving of quarterly directors' fees by the company's Board of Directors. In addition, common dividends have been suspended and preferred dividends have been deferred.

The company also has undertaken balance sheet strengthening initiatives to mitigate the financial impact of COVID-19. At the onset of the pandemic, the company immediately reached out to its lenders to begin discussing forbearance agreements for each of its mortgage loans. To date, the company has been successful in completing a variety of modifications with the majority of its lenders, which provided immediate financial relief, the belief that we believe modifications for the remaining mortgage loans are near completion. Additionally, the company is pursuing all applicable federally funded assistance programs under the CARES Act and thus far has received proceeds from 3 separate applications for the Paycheck Protection Program.

Lastly, while the pandemic has depressed the economy and lodging industry, the changing macro environment has presented challenges as well as opportunities for the company. Later in the call, our CEO, Dave Folsom, will discuss the evolving landscape of the industry and Sotherly's strategy to adapt and capitalize on these opportunities.

I will now turn the call over to Tony.

Thank you, Scott. Reviewing performance for the period ended March 31. Total revenue for the quarter was approximately $37.2 million, representing a decrease of approximately $10.2 million or 21.5% over the same quarter a year ago. Hotel EBITDA for the quarter was approximately $5.1 million, representing a decrease of $8.1 million or 61.6% over the same quarter a year ago. And adjusted FFO for the quarter was a deficit of approximately $3.6 million, a decrease of $8.4 million over the prior year or 175%.

The company had total cash of approximately $22.1 million, consisting of unrestricted cash and cash equivalents of approximately $14.7 million as well as approximately $7.4 million which was reserved for real estate taxes, capital improvements and certain other expenses. At the end of the quarter, we had principal balances of approximately $359.6 million in outstanding debt at a weighted average interest rate of 4.78%. Approximately 86% of the company's debt carried a fixed rate of interest. During the quarter, we took a valuation allowance against the deferred tax asset, resulting in a tax charge of approximately $5.5 million.

As Scott 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 by approximately 70%, we estimate loss of revenue will exceed operating income in the range of $1.6 million to $2 million per month for the second quarter. We expect increases in customer traffic and continued cost containment to ease those burn rates as we move into the third quarter, as we have seen occupancy rates move from the single digits in April to low double digits in May and June.

We also have had to put a hold on all 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 $3.6 million for calendar year 2020. Most of those projects were completed or well underway at the onset of the pandemic.

At the corporate level, we reduced expenses by approximately 25% to a range of $1.15 million to $1.25 million per quarter. The savings is the result -- mostly the result of reductions in regular compensation, anticipated bonuses and benefits from members of the Board, the company's executive officers and employees, as well as elimination of most discretionary expenses. In March, we announced a suspension of our dividend and a deferral of payment of dividends announced in January. The suspension and deferral eliminates a draw on the company's cash reserves of approximately $4.25 million per quarter.

With the onset of the pandemic, we were early to begin discussions with our lenders regarding forbearance of current payments of principal and interest required under our loans. While no interest has been forgiven, we estimate existing and contemplated agreements will allow us to defer current payments of approximately $4.9 million payable during the second quarter 2020 and payments ranging from $3.2 million to $4.1 million payable during the third quarter 2020. 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.

The company has also been in discussion with its lenders regarding anticipated noncompliance with the financial covenants under the agreements that contain them. Based on these discussions, the company anticipates waivers from its lenders under agreements that articulate noncompliance as an event of default.

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 will be used for payroll costs, mortgage interest, rent or utility costs. Recent changes to regulations regarding loan forgiveness provide for the extension of the covered period to 24 weeks, and it lowered the amount of proceeds that must be spent on payroll and related costs to 60% of loan proceeds. Additionally, the repayment period for the portion of the loan that is not forgiven has been extended from 18 months to 5 years, with repayment beginning no later than 10 months after the loan origination date. The company anticipates a significant portion of the loan to qualify for loan forgiveness.

And I will now turn the call over to Dave.

Thank you, Tony, and good morning, everyone. I would like to start off by extending our thoughts and prayers to those that have been affected by the ongoing pandemic as well as our appreciation to health care workers and first responders for their valuable efforts.

Our efforts to preserve our business and ensure its future success have required us to make difficult decisions in the past 90 days. As demand evaporated due to the virus spread, operating expenses were curtailed, capital improvement suspended and extensive employee reductions were made. Our hotels have remained technically open during the pandemic, albeit with only a small cadre of key personnel that are needed to service minimal occupancy but whose presence is necessary to ensure a smooth transition during the recovery.

As a hospitality company whose staff is at the heart of our business, it has been difficult to say the least to make these decisions, especially with respect to our valued associates. We look forward to welcoming back both our loyal staff and guests to our portfolio of hotels in the near future.

Despite COVID-19's negative impact on the lodging industry and the larger macroeconomic environment, we remain confident that travel demand will return. However, the recovery will undoubtedly be shaped by the virus and the government's response to it, along with the industry's ability to adjust to changing consumer preferences.

Our partnership with our dedicated manager, Our Town Hospitality, facilitated the company's efficient and swift response to the unfolding crisis at the end of the first quarter. To adapt and ensure future success for the company, we believe it is important to consider a few key factors that will shape the hotel industry's recovery. First, the trajectory of the virus itself remains unknown due to inconsistent reopenings among jurisdictions and the uncertainty of the containment of the virus. Therefore, the company must be prepared to optimize its cost strategies based on changing scenarios. Staffing protocols for various levels of occupancy will help manage variable costs and ensure maximum property level efficiency and profitability.

Second, we believe this uncertainty will be reflected in muted lodging demand in the near term. As a result, the company must continue to creatively seek alternative sources of business until travel demand normalizes.

Last, the pandemic's impact on traveler behavior and preferences will likely shape the lodging industry service and cleanliness standards for years to come. As a result, every property in our portfolio has adopted extensive hygiene protocols. Hilton's CleanStay and our own SoClean programs, which encompass changes to service standards at every level of the guest experience, have been implemented at our properties. The company will continue to monitor changing consumer preferences and implement changes that fit our long-term strategy.

While we believe corporate and international travel will continue to lag, we're starting to experience some positive momentum as an industry and as a company. Smith Travel and TSA Checkpoint data continue to trend positively, underscoring a definite improvement in consumer confidence among travelers. The transient leisure segment has seen a material improvement in recent weeks, benefiting our coastal and drive-to leisure locations. In general, we agree with the growing consensus that transient leisure business will be the quickest segment to recover.

Overall, we believe our portfolio's concentration of drive-to leisure destinations as well as its relatively minor exposure to global gateway markets will lead to a stronger recovery and outperformance over our peers.

And with that, we'll now open the call up for questions.

(Operator Instructions) And the first question comes from Tyler Batory with Janney Capital Markets.

I hope everyone is doing well. First one for me. Can you give any more color in terms of occupancy trends in your portfolio in May and June? And you mentioned some improvements on the drive-to leisure. Any data points you can share in terms of what you're seeing on the ground at some of these beach or more leisure-focused assets in terms of trends getting a little bit better?

Yes. Generally speaking, in a lot of these markets at the depth of this problem, we saw single-digit occupancies. And that was really a function -- or less; I mean some we had no occupancy for a while -- and that was a function, Tyler, of a lot of the government restrictions for nonessential guests. I mean in some of our hotels, we were not even allowed to have any guess at all unless they were an essential health care or government worker. That's been changed at most of our locations. So what we've seen, let's say over the past several weeks, is a change from low single-digit occupancies to teens, very low teens, and that's growing.

Some of our markets are still essentially locked down. The city of Atlanta is a good example of that. But we're seeing a lot of leisure bookings in the second half of the year, including a resumption of some of the leisure group bookings, which we haven't seen in a while. And I think a couple of our hotels are actually seeing some meeting room space being booked for reservations, which is a good trend. So -- I mean there's a lot of data we can provide you, and you could talk to Scott after the call. But generally, we're not seeing a return to 50%, 60%, 80% occupancy anytime soon, but we are seeing a pickup.

Okay. Okay. And just -- are you seeing any corporate travel at all at your properties? Or is that basically a 0 at this point?

Yes. Tyler, it's Scott. I mean it's not 0, but it is very, very muted. I mean the large corporate clients, I'll give you an example, Nestlé in Northern Virginia, is a huge client, or IBM. I mean any of the large typical corporate clients that we have normal throughput for, they're not traveling yet. You're seeing individual business traveler kind of on their own, smaller shops starting to travel a little bit during the weekday, but it's very muted right now.

Okay. Okay. And then any thoughts in terms of breakeven occupancy levels at some of your properties? I mean I imagine maybe it's different by property type or location, but just kind of trying to get a sense of, at the property level, what sort of occupancy you'd need to see to be profitable?

Yes. I mean it's difficult just to look at it on an occupancy basis. Obviously, if you look at a lower rev -- lower ADR hotel, it's tougher to flow through and cover expenses. So generally speaking, I think we're looking at around a $30 RevPAR should cover property level expenses before ownership costs, but that's just a back of the envelope ballpark across the board. It's obviously a case-by-case basis as you well know.

Okay. Okay. I appreciate that. And then switching gears a little bit, you've gotten some forbearance. Just how have the conversations gone with your lenders? The conversations -- the tone of those conversations maybe changed more recently? Or just trying to get a sense of how some of those discussions are progressing.

Sure. As you know, we got a whole mix of mortgage lenders from small balance sheets to big balance sheet banks to life companies to CMBS. Typically speaking, we've seen the balance sheet banking relationships hold firm and be more than understanding and willing to work with us from the very beginning. And we were probably out ahead of this than most. I mean I think we had all of our lender calls on May -- or March 17, one right after another, to start explaining the situation. So everybody's been appreciative of the communication and been for the most part more than willing to work with us and to try to figure out some solutions for us.

The CMBS world is a little different, as I'm sure has been well documented, both just in the industry publications as well as kind of at the government level, looking for some government intervention. The CMBS structure is just not really set up to manage through a pandemic like this. So we are starting to see some progress with them. It's been opening dialogue, but just to date, not overly productive, but I think we are getting to a point where there will be some productive solutions worked out with them.

Okay. And just following up on that. This is more of an open-ended question, but how are you thinking about your liquidity right now? I mean you provided some data in terms of the cash burn and whatnot. But just kind of curious how you're thinking about the potential options that might be out there over the next couple of months.

Yes. I mean the thing to remember about the liquidity and the cash burn is that it is reducing -- the burn rate is reducing as demand recovers. Now, depending on the pace of the recovery and the pace of demand resumption, it's difficult to forecast when that burn rate basically stops. That was, I think, the part of your breakeven question. But the way we view it is we have been active across the board in looking for liquidity sources and capital for the company since this began, both in the public domain, the private domain and from the government. And we continue to do that weekly in looking for the most advantageous capital solution for the company.

I mean as I mentioned in my remarks, we're confident hotel demand is going to return. But we want to underscore the fact that liquidity is essential for any hotel company's survival, and we've been active with all of our counterparties and -- in trying to access that capital. And as Tony mentioned in his remarks, we were able to do that a couple -- about 1.5 months ago with the paycheck program, and we're continuing to look for all opportunities to bring in the correct form and amount of capital for the company.

Okay. And just the last question for me. At some point in the future, the COVID disruption is going to be behind us. What sort of tailwinds do you think might come from this that may benefit you specifically? And when you look at the operations at your hotels, do you think it's possible that your properties in the future after the pandemic, maybe that the margin structure is perhaps higher or maybe the flow-through is more attractive after we move through this? Or you're expecting things to be roughly the same?

Your question is right on the mark. I mean we have essentially, as Scott mentioned and Tony, that we have laid off, unfortunately, 90%, 95% of our staff at the hotels. And this gives us the opportunity in conjunction with our new management company to essentially restructure the operations and costs at any given hotel. So when we emerge from this, we think across all departments and all of our undistributed expenses, we're going to be able to reorganize all of these hotels for the future. And we think there is margin -- on an apples-to-apples comparison, we think there is margin pickup; sales and marketing efforts. Even though we have new sanitation and hygiene protocols, we think there is an opportunity to perhaps pick up some margins on that front. But your question is well founded.

We think there is some opportunity on that side. And anecdotally, I can tell you that from the field, our managers are telling us there's a pent-up demand for leisure travel. People want to get out of their house. They want to get out of the lockdowns and they want to travel. And we're seeing a lot of pickup in the second half of the year for leisure demand, leisure group. Whether that remains, whether it gets canceled, we don't know yet. But we think there is a tailwind, to use your words, that we think we can realize as this -- as the pandemic abates and we put this behind us that there's going to be an eagerness for people to get out and travel. Tony, do you have any --?

I would only add that I think in the short term, I think we're going to see some pickup with certain segments of the labor market are not going to be as strong and tight as they were before the pandemic. I know we had several markets where the demand for housekeepers was extraordinary and we were having to pay extremely high rates to keep housekeepers in our hotels. And I expect that in the short term that we won't be experiencing the same kind of tightness in the labor market.

The next question comes from Daniel Santos with Piper Jaffray.

I mean just kind of going off of the question before me, I mean can you talk a little bit about -- a little bit more about how you envision the hotels will sort of run differently in this sort of post-COVID cleaner environment? What does that look like? And obviously, this might change what maximum occupancy in your hotels could be. And so could you give us a sense of what you -- how you think this might impact your occupancy once things do start to open up?

Well, I don't think the cost restructuring or the restructuring of the organization necessarily will impact occupancy. I just think it's a function of how we're going to run the hotels. And it's really a function of from every guest point of service that you may have, from the front door to the front desk to the housekeeping, to food and beverage, I mean there's a host of things that will change going forward. Some of these will just be mandated by the brand, some will be internally generated, some of them will be government focused.

I can tell you, for instance, on a housekeeping level, you may think that all this extra hygiene protocol work might add cost. But what the industry is seeing is that if you're there for a 2 or 3 night stay, you will check into a room, and it will have a seal on it that will certify that has been appropriately disinfected, but you're not going to receive the same daily housekeeping service that you used to receive mainly because guests do not want strangers or housekeepers inside the room that they're staying in that could potentially infect them. So you're not going to have the daily, thorough housekeeping cleaning protocols that you used to see. And then when the guest checks out after 2 or 3 days' stay, you have a far lengthier cleaning and disinfecting routine for that room, and it is prepared for a new guest. At the end, that's probably a pickup in terms of margin for us as the owner. That's an example.

And there are a host of other things on the food and beverage side. I think you're going to see a different way to do in-room food and beverage. What we're doing right now is for those areas where you have a continued food and beverage service, the guest orders, and then the guest comes down and gets their food and beverage -- not delivered to them, but they actually go and pick it up and take it back to their room. So it's a different cost structure to do that than it is the old way where you have a uniform member of the hotel staff deliver in-room food and beverage to the 40th floor of a tower.

Got it. That's helpful. And then I was just wondering if you could talk a little bit more about some maybe alternative demand drivers. I mean, you're hearing of some hotels in markets that are close to universities being used for students. Are you seeing any opportunities like that at any of your assets?

We have. And we've been, frankly, looking at each one individually. To your point, though, there have been health care, hospital, room night programs. There have been universities who are attempting to rent rooms on a long-term basis for dormitory stays for students, essential worker, FEMA, government. We've seen a lot of that alternative work. We've taken some of it. We're not too pleased with the idea of turning our hotel or half our hotel into a dorm room. We think that's not a good use, nor is it going to be profitable in the long run. So we've resisted overtures from universities to do that. And frankly, I don't think the brands would allow it for those hotels that are formally flagged with a national franchise. But we've seen different opportunities. We've been very selective in how we take them. And I think that's probably the best way to answer that question.

And the next question comes from Chris Reynolds with Neuberger.

Can you just comment generally about your properties in Florida as well as the Hyde Resorts? And I think there's some condos associated with that. Maybe just start there and update the activity at that property.

Yes, we have several assets in Florida. We've got the DoubleTree in Jacksonville. We've got the Tapestry, Hotel Alba in Tampa, and then have a complex of 3 assets in Florida, in the Hollywood market. It's a DoubleTree, flanked by 2 condo hotels that carry the Hyde brand. It's not really a brand like you would think of with Hilton. But the Hyde moniker, the Hyde Resort and the Hyde Beach House, those are our 5 assets in Florida. Those 2 -- the 2 condo hotels we did technically close during the pandemic, and they've been recently reopened as the state and local officials have allowed for the resumption of travel. So those are -- those were closed and now they've been reopened, and we're restaffing and ramping up the operations there.

And as there are no more questions at the present time, I would like to return the floor to management for any closing comments.

No. Thank you very much for the call. I appreciate it, and I hope everyone remains safe.

Thank you. This concludes today's teleconference. Thank you for attending today's presentation. You may now disconnect your lines.