U.S. Markets close in 5 hrs 40 mins

Edited Transcript of SOHO earnings conference call or presentation 7-May-19 2:00pm GMT

Q1 2019 Sotherly Hotels Inc Earnings Call

WILLIAMSBURG May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Sotherly Hotels Inc earnings conference call or presentation Tuesday, May 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew M. Sims

Sotherly Hotels Inc. - Chairman & CEO

* Anthony E. Domalski

Sotherly Hotels Inc. - VP, Secretary & CFO

* David R. Folsom

Sotherly Hotels Inc. - President, COO & Director

* Scott M. Kucinski

Sotherly Hotels Inc. - VP of Operations & IR

================================================================================

Conference Call Participants

================================================================================

* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Michael Davis

* Tyler Anton Batory

Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the Sotherly Hotels Inc. First Quarter 2019 Earnings Conference Call (Operator Instructions) Please note this event is being recorded.

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

--------------------------------------------------------------------------------

Scott M. Kucinski, Sotherly Hotels Inc. - VP of Operations & IR [2]

--------------------------------------------------------------------------------

Thank you, and good morning, everyone. Welcome to Sotherly Hotels First Quarter Earnings Call and Webcast.

Dave Folsom, our President and COO, 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 review our 2019 guidance. Drew Sims, our Chairman and CEO, will conclude with an update on our strategic objectives. We will then take questions.

If you did not receive a copy of the earnings release, you may access it on our website at sotherlyhotels.com. In the release, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements.

Any statements made during this conference call which are not historical may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained. Factors and risks that can cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in today's press release and from time to time in the company's filings with the SEC. The company does not undertake a duty to update or revise any forward-looking statements.

With that, I'll turn the call over to Dave.

--------------------------------------------------------------------------------

David R. Folsom, Sotherly Hotels Inc. - President, COO & Director [3]

--------------------------------------------------------------------------------

Thank you, Scott. Good morning, everyone.

I'll start off today's call with a review of our portfolio's key operating metrics for what turned out to be an exceptional quarter for the company.

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 8.8% over prior year to $121.86, reflecting a 5.2% increase in occupancy and a 3.5% increase in ADR.

Looking at individual property-level activity and highlights in the quarter. A year after its conversion to a boutique concept, Hotel Ballast in Wilmington continues to improve its performance, gaining 27.4% on RevPAR for the quarter, driven by a 21.4% increase in occupancy and a 4.9% increase in rate. The DeSoto in Savannah steadily continued its ramp-up efforts following the 2017 repositioning, increasing RevPAR by 13.4% to $114.97 with a 12.5% increase in occupancy and a 0.9% increase in rate, while gaining 10.7% of RevPAR share against its competitive set.

The Hyatt Centric Arlington grew RevPAR 6.9% in the quarter and continues to outperform the market as it captured 5.4% from its competitive share -- from its competitive set in RevPAR's fair share. In Atlanta, the Georgian Terrace continued its exceptional performance by taking share from the competition during a strong quarter for the market, which was fueled by the Super Bowl during February. The property increased its RevPAR by 54.5% to $187.75, driven by an 18.4% increase in occupancy and a 30.5% increase in rate during the quarter, achieving a RevPAR index of 118.9, an increase in share of 26.6%.

Looking at our recent corporate activity. In April, we closed on the offering of 1,080,000 shares of our 8.25% Series D cumulative redeemable perpetual preferred stock for total gross proceeds of $27 million. Last week, the underwriters exercised their option on 120,000 shares for additional gross proceeds of $3 million. The company intends to use the net proceeds to redeem in full the operated partnership's 7.25% senior unsecured notes due 2021 and to the extent there are any remaining net proceeds for general corporate purposes, including potential future acquisitions of hotel properties. Strategically, the preferred issuance provides flexibility and reduces risk by replacing short-term bonds with a permanent source of capital while providing the company a mechanism to call that same preferred in 5 years if so desired.

In addition, during April, we announced that the company amended the original $19 million mortgage secured by the Crowne Plaza Tampa Westshore with its existing lender, Fifth Third Bank. With the amendment, the loan's principal amount remains at approximately $18.2 million with a new 3-year term with 2 1-year extension periods. The mortgage's interest rate will remain equal to the 30-day LIBOR plus 375 basis points and will reduce to 30-day LIBOR plus 300 if the property achieves certain performance hurdles. The loan amortizes on a 25-year schedule.

Finally, last month, we announced an increase to our quarterly dividend to $0.13 per share, representing an annualized dividend of $0.52 per share and a yield of 7.3% based on yesterday's closing price. This dividend marks the 11th increase over the last 16 quarters.

And with that, I'll turn the call over to our Chief Financial Officer, Tony Domalski.

--------------------------------------------------------------------------------

Anthony E. Domalski, Sotherly Hotels Inc. - VP, Secretary & CFO [4]

--------------------------------------------------------------------------------

Thank you, Dave. Reviewing performance for the period ended March 31, 2019. Total revenue for the quarter was approximately $47.4 million, representing an increase of 13.5% over the same quarter a year ago. For the quarter, hotel EBITDA was approximately $13.2 million, representing an increase of 10.9% over the same quarter a year ago.

And adjusted FFO was approximately $4.8 million for the quarter, a slight increase over the same quarter a 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 and 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 and 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 March 31, 2019, the total value of our assets was approximately $495.8 million, which includes net investment in hotel properties of approximately $441.3 million. The company had total cash of $33.4 million, consisting of unrestricted cash and cash equivalents of approximately $29 million as well as approximately $4.4 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 $366.3 million and outstanding debt at a weighted average interest rate of 5.13%. Approximately 85% of the company's debt carries a fixed rate of interest.

As of the end of the quarter, there were approximately 14.2 million common shares outstanding, of which approximately 600,000 shares were owned by the company's employee stock ownership plan, and there were approximately 1.8 million limited partnership units outstanding.

At the end of the first quarter, the principal balance on our interest-bearing debt was approximately $123,800 per room. Also, the ratio of debt to total asset value, as defined in the indenture agreement to our senior unsecured notes, was 59% based on a total asset value of approximately $661 million at the end of the quarter.

Turning to guidance. We are revising our guidance for 2019 solely to account for the recent issuance of preferred stock and the anticipated redemption of the operating partnership's unsecured notes later this month. For the year, we are projecting total revenue in the range of $184.2 million to $187.1 million. At the midpoint of the range, this represents a 4.2% increase over last year's total revenue.

Hotel EBITDA is projected in the range of $49.2 million to $50.2 million. And at the midpoint of the range, this represents a 4.2% increase over last year's hotel EBITDA. And adjusted FFO is projected in the range of $15.8 million to $16.8 million or $1.02 to $1.08 per share. At the midpoint of the range, this represents a 1% increase over last year's adjusted FFO per share. Additional details can be found on the Outlook section of our earnings release.

And I will now turn the call over to Drew Sims.

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [5]

--------------------------------------------------------------------------------

Thank you, Tony. While the industry experienced a volatile business environment at the end of 2018, the new year brought life, with U.S. economy growing a solid 3.2% during the first quarter. In our view, we see many reasons to be cautiously optimistic as the macroeconomic environment appears to be stable and corporate profits continue with a steady growth trend. This has translated to a promising forecast for the second quarter and the balance of 2019 for our portfolio.

Our composite portfolio outpaced the U.S. lodging industry during the first quarter, which experienced a modest 1.5% growth in RevPAR. We grew RevPAR at 8.8%, gaining 4.8% in share from our competitive set, driven primarily by occupancy growth. As Dave mentioned, during the first quarter, our portfolio experienced steady growth, highlighted by strong performances at our Arlington, Wilmington, Savannah and Atlanta assets.

The Hyatt Centric in Arlington continued with solid performance in the quarter by capitalizing on rate growth opportunities and benefiting from a number of corporate relocations to the Northern Virginia market, including Amazon, Nestlé and Gerber. The DeSoto in Savannah and the Hotel Ballast in Wilmington continue to gain traction in their markets following successful repositioning to boutique concepts. And finally, the Georgian Terrace, which grew RevPAR 54.5% in the quarter, outperformed its competitive set during an extremely strong quarter for the Atlanta market.

Looking at the balance sheet of our portfolio. In Hollywood, we are approaching the end of our impactful construction activity of the 40-story Hyde Beach House condo hotel adjacent to our DoubleTree resort property. The Hyde Beach House is expected to open in the fourth quarter of this year, and our interest in the building will provide Sotherly with as many as 700 hotel rooms in the Hollywood market, either through our fee simple interest in the DoubleTree or through rental program operations at both the Hyde Beach House and the Hyde Resort & Residences. This has been a 2.5-year process that we are glad to see come to a conclusion in the near term.

We are pleased with the progress at our Tampa property, which is on schedule to relaunch as Hotel Alba, part of Hilton's Tapestry Collection, in June following an $11.3 million renovation. This is the only remaining major renovation project planned for the next 18 months for the company. The completion of this project marks the culmination of 4 years of portfolio-strengthening initiatives, during which approximately 90% of the guest rooms in our wholly owned portfolio were renovated. We look forward to an extended period without significant renovation disruption across the portfolio and believe our assets are poised to outperform the market moving forward.

We continue to focus on improving our balance sheet as evidenced by the recent Tampa loan modification as well as the preferred stock issuance and bond redemption Dave mentioned earlier. We will endeavor to fix interest rates and extend maturities wherever possible, and we'll take advantage of the capital markets when opportunities become available. And lastly, we maintain a disciplined and consistent dividend strategy with a bias towards prudent growth, as evidenced by the increase announced last week.

We will now open the call up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [2]

--------------------------------------------------------------------------------

Congratulations on a nice quarter here. Just a couple of questions from me. In the prepared remarks, you highlighted a number of properties that are outperforming their markets and taking market share. When you look generally at some of those assets, could you talk a little bit more about what's exactly driving some of those share gains?

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [3]

--------------------------------------------------------------------------------

Sure. In Atlanta, I think the overall concept of our boutique hotels has taken hold. And I think that probably would include Atlanta, that would include Wilmington and that would include Savannah. It's taken us a little longer for us to tackle that task over time. And I think that as these concepts get experienced by our guests, what we're finding is they really, really like the experience that they're having there. And as a result, top line growth continues to grow.

--------------------------------------------------------------------------------

Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [4]

--------------------------------------------------------------------------------

Okay. Got it. That's helpful. And then just another general question for your portfolio, too. Any comments on group bookings for 2019?

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [5]

--------------------------------------------------------------------------------

I think the balance of the year is strong. We've seen good group bookings. And that's kind of part and parcel of your previous question. It's taken us a while -- when we drill down on why our group bookings kind of went -- got a little soft on us for a while there, I think a lot of it was our group customers were a little apprehensive about booking our projects -- our properties until they saw the completed project. And so it's taken a little bit longer than we thought for them to warm up to our product offering.

--------------------------------------------------------------------------------

Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [6]

--------------------------------------------------------------------------------

Okay. Got it. And I also wanted to ask about the Hyatt Centric and Laurel as well. I mean, obviously, D.C. is a little bit soft in the first quarter. But you guys performed quite well at both of those properties on the first quarter. So could you talk a little bit more about what's driving the strength of those 2 assets, too?

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [7]

--------------------------------------------------------------------------------

Well, the Rosslyn submarket is on fire right now. I mean it's just -- it's got a lot going for it. And as a result, I know across the river, there were -- they didn't have a great quarter. But Northern Virginia has been a beneficiary of several large relocations, and business travel has been extremely strong in the Rosslyn market and, generally, the Northern Virginia market.

In terms of Laurel, we've just done an excellent job of delivering great service to our guests. That's one of the top-ranked DoubleTrees in the system. And again, we made that conversion, what, 2.5 years ago. It's just taken us a little longer to get our guests acclimated to our service levels and our product offering. And now that they're experiencing what we have at the properties, they like it, and we're getting repeat guests. And so we think that it's -- Laurel, in particular, offers a very good value in terms of pricing for the government groups that we rely on heavily there.

--------------------------------------------------------------------------------

Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [8]

--------------------------------------------------------------------------------

Okay. Perfect. And I also wanted to ask about acquisitions, dispositions as well. Did you guys underwrite any potential deals in the first quarter or put out any bids? Any comment on what you're seeing with respect to pricing out there for potential acquisitions?

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [9]

--------------------------------------------------------------------------------

I think we underwrote, what, Dave, 4 -- 3 or 4 properties in the quarter. We didn't win any of them. I will tell you that -- I'm not going to name off the cities, but we're disciplined in what we're doing and we're not going to overpay. And as you're well aware, Tyler, it's a pretty heated market, so it's hard to get value. But we'll continue to work towards growing our portfolio. That's certainly one of our top missions here.

--------------------------------------------------------------------------------

Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [10]

--------------------------------------------------------------------------------

Okay. Got it. That's helpful. And then just the last question from me. Obviously, you guys increased the dividend recently, which is great. Any general thoughts as far as capital allocation priorities as we move through 2019?

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [11]

--------------------------------------------------------------------------------

Well, as we said in our remarks, we're kind of coming to the end of our renovation cycle on most of our portfolio. So in terms of capital allocation, that's where a lot of our money has been going. We will continue to underwrite deals and try and find the right acquisition that meets our long-term goals. And in the event we find something, then we will be applying capital. If we don't, we'll just keep doing what we're doing because I think we're -- we've had a great quarter, and we feel like 2019 is going to be a little better than what we originally thought.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

The next question comes from Alexander Goldfarb with Sandler O'Neill.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [13]

--------------------------------------------------------------------------------

Just a few quick questions. First of all, just on insurance, not sure where you guys stand in your insurance renewals or not, but just given last year's weather that you had, have you noticed any changes as you're talking about insurance costs across your assets? Just curious what you're hearing or what may be penciled in to guidance.

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [14]

--------------------------------------------------------------------------------

Yes. We just renewed that. I'm going to let Dave tackle that question because he managed that process.

--------------------------------------------------------------------------------

David R. Folsom, Sotherly Hotels Inc. - President, COO & Director [15]

--------------------------------------------------------------------------------

Yes. Alex, I mean, for the property and casualty piece, I think we've looked at an overall -- maybe a 5% increase. We had no real negligible increase on our workman's comp and our other insurance line that we talked about, especially our general liability lines. So all in, I think we are maybe at 4%. I mean, I understand your comment about the weather and our portfolio. The good thing is we managed through those weather events pretty well here at the company, and our carriers are usually pretty happy that we don't have large claims against the policy, which is reflected in pretty decent pricing. I will say that overall, on a macro basis, the insurance market did see some substantial increases well above what we saw, so I think we did pretty well on the renewal.

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [16]

--------------------------------------------------------------------------------

So you changed the carrier. You might want to mention that.

--------------------------------------------------------------------------------

David R. Folsom, Sotherly Hotels Inc. - President, COO & Director [17]

--------------------------------------------------------------------------------

Yes. I mean we changed the carrier mainly for a couple of reasons, that we just get better pricing. So...

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [18]

--------------------------------------------------------------------------------

Yes. I mean we shopped our account and we -- to try to maintain as small an increase as we could.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [19]

--------------------------------------------------------------------------------

Okay. And then the other -- another question is -- obviously, you had the Kentucky Derby this past weekend. We won't talk about the outcome. But as far as your hotel is concerned, is there any impact -- was this a normal Kentucky Derby year? Or was it better than or worse than, meaning is it something that we're going to see when you guys report second quarter numbers, that there was-- whether there were fewer bookings, more bookings, more freebies, more full rate, whatever? Just trying to better understand because, obviously, you said Super Bowl was a huge impact for you in Atlanta. But Kentucky Derby, I know, in the past, has been an issue. So just curious if anything we should look for.

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [20]

--------------------------------------------------------------------------------

We can't really give you that information quite yet. At the next earnings call, we'll be glad to share all that with you, Alex, but can't get ahead of myself here.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [21]

--------------------------------------------------------------------------------

Okay. And then just final question, going back to the prior analyst. A few years ago, you guys have been, it seemed like, a bit more vocal about wanting to recycle assets, trade, sell some assets, buy different ones, try to get more boutique-y, et cetera. But your comments to the prior analyst seem to dial back from that. And I don't know, maybe it was just where -- maybe just the way you responded, but was that your intent, that you're sort of dialing back from the desire to recycle assets? Or you're still looking to do that, but it's just a matter of being able to find the right hotels to sell and buy?

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [22]

--------------------------------------------------------------------------------

Well, I know we talked about -- at length about selling Philadelphia on prior calls. And I think -- well, I thought we made it clear that we marketed that hotel and didn't get the pricing that we wanted. So as a result of that, we decided to refinance that asset and take those -- take the equity out of the asset via debt. And then we reinvested those proceeds into the Arlington asset when we bought it.

So I mean -- so right now, we're pretty square in terms of what we're doing there in Philadelphia. Hotel's doing reasonably well, and we're happy with the performance. And so we don't see any reason to rush out and sell it. If we -- when we get an opportunity, we would certainly consider that. There are a couple other assets in the portfolio that we will look at marketing at some point in the future. Right now, we're not actively selling any assets.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

The next question comes from Mike Davis with College Street Advisors (sic) [Cottage Street Advisors].

--------------------------------------------------------------------------------

Michael Davis, [24]

--------------------------------------------------------------------------------

It's Cottage Street Advisors. But my question is, I like very much the fact that the operating metrics seem to be improving, but I need greater clarity on why, with net income guidance going up, EBITDA is going down and funds available for shareholders is flat. So could you just explain that a little bit for me?

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [25]

--------------------------------------------------------------------------------

Sure. Mike, we had -- for one thing, we had some hedging activity in the quarter, which is a noncash charge, but we still have to -- we have to make an adjustment to our FFO based on that. So because interest rates didn't increase and we had a hedge, we have to mark-to-market. And so we have this noncash charge of about -- I don't know, it's about $450,000,right?

--------------------------------------------------------------------------------

Anthony E. Domalski, Sotherly Hotels Inc. - VP, Secretary & CFO [26]

--------------------------------------------------------------------------------

About $0.5 million.

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [27]

--------------------------------------------------------------------------------

Yes, about $0.5 million that we had to take. So that's the first item. The other item that -- yes, it looks like top line sales are going up appreciably, but it's not flowing through to the bottom line. We have some seasonal issues with our Arlington acquisition, because we didn't own the Arlington hotel in January and February in 2018. We bought that on March 1, 2018. So that hotel, though it has a very positive influence on the top line sales because it's a very high RevPAR hotel, but January and February are the 2 worst months of the year for the Washington, D.C., submarket, so the hotel doesn't create a lot of excess cash flow during those 2 months. So because we're not -- we don't really have an apples-to-apples comparison here. So the Arlington hotel actually has a negative influence on our EBITDA line, but it has a positive influence on our top line revenue. So that's a fairly significant change in our metrics.

And then finally, I would say that on a go-forward basis, in the revised guidance that Tony put out just a few minutes ago, we've also got some more noncash charges that we have to book related to the extinguishment of and the repayment of the baby bonds. That's about $1.1 million. So when you add all these things up, we have noncash charges for the year of almost $1.6 million. For us, that's a pretty big number. It's like $0.10 in FFO. And then we've got the seasonal issue in Arlington. So I hope that brings some clarity. It's -- I think the short answer is we got these special events that don't really affect our cash flow, but they affect the presentation of our financials.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [29]

--------------------------------------------------------------------------------

Thank you all for joining us today, and look forward to a positive report in July. And thank you.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

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