U.S. Markets closed

Edited Transcript of SOHO earnings conference call or presentation 6-Nov-18 3:00pm GMT

Q3 2018 Sotherly Hotels Inc Earnings Call

WILLIAMSBURG Dec 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Sotherly Hotels Inc earnings conference call or presentation Tuesday, November 6, 2018 at 3:00:00pm 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

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

* Daniel Santos

Sandler O'Neill + Partners, L.P., Research Division - VP

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

Presentation

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

Operator [1]

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

Good day, everyone, and welcome to the Sotherly Hotels Inc. Third Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Scott Kucinski, Vice President of Operations and Investor Relations. Please go ahead.

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

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

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

Thank you, and good morning, everyone. Welcome to Sotherly Hotels' third 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 review portfolio performance. Tony Domalski, our CFO, will provide our key financial results for the quarter and update our 2018 guidance. Drew Sims, our Chairman and CEO, will conclude with an update on our strategic objectives. We will then take questions.

If you have 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 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 the call today with a review of our portfolio's key operating metrics in the quarter; 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 2.2% over prior year to $99.72 with a 2.2% decrease in occupancy and a 4.5% increase in ADR. Year-to-date, portfolio RevPAR increased 7% over prior year to $111.60 with a 1.3% decrease in occupancy and an 8.4% increase in ADR.

Hotel EBITDA margins increased 50 basis points for the quarter. Year-to-date, margins have expanded 110 basis points.

Our portfolio was exposed to several large weather-related events in the quarter. Most notably Hurricane Florence was a category 4 storm that struck the Carolinas in early September. Along with the wind effects, the storm was one of the wettest on record, causing massive flooding. As we mentioned in our press release of September 18, our portfolio sustained only minimal damage mainly centered on the Hotel Ballast in Wilmington, North Carolina. The hotel did remain open throughout the storm, serving and safeguarding both guests and employees alike. Power was restored to the hotel after 97 -- 96 hours and normal operations resumed thereafter.

The regional impact of Florence however was more substantial from a business interruption standpoint. The storm was large, slow-moving and its track was uncertain for many days leading up to landfall. We saw cancellations and minimal revenue pickup at our hotels along the coast, ranging from Jacksonville, Florida, to Arlington, Virginia, as a result. Travel throughout the Southeast region was disrupted from early September until the end of the month, and several Southern states issued state of emergency warnings. Major roads, including I-95, were closed due to horrific flooding; major airports were closed and group events were canceled. The result of demand destruction had a resounding impact across much of our portfolio.

Second, South Florida experienced severe tropical storms in and around the important Labor Day weekend that curtailed travel. The impact of red tide has been very damaging to the tourist and lodging industries in Florida to the extent that the governor issued a state of emergency in the corridor for both the East and West Coasts of Florida. These events, coupled with ongoing construction adjacent to our DoubleTree, Hollywood Beach, impacted that asset in the quarter. These events, however, are all one time, are temporary in nature, and we believe this hotel is poised for great growth.

Looking at other highlights across the portfolio, the DoubleTree Philadelphia Airport grew RevPAR 11% in the quarter with a mix of 4.9% occupancy growth and 5.8% increase in ADR. The market also performed well with our comp set RevPAR of 19.5% in the quarter.

The Georgian Terrace in Atlanta grew RevPAR 5.9% in the quarter with all the growth being in rate. The market was up 5.6% and our hotel took 30 basis points in share.

At the DoubleTree Jacksonville Riverfront, the hotel increased RevPAR 8.8% in the quarter, with the market up 5.2% and our hotel taking 360 basis points in share.

At our Tampa Hotel, we continued the renovation to convert to the Hotel Alba next spring. Thus far, approximately 60% of the rooms have been completed, with public space renovations commencing soon. And it will be completed during the slower holiday season.

Looking at our recent corporate activity, in July, we refinanced the DoubleTree Brownstone in Raleigh, North Carolina. The new loan includes an $18.3 million initial funding to repay the existing first mortgage and to fund the acquisition of a portion of the hotel parking lot, which was previously encumbered by a long-term lease. It also includes $5.2 million of future funding to be used for capital improvements associated with an upcoming renovation that will commence in late 2019. The loan carries a 4-year term with a 1-year extension and a floating rate of LIBOR plus 400 basis points. We concurrently purchased a LIBOR cap to protect against future rate increases.

And also in July, we completed an amendment to the loan on our Philadelphia DoubleTree Hotel. The amendment increased the principal balance to $42.2 million, reset the term for 5 years, fixed the interest rate at 5.24% and removed our corporate guarantee. Proceeds from the loan were used to repay the B note on the Hyatt Centric Arlington Hotel and for general corporate purposes.

And then in September, we refinanced the Hyatt Centric Arlington. The new $50 million first mortgage is nonrecourse, carries a 10-year term and a fixed interest rate of 5.25%. Proceeds from the loan were used to repay the existing A note on the hotel and for general corporate purposes.

And finally, last month, we announced our quarterly dividend of $0.125 per share, representing an annualized dividend of $0.50 per share and a yield of approximately 7.2%.

With that, I'll turn it 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 September 30, 2018, total revenue for the quarter was approximately $41.4 million, representing an increase of 12.6% over the same quarter a year ago. For the first 9 months, total revenue was $134.7 million, representing an increase of 16% over the prior period.

For the quarter, hotel EBITDA was approximately $9.2 million, representing an increase of 14.8% over the same quarter a year ago. And for the first 9 months, hotel EBITDA was approximately $37.4 million, representing an increase of 20.8% over the prior period.

For the quarter, adjusted FFO was approximately $1 million, representing a decrease of 43.5% over the same period a year ago. And for the first 9 months, adjusted FFO was $14 million, representing an increase of 13.9% over the same period last 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 or abandoned securities offering costs, changes in the deferred portion of our income tax provision as well as other items. Hotel EBITDA excludes these charges as well as interest expense, interest income, corporate G&A, and the current portion of our income tax provision and some other items. Please refer to our earnings release for additional detail.

On August 31, we entered into a sales agency agreement with Sandler O'Neill + Partners under which the company may sell, from time to time, shares of the company's common stock having an aggregate gross sales price of up to $5 million, and up to 400,000 shares of the company's 7.875% Series C cumulative redeemable preferred stock.

Through September 30, 2018, the company sold 88,297 shares of common stock and 50,541 shares of the Series C preferred stock for an aggregate net proceed -- or aggregate gross proceeds of approximately $1.9 million.

Looking at our balance sheet, as of September 30, the total book value of our assets was approximately $502 million, which includes net investment in hotel properties of approximately $437.5 million. The company had total cash of approximately $42 million, consisting of unrestricted cash and cash equivalents of approximately $37 million as well as approximately $5 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 $394.5 million in outstanding debt at a weighted average interest rate of 5.1%. Approximately 87% of the company's debt carries a fixed rate of interest.

Total stockholder and unitholder equity was approximately $88.5 million at the end of the quarter, of which stockholder equity was approximately $88.2 million and unitholder equity was approximately $0.3 million.

At the end of the quarter, there were approximately 14.2 million common shares outstanding, of which approximately 0.6 million shares are owned by the company's ESOP and there are also approximately 1.8 million limited partnership units outstanding.

At the end of the third quarter, the principal balance on our outstanding -- on our interest-bearing debt was approximately $125,000 per room. Also, the ratio of debt-to-total asset value, as defined in the indenture agreement to our unsecured notes, was 57.2% based on a total asset value of approximately $689.5 million at the end of the quarter.

Turning to guidance, we are updating our previous guidance for 2018 to account for current and expected performance within the portfolio, taking into account current market conditions and the refinance of the mortgage on the Hyatt Centric Arlington and weather-related events, including Hurricane Florence. For the year, we are projecting total revenue in the range of $175.7 million to $178.1 million. At the midpoint of the range, this represents a 14.7% increase over last year's total revenue.

Hotel EBITDA is projected in the range of $47 million to $47.7 million and at the midpoint of this range, this represents a 15.5% increase over last year's hotel EBITDA.

Adjusted FFO is projected in the range of $15.4 million to $16.1 million or $1.01 to $1.05 per share. At the midpoint of the range, this represents a 3% increase over last year's adjusted FFO per share. Additional details can be found in the Outlook section of our earnings release. And I will now turn the call over to Drew.

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

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

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

Thank you, Tony. As Dave mentioned, our markets were considerably challenged in the quarter, primarily due to uncontrollable events. While our hotels survived Hurricane Florence mostly intact and were continuously operating, the resulting demand destruction had a significant negative effect on the company's profitability. While we experienced a recovery in early October, regional travel patterns were again disrupted with the arrival of Hurricane Michael into Florida, Georgia and the Carolinas. While difficult to quantify the exact revenue impact of these events, we estimate that they combine for a $0.06 decline in AFFO per share for the quarter.

Beyond these natural events, it is important to note that the industry was faced with several headwinds in the quarter, including the midweek 4th of July holiday, the shift in the September Jewish holidays and tough comps in Houston from Hurricane Harvey. All of this combines for a relatively week third quarter particularly in comparison to our exceptional second quarter. However, we believe we are generally on track to wrap up 2018 on a positive note and produce results nearly in line with our original expectations for the year.

Looking at our strategic objectives, we continue to focus on maintaining a sound balance sheet by procuring fixed-rate debt, extending maturities and ensuring we have sufficient cash reserves. We were pleased with the execution in the third quarter as we refinanced $110 million worth of mortgage debt, which substantially extended maturities on 3 key assets, and increased our percentage of fixed rate debt for the company from 70% to nearly 90%. The added interest expense did result in some AFFO impact in the quarter, but we believe it is [prudent] to give priority to the long-term benefit of these refinancings.

Looking at the industry as a whole, we remain cautiously optimistic that the long cycle will continue its tepid growth for at least the next year or 2, as transient travel trends are steady in the aggregate, and group bookings pace is strong, with 2019 pacing considerably ahead of 2018 for most of our portfolio. We continue to monitor acquisition opportunities and remain steadfast to our conservative approach to underwriting, as we believe the market is still overheated in terms of pricing. We will focus on identifying long-term value creation opportunities for our shareholders and act if and when we find the right fit.

We will now open the call up for questions.

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

Questions and Answers

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

Operator [1]

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

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

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

Unidentified Analyst, [2]

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

This is [Andrew Coke] filling in for Tyler. Looking at labor costs in 2019, what are you generally expecting as far as increase?

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

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

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

We're looking at a similar increase that we've had in the past 2 years, which would be in the 2% range.

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

Unidentified Analyst, [4]

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

Great. Looking at Philadelphia, it performed strong during the quarter and year-to-date really. What do you think is driving results here?

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

David R. Folsom, Sotherly Hotels Inc. - President, COO & Director [5]

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

The Philadelphia market, which was down significantly in 2017, so '18 has got a favorable comparable to start with, I would say. And the market has really bounced back; it's been very strong this year. Travel trends in and out of the Philadelphia Airport are -- have increased significantly, so I think we're just seeing the overall benefit of the Philadelphia market's positive momentum.

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

Operator [6]

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

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

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

Daniel Santos, Sandler O'Neill + Partners, L.P., Research Division - VP [7]

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

My first one is on your capital plan. Does the recent rise in rates have any impact on what you envision your capital plan is going forward?

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

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [8]

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

Well, I think what you saw us do in the quarter, in the third quarter, was to accelerate our capital plan to try to capture as much fixed rate debt as we could get. And so in terms of our balance sheet structure, we wanted to -- several of these refinancings, we had actually originally intended to do in the first quarter next year or maybe even midyear next year. But given what was going on in the marketplace, we decided we would accelerate our efforts and push quickly and execute on these loans.

In terms of capital -- to make sure I understand your question correctly, in terms of capital spend on our properties, we have spent tens of millions of dollars repositioning our hotels in the last couple of years. And as a result, our capital expenditures, on a go-forward basis, are pretty muted. We went through that 10-year licensing cycle, and we've pretty much gotten through that. We've got one property left and that's Tampa, and we're about halfway through that project in terms of execution and paying for the project. So next year should be pretty light.

The only exception to that is we are going to buy the Hyatt House Front Desk next year, which we've announced. It's another large condominium, hotel-condominium project that's contiguous to us in the Hollywood market. And so we will need to fund that.

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

Daniel Santos, Sandler O'Neill + Partners, L.P., Research Division - VP [9]

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

Got it. But along those same lines, it sounds like the hotels that were affected by the storms fared fairly well. Do you anticipate any significant increase in CapEx just as a preventative measure against storms going forward, or do you think your hotels are in pretty good shape?

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

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [10]

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

Surprisingly, we have endured storms for our entire term that we've owned these properties; it's not something new. And the location of our hotels is such that we -- it's a major impact to us, but from a physical standpoint, we rarely have major physical damage to our properties. And it's just a result of their kind of -- I don't [want to call it] -- downtown location as we're kind of mixed in with a bunch of other buildings, so we don't really see that impact that you would see if you were located out on the waterfront. So we do not anticipate a large CapEx as a result of the storms. We also don't anticipate a large recovery in terms of our lost business. [Fortunately], most of the properties that lost business were not directly affected by the storm in terms of physical damage. And as a result, it doesn't trigger our ability to collect business interruption insurance.

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

Daniel Santos, Sandler O'Neill + Partners, L.P., Research Division - VP [11]

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

One last quick one for me. I know that you guys talked about being opportunistic on acquisitions, but how are you guys thinking about dispositions across your portfolio?

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

Andrew M. Sims, Sotherly Hotels Inc. - Chairman & CEO [12]

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

We continue to look at a couple. We've announced those previously and we look at that all the time. So we will sell if we get the right price.

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

Operator [13]

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

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

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

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

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

Thank you all for joining us. I look forward to reporting our annual results in January. Thank you.

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

Operator [15]

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

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