Sotherly Hotels' (SOHO) CEO Andrew Sims on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: SoTHERLY Hotels (SOHO)

Start Time: 10:00

End Time: 10:19

Sotherly Hotels Inc. (NASDAQ:SOHO)

Q2 2014 Earnings Conference Call

August 5, 2014 10:00 AM ET

Executives

David R. Folsom - President and COO

Andrew M. Sims - CEO

Anthony E. Domalski - CFO

Scott M. Kucinski - Vice President - Operations and IR

Analysts

Carol Kemple - J.J.B. Hilliard W.L. Lyons LLC

Matthew Dodson - JWest, LLC

Operator

Good morning and welcome to the Sotherly Hotels Second Quarter Earnings call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I’d now like to turn the conference over to Mr. Kucinski. Please go ahead.

Scott M. Kucinski

Thank you and good morning everyone. Welcome to Sotherly Hotels second quarter earnings call and Webcast. Dave Folsom, our President and COO will begin today’s call with a view of the Company’s quarterly activities, review portfolio performance. Turning to Domalski, our CFO, to provide our key financial results for the quarter and update 2014 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 Web site at www.sotherlyhotels.com. In the release the Company has reconciled all non-GAAP financial measures to 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 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 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

Thank you, Scott. Good morning, everybody. I’d like to start today by reviewing the Company’s performance for the quarter. The second quarter marks the Company’s best quarter on record. The lodging industry continues to enjoy a strong recovery driving RevPAR and hotel EBITDA growth for us on a same-store basis.

In addition to this tailwind, the Company is starting to reap the benefits and accretive results from our recent acquisitions in Houston and Atlanta. We also continue to see margin expansion across the majority of our portfolio due to strong ADR growth.

So looking at our portfolio performance, for the quarter consolidated RevPAR for the portfolio increased 9.7% with a 4.9% increase in rate and occupancy was up 4.6%. Same-store RevPAR increased 7.5%, driven by a 4.2% increase in rate and a 3.2% increase in occupancy.

Hotel EBITDA margins expanded 116 basis points to 32.9% on a same-store basis. For the quarter, RevPAR for our markets was up 7.6%. Our portfolio performed in line with our markets on a RevPAR fair share basis, while increasing rate share by 70 basis points in the quarter, as we continue to focus on the quality of our revenue and drive our rates across the portfolio.

On balance, our hotels are operating right at 100% of their fair share indices. Our two new acquisitions in Houston and Atlanta are strategically important and conform to Sotherly’s long-term goals, with both assets being well-known properties located at high demand, high barrier to entry, central business district locations in two of the largest markets in the Southern United States.

Houston continues to be one of the strongest domestic hotel markets in the United States. On a 12-month RevPAR look back basis the market is up over 10% and during the same period our hotel captured nearly 300 basis points in RevPAR fair share. For the quarter, the Houston market was up over 5% with our new hotel matching this quarterly increase.

Although we’ve owned The Georgian Terrace, in Atlanta for only one quarter, its operating and financial performance has eclipsed our -- it has eclipsed our original expectations through a combination of diligent asset management efforts, enhanced revenue strategies, expense control, and changes to the hotels food and beverage offerings. Performance has been excellent.

The Atlanta lodging market is also seeing remarkable growth throughout the year, ranking among the top in the United States. We expect this to be a fantastic investment for our shareholders. In the quarter, the hotel was added to the prestigious Southern Living Magazines Hotel Collection, a select group of independent four and five star hotels inns and resorts that span 18 southern states offering the best in authentic Southern hospitality.

In summary, these recent additions to our portfolio have exceeded our expectations thus far and we could not be more pleased with the results. Looking at other highlights across the portfolio, for the quarter we continue to see substantial market improvement in Tampa, were RevPAR was up 18% in the quarter with our hotel gaining 80 basis points in share.

At the Sheraton, in Louisville, our hotel gained 2,600 basis points in share over to the competitive set which was up 7% during the period. And so then our market performance is consistently been up 8% for the prior 12 months. And again, in this past quarter, our Hilton Savannah DeSoto captured 180 basis points in share in the past 12 months and 770 basis points in share in the quarter. Finally, in Jacksonville, the markets saw a significant 12.5% RevPAR increase in the quarter, while our hotel captured 500 basis points in share.

Turning to other corporate developments and activities, last month the Company increases its quarterly dividend by 30%. This amounts to fifth increase in the past seven quarters during which time we’ve increased our dividend 117%. Our current yield is approximately 3.4%, above the average of all of our lodging peers.

We continue to have a bias to raise our dividend in a measured and sustainable way. In the quarter, we modified and extended the mortgage on the Hampton Crowne Plaza hotel and Hampton Virginia. The note was paid down to $5 million, the term was extended for two years and the rate, which had previously been floating was 6% to 12%.

On July 9th we established an active market equity offering program by filing with the SEC a perspective supplement to the Company’s existing effective Form S-3 shelf registration statement. The ATM is a capital raising program common to REITs which allows Sotherly to sell limited amounts of its common stock at the time and price of our [ph] [choosing] pursuant to and subject to a sales agency agreement. We believe the ATM with its inherent flexibility is a valuable tool that much like other REITs we wish to maintain both now and in the future.

So with that, I’ll turn the call over to our CFO, Tony.

Anthony E. Domalski

Thank you, Dave. Reviewing performance for the period ended June 30, 2014, total revenue for the quarter was approximately $36.3 million, representing an increase of 43.9% over the same quarter a year-ago. Adjusted EBITDA was approximately $10.5 million for the quarter, representing a 44% increase over the same quarter a year-ago.

Adjusted FFO was approximately $6.3 million for the quarter or $0.48 per share, representing an increase of 31% over the same quarter a year-ago. The Company reported consolidated net income of approximately $2.2 million for the quarter, with an increase of 65.3% over the same quarter a year-ago.

Please note that both our adjusted FFO and adjusted EBITDA exclude unrealized gains or losses on hedging activities and derivatives, charges related to the early extinguishment of debt, acquisition charges, changes in the deferred 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 June 30, 2014 the total value of our assets was approximately $301.4 million. This includes net investment in hotel properties of approximately $261.2 million and approximately $2.1 million for the Company’s joint venture investment in the Crowne Plaza Hollywood Beach Resort.

The Company had total cash of approximately $24.3 million, consisting of cash and cash equivalents of approximately $17.9 million, as well as approximately $6.4 million, which was reserved for real estate taxes, capital improvements and certain other expenses. As of June 30th, the Company had approximately $251.4 million in outstanding debt at a weighted average interest rate of 5.46%.

It also had total stockholder and unitholder equity of approximately $33.9 million, of which stockholder equity was approximately $27.9 million with approximately 10.4 million shares outstanding and unitholders equity was approximately $6 million with approximately $2.8 million limited partnership units outstanding.

At the end of the second quarter, our interest bearing debt was approximately $93,180 per room and also at the end of the second quarter the ratio of debt to total asset value and to find in our indention agreement to the secured or senior unsecured notes was 55.2%.

Turning to guidance. We are updating our guidance for 2014 to account for current and expected performance within our portfolio. For the year we are projecting total revenue in the range of $120.4 million to $123 million. At the midpoint of this range, this represents a 36.2% increase over last year’s total revenue. Hotel EBITDA is projected in the range of $31.5 million to $32.7 million. And at the midpoint of this range it represents a 38% increase over last year’s hotel EBITDA. And adjusted FFO is projected in the range of $14.4 million to $16.7 million or $1.10 to $1.20 per share. At the mid point of this range it represents 37% increase over last years adjusted FFO. Additional details can be found in the outlook section of our earnings release.

And I’ll now turn the call over to, Drew.

Andrew M. Sims

Thank you Tony. We’re pleased with the results from our portfolio. Not only is the portfolio performing well as a whole, but the brightest stars are properties that have lagged the recovery. With nearly all of our properties performing at a high level combined with the inherent upside yet to be realized in our recent acquisitions we are optimistic about the prospects moving forward.

Our focus in asset management efforts continue to reap benefits as the revenue management strategies implemented across our portfolio have pushed ADR higher and increased our profit margins. We’re also seeing increased guest service and satisfaction scores as we complete capital projects and enhance our product offering at several properties.

On the acquisition front, we continue to monitor our high priority target markets and attract several assets. However we’re not in active negotiations for any new acquisitions at this time. Likewise in terms of potential dispositions we’re not presently marketing any assets for sale. We remain focused on managing our capital structure with the goal of lowering of level of outstanding debt. Repayment of the $19 million Bridge Loan used to purchase the Atlanta asset is a high priority for us.

As Dave noted, we increased our dividend once again last month and maintain a bias towards continued dividend growth. For the quarter our total return was 21.8% ranking us first among all lodging REIT peers. We’re also ranked first on our trailing 12 month basis for the total return of 83.5%. All in all this was an exceptional quarter. We outperformed the market from an operations perspective. We increased our dividend by 30%. Twice in the past four months we increased our annual guidance. We finished the quarter having exceeded our liquidity goals and we continue to be the top performing public hotel REIT in terms of stock performance. The second quarter was the highest performing period in the company’s long history. We believe the coming quarters will see similar results.

We will now open the call up for questions.

Question-and-Answer-Session

Operator

(Operator Instructions) The first question comes from Carol Kemple from Hilliard Lyons. Please go ahead.

Carol Kemple - J.J.B. Hilliard W.L. Lyons LLC

Good morning. Congratulations on a nice quarter.

Andrew M. Sims

Thank you very much, Carol.

Carol Kemple - J.J.B. Hilliard W.L. Lyons LLC

On your revenue and your occupancy and RevPAR guidance for the rest of the year. It says that -- it says in your press release that you look at the Smith Travel Research for the market segment in the ones you operate. Can you give us some kind of guidance on how much you expect occupancy to rise and ADR to rise for the second half?

Andrew M. Sims

I don’t know that we’re giving that guidance out, but I can tell you that, I think you would look backwards at what we’ve just seen. I think that would be a good guidance on a go forward basis. We’re seen good growth on the rate side and we think that will continue. And I would say look at our present results and project that forward would be, whatever.

Carol Kemple - J.J.B. Hilliard W.L. Lyons LLC

Thanks.

David R. Folsom

Yes, I think Carol you’re asking where the markets are going over the next six months. I think of Drew’s comments, we’re not seeing any changes that would alter significantly the past quarter or two and in terms of market progression. At the same time in many instances we really outperformed on share but on average the hotel has been running 100% of the indices which is good. So we’re matching what is a very attractive market growth right now.

Carol Kemple - J.J.B. Hilliard W.L. Lyons LLC

And then, you all mentioned that you didn’t have any dispositions on the market. At this point are you thinking just about selling a property when you have another acquisition to redeploy it into or what are your thoughts on dispositions?

Andrew M. Sims

Well we have said in the past that there are a couple of properties that don’t match our long-term goals, and we’d like to sell them. We want to make sure that we do that within the opportunities at its peak and right now we’ve got some issues going on at different properties that we’re trying to position them for sale, but presently we’re not -- we’re not ready to go yet.

Carol Kemple - J.J.B. Hilliard W.L. Lyons LLC

Okay. Thanks.

Operator

The next question is from Matthew Dodson from JWest. Please go ahead.

Matthew Dodson - JWest, LLC

Hi, guys. Congratulations on a great quarter. First of all, can you kind of help me understand based upon your guidance on AFFO, you guys are expecting a big de-acceleration. Can you help me understand why that is?

Anthony E. Domalski

A big deceleration and I’m sorry Matt…

Matthew Dodson - JWest, LLC

You guys did $0.71 and hit the midpoint of your guidance you need to grow FFO in the back half or just needed to have FFO $0.44. So, I mean, that’s kind of the big [ph] [dig]?

Anthony E. Domalski

Yes, we’re a very seasonal business Matthew, so it grows in relation to what quarter we’re in. So, some quarters are very strong like the second quarter. The third quarter is decent for us. Fourth quarter is our slowest quarter in the year. So, its just in relation to the seasonality. Its really not a deceleration I would say, that it’s a -- you’re going to see a similar percentage increase is just, this is -- it’s a smaller number so it doesn’t show up as substantially as it did in the last quarter.

Matthew Dodson - JWest, LLC

Okay, that’s helpful. And then can you kind of talk about your acquisition opportunities. I believe that the REIT conference, Drew you talked about maybe adding another property by the end of the year. Can you kind of help me understand what's on your radar right now?

Andrew M. Sims

Well, we have said in the past that there’s a couple of markets that we really like to be in Charleston, South Carolina, Nashville, Charlotte, North Carolina. Those are kind of pre-mold markets that we’d like to get into that are here in the south land. So that’s our focus. Our present focus is to come to a solution on this Bridge Loan that we have, that we used to buy the, The Georgian Terrace in Atlanta. And so we need to solve that issue first. But we’re [ph] [forking] around in those markets right now trying to find an asset that we like. And as soon as we have something we can share with you, we’ll be glad to do that.

Matthew Dodson - JWest, LLC

Okay. That’s helpful. Again, congratulation on a great quarter and I look forward talking to you soon.

Andrew M. Sims

Okay. Thank you.

Operator

(Operator Instructions) This concludes our question and answer session. I would like to turn the conference back over to Mr. Sims for any closing remarks.

Andrew M. Sims

Thank you all for joining us this morning. We’re glad to have such great news to share with you, and we look forward to talking to you in the near future. Thank you.

Operator

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

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