SoTHERLY Hotels' (SOHO) CEO Drew Sims on Q4 2015 Results - Earnings Call Transcript

| About: SoTHERLY Hotels (SOHO)

SoTHERLY Hotels Inc. (NASDAQ:SOHO)

Q4 2015 Earnings Conference Call

February 23, 2016 10:00 AM ET

Executives

Scott Kucinski - VP, Operations and IR

Andrew Sims - CEO

David Folsom - President and COO

Anthony Domalski - CFO

Analysts

Carol Kemple - Hilliard Lyons

Dan Donlan - Ladenburg Thalmann

Whitney Stevenson - JMP Securities

Scott Williams - Palogic Capital

Operator

Good day, and welcome to the SoTHERLY Hotels, Inc.'s Fourth Quarter Earnings Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.

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

Scott Kucinski

Thank you, and good morning, everyone. Welcome to SoTHERLY Hotels’ fourth quarter earnings call and webcast. Dave Folsom, our President and COO, will begin today’s call with the review of the company’s quarterly activities and a review of portfolio performance. Turning to Domalski, our CFO, will provide our key financial results for the quarter and update on our 2016 guidance. Drew Sims, our Chairman and CEO, will conclude with an update on strategic objectives. We’ll 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 and 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 result 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 Folsom

Thank you, Scott. Good morning, everybody. I’d like to start today’s call by discussing some of the key operating metrics for the quarter, where our portfolio finished out well for the year.

For the quarter, portfolio RevPAR was $90.37, an increase of 15% over prior year with the 10.7% increase in rate and occupancy increase in 3.9%. Hotel EBITDA for the portfolio increased 28.3% to approximately $8.8 million for the quarter, if not for some non-recurring charges related to a litigation settlement, as well as our real estate tax assessments currently under appeal. Hotel EBITDA would have been 9.6 million for the quarter, representing an increase of 40.4% over prior year. Hotel EBITDA margins expanded by 95 basis points in the quarter, again adjusting hotel EBITDA to account for aforementioned non-recurring charges. Margins expanded by 320 basis points in the quarter. This expansion is primarily driven by rate. Within the portfolio and it’s also important to note that our Hollywood asset was highly accretive to our overall portfolio margins in the quarter.

In terms of relative market performance, our Southern and Mid-Atlantic markets performed well, with a combined 5.2% RevPAR growth. Our portfolio outperformed as a whole, gaining 210 basis points in share on a combined basis points. To review some individual property highlights, our Jacksonville Hotel has gotten off to a strong start, following its conversion to the DoubleTree by Hilton Flag in September. For the quarter, our hotel achieved RevPAR growth of 13.8%, driven by 17% increase in rate.

We are pleased to see this property getting this level of market penetration this quickly following conversion. We expect this momentum to continue as the asset ramps up under the new flag. In Atlanta, where the guest room renovation is near in completion, the hotels saw RevPAR growth of 8.1% in the quarter, driven by a 9.3% rate gain. The competitive set saw a RevPAR increased 6% with the property gaining 200 basis points in share. With the high quality and more consistent rooms’ product now in the mix as a result of our renovation, we’re able to move more aggressively on rate against our competitors that resulted in the share capture.

Our Tampa Hotel produced a strong fourth quarter with RevPAR up 15%, driven by a mix of 8.1% rate growth and 6.4% occupancy growth. The competitive set RevPAR was up a healthy 14.3% for the quarter in this market, resulting in our share gain of 70 basis points for our hotel.

Looking at our renovation activity across the portfolio, the majority of our impactful [ph] renovation work ramped up in the third quarter. However, we continue to have plenty of activity in progress. As I previously noted, our Jacksonville Hotel successfully converted to the DoubleTree Flag in September with all renovations now 100% complete and our Laurel Hotel converted to the DoubleTree Flag in late October. And we wrapped up those renovations prior to year-end.

In Atlanta, our guestroom renovations of the Georgian Terrace are near in completion and we'll conclude by May. In Houston, the final public space renovations are underway with an April completion date, in preparation for the conversion to the White Hall by SoTHERLY, an independent boutique and member of preferred hotels and resorts. Lastly, we are preparing to commence renovations of our hotels in Savanna and Hollywood. Later this year, an anticipation of their conversions in the third quarter of 2017.

Now looking at some of our corporate activity in the quarter. In October, we took advantage of the $2 million earn-out provision in our Jacksonville loan, as a means of partially funding the CapEx spend on that renovation. And in December, we modified our existing mortgage in Laurel, which generated an additional $2.6 million in net proceeds, which was used to partially fund the CapEx spend on the renovation of that hotel.

Finally, in January, we recently announced an increase to our dividend to $8.05 per share, which represents a dividend yield of over 6%, based on current stock price.

And with that, I will now turn it over to our CFO, Tony Domalski.

Anthony Domalski

Thank you, Dave.

Viewing performance for the period ended December 31, 2015. Total revenue for the quarter was approximately $36.8 million, representing an increase of 23.2% over the same quarter a year ago. For the year, total revenue was approximately $138.5 million, representing an increase of 12.7% over the prior year. Adjusted EBITDA was approximately $7.1 million for the quarter, representing an increase of 12.9% over the same quarter a year ago and for the year, adjusted EBITDA was approximately $37.7 million, representing a 27.8% increase over the prior year.

Adjusted FFO was approximately $3.3 million for the quarter, representing a 73% increase over the same quarter a year ago. And for the year, adjusted FFO was approximately $14.9 million, representing a 5.4% increase over the prior year. Please note that both our adjusted FFO and adjusted EBITDA exclude charges related to the early extinguishment of debt, gains and losses on derivative instruments, acquisition cost, 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 December 31, 2014, the total book value of our assets was approximately $393.1 million, which includes net investment in hotel property for approximately $355 million. The company had total cash of approximately $17.3 million, consisting of uninstructed cash and cash equivalents of approximately $11.5 million, as well as approximately $5.8 million, which was reserved for real estate taxes, capital improvements and certain other expenses.

As of December 31, the company had approximately $324.9 million, an outstanding debt at a weighted average interest rate of 5.24%, approximately 85% of the company's debt carries a fixed-rate of interest. Total stockholder and unitholder equity was approximately $52.9 million at the end of the quarter, of which stockholder equity was approximately $49 million, with $14.5 million shares outstanding and unitholders equity was approximately $3.8 million, with approximately $2.2 million limited partnership units outstanding.

At the end of the fourth quarter, out interest-bearing debt was approximately $104,370 per room. Also the ratio of debt to total asset value as defined in the indenture agreements to our senior unsecured notes with 54.3% based on the total asset value of approximately $598 million at the end of the quarter and total debt as previously stated at $324.9 million.

Turning to guidance. We are reiterating our previous guidance for 2016, which accounts for current and expected performance within our portfolio, as well as other factors. For the year, we are projecting total revenue in the range of $151.6 million to $154.3 million. At the midpoint of the range, this represents a 10.4 increase over the last year's total revenue. Hotel EBITDA is projected in the range of $44.7 million to $45.7 million and at the midpoint of this range, it represents a 24% increase over last year's hotel EBITDA. And adjusted FFO is projected in the range of $20.2 million to $21.6 million or $1.21 to $1.29 per share.

At the midpoint of the range, this represents a 25% increase over the last year's adjusted FFO per share. Additional details to be found in the outlook section of our earnings release.

And I will now turn the call over to Drew.

Andrew Sims

Thank you, Tony.

In many respects, 2015 was a transitional year for our portfolio. We completed the most capital improvement projects, our company has undertaken since 2008. Over a third of our guest rooms were renovated in the year, two hotels were up branded and we launched our independent collection with the Georgian Terrace in Atlanta last September.

Additionally, we added the Hollywood hotel for our portfolio, which is our largest asset in terms of asset value and EBITDA production. The hotel is highly accretive to the portfolio as RevPAR and profit margins. While this activity unit near-term results in the third quarter, we now have the highest quality portfolio in our company's history and we believe we are poised for our performance going forward. This was evident in our strong fourth quarter operating metrics. We expect similar results heading into 2016.

We remained cognizant of the signs of a slowing economy, global market disruptions and the threat of a recession. That said, we still see positive trends in most of our markets and remain cautiously optimistic that we have some runway left in this recovery. While the top gateway markets of the U.S. have experienced sizeable supply growth this cycle. The majority of our markets continue to track well below the long run average, adding tangentially competitive product, mostly in the upscale select service segment. We have experienced very little new build full service upper-upscale hotel product in our competitive set this cycle.

Along the same lines, Airbnb has been a hot topic of late. While we don't disagree that Airbnb presents a new alternative to the traditional hotel model. We have not seen any disruption in our markets to-date. We believe the negative Airbnb effect will be experienced primarily in the top 5 high rate gateway markets, where a low-cost alternative is an attractive option. We do not anticipate material impact within our footprint.

Well, the top gateway markets are relied on inbound international traffic [ph], which has slowed due to the global economic disruptions and foreign currency weakness, most of our markets are primarily driven by domestic travel. All this said, we believe our markets are positioned to outperform the industry average and our portfolio is poised to outperform our competitive sets.

As Dave mentioned, the majority of our markets showed strength to finish up the year with over half of our markets turning in RevPAR gains in excess of 8% in the fourth quarter. Another key metric is group pace. For 2016 and into 2017, our bookings are the strongest in the cycle. This bodes well for our full service portfolio. While we cannot control the larger macroeconomic forces, we can and will continue to aggressively manage our portfolio with the goal of producing ever-improving results, in creating value for our shareholders.

We will now open the call up for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]

Our first question comes from Carol Kemple with Hilliard Lyons. Please go ahead.

Carol Kemple

Good morning.

Andrew Sims

Good morning, Carol.

Carol Kemple

You have several one-time items that separate FFO from adjusted FFO. Can you all talk about those and then talk about where we - those items impacted the income statement, if whether it was a G&A or other expense items?

Andrew Sims

I am going to differ to Tony on that...

Anthony Domalski

Sure.

Andrew Sims

But just generally speaking, we have some litigation that we settled, we've got some litigation in the form of appeals and on some tax, real estate tax assessments that we think are unfair. And...

Anthony Domalski

And I think the last item is the loan modification fees during the year. We modified our loans on our asset in Hollywood and on our asset in Laurel, and not all of those costs are deferred, some of those have to expense, so that was about $250,000 there and that was an increase to G&A expense. And I think as Drew alluded, the settlement with Starwood that was - that hit hotel EBITDA as the real estate taxes?

Carol Kemple

Was the Starwood expense, was that in G&A or where was that found on the income statement?

Anthony Domalski

That would be found in the indirect expenses.

Carol Kemple

Okay. And then you all had impairment of investment hotels properties what was that from?

Anthony Domalski

That was Hampton.

Carol Kemple

Okay. And what are your thoughts, I know you've already increased the dividend once this year, but what are your thoughts on the dividend going forward '15-'16?

Anthony Domalski

Our view on dividends hasn't changed, Carol. Our view is that its steadily increasing dividend at a moderate pace that creates a sustainable level of payout is what's best for our company. And I think we've shown that's what we've done in the last four or five years and we'll continue to go on that path unless of course are same major event that we disrupt our whole industry.

Carol Kemple

Okay. And then one final thing, the over assessed real estate taxes under appeal, can that be found on the income statement anywhere?

Anthony Domalski

Those are an indirect expense with the other real estate taxes.

Carol Kemple

Okay. Thank you.

Operator

Our next question comes from Whitney Stevenson with JMP Securities. Please go ahead.

Andrew Sims

Good morning, Whitney.

Operator

Whitney, you might have your phone muted on your end.

Whitney Stevenson

Can you hear me?

Operator

Yeah.

Andrew Sims

Yeah.

Whitney Stevenson

Hi, good morning guys. How are you doing?

Andrew Sims

Doing well. Good morning.

Whitney Stevenson

Good morning. I have a question about your RevPAR growth guidance range. And you talked a little bit Drew about your markets were strong in fourth quarter, I think you said a handful then came in at 8% RevPAR growth. You're obviously taking share this year post renovation branding, but can you talk a little bit about the underlying market growth assumptions contemplated in your portfolio RevPAR growth guidance for 2016?

Andrew Sims

We'll be glad to do that. I guess on our apples-to-apples basis; we're looking at an increase of somewhere in the 4% to 4.5% range. However, because we have remixed our portfolio and we've got different properties some coming in, some going out. We're looking more at our headline number, which is closer to 10%. So, we think that the markets are going to stay in general that is some exception, some are little higher, some are little lower, we're going to be somewhere on an apples-to-apples basis, somewhere in that 4.5% range. And we've got markets like Houston that obviously have suffered as a result of the oil industry being slapped around pretty good. And then the markets like Miami, where the international travel is off some; that's impacted us there. But, all-in-all, we're pretty optimistic as going into 2016.

Whitney Stevenson

Okay. So, is it fair to say that sort of your industry view is in relatively in line with kind of the 3% to 5% range that we've seen from a lot of your peers?

Andrew Sims

I think that's fair.

Whitney Stevenson

Okay. And then one question on Houston. Do you guys have a sort of market-wide RevPAR growth outlook that you're taking into consideration for '16?

Andrew Sims

In Houston?

Whitney Stevenson

Yes.

Andrew Sims

Specifically, I think we're slightly negative.

David Folsom

Yeah, I think, Whitney, its Dave. That was a difficult market to budget in terms of RevPAR outlook, just because of the uncertainty with oil and gas business and the location of our hotel and the comp set. I think we were slightly under zero, I mean so we were looking at RevPAR growth in that market being somewhat negative. But, the first month out of the gate here in January and the Houston comp set we have, was down about 7%. And that's pretty volatile with respect to the bookings pace on the group side in that market.

Andrew Sims

Yeah, and then February is a bit flat. So, it's kind of hard and - further complicates our budgeting, there is that - we're going out of the IT system in mid-April and join in the preferred with the White Hall launch. So that makes it harder to put our finger around the pulse of what's going on there. I will say that with our strategy there has been to really load on group business. We've got tremendous bookings for the first four, five months after the conversion to kind of transition us into being more independent boutique style hotel. So we've really loaded up, and I think our sales rep has done a commendable job. So, I don't expect to see some monumental fall off in our business. We have also gone to great lengths to reach out to our major customers in that market and let them know what we're doing, and the reaction we've gotten from them is very, very positive.

Whitney Stevenson

Great. That's it for me. Thanks.

Andrew Sims

Yeah.

Operator

The next question comes from Scott Williams with Palogic. Please go ahead.

Scott Williams

Good morning.

Andrew Sims

Hi, Scott.

Scott Williams

Continuing on Houston directionally, so when we bought it, it was running at roughly $3.2 million of EBITDA. And I know it's kind of moving around as you transition with the independent brand. What is the budget for the asset this year?

Andrew Sims

Hold on a minute. I'm just going to have to look at if I've got the numbers here.

Scott Williams

I mean do you just plan on extending debt maturity later this year? Just push it out with your extension options?

Andrew Sims

I'm sorry; I was looking for the answer.

Scott Williams

That's fine.

Andrew Sims

What was the second question, Scott?

Scott Williams

On your debt maturity on Houston this year, do you just plan on extending it for...

Andrew Sims

Right. We pretty executed that so we've got an extension there. We're up shopping [ph] the loan right now. We've got lot - actually fair amount of interest surprisingly given what's going on there. So, I'm pretty confident that we're probably end up putting a new loan on there within the next quarter for the half year. But, we don't - there is certainly no huge rush to run out to do something. And I think it'll be, it's already been extended 18 months. So right, we've got plenty of time to do what we got to do. I don't think we have prepayment penalty at this point, do we?

Anthony Domalski

No.

Andrew Sims

So, we're - it's an open door. Our goal was to maybe get a few more million dollars to help fund, partially fund part of the renovation dollars that we put in there, I think which were upwards of $5 million.

David Folsom

Hey, Scott, its Dave here. So, when you ask about the income for the asset. What we try to do this year was budgeted sort of flat to last year, flat to 2015. Probably, we can't give you the exact number, just because I don't think that's what we need to do on the earnings call, we don’t do that with any other assets, but what we try to account for was the renovation, the actual transition for the SoTHERLY Flag in April and right around the transition time, we have a lot of capital expenses, which unfortunately cannot be capitalized, so we have some expenses to keep the income statement and then we try to forecast the group business that Drew alluded to. And the fact that the Crown Flag puts a lid on what we can charge on upscale, upper upscale boutique has a far different rate profile than a Crown Plaza in that market, especially a newly renovated boutique hotel.

So, we try to take into account the market conditions, the renovation expenses, the new hotel, the April transition date, and put that all into the mix and stir it out at the bottom. We came up with a GOP figure that’s essentially flat to 2015 and we think that’s a good estimate of where we should be this year given all those various factors.

Andrew Sims

And Scott one other thing that kind of entered into our thinking about Houston is that 2.5 years ago, IHG went out and approved a new fully renovated holiday inn, 200 rooms about two blocks from us. And that was pretty infuriating [ph] that they are only marginally contributing to our overall success as a Crown and then they come in and put in another competing product that quite frankly has underpriced us right out of the gate. They opened up about three months ago and they’ve got $99 rates over there. And so it’s - I think we've made the right choice. You look back and you say that that was absolutely the right choices to get away from Crown Flag in that…

Scott Williams

The Crown brand, yeah. Okay. Does running the Atlanta property independently allow for any knowledge gain, as you transition the Houston property and look towards maybe the Fort Lauderdale asset and some of these other assets that could stand alone, or is each asset and location have unique features that - as you get to - the knowledge base doesn't transfer over?

Andrew Sims

No, no it absolutely does. We have got some very sophisticated systems put in the hotel tracker guest, and we’re building all of our service standards so that we've got real strong set of services that we’re going to provide for our guests and that goes throughout the entire hotel and include signage and the product and what our guests are, I mean what our employees are expected and what’s expected of them and the staffing levels and everything else. We've pretty much gone through a process with the Atlanta Hotel so that it’s now a model for everything that we’re going to do as we go forward. And that cost some money, so it - but as we go forward, it is going to make this process much, much easier and more efficient.

Scott Williams

Okay. Circling back on just portfolio value since late '08 we've had and we talk about this on the calls. We’ve had a large evaluation gap between what the market tells us and what we think the underlying value of the portfolio is, why do you think this disconnect is persisted for so long?

Andrew Sims

Well, it used to be worse, I’ll say. We were close at the gap at a pretty nice pace, until we bought the Hollywood asset and issued some stock and since then with a kind of gap up again, but I think that the markets didn’t understand how impactful the Hollywood asset is going to be. If you look at our earnings report, if you look at our guidance, I mean we are head, shoulder - in any other REIT, so I guess I would ask you to just be a little patient, let us show you what we’re doing, I think we’re making the right moves here and ultimately we’re going to recognize that value and that could come in many forms and so, I’ve said it before, I'm the largest shareholder I want to recognize the value, just like you want to recognize the value of your holdings and we’re going to do that. So we’re…

Scott Williams

I know, and I certainly appreciate that and you are the largest and so, you had incentivized along with us, but we look, we have an equity that trades at just over four times FFO. What gives you confidence that remaining public is the best way to deliver value and what - as being the largest shareholder what would - if anything would trigger up a view that's different thing just status quo?

Andrew Sims

No, we're always open Scott to any kind of offers, I mean, but our view is that we're not going to give the company away. If some was to come and pay what our assets are worth then that something, we have a fiduciary duty to our shareholders that we would ask, obviously we would take that very seriously and pursue that. But, what we're not going to do is sell it at a fraction of what the assets work that doesn't make any sense for you or for me or for anybody else.

So, we're going to continue to keep our head down, work hard, create value and one of the things that I put in my cover letter just coming out on our annual report, we create over $30 million in NAV last year for our shareholders and that's significant, and that's because of all the hard work and transactional activity that we did, that's going to ultimately benefit you and me and everyone all the other shareholders.

So, are we just going to say status quo, no status quo is not, that's not the ultimate goal. We're always listening, learning and trying to find out what opportunities are out there; that's part of our job is to continue to pursue an ultimate valuation that increases for the benefit of our shareholders.

Scott Williams

Okay. Thank you for your time. And we appreciate all your hard work.

Andrew Sims

Thank you.

Operator

[Operator Instructions] And our next question comes from Dan Donlan with Ladenburg. Please go ahead.

Dan Donlan

Thank you, and good morning.

Andrew Sims

Good morning, Dan.

Dan Donlan

Good morning. Most of my questions have been answered. Just wanted to walk through and I am sorry if I my missed this in the prepared remarks, I have been a little bit late [indiscernible] from some other call. But we're just kind of curious how your guys are going to tackle the debt maturities between 2016 and 2018 and how you feel about where you are in an LTV basis and if you think kind of given where current interest rates are, do you think you can potentially get better rates than what's expiring?

David Folsom

Yeah. Dan its Dave. I mean we're looking at that right now, you heard my remarks, we did quite a few debt transactions during the last year. We've got a couple that we're teaming up right now, where we have the opportunity to refinance assets at very good levels with really good proceeds amounts and very good interest rates.

So, can't spell that out although you can probably look at the debt maturities with the peer on our reports and I think you'd find our Savannah asset and our Wilmington asset are both highly under levered and there is a very significant amount of capital that can be extracted in terms of the equity that we've created over the last 10 years of those hotels that's a very good opportunity for us to tap into that equity and look at refinancing those assets and use those proceeds judiciously be that renovations providing additional liquidity for the company, paying down the series or so or the public bonds that will be callable at the end of this year.

So, we do have some flexibility with respect to the debt numbers that you see and these assets are not financeable, they are very financeable and there is a lot of equity and untapped value there for some of our assets that we frankly look forward to tap into here this year and beginning at next year.

Dan Donlan

Okay, thanks, Dave. I appreciate it.

Operator

Our next question comes from Mike Tobias [ph], Private Investor [ph]. Please go ahead.

Unidentified Analyst

Hey, guys. Can you hear me, okay?

Andrew Sims

Yes. Good morning.

Unidentified Analyst

Good morning. Can you tell me what your thoughts on philosophy are, as it relates to stock share buybacks, especially related what you view as the valuation gap?

David Folsom

Yeah. Its Dave here again. What the market is told us consistently over the last, I'd say two to three years that what we need is more stock liquidity, not less stock liquidity. More stock liquidity equals to more margin expansion and better stock price and that's what we did last year with respect to raising a very small amount of equity and coupled it with a very accretive acquisition. The results of which we are seeing right now in our fourth quarter numbers and we're going to see more of in 2016.

So, just from a strategic standpoint, our investors have told us you need to grow. You need to provide, you need to buy good assets and decoupled that with smart judicious additional equity liquidity at the right time and at the right price. That's what we did last July. Furthermore, what I would call academic look, we don't really think stock buybacks do that much over the long-term, very good interim pieces. But they don't add value in the long-term and the more data we see from consulting firms that is publicly available and sent to us, it's not a very good use of our capital and we do have requirements and needs for our cash that you see on our balance sheet, we renovate our hotels, we amortize our debt, we finance our company not with interest only lines of credit with a bank syndicate. But we put individual mortgages on our properties and we amortize our debt down, which has a beneficial impact to our shareholder vis-à-vis what I just told Dan on the phone, as we create a lot of equity value by paying that debt down overtime, whether it's a few years or 10 years. So that's a long answer to your question. But we don't really have any bias towards stock buybacks right now.

Unidentified Analyst

Okay. This is just one person's point of view and I'm a small private investor. But, I don't care about your liquidity, I don't care if you grow. If you have the opportunity to take a dollar and buy a real estate asset at half of what it's worth, which let's just hypothetically say the stock is trading at half of what the company is worth. It's concerning to me and disappointing that you don't recognize or agree that that's exceptional value. We just reiterate, I don't care about liquidity, I am a long-term holder, I'm not going anywhere. I don't care if you grow. And if the stock is trading at half of what the real estate is worth. Am I missing something, you have an opportunity to buy real estate at half price. What am I missing?

David Folsom

What I would tell you that I think we have a disagreement on where we are headed with the company. But our cash is spoken for and we have requirements for it and it's just not something we sit around and it's not idle cash that we can buy back our own stock.

Andrew Sims

This is Drew Sims. The other issue is critical mass and we're still working toward that, we are a micro-cap company. You say that you don't care if we grow, the market cares if we grow and we need to continue to add some bulk to our asset base and we started out in 2004 with about $200 million worth of assets maybe a little bit more than that and we are up to $600 million in assets. And we continue to add some bulk in it. Ultimately it's going to approve to all our shareholders. I'm sure that in the meantime we pay you a very healthy dividend to wait and we think it's a fair return on your capital. And I would hope that you understand that what Dave said, I think is our view.

Unidentified Analyst

Yeah, and if I can just follow-up on that. I appreciate what you are saying about the studies and what share buybacks do. But, I think the missing piece to it is and I think those studies involve large companies. I think what the study missing is what the valuation is, the idea that there is not a price where you don't think the marginal dollar is well spent on buying back stock. I don't know if you are buying back stock is like endeavor to boost the price, I view it as a phenomenal investment opportunity for the company and let me just say finish thing. It's concerning to me that you would consider buying a real estate at a fair market value to grow the company rather than buyback your own stock, which in essence is buying back real estate at $0.50 on the dollar. I would much prefer you make smart investments as opposed to investments for growing because the market doesn't recognize to value the stock. The market will eventually evaluate it. I would just like you to allocate your capital as smartly as possible and community buying real estate at $0.50 on the dollar is much better than buying real estate at a 100%, does that make sense or not really?

Andrew Sims

We’ve heard your argument, we’ve heard this argument before, we just disagree that’s the best way for us to use our capital.

Unidentified Analyst

Okay. Thank you.

Andrew Sims

Okay.

Operator

Our next question comes from Ryan Weatherman [ph] with Palogic. Please go ahead.

Unidentified Analyst

Hey guys.

Andrew Sims

Good morning.

Unidentified Analyst

I just heard the last caller's comments and we tend to agree with some of the points that you made I don’t know that buying stock backs is the end of deal, but as a marginal investment we tend to agree, we’re not searching for more liquidity, the stock traded 4,000 shares today on an earnings date, so I don’t know that anybody that owns it, is clamoring necessarily for additional shares to be issued, so anyway we can discuss this more offline, but appreciate all the hard work you guys are doing and sounds like we've got an exciting 2016.

Andrew Sims

Yeah. Thank you.

Operator

Our next question comes from Brian Roman [ph] with Boston Partners. Please go ahead.

Unidentified Analyst

Hi, good morning. Thanks for taking my question or actually some comments. Drew. The last two callers, we're not - I'm not on the sell side. I'm not an investment banker, we own your stock. I don’t care about liquidity, you’re so far below book value and NAV as to be - said and I don’t think you need to buyback large amounts of stock but at this point the idea of saying that you’re more focused on growth for growth sake when you have a portfolio that’s underperforming and to say that you are interested in acquiring assets for a hundred cents on the dollar when yours is at $0.50, it doesn’t make a lot of sense. So, I strongly endorse what the other questioners, the issue they raised, but there is a question here which is if you’re interested in growth, how are you funded with your stocks so far below NAV and book value?

Andrew Sims

Our growth plans include recycling some of our assets.

Unidentified Analyst

Okay. Would you at all be interested in issuing stock?

Andrew Sims

No.

Unidentified Analyst

Would you at all be interested in issuing OPE units?

Andrew Sims

Units, if the valuation was proper and when I say that I mean and we’ve had these discussions with some sellers and hotels. If they value their asset based on let's grab a number, 7% cap rate, we’re going to value our assets based on a 7% cap rate. We’re not going to use the stock price as the valuation, so that there would have to be a calculation that we’ve allocated the proper number of units to be trade. Using units as a currency on a 50% discounted basis makes no sense and we don’t intend to do that.

Unidentified Analyst

Yeah, I would say I've never understood the logic of some real estate people who somehow think there is something different about issuing OPE units versus common shares in the marketplace, because as far as we're concerned, it flows into the denominator of any calculation on NAV, FFO anything on a per share basis.

Andrew Sims

We agree with you there.

Unidentified Analyst

Okay. ATM would you be all interested in an ATM?

Andrew Sims

No.

Unidentified Analyst

Okay.

Andrew Sims

We have an ATM that’s been inactive since last July.

Unidentified Analyst

Okay. So, it really sounds like the core of any new financing would be from recycling of assets?

Andrew Sims

Yes.

Unidentified Analyst

All right. Thank you very much for listening to me and taking my question.

Andrew Sims

Absolutely. Thank you for calling.

Operator

Our next question comes from Mark Tromba [ph], a Private Investor. Please go ahead.

Unidentified Analyst

Good morning guys.

Andrew Sims

Good morning.

Unidentified Analyst

I definitely have some comments about the stock buyback and I disagree, I think there was a comment made about buybacks being in effect on the situation. In other words, if you were buying back stock at 8 a share that’s not a good deployment of capital but buying back stock at $5 a share in my opinion would be a good deployment of capital. A lot of we saw back in the Tech boom back in the late 90s, Cisco and lot of these GE were buying back stock at 40 and 50 times earnings so that's why I think if you're actually delve into the details of these studies it's going to be like anything in life it depends on the situation.

And I think in this situation buybacks or at least selective buybacks, not just buying back randomly, but saying hey, if we're going to put a flow under this stock anytime that goes under $5, we're going to buy reasonably. And maybe selling some of the assets and just taking that money for a buyback might be a better use of capital. I agree growth for growth sake is not necessary good use of capital especially if you're paying like one of the callers that 90% or 100% or a getting a slight value when you can get if your market stocks 50% under value that's a better use of capital in my opinion and I've been a long-term shareholder guys I think you're a bunch of great managers, but right now the market is not recognizing the value so something needs to be done to get the stock price up.

David Folsom

Well, one thing I would point out as you need to look at things on a relative basis. We actually perform better than most of universe...

Unidentified Analyst

Dave and I understand that I appreciate all you've done that's why I am sticking with you because I know the fundamentals and your management team has done an excellent job and I really appreciate that.

David Folsom

Right. Okay. And then the second issue is we're a micro-cap company with 12 hotels. If we start selling hotels, we have overhead that we have to cover to top rate as a publicly traded company.

Unidentified Analyst

What about an idea though possibly of selective buyback, like I said you don't want to buyback well nearly like a lot of companies do and I think buybacks have been misused in the past or just reduced the stock options offered. But I think if you look at a little more carefully just considered I am not saying I am definitely right but those studies are incorrect or they give you the wrong conclusion based on there have been a lot of buyback so Warren Buffet if you could read what he said about stock buybacks I think he would come to the similar conclusion in some situations that can be very effective in other situations they cannot.

I don't know the details of your situation I am just talking more in general. But once again I reiterate I appreciate the great job you've done in fact I stay with the hotel in Wilmington the staff was well trained, the hotel was excellent. I have no complaints that was one of the best hotels Dave I've had so like I said I really appreciate all you've done and hope we have some point the market all comes to its census and recognize the value. And that's a lot to say - thank you so much guys.

Andrew Sims

Thanks for the comment. And just to expand just a little bit, the available cash is not there. I think we don't have a big pile of cash that we could use for stock buyback. So, the only way to do that would be to either issue stock which makes no sense if you're going to buyback stocks or we can go out and lever up the company and that's something that we have covenants under a certain debt instruments that we have to comply with and so it is a complicated situation and we're trying to keep things in balance. So we're going for the next...

David Folsom

Let me add one thing Mark its Dave. I appreciate your comments, you've been a long-term shareholder, your comments are always welcomed. I just want to make sure there is a theme in some of these comments this morning about how we are trying to grow for growth sake. And if that were really the strategy here at SoTHERLY, we would be a $1 billion plus market cap company now since we've been public for almost 12 years. That's never been the strategy. We have a very reasoned approach towards hotel underwriting prior to the recession we passed, we didn't pass, we bid on over $1 billion with assets and we missed on all those because we were willing to pay the overpriced, the massive prices that were asked of the market.

So, we do have a disciplined approach towards growth I've been in this business a while and I've seem companies formed whose only strategic intent is to grow, so they can pay themselves more from a managerial perspective and we've never done that. But as Drew said, we have cash on our balance sheet, optically it may look like it be the best use of that cash to go out and buy back stock. I think we have a difference of opinion on a variety of fronts on that, but the fact is that cash that you see is cash that we need as a company to do the things that we've set out to do.

So there is not a lot of excess cash floating around. And we don't finance ourselves with the line of credit like a lot of REITs, because we learned over the recession that if things go sideways, those types of financing vehicles put the entire company at risk. And so we have not financed our company that way. We pay principal amortization every month, every quarter, every year.

We've been very reluctant to raise equity; we've done it once in 12 years. And I'm just here to tell you, I think that a stock buyback would be just a very snapshot, it'll be a snapshot of value and as soon as we finished buying back stock, we're putting the floor under the stock, we're driving the price up as soon as that artificial demand for the stock is released, the price will fall back down. In the long-term, it really doesn't have any impact on our company and it drains our liquidity, it drains our cash reserves.

Andrew Sims

And we're going to have to borrow more money.

David Folsom

Yeah. And the other thing investor have told us is you need to tell us your deleveraging strategy. So I get all these comments we fear heard them before and I think we've told the market what we think about our capital and the best use for that. I think it's important for the market to know that this is really nearly approach towards buying massive amounts of assets. If we wanted to do that we would have done that over the last 12 months. And we haven't done that.

Andrew Sims

Is that it?

Operator

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

Andrew Sims

Yeah, thank you all for joining us for the call. We appreciate the questions and we're always here to assist. Look forward to talking to you all. We invite you to our annual meeting, which is in the last week of April and we love to have some of you all join us here in Williamsburg. Thank you.

Operator

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

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