Sotherly Hotels' (SOHO) CEO Drew Sims on Q2 2016 Results - Earnings Call Transcript

| About: SoTHERLY Hotels (SOHO)

Sotherly Hotels, Inc. (NASDAQ:SOHO)

Q2 2016 Earnings Conference Call

August 09, 2016, 10:00 ET

Executives

Scott Kucinski - VP, Operations & IR

Dave Folsom - President & COO

Tony Domalski - CFO & VP

Drew Sims - Chairman & CEO

Analysts

Carol Kemple - Hilliard Lyons

Daniel Donlan - Ladenburg Thalmann & Company

Operator

Welcome to the Sotherly Hotels, Incorporated Second Quarter Earnings Conference Call. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Vice President, Scott Kucinski. Please go ahead.

Scott Kucinski

Thank you. 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 and a review of portfolio performance. Tony Domalski, our CFO, will provide our key financial results for the quarter and update our 2016 guidance. Drew Sims, our Chairman and CEO, will conclude with an update on 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.

Dave Folsom

Thank you, Scott. Good morning, everyone. I'd like to start today's call by discussing some of the portfolio's key operating metrics. For the quarter, portfolio RevPAR was $109.16, an increase of 1.7% over prior year, with a 0.8% increase in occupancy and a 0.9% increase in rate. For the year to date, portfolio RevPAR was $104.44, an increase of 7% over prior year. Excluding the impact of the Kentucky Derby at our Louisville hotel which I will elaborate on in a moment, our portfolio RevPAR increased 6.5% in the quarter and 9.7% year to date.

Hotel EBITDA for the portfolio increased 5.1% to approximately $12.5 million for the quarter. Year to date, hotel EBITDA increased 14.5% excluding the Kentucky Derby impact, hotel EBITDA increased 15% for the quarter and 20.9% year to date. With regard to the Kentucky Derby issue at our Louisville Sheraton Hotel, in 2015 our franchise partner, Starwood Hotels and Resorts, changed its global policy governing the reimbursement to hotel owners for reward nights booked by frequent traveler members utilizing reward points within the Starwood Preferred Guest Membership Program. The policy change placed a cap on the reimbursement rate that Starwood pays to a hotel owner for those reward nights when occupancy reaches a certain threshold. For the Derby, the entire market is saturated by rooms booked with reward points. And the small number rooms that are booked via conventional methods carry a very high rate for several days.

In effect, by placing a cap on its reimbursement rate, Starwood reduced our hotel's ADR by as much as $1,400 a night for the Derby event period which often has a three- to five-night minimum stay. This resulted in a substantial reduction in hotel EBITDA, RevPAR and ADR for the hotel for the quarter. Overall, the portfolio performed well in the quarter, with the exception of this aberration. To review some of our other individual property and market highlights, in Jacksonville at our DoubleTree Hotel, we converted the hotel last September. And it continues it's strong performance and ramp-up towards stabilization. In the quarter, RevPAR increased 36.9% compared to the comp set's healthy 8.8% increase, with the hotel gaining 2,580 basis points in fair share. This hotel's fair share index was nearly 105% for the quarter and continues to show positive momentum heading into the second half of the year.

Our Laurel, Maryland hotel which converted to the DoubleTree by Hilton flag last November, has hit its stride in the ramp-up period, with RevPAR growing 42.6% for the quarter compared to market growth of 10.7%, resulting in a 2,880-basis-point gain in fair share. This hotel is beginning to take rate share in the market, although there is still an additional $20-plus rate gap compared to its competitive set. We expect the hotel to continue to gain momentum for the remainder of the year.

In April, we successfully completed the conversion of the Houston Crowne Plaza to the Whitehall Hotel by Sotherly, returning the hotel to its original position as a high-end, independent, boutique hotel which at one time was Texas's first five-star hotel. The hotel is affiliated with Preferred Hotels and Resorts and will further benefit from the extensive and detailed $5 million renovation which included the establishment of a new outdoor dining venue amongst many other upgrades and additions. The hotel has been greeted with great enthusiasm in the market. And our guest scores and reviews have been fantastic, as travelers bear witness to the new product and enhanced guest service delivery.

The Houston market, however, continues to be impacted by the economic downturn in the Oil and Gas sector, as evidenced by a 5% decline in RevPAR for the market during the quarter. This creates a challenging environment to ramp up the newly-repositioned hotel, but we continue to see incremental improvements as the hotel gains traction. The process to get the hotel stabilized in its new configuration and position will simply take longer than initially thought.

Looking at overall market performance across the portfolio, with the exception of the down Houston market, our combined markets had a healthy quarter of growth, with RevPAR increasing 4.7%, driven by a 3.3% increase in rate. Looking at our renovation activity across the portfolio, in Atlanta the $7 million guest room renovation is now substantially complete. In Louisville, we completed the mid-license product improvement plan for the Sheraton brand at an estimated cost of $1 million. And in Savannah, the $8.1 million renovation has been underway since June 1, 2016, with approximately 20% of the guest room inventory fully renovated by this point. This phased renovation will continue for approximately 12 months to minimize any significant disruption to operations.

Looking at some of our corporate activity in the quarter, in June we refinanced the Crowne Plaza Tampa Westshore Hotel with Fifth Third Bank. The new $15.7 million loan includes a $3.3 million earnout option and carries a floating-rate LIBOR plus 3.75% rate. It has an initial term of three years with two one-year extensions. Also in June, we refinanced the Savannah Hotel with Mutual and New York Life. This new $35 million loan carries a fixed interest rate of 4.25% with a 10-year term. And at the beginning of the quarter, we announced that we entered into an agreement to sell the Crowne Plaza Hampton Marina Hotel for $5.8 million. We anticipate this transaction to close later this month.

And lastly, in July, we announced another increase to our quarterly dividend which is now $0.095 per share, representing an annualized yield of approximately 6.3%, based on current pricing of $6 per share.

With those comments, I'll turn it over the call to Tony Domalski, our Chief Financial Officer.

Tony Domalski

Thank you, Dave. Reviewing performance for the period ended June 30, 2016. Total revenue for the quarter was approximately $41.8 million, representing an increase of 13.5% over the same quarter a year ago. For the six months ended June 30, 2016, total revenue was approximately $79.6 million, representing an increase of 17.4% over the same period a year go. For the quarter, adjusted EBITDA was approximately $11.1 million, representing an increase of 3.3% over the same quarter a year ago. And for the six months ended June 30, 2016, adjusted EBITDA was approximately $20.2 million, representing an increase of 12.1% over the same period a year ago.

For the quarter, adjusted FFO was approximately $6.5 million, representing a decrease of 3.3% over the same quarter a year ago. However, for the six months ended June 30, 2016, adjusted FFO was approximately $10.3 million, representing a 3.2% increase over the same period a year ago. 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 costs, changes to 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, 2016, the total book value of our assets was approximately $401.3 million which includes the net investment in hotel properties, including hotel properties held for sale totaling approximately $356 million combined. The Company had total cash of approximately $30.6 million, consisting of unrestricted cash and cash equivalents of approximately $26.1 million.

As well as approximately $4.5 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 $334.1 million in outstanding debt, at a weighted average interest rate of 5.08%. Approximately 80% of the Company's debt carries a fixed rate of interest. Total stockholder and unitholder equity was approximately $52.7 million at the end of the quarter, of which stockholder equity was approximately $49.7 million, with approximately 14.9 million shares outstanding. And unitholders' equity was approximately $3 million, with approximately 1.8 million limited partnership units outstanding.

At the end of the second quarter, the principal balance on our interest-bearing debt was approximately $107,200 per [indiscernible]. And also the ratio of debt to total asset value, as defined in the indenture agreement to our senior unsecured notes, was 57.5%, based on a total asset value of approximately $580.8 million at the end of the quarter.

Turning to guidance, we're revising our previous guidance for the year which accounts for current and expected performance within our portfolio, as well as other factors. For the year, we're projecting total revenue in the range of $151.1 million to $153.9 million. At the midpoint of the range, this represents a 10.1% increase over last year's total revenue. Hotel EBITDA is projected in the range of $43.3 million to $44.5 million. And at the midpoint of the range, this represents a 20.3% increase over last year's hotel EBITDA. And adjusted FFO is projected in the range of $19.2 million to $20.6 million or $1.15 to $1.23 per share. At the midpoint of the range, this represents a 19.2% increase over last year's adjusted FFO per share. Additional details can be found in the Outlook section of our Earnings Release.

I will now turn the call over to Drew.

Drew Sims

Thank you, Tony. With the exception of our Starwood policy issue in Louisville and the challenging work in Houston, we continue to see generally healthy trends throughout our markets. With strength building in the back half of the year, transient travel has been inconsistent, particularly in the individual business travelers segment. The group segment was up 6.8% in the quarter and we continue to see strong group pace in the back half of the year and into 2017 which bodes well for our full-service portfolio.

That said, there are pockets of weakness and headwinds that have decreased our visibility and are limiting pricing power. As our portfolio is U.S.-focused, it is less affected by the international travel issues caused by the strong dollar and economic issues abroad. However, our domestic travel base does react to uncertainty in the U.S., such as the looming Presidential election, stock market fluctuations, oil pricing and an increase in terrorism and protests we've seen of late. Notwithstanding all this negative noise, most of our markets were steady. We're seeing some room bookings continue to shift to the OTAs, with customers becoming more price-sensitive at this point in the cycle.

While we continuously strive to implement robust revenue management and direct booking initiatives to address this shift, we're also focused on the basic hallmarks of hospitality through good service, quality product and providing an exceptional experience. So our guests feel they are getting an appropriate value for the rate they are paying and, in turn ,will come back again and again. We believe providing excellent service is the best strategy to drive guest into our hotels without using the OTAs. Looking at our strategic initiatives for the year, we continue to focus on balance sheet management with various refinancing Dave referenced.

An increased cash position provides us the necessary liquidity and safety in the event of a downturn. And provides us with the capital to continue to prove our assets and deliver a competitive product to the market. With the recently-completed renovations and those currently in process, our portfolio is of the highest quality in the Company's history. We're also setting the table to be opportunistic acquirers at this point of the cycle, as we believe asset pricing will move in a favorable direction over the next 12 to 24 months. We believe our portfolio will continue to produce results that outpaced the broader industry, given the strength of our southern markets. and the repositioning efforts we've made to date and have planned going forward. For our shareholders, our positive view resulted in an increase in the Company's quarterly dividend. We've now raised our dividend 10 out of the last 13 quarters.

With that, we'll open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Carol Kemple with Hilliard Lyons. Please go ahead.

Carol Kemple

In your guidance, does that assume the Hampton asset sold this month or do you have the Hampton asset in guidance for the full-year?

Drew Sims

It assumes that it sold. Yes, in the third quarter. And as we said, we expect that to be later this month.

Carol Kemple

Are you all just waiting to sign the documents or is there any other due diligence that needs to be done on that?

Drew Sims

We're in the final stage, is all I can tell you. They've got a fairly significant nonrefundable deposit at risk and we're trying to move to closing at this point.

Carol Kemple

Okay. And then can you give me some color on what's the interest expense you expect for the full-year?

Tony Domalski

Carol, off the top of my head I would have to go back -- I don't know, I would have to go back and look at that. We can get back to you.

Operator

[Operator Instructions]. Our next question is from Daniel Donlan with Ladenburg Thalmann. Please go ahead.

Daniel Donlan

Just curious if you could talk about the Starwood issuing at the Louisville property. Is that something that is going to be recurring every year or is there something that you guys can work with them on? Just kind of curious, any type of color you could give there?

Drew Sims

No, it is going to recur every year, unfortunately and it's a result of a policy change where basically they're putting a cap on our rate. We're only allowed to collect from the Starwood rewards points members six times our average annual rate which is a fraction of what we were getting prior to this.

So the best that we can do, Dan, at this point is to create some strategies to not accept as many Starwood points members through the Derby period and we've talked to Starwood about that and how that can get accomplished. But it is just a change in strategy. They were teeing the Company up for sale it looks like and so they changed their strategy and changed their CEO. So the end result is, I guess, about $1 million was taken out of our pocket and put in their pocket.

Daniel Donlan

Right, no, I noticed that. I was just kind of curious about what you said which was that you could potentially shut off a certain amount of reimbursements or a certain amount of rewards travel, so I--

Drew Sims

I think we can, but we need the time to execute on that and we didn't have the time to execute on it this year, so we're going to have to do a better job.

Daniel Donlan

Sure. As far as Laurel is concerned, how long do think it is going to take to close the rate gap you cited versus competitive set, I think you said it is close to $20?

Drew Sims

Well, you can see how will we're doing now. It has been a very successful conversion. The hotel really took off about mid-March and the second quarter was the first quarter that just was doing gangbusters. Third quarter looks really good as well. We were trying to build our occupancy back and then we will start worrying about the rate, so I think we have hit those occupancy hurdles that we want, that we set for ourselves and now we're going to start working on the rate. So I would say, maybe by the fourth quarter or the first quarter next year, we should see that rate gap close up which will really continue to add significant dollars to the bottom line here.

Daniel Donlan

Okay. And it pertains to your guidance, it looks like it came down by roughly the same amount of what you lost from the Louisville property. Was just kind of curious, given that everybody -- most of your peers have brought down the RevPAR guidance for the back half of the year and to a lesser degree maybe the EBITDA hasn't moved as much, was just curious what gives you the confidence to not to take it down a little bit more, given what other people are seeing? I know you guys are different markets, but just curious what you are seeing versus your peers?

Drew Sims

Yes, you're exactly right. The impact of the Starwood policy change was about $0.065 and so it's about exactly what we brought the guidance down. At this point, we actually had a pretty easy comparable. Our second half of last year was not very strong. We had a bunch of projects going on. We were finishing Laurel, would just getting Jacksonville out of the gate. We had Houston in a full-blown rooms renovation. So we had a lot going on companywide. We had a lot of rooms out of service in Atlanta. We actually had rooms out of service in Wilmington, North Carolina.

So our portfolio now is in a much better place than it was a year ago, a And we're not going to have all of these rooms out of order, so that would be primary, it's just we have a much easier comparable than in past years. So we see some headwinds? Yes we do, but because of the issues that we have last year, it was kind of an A-plus-B. This year we just have a single issue we've got to deal with which is market conditions and as we've said, if you look at our markets, they were pretty healthy. But for Houston and -- I mean, even Louisville was healthy, so hurt a little bit in the first quarter, the second quarter was actually pretty good for us. It was strong and we're having quite a good start to this quarter. So we're pretty optimistic.

Daniel Donlan

And as it pertains to the Savannah property, it looks like it was down 8% or so in the quarter. How much of that was driven by renovation versus maybe new supply or what is going on with that particular market?

Drew Sims

The market was very strong. We did have some rooms out of service which was -- caused some issues. We had a change in GM there, so we've got a transition going on.

Daniel Donlan

Okay and then as it pertains to the Philadelphia property, you're not running into any type of issues that you ran into Starwood with the Democratic Convention, did you?

Drew Sims

No, we had an awesome week there. It was very, very strong. And we actually -- the hotel was booked up with groups, so we didn't really have any redemption points.

Daniel Donlan

Did you know because you were there at the hotel?

Drew Sims

No, I watch the daily reports everyday especially when we're doing and ADR of $330 or $350 a night, so it captures my attention.

Operator

[Operator Instructions]. Looks like there no further questions. This will conclude our question-and-answer session. I like to turn the conference back over to CEO, Drew Sims, for any closing remarks.

Drew Sims

Thank you all for joining us today. Look forward to talking to you in the next quarter. Thank you.

Operator

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

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