Sotherly Hotels Inc. (NASDAQ:SOHO) Q2 2018 Earnings Conference Call August 7, 2018 10:00 AM ET
Scott Kucinski – Vice President-Operations and Investor Relations
Dave Folsom – President and Chief Operating Officer
Tony Domalski – Chief Financial Officer
Drew Sims – Chairman and Chief Executive Officer
Tyler Batory – Janney Capital Markets
Daniel Santos – Sandler O'Neill
Mike Davis – Cottage Street Advisors
Good day everyone, and welcome to the Sotherly Hotels Inc.’s Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please also note that today’s event is being recorded.
I would now like to turn the conference over to Scott Kucinski. Please go ahead.
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 review of the company’s quarterly activities and a review of portfolio performance. Tony Domalski, our CFO will provide our key financial results for the quarter and review our 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 measures 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 in 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.
Thank you, Scott, and good morning everyone. I’ll start today’s call 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 to 11.3% over prior year to $123.17, with a 2% increase in occupancy and a 9% increase in rate. Year-to-date portfolio RevPAR increased 9.2% over prior year to $117.81 with a 1.1% decrease in occupancy and a 10.3% increase in rate.
Hotel EBITDA margins increased 350 basis points in the quarter. Year-to-date, margins have expanded 130 basis points. Looking at property level activity and highlights in this quarter The DeSoto and Savannah increased RevPAR 11.9% in the quarter driven by a 12.3% increase in rate, as we continue to implement our repositioning strategy and ramp-up of the property following its conversion to an independent boutique last August. The market grew a healthy 6% with our property taking 5.9% in fair share.
The Whitehall in Houston increased RevPAR of 15.6% in the quarter with an 11.3% increase in occupancy and a 3.9% increase in rate. Market RevPAR was up 13% in the quarter and the market has now experienced five consecutive months of RevPAR growth. The Georgian Terrace in Atlanta increased RevPAR 9.6% with occupancy increasing 4.3% and the ADR growing 5.1%. The market was up 3.3% with our hotel taking 6.3 percentage points in share. And lastly, the DoubleTree in Jacksonville at the Riverfront continues its streak of exceptional performance with RevPAR increasing 14.8% in the quarter with the market up 12.7% and our hotel taking 2.1% in share to a main market leader.
In April, we completed the renovation of conversion of our Wilmington, North Carolina hotel to Hotel Ballast, this is nearly $10 million renovation to re-image the entire property with key elements that include Board and Barrel, our new waterfront food and beverage venue, Buffalo Bayou Coffee, a curated art exhibit from the Savannah College of Art Design along with other local flair and southern hospitality touches similar to other Sotherly conversions. We believe this property is now positioned to remain the market leader and centerpiece of Downtown of the Wilmington for many years to come.
And lastly, at the end of the quarter, we commenced the renovation of our Tampa Hotel, which will be converted next summer to Hotel Alba. Looking at our corporate activity, last month, we refinanced our hotel 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 four-year term with a one-year extension and a floating rate of LIBOR plus 400. We concurrently purchased the LIBOR cap to protect against future rate increases. Also completed last month was an amendment to the loan on our Philadelphia Doubletree Hotel. the amendment increased the principle balance to $42.2 million, we set the term for five years, fixed the interest rate of 5.25% and removed our corporate guarantee, proceeds of the loan were used to repay the B-Note on the Hyatt Centric Arlington hotel and for general corporate purposes.
Finally, last month, we announced an increase to our quarterly dividend to $0.125 per share an increase of 4.2% representing an annualized dividend, the $0.50 per share and a current yield of approximately 7%.
I’ll now turn the call over to our CFO, Tony Domalski.
Thank you, Dave. Reviewing performance for the period ended June 30, 2018; total revenue for the quarter was approximately $51.6 million representing an increase of 26.8% over the same quarter a year ago. For the first six months, total revenue was $93.3 million representing an increase of 17.6% over the prior period. For the quarter, hotel EBITDA was approximately $16.4 million representing an increase of 42.2% over the same quarter a year ago. And for the first six months, hotel EBITDA was $28.3 million representing an increase of 22.9% over the same period a year ago.
For the quarter, adjusted FFO was approximately $8.4 million representing an increase of 68% over the same quarter a year ago, and for the first six months, adjusted FFO was approximately $13.1 million representing an increase of 29.5% over the same period a year ago. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, gains and losses on derivative instruments, charges related to aborted or abandoned offerings, changes to the deferred portion of our income tax provision as well as our other items.
Hotel EBITDA excludes these charges as well as interest expense, interest income, corporate G&A, the current portion of our income tax provision and a few other items. Please refer to our earnings release for additional detail.
Looking at our balance sheet as of June 30, 2018, total book value of our assets was approximately $492.7 million, which includes net investment in hotel properties of approximately $434.3 million. The company had total cash of approximately $33.7 million, consisting of unrestricted cash and cash equivalents of approximately $28.4 million as well as approximately $5.3 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 $378.2 million in outstanding debt at a weighted average interest rate of 4.99%. Approximately, 70% of the company’s debt carried a fixed rate of interest.
Total stockholder and unit holder equity was approximately $92.1 million at the end of the quarter of which stockholder equity was approximately $91.2 million and unit holder equity was approximately $0.9 million. At the end of the quarter, there were approximately 14.1 million common shares outstanding, of which 0.6 million shares are owned by the company’s ESOP and there were also 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 $121,000 per room. Also, the ratio of debt to total asset value as defined in the indenture agreement to our senior unsecured notes was 55.3% based on the total asset value of approximately $693.7 million at the end of the quarter.
Turning to guidance, we are updating our guidance for 2018, which accounts for current and expected performance within our portfolio, the acquisition of the Hyatt Centric Arlington and the recently announced refinancing activity as well as other factors. For the year, we are projecting total revenue in the range of $172.3 million to $175.2 million.
At the midpoint of range, this represents a 12.5% increase over the last year’s total revenue. Hotel EBITDA is projected in the range of $47.5 million to $48.2 million. And at the midpoint of this range, this represents a 16.7% increase over last year’s hotel EBITDA. And adjusted FFO was projected in the range of $15.9 million to $16.5 million or $1.04 to $1.08 per share. And at the midpoint of this range, this represents a 6% increase over last year’s adjusted FFO per share. Additional details can be found on the outlook section of our earnings release.
And I will now turn the call over to Drew.
Thank you, Tony. We are pleased to report that the second quarter was one of the most successful in the history of our company in terms of year-over-year growth. It was the first time in nearly three years that we did not have significant renovation impact ongoing throughout the portfolio.
Our reposition portfolio benefited as our properties ramp up to stabilization as evidenced by strong rate growth and margin expansion. We’re also seeing exceptional growth in other revenue departments. Food and beverage revenue grew 29% in the quarter as our new and repositioned outlets focused on capturing business from the local community as well as our hotel guests.
The Hyatt Centric Arlington is a significant addition to the enterprise. The second quarter was our first full quarter of ownership and we are pleased with the initial results. Rosslyn is a robust DC submarket with a seemingly endless string of good news related to corporate relocations, expansions, new residential projects and infrastructure investment.
Our hotel is the market leader with no new supply or changes in our competitive set on the horizon. We believe the future is bright for this asset and we look forward to continuing to implement our value creation strategy through additional rate growth increasing food and beverage revenue and driving parking receipts.
Looking at the industry, the long cycle continues with no apparent disruption for at least the next two years as the domestic economy continues to grow and prosper. All but one of our markets grew in the quarter, the exception being Louisville, which has been hit with an inordinate amount of new supply in a convention center under renovation.
Looking ahead, transient travel trends are steady and group booking pace is strong, 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 the long-term value creation opportunities for our shareholders and act if and when we find the right fit.
We are focused on diligently managing our balance sheet as evidenced by the recent refinancing activity, which addressed the company’s only near-term maturities and increased the portion of our long – of our debt with a fixed rate of interest.
And lastly, we maintain a disciplined and consistent dividend strategy with a bias toward prudent growth as evidenced by a 4.2% increase announced last month, which was our 18th increase in the past 25 quarters.
We will now open the call up for questions.
Thank you. [Operator Instructions]. And our first questioner today will be Tyler Batory with Janney Capital Markets. Please go ahead.
Good morning, everyone.
Good morning, Tyler.
So, I wanted to touch on guidance first, if I could. Can you talk a little bit more about your outlook for the second half of this year from a RevPAR perspective and maybe what’s changed today versus a couple of months ago?
Well, I mean we continue to be bullish on the balance of the year. What we are – I think we’re taking a conservative approach to the second half based on the fact that the last two years, we’ve had significant hurricane activity and we kind of want to get about another three months down the road before we revise any of our major guidance.
Okay. That makes sense. And then I’m curious on the labor front, wages, what you guys are seeing as far as increases and what’s in your guidance for that full year just as far as labor costs and wages?
We’ve actually done a very good job of maintaining labor consistent with prior year. We’ve had marginal increases over prior year. So, we give our managers kudos in that regard. We do see that the hiring is becoming more aggressive in terms of competition. So, we would expect some minor increases, but nothing major.
Okay. That’s helpful. And then just some market-specific question, I’m looking at Jacksonville, specifically. It feels like every quarter, the numbers continue to be really tremendous there. I mean, how much market share do you guys think you can take? I mean what’s your outlook for the Jacksonville markets for the rest of this year?
That’s a great question. I’m not sure I have an answer for you. It exceeded all expectations on this. And I can tell you, we just seem to have a synergy at this point that is working in the market. We’ve got a great couple of food and beverage outlooks in the hotel. We got a very active lobby bar that all the locals come and enjoy. And we’ve got Ruth’s Chris and their bar activity. And so it’s kind of become the place in Jacksonville to do business. And so we just continue to see occupancy and rate increase there. So, it certainly has got flatten out at some point here, but we’re going to enjoy the ride.
Okay, got it. And then just on Wilmington, I mean was there any disruption earlier in the quarter from doing that conversion? And then I’m curious now that you’ve been up and running there for a couple of months now, I mean, what are you seeing as far as the guest response and how that asset is performing?
Just like all of our conversions, it does have a negative impact. It’s going to take us a time – some time to ramp back up. We think the worst is behind us in terms of impact. But it will continue probably for the next – the balance of the year. We think before we get back to getting our fair share. Any kind of change in the name of a hotel, you lose visibility. And regardless of whether that’s within the family of Hilton brands, where you change one brand with the other or you’re going completely out of that family of brands, it has an impact. We just lost the visibility on the Internet and we’re getting all that back now. In terms of guest reaction, our guests love what we’ve done there. Our food and beverage outlets increased tremendously in terms of revenue.
So, we’re getting a lot of the local Wilmington folks to come in and see the hotel, which is consistent with our overall plan, which is if you’re willing to go there and have a dine and have drinks, you’re certainly going to want to use the facility when it comes on to – for lodging services. So we’re very pleased with the way it’s gone – it’s gone about as how we anticipated and as you’re seeing with some of the numbers that Dave shared with us this morning, our independent hotels there in terms of the upward migration, are doing great. So, we expect the same kind of results here. It’s probably going to be next year when we’re touting how great it is. But right now, we’re in that ramp-up phase and we’re delivering good service.
Okay, great. And then last question from me, can you touch on your capital allocation priorities and then talk about leverage as well?
Well, in terms of leverage, anytime we do a really large acquisition like we did in Arlington, which was for us, was a big deal. It’s $80 million. We toggle up and down on our leverage. Right now, we’re a little higher than we’d like to be, but we’re going to – we’ll work towards getting that back to our target, which is in the – around 50%. And so we’ll work on that. And the way we work on that is doing the blocking and tackling at the property levels, so that we can increase the value of our properties on a quarterly look-back basis.
And of course, we also pay down debt on a quarterly basis on all of our loans, because we have amortizing debt. So, that’s how we have been growing the business for the last 14 years and we’ll continue to do it that way. So, our target is to get back to 50%. I think we’re around 56% now. So, we will work on that to get that number down. I’m sorry; I forgot the first half of your question.
What are just your priorities for capital allocation?
Capital allocation, we are going to continue to grow the company as we can. As always, we’re going to apply capital to our assets to keep them in great shape, which is a high priority for us. We’ve got some targets in terms of liquidity, where we want to keep our cash. So that’s a high priority for us. And again, if we’re going to grow the company, we probably have to come back to the capital markets and do some sort of transactions like we have in the past four years.
Okay, that’s all from me. Thank you.
And the next questioner today will be Daniel Santos with Sandler O’Neill. Please go ahead.
Hey, good morning. Thanks for taking my questions. I just want to go back to guidance.
Yes. Good morning.
Good morning. I just want to go back to guidance. Is it safe to say that the reduction in guidance is a more conservative outlook on the impact of hurricanes? And if not, what’s really driving that guidance reduction given you guys had a pretty solid quarter.
This is Tony here. I think we’ve got better visibilities for all of our properties and where we expect the year to end up. I think we’ve got some of our higher RevPAR properties that are coming in a little bit lower. Some of our lower RevPAR properties coming in a little bit higher. Our margins are going up and so we’re revising all the guidance, trying to narrow the focus towards where we see it coming in at the end of the year. So, some properties are coming in a little below, where we saw them three and six months ago, other properties coming in higher. And so when you blend that altogether, it results in the revised guidance that we presented in the earnings release.
And Daniel, having said that, we’re also – we’re hedging our bet a little bit on hurricane season. We’re going to wait and see what happens, because we’ve faced some pronouncements in the last couple of years and then all of a sudden, we got two or three hurricanes and things change in a hurry. So, I think we’ll be in a position the next time we talk to give a much clearer picture on how we think the end – the year is going to finish up.
Okay. Are there any – could you give us some more color on any particular assets that you’re worried about going into the back half of the year?
Not really. I mean we’ve had – we’ve just talked about Wilmington and how that’s – we’d have to reposition that. So, it’s going to ramp up slowly. We have – we do have some renovation activity in Tampa that’s going to be getting into full swing here in the second half of the year. It’s going to have some impact on the hotel and it’s a little bit surprising us with the Hollywood repositioning, where we switched from Crowne Plaza to Doubletree has not accelerated as quickly as possible. But there again, the state is redoing the road in front of the hotel.
Our neighbor to the south is building up 60-storey building. Our neighbor to the north is renovating a 20-storey building. So, we’re surrounded by this construction activity that has – it’s not self-induced, but it’s certainly having an effect on our business, on three sides of the hotel, we’re surrounded.
Yes. So we think that that property will – it will hit its strike probably in the fourth quarter of this year, but it looks like it’s going to be pretty slow between now and then.
Okay. That’s helpful. And then could you give us some more color on the parking lot acquisition? Do you guys already own the portion that you didn’t just buy and how should we be thinking about it as far as earnings going forward?
Yes, right. So when this hotel was built in the 1960s, they acquired a lot, and they built this hotel. They didn’t have enough parking, so they acquired a home that was next door and tore it down. And the folks that are on the home didn’t want to sell, but they would lease it to them, so they leased them this parking – part of the parking. So we had a – we extended that lease many years ago before we were public, and there was a put and call on that. So they put the property to us. So we had – pretty much had to buy it, so we had to buy it at fair market value. And so we did and so now, we own the whole parcel and fee, which is – it’s much preferred for us as a REIT that 100% of the real estate. So, we see it as a good thing. It’s not a bad thing. We don’t have to pay rent anymore and we have a little bit more debt services. It’s not going to affect our earnings one way or the other really.
Okay. Thank you. That’s helpful.
[Operator Instructions]. And our next questioner today will be Mike Davis with Cottage Street Advisors. Please go ahead.
Thank you very much. Nice quarter by the way. I have a question on the guidance. I see that you increased EBITDA and hotel EBITDA estimates, and left your adjusted FFO available for common shareholders the same. So is that the contingency – you’re just putting in a contingency? Is it interest expense? Is it something specific or just a general conservative position at this point?
Yes. I think as we said with the previous question, we’re trying to get through hurricane season before we modify our AFFO estimates, because quite frankly, we’re dependent on the weather. And we don’t want to increase that number and then have to retrench later. And so we’re just going to leave it the way it is right now and we’re revisit that at the next call.
Great. And the second question is with the refinancing, how does your future mortgage debt maturities? I know you had a big bulge in fiscal year 2019. How has that impacted what you have to think about for the debt maturities in 2019?
We’ve pretty much got clear sailing. We got – well, this is Tony Domalski, Mike; we took care of the two loans, the one loan that matures in 2018. We took care of the large loan that matures in 2019. We have another small loan that matures about mid-year next year. But we also have the opportunity to push that out another year. So, it really takes the heat off of the maturity that are coming up in the next year.
In Tampa, okay.
So the one maturing we have, Tampa, once we finish our repositioning there, which is in process, we just started that. We’re going to be taking the Crowne Plaza flag off the hotel, making it part of the Hilton system under their new Tapestry brand and we’ll be creating this hotel Alba. We think the hotel will be a lot more valuable then and we can refinance it at that point.
Perfect. Thanks a lot. Appreciate it.
And it looks to be no further questions at this time. So, this will conclude our question-and-answer session. I would like to turn the conference back over to Drew Sims for any closing remarks.
Well, thank you all for joining us today. We’re very excited about what we’ve reported to you all, and we look forward to talking to you in the next call.
The conference has now concluded. Thank you for attending today’s presentation. And you may now disconnect.