Q1 2020 Sotherly Hotels Inc Earnings Call
Hello, and welcome to salary hotels first quarter 2020 earnings conference call webcast.
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Now I turn the conference over to maxims. Mr. Sounds. Please go ahead.
Thank you and good morning, everyone.
He has not received a copy of the earnings release, you may access that on our website Sotherly hotels dot com.
In the release the company is reconciled all non-GAAP financial measures to the most directly comparable GAAP measure.
Accordance with Reggie requirements.
These statements made during this conference call, which are not historical may constitute forward looking statements.
Although we believe the expectations reflected as any forward looking statements are based on reasonable assumption. We can give no assurance that these expectations will be a thing.
Factors and risks that can cause actual results could differ materially from those expressed or implied forward. Looking statements are detailed in today's press release and from time to time and the company filing to the FCC.
I think does not undertake no duty to update or revise any forward looking statements with that I'll turn the call over Scott.
Thanks Mack good morning, everyone.
Heading into 2020, we believe the company is well positioned for a great year.
Had a solid balance sheet, our asset condition with the best has ever been and way to renew managerial focus on executing our strategy.
This belief proved true with commendable revpar growth in January and February excluding the Georgian terrace due to the 2019 superbowl comp our portfolio experienced revpar increases in January and February, 5.8% and 4.3% respectively.
Compare this the total U.S. lodging market Revpar increases of 2.2% January and 1.7% February.
That's a sizable output outperformance for our portfolio. Unfortunately, as we all know does when the world was changed by the Cobot 19 pandemic.
As a concern surrounding the pandemic escalated U.S. hotels experienced unprecedented decline to topline performance in March with Revpar dropping 51.9% from the same month last year. Despite our strong start to the quarter also with markets finished the quarter with Revpar declines.
Characterized by the unprecedented events Ryan covered 19 pandemic, we believe the first quarter. This year will ship futures lodging lodging industry for some time.
The impact was immediately felt across all sectors. The economy as government mandated closures non essential businesses and social distance the requirements to place.
Furthermore, state and local government as you travel restrictions in early March said shockwaves through through lodging industry, resulting in a rapid increase in group and transient cancellations and sharp revenue declines at situation unfolded. So his leadership team recognize that do the speed severity the pandemics impact Swift action was required.
So he is action plan to limit the this impact operations and preserve long term value for our shareholders consists of several key objectives.
The company gave first priority to the safety of it staffing guess by implementing a number of standard operating procedures that properties in order to maintain elevated levels amortization.
Second the company focused on mitigating that Pandemics financial impact by quickly implementing stringent property and corporate level cost reduction initiatives.
The property level, the company's relationship with its dedicated manager our town hospitality and able to Swift rollout a retrenchment plan.
Action items include the closure of food and beverage outlets and other non essential guest amenities in order to shrink the cost structure of the properties.
The downsizing the staffing levels and benefits, including the layoff of 90% of hotel staff with reductions in salary for staff not subject to lay off.
And the deferral of all non essential capital expenditures. The company also worked with as management partners to seek out alternative sources of revenue and renegotiate all service and vendor contracts.
At corporate level the company implemented several cost containment initiatives, which include a lay off of over 20% of staff reduction in salaries and benefits for all remaining staff and the waving of quarterly directors fees by the company's board of Directors. In addition, common dividends have been suspended and preferred dividends have been deferred.
The company also is undertaking balance sheet strengthening initiatives to mitigate the financial impact of Coven 19.
At the onset pandemic the company nearly reached out.
Two other lenders to begin discussing forbearance agreements for each of its mortgage loans to date, the companies and successful and completing a variety of modifications with the majority of its lenders, which provided immediate financial financial relief.
We believe that we believe modifications for the remaining mortgage loans are near completion.
Additionally, the company is pursuing all App cool federally funded assistance programs under the cares Act and thus far as receive proceeds from three separate applications for the Paycheck protection program.
Lastly, while the pandemic has depressed the economy lodging industry, the changing macro environment has presented challenges as well as opportunities for the company.
Later in the call our CEO day, Folsom will discuss the evolving landscape of the industry and totally strategy to adapt and capitalize on these opportunities I will now turn the call over to Tony.
Thank you Scott.
Reviewing performance for the period ended March 31st.
Total revenue for the quarter was approximately $37.2 million, representing a decrease of approximately $10.2 million at 21.5% over the same quarter a year ago.
Hotel EBITDA for the quarter was approximately $5.1 million, representing a decrease of $8.1 million or 61.6%, but were the same quarter a year ago.
And add adjusted FFO for the quarter was a deficit of approximately $3.6 million.
A decrease of $8.4 million over the prior year or 175%.
The company had total cash of approximately $22.1 million, consisting of unrestricted cash and cash equivalents of approximately $14.7 million as well as approximately $7.4 million, which was reserved for real estate taxes capital improvements and certain other expenses.
The ended the quarter, we had principal balances of approximately $359.6 million and outstanding debt at a weighted average interest rate of 4.78%.
Approximately 86% of the company's that carried a fixed rate of interest.
During the quarter.
We took a valuation allowance against the deferred tax assets, resulting in the tax charge of approximately five and a half million dollars.
As Scott mentioned with the onset of the pandemic, we reacted swiftly in coordination with our management companies to reduce hotel operating expenses and mitigate the impact of the loss of business.
Although we reduced hotel operating expenses by approximately 70% we estimate loss of revenue will exceed operating income in the range of 1.6 million to $2 million per month for the second quarter.
We expect increases and customer traffic and continued cost and take containment to ease those burn rates as we move into the third third quarter as we have seen occupancy rates move from the single digits in April to low double digits in May and June.
We also have had to put a hold on all capital projects and anticipate the capital expenditures for the remainder of the year will only relate to the replacement of critical systems, reaching the end of their useful life.
We estimate total capital expenditures will amount to approximately $3.6 million for calendar year 2020.
Most of those projects were completed are well underway at the onset of the pandemic.
At the corporate level, we reduced expenses by approximately 25% through a range of $1.15 million to $1.25 million per quarter.
Savings as the result.
Mostly the result of reductions in regular compensation anticipated bonuses and benefits from members of the board the company's executive officers and employees as well as elimination of most discretionary expenses.
In March we announced the suspension of our dividend and the deferral of payment of dividends announced in January the suspension, then deferral eliminates a draw on the company's cash reserves of approximately four in the quarter million dollars per quarter.
With the onset of the pandemic, we were early to begin discussions with our lenders regarding forbearance of current payments of principal and interest.
Wired under our loans.
Well no interest has been forgiven, we estimate existing and contemplated agreements will allow us to defer current payments of approximately $4.9 million payable during the second quarter 2020, and payments ranging from 3.2 million to $4.1 million payable during the third quarter 2020.
Well some deferrals are required to be repaid or caught up in subsequent quarters. Most of the deferrals will be repaid upon maturity of the loans.
The company has also been in discussion with us lenders regarding anticipated noncompliance with the financial covenants under the agreements that contain them based on these discussions as a company anticipate waivers from its lenders under agreements that articulate noncompliance has an event of default.
During the second quarter the company made applications through its banks under the Sps pay Tech protection program and receive proceeds of approximately $10.7 million.
Pursuant to the terms of the care Zach the proceeds of HPP alone will be used for payroll costs mortgage interest rent or utility costs recent changes to regulations regarding loan forgiveness provides for the extension of the covered period to 24 weeks and that lowered the amount of proceeds that must be spent on payroll and related costs.
To 60% of loan proceeds.
Additionally, the repayment period for the portion of the loan that is not forgiven has been extended from 18 months to five years with prepayment beginning no later than 10 months after the loan origination date.
The company anticipates, a significant portion of the loan to qualify for loan forgiveness and I will now turn the call over to Dave.
Thank you Tony and good morning, everyone I would like to start off by extending our thoughts and prayers to those that have been affected by the ongoing pandemic as well as our appreciation to healthcare workers and first responders for their valuable efforts our efforts to preserve our business and insurance future success have required us to make difficult decisions until late in the past.
90 days as demand evaporated due to the virus spread operating expenses were curtailed capital improvements suspended and extensive employee reductions were made our hotels of remain technically opened during the pandemic, albeit with only a small condray of key personnel that are needed to serve.
This minimal occupancy, but whose presence is necessary to ensure a smooth transition during the recovery as a hospitality company, who staff is at the heart of our business. It has been difficult to say the lease to make these decisions, especially with respect to our valued associates. We look forward to walk in the back of both our.
Oil staff and guests to our portfolio of hotels in the near future.
Despite cobot nineteens negative impact on the lodging industry and the larger macroeconomic environment, we remain confident the travel demand will return.
However, the recovery will undoubtedly be shaped by the virus and the government's response to it along with the industry's ability to adjust to changing consumer preferences, our partnership with our dedicated manager our town hospitality facilitated the company's efficient and Swift response to the unfolding crisis of the.
End of the first quarter.
Two adaptive ensure future success for the company. We believe it is important to consider a few key factors that will shape the hotel industries recovery.
First the trajectory of the virus itself remains unknown due to inconsistent reopenings among jurisdictions and the uncertainty of the containment of the virus. Therefore, the company must be prepared to optimize its cost strategies based on changing scenarios staffing protocols for various levels of occupancy.
Will help manage variable costs and ensure maximum property level efficiency and profitability.
Second we believe this uncertainty will be reflected in muted lodging demand in the near term.
As a result, the company must continue to creatively seek alternative sources of business until travel demand normalizes last the pandemics impact on traveler behavior, and preferences will likely shape lodging industry service and cleanliness standards for years to come as a result every property in our portfolio has adopted extensive high.
Gene protocols, hilton's clean stay and our own so clean programs, which encompass changes to service standards at every level of the guest experience has been implemented at our properties. The company will continue to monitor changing consumer preferences and implement changes that fit our long term strategy while we.
We believe corporate and into the international travel will continue to lag.
We're starting to experience some positive momentum as an industry and as a company Smith travel and TSH checkpoint data continue to trend positively underscoring a definite improvement in consumer confidence among travelers. The transient leisure segment has seen a material improvement in recent weeks benefiting our coastal and drive.
Who leads or leisure locations in general we agree with the growing consensus the transient leisure business will be the quickest segment to recover overall, we believe our portfolios concentration of drug to leisure destinations as well as its relatively minor exposure to global gateway markets will lead to a stronger recover.
Every an outperformance over our peers.
With that we'll now open the call up for questions.
Yes. Thank you.
We will now begin the question and answer session.
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His time, we'll pause momentarily to assemble the roster.
And the first question comes from Tyler battery with Janney capital markets.
Hey, good morning, Thanks for taking my questions hope everyone are doing well.
Your first one for me.
Can you.
Give any more color in terms of.
Occupancy trends in your portfolio.
In May and June you mentioned.
Some improvement from the drive to trigger any any data points you can share in terms of what you're seeing on the ground at some of these each were more leisure focused assets in terms of trends getting a little bit better.
Yes.
Generally speaking a lot of these markets at the depth of this problem, we saw a single digit occupancy.
And that was really a function or less submitted in some we had no occupancy for awhile and that was a function Tyler.
A lot of the government restrictions for non essential guests something that some of our hotels, we were not even allowed to have any guess at all unless they were essential health care or government worker.
Thats been changes most of our location. So what we've seen let's say over the past several weeks is a change from.
Low single digit occupancy is to teens very low teens.
Thats growing.
Some of our markets are still.
Centrally lock down.
City of Atlanta is a good example of that but we're seeing a lot of leisure bookings in the second half of the year, including a resumption of some of the leisure group bookings, which we haven't seen in awhile and I think.
Couple of our hotels were actually seeing some meeting room space being booked for reservations, which is a good trend so.
I mean, there theres a lot of data we can provide you you could talk to Scott after the call but.
Generally we're we're not seeing a return to 50 60, 80% occupants anytime soon but we are seeing a pickup.
Okay, Okay and just.
I received any corporate travel at all at your after properties or is that basically.
Zero.
Hey, good morning, Tyler, It's Scott I mean, it's not zero, but it is very very muted I mean are the large corporate clients.
I'll give an example, nestle and.
In Northern Virginia is huge kleiner.
Yes, hey, the large typical corporate clients that we have normal throughput for theyre not traveling yes, you are seeing individual business traveler kind of on their own smaller smaller shops, starting to travel little bit during the week day, but it's very muted right now.
Okay. Okay.
Any thoughts in terms of.
Breakeven occupancy levels some of your properties and the I imagine maybe it's different by.
Property type or or location, but just kind of trying to send.
Property level.
What sort of occupancy you'd need to see to profitable.
Yes.
This call just to look at on the occupancy basis, obviously casino. If you look at a lower revenue lower 80, our hotel, it's tougher to flow through and cover expenses. So.
Generally speaking I think we're looking at around $30 Revpar.
Should cover property level expenses before ownership costs, but thats you know thats just a back of the envelope ballpark across the board. It's obviously a case by case basis as unit will now.
Okay. Okay I appreciate that and then switching gears a little bit you Ron forbearance.
Just how the conversations going on with your with your lenders.
The conversations with the tile conversations changed.
More recently or or.
Just trying to get a sense of how some of those discussions or are progressing.
Sure.
As you know, we got a whole mix of mortgage lenders from from small balance sheets big balance sheet banks to web companies. The CMBS typically speaking we've seen.
The balance sheet banking relationships hold firm and be more than understanding and willing to work with us from the very beginning we were probably out ahead of this than most demanding we had all of our lender calls on on made their March 17th one right. After another to start explained in the situation. So.
Everybody's been appreciative of the communication and been.
For the most part more than willing to work with us and try to figure out some solutions for us the CMBS World is a little different as I'm sure it's been well documented.
Both you know just in the industry publications as well as kind of at the government level.
Looking for some government intervention the CMBS structures is not really set up to manage through.
Pandemic like this so we are starting to see some progress with them.
Ben opening dialogue, but just to date not.
Overly productive, but I think we are getting to a point, where there will be some some productive solutions worked out with them.
Okay and following up on us with more of an open ended question, but.
How are you thinking about.
Your liquidity right now I mean, you providers of data in terms of the cash burn and whatnot.
Just kind of curious.
How you're thinking about the potential options that might be out there.
The next couple of months.
I mean, the thing to remember about the liquidity in the cash burn as that.
It is.
Reducing the burn rate is reducing as demand recovers.
Now depending on the pace of the recovery of the pace of demand resumption.
It's difficult to forecast when that burn rate basically stops that was I think as part of your breakeven question.
But.
The way we view it as we have been active across the board and looking for liquidity sources and capital.
For the company census began both in the public domain private domain and from the government and we continue to do that weekly and looking for the most advantageous.
Capital solution for the company.
As I mentioned in my remarks, we were confident hotel demand is going to return.
But we want to underscore the fact that.
Liquidity is essential for for any hotel company survival and we've been active with all of our Counterparties.
And tried to access that capital and as Tony mentioned in his remarks, we were able to do that.
Couple of about a month and a half ago.
With the paycheck program and continuing to look for all opportunities to bring in the correct form and amount of capital for the company.
Okay last question for me.
At some point in the and the future.
The covert disruption is going to be behind us.
What's sort of Tailwinds do you think might come from less than a benefit you specifically and when you look at the operations at your hotels.
I think it's possible that.
Your properties in the future after the pandemic than maybe the margin structure is perhaps higher already to flow through is more attractive.
Remove service or or.
Vectoring things that could be roughly the same.
Your question is right on the Mark.
We have the centrally as Scott mentioned.
Tony.
We have we have laid off unfortunately.
90, 95% of our staff at the hotels is this gives us the opportunity in conjunction with our new management company to essentially restructure the operations and costs at any given hotel.
So when we emerge from this should we think across all departments.
All of our undistributed expenses were going to be able to reorganize all of these hotels for the future and we think there is margin on an apples to apples comparison, we think there is margin pickup sales and marketing efforts, even though we have new sanitation and hygiene protocols. We think there is an opportune.
The perhaps.
Pickups and margins on that front, but but your question as well founded we think there is some some opportunity on that side and anecdotally I can tell you that from the field.
Managers are telling us there's a pent up demand for leisure to for leisure travel people want to get out of their house, they want to get out of the Lockdowns and they want to travel and we're seeing a lot of pickup in the second half of the year for leisure demand leisure group, whether that remains whether it gets cancelled we don't know yet.
But we think there is a tailwind to use your words that we think we can realize as this is the pandemic abates and we put this behind us that theres going to be in eagerness for people to get up travel.
Total revenue.
I would only add that I think in the short term I think we're going to see some pickup with.
Certain segments of the labor market are not going to be as strong and tight as they were.
Before the pandemic.
I know, we had several markets where.
The demand for Housekeepers was extraordinary if we were having to pay.
Extremely high rates to keep housekeepers in our hotels.
And I expected in the short term that we won't be experiencing the same kind of tightness in the labor market.
Okay. That's all for me thank you.
Thank you.
Thank you and then next question comes on Daniel Santos with Piper Jaffray.
Hey, good morning, guys. Thanks for taking my question I mean, just kind of going off of the question before me I mean can you talk a little bit about a little bit more about how you envision the hotels will will sort of run differently in the sort of post co bid.
Cleaner environment, what does that look like in and obviously this might change what maximum occupancy in your hotels.
Could be in so could you give us a sense of what you. How you think this might impact your occupancy once things do start to open up.
Well I don't think the cost restructuring or the restructuring of the organization. This certainly will impact the occupancy I think it's a function of how we're going to run the hotels. So thats, it's really a function of from every every guest point of service that you may have from the front door to the front desk too.
To the.
Just a housekeeping to food and beverage Theres a host of things that will change going forward. Some of these will just be mandated by the brand some will be internally generated some of then we'll be government focused.
I can tell you for instance.
On a housekeeping level you may think that all this extra us the extra hygiene protocol work.
Might add cost, but what the industry is seeing is that if you're there for a two or three nights day, you will check into a room and it will have a seal on it that will certify that has been appropriately disinfected, but you're not going to receive the same daily housekeeping.
Service that you used to receive mainly because guests do not want to strangers or housekeepers inside the room that they're staying in that could potentially effective so youre not going to have the daily thorough housekeeping.
Leaning protocols that you used to see and then when the guest checks out after two or three days day, you have a far lengthier cleaning and disinfecting routine for that room and that is prepared for a new guest at the end that's probably.
Pickup in terms of margin for us as the owner.
That's an example.
And there are a host of other things on the food and beverage side.
Thank you are going to see a different way to do in the room food and beverage what we're doing right now is for those areas, where you have a continued food beverage service as a guest orders and then the guest comes down and gets.
There are their food beverage.
Got delivered to them that they actually going pick it up and take it back to their room. So it's a different cost structure to do that than it is the of the old way, where you have a uniform member of the hotel staff deliver.
In room, food and beverage to the 40 of floor of a tower.
Got it that's helpful. And then I was just wondering if you could talk a little bit more about some maybe alternative demand drivers I mean, you're hearing of some hotels in markets that are closely universities being used for students are you seeing any opportunities like that at any of your assets.
We have and we've been frankly.
Looking at each one individually to your point, though there has been healthcare hospital.
Room night programs, there have been universities or.
Turning to rent rooms on a long term basis for dormitory stays for students.
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Central worker FEMA government there we've seen a lot of that alternative work we've taken some of it.
We're not too pleased with.
The idea of turning our hotel or half our hotel into a dorm room, we think thats not a good use more is it going to be profitable in the long run so we've resisted.
Overtures from universities to do that.
And frankly, I don't think the brands would allow for those hotels that are formally flagged with.
The national franchise.
But we've seen different opportunities, we've been very selective and how we take them and.
I think thats that.
Probably the best way to answer that question.
Got it thanks guys.
Thank you.
Thank you and then next question comes from Chris trials with no Berger.
Yes. Good morning, Thank you for taking my question.
Can you just comment generally about your properties and Florida as well as the the hide resorts and.
I think there's some condos associated with that maybe just start there.
And then update.
The activity at that property.
Yes, we have several assets of Florida, we've got the double tree and Jacksonville.
We've got the tapestry hotel all the in Tampa and than we have a.
A complex of three assets in Florida in the Hollywood market. Its doubletree flanked by two condo hotels that carry the hi, Hi brand, it's not really a brand like you would think of it with Hilton, but the hide moniker.
Hi resort and the high Beach House those are our five assets, Florida.
Those to those the two condo hotels, we did technically closed during the pandemic and Theyve been recently reopened as the state and local officials have allowed for the resumption to travel. So those are those were closed down they've been reopened and we're re staffing and.
Wrapping up the.
The.
The operations there.
Thank you so much.
Thank you.
And as there are no more questions a presence how we would like to return the Florida management for any closing comments.
No. Thank you very much for the call.
I appreciate it and I hope everyone remain safe.
Thank you. This concludes todays teleconference. Thank you for attending today's presentation.
Centralized.