Q2 2020 Sotherly Hotels Inc Earnings Call
Good morning, and welcome to the Sotherly hotels second quarter 2020 earnings call Oh.
All participants will be on lots and I'll leave that should you need assistance, we single conference specialist for pressured Starkey all buys here.
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Please note. This event is being recorded I would now let's turn the conference over to Max.
Let's go ahead.
Thank you and good morning, everyone.
He is not receive a copy of the earnings release, you may access the honor website at Sotherly hotels Dot com.
In the release the company is reconcile all non-GAAP financial measures. The most directly comparable GAAP measure in accordance with Reggie requirements.
Any statements made during this conference call, which are not historical may constitute forward looking statements. Although we believe the expectations reflect isn't any forward looking statements are based on reasonable assumptions. We can give no assurance of these expectations will be attained.
Factors and risks that could cause actual results to differ materially from those expressed or implied by such forward. Looking statements are detailed in today's press release and from time to time in the company's filing to the FCC. The company does not undertake no duty to update or revise any forward looking statements with that I'll turn the call over to Scott.
Thanks, Matt Good morning, everyone.
Start off today's call to review our portfolios key operating metrics in the quarter, which as we all know was the worst quarter our record for industry do the cobot 19 pandemic.
All of the company's hotels remained open during the quarter with the exception of our two rental program to the hard resort and I'd be job kind of hotels, which were temporarily suspended during the month of April and May as well as a result and government mandates.
Looking at results for the wholly owned portfolio Revpar decreased 89.3% over prior year, reflecting an 85.1% decrease in occupancy and a 28.1% decrease in 80 arm.
Year to date portfolio Revpar decreased 58.9% over prior year.
55.3% decrease in Iraq occupancy and an 8.1% decrease in HDR.
These metrics were in line with our comp sets in the upper upscale U.S. lodging segment and appear to be ahead of the majority of our repairs Theyve reported thus far.
Our portfolio's performance was clearly driven by koby nineteens impact on travel demand and the uphill Battle, we're now flooding as our industry tries to gain some traction.
All our operators of work to maintain rate integrity at demand returns pricing wars are inevitable in some markets, where non institutional owner operators are simply trying to put heads in beds at any cost our operators have done a commendable job staying the course.
The full service segment, which all of our hotel sit in currently has a matter of headwinds due to our reliance on group and catering revenues, which event severely limited due to social distancing measures group gathering side limitations and corporate travel restrictions.
Until these restrictions on events are further lifted this portion of our business will be in question.
There is important note that our reliance on the road war your individual business traveler has been reduced over the past few years as we transitioned our properties. The lifestyle concepts. This should be a benefit to us during the recovery as we don't see that segment coming back sometime.
Lastly, our properties located in CBD locations more densely populated urban markets, such as Washington, DC Raleigh, Atlanta Houston.
I've underperform national averages as consumers have understandably, Ben avoiding travel more densely populated areas.
If you dissect the quarter month by month, you can see solid incremental improvement as the quarter went on and phase Reopenings commenced like most our portfolio bottom out in April with 95.7% decline in revpar over prior year.
It's ticked up slightly in may with portfolio Revpar decline of 90.1% from last year. The result of government restrictions starting to be lifted in the latter half a month around the memorial day holiday.
As a phase Reopenings continue through June we saw Revpar further improve with decline of with the decline of 80.5% year over year.
Hi line, that's relative improvement performance, where our leisure drive two locations such as Wilmington, Jacksonville Savannah. These properties were able to outperform the competitive sets in the broader U.S. market, particularly in terms of 80 are primarily driving we get truck primarily driven by weekend leisure business.
Unfortunately, we have seen these trends were probably begin to stall following corona virus case surges and some southern states in the latter half in June with several of our markets Reimplementing restrictions in an effort to gain again flatten the curve.
Specifically relating to our portfolio, Florida, Texas in the city of Atlanta have taken actions to pause reopening which have directly impacted the operations at our properties located in those destinations.
As we continue on our path recovery, we expect the government's response the trajectory of the virus via primary driver in shaping demand in the industry.
I'll now turn the call over to Tony Thank you Scott.
Reviewing performance for the period ended June Thirtyth 2020.
For the second quarter, which represents the first full quarter.
And then make began.
Total revenue was approximately $5.3 million, representing a decrease of approximately $46.2 billion or 89.7% over the same quarter a year ago Hotel EBITDA for the quarter was a deficit of approximately $5.2 million, representing a decrease of $20.8 million.
Or 133.4% over the same quarter a year ago.
And adjusted FFO for the quarter was the deficit of approximately $11.1 million, a decrease of 18.3 million or 254.8% over the same quarter a year ago.
The company had total cash of approximately $24.9 million, consisting of unrestricted cash and cash equivalents of approximately $18.5 million as well as approximately $6.4 million, which was the reserve to real estate taxes capital improvement.
And certain other items.
The ended the quarter, we had principal balances of approximately $369.9 million, an outstanding debt at a weighted average interest rate of 4.59%.
Fully 86% of the company's that carries a fixed rate of interest.
As previously 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 approximately 71% from the same quarter a year ago Hotel operating expenses exceeded hotel revenue by approximately $5.2 million.
Due to the anticipated increase in customer traffic and continued cost containment, we expect the narrowing of that gap in the third quarter with hotel operating expenses exceeding hotel revenue by no more than $1.2 million per month, and an achievement of breakeven performance before the end of the quarter.
We have also reduced 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.
I will amount to approximately $4.4 million for the calendar year 2020.
Most of those were already completed are well underway at the onset of the pandemic.
The majority of our wholly owned Guestrooms undergoing resid renovation over the last five years, we feel our portfolio was that a good position with no required renovations for the balance at the end of the year.
As a corporate level, we reduced expenses by approximately 25% to a range of $1.1 million to $1.3 million per quarter.
The savings resulted primarily from reductions in regular compensation anticipated bonuses and benefits for the members of the board at the company's executive officers and employees as well as in the elimination of discretionary expenses.
In March we announced the suspension of our dividends in the deferral payment for dividends announced in January the suspension, then deferral eliminated draw on the company's cash reserves of approximately four to quarter million dollars per quarter.
Since the onset of the pandemic, we have had continuing discussions with our lenders regarding forbearance of current payments of principal and interest required under our loan agreements existing and contemplated agreements provide for the deferral of current payments.
Approximately $4.7 million that would have been payable in the second quarter and approximately $3.1 million that would have been payable in the third quarter.
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.
Notwithstanding the company has been in discussion with its lenders regarding anticipated noncompliance with the financial covenants under the agreements that include them.
Based on these discussions as the company believes it will obtain waivers from lenders under agreements that articulate noncompliance. After the event of default. However, no guarantee can be made that we will obtain such flavors. Neither can we guarantee that obtaining such flavors will not come without incurring additional cost increase interest rates or additional restrictive.
Covenants and other lender protections related to such loans.
As previously stated during the second quarter the company made applications through its banks under the SBH Paycheck protection program I receive proceeds of approximately $10.7 million.
Pursuant to the terms of the cares act the proceeds of each PPP loan may be used for payroll costs mortgage interest rent for utility costs and the company anticipates a significant portion of the loan to qualify for loan forgiveness.
I'll now turn the call over to Dave.
Tony Good morning, everyone.
First I'd like to recognize our hotel associates for their dedication and resilience during this unprecedented time.
Our efforts have been integral and preserving the company's liquidity in protecting the health and safety of guests at our hotels.
The second quarter operating environment was unlike anything we've experienced in the company 63 years in business as the corporate 19 pandemic resulted in government mandated closures and so for your travel restrictions, causing significant cancellations in revenue declines for the lodging industry to put things of context lodging industry.
He is tied very closely to GDP and general economic conditions in the second quarter. The U.S. Commerce Department reported GDP plunging, 32.9% on an annualized basis. This is the most severe economic contraction over such a short period of time ever recorded.
Including the financial crisis of a decade ago, the great depression in a number of other economic recessions or downturns over the past century.
LNG with this environment, we took immediate action to cut costs and preserve liquidity.
As described on our first quarter earnings call. Our action plan contain several key objectives.
Including prioritizing the safety of our staff and guests mitigating the pandemics financial impact with stringent property and corporate level cost reduction initiatives strengthening our balance sheet with alternative sources of capital and capitalizing on new opportunities presented by the industry's evolving landscape.
We believe the progress we have made on each of these key objectives has positioned the company to persevere as demand recovers in the months in years ahead more specifically during the second quarter, we address the concerns surrounding the safety of our staff and guess by implementing extensive hygiene protocols at every property in our portfolio.
The standard operating procedures encompass changes to service standards at every level of the guest experience during the quarter. We were successful in working with our management partners to optimize our operations to achieve maximum property level efficiency.
We effectively managed property staffing levels by implementing cross training programs and layering on personnel relative to the growth in demand.
We believe our stay open strategy prove successful as revenue exceeds variable expenses for the quarter.
And in enabled a quicker ramp up process as demand grew in the latter part of the quarter. In addition, we bolstered our balance sheet during the quarter by securing proceeds through the SBS Paycheck protection program.
We continue to evaluate alternative sources of capital whether through government sponsored programs are private equity partners to provide immediate liquidity to the company.
The macroeconomic environment has shown mixed indicators in recent weeks as increase case counts across a number of states are shifting market sentiment and could negatively impact summer travel demand while the uptick of cases is concerning an uneven recovery was not unexpected due to the inconsistent reopening plans among state and local jurisdictions.
Two questions remain about the pace of reopening the election default school calendar and a return to the workplace all of which directly and pipe impact the travel industry and our portfolio's performance.
The positive data from the U.S. upon the labor shows the economy added combined 6.6 million jobs during June and July dropping the unemployment rate to 10.2%.
New surrounding potential vaccine has been encouraging although the timeline for its rollout is still uncertain. While we continue to see some green shoots of recovery, including reasonably solid leisure demand a consumer spending the peso the recovery moderated from the spike over the July 4th holiday week, we do not believe however that our industry will.
Retrace the gains made since the early April in the year of revenue losses.
We have seen slow and gradual demand increases since that time, regardless of macroeconomic factors. We believe our diversified portfolio, which includes in demand leisure or drive to destinations along with our renewed focus on streamline streamlined operations have positioned the company to withstand the current environment, we remain dedicated.
At the making sound operational decisions to reduce losses have been sort of liquidity, while delivering long term value for our shareholders.
And with that operator, we can open the call for questions.
We will now begin the question answer session.
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Okay.
Our first question will come from Tyler about are you Jamie. Please go ahead.
Hi, Good morning. This is Jonathan on for Tyler. Thanks for taking my questions first one for me is just wondering if you guys could provide some additional color on your rent revenue management strategy broadly how much competitive discounting are you seeing and some of your markets currently.
Yes, I mean, we're seeing we're seeing a lot of that especially if some of the CBD locations, but I think many hotels, including ours in those locations, we're trying to rate retain some rate integrity.
Really doesn't serve a purpose to drop the rate down to a point where.
Simply trying to get occupancy of its very limited in the first place. So we've actually been able to maintain some rate as you can see from Scott's comments that he made rate has gone down but it has not gone down as significantly as occupancy in these markets. So there are travelers, albeit a few in the second quarter and.
They were willing to pay rates that.
We will not rock bottom rates, but nonetheless, we think is demand reemerges will get both the rate back and the occupancy, but there has been some of that tile.
John John.
Okay, Great Thats very helpful and then.
Turning to the markets Louisville seems to have quite strong occupancy can you just provide some color on what you've seen there.
Second quarter, what was driving that.
Yes, we have a large.
EPS contract counterparty in the in the hotel.
She has actually been.
Very fortunate.
And their consumption of room demand their consumption of rooms is actually increased during the second quarter.
Because the schedules out of the air hub and lower will actually increase so thats been of.
That's been a.
Good.
Tom for US I mean, our index a fair share is over 200% in that market our fair share index. So it's all contract business.
Okay, Great I appreciate the detail that's all from me. Thank you.
Thanks.
Again, if you ask the question that as followed by the one Star then one to ask the question.
Our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning, good morning down there and that.
Good to hear you guys glad you guys are are are holding up.
Just some quick questions here really around cash management.
One if you can just give us an update on how the forbearance and mortgage restructuring conversations are going our lenders being accommodative or do you feel like.
Yes, they are not being reasonable on how they are they're looking at either recovery and the ability for you guys to once again become current on the properties.
Yes, let me just generally speak to that Alex and then we can probably give you some more detailed data now or if you want to talk to Scott later, but.
Generally speaking our lenders have been very accommodating I think we all understand.
Situation we're in.
So it's sort of when phases of the initial phase that we saw was in March and April when we got out in front of this.
And the entire market just basically gave every lender every borrower sort of a 90 day stands still it was kind of phase one event and then everybody was hoping to see the schmo clear a little bit and we entered what we call sort of phase two of our forbearance and modifications and weve essentially been able to get.
Pretty decent terms from balance sheet lenders like company lenders and even in some instances some terms from the CMO CMBS guys, even though they're they're constrained by the the structure that loan type. So those results were good and that will take us pretty.
Much into the fourth quarter generally speaking and then.
If the demand returns in the marketplace, then, we'll probably see a sort of a catch up period, where we're going to have to stay current on loans and deal with the forbearance measures and if things don't recover I think pretty much most of the lenders that we've talked to will be addition.
They will accommodate us Additionally, as borrowers because they have to.
So thats the landscape, we're seeing Scott if you want to add anything.
Yes, that's how does that mean.
Of our individual loans that were dealing with really everybody is either have agreements in place or we are in active negotiations and pending approvals for.
For forbearance or modification, thanks to that have been noted.
As a default their Hollywood, which we're in and active conversation with special servicer and approval as pending.
They are committee and I think Philadelphia is maybe noted that that we're in.
We got initial.
Initial forbearance from them out of the gate and now he has been in kind of ongoing conversations and working on finalizing the document for additional terms. There. So basically we expect every loan to continue to be addressed with our lenders going forward for today.
Okay, and then just looking at your cash needs and we appreciate the color and the in the press release it looks like basically you have nine month of cash.
Cash on your balance sheet based on just under 2 million a months I think you said and basically 18 million of cash.
So really it's fair to say that through year end do you guys are fine, but really you need the markets to improve in the first quarter and then with regards to the deferred.
Preferred dividend that's accruing it I guess my math is right 900000, the quarter. So thats something additional that would also has to be caught up on so am I thinking about it right that basically you guys are fine so the balance this year and really.
Beginning of 2021 is when I guess sort of rubber needs to hit the road is that a fair way to think about it both from an operations as well as from.
Debt.
Agreement restructuring what have you.
Yeah, I think Thats fair to say as a worst case scenario.
I mean, we're seeing improvement just in the last two weeks across our portfolio and I understand the news that use that we all see is tempered by a variety of factors but.
I saw just last week that the state department in the CDC lifted the four month old level for travel ban internationally. So I think with negative news that you see we're also seeing some other good things in that things were seeing.
Our black and white on our financials.
And changes to forecast some results. So your statement is true as a worst case scenario that this market does it move.
I think the I think if we get some rational level of recovery here in the fourth quarter and the first half of next year, you could push that number out further Alex.
But at the same time I think we're all.
I think we all understand that.
Company like ours with the amount of real estate that we own the operations that we have we're going to need some additional liquidity. So we're in the marketplace trying to find that right now.
Okay. So maybe I'll just.
Finished with that last question. There can you just villa San on what you guys are thinking as far as.
No capital was that equity is that a private investment as that may or June joint venture, maybe just share a little bit about what you guys are thank you.
I think the answer to that is yes to all I mean, we continue to look at government programs.
Version two point over the PPP excludes the public companies, but that not that may not be the end of the ESB program. The main street program was really not suitable to real estate investors, but that may change in if you know you watch some of the news out of Congress Theres this whole price.
But equity line that was being sponsored by a congressman out of Texas, which is geared for the CMBS universe and real estate lenders and Thats a very good program I don't know if any of those are going to come to pass or not but we continue to monitor those we already took advantage of one of them. The PPP program back in the quarter.
On the private side.
The answer is yes, we're looking at solutions that would provide liquidity to the company.
We're looking at joint venture partners, because we think theres a once in a century opportunity here. So we're looking at partnering with the.
Some.
Some capital provision or to take advantage of buying opportunities the nature of that structure of the nature of the capital. We're just not there yet so I really can't comment on what it would look like but we all know the need and we all know what the opportunity is and so does the investment community. So everyone's trying to workout.
Some transaction terms and we think there something we can do in the future to alleviate some of these issues and position us to buy properties in the future.
Okay.
Thank you for your time.
Thanks, Alex.
Okay.
This will conclude our question answer session I'd like to turn the conference back over to Dave Paulson for any closing remarks.
Thanks, everyone for participating in our call and we look forward to speaking with everyone again on in their next quarter. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.