Q3 2020 Sotherly Hotels Inc Earnings Call
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Good day and welcome to the Sotherly hotels, Inc. third quarter 2020 earnings call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to enjoy your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference average Maxims Vice President. Please go ahead.
Thank you and good morning, everyone. If you did not receive a copy of the earnings release, you may access all access it on our website as Sotherly hotels dot com in.
In the release the company has reconciled all non-GAAP financial measures. The most directly comparable GAAP measure in accordance with Reg G requirements any statements made during this conference call, which are not historical make.
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.
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 Companys filings with the FCC.
The company does not undertake a duty to update or revise any forward looking statements with that I will turn the call over to Scott.
Thanks, Mac good morning, everyone I'll start off today's call with a review of our portfolios key operating metrics for the quarter.
Looking at results for the composite portfolio, which remain fully opened during the quarter revpar decreased 63.3% over prior year, reflecting a 59.8% decrease in occupancy and an 8.9% decrease in HDR.
Year to date portfolio Revpar decreased 60.4% over prior year.
With 57.6% decrease in occupancy was 6.5% decrease Navy yard.
These metrics were generally in line with our comp sets and the upper upscale us lodging segment and appear to be ahead of the majority of our REIT peers that have reported thus far.
Similar to the second quarter the industries third quarter performance was firmly influenced by coven, 19th impact on travel demand as a gradual improvement in travelers sentiment reflected the progress and performance as an industry the.
The relative improvement in performance was not without setbacks, however, as state and local jurisdictions strove to strike a balance between curbing the spread of the virus and reopening their economies during the quarter several northeastern states implemented new travel restrictions requiring travelers from states with higher infection rates to quarantine. After arriving most of these have now been lifted.
Several states rollback reopening plans with restrictions on businesses and social gatherings, while other states such as Florida are now operating without any significant restriction at all.
Lastly, during the quarter civil unrest in several of our markets led further complications for hotel operations in those locations. Thankfully. This activity has now also has now also subsided.
Needless to say, a bumpy start to the recovery, but it starts of the recovery Nonetheless, as the broader travel industry experienced incremental improvement performance throughout the quarter as evidenced by the steady upward trajectory of airline passengers and hotel demand.
Examining our composite portfolios performance month by month, we saw solid incremental improvement as the quarter went on and more consumers feel comfortable traveling again.
Looking at Revpar results on an absolute basis port for the portfolio highlights. This gradual improvement as Revpar was $36.27 in July $40.28 in August and then $44.28 in September these.
These figures represent a deceleration in year over year declines, which were 68.4% July 58.9% in August and 57.5% in September.
While certainly not attractive figures on their own they do represent consistent and meaningful steps in the rejection month after month.
Similar to the first part of the summer this relative improvement in performance for our portfolio was led by our leisure drive to destinations such as Wilmington, Savannah, and our Florida properties. In contrast to our properties located in CBD locations of more urban markets, such as Washington, DC, Raleigh, Atlanta, and Houston have continued to be impacted by.
The limited improvement in travel to those more densely populated locations that's.
It's also noteworthy that our management teams have done a commendable job maintaining rate at our properties, which outperformed the competitive set is year over year by year over year results.
By maintaining rate integrity, our properties were able to control costs and improve flow through during the quarter.
Although the third quarter experienced a considerable improvement in performance during the second quarter over the second quarter substantial challenges lie ahead for our portfolio in the lodging industry as a whole.
Intense pricing competition is underway in certain markets further threatening the profitability of our operations.
The upper upscale segment, which encompasses the majority of our properties faces added headwinds due to its reliance on group and catering revenues, which had been severely limited due to social distancing measures group gathering size limitations and corporate travel restrictions.
Furthermore, although the slight uptick in business travel is encouraging this segment remains severely constrained as companies extend corporate travel restrictions into early 2021.
Lastly, and perhaps perhaps more profound we expect the government's response the trajectory of the virus to be a primary driver in shaping demand in the industry.
Despite these challenges we believe our corporate team and management partners have executed soundly on our strategic plan and will adapt to the evolving lodging environment moving forward.
I would like to end by noting that this past month, we began the process of transitioning the management of the Hyatt centric Arlington to suddenly dedicated manager our town hospitality with this change which is planned to be completed later this month all of sudden lease properties will be managed by our town. We believe the change will result in improved work flow and efficiency.
The property and corporate level, which we believe will in turn lead to improved results in the future.
I will now turn the call over to Tony.
Thank you Scott reviewing.
Reviewing performance for the period ended September Thirtyth 2020.
For the third quarter total revenue was approximately $14.4 million, representing a decrease of approximately $28.1 million or 66.1% over the same quarter a year ago.
For the first nine months total revenue was approximately $56.9 million, representing a decrease of $84.6 million or 59.8% over the prior period.
EBITDA for the quarter with a deficit of approximately $1.2 million, representing a decrease of approximately $10.1 million or 113% over the same quarter a year ago.
For the first nine months hotel EBITDA was a deficit of approximately $1.3 million, representing a decrease of approximately $39 million or 103 and 5% over the prior period.
And lastly, adjusted FFO for the quarter was a deficit of approximately $8.6 million, a decrease of approximately $12.8 million or 301% over the same quarter a year ago and for the first nine months adjusted FFO was a deficit of approximately $25.5 million right.
Representing a decrease of approximately $41.7 million or 257% over the prior period.
As Scott mentioned due to the incremental demand experienced during the third quarter six of our 14 hotels achieved better than a breakeven EBITDA, including Philadelphia, Jacksonville, our hotels, and Wilmington, Laurel Louisville, and the Hyde resort in residences.
The company had total cash of approximately $23.2 million, consisting of unrestricted cash and cash equivalents of approximately 15, and a half million dollars as well as approximately $7.7 million, which was reserved for real estate taxes capital improvements and certain other items.
Company estimates the average monthly cash used for hotel level expenses.
For the fourth quarter to range between a small amount of cash generation in the month of October to now more than.
0.4 $5 million in the month of November and December we expect corporate level general and administrative expenses to range between 0.4 or $5.5 million per month.
And outlays for scheduled principal payments.
Scheduled payments of principal and interest to be approximately $1.3 million per month.
At the end of the quarter, we had principal balances of approximately $369.7 million on outstanding debt at a weighted average interest rate of 4.64%.
Ultimately, 86% of the company's debt carries a fixed rate of interest.
During the third quarter, we remain committed to our action plan in accordance with our management companies to reduce hotel operating expenses and mitigate the impact of loss of business.
Although we reduced total operating expenses by approximately 61% from the same quarter a year ago Hotel operating expenses exceeded hotel revenue by approximately $1.2 million.
We have significantly significantly scaled back our capital projects and anticipate the capital expenditures for the remainder of the year, we'll only relate to that replacements of system is critical to the operation of our hotels.
We estimate total capital expenditures.
To be approximately $4.4 million for calendar year 2020, most of which were already completed or well underway at the onset of the pandemic.
As a result of a majority of our wholly owned guestrooms undergoing renovation over the past five years, we feel our portfolio is in a good position with no required renovations through the end of 2021.
At the corporate level, we reduced expenses by approximately 25% to a range of $1.2 million to $1.4 million per quarter. The savings resulted primarily from reductions and regular compensation anticipated bonuses and benefits for members of the board the company's executive officers and employees as well as any.
Emanation of discretionary expenses.
In March we announced the suspension of our dividend.
And the deferral of payments of dividends announced for January.
The suspension and deferral eliminated draw the company's cash reserves of approximately $440 million per quarter.
Since the onset of the pandemic, we've 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 deferral of current payments of approximately $3.9 million that would have been payable in the third quarter and approximately $3 million that would have been payable in the fourth quarter.
While some deferrals are required to be repaid or caught up in subsequent quarters.
After the deferral will be repaid upon maturity of the loans.
The company has been engaged in productive discussions with its lenders regarding anticipated non compliance with the financial covenants under the agreements that include them.
Based on these discussions the company believes that will obtain waivers from its lenders under agreements that articulate noncompliance as an event of default. However, no guarantee can be made that we will obtain such waivers. Neither can we guarantee that obtaining such flavors will not come without incurring additional costs increased interest rates or additional restrictive covered.
That's an underlying lender protections related such loans and I will now turn the call over to Dave.
Thank you Tony and good morning, everyone I'd like to take this opportunity to really recognize our corporate and hotel associates for their hard work and perseverance. During this unprecedented time for our industry.
So the last earning calls in the last earnings call in August the lodging industry and our company has continued to face significant challenges the country grapples with COVID-19, and its effect on economic activity. While we continue to see green shoots of recovery as a whole the revenue recovery trajectory for the U.S lodging industry.
It has been slower than originally projected by industry experts. Despite the challenging operating environment, we remain dedicated to effectively managing the factors that are within our control, including mitigating risk minimizing losses and capitalizing on available opportunities.
During the quarter. The company made notable progress in realigning its strategy to the new normal market environment generated by COVID-19.
First and foremost we continue to prioritize the health and safety of our guests and our associates. The extensive hygiene protocols implemented each of our hotels have been successful in protecting our guests while maintaining a welcoming guest experience.
As the quarter progressed, we recognize and capitalize on new trends in traveler behavior, which were a direct result of the COVID-19 pandemic, most notably was the importance of capturing transient leisure business, which was further amplified by the steep decline of group and travel group and business travel weekend leisure business quickly became the Companys most.
Well market segment influenced by pent up demand and relaxed work from home policies are leaves or our leisure destinations, including Wilmington, Savannah, and Jacksonville performed well during the quarter due to their drivable coastal locations. In addition, several of our markets, including Philadelphia in Hollywood became prime markets for local.
I guess to take Staycations.
While we do not believe this will be a permanent source of revenue provided relatively healthy weekend business at certain locations during the quarter.
The company also focused on mitigating the pandemics financial impact by delivering on and adapting stringent property and corporate level cost reduction initiatives implemented during the first quarter as Tony mentioned, the increased property level efficiencies reduced hotel operating expenses by more than 60% during the quarter, we managed to improve.
Profitability during the quarter by increasing occupancy maintaining rate integrity and streamlining operations in order to streamline ops, we focused on Rightsizing property services and amenities for example in certain markets, we limited food and beverage offering hours downsized menus implemented just in time food shipments and.
Weighted valet service.
Shifting guest preferences, which include the desire to forego daily service in order to minimize contact with staff have allowed our operations to improve housekeeping cost efficiencies.
The lodging industry faces a number of challenges both in the near and long term one of the primary concerns surrounding the upper upscale lodging segment as well as our company is the timeline on the return of group business due to government mandates group gatherings has been heavily restricted resulting in muted pickup from this segment during the quarter in recent weeks.
We have been encouraged by the modest return and smaller group functions and room blocks. However, we expect this segment to be severely limited until social gathering restrictions are lifted the second area of concern for our industry I'd like to touch on is the return of business travel, which has been severely constrained since the outset of the pandemic due to ongoing corporate travel restrictions.
Actions, while a portion of the Workforces adapted to virtual business, we expect that once travel resumes the competitive nature of business will accelerate in person meetings and transient business demand will improve similar group travel we have seen a slight increase in demand from this segment in recent weeks, albeit at a muted pace.
The convergence of several macroeconomic economic factors has resulted in a volatile operating environment for hotels uncertainties surrounding the passing of unnecessary stimulus bill and the development of a co but 19 vaccine are continuously shifting consumer confidence in our directly impacting the travel industry.
The resolution of these events should be a game changer for our industry. Although the timeline for its rollout is still uncertain. We believe todays encouraging news regarding pfizer's vaccine and the eventual implementation of a COVID-19 vaccine program will spur consumer confidence and provide an immediate boost to.
Traveler sentiment in the lodging industry until these critical macroeconomic events are resolved the pace and magnitude of the recovery will remain uncertain. We expect 2021 to be a vast improvement over 2020 and expect to see a material improvement in demand, which will initially be reflected in occupancy gains with.
Subsequent increases in rate forecasting a full return of demand and profitability in the lodging industry remains elusive and the timeline for a full return to 2019 demand levels remains unclear.
Regardless of the macroeconomic factors, we remain dedicated to making sound operational decisions to reduce losses, and conserve liquidity, while delivering long term value for our shareholders strategically our foremost concern heading into the end of the year as preserving in sourcing liquidity as Tony mentioned, we still have a monthly cash burn rate.
And all this bar and although this burn rate has slowed it still must we still must contend with shrinking liquidity pool, we're looking to all sources for additional liquidity, including private capital and any government programs for which we may qualify and we believe we will be successful in this endeavor.
And with that operator, we'll open the call up to questions.
And at this time, we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if.
If you are using a speakerphone. Please pick up your headset before pressing the keys to withdraw your question. Please press Star then too.
And our first question today will come from Tyler Battery battery with Janney capital Janney Capital markets. Please go ahead.
Hi, Good morning. This is Jonathan on for Tyler Thanks for taking our questions.
Obviously the industry you've got some positive news. This morning can you just provide us with some thoughts on their coverage of your business and which segments or if that changes which segments may return first.
Well I think as I said in my remarks, and what Weve alluded to in the call is we think theres a lot of pent up leisure demand.
And with a rollout of a vaccine program I think we will see some group business some group and some and some corporate business return.
What weve seen Jonathan over the months prior to this.
As it has been.
The group and the business travel the corporate group has pushed its reservations constantly into the future.
So we'll have a we'll have a booking the booking will be canceled it will roll into the future and on and on and on at some point I think that has become a function of confidence in whether or not these groups can actually materialize at our hotels I think with a good vaccine program implementation by the government and the private sector.
Other than that certainty will will will be quite clear for these groups and those bookings will become definite so.
So thats the thesis we have I think going into the first quarter next year.
Okay, great I appreciate that color.
Then switching gears toward rate Scott touched on this in his opening remarks, but.
The relatively strong in the quarter given the environment can you just provide some color on some of the revenue management initiatives that you've taken.
Yes, I mean, obviously.
Obviously, we're big believers in revenue quality than revenue quantity, we think a race to the bottom is not necessarily a good idea for any of our hotels were any hotel in general you get into these environments. There are operators that just crash rates to give what little occupancy they can and though dells.
We have tried to avoid that sometimes it's unavoidable.
In this environment, where were rate does decline, but we've taken steps to ensure.
That we preserve as much rate integrity as we can.
And we think Thats thats positions us well when when we start to get a real recovery I mean, if you've got any comments on the only thing I'll add to that John and you obviously as we've said the the recovery in demand. We've seen has been leisure business predominately on the weekends.
And there are certain markets and the pricing power is there.
But there isn't anything went the weekends over when you get to mid week, there isn't a whole lot demand. So we don't see the.
Yeah, the thought process between dropping your rates mid we just to get a couple of rooms in the hotel.
That's really where we've seen overall our rates be.
Be fairly stronger at those hotels, where we just keep.
Keep keep some good to great integrity on a consistent seven day week basis.
Yes, there are some markets, though is as we mentioned that are starting to really see challenges Philadelphia airport being one of them unit from.
Yes, you see year over year rates I mean, there are there are some battles that we're finding any I think we will be fighting those for a while coming out of this but overall I think we've seen our managers do pretty good job of holding firm.
Okay. Thank you Thats very helpful. And then lastly from me could.
Could you just provide some additional color on the occupancy trends and how they've moved into October.
Well.
As Scott gave in his opening remarks, I mean, we've seen these incremental increases since the April lows.
Week by week month by month.
We had a good spike in early September over the holiday.
Leading into the election things sort of tempered off a little bit, but we are still seeing gradual.
Gradual increases and we were still seeing that I think now we're going to start to see those trends accelerate.
A lot of those occupancy trends were a function of the decisions.
Decisions made at the local jurisdictional level.
In Florida, when you saw the governor or mayors of or counties relax their restrictions during the summer also we'd see a big bump in occupancy and then if those restrictions will.
Reinstated then you have a muted we saw muted occupancy trend that followed so.
I think what we're going to see now with this current news and some clarity with respect to the vaccine rollout is just continued incremental increases in occupancy, but this may be the news that everyone has been waiting for it to start to.
Relax travel restrictions ones to rollout starts.
Okay, great. Thank you for all the color Thats all from me.
Thank you.
And once again, if youd like to ask a question. Please press Star then one.
Our next question will come from Alexander Goldfarb with hyper Sandler. Please go ahead.
Hey, good morning morning down there.
No.
Hey, how are you.
So just a few questions here one.
Just looking at your cash balance from last quarter number two it's an aggregate both the restricted and unrestricted you would only went down by about.
$2 million you still have about the same 2 million burn rate. So I'm guessing that the reason that it didn't go down more than all the loans that were in.
For men or discussion you made no payment on any of these so wendy's gets settled out than that.
Will there be a catch up on these loans or they'll just you'll just start payment from that date forward and the missed payments.
Don't have to be caught up all at once.
Lets ill, let Tony talk about the cash per se, but just just so we're clear.
Our mortgage loans.
Those that have or or regardless of their forbearance were current on all of those so we have not just blanket not paid our mortgages. So.
We have.
A wide array of forbearance and modification agreements in initiatives that we've undertaken since April and were current on all those.
I think Tony do you want to comment on the burn versus the well no I mean, I would I was going to Echo what David just said I think first off if we look back at what happened in the third quarter.
We ended up realizing forbearance from a number of lenders that we couldnt have projected.
Three months ago when we.
When we gave our.
Made our disclosures.
And so and.
You know I think we also performed better from a hotel EBITDA perspective.
Then what we were forecasting I think as far as what happens in the future we have ongoing discussions with our lenders.
When we first began talking to them back in April everybody thought this was maybe a three month problem or a six month prop problem and.
Every three months were on the phone with our lenders updating them as to what are what the what the outlook is for each of our properties and the kind of forbearance that we would like to have and.
You know it's a at.
At this mortgage board some lenders want a fixed repayment schedule of deferred interest others of them are willing to put it onto the back end of the loans other than any.
Yet others are willing to say, let's wait and see and if the property generate extra cash then let's take the extra cash when the property take generates the extra cash if they generate the extra cash.
Okay. So just so we're all clear and we're all using I guess, yes.
Simple English just so we're on the same page all of the loans that you have against all of your hotels.
All those loans are current on payments or some of those have been you've been paying it at a lesser rate whether it be it interest or modified principle I just want to make sure that I'm just clear on everything that way, we can sort of you know.
Ports.
Forecast, how you guys are going to emerge from this.
I think what.
I think what Dave was saying is that we're within the terms of our agreements as they have been modified with the lender.
So if the if the agreement that was in place a year ago called for monthly payments.
Principal and interest of $100000 a month, we may not have paid that but as we've been able to negotiate.
A forbearance agreement with the lender, we're and we're in compliance and within terms of that a forbearance agreement.
Okay. So so were clear that youve gone to the lenders you've got waivers adjustments what have you and with those new terms Youre now current.
Exactly thats the right phrase.
We're on the phone every week with lenders basis, Okay got it so.
So whatever was the original versus now that Delta.
It's an individual discussion whether it gets tacked on to the end, whether you make accelerated to try and cover that but the point is that once you've modify the loans, you're now saying, Okay got it got it that's helpful. The second question is.
You guys have whats your split of CMBS versus individual.
Hotel loan so how many of your hotels have individual loans and how many are in CMBS pools we.
We have three three CMBS loans of the 12 mortgages.
Okay. So there are no individual loans they were all welcome to CMBS.
No theres three individual CMBS loans on three individual hotels, we have 12 12 individual mortgages on 12 assets three of which are CMBS ones. None of our none of our hotels. None of our mortgages are pooled are cross collateralized everything's solid individually on each hotel asset.
Okay. So there's no cross collateralized, okay that that's good that's important.
And then just a final thing.
Land and we'll put we'll put today's announcement aside but definitely has has seen that the sun belt has been just doing a lot better than the coasts you.
You mentioned some of your hotels were impacted by some of the social unrest.
But then you also mentioned that Philly was breakeven and certainly you know fairly would I would think would fall into the latter category. So can you just comment a little bit more on the hotel performance, especially with some of your breakeven hotels and has it been just in general just economic improvement in the area or there's certain dynamics that are going on.
That are specific to some of your hotel locations that have been more the driver.
Well in some locations as Scott mentioned in the outset the.
We've got leisure destinations in Wilmington, Savannah, those types of locations Thats been the catalyst for the improvement at.
At or above a breakeven level, because and in some of those states in locations, where there are minimal restrictions on activities.
So thats been a dynamic qualifier I guess, if you want to term it that way and some other markets has been far more restrictive.
From a government standpoint, and if you're in a center city urban core location with an upper upscale full service hotel. That's that's it hasn't been a good equation for the last six months, Alex Places like Houston to me I'll just give you give you. An example in Georgia right to Savannah is getting all the weekend leisure.
Demand driven driven to it from Atlanta, and the surrounding markets, but nobody from Savannah is driving to Atlanta middle the week to do business. So I mean, that's that's really the situation that we're in and just ask your answer your point on Philadelphia as kind of an anomaly, it's not obviously our hotels not in the CBD.
Affiliates out the airport and there has been a little bit of Arab airport business at the property, but its also seen some leisure business from the local that when we referenced the Staycations that was one hotel that had a lot of locals come and stay at the property. We have an indoor pool I think that was the bonus so.
That was a bit of of.
Different of demand that we normally don't see at that property that has helped that property performed throughout the summer.
Yes, just a quick.
Just to add to that I mean, like it really had a lot of downtown hotels that were closed some of which some of which carry.
Hilton flag, so we were actually getting a small amount of.
Of.
Business that otherwise would have gone down.
Now to our hotel through the Hilton reservation system nominal amount, but when everything is closed downtown were open it does help.
Okay. Okay listen thank you. Thank you guys.
Okay. Thanks.
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And once again, if youd like to ask a question. Please press Star then one.
And this will conclude our question and.
To answer session I'd like to turn the conference back over to the management team for any closing remarks.
Thank you operator, thank you all for dialing in this morning and everyone have a good day. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Thank you.
Sure.
Yes.
Yes.
Okay.
Hi, Matt.
Yes.
Yes.
Hi, Scott.
Hi, Tony.
Got it gone zero Cameron.
So Paul.
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Thanks, Paul.
Please turn around so you all there.
On the policy is on it.
No.
Hello.
Yes.