Q4 2020 Sotherly Hotels Inc Earnings Call
Good day and welcome to the Southern Lea hotels fourth quarter 2020 earnings call and webcast. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero <unk>.
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 withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Maxim. Please go ahead.
Thank you and good morning, everyone.
You did not receive a copy of the earnings release, you may access it on our website at suddenly hotels dot com.
In the release the company has reconciled all non-GAAP financial measures most directly comparable GAAP measure in accordance with Reg G requirements.
Any statements made on this conference call, which are not historical may constitute forward looking statements.
Although we believe expectations reflected in any forward looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained.
Actors and risks that can cause actual results to differ materially from those expressed or implied by forward. Looking statements are detailed in today's press release and from time to time in the company's filings with the SEC. The company does not undertake a duty to update or revise any forward looking statements with that I will turn the call over to Scott.
Thanks, Matt Good morning, everyone I'll start with start up todays call with a review of our portfolio's key operating metrics in the quarter and the year.
Looking at results for the composite portfolio, which remains fully open during the quarter.
Revpar decreased to 62, 3% over prior year, reflecting a 52, 6% decrease in occupancy and a 24% decrease in ADR.
For the year portfolio Revpar decreased to 68% over prior year with a 56, 4% decrease in occupancy and a 10, 1% decrease in ADR vs.
These metrics were generally in line with our market competitors and ahead of the upper upscale U S lodging segment for the quarter and for the year.
The lodging industry is fourth quarter performance continued to be firmly influenced by COVID-19 impact on travel demand as well as macroeconomic factors while.
While the third quarter showed gradual improvement the fourth quarter as choppy or October results were relatively strong driven by leisure travel and a modest recovery in business and group travel.
We experienced a decline in demand in November December as a third wave of Covid led to a record number of cases hospitalizations and a re implementation of travel restrictions and some municipalities.
Examining revpar results on an absolute basis for the portfolio highlights the Coors uneven performance as Revpar was $43 78 in October and $35 67 in November and $36 56 in December.
Despite the challenges faced during the quarter and December our staff strong sales efforts resulted in the highest level of group bookings since the outset of the pandemic.
Led by the return return of film industry crews the Georgian Terrace in Atlanta.
We were also able to close out the year on a high note as our warm weather leisure destinations, including savanna, and our Florida properties in Jacksonville, Tampa and Hollywood, all experienced strong pick up leading up to the new year's holiday.
Improved group and leisure performance has carried through to the new year as green shoots in these segments suggest at the beginning of a sustained recovery is on the horizon.
Looking at more detailed property highlights for the quarter, our doubletree in Jacksonville, continuing to outperform market achieving a revpar index of 146 for the quarter, gaining 2700 basis points in share in the quarter. The outperformance was due to a small group business and uptick in transient business travel and weekend leisure business.
Albert in Tampa continue to ramp up following its renovation and conversion achieving a revpar index of 125 for the quarter, gaining 4900 basis points in share from its competitors. We are optimistic. This hotel has even more room to grow share and firmly position itself as a market leader.
During the quarter for Georgia tariffs in Atlanta outperformance, new competitive set which consists exclusively exclusively of luxury properties, achieving a revpar index of 121% a gain of 700 basis points and share. The outperformance is due to the return of the film groups, we mentioned as well as weekend leisure business, both of which have been severely disrupted during.
The pandemic.
Turning to corporate activity in November we successfully transitioned the management of the Hyatt centric Arlington to our town hospitality with that transition our town now manages 100% of our portfolio, which should continue to improve the efficiency and effectiveness of our day to day managerial effort.
We are continuing to work with our lenders and to date have successfully completing a variety of modification and forbearance agreements across the majority of the portfolio, which generally allows us to defer payments of principal <unk> interest for periods that began back in April 2020, and that extends through various dates extending ending between February of 2021.
In December of 2021.
They also waive or modify covenants in order to keep the loans and compliance.
To date, the only low non compliance with its covenants as the mortgage loans secured by the Doubletree Resort Hollywood Beach House.
We are in active negotiations with that special servicer to finalize a forbearance agreement.
During our last earnings call, we referenced our monthly cash burn rate and the need to address the company's shrinking liquidity pool at.
At the end of the year, we announced that we entered into a loan agreement with affiliates of Kemmons Wilson Hospitality LP in a co investor in an aggregate amount of $20 million with industrial additional $10 million available to draw by year end 2021 for <unk>.
Loan matures in three years and will be payable on or before the maturity date at the rate of 147 ex the principal amount borrowed during the initial three year term with a one year extension at the Companys option for <unk>.
<unk> also carries a 6% current interest rate payable quarterly during the initial three year term and include certain covenants, such as borrower borrower liquidity thresholds.
We believe the loans satisfies our immediate need for liquidity that will provide us the bridge for a sustained recovery for the industry.
I will now turn the call over to Tony.
Got it.
Reviewing performance for the period ended December 31 2020.
For the fourth quarter total revenue was approximately $14 6 billion, representing a decrease of approximately $29 7 million.
Or 67, 1% over the same quarter a year ago for the year total revenue was approximately $71 $5 million, representing a decrease of approximately $114 3 million or 61, 5% over the prior period.
EBIT for the quarter was a deficit of approximately $1 9 million, representing a decrease of approximately $11 $2 million or 120% over the same quarter a year ago for.
For the year Hotel EBITDA was a deficit of approximately $3 $2 million.
Presenting a decrease of $52 million or 107% over the prior period.
And adjusted <unk> for the quarter was a deficit of approximately $10 7 million.
A decrease of approximately approximately $11 $7 million over the same quarter a year ago.
And for the year adjusted <unk> was a deficit of approximately $36 2 million representing.
A decrease of approximately $53 4 million or over 300% over the prior period.
Please note that our adjusted <unk> excludes charges related to the early extinguishment of debt gains and losses on derivative instruments charges related to aborted or abandoned securities offering costs changes to the deferred portion of our income tax provision as well as other items.
Hotel EBITDA excludes these charges as well as interest expense and interest income corporate general and administrative expenses and the current portion for the cash portion of our income tax provision and other items as well please refer to our earnings release for additional detail.
Looking at our balance sheet.
As of December 31, the company had total cash of approximately $35 $3 million.
A listing of unrestricted cash and cash equivalents of approximately $25 3 million as well as approximately $10 million, which was reserved for real estate taxes capital improvements and certain other items.
The company estimates the average monthly cash generated at the hotel level for the first quarter to range between 500000 and 600000 per month thus.
Thus, we believe that this will be the first quarter, our properties will achieve positive cash flow since the start of the pandemic.
We expect corporate level G&A expenses to range between 500 550000 per month.
Capital expenditures are estimated to range between 250000 and 350000 per month.
And outlays for scheduled payments of principal and interest are expected to range between one one and one for a $5 million per month.
Overall, we're expecting a total cash burn of approximately $4 5 million for the first quarter.
At the end of the quarter, we had principal balances of approximately $393 million in outstanding debt at a weighted average interest rate of 466% approximately 87% of the company's debt carries a fixed rate of interest.
During the fourth quarter, we remain committed to our action plan in coordination with our management company to reduce hotel operating expenses and mitigate the impact of the loss of business.
Although we've reduced hotel operating expenses by approximately 53% from the same quarter a year ago Hotel operating expenses exceeded hotel revenue by approximately $1 $9 million.
We are also significantly scaled back our capital projects and anticipate the capital expenditures, which primarily represents the replacement of systems critical to the operation of our hotels will amount to approximately $4 million for calendar year 2021.
As a result of the majority as a result of the majority of our wholly owned Guestrooms undergoing renovation over the last five years, we feel our portfolio is in a good position with no required renovations through the end of 2021.
Last March we announced the suspension of our dividend.
And deferral of payment of dividends announced in January the suspension and deferral eliminated draw on the company's cash reserves of approximately 400 quarter million dollars per quarter.
The company continues and will continue to have discussions with its lenders regarding anticipated noncompliance with the financial covenants under the agreements that include them based.
Based on these discussions the company believes will continue to obtain waivers from its lenders under agreements that articulate noncompliance as an event of default.
However, no guarantee it can be made that such waivers.
We will be obtained neither can we guarantee that obtaining these waivers will not come without <unk>.
Incurring additional costs increased interest rates or additional restrictive covenants another lender protections related to such loans and I will now turn the call over to day.
Thank you Tony and good morning, everyone.
Filled with unprecedented challenges 2020 was the most difficult year in history for the modern lodging industry as well as our company.
COVID-19 pandemic caused the most severe contraction for the lodging industry ever recorded including the financial crisis, a decade ago. The great depression in any number of other economic recessions or downturns over the past century, while we recognize the challenges facing our industry are far from over we are happy to say.
For 2020 is behind Us and feel it is important to review the accomplishments of our committed property and corporate level teams during the year. Despite.
Despite 2000 twenty's difficult operating environment, we remain dedicated to effectively managing the factors within our control, including mitigating risk minimizing losses and capitalizing on available opportunities first we prioritize the health and safety of our guests and associates by implementing extensive sanitation.
Protocols at each of our hotels, which have been successful in keeping our guests and associates safe, while maintaining a pleasant and welcoming lodging experience. Our stay open strategy for the portfolio proved successful as it enabled a quicker ramp up following the pandemic initial demand shock and allowed us.
<unk> sales effort throughout the course of the year.
The company focused on mitigating the pandemic financial impact by delivering on stringent property and corporate level cost reduction initiatives implemented during the first quarter, including the lay off of over 90% of hotel staff.
Closure of food and beverage outlets and other non essential guest amenities in order to shrink the cost structure of the properties and the deferral of all non essential capital expenditures as Tony mentioned, the increased property level efficiencies reduced hotel operating expenses by more than 50%, 53% during the quarter.
At the corporate level the company implemented several cash conservation efforts, which included the layoff of over 20% of the staff a reduction in salaries and benefits for all remaining staff ceasing all cash incentive compensation and waiving of the quarterly directors cash fees by the company's board and <unk>.
<unk> common dividends were suspended preferred dividends were deferred and our balance sheet was bolstered during the second quarter by securing growth proceeds through the Sba's Paycheck protection program.
As we adjusted our strategy to fit the operating environment shaped by Covid, we manage our margins to meet depressed demand by preserving occupancy maintaining rate integrity and streamlining our operations, we recognize the capitalized on new trends and traveler behavior, which were a direct result of the pandemic highlighted by the importance of cash.
During transient leisure business, which was amplified by the steep decline of group and business travel.
As a result of managements quick and decisive actions during the year. We believe we are on the right course to endure the waning impacts of the pandemic and to preserve the company's future success as Scott mentioned during the fourth quarter, we addressed our near term liquidity concerns by securing a loan in the amount of $20 million.
Which includes an option to draw an initial $10 million by year end the loan greatly improves the company's liquidity position and enables us to navigate the ongoing negative impacts of the pandemic focus on the impending recovery manage our balance sheet obligations and preserve our asset base with the completion of this transaction.
We accomplished our number one objective for the fourth quarter and better position the company to take advantage of the recovery.
Although a number of events shaped the lodging business climate during the fourth quarter. Non words. This is significant for our industry is the approval of the vaccine.
While it has a positive impact is not fully materialized. The vaccine is a fundamental game changer for the travel industry as it provides confidence in the ability to travel safely and serves as the catalyst needed to lift corporate travel restrictions and hold in person events.
Still the primary contributing factor in the industries recover in the near term is the rate at which the vaccine program is rolled out while the program experienced a slow start in December January due to strict guidelines for eligible recipients. The U S. Coronavirus vaccine supply is poised to double in the coming weeks, allowing abroad.
Expansion of vaccination efforts and what we believe will be the subsequent relaxation of travel restrictions meantime, COVID-19 case counts positivity rates and hospitalizations continued their downward trend while TSA airline data has shown significant improvements in recent weeks skiffs.
Index, which tracks a number of leading and trailing indicators, including website visits and bookings future bookings and achieved Occupancies reported a travel environment in January in January that was the best since the outset of the pandemic.
Access will rollout of the vaccine is also a primary contributor to the timeline on the return of group business at our properties. During the start of the new year. We've been encouraged by the return of smaller groups and room blocks as the vaccine has become more widely available corporations and meeting planners are express greater confidence in the ability to safely.
Hold larger events during the second half of the year in January our sales team booked more group business than during the entire quarter fourth quarter of 2020, social groups represent a majority of our near term group bookings, while the back half of the year should be characterized by larger corporate and perhaps citywide events.
Entering the next phase of the business cycle, we have plenty of reasons for optimism.
In addition to the improving vaccine program rollout, we believe the concentration of our properties.
The southern U S with limited exposure to large gateway markets positions the company well for outsized returns. Additionally, we believe there is a substantial amount of pent up travel demand in both business and leisure travel segments consumers have a mass significant savings since the outset of the pandemic, which should support.
Strong leisure travel once the vaccine is more widely distributed validating the sentiment recent Smith travel data reported industry wide occupancy hit its highest level. Since October we are cautiously optimistic that the combination of these factors will lead to a sharp increase in travel and a strong recovery.
<unk> for the industry in the coming months.
Looking ahead as the industry writes itself, we believe prospects will arise for season hotel companies like suddenly to take advantage of acquisition and asset management opportunities. In addition, a number of capital providers have expressed interest in partnering or joint ventures or other structures in the logic space, we continue to pursue.
Such opportunities.
In closing there is a great deal of work yet to be done, but we believe our strong efforts during 2020 have positioned us well entering the recovery, we remain dedicated to making sound operational decisions to reduce losses and conserve liquidity in the near term, while delivering long term value for our shareholders. We will now open.
For the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question will be from Tyler battery of Janney.
Thank you good morning, I hope everyone is.
Doing well.
<unk> for me and I wanted to start with the comments on good positive cash flow at the property level in the first quarter. Just wondering if we could unpack that a little bit more and if you could talk about some of the assumptions broadly behind that whether it be occupancy levels or rates.
And then also how many hotels potentially.
Driving that number specifically.
I would tell you that so far in the quarter Tyler we've seen a broad based positive environment. Our January numbers were very very attractive February.
Frankly, we blew by our budgets in January it was it was very very attractive February is going to be pretty good as well I think we will be on track and I think.
So its portfolio wide, we did have some government pick up in some of our markets in Northern Virginia in January which was also beneficial.
What Tony mentioned as the hotels, reaching positive hotel EBITDA is I think where we are as a company right now hopefully we're going to continue to go in a positive direction I will tell you as early as <unk>.
As close as eight weeks ago.
We were probably seeing 40 $50 a night in bookings now we're seeing a $150000 a night in bookings portfolio wide. So.
Most of it's transient were getting smaller groups here and there, but most of it is simply pent up leisure demand and now the restrictions are being lifted and people are more confident theyre getting out on the road, they're getting into airplanes anecdotally.
Some of the airport.
Information that I've talked.
Talk to from our board of directors and some other folks airports are packed so where they were this past weekend. So all those are good comments and.
I don't know if thats that fully answers your question or not but thats what were seeing.
Yes, no that's very helpful color I appreciate that.
Just follow up I wanted to go back for the commentary on group bookings, especially for the back half of 2021.
How many of those are rescheduled business that was canceled in 2020 that has been pushed out.
How much of that is incremental bookings that are that are coming through as well.
Well I'll, let al as our team answer as well, but I cant tell you last year as you know.
Corporate group bookings will rolling forward.
So you'd have a cancellation and then they booked 90 days out and then rebook and rebook because no one knew where the bottom was at the end of the pandemic I would say some of that has rolled forward, but as you go into the new year a lot of it went away, but now it's automatically coming back.
In the second half of the year in terms of the demand.
The Big question, Mark really as corporate travel restrictions you see a lot of big companies that still have not really open the door, but all their meeting planners and group bookers Theyre already looking around there are already putting what I would call shadow bookings.
At the hotels in anticipation of being able to do so for real so that demand I think is there youre going to have to see sort of the final unwinding of restrictions both in localities and at corporations to see those things actually become definite.
Group bookings.
You guys have anything to add.
Yes.
Okay.
And then in the prepared remarks, you talked about potentially some JV is taking advantage of acquisition opportunities that are out there.
I'm curious.
Whats Youre seeing in Europe.
In your target markets on the acquisition side in terms of potential opportunities interested what's out there interested if youre seeing any any distress as well.
Yes, I mean, I think there's more of it to come but we've seen a few bankruptcy filings we've seen some UCC sales, we see some outright marketing traditional marketing for hotels. So the activity is definitely picking up.
And I think what we would say is there is a lot of capital out there on the sidelines waiting for the right time, the right transaction and the right.
Hotel partner.
To come in with and make some of these transactions happen. So.
I mean, we're seeing a lot of activity a see quite a bit every week.
So it's the bow wave is definitely getting a little bigger.
And I think in 2021, we're going to see a lot more activities with assets trading hands.
Okay, Great and then just last question for me is more more housekeeping interest there, but the latest is on.
For the negotiations.
Special Servicers for the the Doubletree bounding down in Hollywood just interested how those are progressing.
And how you see that situation potentially playing out.
Yeah, Hey, Tyler it's Scott.
Going well.
May comment before I mean, the special Servicer network, especially for this one in particular interest.
It's just very very slow moving minutes to complete logjam and so we've we've been in continue although inconsistent communication. We do have forbearance terms that we could accept that but they're ready to provide however, we continue to talk to them about some.
Movements for those terms and they are receptive to that but they are currently continuing to go through the approval process on that so.
The short answer is it's all positive for US just a matter of trying to get the best deal that we can at this point.
Okay, Great I appreciate all that detail that's all for me. Thank you.
The next question will be from Alexander Goldfarb of Piper Sandler.
Hey, good morning.
Just a few questions here.
Picking up.
On the on the loans that you have in deferral.
Where you reached resolution I think you said debt.
Apart from the Hollywood Hotel debt you have you can defer payments.
From.
February or at the latest one until till December.
I guess two parts debt when they ask the first.
Okay.
What are the changes that you guys have seen in interest rate or covenants or any of the terms. So what are the changes that you're seeing as the lenders agree of the deferrals.
Assets.
There has not been any change in interest rates at this point.
So that hasnt been asked.
Covenants Luckily for us I mean, I think almost half of our portfolio is covenant free in terms of not having any DSR covenants as part of our loan agreements.
So they havent there has hasn't been a requirement to do any waivers.
Ones that do have debt service coverage ratio covenants or any other covenants. They just continue to modify them day theyre waive them for a period of time or now we're starting to just set them.
In a ramped up fashion, so that they are achievable no lender as is coming to us, saying, we need to meet our debt service coverage ratio test there understanding that that's just not achievable. So we're just continuing to modify them in a fashion. So they can be achieved and kept in good standing on their books.
Okay, and then just given what you've outlined as far as.
<unk> for <unk>.
Second half for.
For corporate travel to come back obviously, it's great to see the pent up demand I mean.
Pop North we can see everyone is heading down to Florida or down south to get out of the restrictions in the north so definitely can appreciate that but.
It would seem like you guys are going to need to defer these loans into 2022 and based on Scott Your comments.
About the lenders receptiveness on making any covenant adjustments to be reflective of the environment.
Should we take it that it's not a problem for you guys to extend these loans or defer them into 2022.
Or is your sense that the special Servicers are the lenders are going to start to play hard ball. If you can't start to do something by later this year they may ratchet it up.
Yes, so I mean, we're <unk>.
Obviously dealing with net loan by loan and property performance by property performance and.
That's what the lenders are becoming focused on obviously, if it's <unk>.
Lenny mentioned as we mentioned some of our properties are cash flow positive in the first quarter as a portfolio, we expect them to be cash flow positive and a lender is going to be looking at that as these properties as their property. The day of alone on becomes cash flow positive they become less inclined to.
To deferred their payments. So what we've seen is most lenders have gone from deferring principal and interest to now just deferring principal and eventually that's going to burn off so as we get to the end of forbearance.
Agreements and the term of those we continue to go back to the well per se and ask for more but I think at a certain point if the properties generating cash flow, we're going to get less and less receptive responses from lenders to give forbearance.
Okay, and then actually that's a good point, so when you say that.
I think you said for the first quarter, you expect the properties to be positive.
I think collectively 500 600000 per month.
Thats it for debt service right, so right correct.
Okay. So for us thinking about the company.
You guys talked about positive property level. That's just simply the operations that is before you have to talk about the debt both on the interest and the.
And the principal correct.
That's right that's right and that's obviously the discussion with the lender just because they are generating some some hotel EBITDA doesn't mean, they're covering their full debt service and so if that's the case and thats, where forbearance as needed.
Okay and then just.
That's why Tony mentioned in his remarks that the first quarter is still going to have a cash burn for the very reason you just highlighted I mean, the properties are getting to where theyre GOP and their hotel EBITDA is positive, but everything below the line still needs to be covered.
Okay.
That's fine and then the last question is on.
You guys rebound on the business.
Obviously, you've caught a lot of jobs, which is always very difficult as an employer to have to lay off people not easy to do.
Made the business more efficient, whether it's blocking out slow wars or liberating.
The amenity services et cetera, but as you guys reopened is there do you envision a point, where youre going to have to re add staff for re add amenities before this sort of revenue picks back up just because of competitiveness or is your view that you can sort of maintain this more efficient business model.
You've adopted further into the recovery.
Before you have to.
Start restoring some of the amenities or staffing or things like that.
Yeah, I will tell you every two weeks I look at the payroll numbers as a percentage of revenues and that percentage is plummeting. So our flow through continues to improve because as we get more occupancy in more rate more revenue. We are not layering on additional expenses are.
Internal policy with our manager and this is where it's beneficial to have one manager that you can touch at all of the hotels is that we're not going to frontload expenses, and we're not going to frontload payroll in anticipation of increased demand. So it's going to have to be in lockstep as we get additional books.
<unk> as the climate improves that's when we think about opening up amenities food and beverage services and additional staffing so what youre alluding to what you are concerned about is what we've been concerned about for 12 months is we've got to match fund our revenues with our costs on.
A very marginally profitable basis, and we're just not going to say the pandemic is over then re hire everybody. So it's.
It's a very sensitive process and you really have to have onsite personnel with our finger on the pulse of the business to make sure. We are not overloading the assets with expenses too early.
Okay. Thank you very much.
Yes.
And this concludes our question and answer session I would now like to turn the conference back over to Dave Folsom day, any closing remarks.
Thank you for joining us on our call and we look forward to talking with everybody in a few months. Thank you.
The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
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For the year.
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