Q2 2021 Sotherly Hotels Inc Earnings Call
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Good day and welcome to the suddenly hotels second quarter 2021 earnings conference call and webcast all participants will be in a listen only mode should.
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I'd now like to turn the conference over to Mack Sims. Please go ahead.
Thank you and good morning, everyone. If 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 to the most directly comparable GAAP measure in accordance with Reg G requirements.
Any statements made during this conference call, which are not historical may constitute forward looking statements. Although we believe the expectations reflected in any forward looking statements are based on reasonable assumptions. We can give no assurance that these expectations will be attained.
Factors and risks that can cause actual 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.
Now I'll turn the call over to Scott.
Thanks, Mac and good morning, everyone.
I'll start off today's call to review of our portfolio's key operating metrics for the quarter, which we are pleased to report exceeded our expectations, reflecting the accelerating momentum in travel demand and confirming our position that a sustained recovery is underway for our industry.
Looking at the second quarter results for the composite portfolio.
Revpar was $94.93, driven by an occupancy of 59% and an ADR of $161.
And these figures versus the second quarter of 2019, Revpar was down 25, 9% with occupancy down 22, 7% and ADR down four 1%.
Year to date Revpar for the composite portfolio was $80.54.
With an occupancy of 54% and an ADR of $159.93.
Looking at these figures versus the comparable period in 2019, Revpar was down 35, 6% with occupancy down 31, 1% in ADR down six 4%. These.
These operating metrics were ahead of most of our REIT peers that have reported thus far for the quarter.
<unk> were also better than our market competitors as nearly all of our hotels gained share from their competitive sets in the quarter as a group the portfolio gained 3150 basis points in share in the quarter.
We are also pleased to see the incremental pace of demand recovery throughout the quarter.
Examining composite portfolio Revpar result on a monthly basis benchmark against 2019 highlights the quarters continuous improvement.
April Revpar of approximately $93 was 68% of April 2019 Revpar.
May revpar of $95 was 73% of May 2019.
At June Revpar of $97 was 83% of June 2019.
Dave will speak to our forecast for the third quarter a little later in the call that we are seeing this trend continue.
The second quarter's performance was characterized by strong leisure travel fueled by pent up demand for warm weather in coastal locations with leisure performance eclipsing 2019 levels in some markets.
Looking at some highlights across our portfolio the Doubletree resort Hollywood Beach, Florida saw Revpar surge past 2019 levels by nearly 11% in the quarter driven by a substantial rate growth of nearly 14%.
Hotel Alba and Tampa produced Revpar over 15% greater than 2019 with ADR growing over 5% occupancy up nearly 10%. This.
This hotel is nearing stabilization. Following this repositioning and is now performing at over 125% fair share against its competitive set in the market.
The Desoto Savannah is Q2, Revpar was only off by 5% compared to 2019.
Grew ADR by one 3%. This hotel gained nearly 10000 basis points in revpar share from its competitors in the quarter.
When compared to its competitive set this hotel is producing some of the best results. We've seen since it is converted to an independent lifestyle hotel in 2017, a commendable job for our hotel staff and our new management partner.
During the quarter municipalities across our markets reopen their local economies by lifting restrictions and reopening our demand generators.
This had an immediate impact on leisure travel segment. There's also directly correlated with the recent improvement in the group and business travel segment, which we believe will provide a considerable base of business in the fall once major corporations return to the workplace and continuing to lift corporate travel restrictions are.
Our sales teams are producing impressive bookings for the second half of the year, especially at our core group locations, such as Wilmington, Jacksonville, Savannah and Atlanta.
Zamin booking trends for the year, we have witnessed a steady acceleration in group business the.
The first quarter only produced approximately 15% of the stabilized group revenue when compared to 2019 results and.
In the second quarter this more than doubled to 32, 5% of Q2.2019 bookings.
We are forecasting this to nearly double again in the third quarter to nearly 60% of Q3.2019 group bookings.
While still plenty of room to grow compared to 2019. This trajectory of group demand recovery is a promising indicator of how quickly our industry can return to a state of normalcy.
Looking forward, although the recent rise of the Delta variant creates additional uncertainty in forecasting travel demand, we have not experienced any significant cancellations or changes to booking trends as a result of these concerns we continue to monitor the impact of the Delta variant and will adjust our operational strategies accordingly.
Yes.
During the quarter not only did topline revenue production surpassed our expectations, but so did bottomline profitability with hotel EBITDA margins, increasing 1000 basis points over the first quarter of the year. Our managers continue to adhere to strict strict expense controls and just in time delivery of services and amenities that coincide with the return of demand.
To their individual markets. This results in strong flow through and profit margins.
Staffing is one area, we wouldn't mind, adding a little expense. However, the labor market remains a challenge we face as an industry and as a nation. We have seen some incremental improvement as our southern state governors have worked to encourage their population back to work and we expect this to continue to improve in a meaningful way through September as government benefits burn off and.
Schools resumed normal operations.
Turning to corporate activity during the quarter, we addressed the upcoming low maturity for our doubletree asset in Laurel, Maryland by extending the maturity date with our existing lender through May 2022 by extending this loan. We believe this will allow the industry to chance to enter a sustained recovery and will facilitate better opportunities for more permanent loan restructuring solution next year.
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Also during the quarter, we executed an agreement with one of the largest holders of the company's preferred stock to exchange 220000 shares of preferred stock for approximately $1.5 million common shares.
The execution of this exchange fits with our long term strategy to shore up our balance sheet. While also preserving liquidity. This transaction eliminated approximately $660000 of deferred dividend payments as well as 440000 in annual preferred dividend payments going forward.
In June the company entered into a hotel person sale agreement to sell the Sheraton Louisville, Riverside Hotel for a price of 11 million $11.5 million, including the assumption by the buyer of the mortgage loan on the hotel, which currently has an outstanding balance of approximately $11 million.
The agreement includes a 200000 dollar deposit posit, which is now nonrefundable.
As a result of the market's underperformance and a steady decline in brand contribution the companys smallest asset no longer fit our long term strategy is successful we believe that this disposition of this asset will be really accretive to our cash flow.
Yes.
Lastly, the company recently filed an S 11 registration statement with the SEC, which contemplates an unsecured note offering net proceeds from any offering will be used to repay in full or in part to loan that was originated in December of 2020 to replenish the cash burn during the depths of the pandemic, we continue to evaluate all capital markets options available to us.
With the goal to enhance our liquidity position bolster our balance sheet and position the company for future success.
Ill now turn the call over to Tony.
Thank you Scott reviewing performance for the period ended June 32021 four.
For the quarter total revenue was approximately $34.4 million, representing an increase of 549, 5% over the same quarter in 2020.
Year to date total revenue was approximately $57 million representing.
An increase of 34, 2% over the same period in 2020.
Comparing these results to the second quarter 2019, total revenue was down $17.2 million or 33, 3% and year to date total revenue was down $41.9 million or 42, 4% over the same period in 2019.
Hotel EBITDA for the quarter was approximately $9.7 million, representing an increase of 285, 5% over the same quarter in 2020.
Year to date hotel EBITDA was approximately $13.9 million.
Representing an increase of over 9% over the same period in 2020.
Comparing the current period's results over 2019 hotel EBITDA was down $5.9 million or 38%.
And year to date hotel EBITDA was down $14.9 million to 2019 year to date Hotel EBITDA.
Adjusted <unk> for the quarter was approximately $1.1 million or 108, 3% over the same quarter of 2020.
Year to date adjusted <unk> was a deficit of approximately $4.1 million, representing an increase of 76% over the same period in 2020.
Comparing these results to the same period in 2019.
Adjusted <unk> was down approximately $6.1 million or <unk> 84, 6% and year to date, adjusted <unk> was down $16 million or 134% over the same period in 2019. Please.
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 offerings.
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 interest income corporate G&A expenses in the current portion of our income tax provision as well as other items.
Please refer to our earnings release for additional detail.
Looking at our balance sheet as of the end of the quarter. The company had total cash of approximately $33.5 million.
Listing of unrestricted cash and cash equivalents of approximately $21.8 million as well as approximately $11.7 million, which was reserved for real estate taxes capital improvements and certain other items.
Looking at cash burn for the second quarter. The company generated a positive cash flow of approximately $5 million compared to our forecast in may which was a cash burn of approximately $5.1 million. Thus.
This represents a sizable outperformance, which was driven by stronger than expected cash flow at the property level as well as excellent flow through.
This positive change in cash flow is an important inflection point in the company's recovery.
Looking ahead to the third quarter.
Our outlook continues to trend positively.
Company estimates that average monthly cash generated at the hotel hotel level to range between $2.90 million to $95 million we.
We expect corporate level G&A expenses to range between $400.450000 per month.
And capital expenditures will be approximately a $5 million per month and outlays of four scheduled payments of principal and interest are expected to be approximately $2.4 million per month.
Overall, we're expecting a total cash burn of approximately $400000 per month in the third quarter or approximately $1.2 million for the quarter as a whole as higher levels of hotel profitability assist us in meeting our debt service obligations, which include scheduled repayment of deferred interest and principal from 2020.
At the end of the quarter, we had principal balances of approximately $387.5 million of outstanding debt at a weighted average interest rate of four 6%, 6% proxy.
Approximately 87% of the company's debt carries a fixed rate of interest.
As a result of our wholly owned Guestrooms undergoing renovation over the past five years, we have significantly scaled back our capital projects and anticipate the capital expenditures, which primarily represent the replacement of systems critical to the operation of our hotels will amount to approximately $4 million for calendar year 2021.
In March of 2020, we announced the suspension of our dividend and a deferral of payment of dividends on our common stock announced two months previous the suspension or deferral eliminated draw on the company's cash reserves of approximately $4.4 million per quarter I will now turn the call over to Dave. Thank you Tony and good morning every.
We're pleased to report that the recovery of our operations and financial results continued to accelerate and results for the second quarter exceeded managements expectations and all metrics metrics in segments of our business through July the steady improvement in occupancy and rate in the lodging industry indicates that the recoveries are.
Ongoing as demand since the onset of the pandemic, notably reached record high levels in June and Revpar exceeded 2019 for the fourth of July weekend, which acts as an important milestone for our industry.
The second quarter built on a strong and solid foundation established during the first quarter as the recovery continued to be characterized by strong leisure demand, which was especially robust in our warm weather in coastal locations expectations for strong leisure demand were high going into the summer and it did not disappoint.
We can travel continued to dominate bookings, but midweek travel did experience a steady improvement throughout the quarter.
Occupancy improved each month as leisure demand was combined with pockets of corporate and group business.
As performance steadily ramped up throughout the first half of the year, we were able to exceed each month's internal budget and forecast as a result hotel EBITDA was positive each month during the quarter. Miss was the first time, we've seen that since the fourth quarter of 2019.
Focusing on composite revpar compared to the same periods in 2019 further highlights this trend as Q1.2021 was down 45, 8% to Q1.2019.
And Q2's 21 in Q2.2020 one's Revpar declined 25, 9% versus 2019.
Both quarters Revpar performance relative to 2019 are we believe amongst some of the best results in the lodging REIT space looking towards the back half of the year. We believe these trends will continue july's preliminary revpar of $105.84.
Is only two 8% lower than our 2019 July results July's results significantly outperformed the national Upper upscale segments July Revpar, which was 20% below 2019 levels factoring in July strong results. We're currently forecasting third quarter.
Positive revpar to be down approximately 5% to 10% to 2019.
This is an impressive accomplishment only months following the worst recession in the history of the lodging industry.
A quick rebound in Revpar has not only been attributable to surges in occupancy, but also due to strong ADR pent up transient demand coupled with consumers increased savings during the pandemic has led to less price sensitivity among travelers, enabling our managers to achieve better than expected rates during the quarter.
Scott mentioned average daily rates for the quarter at some of our hotels eclipsed the same period in 2019, and our portfolio's June average rate exceeded 2019 levels. In addition to rate expansion during the quarter, we were able to achieve strong margins and excellent.
Flow through with diligent management and cost controls at the properties.
We believe the second half of the year is emerging with a number of unique challenges and opportunities. The recent headlines reflecting the resurgence of Covid 19, with the Delta Varian create additional uncertainty in the operating environment. Although to date, we have not experienced any wholesale cancellation of our booked group business those groups that have.
Canceled in the near term are simply Rebooking in later months, indicating that the demand is there in the short term our managers believe transient pace will replace any such group cancellations.
While the recovery recovery of our urban markets has lagged up to this point, we expect a return of demand generators will act as a positive catalyst for our assets located more heavily impacted urban markets. For example, the Fox theater, which is slated to return to full schedule of events. Later. This months later this month serves as a major.
Source of business for the Georgia Terrace Hotel in Atlanta, Similarly, our Doubletree hotel in Raleigh, which is located adjacent to NC State University is poised for a significant boost in business with a return of in person learning and more normalized operations at the University later this month.
Generally the reopening of restaurants, along with a full schedule of concerts sporting events and festivals will reinforce transient travel demand for our portfolio going forward.
We believe our concentration of assets in the southern United States will continue to act as a tailwind for our portfolio in a competitive advantage versus our peers leisure travel to these destinations has outperformed the broader U S lodging market and should continue on this track into the fall as a result of these factors along with the increasing vaccine.
Asian rates, we're optimistic about our growth prospects heading into the fall and into 2022, we remain dedicated to proactive investment strategies, and making sound operational decisions, while delivering long term value for our shareholders with that I'll open the call up to questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And the first question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning.
I have to say nice to see some good.
Good things coming out of the hotel business. So are you guys must be a lot.
I don't know relief, but certainly much happier.
So just a few questions here first Scott.
Interesting transaction that you were able to negotiate with the FERC older as we think about the go forward.
I.
I assume that the pay rates are they preferred dividends in the quarter and the second quarter is that good run rate going forward.
Yes.
So I think Tony I'll defer to Tony on that yes. This is Tony there Alex.
The expense there in the second quarter reflects a reversal of the.
The deferred dividend some of the deferred dividends on those exchange preferred.
So that's not a good that one five to $1.6 million is not a good run rate, it's closer to $2 million.
Okay. So $2 million is the preferred run rate, we should think of going forward.
That's correct.
Second along the same math.
The shares you issued 154 million shares is that.
The share count that we see for the second quarter is that the appropriate share count for the fourth for the third quarter and going forward or we need to time adjusted.
You need to time, adjusted we did that transaction at the very end of the quarter. So when youre looking at average number of shares outstanding in calculating earnings per share and <unk> per share.
That's that's a weighted average and so it's going to be.
A bit higher than that going forward.
Okay. So if you do it.
And it sounds like we got to add like another one.
2 million shares or something not unlike.
That yeah.
Okay.
Great and then going on to the.
And the leisure.
You mentioned number of Scott.
It was a little fast for me to get everything down, but just big picture as a percent of recovery.
How much have you guys recovered the leisure business and how much have you recovered b.
The the.
Business Lash group bookings.
You've mentioned, where you thought group bookings would be yes. It was 15% in first quarter at 30% and you think third quarter would be third.
60%, so I want to be clear, that's group and business, our business would be incremental to that so.
If you could just answer that.
Yeah, Alex this is Scott so.
Those stats are for group business group contracts and whether that's a business group for a meeting or a wedding leisure group whenever it may be it doesn't account for your individual business traveler you Road warriors that are staying at the hotel on their own.
That's what the statistics are measuring so again, we've seen that incremental increase doubling quarter after quarter.
And we see that trend continuing for the rest of the year. So we're not going to have to see group business nearly fully back 2019 levels, but its obviously coming back at a very quick pace.
And then as I mentioned leisure travel and many of our markets has eclipsed 2019 levels handedly.
Particularly in the Savannah.
In Florida, Georgia markets.
Wilmington, North Carolina.
We're well above the leisure demand that we saw in 2019, so it's helping to fill that gap.
But Scott Big picture <unk>.
Laid out the good.
<unk> for the group.
As a percentage overall, it's great that some of your market.
Our exceeding 2019, but in total leisure is what it's back to 80% of 2019, 90%.
Well I mean, as we as Dave said, our third quarter Revpar is forecasted to only be down 5% to 10% overall the 2019 so.
We're going to be down 60, we're going to be back to 60% of our group bookings for the third quarter.
Means that leisure travel is in excess of 100%.
To fill that gap growing it would be down 5% to 10% on the top line.
That's awesome and then the final question, which segue to that is the discussions with the mortgage holders.
Forbearance modifications.
What they're seeing now that you have.
Uptick in Revpar et cetera are you are you and the lenders getting more optimistic that resolutions will be yes, maybe in the next six to 12 months or is it. The fact that you got from the lenders is it's going to take longer than that to get these results.
Alex It's Dave here I mean, I think we have forbearance agreements on our mortgage.
On our mortgages that we have been aimed to over the past year.
And we're in the process right now of simply repaying the deferred interest and principal and Thats going to take us to the end of next year in terms of additional terms or additional modifications.
Thank the lender community is looking to do any such modifications so.
We are where we are with respect to our forbearance and we have a schedule.
Of repayment of deferred interest and principal.
In our forecast model that we know what it is and we.
Counted for it.
Okay, Okay listen thank you very much.
Thanks Al. Thank you Alex I appreciate it.
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This concludes our question and answer session I would like to turn the conference back over today's call CEO for any closing remarks.
Thank you for joining us on the call. This morning, we look forward to speaking with everyone on the next quarterly call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.