Q3 2021 Sotherly Hotels Inc Earnings Call
Revpar was down 28, 1% with occupancy down 26, 9% and ADR down only one 7%.
These operating metrics were ahead of most of our REIT peers that have reported thus fall thus far for the quarter.
We were pleased overall with the third quarter results and believe the fact that our portfolio is revpar results.
Finished within 10% of 2019 third quarter marks an important step in the Companys recovery. The third quarter started strong with continued pent up demand from the leisure segment as July's Revpar came within approximately 2% of 2019 levels.
The strength of demand continued through mid August when we started to experience some impact from the Delta variance as group meeting planners began showing hesitancy and major corporations pushed back to return back return to the workplace dates and extended travel restrictions.
We also saw the standard demand and leisure demand caused by the return to school something that did not occur in 2020.
Despite this headwind August revpar for our portfolio was only off 12% from August of 2019.
September got off to a good start as the Labor day holiday weekend performed very well for the portfolio from a leisure demand perspective, nearly matching 2019 levels. However, the weakness in the business travel segment continued through mid September and did not fully replace the seasonal trend away from leisure travel.
Regardless group and business travel demand began to ramp up steadily as Covid cases began decline in the latter half of September and into October.
In total September Revpar finished down approximately 16% in September of 2019.
Despite the impact from the Delta variant our portfolio was able to improve incrementally from the second quarter and achieved revpar within the range. We provided for the third quarter during our last earnings call in August.
Our portfolio's best performing hotels during the quarter continued to be fueled by strong leisure travel during the summer months as well as the labor day holiday weekend looking.
Looking at some highlights across the portfolio. The Desoto Savannah continued its stellar performance during the quarterly quarter easily outpacing 2019 metrics with a 24, 3% gain in Revpar over 2019 fueled by rate growth of 23, 1%. The hotel also continued outperformance comps at gaining over 2000 base.
Points in Revpar share during the quarter.
The Doubletree resort Hollywood Beach saw excellent results during the quarter.
With Revpar, surpassing 2019 levels by 12, 6% driven by substantial rate growth of over 34%.
Hotel Alba and Tampa continues to be a portfolio standout as it produced revpar of more than 53% greater than the third quarter of 2019 with ADR growing over 14% and occupancy up more than 34%.
This hotel achieved a revpar index of 131, 4% in the quarter firmly holding its position as the leader among its competitive set.
While the Delta Varian had a moderate impact on the group and business travel segments. We are seeing this business returned this fall is national and regional companies steadily return to the workplace and continue to lessen travel restrictions examining recent booking trends demonstrate the steady acceleration in group and business travel at our hotels in terms of group business. The third quarter produced a <unk>.
The 4% improvement over the second quarter, Meanwhile, business travel improve more than 14% over the second quarter. This year, while still plenty of room to grow compared to 2019. This trajectory of group and business demand recovery is a promising indicator for our company.
During the quarter, our managers continue their excellent expense controls leading to strong flow through and profit margins for the portfolio.
Despite the pressure caused by rising costs of goods and labor our management teams achieved strong margins during the quarter demonstrated by hotel EBITDA margins more than 300 basis points above the third quarter of 2019, many cost savings initiatives such as regional positions Cross training just in time deliveries and simplified F&B offerings are expected to become <unk>.
Permanent S&P's of our properties moving forward. Meanwhile.
Meanwhile, hiring is slowly ramping up in proportion to the return in travel demand as staffing shortages have improved significantly in the past six weeks as children went back to school vaccination rates improved and enhanced unemployment benefits expired.
Looking at corporate activity in June the company entered into a hotel person sale agreement to sell the Sheraton Louisville Riverside.
During the quarter the company terminated its agreement due to the buyers and ability to perform as a result of the termination of the buyer forfeit into $200000 deposit associated with the agreement we will continue to monitor opportunities for the disposition of this property and.
In addition, during the quarter the company elected to withdraw our S 11 registration statement with the SEC, which contemplated an unsecured note offering.
We determined that market dynamics did not align with our desired pricing and structure. While this is not the outcome. We are seeking similar alternatives are being explored as the industry continues its recovery, Dave will comment more on this transaction and how it fits within our overall capital structure later in the call.
I'll now turn the call over to Tony Thank you Scott.
Reviewing performance for the period ended September 32021 for.
For the third quarter total revenue was approximately $35 5 million.
Renting an increase of 146, 2% over the same quarter last year.
Year to date total revenue was approximately $92 5 million.
Renting an increase of 63, 7% over the same period in 2020.
Comparing third quarter results to the same period in 2019 total revenue fell short by approximately $7 1 million or 16, 6% and.
And comparing year to date results to the same period in 2019 total revenue fell short by approximately $49 million or.
Or 34, 6%.
Hotel EBITDA for the quarter was approximately $8 9 million compared to a deficit of approximately $1 2 million from the same quarter last year.
Year to date hotel EBITDA was approximately $22 8 million.
Compared to a deficit of approximately $1 3 million in the same period as well.
Comparing third quarter results to the same period in 2019 hotel EBITDA increased slightly by $27000 or 3%.
In comparing year to date results to the same period in 2019.
Hotel EBITDA fell short by approximately $14 9 million.
With 39, 5%.
For the quarter adjusted <unk> was almost breakeven at a deficit of approximately 51000.
A vast improvement over the deficit of approximately $8 6 million in the same quarter last year and year to date adjusted <unk> with a deficit of approximately $4 $1 million.
Representing an improvement of 83, 8% over the same period last year.
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. The current 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 September 32021, the company had total cash of approximately $32 7 million <unk>.
Consisting of unrestricted cash and cash equivalents of approximately $19 6 million.
As well as approximately $13 2 million, which was reserved for real estate taxes capital improvements and certain other items.
Looking at cash burn for the third quarter the company experienced a cash burn of approximately $750000 compared to our forecast back in August of a cash burn of approximately $1 2 million.
Our positive net change of approximately $450000.
Looking ahead to the fourth quarter, our outlook continues to trend positively the company estimates that the average monthly cash generated at the hotel level to range between $2 $95 million to $3 million.
We expect corporate level G&A expenses to range between 600 $650000 per month.
Capital expenditures of approximately $5 million per month, and outlays for scheduled payments of principal and interest.
Our expected to be approximately $2 $35 million per month.
Overall, we're expecting a total cash burn of approximately $5 million per month as seasonally adjusted level of hotel profitability assist us in meeting our debt service obligations, which includes scheduled repayment of deferred interest and principal originating from last year, a forbearance agreement.
At the end of the quarter, we had principal balances of approximately $385 million outstanding debt at a weighted average interest rate of four 6%.
Approximately 87% of company's debt carries a fixed rate of interest.
At the outset of the pandemic, we have significantly since.
Since the outset of the pandemic, we have significantly scaled back our capital projects and anticipate that capital expenditures will consist primarily of the replacement of system is critical to the operations of our hotels we.
We anticipate total capital expenditures.
For calendar year, 2021 of approximately $3 1 million of which half will be spent in the fourth quarter.
In March of 2020, we announced the suspension of our dividend and the deferral of payment for dividends on our common stock announced two months prior.
The suspension and deferral eliminate a draw on the company's cash reserves of approximately $4 $4 million per quarter, and I will now turn the call over to Dave. Thank.
Thank you Tony and good morning, everyone. Overall, we were pleased with our portfolio's progress during a quarter, which was characterized by continued strength in leisure demand as well as moderate impact caused by the Delta Varian the quarter started exceptionally strong with pent up leisure demand continuing to drive performance during the month of July which outperformed.
July 2019, <unk> hotel EBITDA by more than 18%. This represents the first month since the onset of the pandemic where financial performance exceeded the same month in 2019, an important milestone in the recovery of the company by mid August the Delta Varian started to impede the return of group of business travel.
<unk>, which industry analyst forecasted would replace the strength in leisure travel during this timeframe.
Fortunately by mid September Covid spheres in our markets had mostly been quell this case counts and hospitalization started to decline, resulting in the resumption of group of business travel overall, we were very pleased with our manager's ability to preserve profitability and to eclipse 2019 to hotel EBITDA for the.
Period, and especially impressive accomplishment considering the headwinds faced during the quarter.
Several unique challenges continue to face our industry is that as they were.
Recovery unfolds heading into the new year as previously discussed the labor shortage has been particularly difficult for our industry. However over the last several weeks there has been a noticeable shift in a more qualified employees are starting to be hired at our properties as enhanced government benefits have expired and children have returned to normal.
Personal learning.
This is evidenced by the encouraging data from the latest jobs report with payrolls rising more than expected and the unemployment rate falling to four 6% its lowest mark since the start of the pandemic secondly in recent months the threat of inflation has become a major focal point of the business community as wages and cost of goods.
So cost of goods sold have steadily increased while inflation does not appear to be transitory. We believe our revenue management and pricing strategies can help offset increase in costs, thus minimizing its impact on our operations.
Last week, Osha announced starting January 4th private sector companies with 100 or more workers must require their employees to be fully vaccinated against COVID-19 will be or to be tested for the virus weekly. This executive order is being highly contested and litigated and we will continue to monitor its impact on our company's operations.
Lastly, supply chain disruptions have impacted lodging industry, making it difficult to efficiently receive shipments of food and beverage guest amenities and other supplies. Our management teams have adapted to this challenge by utilizing local suppliers at simplifying menus and guest amenities.
Despite the challenges still facing our industry recent demand trends bring optimism for the continued recovery of our business first one of the most important catalysts in the return to a normalized lodging environment is the resurgence of business travel. Although the return of this segment was delayed due to the due to the Delta area.
Third quarter business travel improved by 14% over Q2.
And in recent weeks, we have seen business travel continue its upward trajectory, while major corporations are still hesitant and reverting to normal travel policies and a full return to the workplace demand from small and medium sized businesses are nearing stabilization we.
We expect most major corporations to resume more normalized office environments and travel policies in the first quarter of next year.
Additionally, recent data for major Airlines reported the best corporate booking train trends since the onset of the pandemic a positive indicator for the lodging industry.
While also impacted by the Delta variant group travel is starting to pick up in our hotels has more corporate association of government group events are being held at our properties to supplement the social events that have made up that made up the majority of bookings in this segment those groups that canceled in the third quarter as a result of the delta variant or simply Rebooking and.
Later months, indicating that the demand is there looking to 2022, our group booking pace for next year is approximately 71% of the same pace. In 2019. This is a substantial improvement over last year. When our group are similar group booking pace was approximately 50%.
Of the group booking pace in 2019.
<unk> growth continues to surprise to the upside and we believe that will fuel a faster than expected recovery for the industry pent up travel demand coupled with consumers increased savings during the pandemic has led to less price sensitivity among travelers, enabling our managers to drive rate at our hotels in fact during the quarter, we achieved a 10% <unk>.
Premium for the composite portfolio over 2019, our managers were able to couple those strong rates with diligent management and cost controls at our properties to achieve strong margins and excellent flow through we expect this trend to continue into next year.
Two recent headlines bring additional optimism for the recovery of the lodging sector first.
Last week, Pfizer announced that are in clinical trials. Its COVID-19, pill, which can be taken after showing symptoms produced very promising results because the oral treatment can be easily administered at home officials believe the drug should be a game changer in putting an end to the pandemic.
We believe this should fuel demand by providing a layer of additional confidence to consumers, who may have still been hesitant to travel.
On Tuesday, the <unk>.
Reopened its borders to international travel, which had created additional demand for U S travel and accelerate the industry's recovery.
Looking at our strategy and the strategic initiatives for 2022, as Scott mentioned the market dynamics in September did not align with our desired pricing and structure for an issuance of senior unsecured debt in the public markets. We intended to use the proceeds of that debt to repay the high cost covenant heavy liquidity loan we took in 2012.
At the height of the pandemic the repayment of the load the repayment of that loan remains a top priority for the company and we believe there will be opportunities in the coming year to repay that debt in whole or in part.
Looking towards 2022, we believe the location of our assets in the Southern U S will continue to act as a tailwind for our portfolio and a competitive advantage versus our peers.
Demand in those destinations has outperformed the broader U S logic market and we believe should continue in this pattern, especially during the upcoming cold weather months. Further we believe our urban markets are poised to break out as demand generators continue to reopen business travel begins to normalize and more sizeable groups book event.
And room blocks at our hotels as a result of the additional upside we see for our portfolio along with the recent decline in Covid cases in our markets. We are optimistic about our growth prospects heading into 2022.
We remain dedicated to proactive investment strategies, making shot operational decisions, while delivering long term value for our shareholders.
We will now open the call for questions.
Thanks, Keith if you would like to ask a question. Please press star followed by one on your kind of thank you Pat now.
Change your mind I would like to withdraw your question. Please press star.
When preparing to ask your question please ensure you're fine.
Our first question comes from Tyler <unk> from Janney Hi, net. Please go ahead. Your line is now open.
Thank you good morning, everyone I appreciate all the detail here.
Very helpful. Just two follow up questions for me.
I wanted to dive in a little bit more on the leisure travel topic, certainly been a bright spot for the industry and for your portfolio interested your perspective on the sustainability of that demand, especially as we move into the winter here and then also interested when you.
They had possibly to 2022.
What your perspective is on the sustainability of the rates and the ADR in that in that business, which has been exceptionally strong.
Yes, Thanks, Tyler right now I mean, as you well know leisure has been a mainstay for the lodging industry and in a lot of our hotels and I don't see necessarily a major shift going backwards in that segment. I mean, we still have a ways to go even though the rate has been very very strong.
I still think we're going to get the same amount of leisure travel that we've historically seen at our hotels, especially those that.
That benefit from that segment.
We just don't see booking trends where rate is going backwards right. Now now granted leisure is a shorter term booking window than the longer longer term group window, but right now what we're seeing is.
Right.
It's still being very attractive and I think part of that is there.
A lot of pent up demand, we did have a lot of excess what I would call stimulus money that was sloshing around the markets and people took advantage of the extra cash in their pocket to travel.
But at the same time.
The rate picture is also a function of the general pricing in the economy and thats not going down anytime soon.
Okay. Okay.
And why does that commentary on them.
I think that the outlook, which you provided in terms of group for next year in corporate.
It was quite positive I understand that you can't give guidance, but just at a high level. How are you thinking about 2022 from a revpar and an EBITDA perspective is it possible that.
To get back to 2019 levels next year, just given everything that you are seeing out there.
Yes to your point.
The answer to that and if you even if I did I probably could tell you right now on the phone, but I am very encouraged by what we're seeing.
Our manager with respect to pace and expectations now are we going to get back to our portfolio Revpar of 2019, I don't know.
But this year has been a very pleasant surprise on that front and I don't see us going backwards.
Unless something happens in the market that we haven't anticipated yet.
I don't think rates necessarily going to back off.
And with respect to EBITDA I think I think margins are still being managed correctly in our industry for a variety of reasons and our portfolio is no different I think what you may see though going forward as revpar when I say read probably globally in our in the domestic markets Revpar.
I feel it's going to be a little sooner to come back to maybe some of what some of what you read in the consultants EBITDA may be a little later than that because of some of these cost issues that have emerged in the last 90 to 120 days. So I think EBITDA may lag a little bit behind the Revpar increase.
Yes.
Okay, Okay excellent.
Other questions for me I'm interested what youre seeing on the supply front and some of your markets.
Martin discussion about supply growth down substantially from where it was pre pandemic and potentially that's a long term tailwind.
Plumbing that sure that Youre noticing in your in your markets.
Well.
<unk> this a little bit to the recession.
Properties that were well under development probably had a pause.
But theyre going to get open, but I would tell you the lending community is still not favorable on new development for hotels, I would think that probably be a fair statement to make.
I think there's I think there's bigger demand for for real estate and for hotel properties for alternative use reasons.
Than necessarily new starts for hotels.
There's a lot of negative sentiment about.
New supply and what about this new normal with respect to people not working in the office, we think that that sentiment is misplaced here. We think even if people are working from home more than they used to they are still going to be a lot of business travel.
In travel in general So we don't necessarily think that's going to be a big negative for hotels. So I.
I don't see any major new supply issues that have not yet.
Ben reveal to us that we didn't know a year ago or two years ago.
Okay. Okay.
Last question for me just interested what youre seeing on the transaction front obviously.
The sale in Louisville didn't.
Didn't come to fruition.
Other assets in the portfolio, perhaps that you might be looking at for sale and how youre thinking about the removal aspect going forward now.
Well I mean, I think Louisville was an opportunistic sale for us. Unfortunately, the buyer couldnt perform there has been additional interest in that hotel. So we're looking at that I mean.
Generally speaking hotel prices are very very attractive right now in terms of sale prices.
So.
Whether we have the interest and other hotel sales will look at those each individually as they pop up.
The acquisition market is very active right now and pricing is very high.
Okay.
Okay. That's all for me appreciate all the detail. Thank you.
Thanks Tyler.
Thank you Tyler and the next question comes from Alexander Goldfarb from Piper Sandler Alexander. Please go ahead. Your line is now open.
Oh, good morning, and thank you. Thank you so just a few questions here.
Can you just.
Just help me understand.
Because it's really interesting you guys were able to drive higher ADR.
Overall occupancy was down so.
I mean, we've all seen the tourism impact you go to airports et cetera, you can see the lights, so what's going on so basically.
The tourists are willing to pay higher rents.
Alright.
I would think that that would translate to more occupancy. So can you just sort of walk through what you guys are seeing and why.
It seems like you definitely have pricing power.
We see higher occupancy as well maybe you can just walk through or maybe it's just portfolio mix, where your destination hotels are doing really well, it's still at that more.
Business travel hotels are still lagging and maybe that's the offset.
Well that's part of it you are right I mean, we do very well on the weekends, especially in our leisure destination locations and we've suffered a little bit as everybody else has and those destinations on weekday travel I will tell you. There are selective there are selective indications in our portfolio for instance, where we've tried to manage our.
Our rate structure and maintain rate integrity.
In some locations and sacrificed a little occupancy for that and that's not necessarily a bad thing given what we've gone through over the last two or three quarters with respect to labor shortages and I will tell you for instance in Hollywood, where we have a large presence in Florida.
The large 1000 room resort diplomat opened.
And they are.
Our luxury brand on the Ocean front with 1000 rooms, and they are undercutting the entire market with rate.
So we've tried to maintain rate integrity.
And that of sacrifice, a little occupancy and that actually helps with flow through but our thesis is the group returns and as the business travel returns, we're going to backfill that occupancy with.
With that additional segment business.
But.
Your observation is well taken.
Okay. So if I understand you correctly. So basically one is you have labor shortages. So in a sense you don't want the hotel to be to fall.
Is that basically what one of the one of the things they are grappling with.
No not really I mean, we can service the guests and like I said on weekends, we have sometimes with.
100% occupancy on the weekend, so it's really not about guest service delivery, but.
And it's not a conscious decision to take less occupancy, sometimes we just don't get it during the week.
Yes, Alex this is Scott.
I think at the end of the day.
But we're off from 2019 occupancy, but were more than double what we were doing last year. So we're obviously doing doing fairly well in terms of occupancy recovery is just ADR is just.
Far outpacing the occupancy recovery for us.
And I think Thats a lot of our peers.
No.
Great that's definitely jives with.
But what we can when my wife would look for for vacation hotel rates God bless.
And then on the operation you spoke about the efficiencies that you gain the margin improvement and how you think that will that will be permanent you also spoke about business steadily getting cutting back. So in general do you feel like you guys have put the portfolio.
In the best position possible or do you feel like there is some other things that you guys can do outside of demand coming back to help improve things.
Yes, I think obviously I mean, we're still we're still ramping up operations. So I.
I mean part I think we're going to have good margins and good flow through going forward, but quite frankly, I mean part of our ability to flow.
So profitability right now is because we have limited food and beverage operations and we're only bring them back to the type of amenities as the demand dictates it food and beverages.
It is less profitable.
Department for us at our hotels.
As we've reopened those all of the outlets in all of our service and Wendy's.
That's when we start.
Having a little more margin pressure, but I think we're in a pretty good position to manage that and we are only going to bring back those services and those Mendes Hasnt makes sense and as we believe theyre going to be profitable for the operation.
But there's definitely more opportunity as we get these hotels fully ramped up we're far from.
What we would consider running on all cylinders yet.
At a handful of our hotels that are.
We've called out in the past the urban hotels are still really running on skeleton staffs and very minimal amend these just because the demand is not there yet.
Okay and then another question.
The Covid loan that you that you took obviously during COVID-19.
Good luck.
Loan that has I think the kicker on the backend.
Is there a set dead.
Deadline with that loan to be repaid or is there any sort of accelerated or increasing interest rate or payback feature that if you don't pay it back by a certain time kicks in.
No it's a three year term.
And it's.
Flat interest rate and flat repayment.
<unk>.
Okay fixed three year term.
Right.
We can prepay it.
And events.
We still own the multiplier.
Okay, great Okay.
That's it.
Thank you.
Thanks, Alex.
Thank you Alexander our next question comes from Robert Smith from Lisa.
Robert Please go ahead. Your line is now open.
Great Great performance guys, Great performance, Hey, I was wondering.
Do you guys plan on installing electric car charging stations at your hotels.
I'm going to add I'm going to have Scott answer that because I don't know.
That's not a not.
Not a primary focus for us I will tell you in the past we've been approached by Tesla and some of the other companies about possibly installing at certain locations that have high traffic visibility, but it's not a not a ton.
High priority for US right now nor north of the guest.
Okay. Thank you.
Yes.
Thank you.
As a reminder to ask any further questions. Please press star followed by one on your tenant Thank you Pat.
I have a question from William will come from independent William. Please go ahead. Your line is now open.
Yes, Thank you for taking my call.
I would like to ask about thing.
Suspended dividends on the preferred stock.
Similar to how that is accounted or do you have a total all day accumulated.
All three of them.
Can you discuss that please.
Sure.
This is Tony the mask you William.
We follow a proper accounting for that we don't record any of those liabilities.
On the balance sheet as a.
As the dividend liability until those dividends are declared.
Our board has some.
Spend at those dividends are not declare them now for about.
Six or seven quarters.
So we have some we have accumulated about $14 million worth of.
Undeclared dividends and we disclosed the totals every quarter in our filing with the SEC on either Form 10-Q, our Form 10-K.
Okay. Thank you.
Thank you William at the final reminder, to ask a question. Please press star followed by one.
One on your telephone keypad now.
We now have a question from Michael <unk> from Chopin, David Michael. Please go ahead. Your line is now open.
Yes. Thank you.
Good quarter.
A difficult time last year.
Yes.
Really pulling it together I have a quick question now on business.
So have you guys done any internal.
Studies or the wind business travel will be picking up if you have any idea when those proceeds will get back to let's say 90, 95% occupancy employee business travel.
Yes look it's picking up now so last quarter I mean, BT is still probably our last thing to come back, but as I mentioned in my remarks, Mike.
Last quarter was markedly better than second quarter, and we're seeing the same sort of trajectory in this quarter and we think not only the transient business traveler, but the corporate group business that coincides with the BT traveler will come it will come back.
Strong next year I mean, this was the year for transient leisure travel. We think next year will be the the return of business travel now when we get back to the same level of BT segmentation that we saw in 2019.
That's a crystal ball that I just don't have.
See varying consultant that out there or other.
And industry data some of it will say.
'twenty 'twenty four 'twenty five but the airlines the data, they're putting out and I think it was either delta or southwest they expect their business travel.
From a flight perspective to be back to 90% to 100% by the end of next year, which we think.
That'd be great it seems a little aggressive.
And thats kind of straight out of their last earnings call.
Michael the other thing Yes go ahead.
2025.
Okay.
That's on the that's on Canada.
<unk> de consultant data you see and then again, you see something more aggressive where it's at where an airline I'll say, it's going to be all the way back by the end of next year, we think it's probably a little bit closer a little bit closer to the end of next year that is 2024 25, given what we're seeing.
Thank you.
Any other questions Michael.
No that's great. Thank you. Thank you both thank you I appreciate it.
Thank you Michael This concludes our Q&A session. Thank you for joining today's call I will now pass you back to Dave Wilson for closing comments.
Thank you everyone for joining us on the call and we look forward to speaking with everyone next quarter.
Thank you everyone. You may now disconnect your lines.
Okay.
Yes.
Okay.
Yes.
Okay.