Q4 2021 Sotherly Hotels Inc Earnings Call
In our portfolio and its competitive set during the period. It produced revpar nearly 40% greater than fourth quarter 2019, with ADR growing over 12% and occupancy up more than 19%. This hotel achieved a revpar index of 126, 3% in the quarter strongly positioning itself as a leader in its comp set.
The Desoto Savannah continued its excellent performance during the quarter again, outpacing 2019 metrics with a 17, 3% gain in revpar fueled by strong rate growth of 14, 2%.
The hotel also continues to outperform its comp set gaining more than 'twenty 100 basis points in revpar share during the quarter.
Hotel ballast in Wilmington saw excellent results during the quarter as Revpar surpassed 2019 levels by 12, 6% driven by substantial rate growth of over 34%. The property gained more than 6000 basis points of share during the quarter as an encouraging level of group business returned to the hotel.
Although the Delta and Omicron variance had a moderate impact on the group and business travel segments. During the fourth quarter. We are witnessing continual improvement in these segments as national and regional companies steadily return to the workplace and continue to lessen travel restrictions.
<unk> recent booking trends demonstrate the steady acceleration in group and business travel at our hotels in terms of group business. The fourth quarter produced an 11% improvement over the third quarter, while business travel improve more than 10% thus.
Thus far during 2022, we've experienced further improvement to these segments and are projecting this trend to continue as the first quarter is shaping up nicely with citywide events in house meetings, and corresponding group room blocks holding strong.
While still plenty of room to grow compared to 2019. This trajectory of group business demand recovery is a promising indicator for our company.
During the quarter, our managers combined prudent revenue management strategies with excellent expense controls to achieve strong flow through and profit margins for the portfolio. Despite rising cost of goods and labor. Our management teams achieved strong margins during the quarter exhibited by hotel EBIT margins more than 200 basis points above the fourth quarter of 2019 many.
Cost savings initiatives, such as clustered regional sales and HR positions Cross training just in time deliveries and simplified F&B offerings are expected to become permanent srp's for our properties moving forward.
Meanwhile, our managers have been carefully ramping up staffing levels in relation to the return on travel demand.
We expect that our ability to achieve strong rates will continue to offset the increase in labor and other rising costs associated with an inflationary environment.
Turning to corporate activity during the fourth quarter. The company entered into a purchase hotel purchase and sale agreement to sell the Sheraton Louisville Riverside. The company recently announced the completion of the sale for a purchase price of $11 5 million as we stated before the hotel no longer fit the long term strategic objectives of the company.
We believe the company garnered an attractive valuation for this asset in the current market and this disposition will be immediately accretive to our cash flow.
Also during the quarter, we executed agreements to exchange 85000 shares of preferred stock for approximately 690000 common shares the execution of these exchanges fit with fits with our long term strategy to shore up our balance sheet. While also preserving liquidity this transaction eliminated approximately $335000 or deferred.
Dividend payments as well as approximately 170000 in annual preferred dividend payments going forward.
And lastly, during the quarter, we entered into an agreement to sell the doubletree by Hilton Raleigh Brownstone hotel for purchase price of $42 million, we anticipate a closing date no longer than June <unk>.
The company intends to use the net proceeds from the sale of the hotel to repay the existing mortgage of property repay a portion of the secured notes with Kemmons Wilson.
To make any required distribution of the company's preferred stock related to maintaining the company's REIT status and for general corporate purposes, I will now turn the call over to Tony.
Thank you Scott reviewing performance for the period ended December 31.
For the fourth quarter total revenue was approximately $35 1 million representing.
Representing an increase of 145% over the same quarter in 2020.
For the year total revenue was approximately $127 6 million.
Representing an increase of 78, 4% over the full year 2020 are the same period in 2020.
Comparing fourth quarter results to the same period in 2019 total revenue fell short by approximately $9 2 million or 28%.
In comparing full year 2021 results to the full year 2019 total revenue fell short by $58 2 million.
Our 31, 3%.
Hotel EBITDA for the quarter was approximately $8 1 million.
Yes.
Thank you and good morning, everyone.
We were pleased with the continued progress of our portfolio during the fourth quarter and the overall progress we made as a company over the course of the year.
Although 2021 recovery followed.
And uneven trajectory the year brought a better than expected rebound in hotel demand and our portfolio's results far exceeded our expectations.
The first half of 2021 saw hotel fundamentals improve dramatically across many of our markets as the traveling public returned to more normalized travel patterns. During the summer months as pandemic restrictions were lifted across the nation leisure travel dominated the landscape as a number of our resort and leisure hotels exceeded.
<unk> 2019 revenue production levels.
Although the Delta variant moderately impacted the return of group in business travel during the fall months, we only witnessed these effects and hotels heavily oriented towards business travel.
In general the impact of business and group travel that occurred as a result of the Delta in Omicron variance were offset by robust robust leisure travel, which finished the year strong. Despite these disruptions.
During the year I was especially proud of our team's ability to navigate the challenging environment with quick and decision quick and decisive decision, making we surpassed both top and Bottomline budgeted expectations for the year with Bottomline results outstripping expectations by a substantial margin.
We achieved this goal by working closely with our management team to reconfigure it to reconfigure the operating models at our hotels, we were able to streamline streamline operations by simplifying guest amenities and staffing models, while utilizing dynamic revenue management strategies with a focus on driving strong rates as.
As a result of these measures we were able to achieve significant improved flow through.
And in addition, our hotels performed well against their competitive sets with the portfolio, gaining nearly 800 basis points in revpar share for the year, our ability to adapt to the new and changing lodging environment was pivotal in achieving our financial goals for the year as.
As we navigate the recovery our industry continues to face challenges.
<unk> costs have been particularly difficult for our industry. Our management teams are focused on minimizing the impact of inflation on our operations by diligently controlling costs, while focusing on driving rate as a result of these efforts hotel EBITDA margins exceeded the fourth quarter of 2019 by more than 200 basis.
Points, while ADR increased more than 4% over the same period.
We expect this pricing power in ADR to continue as consumer balance sheets remain strong despite ongoing inflationary pressures.
We have seen labor shortages ease in many of our markets and our managers have worked diligently to adopt staffing models that match not only demand for hotel rooms, but also demand for other guest amenities in January the Supreme Court blocked.
The much discussed vaccine mandate for private sector companies with over 100 employees, which helped us avoid significant disruption at our hotels.
With the impact of the Omicron variant fading in recent weeks. Most experts agree we are exiting the pandemic and entering a more manageable phase of the virus that allows a return to a level of normalcy, we have not seen in over two years with that change we are experiencing a positive shift in momentum in the logic markets as bookings.
<unk>, along with rising average daily rates provide for a positive outlook for the remainder of 2022.
Most markets have seen a complete reversal of COVID-19 restrictions, which bodes well for travel as pent up leisure demand and returning group and business travel is evident in forward bookings the positive momentum is especially evident in the booking trends at our urban business and group centered market such as Arlington, Virginia Atlas.
Into GA in Houston, Texas.
These segments have lagged for much of the pandemic due to restrictive government mandates and stringent corporate travel restrictions.
In addition return to workplace rates have climbed significantly in recent weeks, indicating post omicron efforts to get employees back to the office.
Evaluating the evaluating the portfolio's group bookings for the year validates this shift and traveler behavior currently our portfolio's group booking pace for 2022 is approximately 79% of the same booking pace. In 2019. This is a significant improvement over last year.
When our group booking pace for 'twenty 2021 was approximately half of the group booking pace in 2019 meantime, we have 45% more tentative group bookings for 2022 than we did at the same time in 2019.
In recent weeks, we've seen a meaningful increase in transient bookings, which were up nearly 20% over 2019 levels for the month of February these encouraging trends combined with rapidly declining case counts steady improvement in the return to office rate and continued pent up leisure demand bring optimism for the standard risk.
Sustained recovery of our business.
We believe our portfolio is high quality product diversified mix of business, an ideal locations concentrated in southern coastal markets positioned the company well among among its peer set. In addition, we remain optimistic that the U S is pressing beyond the pandemic and are hopeful that the high infection rates of the <unk> variant.
We will accelerate the shift of post pandemic travel norms. As a result of these factors we are confident in our growth prospects for the remainder of the year and beyond we remain dedicated to proactive investment strategies, and making sound operational decisions to deliver long term value for our shareholders.
And with that we can open up the call to questions.
As a reminder, if you'd like to register a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by two and please ensure you're muted when speaking.
Again star followed by one to register a question.
Our first question comes from Tyler Battery with Janney Montgomery, Scott ton at the mine is yours.
Good morning. This is Jonathan on for Tyler. Thanks for taking our questions first one for me I was wondering if you could provide some additional color on your revpar assumption for the first quarter and I'm curious if that 20% estimate.
<unk> necessitate.
Any meaningful further recovery in March.
The continuation of the current trends that Youre seeing.
Yes, good morning, Jonathan It's Scott Thanks for the question.
That estimate based on the most recent forecast we have which.
Includes a pretty good draft number for February an updated forecast for March.
So.
We stayed in our notes had a pretty rough start to the year with Omicron mid January and the first part of February .
We're not good compared to what we were hoping for.
Especially in.
Our southern markets or southern.
Southern most markets, meaning Hollywood Jacksonville Savannah, some of those markets were really impacted by it but things are really starting to pick up now so thats.
As good of a estimate we can give at this point.
Okay, Great I appreciate all the detail and then can you just remind us what a normalized mix of leisure versus corporate it and why.
That was in the fourth quarter, and maybe discuss the opportunity and the recovery there for the overall portfolio.
Well I think.
On the mixed basis, our transient is a combination of leisure.
And corporate business and it really depends on hotel to hotel.
Some of our more urban hotels like Arlington, which is in the suburban or in the urban D C area versus.
Hotel like Savannah, Georgia, which is the leisure market. So.
It's really dependent hotel to hotel.
What we saw last year, including the fourth quarter was.
<unk> sustained leisure demand picture, what we thought we were going to see in the fourth quarter was a return to more business to see the emergence of more business travel corporate travel and group and there was a lot of that in the on the books in the fourth quarter as we started but is the delta variant.
Kind of took hold at the end of September and then later the omicron that those those bookings got stretched out into this year.
I don't know if that necessarily answers your question or total or not but.
It's a mix where.
It's really by property dependent.
Yes.
Okay got it very helpful and then.
Turning to the labor discussion you guys walked through the costs that are running through the business.
Very well, but I'm curious what the what the hiring market is been like how many ftes are you currently running versus normal and more broadly on the cost side.
Any potential that you see there for long term cost savings I know you said that that rate should you think will remain elevated but.
Long term cost savings and the business anything you see there.
Yeah.
Well I think.
Some of the brands have highlighted that there may be some long term changes in operational standards, which may reflect in some cost savings for us.
At the same time, you're seeing a more touchless.
Guest impact.
Environment, which will probably <unk>.
Survive the pandemic.
That in part some cost savings for us the labor markets have eased of late so.
So we're seeing more people back in the hotels, and we're able to staff the hotels more appropriately as amenities.
Our reintroduced at the assets.
I think youre going to see cost continue to decline.
There are things that are there.
The variable cost structure at the hotel with respect to paying your utilities and all the other things you have to pay to operate the hotel those costs are not fixed they will go up rate will go up it's just a measurement of prudent management, that's going to allow us to continue to drop dollars to the bottom line.
<unk> and sustain our margins and we've been successful so far in doing that and I think it's 2022 unfolds, we're continuing that trend.
Great I appreciate all that detail and then last one from me on the kw alone any updated thoughts on the exit there what would you need to see to get more aggressive on exiting alone. Maybe later this year.
The additional asset sales makes sense at the right price any color there.
Well as <unk>.
Scott mentioned in his remarks.
We entered into a purchase and sale agreement to sell our asset in Raleigh.
And if that is successful later in the year in the next few months that will go towards a significant pay down of that loan not complete but vast majority of it will be.
Back through the sale of Raleigh, and let me pause just buy that's a broader balance sheet strategy, we sold the Louisville asset.
We intend to sell.
Only asset and if we're successful on those counts.
We will pay off the majority of that K WC liquidity note and that will go towards really.
The removal of about $55 million worth of leverage on our balance sheet.
And at the same time selling this.
Two hotels.
Will allow us not to spend upwards of $22 million on required lifecycle capex that we would otherwise have to pay to re license both of those hotels.
So by mid year, if we're successful on those strategic points will remove about $55 million worth of debt and save about $22 million worth of Capex.
And that is a total amount of well over $75 million, which will really help us.
And put our balance sheet.
In a better condition and have a more healthy balance sheet going forward.
Okay, great. Thank you for all the color. This morning, that's all for me.
Thank you Keith.
Our next question comes from Alexander Goldfarb with Piper Sandler Alexander Please go ahead.
Oh, Thank you and good morning, just continuing on that on the kw C. Can you remind us of what the current balances including.
The additional kicker at the AD so what the current balances on that note, including the full payout.
The face to face amount is $20 million yes.
The factor on the back end is nine 7% nine 4% $9 four excuse me, yes. So Alex this is Tony answered about $23 million.
As of the end of.
December .
And Tony the $23 million that includes the kicker or that.
Got it got it.
On a pro rated amount of the kicker that thats been expensed.
I mean, the kicker is payable whether we execute it today or a year from now so the amount to exit the loan is still 29 point before exit Brightcove alone was $29 4 million.
Okay, Yes, yes, so the 'twenty three if not so what you would so to the prior question. Yes. The proceeds from these hotel sales really has to pay down that basically 30 $30 million in round numbers Scott.
Right exactly right Alex Yes, it's 129 forward $29 four is the number in Raleigh sale is successful will pay off.
Yes about two thirds of that total.
Okay. Okay. In addition to the mortgage on the Raleigh.
And Additionally, exactly edition the mortgage on the on Raleigh, and closing costs and yes.
Okay, and then as far as the hotels go you mentioned Raleigh Louisville.
Are there other hotel sales that are planned or other hotels, where Dave as you mentioned future branding Capex, what have you where it just doesn't make economic sense trying to get a sense for.
Where the portfolio will be sort of a year from now on your holdings versus no. These hotels that you've announced so far that sit there is nothing else.
And planning.
Well I think I could better answer that when we consummate the sale of Raleigh.
That's probably the way I would best answer that question.
I don't foresee us selling any assets in the next.
Two or three or four quarters. If we're successful on all those fronts with selling Raleigh, we've completed the sale of Louisville as planned we've saved.
21 $22 million in Capex that would otherwise have needed to be paid over the next 36 months pay down all of that debt.
Foresee us liquidating any more assets in fact, I think the equity component of a lot of our hotels is going up right now.
And if we have to refinance or do some other financing activity to pay off the final amount of the K WC loan I think we'll be able to do that organically without having to sell a hotel will go back to the markets.
Okay, and then just can you remind us is there a shot clock on the kw sake is there like a fixed due date or that to open ended at your discretion.
At the end of 2023.
End of 'twenty three Okay and then the final question is.
You mentioned.
Additional proceeds could pay the preferred.
You had the exchange on the preferred to comments that alleviate some but I think you have about 14 five for $15 million of accrued dividends, so far how realistically how soon.
Or when do you think you'd be in a sort of.
Positive tax position that you would start to have to pay those dividends do you think that that's something in 'twenty three or is that beyond yes based on what you see currently in your budgets.
Yes, I can't really give you a projection on that Alex what I would tell you is the K WC note.
As the first priority for us.
Getting our debt paid down deleveraging the company and watching the portfolio respond to the recovery, we get demand back we get flow through we get additional EBITDA recovery and start to approximate those types of EBITDA levels. We had pre pandemic. That's when we I think we would see.
To look at commencing the preferred dividend repay.
Repayment and chipping away at that accrual, but.
But I can't give you a date on when we think that will start right now okay and just one final forgive me can you just.
Scott can you just remind the preferred to common conversion can you just go over how much preferred was exchanged for how much common and then what the existing share count is that we should be using for modeling on the common shares.
Sure. We did 85000 preferred shares for 690000 common shares in December .
In terms of the share count for Tony on that one he is pulling up his numbers.
Here.
We've got about $17 4 million.
$17 4 million.
Shares of common outstanding right now.
And then we've got another about $1 million one.
Units, so on a combined basis about 18 five.
Okay. So 18, five should be what we used for the first quarter.
Yes.
Great. Okay listen thank you very much.
Thanks Al Thanks, Alex.
Yes.
We have no further questions on the phone line, so I'll hand back for any closing remarks.
None here. Thank you everyone for joining us and we'll speak next quarter. Thanks.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Okay.
Okay.
[music].
Yes.