Q1 2022 Sotherly Hotels Inc Earnings Call

Yeah.

Hello, everyone and welcome to the South of the hotel's first quarter Chief us into the G. I know.

My name is Victoria and now with 19 your call today if.

If you'd like to ask a question during our presentation. My G site by pressing star one on your side of thing keypad. If you wish to withdraw your question. Please staci. If you have a job that's online. Please press the red flag icon when PREPA and ask a question. Please ensure that your line is on mute locally.

I will now pass over to your House Max She began please go ahead.

Thank you and good morning, everyone.

Did not receive a copy of the earnings release, you may access it on our website at southerly hotels Dot com.

In the release the company has reconciled all non-GAAP financial measures to 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 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'll turn the call over to Scott.

Thanks, Mac good morning, everyone I'll start off today's call to review of our portfolio's key operating metrics for the quarter.

Looking at the first quarter results for the composite portfolio Revpar was $100.89 driven by an occupancy at 53, 9% and an ADR of $187 23, SaaS first quarter Revpar performance represents an increase of 52, 5% over the same period in 2021 look.

At these figures versus the first quarter of 2019, Revpar was down 17, 2% with occupancy down 22, 9%, but ADR increasing seven 5%.

Overall, we were pleased with our first quarter results. Despite headwinds faced at the start of the year do you do omicron variant and believe the improvement throughout the quarter demonstrates that our portfolio is quickly advancing towards normalization.

Examining composite portfolio Revpar results on a monthly basis benchmark against 2019 highlights the quarters continuous improvement.

January Revpar was 66% of January 2019, Revpar February Revpar grew to 77% of February 2019, while March Revpar actually eclipsed 2019 with Revpar, representing just over 100% of March 2019 results.

While the omicron variant had a substantial impact on all travel segments. During the start to the first quarter, we experienced a transformative shift in consumer behavior. During the second half of the quarter as rapidly declining case counts were combined with a significant increase in bookings, particularly from group in corporate travel. We are encouraged by the performance of our urban.

Market hotels, such as Arlington in Houston, which despite the headwinds caused by omicron easily surpassed budgeted expectations for the quarter following nearly two years of underperformance.

Our portfolio continued to benefit from a sustained recovery in leisure travel, which became even more robust due to pent up demand from the omicron variant in late December and January .

In particular, our coastal markets, such as Savannah, Tampa, Wilmington, and Hollywood experience renewed surge in leisure demand that was combined with a steady return of group demand during the second half of the quarter.

Pricing power continues to be the major driver of profitability, especially for these leisure destinations many of which attracted unprecedented rates during peak periods, such as Presidents' day weekend and spring break.

Our portfolio's best performing hotels during the quarter were again, primarily driven by strong leisure travel, but also boosted by the return of group and business travel looking at some highlights across the portfolio.

The Desoto Savannah continued its excellent performance during the quarter again, outpacing 2019 metrics with an $8 eight 4% gain in revpar fueled by significant rate growth of nearly 35% over 2019, which led to outstanding flow through the hotel also continues to outperform its comp set gaining 850 basis points.

Revpar share during the quarter.

Hotel Alba and Tampa continues to be a standout among our portfolio and hotels competitive set during the period and produced Revpar nearly 33% greater than the first quarter 2019 with occupancy up nearly 2% in ADR growing more than 30% comparing these results to Q1 2021, which included a soup.

Both in the immediate market also highlights the property stellar results as Revpar increased nearly 34% year over year over year against a tough comparable.

This hotel achieved a revpar index of 116% in the quarter solidifying its position as a leader among its competitive set.

Hotel ballast in Wilmington, So excellent results during the quarter with signals of a sustained recovery is underway for this asset substantial rate growth of 20% over 2019 levels facilitated impressive flow through during the quarter, notably the property gained more than 2600 basis points in share from its competitive set during the quarter as the group business segment.

Which is vital to this hotel's performance ramped up to prepaying demick performance levels in the latter half of the quarter.

Examining our portfolio as recent booking trends further demonstrating steady acceleration in group and business travel at our hotels during the first quarter. The group segment produced a 15% improvement over the fourth quarter of 2021, while business travel improved more than 20% over the fourth quarter of last year.

Thus far during the second quarter, we have experienced further improvement to the segments and are projecting this trend to continue as the balance of the year is shaping up nicely with strong attendance at citywide events in house meetings and corresponding group room blocks.

While still plenty of room to grow compared to 2019. This trajectory of group business demand recovery is a promising indicator for our company.

Our managers executed a lean and flexible staffing model in order to control variable cost and achieve excellent flow through despite uneven demand and rising costs of goods and labor faced during the quarter. We continue to focus heavily on pricing power not only for our room rates, but also for our F&B offerings banquet rentals and parking for which consumers are showing minimal price sensitivity.

Moving forward, we expect that our ability to achieve strong rates, we will continue to offset the increase in labor and other rising costs associated with inflationary environment.

Turning to our corporate activity as previously noted the company has entered into an agreement to sell the doubletree by Hilton Rally Brownstone hotel for purchase price of $42 million. During the first quarter, we entered into an amendment to this agreement with the buyer to extend the closing period in exchange for an additional cash to positive $800000 with the <unk>.

Closing date now set for June one.

Including this modification the buyer has a total of $1 $6 million in nonrefundable deposits associated with this transaction.

The company intends to use net cash proceeds from the pending sale of the hotel to repay the existing mortgage on the property and to repay a portion of the secured notes with Kevin Wilson.

The company recently extended maturity date on the existing mortgage of the doubletree by Hilton Raleigh, or Laurel excuse me with the existing lender by one year to May 2023.

As part of the modification the company paid down the principal balance of the loan by $400000. The current loan balance is now approximately $7 $6 million or approximately $37000 per key.

Lastly year to date, we have executed agreements to exchange approximately 50000 shares of preferred stock for approximately 488000 shares chairs the.

The execution of these exchanges fits with our long term strategy to shore up our balance sheet, while also preserving liquidity.

These transactions eliminated approximately $245000 of deferred dividend payments as well as approximately $100000 in annual preferred dividend payments going forward I will now turn the call over to Tony.

Thank you Scott reviewing performance for the period ended March 31 2022.

For the first quarter total revenue was approximately $38 4 million representing.

Representing an increase of 69, 4% over the same quarter in 2021.

Comparing first quarter results to the same period in 2019 total revenue fell short by approximately $9 million or 19, 1%.

Hotel EBITDA for the quarter was approximately $10 million compared to approximately $4 2 million from the same quarter of 2021.

Comparing first quarter results to the same period in 2019 hotel EBITDA decreased by approximately $3 2 million or.

24, 3%.

And for the quarter adjusted <unk> was approximately $1 2 million.

Representing an increase of 126, 6%.

<unk> percent or $5 9 million for the same quarter 2021.

Comparing first quarter results to the same period in 2019, adjusted <unk> decreased by approximately $3 7 million or <unk> 74, 8%.

Please note that our adjusted <unk> excludes charges related to the early extinguishment of debt gains and losses on derivative instruments.

Charges related to our board at or abandoned securities offerings.

Aesop and stock compensation expense as well as other items.

Hotel EBITDA excludes these charges as well as interest expense interest income other corporate and G&A expenses and the current portion of our income tax provision and other items as well please refer to our earnings release for additional detail.

At our balance sheet as of March 31, 2022, the company had.

Total cash of approximately $30 3 million consisting of unrestricted cash and cash equivalents of approximately $22 million.

As well as approximately $10 1 million, which was reserved for real estate taxes capital improvements and certain other items.

Looking ahead to the second quarter. The company estimates the cash generated at the hotel level to range between $13, three 5% and $13 6 million.

We expect corporate level G&A expenses of.

$1 5 million for the quarter.

Capital expenditures are expected to range between $2 million and $2 5 million for the quarter. While outlays are scheduled payments of principal and interest are expected to be approximately $6 3 million for the second quarter.

Overall, we're expecting cash use generated from our portfolio to range between one five and $1 8 billion for the second quarter.

It is important to note that a portion of our current debt service includes scheduled repayment of deferred interest and principal originating from forbearance received during the pandemic.

At the end of the quarter, we had principal balances of approximately $367 $5 million outstanding debt at a weighted average interest rate of 474% approximately 86% of the company's debt carries a fixed rate of interest.

As we move towards a normalized operating environment, we anticipate capital expenditures to be more in line with historical norms, and we estimate capital expenditures will amount to approximately $6 3 million for <unk>.

Calendar year 2022.

In March 2020, we announced the suspension of our dividend and a deferral of payment for dividends on our common stock announced two months previous the suspension and deferral eliminated 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 you Tony and good morning as Scott.

Remark the first six weeks of the quarter did not start well for our industry hotel demand was tempered by new Covid variance, but towards the end of February travelers sentiment almost completely reversed his business and group travel rebounded rebounded and was combined with ongoing pent up leisure demand. Despite the year slow start of the quarter.

Exceeded our expectations.

Capped off a remarkable recovery for the quarter and was by far our best performing month since the start of the pandemic as leisure group and business travel started to fire on all cylinders our portfolio achieve unprecedented room rates during the month of March outpacing March 2019 by more than $14.

<unk>.

While these results are impressive we believe we still have plenty of opportunities for growth, particularly at our locations that are more dependent on business travel, which are still in the early stages of recovery.

These urban markets are still tracking significantly below 2019, revpar levels that being said since mid February there has been a noticed noticeable shift in demand at these locations, especially during mid week.

Our sales teams are reporting positive feedback from corporate travel planners in these markets, especially in Arlington, Virginia in Houston, where demand.

Where demand from our most important corporate clients as quickly returned following two years of absence for.

For example, our number one corporate client located adjacent to our hotel in Houston approach normalized transient productions.

In production levels in April Meanwhile, occupancy at the Hyatt centric in Arlington, Virginia, which is a hotel focused on the business traveler has climbed rapidly from 25% occupancy in January to 37% and February 69% in March and a 70% to 78.

8% occupancy in April which was the highest occupancy month for this hotel since the start of the pandemic.

While business travel demand in Arlington has improved drastically we expect the pace of recovery in this segment to vary significantly by location.

Evaluating the portfolio's group bookings for the year confirms there was a notable noticeable shift and traveler preference towards in person meetings and events in recent weeks, we witnessed additional pent up demand in this key segment as citywide convention and group meetings of all sizes are taking place with greatly improved attendance number.

Currently our portfolio's group booking pace for 2022 is more than 72% of the same pace. In 2019. This is a significant improvement over the same time last year when our group booking pace for 2021 was approximately 44% of the <unk>.

Booking pace in 2019, this equates to a 67% improvement in group business for 2022 versus 2021, which is a huge overall improvement.

Looking at our strategic initiatives. Our recent activities are focused on deleveraging our balance sheet.

While also improving the company's liquidity position.

We believe believe the sale of our Louisville asset and pending sale of our Raleigh asset will help accomplish both of these goals. The disposition disposition of these assets will allow us to repay significant mortgage debt and partially repay corporate debt at the same time selling these hotels saves approximately $25 million.

And brand required lifecycle renovation capital over the next two to three years in total the sale of Louisville, and Raleigh will remove approximately $48 million of debt from our balance sheet, including $30 million in mortgage debt or.

Our strategy to exchange preferred stock also aligns with our deleveraging strategy by exchanging preferred stock we remove not only the par amount of the preferred but also the legacy accrued dividends as well as future dividend payments.

Looking forward, we are confident in our ability to source the additional cash needed to repay the remaining portion of our corporate debt, which will further reduce our leverage and allow the company to focus on its core operating strategies.

In summary, strong booking trends characterized by the steady return of corporate and group business and continued pent up leisure demand brings optimism for the state for the sustained recovery of our business and with that operator, we'll now open the call for questions.

Thank you.

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Next question comes from Alexander Goldfarb of Piper Sandler. Please go ahead.

Hey.

Good morning, good morning down there.

So a few questions here first obviously.

Great to see positive <unk> and positive free cash flow and.

Quarter and your expectation for positive in the second quarter is your view now that earnings and free cash flow from here on out will be positive I mean, assuming.

The world doesn't come to an end or something I'm just talking about from what you see in your current operations. Your current demand your future bookings everything that you guys see today currently is it your view that SFO and free cash flow will remain positive for the balance of this year into next.

Yes, Alex Good morning, Scott, Yes, that's our expectation as we said I mean fundamentals.

Proved month over month to the point of March basically meeting 2019 levels and yes, there might be little bits ups and ups and downs on a monthly basis, but overall going forward. We think we're kind of back to that normalized.

Level of operation, which should produce.

Positive free cash in <unk>.

Okay, and then can you remind us how much preferreds are remaining are outstanding.

The par amount is approximately 100 million, yes, just over 100 million Bucks.

Which is a one.

Well we.

109.

As a $109 million of par before we started the exchanges. So the par amount has been reduced to $100 million.

You are asking for the total unpaid accrued dividend on top of that.

So you have a 100 million remaining to buy to hopefully buy back our exchange correct.

Right I mean, that's.

The par amount that's remaining.

Okay and okay.

That makes sense.

And then what's the accrued balance right now.

As of March 31.

But right around $20 million.

Okay.

And then as you guys wonderful to see return of group business of leisure travel drive and all of that.

And you spoke about.

Pricing issues with F&B parking room rate what have you where is your opex.

The property level are you.

Ed.

Are you commensurate with the level of demand or do you feel that you are hitting the point, where youre going to have to increase hire more people and we will see capex opex increase like I am just trying to think with where the operations are going are you.

Staffed appropriately or do you think theres going to be another increase in staffing that's necessary. So that we may see the opex slide actually go up.

Relative to that.

Well as pricing has gone up just in an inflationary environment. We've also seen operating expenses at the hotels go up.

Of that is labor, which is what you alluded to and staffing conditions at the hotels have improved more people are eager to come back to work.

Still having a lot of.

Yes.

Outsource labor requirements at the hotels and I think if we can get back to permanent staffing will remove some of the cost of those third party staffing entities, but utilities.

Cost of goods sold all of those things will continue to rise in an inflationary environment, but what we are seeing Alex is that the rate structure at the hotels is providing.

Just a very powerful flowed through to the bottom line, which is helping the margins. So we have made a conscious decision not to layer in.

Over the past several quarters not to layer in expenses until the Revpar was there and that's been that has allowed us to manage our margins and go in the right direction. So I don't really see that I don't see a blip about operating expenses that would change that unless we get a reversal in.

The rate structure growth.

Okay, No I would agree.

We're seeing stability in our margins.

And.

We've got increased labor costs offset by.

Now empty positions that we cant fill because of the labor markets.

So there has been.

There has been a stability to our margins.

And we're continuing to expect that.

Okay, and then just the final question.

As far as potential further hotel sales or debt.

That give backs or what have you is there anything else that you expect or I mean, obviously Raleigh was a great great outcome, but.

Do you expect any more dispositions or any more sort of.

Need to.

To give back a hotel for that reasons or anything like that or the portfolio that you have is basically the one that you expect to keep.

Yes, I think Thats right I mean, the sale of Louisville was we've been trying to sell that hotel for five years. It was a non core asset for us and a lot of things happened in that market with respect to.

Oversupply in the merger with Starwood, and Marriott, which changed some of the reservation system dynamics for us and as you said Raleigh was kind of a once in a blue moon price opportunity, but we don't want to cut it.

Do not want to cut into bone and muscle here. So I don't see us looking to liquidate any other assets and I don't think we need to to complete the repayment of our corporate debt I think we've got that covered with respect to the sale of Raleigh.

The refinance of other assets and or our available free cash.

Okay.

The second.

Yeah.

Perfect. Thank you so much for your question Alexander.

And as a reminder, I'd like to ask a question. Please press star.

One on your telephone keypad.

Yes.

At this time there are nice to have a questions and now I'd like to pass back over to Dave Wilson CEO for any final remarks.

Well, thank you operator, and thanks for everyone on the call and we'll speak again next quarter. Thank you.

Thank you everybody for joining today's call you may now disconnect.

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