Q4 2022 Sotherly Hotels Inc Earnings Call

Speaker 1: Hello and welcome to today's suddenly hotels for Q2022 earnings call and webcast. My name is Bailey and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad.

Speaker 1: I would now like to pass a conference over to our host, Max Sims, Vice President of Operations. Please go ahead. Thank you and good morning everyone.

Speaker 2: If you did not receive a copy of the earnings release, you may access it on our website at southerlyhotels.com. In the release, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with the Breg G requirements. Any statements made during this conference call, which are not historical, may constitute for looking statements. Although we believe the expectations reflected in any four-looking statements.

Speaker 2: are based on reasonable assumptions. We can give no assurance that these expectations will be obtained. Factors and risks that can cause actual results that 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. And with that, I'll turn it all over the chat. Thanks, Mack. Good morning, everyone.

Speaker 3: period in 2021. For the year RevFar for the same store composite portfolio was $108.56 with the occupancy of 61% and 80% of $178.202.4 RevFar performance represents an increase of 27.7% over the same period in 2021.

Speaker 3: Overall, we were pleased with our portfolio's fourth quarter results, highlighted by sustained strength and demand for leisure travel, coupled with growing demand for group and business travel.

Speaker 3: During October , which is historically one of the busiest group in business travel months of the year for our portfolio, RevFar was up 3.3% over 2019 levels with ADR of more than 11%. November experienced some softness due to Hurricane Nicole's threatened impact on the Southern U.S. However, December produced similarly strong results.

Speaker 3: with RevPAR outpacing 2019 by 1.3% with ADR up nearly 19%.

Speaker 3: For the quarter as a whole, REF FAR was off by 2.5% to Q4 2019. On an annualized basis, 2022 REF FAR was off 2019.6% by 6.2% with occupancy down 12.9% with ADR increasing 7.7%. While we expect rates to remain strong, we believe occupancy growth will be the biggest opportunity going.

Speaker 3: 2019. During 2022 the Nature of our Group bookings was 25% corporate representing a positive change from the prior year or corporate accounted for 15% of total group bookings. For the Trans-e and business travel segment our portfolio was 68% of the business travel produced.

Speaker 3: and Q4 2019, but was 36% greater than Q4 2021. These gains in group and business travel demand came across the entire portfolio, but most notably at our urban properties in Washington, DC, and Atlanta, which experienced the best year of year improvements in performance. Meanwhile, our portfolio's leisure focus totals continue to outperform expectations during the course.

Speaker 3: further improvement to these trends for the portfolio are an encouraging sign for our company. Dave will comment more on this later in the call.

Speaker 3: Looking at some highlights across the portfolio, the highest centric Arlington continued to show steady sequential improvement relative to 2019, fueled by the return of group and business travel to the hotel.

Speaker 3: Fourth quarter RevFAR was only down 2019 by 1.3% as compared to a 10.1% deficit during the third quarter rate, which was up 12.4% compared to the fourth quarter 2019 with the driver of this improvement. The property continues to outperform its competitive set and during the quarter the hotel achieved a RevFAR index of over 123% and gained over 11.6% RevFAR share.

Speaker 3: further solidifying its position as the market leader. The DeSoto Savannah continued its streak of excellent performance, which is driven by a well-balanced mix of leisure and group business. During the quarter, the property easily outpaced 2019 metrics with a 21.3% gain in RevFar fuel-bots significant rate growth of 26.1% over 2019.

Speaker 3: Putel Alba in Tampa continues to record exceptional results significantly outpacing 2019 rev far by 54.2% during the quarter. Fourth quarter results for this hotel were fueled not only by a 30.8% increase in rate, but also an 18% gain in occupancy.

Speaker 3: a notable performance that highlights the hotel's successful repositioning strategy. Our management team achieved commendable profitability metrics during the fourth quarter by executing revenue management strategies aimed at driving rate and controlling variable costs at our properties.

Speaker 3: As a result of these efforts, Rooms margin profit expanded 280 basis points over 2019 to 76.5% during the fourth quarter. Meanwhile, hotel EBITDA margins for the fourth quarter in 2022 versus 2019 expand an impressive 780 basis points to 28.8%. For the year, hotel EBITDA margins expanded 270 basis points over 2000.

Speaker 3: going forward. I will now turn the call over to Tony. Thank you Scott. Reviewing performance for the period ended December 31st, 2022.

Speaker 2: For the fourth quarter, total revenue was approximately $41.3 million, representing an increase of 17.8% over the same quarter in 2021.

Speaker 4: For the year, Total Revenue was approximately $166.1 million, representing an increase of 30.1% over the prior year. Comparing current performance to pre-pandemic levels, Total Revenue for the fourth quarter represented 93.3% of Total Revenue for the same period in 2019.

Speaker 4: And for the year, Total Revenue represented 89.4% of Total Revenue for the full year 2019.

Speaker 4: Hotel EBITDA for the quarter, what's approximately $11.9 million, representing an increase of 46.8% over the same quarter in 2021. Year to date, hotel EBITDA was approximately $46.5 million, representing an increase of 50.4% over full year 2021. Comparing fourth quarter performance to pre-pandemic levels.

Speaker 4: Hotel Ibita represented 128.2% of hotel Ibita for the same quarter 2019. For the full year hotel Ibita represented 99% of hotel Ibita for full year 2019. For the quarter, a dozen FFO with approximately $8.5 million, representing an increase of $9.8 million over the same quarter 2021.

Speaker 4: For the year, adjusted FFO was approximately $18.3 million, representing an improvement of approximately $23.2 million over full year 2021. Comparing fourth quarter performance to pre-pandemic levels.

Speaker 4: Adjusted FFO represented more than an eight-fold increase in Adjusted FFO for the same quarter in 2019.

Speaker 4: And on a full-year basis, adjusted FFO represented 104.3% of adjusted FFO for the full year 2019. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, gains and losses on derivative instruments.

Speaker 4: charges related to aborted or abandoned securities offerings, and esophage.commentation expense as well as other items. Hotel Liboda excludes these charges as well as interest expense, interest income, corporate general and administrative expenses, the current portion of our income tax provision, and other items as well. Please refer to our earnings release for additional detail.

Speaker 4: Looking at our balance sheet, as of December 31st, 2022, the company had total cash of approximately $27.3 million, consisting of unrestricted cash and cash equivalents of approximately $21.9 million, as well as approximately $5.4 million, which was reserved for real estate taxes.

Speaker 4: capital improvements and certain other items. At the end of the quarter, we had principal balances of approximately $324.4 million without standing debt at a weighted average interest rate of 5.0%. Approximately 96% of the company's debt carries a fixed interest rate

Speaker 4: after taking into account the company's interest rate swap agreements. This week we announced the modification of the existing loan on the White Hall in Houston with the existing lender. The loan, which has a principal balance of approximately $14.2 million, was extended for five years until February of 2028 and maintains a floating interest rate of New York.

Speaker 4: prime rate plus 1 and a quarter percent subject to an overall floor rate of 7.5%. In December 2022 we were notified that the forgiveness application related to one of the loans we received under the SBA payroll protection program had been approved. In January we were notified that a second forgiveness application had also been approved.

Speaker 4: In total, we received approximately $4.9 million in principal forgiveness, plus the associated accrued interest. A third forgiveness application of approximately $0.3 million is still pending with a small business administration.

Speaker 4: As we enter a more normalized operating environment, we anticipate capital expenditures more in mind with historic norms and as to make capital expenditures we'll amount to approximately $7.2 million for calendar year 2023.

Speaker 4: We are resuming guidance with the forecast of anticipated results for the first quarter. Our guidance takes into account market conditions and accounts for current and expected performance within the portfolio.

Speaker 4: We are projecting total revenue and the range of $42.3 to $44.3 million for the first quarter 2023.

Speaker 4: At the midpoint of this range, it represents a 13% increase over prior period total revenue. Hotel Ibeda is projected in the range of 11.9 to 12.5 million dollars. And at the midpoint of the range, this represents a 22.3% increase over the hotel Ibeda for the same quarter in the prior year.

Speaker 4: and adjusted FFO was projected in the range of $4.1 to $4.7 million or 21 to $4.24 per share.

Speaker 4: And the midpoint of the range this represents more than a 200% increase of a adjusted FFO for the same quarter in the prior year. And now I'll turn the call over today. Thank you Tony. Good morning everyone. Our portfolio will continue to demonstrate encouraging trends for the fourth quarter characterized by further improvement in group and business transit demand in our urban market.

Speaker 5: made during the fourth quarter, capped off a year of significant progress in its recovery from the pandemic. Thus far, this momentum, which highlights the positioning and management of our assets in their respective markets, has been carried forward into the first quarter of this year.

Speaker 5: Overall, 2022 significantly outperformed our expectations. During the year, a management team soundly executed several objectives, which ultimately resulted in a transformative shift in the outlook for the company.

Speaker 5: The sale of our Louisville and Raleigh assets in the year allowed us to reduce secured mortgage debt and additionally repay an expensive corporate loan while concurrently eliminating the need for expensive near-term cat-backs required for life cycle improvements at these two hotels. In addition, the loan modification of our Tampa asset

Speaker 5: provided improved terms and additional cash proceeds for the company. This series of transactions allowed for the complete repayment of the aforementioned corporate loan with the Chemman's Wilson companies, and as a result, the elimination of high interest current payments, onerous loan covenants, and the return of a significant interest reserve. In addition, we believe our strategic approach towards holding properties in southern markets proved successful.

Speaker 5: as these locations experienced outsides performance during the industry's recovery following the pandemic. One of the best examples of this trend is the performance of the DeSoto in Savannah, Georgia, where 2022's RevPAR gain of 22% over 2019 represented the best year of performance in the property's lengthy history. Meanwhile, revenue growth in strong margins led to record profitability metrics for the second, third and fourth quarters.

Speaker 5: each outperforming the same periods in 2019. As a result of these efforts, 2022's Hotel EBITDA notably surpassed same store 2019 Hotel EBITDA, completing a remarkable recovery for our portfolio following the pandemic.

Speaker 5: Facilitated by the continued improvement of the company's operating fundamentals, in January we announced the reinstatement of our quarterly preferred dividends. In addition, we announced in the future we intend to reduce the amount of cumulative unpaid preferred dividends through the periodic announcement of special dividends, as is warranted by market condition.

Speaker 5: market conditions in the company's profitability. This announcement demonstrates management's confidence in our financial health and our ability to navigate the changing, lodging environment. Looking forward, we believe there's significant upside for our portfolio, especially in the transient business travel and group segments, which are trending positively thus far this year. In fact, transient business travel reservations organizations.

Speaker 5: are projecting tremendous growth for the year, already pacing 145% of the same time last year.

Speaker 5: Meanwhile, we expect group business to build on last year's improvement with group bookings for this year currently pacing 47% ahead of prior year. Overall we are pleased by the progress we are seeing in our operations so far this year with first quarter rev par forecasted to be in the range of 97 to 101%.

Speaker 5: of the first quarter of 2019. A difficult comp for us, which included the Super Bowl in Atlanta. We are closely monitoring macroeconomic data, consumer behavior and corporate travel policies, and have not yet seen any pullback in demand. Future booking pays are room rates. We remain cautiously optimistic that these encouraging booking trends

Speaker 1: as well as the tailwinds we've discussed will continue to fuel our growth prospects moving forward. And with that everyone will open the call up for questions. Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, that was a question, please press star followed by one. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question.

Speaker 3: Our first question today comes from the line of Alexander Golfar from Patisama. Please go ahead, your line is not open. Hey, good morning down there. So a few questions. First, obviously, great to see the PPP forgiveness in the quarter. It definitely drove a good chunk of the FFO beat, but certainly good to say. Question is, further release you guys took out just over 10 million of PPP.

Speaker 3: You've now been forgiven of about 5 million. There's another I think you said 300,000 that you submitted for. What's your expectation for the balance of the PPP loan? Call it roughly 5 million. Are you expected to pay that back or you anticipate also being granted forgiveness on that portion?

Speaker 4: Alex, this is Tony. No, there's no additional forgiveness, unfortunately. You know, we submitted one round of forgiveness applications and total forgiveness leads somewhere around $5 million. We've made payments already on that loan.

Speaker 4: So we've we've got it down to you know between two and a half two and two and a half million dollars left And we've got the remainder of a five-year period to repay that so we'll have whatever the balance is we'll have until sometime in mid early to mid 2025 to get that paid

Speaker 3: And what's the rate on that? 1% Oh, geez Louise. Tax fair dollars at work. So you're welcome on that.

Speaker 3: Yeah, well you're welcome as a taxpayer. Okay, so 20, 20, early, mid-20, 25 do and it's a 1%. Okay, great. The second question is, Alex, did you say how did that? If there's a monthly payment that's required, it's not a balloon. Yeah, yeah, no, I got it, I got it. Um.

Speaker 3: The next question is on the preferred. I think Scott, last time you and I spoke, when I think the cruel balance was 23 million on the preferred, not sure if that's still correct or with the resumption of the payment that's come down. But on our cash basis sort of rough numbers, we have you post dividend, post preferred, sort of around 10 million a year free cash flow. Again, after CapEx, after preferred, which would suggest another two years.

Speaker 3: preferred payments before the common dividend could be once again reconsidered. Would you sort of, is that a fair timeline to think about? And then separate, is there anything to it? I know you mentioned special dividends to settle up the accrued, but presumably that would imply some asset sales. And I think most of your hotels are levered, which means probably not that much proceeds. So just sort of curious on one.

Speaker 3: you know how you would fund any accelerated repayment and then two if my 10 million free cash low is correct is about a two-year timeline fair for returning up the common dividend. Alex, it's Dave here. Let me address your second question first. So with respect to the timeline, I can't give you any definitive guidance right now on the frequency.

Speaker 5: depend on how the lodging industry progresses, how our profitability is evident, and any other demands for our capital, which includes things like non-recurring capex for relicencing these hotels, mortgage debt refinancing activity, how that will shake out.

Speaker 5: And to your other, so to your second question, we do have free cash flow and it will take time to repay this on a periodic basis as we said on our last call. And what we said today is we're going to make special dividends. I just can't tell you how long it's going to take to get the recruit paid off. And I'm going to have a free cash flow and it will take time to repay this on a periodic basis.

Speaker 5: I think the $23 million number at the end of 2022 is the correct number plus or minus a very small amount. With respect to accelerating the repayment, I mean there are things we can take advantage of which would include lowering the preferred principle through exchanges which we did for the last two or three years. That's really a function of pricing. And then we're always looking for opportunities to raise fresh capital that could accelerate the repayment of that preferred. But what I will tell you is your comment.

Speaker 3: about selling assets, that's not anything we're considering right now to help accelerate the repayment of that preferred dividend. Okay, yeah, Dave, that's what I, that's a, you answered that question. And then is the 23 million out of your end, is that still the balance today? You made the initial preferred payment, preferred dividend. So is that...

Speaker 5: the 23 million net of that payment or we would have to reduce the 23 million by the preferred. Well, as you know, once we stop paying preferred that that accrual just kept growing and growing and growing, now that we have started, we have reinstated the preferred dividends.

Speaker 5: That fixes that accrual. The unpaved accrual is now fixed and we just have to pay it off. So it's 23 million total and then out of cash flow or through other mechanisms we'll have to pay that off sequentially through special dividends.

Speaker 3: Okay, got it. And then I guess the final question is, you know, your comments about not really seeing anything of the recession down in your markets, you talked about Stroynton, Urban, Group Planning, etc. Uh...

Speaker 3: Is there just no sign at all throughout your portfolio, whether it's individual travel, group business travel, group planning, etc. Are there any cracks at all and anything by market or your sense is as you hear back from your various hotels, from Philly down to Texas and Florida, that sort of...

Speaker 5: There's really no change in what you're seeing on an operational, you know, business sense. You know, that's correct. I mean, we have very detailed, very lengthy calls every two weeks with the DOS's, the GMS, the corporate staff for our management company. And frankly, right now, the answer is no.

Speaker 5: Additional BT customer bookings, group bookings, rate. It's all there. We're very thankful to see the BT customer and the corporate group layer back into our business mix. And I can just tell you, we don't see it right now. I'm sure it's gonna change, but I can't tell you when that'll be, but we're not seeing any cracks, as you mentioned.

Speaker 1: Okay, let them thank you. Thanks, Alex. Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad.

Speaker 1: Okay, listen, thank you. Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad.

Speaker 1: There are no additional questions waiting at this time, so let's pass the conference over to Dave Fulson for any closing remarks. Please go ahead. Thank you, operator. Thank you, everyone, for joining us for our quarterly call, and we look forward to another one in a few months. Thank you.

Speaker 1: There are no additional questions waiting at this time, so let's pass a conference over to Dave Fulson for any closing remarks. Please go ahead. Thank you, operator. Thank you, everyone, for joining us for our quarterly call, and we look forward to another one in a few months.

Speaker 1: This concludes today's conference call. Thank you all for your participation. You may now disconnect your life.