Q2 2023 Sotherly Hotels Inc Earnings Call

Hello, everyone and welcome to suddenly hotels second quarter 2023 earnings call and webcast. My name is Daisy and I'll be coordinating Yoko today, if you would like to register a question. Please press star followed by one on your better. Thank you Pat.

I would now like to hand over to your highest Mike Senft Vice.

Vice President of operations begin the Mark. Please go ahead.

Thank you and good morning, everyone. If you did not receive a copy of the earnings release, you may access access it on our website that thoroughly hotels dot com in the release the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Greg 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 could cause <unk> 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 Companys 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 and good morning, everyone I'll start off today's call to review of our portfolio's key operating metrics for the quarter.

Looking into the second quarter results for the same store portfolio Revpar was $131 16.

Driven by an occupancy of 76% and an ADR of $185 82.

Second quarter Revpar performance represents an increase of 5% over the same period in 2022, driven by a one 6% increase in occupancy and a three 4% increase in rate.

Year to date Revpar for the same store portfolio was $122 27.

With occupancy of 65, 6% and an ADR of $186 45.

Year to date Revpar performance represents an increase of 11, 9% over the same period in 2022, driven by five 8% increase in occupancy and a five 8% increase in rate.

Overall, our portfolio of second quarter results characterized by further recovery of group and corporate demand at our hotels were generally in line with our expectations.

Despite softer than expected leisure demand at our South Florida properties on a year over year basis, our portfolio continued to shift to a more normalized mix of business with strong revpar growth from our group and corporate transient segments comparing to pre pandemic metrics revpar increased by one 8% compared to the second quarter of 2019 despite occupancy.

<unk> being down by eight 7% demonstrating there is still significant upside for the portfolio.

Examining our portfolio as recent booking trends for business and group travel confirm our belief that demand at our hotels continues to progress towards a more normalized mix of business for the group segment. Our portfolio produced eight 7% more group business in the second quarter 2023 compared to the same period in 2022.

Business travel was slightly ahead of the second quarter of last year.

These results were largely largely driven by our Washington, DC market hotels in Arlington, Virginia, and Laurel, Maryland, which are now outperforming 2019 results while.

While the Washington, DC market is nearing a full recovery our hotels in Houston, Philadelphia, and Atlanta have plenty of upside potential as corporate travel in those markets is still significantly below pre pandemic levels. We expect many of these hotels to continue to improve during the corporate and group heavy fall travel season, which should help close the gap to pre pandemic occupancy for those hotel.

<unk>. Meanwhile, leisure demand across the portfolio remains strong as a whole with encouraging booking trends moving forward.

Look at some highlights across the portfolio the Hyatt centric Arlington posted commendable performance during the quarter fueled by a noteworthy recovery in group and business demand and the hotel. This property is hitting on all cylinders. Following a lagging recovery in the Washington, DC market outperforming last year's Revpar by nearly 25%.

<unk>, which was up 16, 6% compared to the second quarter of last year was the primary driver of this improvement while occupancy continues to grow as well.

Property further solidified its position as the market leader among its competitive set achieving a revpar index of over a 121% during the quarter.

Hotel ballast in Wilmington, North Carolina reported excellent results during the quarter, beating prior year Revpar by nearly 15% fueled by an 11, 1% improvement in occupancy and a 3% increase in rate results were driven by improved demand from the corporate group and transient business travelers segments and continued strength from leisure demand.

The Desoto Savannah continues to deliver a well balanced mix of leisure and group business during the quarter property easily outpaced the comparable period in 2019 with Revpar, improving nearly 25% fueled by significant rate growth of nearly 19% and property continues to improve versus competitive set getting 730 basis points and fair.

Sure during the quarter.

During the second quarter, our management team achieved commendable profitability metrics by controlling variable costs and executing revenue management strategies aimed at driving higher rates.

<unk> EBIT margins for the second quarter 2023 were slightly ahead of the comparable period. In 2019. We are pleased with these metrics, especially considering increased expense pressures from re staffing our hotels higher utility rates increased insurance costs and expanded food and beverage offerings that has been layered into our properties moving forward we.

<unk> margins to stabilize as we have reached normalized staffing in many levels at our hotels following a lean operating model during the pandemic I will now turn the call over to Tony.

Thank you Scott reviewing performance for the period ended June 32023.

For the second quarter total revenue was approximately $49 million representing.

An increase of three 9% over the same quarter of 2022.

Year to date total revenue was approximately $92 $5 million.

Resenting, an eight 2% increase over the same period last year.

Hotel EBITDA for the quarter was approximately $14 8 million, representing an increase of a half a percent over the same quarter of 2022.

Year to date.

<unk> EBITDA was approximately $26 9 million.

Representing an increase of eight 8% over the same period last year.

For the quarter adjusted <unk> was approximately $7 million, representing an increase of 12, 9% over the same quarter 2022 and.

And year to date, adjusted <unk> was approximately $11 $7 million representing.

Representing an improvement of 56, 5% 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.

Lease up and stock compensation expense 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.

Please refer to our earnings release for additional detail.

Looking at our balance sheet as of June 32023, the company had total cash of approximately $32 2 million consisting.

Consisting of unrestricted cash and cash equivalents of approximately $24 2 million.

As well as approximately $8 million, which was reserved for real estate taxes capital improvements and certain other items.

At the end of the quarter, we had principal balances of approximately $322 $7 million in outstanding debt at a weighted average interest rate of $5 one 1%.

Approximately 90%, 96% of the company's debt carries a fixed rate of interest after taking into account the company's interest rate swap agreements.

During the second quarter, we announced the refinance of the mortgage on the Doubletree by Hilton Hotel in Laurel, Maryland with city real estate funding the.

The interest only loan which has a principal balance of $10 million has a five year term maturing in may 2028, and maintains a fixed rate of interest of 735%.

Given the challenges in the current lending environment. We were pleased with the execution of this transaction, which netted net cash proceeds of approximately $2 $5 million to the company.

As we enter a more normalized operating environment.

We anticipate capital expenditures to be more in line with historical norms and estimate capital expenditures will amount to approximately $7 4 million for calendar year 2023.

Yes.

We are issuing guidance with a forecast of anticipated results for the third quarter, our guidance considers market conditions and accounts for current and expected performance within the portfolio.

We're projecting total revenue in the range of 39, 1% to $41 million.

For the third quarter Hotel EBITDA.

<unk> in the range of eight $5 million to $9 million.

The year over year decrease in hotel EBITDA is largely due to a benefit received last year related to successful real estate tax appeals of approximately $434000 as well as an increase in the quarter for the costs related to the renewal of our property and casualty policies of approximately five.

$560000.

Adjusted <unk> is projected in the range of six to $1 1 million or <unk> <unk> per share now I'll now turn the call over to Dave. Thank.

Thank you Tony.

Our portfolio delivered solid results in the quarter, we outpaced prior year operating metrics, despite moderate market related headwinds faced in Atlanta, and South Florida. Our portfolio's results benefited from the continued improvement of fundamentals at our urban hotels, which saw further recovery from the corporate and group segments as well.

As weekend leisure travel in addition, our coastal leisure focused hotels in Tampa, Savannah, and Wilmington continue to perform well due to continued strength in leisure demand coupled with strong group pickup.

Overall, the strength in both group and business traveler bookings as reflected in the market's continued demand normalization for these revenue segments in the quarter, we saw demand softened in our South Florida markets, which followed the period of pent up demand, which benefited and characterize these markets immediately following the pandemic.

Increased competition from international destinations and cruise lines were major contributors to this moderation in demand.

We also faced a material reduction in demand via group bookings at our Atlanta location related to the ongoing Hollywood writers and actors strike revenues fulfillment television crew productions, which has been a mainstay source of revenue for many years of this hotel were negatively impacted by approximately 300000 during the.

Second quarter of $900000 year to date.

Despite these headwinds our portfolio achieved commendable hotel EBITDA outperforming the same period last year, which at the time, So a hotel operating expenses well below of stabilized levels as full service hotel amenities and services had not yet been fully re introduced.

The strong rates continue to be a critical factor in both revpar growth and overall profitability during the quarter our portfolio outpaced prior year's ADR by three 4% in 2019 as ADR by 11, 5%.

While occupancy showed sequential improvement and important factor, which validates the continued recovery of the group and business travel segments at our hotels as Scott mentioned the most notable improvement in Revpar occurred at our group and corporate focused hotels in markets, where return to office rates continue decline following the pandemic.

Our hotel in Arlington continues to surprise to the upside easily outperforming its competitive set with a well balanced mix of business that includes strong group weekend leisure and corporate travel revenue, which surpassed pre pandemic levels during the quarter moving forward. We believe there is still significant.

<unk> to be unlocked at our urban locations, which have historically been more dependent on corporate transient and group demand.

Previously, we announced the reinstatement of quarterly dividend payments for our preferred shareholders and during the second quarter. We also announced an additional catch up payment for our three series of preferred stock decreasing the amount owed on the unpaid cumulative preferred dividends by approximately $1 9 million, reducing the unpaid.

<unk> represents an ongoing priority for the company.

Forward bookings for our portfolio continued to trend positively despite uncertainty surrounding a potential recession. We believe the decline in the rate of inflation, coupled with the possibility of a soft landing by the fed will provide an environment for ongoing demand growth. Our portfolio's outlook is pacing well for the balance of the year.

With 2020 Threes group revenue pacing, 24% ahead of last year, while the business transient segment is pacing, 18% ahead of last year. We believe this segment still has plenty of opportunity for growth in the back half of the year.

Overall, we are encouraged by the progress we are seeing in our operations with Q3 Revpar forecasted to range between 103, and 109% of Q3 2020 two's Revpar.

We remain optimistic that improved market conditions, and encouraging booking trends will continue to fuel growth prospects for our well positioned portfolio.

Okay. We will now open the call up for questions operator.

Yes.

Thank you.

I would like to Matt just a question. Please press star followed by one on your telephone keypad.

Your question. Please ensure you Amit had lately and if you would like to withdraw. Your question. Please press star followed by T that style led by one on your telephone keypad to register a question.

Our first question today comes from Alexander Goldfarb from Piper Sandler.

Please go ahead your line is open.

Oh, great. Thank you good morning.

I guess the first pick the first question is sort of a big picture.

Do you guys feel that the portfolio is now back to sort of a normalized level or do you feel that there is more meaningful catch up to occur from now versus what the level was before the pandemic.

Well, Alex it's Dave good morning.

There is still some growth out there on a from a macro what I'll call macro pre pandemic.

And both Scott and I and our remarks, Theres still some room to grow in some of our markets.

From a both a group of BT segment basis. Some of these markets still have some some opportunity to improve.

The Philly market the Houston market the Atlanta market. These these markets are not yet in the shape they need to be to get a fully normalized set of revenue for the hotel industry. So I think there is some opportunity there and then on a property by property basis. There is definitely opportunity for improvement as you may or may not.

Recall last year, we had a significant casualty in Atlanta that has since been resolved and repaired.

He was a water issue our year over year results are very very good there because we had a problem last year with the hotel. So there are both selective hotel upsides and I think there are some market upside.

Some of these some of these locations, especially when we look at the group of the BT customer.

Okay. That's that's helpful and then.

On the insurance.

Can you just remind us how much your premiums went up and I believe when we met at NAREIT. You said second quarter would include the full impact of the new insurance. So can you. Just contrast, how much the premiums are now versus previous and then do you anticipate sort of a similar increase next year or from <unk>.

<unk> met with the insurance companies and brokers.

They were indicating that this year is probably the biggest one.

Early next year.

Maybe the reserves insurance companies or the reinsurers have there's a little bit better just.

Just trying to get a sense.

We're going to be multi year.

Substantial increase environment or if maybe you got some light at the end of the tunnel when you spoke to the brokers and the insurance companies.

Right. So we're at April one renewal company.

And I'll give I'll, let Tony give you the before and after numbers.

Driver for property and casualty premiums were really a function nationally.

<unk>.

What happened in Florida.

And those those property premiums really drove the change with respect to what's going to happen next year I think we're going to be able to answer that better in November after hurricane season is over.

It's really kind of where the market's waiting to see if there is excess capacity.

Whether there are a lot of casualties.

Right now I would tell you if I was a betting individuals that are agent would probably say there won't be a huge reduction in premium, but we won't have it doubling again or a 50% increase.

Worse.

Insured saw this year, so Tony you want to add into that yeah year over year, our insurance premiums went up little over 2 million box. So it's about 500 550000 a quarter.

And a small bit of that is just the normal increase in general liability auto cyber crime and that kind of policy.

Bulk of the increase was.

With property coverage as you know we have we have a lot of coastal properties, they're Wilmington, Savannah, Jacksonville, South, Florida and Tampa.

And even Houston into that.

That's a large exposure for us and and hence the large increase in premium.

As a percentage of what is.

What's the percentage of the 2 million as a percentage.

Tim.

No.

Total premiums.

It was about 50% change.

So if you add all of our insurance cost probably running $4 million a year now its running six.

Okay.

Okay.

And then the final question.

Can you just update us.

On where you stand on the preferred for.

Are there still accrued but unpaid balance.

Yes, we made one catch up payment in the quarter last quarter.

As you know, we're shareholders, whereas eager as everyone else to receive a common dividend.

So we want to get that the catch up payments paid up.

Right now, we're being a little more cautious and prudent I can't give you a window when thats all going to be done as you mentioned on your interview yesterday with Bloomberg.

Lot of the caution rests with the lending markets and how we're going to deal with mortgage refinancings of what the assumptions are and frankly, what's going to happen in the operating environment in the lodging industry over the next.

Four to eight quarters, so if market conditions warrant, we're going to make additional payments I just can't give you the the.

Time and frequency of when those payments are going to be stabilized.

Right, but what's the current balance that you still have.

So the crude.

The unpaid balance is $20 million right 29, okay great.

Listen thank you very much.

Thanks, Alex.

Thank you.

A reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad.

We have no questions at this point in time, I would like to hand back to the management team for any further remark.

Thank you operator, and thanks to everyone listening in today and we look forward to speaking with you at the next quarterly review.

Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.

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