Q3 2023 Sotherly Hotels Inc Earnings Call
Hello, and welcome to the <unk> hotels third quarter 2023 earnings call. My name is Alex and I'll be coordinating the call today.
If you'd like to ask a question.
Some patients you can press star one on your telephone keypad.
Alright drum beat your question you May press Star two.
I'll now hand, it over to Mack Sims, Vice President Vice President of operations. Please go ahead.
Okay.
Thank you and good morning, everyone.
Did not receive a copy of the earnings release, you may access it on our website at suddenly 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 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. It 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 third quarter results for the same store portfolio relative to 2019 third quarter Revpar was up one 7% driven by ADR growth of 15%.
Third quarter occupancy was down to 2019 by 11, 6%, reflecting the significant upside for the portfolio moving forward.
Year to date Revpar performance represents an increase of 1% over the same period in 2019, driven by a 13, 9% increase in rate and an 11, 3% decrease in occupancy.
Looking at the third quarter results compared to 2022 Revpar performance represents an increase of <unk>, 6% over prior year, driven by one 5% increase in rate and a 0.9% decrease in occupancy.
Year to date Revpar increased eight 3% over the same period in 2022, driven by three 5% increase in occupancy and a four 6% increase in rate.
Overall, our portfolio third quarter top line results were generally in line with expectations. These results were characterized.
Victor adds by further recovery of group and corporate demand combined with the softening of leisure demand in certain markets. The softening of leisure demand is especially evident for our south Florida properties, which underperformed in terms of both occupancy and ADR compared to prior year.
Call that last year, South, Florida, but still benefiting from the re revenge travel demand following the pandemic as well as the reduction of outbound international travel due to Covid testing policies. This year outbound international travel has grown significantly, whereas inbound international travel has only seen moderate improvement leading to a net negative in leisure demand for the South Florida.
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While the leisure segment was not as strong as last year, our hotels in this market continue to shift to a more normalized mix of business with revpar growth from our group and corporate transient segments.
While our Atlanta hotels film and entertainment business contracts were heavily impacted during the third quarter by the entertainment industry strikes.
The writers strike was recently settled and as of last night. The actors strike was tended we settled which should dramatically improve the Georgia <unk> growth prospects moving forward.
Despite these market related challenges several of our hotels driven by further improvement in group and business travel in the quarter continued to perform historically well.
Looking at some highlights across the portfolio the Desoto in Savannah continued its excellent performance during the quarter outpacing both prior year and pre pandemic levels fueled by strong group business, which outpaced the comparable period in 2019 by nearly 45%.
The properties third quarter Revpar outperformed prior year by five 2% driven by a strong eight 9% increase in occupancy.
Setup easily outpaced the comparable period of 2019 with Revpar, improving 43, 5% fueled by significant rate growth of 23, 6%.
Pretty continues to improve its position amongst competitive set getting 280 basis points in fair share during the quarter.
The Hyatt centric Arlington fueled by continued recovery in group and corporate travel demand at the hotel posted exceptional results for the third quarter group business is rapidly surpassed pre pandemic levels outperforming the third quarter of 2019 by 55%.
Overall, the property outpaced prior year's Revpar by nearly 19% driven by an 11, 7% increase in occupancy and a six 6% increase in rate.
Property, 7% in Revpar versus comparable period in 2019 demonstrates this hotel's fully recovered following the gradual post pandemic ramp up period to.
The property continues to be a standout amongst competitive set achieving a revpar index of over 130%, while gaining 550 basis points of share for the quarter.
Hotel ballast in Wilmington, North Carolina continued to record strong results during the quarter as improved group demand was coupled with continued strength from leisure demand.
40 outpaced prior year Revpar by eight 6% fueled by a three 6% increase in occupancy and a four 8% increase in rate.
<unk> achieved strong results versus competitive set gaining 250 basis points of share during the quarter.
And lastly hotel Alba and Tampa fueled by a well balanced mix of business returned excellent results during the quarter. The hotel's revpar surpassed prior year by 11, 6% fueled by three 7% increase in occupancy and a seven 7% increase in rates. The Tampa market continues to be one of the top hotel markets in the country and this hotel is a standout.
Amongst competitive set achieving a revpar index of 116, 5% during the quarter.
I will now turn the call over to Tony.
Scott.
<unk> performance for the period ended September 32023 for.
For the quarter total revenue was $39 2 million, representing a decrease of just 1% over the same quarter in the prior year year to date total revenue was approximately $131 $7 million representing.
An increase of five 6% over the same period last year.
Hotel EBITDA for the quarter was approximately $7 6 billion.
Representing a decrease of 23% from the same quarter.
Last year.
Year to date hotel EBITDA was approximately $34 5 billion.
Representing a decrease of just 2% from the same period in 2022.
For the quarter adjusted <unk> was approximately $88000, representing a decrease of approximately $2 $3 million from the same quarter a year ago year.
Year to date, adjusted <unk> was approximately $11 8 million representing.
Representing an improvement of $1 $9 million over the same period last year. Please.
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 of direct van and securities offerings.
Aesop and stock compensation expense as well as other items.
Hotel EBITDA excludes these charges as well as interest expense interest income corporate general and administrative expenses.
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 32023, the company had total cash of approximately $29 $4 million consistent.
Consistent of unrestricted cash and cash equivalents of approximately $19 2 million as well as approximately $10 $2 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 $328 million an.
<unk> outstanding debt at a weighted average interest rate of 541%.
Really 83, 5% of the company's debt carries a fixed rate of interest after taking into account the company's interest rate swap agreements.
As we enter a more normalized operating environment, we anticipate capital expenditures to be more in line with historical norms and estimate capital expenditures to approximately $7 6 million.
For calendar year 2023.
We're providing guidance for with a forecast of anticipated results for the fourth quarter, our guidance considers market conditions that accounts for current and expected performance within the portfolio.
We're projecting total revenue in the range of $45 million to $42 million for the fourth quarter Hotel EBITDA is projected in the range of nine 3% to $9 6 million.
And year to year year over year decrease in hotel EBITDA is largely due to a benefit received last year related to our <unk>.
Recovery of a theft loss of $975000.
As well as an increase in the current year insurance costs related to the renewal of our property and casualty policies and that amounts to about $590000 adjusted.
Adjusted <unk> is projected in the range of one two to $1 6 million.
Or $6 <unk> per share and I will now turn the call over to Dave.
Thank you Tony and good morning, everyone.
Overall, the lodging industry's recovery in demand, which has been characterized by significant increases in ADR flattened during the third quarter changes in logic demand has been a market by market phenomenon, leading the mixed results for our portfolio in the quarter on the one hand several of our key properties performed historically well from a raw.
And Revpar standpoint, and maintain excellent prospects moving forward and Tampa Savannah, and Wilmington continued strength in leisure demand along with strong group business and business travel pickup resulted in notable year over year gains. Meanwhile, market specific factors stalled the recovery of three of.
Our largest revenue contributing assets leading to results at those properties falling short of expectations during the quarter.
Despite some market related headwinds, we believe there is ample opportunity for occupancy growth at our hotels as our portfolio's occupancy was still two 670 basis points below 2019 levels during the third quarter, specifically looking at the slow to recover Philadelphia Airport submarket or compare.
I've sets occupancy was still 500 basis points below 2019 levels during the quarter a.
A stronger citywide event calendar for Philadelphia in 2024, combined with continued growth in business travel should create compression in the market and provide a significant boost in demand at our hotel.
Meanwhile, the Georgia terrorists, whose performance was dampened in the quarter by Union strikes in the entertainment industry is gaining traction and capturing new base business, which a diversified mix of business and boost occupancy going forward. The recent settlement of both the writers and actors strikes should provide a much needed demand boost for this hotel in the near future.
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In addition weekend business at our urban market hotels, bolstered by professional and college sports concerts and other cultural events is starting to normalize to pre pandemic levels finally, while our Arlington, Virginia hotels experienced tremendous improvement over the past year, we believe the occupancy gap of 600 <unk>.
30 basis points to 2019 during the quarter positions. This hotel for outsized growth in the near term as business travel continues to improve.
The continued recovery of group business was a key factor in the overall year over year growth of our for our portfolio during the quarter.
During the quarter group business gained 3% over the same quarter a year ago group business at the Hyatt centric in Arlington and the Desoto in Savannah, Georgia is tracking significantly above pre pandemic levels, we see opportunities for continued growth of this segment moving forward, especially in Houston, Atlanta and Atlanta.
Too slow to recover hotels events, historically had a large group component.
We expect the recent improvement of return to office rates in these markets to positively impact demand.
For these hotels looking at our portfolios group revenue picture strong rates have driven our portfolio's total group revenue to new pandemic near pre pandemic levels trailing 2019 third quarter group revenue by approximately 10%.
However, the total number of group room nights trailed 2019 by nearly 20, 26% during the third quarter demonstrating there is still considerable runway for growth in this segment.
Previously, we announced the reinstatement of quarterly dividend payments for our preferred shareholders. During the third quarter, we paid out a catch up payment for our three series of preferred stock decreasing the amount owed on the unpaid cumulative preferred dividend by approximately $1 $9 million further reducing the unpaid preferred.
The unpaid dividend represents a key priority for the company.
So far this year, we have successfully refinanced the mortgage loans for our hotels in Huston and Laurel with favorable terms as lending standards continue to tighten we are focused on upcoming loan maturities for our portfolio. We are diligently working on restructuring options with the lender for our doubletree by Hilton Hotel in Philadelphia.
Who who accommodated our request for a short term extension on the loan while loan terms have undoubtedly become less favorable for borrowers we expect a resolution on this mortgage loan in the near future.
Looking ahead the loan maturity schedule for the portfolio is spread evenly over the next several years with only one additional loan maturity coming in 2024.
Despite a turbulent macro environment during the year. The lodging industry has demonstrated continued resilience with additional growth anticipated for the near term.
Looking ahead, we believe industry growth will be fueled by the corporate and group segments with corporate travel providing the biggest opportunity for upside in 2024 improve.
Improvement in the corporate travel segment is predicated on return to office rates, which continue to trend positively and encouraging sign for the industry looking specifically at our portfolio.
2023 as group revenues pacing, 13% ahead of last year, while the business transient segment as patient 6% ahead of last year.
Overall, we are encouraged by the progress we're seeing in our operations with Q4 Revpar forecast to range between 103, and 100% of fourth quarter last year.
We remain cautiously optimistic that normalizing market conditions, and encouraging booking trends will continue to fuel our portfolio's growth prospects moving forward.
And with that operator, we can open the call up to questions.
Thank you as a reminder, if you'd like to ask a question he compressed.
One on the telephone keypad.
Thanks <unk> for your question you May press Star followed by two.
Decent unmentioned lately when asking your question.
Our first question for today comes from Alexander Goldfarb from Piper Sandler. Your line is now open. Please go ahead.
Hey, good.
Good morning, good morning down there.
So a few questions.
The ramp up of the of the staffing levels are you back to now full staffing and also I'm, assuming that the need to ramp that staffing up is because at some point, presumably where we are in order to increase.
Profitability of the hotel with that.
People checking in.
Back to a certain level of staffing so.
I'm, assuming that's why you had to raise it even though it seem to pressure margins is that a fair fair way to think about it.
Yes that is exactly the right way to think about it.
We're not completely staffed for 2019 levels.
Yet and as you saw maybe some of the.
Some of the flattening out in the third quarter.
We have continued to step up and provide additional services and amenities.
While we normally.
Normally to provide it did have a drag on margins.
Yes.
Just to add to that.
Food and beverage is the key component there, we've really ramped up our food and beverage offerings to reopen those outlets to more normalize hours, which was not the case last year.
Food and beverage while provides revenue boost as it come its a less profitable piece of a piece of revenue for the hotels. So that does have a drag on margins.
Right right, but obviously people if they're going to travel they expect those amenities.
What's going on and what's going on in Houston, you talked about the South Florida weakness you talked about.
Yes.
Arlington, what's going on in Houston that the White Hall continues to sort of be a laggard.
Well look the market is not as healthy as it has been in the past.
Out of the CVP and entertainment.
Thats just have not returned yet.
The same time, we've had some assets in the comp set around the hotel and the metro market that were either closed or under under renovation those are back and as some of the demand has returned to the market a lot of that is initially gone to flagged hotels and werent independent asset but.
So as this market stabilizes I mean this this hotel did very very well prior to the pandemic and I don't see why that's not going to return its just slower to happen then by comparison, what we've seen in Arlington, Virginia in the Metro DC market.
Yes going back to the debt and appreciate that you guys only have one loan in 'twenty four but we do see that Billy hotels extended year.
And this year before resolution, but if we take your average interest rates, where they are sort of in the mid fives I think you said and take your total.
That balance and adjusted for today's interest rates, that's like an extra $6 million, which would basically.
No.
That does yes, that's a big number given your earnings.
How are you guys thinking about balancing reducing your debt load versus the.
The rising rates it just seems to be tough math, if we think about it obviously you guys have.
<unk> continued to address this but I just wanted to hear how you're thinking about.
Dealing with rising rates, while the portfolio is still trying to work to get back to.
Full all cylinders running.
Well as you mentioned, we get the Philadelphia alone.
Orct out here this year and then we're really only looking at one.
One issue next year I mean, I think if you look at our total leverage level you've seen over the past couple of years, we have we've adjusted down across both the preferred and the.
The funded debt levels I mean, we have to take each one of these.
On a property by property.
Basis.
I mean, our thesis would be Alex that going forward, we're going to see some interest rate reductions next year, which we think will help lift the industry.
The debt issues.
The other thing to remember in my view is what you said yesterday on your Bloomberg interview.
As lenders are not eager to create problems right now.
And that actually works in the favor of the borrower to extend out mortgages and deal with some of these interest rate increases.
In the longer term.
You want to add Tony.
I was just.
What I would add is that I think our expectation is as mortgages become due in 'twenty five 'twenty six 'twenty seven we're not going to be looking at the same interest rate environment and if we are.
Not going to be back down into inflation at one 5% to 2%.
And so I think theres going to be.
That as these mortgages mature and as.
Our average.
Weighted average interest rate on our debt rises we're going to see some amount of corresponding lift in ADR and a hotel EBITDA to a comment too.
Afford that.
Okay and you answered my next question, which was going to be on bank willingness to work with you guys, but you obviously answer that because clearly the banks don't want to add to their CRE portfolio. So it sounds like they're doing what their can do adjust the balance right. So that way, it's still a loan outstanding rather than.
They are taking possession that tends to be the ml right or.
Or otherwise.
No you are correct that's correct.
Okay listen thanks, a lot.
Thanks Al Alright, Thank you Alex.
Thank you and sorry reminder, if you'd like to ask a question you can press star one on your telephone keypad.
Our next question comes from Jeff <unk> from H C. Enterprise. Your line is now open. Please go ahead.
Sure.
Alright.
Good morning, Thank you for the transparency on your call I sure appreciate it I have two questions.
The first question is dealing with the 11% drop in occupancy from the 29 2019 numbers and you provided.
Some rationale for that or whats occurred in general in the marketplace.
And then you also described what you think in the future in terms of market trends youre going to help that recover back to maybe that 2019 number.
So the first question around that is beyond just hoping the market conditions prevail.
Are you doing proactively as.
As a company from a competitive landscape perspective to.
To help make sure that happens.
Just hoping the market conditions improve.
That's the first question. The second question I'll, just ask now as well.
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Look forward and project some nominal operating conditions, you sort of a best case kind of forecast or a nominal case forecast going forward would you anticipate a potential return of dividends to common shareholders. That's the second question.
The first the first question on the occupancy.
It's pretty consistent across our industry.
One of the things we need to do at the property levels to make sure that we're competing within our comp sets.
With the correct share.
Share capture.
Something we challenge our management company to do.
And Thats, probably the nearest piece of low hanging fruit to try to capture some additional occupancy as you saw or heard in our prepared remarks, we've all talked about the upside in occupancy and some of that has to do with the recovery of group and business travel.
Into the hotels and that will lift group in lift revenue.
It's not singular to suddenly hotels.
So nominal with occupancy rate has been the driver of revenue over the recovery and I think to your second question, which was when are we going to pay common dividends as you're probably aware.
We can't pay common dividends until we are caught up on any cumulative outstanding preferred dividends and we're trying to pay those back.
I can't tell you the pace or frequency or timeline to do that but our management team as we are significant shareholders.
We want our common dividend as bad as everybody else I, just I can't give you the timeline on when that might happen.
Alright.
Appreciate it thank you for the color.
Thank you.
Thank you.
Thank you.
We currently have no final questions.
To see Dave Folsom for any further remarks.
No. Thank you very much operator, and thanks for everyone listening to our call and we'll circle back next quarter. Thank you.
Thank you for joining today's call you may now disconnect your lines.
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Okay.
Okay.
Yes.
Okay.