Sotherly Hotels Inc. (NASDAQ:SOHO) Q3 2022 Results Conference Call November 10, 2022 10:00 AM ET
Company Participants
Mack Sims – Head of IR
Scott Kucinski – Executive Vice President and Chief Operating Officer
Tony Domalski – Vice President and Chief Financial Officer
Dave Folsom – President and Chief Executive Officer
Conference Call Participants
Alexander Goldfarb – Piper Sandler
Operator
Hello, and welcome to today’s Sotherly Hotels Third Quarter 2022 Earnings Call and Webcast. My name is Bailey, and I’ll be your moderator for today’s call. All lines will be muted during the presentation portion of the call within opportunity for questions and answers at the end. [Operator Instructions].
I would now like to pass the conference over to our host, Mack Sims, Vice President of Operations. Please go ahead.
Mack Sims
Thank you, and good morning, everyone. If you did not receive a copy of the earnings release, you may access it on our website at sotherlyhotels.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, 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.
Scott Kucinski
Thanks, Mack. Good morning, everyone. I’ll start off today’s call for a review of our portfolio’s key operating metrics for the quarter.
Looking at the third quarter results for the same-store composite portfolio. RevPAR was $103.42, driven by an occupancy of 62.7% and an ADR of $164.97. Third quarter RevPAR performance represents an increase of 12.3% over the same period in 2021.
Looking at these figures versus third quarter of 2019, RevPAR increased 2.7%, with occupancy down 7.2%, with ADR increasing 10.8%. Year-to-date RevPAR for the same-store composite portfolio was $110.65, with occupancy of 62.2% and an ADR of $177.88. Year-to-date RevPAR performance represents an increase of 31. 4% over the same period in 2021.
Looking at these figures for the comparable period in 2019, RevPAR was down 7.2% with occupancy down 12.9% and ADR increasing 6.5%. Overall, we were pleased with our portfolio’s third quarter results, highlighted by sustained strength of demand for leisure travel during the summer months, coupled with strong growth in demand for group business travel.
For September alone, RevPAR was up 9% over 2019, with ADR up nearly 11% and occupancy only slightly off to pre-pandemic levels, a definitive indication that we are nearing a normalized operating environment. Examining our portfolio’s recent booking trends for business and group travel further validates the thesis that demand from these segments is returning to normalized levels.
For the group segment, our portfolio produced 86% of the group business in the third quarter 2022 compared to Q3 2019. However, in September, group business was 106% of group businesses in September 2019. For the business travel segment, our portfolio was at 67% of the business travel produced in Q3 2019. Though in September, business travel revenue increased to 78% of the business travel in September of 2019.
These trends, which have shown further improvement thus far during the fourth quarter are an encouraging sign for our company. The continued strengthening of the business travel and group segments came across our entire portfolio, but was most noteworthy at our heavily impacted urban hotels in Washington, D.C. and Houston, which experienced the best year-over-year improvement in performance.
While contribution from group and business travel at these hotels was at its highest level since the start of the pandemic, we believe there is still significant upside potential for these assets as midweek occupancy continues to grow and forward bookings are trending positively for Q4 and next year.
In addition, weekend performance at our urban properties was boosted during the quarter by demand drivers such as concerts, major sporting events and citywide events that are now running at or near full capacity. Meanwhile, our portfolio is leisure-focused hotels maintained their strong results during the quarter, as leisure demand was combined with a steady return of group demand to produce outstanding results. Rate growth at our leisure-focused hotels was especially strong during the quarter with rates easily outperforming pre-pandemic levels.
Looking at some highlights across the portfolio. The DeSoto Savannah continued its excellent results during the quarter as the property easily outpaced 2019 metrics with a 36.3% gain in RevPAR, fueled by significant rate growth of 27.8% and occupancy growth of 6.7% over 2019. The Hyatt Centric Arlington continues to show strong sequential improvement relative to 2019, fueled by the return of business travel to the hotel.
Though, third quarter RevPAR was still off 10.1% compared to the same period in 2019, this was a significant improvement over the second quarter. Rate, which was up 8.6% compared to the third quarter of 2019, was the main driver of this improvement. The property continues to outperform its competitive set. And during the quarter, the hotel achieved a RevPAR index of nearly 124% and gained over 8% in RevPAR share, further solidifying its position as the leader in the market.
Hotel Ballast in Wilmington, North Carolina posted exceptional results for the third quarter as the hotel drove strong demand from the leisure and group segments, improving RevPAR by 12.3% over 2019, fueled by a 3.2% increase in occupancy and an 8.9% increase in rate. The property continues to perform well versus competitive set, gaining 7.4% in RevPAR share during the quarter. Management’s strategic cost control initiatives and revenue management strategies aimed at driving rate led to commendable profitability during the third quarter as we continue to experience margin expansion over pre-pandemic levels.
Looking at hotel EBITDA margins. For the third quarter 2022 versus 2019, margins expanded 420 basis points to 25.1%. Year-to-date, margins have expanded 110 basis points over 2019 to 27.7%, the highest level in the company’s history. While the labor markets are still challenging, this headwind appears to be easing, thus reducing our reliance on expensive contract labor while also improving the quality of service for our guests.
In addition, guests at our hotels continue to show minimal price sensitivity to ancillary revenue drivers, such as food and beverage outlets, parking, banquet rentals and resort fees. Following a period of greatly reduced offerings during the pandemic, our hotels reconfigured food and beverage operations are nearing stabilization, providing additional revenue opportunities at our properties. As we navigate the post-pandemic operating environment, margin control will continue to be a crucial area of focus for our managers. All in all, we are pleased with the quarterly operating results for our portfolio and are encouraged by the trends we are seeing going forward.
I will now turn the call over to Tony.
Tony Domalski
Thank you, Scott. Reviewing performance for the period ended September 30, 2022. For the third quarter, total revenue was approximately $39.2 million, representing an increase of 10.5% over the same quarter in 2021.
On a year-to-date basis, total revenue was approximately $124.7 million, representing an increase of 34.8% over the same period in 2021. Comparing current performance to pre-pandemic levels, total revenue for the third quarter increased to 92.2% of the level of total revenue for the same period in 2019.
On a year-to-date basis, total revenue increased to 88.2% of the level of total revenue for the same period in 2019. Hotel EBITDA for the quarter was approximately $9.8 million, representing an increase of 10% over the same quarter 2021. Year-to-date, hotel EBITDA was approximately $34.6 million, representing an increase of 51.7% over the same 9-month period in 2021. Comparing current performance to pre-pandemic levels, hotel EBITDA increased to 110.3% of hotel EBITDA for the same period in 2019.
On a year-to-date basis, hotel EBITDA increased to 91.8% of the level of hotel EBITDA for that same 9-month period in 2019. For the quarter, adjusted FFO was approximately $2.4 million, representing an increase of $2.4 million over the same quarter 2021. Year-to-date, adjusted FFO was approximately $9.8 million, representing an improvement of approximately $13.4 million over that same 9-month period in 2021.
Comparing current performance to pre-pandemic levels, adjusted FFO increased to 217.5% of the level of adjusted FFO for the same period in 2019. Year-to-date, adjusted FFO increased to 81.1% of the level of adjusted FFO for that same 9-month period in 2019. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, gains and losses on derivative instruments, charges related to aborted or abandoned securities offerings, ESOP 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 and our income tax provision as well as other items. Please refer to our earnings release for additional detail.
Looking at our balance sheet. As of September 30, 2022, we ended the quarter, the company had total cash of approximately $30 million, consisting of unrestricted cash and cash equivalents of approximately $23 million, as well as $7 million which was reserved for real estate taxes, capital improvements and certain other items. Looking ahead to the fourth quarter, the company estimates cash generated at the hotel level to range between $10 million and $10.25 million. We expect corporate level G&A expenses of approximately $1.55 million. And capital expenditures are expected to be approximately $2.4 billion to $2.65 billion for the quarter.
Outlays for scheduled payments of principal and interest are expected to be approximately $6.3 million for the quarter. Overall, we are expecting cash used by our portfolio to be no more than about $600,000. Since December 2020, we have removed $55.3 million of debt from the company’s balance sheet using approximately $52.2 million generated in asset sales.
During that period, we reduced deferred interest due to our lenders and deferred fees due to certain vendors. All of which was granted to us through various forbearance agreements, and we reduced this by approximately $8.5 million over the period.
We expect all such repayment of deferred interest and principal from forbearance granted during the pandemic as well as forbearance granted by our vendors to be complete by the end of 2022, ending another important chapter in the company’s recovery from the pandemic financial impact.
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 4.88%. Approximately 96% of the company’s debt carried 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 be more aligned with historic norms, and we estimate capital expenditures will amount to approximately $7.2 million for calendar year 2022.
And I’ll now turn the call over to Dave.
Dave Folsom
Thank you, Tony, and good morning, everyone. During the third quarter, we experienced encouraging trends across our portfolio as business and group travel continue to improve, while leisure travel maintained its robust demand and exceptionally strong rate growth. . The improvement in operating fundamentals was reflected in the quarter’s profitability metrics with hotel EBITDA and adjusted FFO per share easily outpacing the same period in 2019. Our portfolio’s continued recovery during the quarter demonstrate the ideal location of our southern coastal markets as well as management’s ability to navigate the lodging environment with a flexible operating model.
Our portfolio sustained no material damage from Hurricane Ian, which swept through Florida and up the East Coast at the end of the quarter.
This major storm caused only a nominal impact on revenues for the portfolio in the quarter as our sales managers did a commendable job in seeking out replacement business from hurricane-related response personnel and rebooking group business for future dates. Leisure demand at our hotels remained particularly strong during the quarter, especially at our coastal properties such as Hotel Ballast and the DeSoto, which posted historically strong room rates during the period.
Rates were especially strong during high demand periods in the quarter, such as the July 4, Labor Day weekend and other citywide events. Notably, ADR at the DeSoto increased nearly 28% over the third quarter of 2019, translating to excellent profitability. While the pace of the recovery has been uneven across segments and markets, we are progressively witnessing signs that traditional travel patterns are normalizing. Demand at our urban locations experienced the most profound year-over-year increases during the quarter, a trend which clearly reflects the improving group and business travel segments in those markets.
Much of this improvement was driven by post-Labor Day demand, suggesting a more normalized corporate travel calendar, one which the industry has not experienced since before the start of the pandemic. The market improvement at the Hyatt Centric in Arlington highlights this trend as RevPAR steadily pushes towards 2019 levels. Notably, RevPAR at this property improved approximately 1,000 basis points quarter-over-quarter relative to 2019. Group demand at the property sold during the period actually outpacing 2019 by nearly 20%. While year-over-year occupancy growth for our portfolio is impressive, we believe there is still significant room for improvement as occupancy was still 7.2% below 2019 during the third quarter.
We expect the momentum gained during the third quarter to continue as corporate travel trends are improving and site visits, leads, and group bookings remained strong for the fourth quarter of next year. In fact, fourth quarter group bookings are pacing 12% ahead of 2019 levels, representing a significant improvement over the third quarter’s group bookings.
In addition to the improvements in group, we anticipate closing out the year with a robust holiday travel season driven by high rated leisure travel, especially in our warm weather markets. Overall, we are forecasting fourth quarter RevPAR to be approximately 6.5% above the same period in 2019.
We are closely monitoring macroeconomic data, consumer behavior and corporate travel policies and have not seen any pullback in demand, future booking pace of room rates. We believe these encouraging trends and tailwinds for our industry and our portfolio to fuel our growth prospects for the remainder of 2022 and beyond.
And with that, operator, we can open the call up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question today comes from the line of Alexander Goldfarb from Piper Sandler.
Alexander Goldfarb
So just getting to the overall business and profitability. One, great to hear that all of leisure business are coming back. Great to hear about the strong group bookings, holiday travel, et cetera. But if we look at your press release and estimated uses of cash, even with all these positives, you’re still going to use a few hundred thousand of cash based on the debt service of $6.3 million.
So if you’re back — I think I heard you guys say you’re back to sort of 92% of revenue levels. So how are you thinking or how should we think about the ability for the company to get back to being cash flow positive in a meaningful way? And are there ways to — I mean in a high-rate environment, sounds tough, but are there ways to reduce the debt service while still growing revenue or additional expense savings? Maybe you could just walk through that.
Scott Kucinski
Alex, this is Scott, and Tony and I’ll contact you on that one. I guess a couple of things. First of all, when we’re looking at cash usage in the fourth quarter that Tony forecasted, there’s still about, what, $300,000 or maybe a little bit more than that, $600,000 of forbearance catch-up payments there. So had we — on a normalized basis, we’re at least cash neutral when you remove those onetime forbearance payments that we’re finishing up here at the end of the year.
The other piece, our CapEx forecast for the fourth quarter is kind of back loaded, that’s a heavy number just because we’ve kind of taken taking the year and things are delayed. So we didn’t spend as much earlier in the year, and we’re going to be spending more in the fourth quarter just because it just takes longer to get stuff done and get products delivered at this point. So again, that’s a heavier number for the fourth quarter.
Tony Domalski
I think to that, Alex — this is Tony. I would add that ours is a seasonal business, a really, really strong second quarter, a good first quarter and the last half of the year is generally good. But if nowhere near as good as the first half of the year. So where the company generates most of its cash flow would be in that — on a quarterly basis would be in those first two quarters of the year.
Alexander Goldfarb
Okay. So as you think about where the company is now and you think about next year based on what you’re — what trends you have in place, obviously, things can change. But as it stands today, do you envision that for the full year 2023, you guys will be cash flow positive, breakeven, materially cash flow positive? Just trying to get a sense for where things stand after debt service after CapEx.
Dave Folsom
Yes. I think on a CAD basis, we’re definitely going to be positive. We’re in the budget cycle right now, Alex. And I think the data that we’re receiving is pretty robust in terms of where we think the market is going to be next year.
Alexander Goldfarb
Okay. And then as far as debt goes, the — so it sounds like that $6.3 million is really $5.7 million. Are there ways to further reduce that debt service. Again, understanding that refinancing probably isn’t an option.
So I’m thinking more, are there principal pay downs or anything like that, that you can do to reduce the debt service such that cash flow can really start to grow and obviously then get towards dividend restoration.
Scott Kucinski
Yes, Alex. I mean all of our debt is amortizing, so we make principal payments on all that on a scheduled basis. So it’s by nature, the principal balance is producing every single quarter, every single month. Beyond those scheduled payments to use excess cash to reduce the debt could be a possibility, but it’s not going to be a meaningful pay down. We’re not sitting on a ton of excess cash to reduce our debt in that manner.
Tony Domalski
Yes. This is Tony. I would add that we do have a number of loans that either we cannot pay down like a CMBS debt — some of our CMBS debt or their significant prepayment penalties on that debt. So there’s not too many pieces of mortgage debt that we really have the opportunity to pay down outside maybe a couple of pieces that are coming up for in maturity next year.
Alex, I’d also bring your attention to, I think we made a comment in the script that there is — for the calendar year 2022, there’s about $7.5 million to $8.5 million worth of forbearance payments. That’s cash that we use to catch up on deferred interest and deferred principal and deferred vendor payments that won’t recur next year. So there’s — in our view, we look at that as a source of liquidity source of free cash flow for next year.
Alexander Goldfarb
You said $8.5 million of forbearance and catch-up payments that we’re in ’22 that won’t be in ’23, correct?
Scott Kucinski
That’s correct.
Tony Domalski
Right.
Operator
[Operator Instructions] There are no additional questions waiting at this time. So I’d like to pass the conference back over to Dave Folsom for any closing remarks. Please go ahead.
Dave Folsom
Thank you, everyone, for joining us on our call, and we look forward to speaking with you again on our fourth quarter earnings release. Thank you.
Operator
This concludes today’s conference call. Thank you all for your participation. You may now disconnect your lines.
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