Sotherly Hotels Inc. (NASDAQ:SOHO) Q4 2024 Earnings Call Transcript

Sotherly Hotels Inc. (NASDAQ:SOHO) Q4 2024 Earnings Call Transcript March 13, 2025

Sotherly Hotels Inc. misses on earnings expectations. Reported EPS is $-156.01274 EPS, expectations were $0.03.

Operator: Good morning, all, and thank you for joining us. Sotherly Hotels Inc. Q4 2024 conference call and webcast. My name is Carly, and I’ll be coordinating the call today. If you’d like to register a question during the call, you can do so by pressing one on your telephone keypad. To remove yourself from the line of questioning, press two. And now I’ll hand over to your host, Mack Sims, Vice President of Operations. The floor is yours.

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 SEC 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 Kucinski.

Scott Kucinski: Thanks, Mack. Good morning, everyone. I’ll start off today’s call with a review of our portfolio’s key operating metrics for the fourth quarter. At the fourth quarter results for the actual portfolio compared to 2023, RevPAR increased 2.9% driven by a 7% increase in occupancy with a 3.7% decrease in ADR. Stripping out Tampa from the results due to hurricane impact, the fourth quarter’s actual portfolio RevPAR increased to a healthy 5.8% compared to the prior year. Looking at the fourth quarter results for the actual same-store portfolio relative to 2019, RevPAR increased 3.8%, driven by ADR growth of 7.9% while occupancy was down 3%. For the full year 2024, RevPAR performance represents an increase of 3.5% over the same period in 2023, driven by a 6.1% increase in occupancy and a 2.5% decrease in rate.

Again, stripping out Tampa from the results due to hurricane impacts, the annual actual portfolio RevPAR increased 3.9% compared to 2023 levels. Looking at the annual results for the same-store actual portfolio relative to 2019, RevPAR was up 1.3%, driven by ADR growth of 8.6% and occupancy decline of 6.8%. Overall, our portfolio’s fourth-quarter results were driven by strong year-over-year occupancy growth ahead of our budget expectations. Occupancy growth was especially strong in our slower-to-recover urban markets, a positive indicator that lodging fundamentals have normalized following the uneven recovery period after the pandemic. As part of this normalization of lodging fundamentals, rates have settled down a bit following the revenge travel trends of the prior two years, with an ADR decline of 2.5% partially offsetting the quarter’s 6.1% gain in occupancy.

Q&A Session

Hurricane Helene, which struck during the third quarter, contributed to significant operational impact during the fourth quarter of 2024. As a result of the hurricane storm surge, Hotel Alba sustained water intrusion on the first floor of the hotel, causing damage to furniture, finishes, and equipment in public areas and guest rooms as well as some building systems. Due to our operating team’s expeditious restoration efforts following the storm, the hotel remained fully operational. To date, the work associated with this fully insured casualty has been efficiently executed, and only final FF&E replacements and elevator work remain to be accomplished. We anticipate the impact on operations at Hotel Alba as a result of Hurricane Helene to continue through the second quarter of this year.

From an accounting perspective, the company’s headline quarterly operating metrics, including occupancy, ADR, and RevPAR, reflect the impact of Hurricane Helene on Hotel Alba’s operations prior to business interruption insurance proceeds, while the company’s revenue and profitability metrics include business interruption insurance credits. Looking at some highlights across the portfolio, the DoubleTree Resort in Hollywood, Florida posted strong year-over-year results during the quarter, improving RevPAR by 13.8% fueled by a 13.4% increase in occupancy and a slight increase in rate. The hotel’s improvement in occupancy, which led to greater ancillary revenue capture, was a result of stronger-than-expected weekend demand as well as improved bookings.

Driven by a 13% increase in occupancy share, the DoubleTree easily outperformed its competitive set during the quarter, growing its RevPAR index by 8.5%. The Whitehall in Houston continued to build momentum during the fourth quarter, growing RevPAR by nearly 50%, driven by occupancy growth of 46.1% and rate growth of 2.7%. The hotel’s improved performance was predominantly driven by growth in the leisure transient segment. The Whitehall easily outperformed its competitive set during the quarter, gaining more than 30% RevPAR share fueled by strong occupancy share improvement of nearly 34%. Our DoubleTree Hotel in Philadelphia continued a streak of improved performance during the fourth quarter, posting a 9.4% increase in RevPAR driven by a 16.2% increase in occupancy.

The hotel’s submarket continues to trend positively during the quarter, benefiting from increased demand from special events as well as improved airport traffic. Meanwhile, the hotel’s strong occupancy growth, which is driven by increased business and group travel, contributed to a 5.2% RevPAR share gain during the fourth quarter. Hotel Ballast in Wilmington posted strong year-over-year results, growing RevPAR by 7.1%, which was fueled by a 1.9% increase in occupancy and a 5% increase in rate. Hotel Ballast’s well-balanced approach, highlighted by group with strong banquet and catering contribution, continues to drive the hotel’s revenue picture. Looking at profitability metrics for the portfolio, while hotel EBITDA margin experienced a slight year-over-year decline, the prior year included a $700,000 grant payment at the Georgia Terrace.

Stripping out this one-time event, fourth-quarter hotel EBITDA margin improved by 150 basis points over the prior year, a commendable effort considering the portfolio’s moderate rate decline during the quarter. The portfolio’s occupancy growth trend has allowed our managers to drive also taking advantage of economies of scale, especially in our slower-to-recover markets, in order to drive flow-through. Moving forward, we expect normalized staffing and amenity levels along with stabilized wage costs to result in relatively stable margins for the portfolio. Turning to corporate activity, the company continues planning and preparation for two upcoming PIP renovations. In Philadelphia, we have executed a new ten-year franchise agreement with Hilton for the DoubleTree flag.

The acquired PIP renovation has an $11.5 million budget with an expected completion date of May 1, 2026. In Jacksonville, the company executed a new ten-year franchise agreement with Hilton to convert the hotel to a soft-branded concept under the name Hotel Bellamy. This $14.6 million renovation has an expected completion date of January 1, 2027. I will now turn the call over to Tony Domalski.

Tony Domalski: Thank you, Scott. Reviewing performance for the period ended December 31, 2024. For the fourth quarter, total revenue was approximately $44 million, representing an increase of 4.3% over the same quarter in 2023. Year-to-date, total revenue was approximately $182 million, representing an increase of 4.6% over the full year 2023. Hotel EBITDA for the quarter was approximately $10.7 million, representing an increase of 3.6% from the same quarter last year. Year-to-date, hotel EBITDA was approximately $46.8 million, representing an increase of 4.5% over the full year 2023. For the quarter, adjusted FFO was approximately $2 million, up about $850,000 from the same quarter in 2023. Year-to-date, adjusted FFO was approximately $14.3 million, representing a decrease of approximately $250,000 from the prior year.

Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, unrelated 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, realized gains and losses on derivative instruments, and the current portion of our tax provision as well. Please refer to the earnings release for additional detail. Looking at our balance sheet as of December 31, 2024, the company had total cash of approximately $28.7 million, consisting of unrestricted cash and cash equivalents of approximately $7.3 million, as well as approximately $21.4 million which was reserved for real estate taxes, insurance, capital improvements, and certain other items.

At the end of the quarter, we had principal balances of $319.3 million in outstanding debt, at a weighted average interest rate of 5.88%. Approximately 84.5% of the company’s debt carried a fixed rate of interest when taking into account the company’s interest rate hedges. We anticipate routine capital expenditures for the replacement and refurbishment of furniture, fixtures, and equipment will amount to approximately $7.2 million for calendar year 2025. A significant portion of our product improvement plans at the DoubleTree by Hilton Philadelphia Airport and the DoubleTree by Hilton Jacksonville will occur during the year. Anticipated capital expenditures related to these projects total approximately $11.6 million. Turning to guidance, we are publishing full-year guidance for 2025, accounting for current and expected performance within the portfolio and taking into account market conditions.

We are projecting total revenue in the range of $183.4 million to $188.2 million for the full year 2025. At the midpoint of this guidance, this represents a 2.1% increase over the prior year. Hotel EBITDA is projected in the range of $48.8 million to $49.6 million, and at the midpoint of the guidance, this represents a 5.2% increase over the prior year. Adjusted FFO is projected in the range of $11.5 million to $12.3 million, or $0.57 to $0.61 per share. At the midpoint of the guidance, this represents a 16.4% increase compared to the prior year. I will now turn the call over to Dave Folsom.

Dave Folsom: Thank you, Tony. Good morning, everyone. We were pleased with our portfolio’s fourth-quarter results, which capped off a productive year characterized by improved operating fundamentals and continued occupancy growth. Our portfolio’s 6.1% occupancy improvement during the fourth quarter was particularly impressive given the challenges faced at our Tampa hotel following the major hurricane at the end of the third quarter. Additionally, the sustained recovery at two of our urban hotels in Houston and Philadelphia was an encouraging sign for the portfolio. The noteworthy rebound in demand at our DoubleTree Hotel in Hollywood, Florida, which was driven by a balance of strong weekend leisure pickup and weekday group business, was also a positive catalyst for our portfolio during the quarter.

Despite some softening in rate during the quarter, we continue to be encouraged with our managers’ ability to utilize streamlined revenue management strategies in order to drive strong top-line growth, gain RevPAR share versus our competitive sets, and deliver solid margins. As a result of these initiatives, we were able to achieve our full-year guidance targets for revenue, hotel EBITDA, and adjusted FFO, which were initiated last March. Occupancy growth continued during the quarter, with many of our hotels delivering double-digit occupancy growth over the prior year. The Whitehall in Houston was a standout performer as its reenergized sales effort drove 46% occupancy growth over the prior year, primarily through weekend leisure and group business, the latter of which improved more than 50% during the quarter.

For the year, the Whitehall’s occupancy improved nearly 35% over the prior year, and its RevPAR share grew more than 20%. Similarly, our DoubleTree Hotel at the Philadelphia Airport delivered excellent occupancy growth of 16% over the prior year as the hotel outperformed its comp set during the quarter. Even with rate softness in this market, our manager was able to significantly improve that hotel’s profitability relative to the prior year, growing hotel EBITDA by 74% for the quarter. We believe there’s still significant opportunity for growth at this hotel as its occupancy remains nearly 600 basis points below 2019. As one of the largest revenue contributors in the portfolio, the improved performance at our DoubleTree Hotel in Hollywood during the quarter was especially encouraging, with occupancy growth of 13.4% and hotel EBITDA growth of 15% over the prior year.

Group revenue growth was also strong at this hotel, growing 15% over the prior year. Looking at the total portfolio, group continues to be the strongest driver of growth for the portfolio, expanding by 5.9% for the full year 2024 with additional upside opportunities for 2025. Looking at our balance sheet initiatives throughout 2024, Sotherly Hotels Inc. continued to successfully navigate the mortgage markets, despite ongoing challenges in the debt markets from a borrower perspective. During the year, we completed refinancings or extensions at several hotels, including the DoubleTree at the Philadelphia Airport, Hotel Alba in Tampa, and the DoubleTree Hotel in Jacksonville, Florida. Currently, the company continues its efforts in executing life cycle improvements in conjunction with the renewal of Hilton franchises at its DoubleTree locations in Philadelphia and Jacksonville.

We believe the necessary upgrades to these properties will allow our managers to drive increased profitability through rate capture to deliver long-term value. Looking ahead, we will continue to conservatively approach upcoming debt maturities for our portfolio, which are spread evenly over the near term. Looking at 2025, we continue to be cautiously optimistic on the lodging industry. Despite the uncertain macro environment so far this year, we have been pleasantly surprised by our portfolio’s operating fundamentals, with January’s results finishing well ahead of expectations. Preliminary January RevPAR, highlighted by continued improvement at our urban hotels coupled with strong demand at our South Florida hotels, showed a 12.8% improvement over the prior year.

Full-year 2025 RevPAR for our portfolio is forecasted to range between 103% and 105% of full-year 2024 RevPAR. Looking ahead, we believe that our portfolio of well-positioned hotels, driven by occupancy growth, will continue to outperform. And with that, we will open the call up for questions. Thank you very much. We now have to open the line for Q&A. If you would like to ask a question, please press star followed by two. Our first question comes from Alexander Goldfarb of Piper Sandler. Alexander, your line is now open.

Alexander Goldfarb: Hey. Morning down there. Just a few questions. Looking at guidance, your revenue is projected to be higher, EBITDA is expected to be higher. You guys spoke about a pretty good outlook, you know, stable operating costs, yet FFO looks to decline. So just want to get a bit more color on this. Is this because of refinancing activities or interest, and also, you know, what do you think the trajectory of FFO is if, you know, operations are improving but FFO is going down?

Tony Domalski: This is Tony, Alex. You know, we’re seeing improvements in revenue and EBITDA, as you said. But we have a bevy of loans that we originated five to ten years ago in the four to five percent interest rates that we’re now having to refinance. And so we’re going to see interest costs creep up. We saw it creep up last year. We’re seeing it creep up again in 2025. And I think until we complete these refinances, they’ll slowly plateau as we complete all these refinances of those legacy mortgages.

Alexander Goldfarb: Okay. And then just following up on the 8-K you guys filed last month on the NASDAQ on the stock trading below a dollar. Yeah. It would seem like a reverse split is the easiest thing, but just curious how you guys are thinking about it. I think you have until August to get the stock above a dollar.

Dave Folsom: That’s right, Alex. It’s Dave here. We have 180 days upon notice to cure the deficiency, and that’s normally accomplished, as you said, by executing a reverse split of some ratio to get above the dollar threshold. Or during that period, if the stock price rises above that dollar, it’ll cure itself.

Alexander Goldfarb: Okay. And then as far as the hotels that you’re doing the repairs on, I think the Alba, is there anything in guidance for insurance recoveries? Like, is any part of FFO enhanced by just, you know, recovering insurance dollars?

Scott Kucinski: Alex, this is Scott speaking. You know, our guidance assumes normal operations at the hotel where we’ve, you know, had business interruption proceeds from our insurance carriers to date. We’ve been, you know, doing those calculations on a monthly basis. So as I think I mentioned in my comments, Q4 of last year, our bottom line results, our revenue results, and our bottom line delivered results reflect the collection of those business interruption proceeds to essentially make us whole. And that’s our assumption going forward. The business interruption is fairly minimal at this point since the hotel is pretty much all put back together. But every month that goes by, any shortfall to operations will be filled with that business interruption proceeds. So the guidance is just assuming, you know, we’re fully made whole.

Alexander Goldfarb: Okay. So, basically, what you’re saying is the number for the guidance for 2025 is a good run rate for the portfolio. It’s not being enhanced at all by… okay, good. And then finally… Right. And this… Okay, cool. And then just last question, you know, you mentioned about refinancing this year. You know, obviously, debt load on the company, you know, every asset encumbered. Given the steady rebounding in asset values, as you guys contemplate refinancing debt, especially to try and grow FFO, is there, you know, any thought, any of the assets that have, you know, a healthy amount of equity, that you could see a path to maybe sell one or two, start to unencumber some of the other assets with the excess proceeds, and try to get this company in a better spot leverage-wise so that we can, you know, talk more about growing the equity? Is that something that you think is feasible or reasonable as you think about refinancing?

Dave Folsom: I mean, we’re always looking at options on how to manage cash and manage the portfolio structurally. I don’t think we’ve really looked that hard at selling assets for the purpose you’re articulating. I mean, I do believe that as fundamentals continue to go up, hopefully, we’re going to get better results on the refinancing picture. I mean, to date, interest rates have come down since last year. Some of the other structural aspects of refinancing and debt mortgaging as it is are still pretty sticky with debt yields and debt service coverage ratios. But our goal right now is to take each one of these mortgages that are coming due with legacy loan rates and legacy loan structures and get the best outcome we can from the markets. And I think that’s the strategy we’ve looked at with the board, and that’s what we’re going to pursue.

Alexander Goldfarb: Okay. Listen. Thank you for your time.

Dave Folsom: Alright. Thank you very much. Thank you very much.

Operator: We will allow just a moment for any questions to filter in. We currently have no further questions. So I’d like to hand back to Dave Folsom for any closing remarks.

Dave Folsom: Thank you, everyone, for participating today, and we look forward to our next earnings call. Thank you, Albert.

Operator: As we conclude today’s call, we’d like to thank everyone for joining. You may now disconnect your lines.