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spk06: Good day and welcome to the Southerly Hotel's fourth quarter 2020 earnings call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Max Sims. Please go ahead.
spk00: Max 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 southerlyhotels.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 the conference call, which are not historical, may constitute poor-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. Thanks, Mac.
spk02: Good morning, everyone. I'll start off today's call with a review of our portfolio's key operating metrics in the quarter and the year. Looking at results for the composite portfolio, which remained fully open during the quarter, REVPAR decreased 62.3% over prior year, reflecting a 52.6% decrease in occupancy and a 20.4% decrease in ADR. For the year, portfolio REVPAR decreased 60.8% over prior year, with a 56.4% decrease in occupancy and a 10.1% decrease in ADR. These metrics were generally in line with our market competitors and ahead of the upper upscale U.S. lodging segment for the quarter and for the year. The lodging industry's fourth quarter performance continued to be firmly influenced by COVID's impact on travel demand, as well as macroeconomic factors. While the third quarter showed gradual improvement, the fourth quarter is choppier. October results were relatively strong, driven by leisure travel and a modest recovery in business and group travel. However, we experienced a decline in demand in November and December as a third wave of COVID led to a record number of cases, hospitalizations, and the reimplementation of travel restrictions in some municipalities. Examining REVPAR results on an absolute basis for the portfolio highlights the Corps' uneven performance. As REVPAR was $43.78 in October, then $35.67 in November and $36.56 in December. Despite the challenges faced during the quarter, in December our staff's strong sales efforts resulted in the highest level of group bookings since the outset of the pandemic, highlighted by the return of film industry crews to the Georgian Terrace in Atlanta. We were also able to close out the year on a high note as our warm weather leisure destinations, including Savannah and our Florida properties in Jacksonville, Tampa, and Hollywood, all experienced strong pickup leading up to the New Year's holiday. The improved group and leisure performance has carried through to the new year, as green shoots in these segments suggest that the beginning of a sustained recovery is on the horizon. Looking at more detailed property highlights for the quarter, our Doubletree and Jacksonville continue to outperform the market, achieving a REVPAR index of 146 for the quarter, gaining 2,700 basis points in share in a quarter. The outperformance was due to a small group business, an uptick in transient business travel, and weekend leisure business. Hotel Alba in Tampa continued to ramp up following its renovation and conversion, achieving a REVPAR index of 125 for the quarter, gaining 4,900 basis points in share from its competitors. We are optimistic this hotel has even more room to grow share and firmly position itself as the market leader. During the quarter, the Georgian Terrace and Atlanta outperformed its new competitive set, which consists exclusively of luxury properties, achieving a red par index of 121%, a gain of 1,700 basis points in share. The outperformance was due to the return of the film groups we mentioned, as well as weekend leisure business, both of which have been severely disrupted during the pandemic. Turning to corporate activity, in November, we successfully transitioned the management of the Hyatt Centric Arlington to our town hospitality. With that transition, our town now manages 100% of our portfolio, which should continue to improve the efficiency and effectiveness of our day-to-day managerial effort. We have continued to work with our lenders and to date have successfully completed a variety of modification and forbearance agreements across the majority of the portfolio, which generally allows us to defer payments of principal and or interest for periods that began back in April 2020 and that extends through various dates ending between February of 2021 and December of 2021. They also waive or modify covenants in order to keep the loans in compliance. To date, the only loan not in compliance with its covenants is the mortgage loan secured by the Doubletree Resort, Hollywood Beach. However, we are in active negotiations with that special servicer to finalize a forbearance agreement. During our last earnings call, we referenced our monthly cash burn rate and the need to address the company's shrinking liquidity pool. At the end of the year, we announce that we enter into a loan agreement with affiliates of Kemmons Wilson Hospitality, LP, and a co-investor in an aggregate amount of $20 million with additional $10 million available to draw by year-end 2021. The loan matures in three years and will be payable on or before the maturity date at the rate of 1.47X, the principal amount borrowed during the initial three-year term, with a one-year extension at the company's option. The loan also carries a 6% current interest rate, payable quarterly during the initial three-year term, and includes certain covenants such as borrower liquidity thresholds. We believe the loan satisfies our immediate need for liquidity that will provide us the bridge to a sustained recovery for the industry. I will now turn the call over to Tony.
spk05: Thank you, Scott. Reviewing performance for the period ended December 31, 2020. For the fourth quarter, total revenue was approximately $14.6 million, representing a decrease of approximately $29.7 million, or 67.1% over the same quarter a year ago. For the year, total revenue was approximately $71.5 million, representing a decrease of approximately $114.3 million, or 61.5% over the prior period. Hotel EBITDA for the quarter was a deficit of approximately $1.9 million, representing a decrease of approximately $11.2 million, or 120%, over the same quarter a year ago. For the year, hotel EBITDA was a deficit of approximately $3.2 million, representing a decrease of $50.2 million, or 107%, over the prior period. And adjusted FFO for the quarter was a deficit of approximately $10.7 million, a decrease of approximately $11.7 million over the same quarter a year ago. And for the year, adjusted FFO was a deficit of approximately $36.2 million, representing a decrease of approximately $53.4 million, or over 300% over the prior period. 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 offering costs, changes to the deferred portion of our income tax provision, as well as other items. Hotel EBITDA excludes these charges, as well as interest expense and interest income, corporate general and administrative expenses, and the current portion, or the cash 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 December 31st, the company had total cash of approximately $35.3 million, consisting of unrestricted cash and cash equivalents of approximately $25.3 million, as well as approximately $10 million, which was reserved for real estate taxes, capital improvements, and certain other items. The company estimates the average monthly cash generated at the hotel level for the first quarter to range between $500,000 and $600,000 per month. Thus, we believe that this will be the first quarter our properties will achieve positive cash flow since the start of the pandemic. We expect corporate level G&A expenses to range between 500 and 550,000 per month. Capital expenditures are estimated to range between 250,000 and 350,000 per month. And outlays for scheduled payments of principal and interest are expected to range between 1.1 and $1.45 million per month. Overall, we're expecting a total cash burn of approximately $4.5 million for the first quarter. At the end of the quarter, we had principal balances of approximately $390.3 million in outstanding debt at a weighted average interest rate of 4.66%. Approximately 87% of the company's debt carried a fixed rate of interest. During the fourth quarter, we remained committed to our action plan in coordination with our management company. to reduce hotel operating expenses and mitigate the impact of the loss of business. Although we reduced hotel operating expenses by approximately 53% from the same quarter a year ago, hotel operating expenses exceeded hotel revenue by approximately $1.9 million. We have also significantly scaled back our capital projects and anticipate the capital expenditures, which primarily represent the replacement of systems critical to the operation of our hotels, will amount to approximately $4 million for calendar year 2021. As a result of the majority of our wholly owned guest rooms undergoing renovation over the last five years, we feel our portfolio is in a good position with no required renovations through the end of 2021. Last March, we announced the suspension of our dividend and deferral of payment of dividends announced in January. The suspension and deferral eliminate a draw on the company's cash reserves of approximately $4.25 million per quarter. The company continues and will continue to have discussions with its lenders regarding anticipated noncompliance with the financial covenants under the agreements that include them. Based on these discussions, the company believes it will continue to obtain waivers from its lenders under agreements that articulate noncompliance as an event of default. However, no guarantee can be made that such waivers will be obtained. Neither can we guarantee that obtaining these waivers will not come without incurring additional costs, increased interest rates, or additional restrictive covenants and other lender protections related to such loans. And I'll now turn the call over to Dave.
spk04: Thank you, Tony, and good morning, everyone. Filled with unprecedented challenges, 2020 was the most difficult year in history for the modern lodging industry as well as our company. The COVID-19 pandemic caused the most severe contraction for the lodging industry ever recorded, including the financial crisis of a decade ago, the Great Depression, and any number of other economic recessions or downturns over the past century. While we recognize the challenges facing our industry are far from over, we are happy to say that 2020 is behind us and feel it is important to review the accomplishments of our committed property and corporate level teams during the year. Despite 2020's difficult operating environment, we remain dedicated to effectively managing the factors within our control, including mitigating risk, minimizing losses, and capitalizing on available opportunities. First, we prioritize the health and safety of our guests and associates by implementing extensive sanitation protocols at each of our hotels, which have been successful in keeping our guests and associates safe while maintaining a pleasant and welcoming lodging experience. Our stay-open strategy for the portfolio proved successful as it enabled a quicker ramp-up following the pandemic's initial demand shock and allowed a continuous sales effort throughout the course of the year. The company focused on mitigating the pandemic's financial impact by delivering on stringent property and corporate-level cost reduction initiatives implemented during the first quarter, including the layoff of over 90% of hotel staff, the closure of food and beverage outlets and other nonessential guest amenities in order to shrink the cost structure of the properties, and the deferral of all nonessential capital expenditures. As Tony mentioned, the increased property level efficiencies reduced hotel operating expenses by more than 53% during the quarter. At the corporate level, the company implemented several cash conservation efforts, which included the layoff of over 20% of the staff, a reduction in salaries and benefits for all remaining staff, ceasing all cash incentive compensation, and waiving of the quarterly director's cash fees by the company's board. In addition, common dividends were suspended, preferred dividends were deferred, and our balance sheet was bolstered during the second quarter by securing proceeds through the SBA's Paycheck Protection Program. As we adjusted our strategy to fit the operating environment shaped by COVID, we managed our margins to meet depressed demand by preserving occupancy, maintaining rate integrity, and streamlining our operations. We recognized and capitalized on new trends in traveler behavior which were a direct result of the pandemic, highlighted by the importance of capturing transient leisure business, which was amplified by the steep decline of group and business travel. As a result of management's quick and decisive actions during the year, we believe we are on the right course to endure the waning impacts of the pandemic and to preserve the company's future success. As Scott mentioned, during the fourth quarter, we addressed our near-term liquidity concerns by securing a loan in the amount of $20 million, which includes an option to draw an initial $10 million by year-end. The loan greatly improves the company's liquidity position and enables us to navigate the ongoing negative impacts of the pandemic, focus on the impending recovery, manage our balance sheet obligations, and preserve our asset base. With the completion of this transaction, we accomplished our number one objective for the fourth quarter and better positioned the company to take advantage of the recovery. Although a number of events shaped the lodging business climate during the fourth quarter, none were as significant for our industry as the approval of the vaccine. While its positive impact is not fully materialized, the vaccine is a fundamental game changer for the travel industry as it provides confidence in the ability to travel safely and serves as the catalyst needed to lift corporate travel restrictions and hold in-person events. Still, the primary contributing factor in the industry's recovery in the near term is the rate at which the vaccine program is rolled out. While the program experienced a slow start in December and January due to strict guidelines for eligible recipients, the U.S. coronavirus vaccine supply is poised to double in the coming weeks, allowing a broad expansion of vaccination efforts and what we believe will be the subsequent relaxation of travel restrictions. Meantime, COVID-19 case counts, positivity rates, and hospitalizations continued their downward trend, while TSA airline data has shown significant improvements in recent weeks. SCIF's Recovery Index, which tracks a number of leading and trailing indicators, including website visits and bookings, future bookings, and achieved occupancies, reported a travel environment in January that was the best since the outset of the pandemic. A successful rollout of the vaccine is also a primary contributor to the timeline on the return of group business at our properties. During the start of the new year, we have been encouraged by the return of smaller groups and room blocks. As the vaccine has become more widely available, corporations and meeting planners have expressed greater confidence in the ability to safely hold larger events during the second half of the year. In January, our sales team booked more group business than during the entire fourth quarter of 2020. Social groups represent a majority of our near-term group bookings, while the back half of the year should be characterized by larger corporate and perhaps citywide events. Entering the next phase of the business cycle, we have plenty of reasons for optimism. In addition to the improving vaccine program rollout, we believe the concentration of our properties in the southern U.S. with limited exposure to large gateway markets positions the company well for outsized returns. Additionally, we believe there is a substantial amount of pent-up travel demand in both the business and leisure travel segments. Consumers have amassed significant savings since the outset of the pandemic, which should support strong leisure travel once the vaccine is more widely distributed. Validating this sentiment, recent Smith Travel data reported industry-wide occupancy hit its highest level since October. We are cautiously optimistic that the combination of these factors will lead to a sharp increase in travel and a strong recovery for the industry in the coming months. Looking ahead, as the industry writes itself, we believe prospects will arise for seasoned hotel companies like Southerly to take advantage of acquisition and asset management opportunities. In addition, a number of capital providers have expressed interest in partnering in joint ventures or other structures in the lodging space. We continue to pursue such opportunities. In closing, there is a great deal of work yet to be done, but we believe our strong efforts during 2020 have positioned us well entering the recovery. We remain dedicated to making sound operational decisions to reduce losses and conserve liquidity in the near term while delivering long-term value for their shareholders. We'll now open the call for questions.
spk06: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question will be from Tyler Battery of Jannie.
spk03: Thank you. Good morning. I hope everyone is doing well. A few questions for me, and I wanted to start with the comments on the positive cash flow at the property level in the first quarter. Just wondering if we could unpack that a little bit more and if you could talk about some of the assumptions broadly behind that, whether it be, you know, occupancy levels or rates, and then also how many hotels potentially are driving that number specifically?
spk04: I would tell you that so far in the quarter, Tyler, we've seen a broad-based positive environment. Our January numbers were very, very attractive. And frankly, we blew by our budgets in January. It was very, very attractive. February is going to be pretty good as well. I think we will be on track today. And I think, so it's portfolio-wide. We did have some government pickup in some of our markets in northern Virginia in January, which was also beneficial. What Tony mentioned is the hotels reaching positive. Hotel EBITDA is, I think, where we are as a company right now. Hopefully, we're going to continue to go in a positive direction. I will tell you, as early as, you know, as close as eight weeks ago, You know, we were probably seeing $40,000, $50,000 a night in bookings. Now we're seeing $150,000 a night in bookings portfolio-wide. So most of it's transient. We're getting smaller groups here and there. But most of it is simply pent-up leisure demand. And now the restrictions are being lifted and people are more confident. They're getting out on the road. They're getting into airplanes. Anecdotally, some of the airport information that I've talked to from our board of directors and some other folks, airports are packed, or they were this past weekend. So all those are good comments, and I don't know if that fully answers your question or not, but that's what we're seeing.
spk03: Yes, that's very helpful, Kyle. I appreciate that. And then to follow up, I wanted to go back to the comments there on group bookings, especially for the back half of 2021, how many of those are rescheduled business that was canceled in 2020 that has been pushed out? How much of that is incremental bookings that are coming through as well?
spk04: Well, I'll let our team answer as well. But I can tell you, last year, as you know, corporate group bookings were rolling forward. So you'd have a cancellation, and then they'd book 90 days out and then rebook and rebook because no one knew where the bottom was at the end of the pandemic. I would say some of that has rolled forward, but as you go into the new year, a lot of it went away, but now it's automatically coming back in the second half of the year in terms of the demand. The big question mark really is corporate travel restrictions. You see a lot of big companies that still have not really opened the door, but all their meeting planners and group bookers, they're already looking around. They're already putting what I would call shadow bookings at the hotels in anticipation of being able to do so for real. So that demand, I think, is there. You're going to have to see sort of the final unwinding of of restrictions both in localities and at corporations to see those things actually become definite group bookings. Do you guys have anything to add?
spk02: No. Okay. Okay.
spk03: And then in the prepared remarks, you know, you talked about potentially some JVs taking advantage of acquisition opportunities that are out there. Just curious what you're seeing in your target markets on the acquisition side in terms of potential opportunities, interested what's out there, interested if you're seeing any distress as well.
spk04: Yeah, I mean, I think there's more of it to come, but we've seen a few bankruptcy filings. We've seen some UCC sales. We've seen some outright marketing, traditional marketing for hotels. So the activity is definitely picking up. And I think what we would say is there is a lot of capital out there on the sidelines waiting for the right time, the right transaction, and the right hotel partner to to come in with and make some of these transactions happen. So, I mean, we're seeing a lot of activity. I see quite a bit every week. So the bow wave is definitely getting a little bigger. And I think in 2021, we're going to see a lot more activities with assets trading hands.
spk03: great and just last question for me is more more housekeeping interested what the latest is on the negotiations with um special servicers for the the double tree down in down in hollywood um just just interested you know how those are progressing um you know how you see that situation potentially playing out yeah hey tyler it's scott um it's it's going well as we've you know made comments before i mean the the special servicer network especially
spk02: For this one in particular, it's just very, very slow moving. It's a complete logjam. We've been in continual, though inconsistent, communication. We do have forbearance terms that we could accept. They're ready to provide. However, we continue to talk to them about some improvements to those terms, and they're receptive to that, but they're currently continuing to go through the approval process on that. The short answer is it's all positive. It's just a matter of trying to get the best deal that we can at this point.
spk03: Great. I appreciate all that detail. That's all from me. Thank you.
spk06: The next question will be from Alexander Goldfarb of Piper Sandler.
spk01: hey uh good morning um just a few questions here sort of uh picking up uh on the on the loans that you have in deferral uh where you reach resolution i think you said that uh you know apart from the hollywood hotel that you have you can defer payments uh from you know uh february or you know at the latest one till till december uh i guess two parts to that let me ask the first uh What are the changes that you guys have seen in interest rate or covenants or any of the terms? So what are the changes that you're seeing as the lenders agree on the deferrals?
spk02: Yeah, so there has not been any change in interest rates at this point. That hasn't been an ask. Covenants, you know, luckily for us, I mean, I think almost half of our portfolio is covenant free in terms of not having any DSCR covenants as part of the loan agreements. So there hasn't been a requirement to do any waivers. The ones that do have debt service coverage ratio covenants or any other covenants, they just continue to modify them. They either waive them for a period of time, or now we're starting to just set them in a ramped-up fashion so that they're achievable. I mean, no lender is... is coming to us and saying we need to meet a debt service coverage ratio test. They're understanding that that's just not achievable. So we're just continuing to modify them in a fashion so they can be achieved and kept in good standing on their books.
spk01: Okay. And then, you know, just given what you've outlined as far as, you know, potential for, you know, sort of second half for, you know, for corporate travel to come back, obviously it's great to see the pent-up demand. I mean, you know, up north we can see everyone who's heading down to Florida or down south to get out of the restrictions in the north. So definitely can appreciate that. But it would seem like you guys are going to need to defer these loans into 2022. And based on, Scott, your comments, about the lender's receptiveness on making any covenant adjustments to be reflective of the environment. Should we take it that it's not a problem for you guys to extend these loans or defer them into 2022? Or is your sense that the special servicers or the lenders are going to start to play hardball, and if you can't start to do something by later this year, they may ratchet it up?
spk02: Yeah, so, I mean, we're obviously dealing with it, you know, loan by loan and property performance by property performance. That's what the lenders are becoming focused on. Obviously, as Tony mentioned, as we mentioned, some of our properties are cash flow positive in the first quarter. As a portfolio, we expect them to be cash flow positive. And the lenders are going to be looking at that. As these properties, as their property they have a loan on becomes cash flow positive, they become less inclined to defer their payments. So what we've seen is... Most lenders have gone from deferring principal and interest to now just deferring principal, and eventually that's going to burn off. So as we get to the end of forbearance agreements and the term of those, we continue to go back to the well, per se, and ask for more. But I think at a certain point, if the property is generating cash flow, we're going to get less and less receptive responses from lenders to give forbearance.
spk01: Okay, and then actually, that's a good point. So when you say that, I think you said for the first quarter, you expect the properties to be positive, I think, collectively, 500 to 600,000 per month. That's before debt service, right? So, right. Okay, so for us thinking about the company, you know, when you guys talk about positives at the property level, That's just simply the operations. That's before you have to talk about the debt, both on the interest and the principal, correct?
spk02: That's right. That's right. And that's obviously the discussion with the lender. Just because they're generating some hotel EBITDA doesn't mean they're covering their full debt service. And so if that's the case, then that's where forbearance is needed.
spk04: And that's why Tony mentioned in his remarks that the first quarter is still going to have a cash burn. for the very reason you just highlighted. I mean, the properties are getting to where their GOP and their hotel EBITDA is positive, but everything below the line still needs to be covered.
spk01: Okay. That's fine. And then the last question is on, you know, as you guys rebound on the business, Obviously, you've cut a lot of jobs, which is always very difficult as an employer to have to lay off people, not easy to do. You've made the business more efficient, whether it's blocking out floors or limiting the amenity services, et cetera. But as you guys reopened, Do you envision a point where you're going to have to re-add staff or re-add amenities before this sort of revenue picks back up just because of competitiveness? Or is your view that you can sort of maintain this more efficient business model that you've adopted further into the recovery before you have to, you know, start restoring, you know, some of the amenities or staffing or things like that?
spk04: Yeah, I will tell you, every two weeks I look at the payroll numbers. as a percentage of revenues and that percentage is plummeting. So our flow through continues to improve because as we get more occupancy and more rate and more revenue, we are not layering on additional expenses. Our internal policy with our manager, and this is where it's beneficial to have one manager that you can touch at all the hotels, is that we're not gonna front load expenses and we're not gonna front load payroll in anticipation of increased demand. So it's going to have to be in lockstep as we get additional bookings, as the climate improves. That's when we think about opening up amenities, food and beverage services, and additional staffing. So what you're alluding to, what you're concerned about is what we've been concerned about for 12 months, is we've got to match fund our revenues with our costs on a very marginally profitable basis And we're just not going to say the pandemic's over and then rehire everybody. So it's a very sensitive process, and you really have to have on-site personnel with their finger on the pulse of the business to make sure we are not overloading the assets with expenses too early.
spk01: Okay. Thank you very much. Thanks, Alex.
spk06: And this concludes our question and answer session. I would now like to turn the conference back over to Dave Folsom for any closing remarks.
spk04: Thank you for joining us on our call, and we look forward to talking with everybody in a few months. Thank you.
spk06: The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.
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