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spk00: Good day and welcome to the Southerly Hotel's second quarter 2021 earnings conference call and webcast. All participants will be in a 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 a touch-tone 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.
spk01: 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 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.
spk02: Thanks, Mac. Good morning, everyone. I'll start off today's call to review our portfolio's key operating metrics for the quarter, which we are pleased to report exceeded our expectations, reflecting the accelerating momentum in travel demand and confirming our position that a sustained recovery is underway for our industry. Looking at the second quarter results for the composite portfolio, REVPAR was $94.93, driven by an occupancy of 59% and an ADR of $161. Looking at these figures versus the second quarter of 2019, REVPAR was down 25.9%, with occupancy down 22.7%, and ADR down 4.1%. Year-to-date, REVPAR for the composite portfolio was $80.54, with an occupancy of 50.4%, and an ADR of $159.93. Looking at these figures versus the comparable period in 2019, REVPAR was down 35.6%, with occupancy down 31.1%, and ADR down 6.4%. These operating metrics were ahead of most of our REAP peers that have reported thus far for the quarter. The results were also better than our market competitors, as nearly all of our hotels gained share from their competitive sets in the quarter. As a group, the portfolio gained 3,150 basis points in share in the quarter. We were also pleased to see the incremental pace of demand recovery throughout the quarter. Examining composite portfolio REVPAR results on a monthly basis benchmark against 2019 highlights the quarter's continuous improvement. April rev par of approximately $93 was 68% of April 2019 rev par. May rev par of $95 was 73% of May 2019. And then June rev par of $97 was 83% of June 2019. Dave will speak to our forecast for the third quarter a little later in the call, but we are seeing this trend continue. The second quarter's performance was characterized by strong leisure travel, fueled by pent-up demand for warm weather and coastal locations, with leisure performance eclipsing 2019 levels in some markets. Looking at some highlights across the portfolio, the Doubletree Resort in Hollywood Beach, Florida, saw RevPAR surge past 2019 levels by nearly 11% in the quarter, driven by substantial rate growth of nearly 14%. Hotel Alba in Tampa produced RevPAR over 15% greater than 2019, with ADR growing over 5% and occupancy up nearly 10%. This hotel is nearing stabilization following its repositioning and is now performing at over 125% fair share against its competitive set in the market. The DeSoto Savannah's Q2 RevPar was only off by 5% compared to 2019, but grew ADR by 1.3%. This hotel gained nearly 10,000 basis points in RevPar share from its competitors in the quarter. When compared to its competitive set, this hotel is producing some of the best results we've seen since it has converted to an independent lifestyle hotel in 2017, a commendable job for our hotel staff and our new management partner. During the quarter, municipalities across our markets reopened their local economies by lifting restrictions and reopening our demand generators. While this had an immediate impact on the leisure travel segment, it is also directly correlated with the recent improvement in the group and business travel segments. which we believe will provide a considerable base of business in the fall once major corporations return to the workplace and continue to lift corporate travel restrictions. Our sales teams are producing impressive bookings for the second half of the year, especially at our core group locations such as Wilmington, Jacksonville, Savannah, and Atlanta. Examining booking trends for the year, we have witnessed a steady acceleration in group business. The first quarter only produced approximately 15% of the stabilized group revenue when compared to 2019 results. In the second quarter, this more than doubled to 32.5% of Q2 2019 bookings. We are forecasting this to nearly double again in the third quarter to nearly 60% of Q3 2019 group bookings. While still plenty of room to grow compared to 2019, this trajectory of group demand recovery is a promising indicator of how quickly our industry can return to a state of normalcy. Looking forward, although the recent rise of the Delta variant creates additional uncertainty in forecasting travel demand, We have not experienced any significant cancellations or changes to booking trends as a result of these concerns. We continue to monitor the impact of the Delta variant and will adjust our operational strategies accordingly. During the quarter, not only did top-line revenue production surpass our expectations, but so did bottom-line profitability, with hotel EBITDA margins increasing 1,000 basis points over the first quarter of the year. Our managers have continued to adhere to strict expense controls and just-in-time delivery of services and amenities that coincide with the return of demand to their individual markets. This results in strong flow-through and profit margins. Staffing is one area we wouldn't mind adding a little expense. However, the labor markets remains a challenge we face as an industry and as a nation. We have seen some incremental improvement as our southern state governors have worked to encourage their population back to work, and we expect this to continue to improve in a meaningful way through September as government benefits burn off and schools resume normal operations. Turning to corporate activity, during the quarter, we addressed the upcoming loan maturity for our DoubleTree asset in Laurel, Maryland by extending the maturity date with our existing lender through May 2022. By extending this loan, we believe this will allow the industry the chance to enter a sustained recovery and will facilitate better opportunities for a more permanent loan restructuring solution next year. Also during the quarter, we executed on an agreement with one of the largest holders of the company's preferred stock to exchange 220,000 shares of preferred stock for approximately 1.5 million common shares. The execution of this exchange fits with our long-term strategy to shore up our balance sheet while also preserving liquidity. This transaction eliminated approximately $660,000 of deferred dividend payments, as well as $440,000 in annual preferred dividend payments going forward. In June, the company entered into a hotel person sale agreement to sell the Sheraton Louisville Riverside Hotel for a price of $11.5 million, including the assumption by the buyer of the mortgage loan on the hotel, which currently has an outstanding balance of approximately $11 million. The agreement includes a $200,000 deposit, which is now non-refundable. As a result of the market's underperformance and the steady decline in brand contribution, the company's smallest asset no longer fit our long-term strategy. If successful, we believe the disposition of this asset will be nearly accretive to our cash flow. Lastly, the company recently filed an S11 registration statement with the SEC, which contemplates an unsecured note offering. Net proceeds from any offering would be used to repay, in full or in part, the loan that was originated in December of 2020 to replenish the cash burned during the depths of the pandemic. We continue to evaluate all capital markets options available to us with the goal to enhance our liquidity position bolster our balance sheet, and position the company for future success. I will now turn the call over to Tony.
spk04: Thank you, Scott. Reviewing performance for the period ended June 30, 2021. For the quarter, total revenue was approximately $34.4 million, representing an increase of 549.5% over the same quarter in 2020. Year-to-date, total revenue was approximately $57 million, representing an increase of 34.2% over the same period in 2020. Comparing these results to the second quarter of 2019, total revenue was down $17.2 million, or 33.3%, and year-to-date total revenue was down $41.9 million, or 42.4%, over the same period in 2019. Hotel EBITDA for the quarter was approximately $9.7 million, representing an increase of 285.5% over the same quarter in 2020. Year-to-date, hotel EBITDA was approximately $13.9 million, representing an increase of over 9,000% over the same period in 2020. Comparing the current period's results over 2019, hotel EBITDA was down $5.9 million at 38%, and year-to-date, hotel EBITDA was down $14.9 million to 2019 year-to-date hotel EBITDA. Adjusted FFO for the quarter was approximately $1.1 million, or 108.3% over the same quarter of 2020. Year-to-date, adjusted FFO was a deficit of approximately $4.1 million, representing an increase of 76% over the same period in 2020. Comparing these results to the same period in 2019, adjusted FFO was down approximately $6.1 million, or 84.6%. In year-to-date, adjusted FFO was down $16 million, or 134%, over the same 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, 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, interest income, corporate G&A expenses, and the current portion of 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 the end of the quarter, the company had total cash of approximately $33.5 million, consisting of unrestricted cash and cash equivalents of approximately $21.8 million, as well as approximately $11.7 million, which was reserved for real estate taxes, capital improvements, and certain other items. Looking at cash burn for the second quarter, the company generated a positive cash flow of approximately a half million dollars compared to our forecast in May, which was a cash burn of approximately $5.1 million. This represents a sizable outperformance, which was driven by stronger than expected cash flow at the property level, as well as excellent flow through. This positive change in cash flow is an important inflection point in the company's recovery. Looking ahead to the third quarter, our outlook continues to trend positively. The company estimates that average monthly cash generated at the hotel level to range between $2.9 and $2.95 million. We expect corporate-level G&A expenses to range between $400,000 and $450,000 per month, and capital expenditures will be of approximately $500,000 per month and outlays for scheduled payments of principal and interest are expected to be approximately $2.4 million per month. Overall, we're expecting a total cash burn of approximately $400,000 per month in the third quarter, or approximately $1.2 million for the quarter as a whole, as higher levels of hotel profitability assist us in meeting our debt service obligations, which includes scheduled repayment of deferred interest and principal from 2020. At the end of the quarter, we had principal balances of approximately $387.5 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. As a result of our wholly owned guest rooms undergoing renovation over the past five years, we have 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. In March of 2020, we announced a suspension of our dividend and a deferral of payment of dividends in our common stock announced two months previous. The suspension and deferral eliminated draw on the company's cash reserves of approximately $4.4 million per quarter. I'll now turn the call over to Dave.
spk03: Thank you, Tony. Good morning, everyone. We're pleased to report that the recovery of our operations and financial results continue to accelerate, and results for the second quarter exceeded management's expectations in all metrics and segments of our business. Through July, the steady improvement in occupancy and rate in the lodging industry indicates that the recovery is ongoing, as demand since the onset of the pandemic notably reached record high levels in June, and REVPAR exceeded 2019 for the 4th of July weekend, which acts as an important milestone for our industry. The second quarter built on the strong and solid foundation established during the first quarter, as the recovery continued to be characterized by strong leisure demand, which was especially robust in our warm weather and coastal locations. Expectations for strong leisure demand were high going into the summer, and it did not disappoint. Weekend travel continued to dominate bookings, but midweek travel did experience a steady improvement throughout the quarter. Occupancy improved each month as leisure demand was combined with pockets of corporate and group business. As performance steadily ramped up throughout the first half of the year, we were able to exceed each month's internal budget and forecast. As a result, hotel EBITDA was positive each month during the quarter, and this was the first time we've seen that since the fourth quarter of 2019. Focusing on composite rev par compared to the same periods in 2019 further highlights this trend, as Q1 2021 was down 45.8 percent to Q1 2019, and Q2 2021's rev par declined 25.9 percent versus 2019. Both quarters' rev par performance relative to 2019 are, we believe, among some of the best results in the lodging REIT space. Looking towards the back half of the year, we believe these trends will continue. July's preliminary REVPAR of $105.84 is only 2.8% lower than our 2019 July results. July's results significantly outperformed the national upper upscale segments July REVPAR, which was 20% below 2019 levels. Factoring in July's strong results, we're currently forecasting third quarter composite REVPAR to be down approximately 5% to 10% to 2019. This is an impressive accomplishment only months following the worst recession in the history of the lodging industry. The quick rebound in REVPAR has not only been attributable to surges in occupancy, but also due to strong ADR. Pent-up transient demand coupled with consumers' increased savings during the pandemic has led to less price sensitivity among travelers, enabling our managers to achieve better-than-expected rates during the quarter. As Scott mentioned, average daily rates for the quarter at some of our hotels eclipsed the same period in 2019, and our portfolio's June average rate exceeded 2019 levels. In addition to rate expansion during the quarter, we were able to achieve strong margins and excellent flow-through with diligent management and cost controls at the properties. We believe the second half of the year is emerging with a number of unique challenges and opportunities. The recent headlines reflecting the resurgence of COVID-19 with the Delta variant create additional uncertainty in the operating environment, although to date we have not experienced any wholesale cancellation of our booked group business. Those groups that have canceled in the near term are simply rebooking in later months, indicating that the demand is there. In the short term, our managers believe transient pace will replace any such group cancellations. While the recovery of our urban markets has lagged up to this point, we expect the return of demand generators will act as a positive catalyst for our assets located in more heavily impacted urban markets. For example, the Fox Theater, which is slated to return to full schedule of events later this month, serves as a major source of business for the Georgian Terrace Hotel in Atlanta. Similarly, our Doubletree Hotel in Raleigh, which is located adjacent to NC State University, is poised for a significant boost in business with a return of in-person learning and more normalized operations at the university later this month. Generally, the reopening of restaurants along with a full schedule of concerts, sporting events, and festivals will reinforce transient travel demand for our portfolio going forward. We believe our concentration of assets in the southern United States will continue to act as a tailwind for our portfolio and a competitive advantage versus our peers. Leisure travel to these destinations has outperformed the broader U.S. lodging market and should continue to on this track into the fall. As a result of these factors, along with the increasing vaccination rates, we are optimistic about our growth prospects heading into the fall and into 2022. We remain dedicated to proactive investment strategies and making sound operational decisions while delivering long-term value for our shareholders. With that, I'll open the call up to questions.
spk00: 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. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. And the first question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
spk05: Hey, good morning. And I have to say, nice to see some good things coming out of the hotel business. So you guys must feel excited. quite, I don't know, relieved, but certainly much happier. So just a few questions here. First, Scott, interesting transaction that you were able to negotiate with the preferred holder. As we think about the go forward, assume that the pay rate for the preferred dividends in the quarter and the second quarter is the good run rate going forward.
spk02: Tony, I'll defer to Tony on that question.
spk04: Yeah, this is Tony there, Alex. The expense there in the second quarter reflects a reversal of the deferred dividend, some of the deferred dividends on those exchanges preferred. So that's not a good, that $1.5, $1.6 million is not a good run rate. It's closer to $2 million.
spk05: Okay, so $2 million is the preferred run rate we should think of going forward.
spk04: That's correct.
spk05: Okay. Second, along the same map, the shares, you issued 1.54 million shares. Is that, again, the share count that we see for the second quarter, is that the appropriate share count for the third quarter and going forward, or we need to time adjust it?
spk04: You need to time adjust it. We did that transaction at the very end of the quarter. So when you're looking at average number of shares outstanding in calculating earnings per share and FFO per share, that's a weighted average. And so it's going to be a bit higher than that going forward.
spk05: Okay. So if you do at the end, it sounds like we got to add like another 1.2 million shares or something.
spk04: Something like that. Yeah.
spk05: Okay. Great. And then going on to the business and the leisure, you mentioned number of stats. It was a little fast for me to get everything down, but just you know, big picture as a percent of recovery, how much have you guys recovered the leisure business and how much have you recovered the, uh, the, the, uh, business slash group bookings. And you, you mentioned where you thought group bookings would be, you know, it was 15% in the first quarter, 30%. And you think third quarter would be third, 60%. So I want to be clear that's group and business or business would be incremental to that. So, if you could just answer that.
spk02: Yeah, Alex, this is Scott. So those stats are for group business, you know, group contracts, whether that's a business group for a meeting or, you know, a wedding, leisure group, whatever it may be. It doesn't account for, you know, your individual business traveler, you know, your road warriors that are staying at the hotel on their own. That's what those statistics are measuring. So, again, we've seen that incremental increase doubling quarter after quarter. and we see that trend continuing for the rest of the year. So we're not going to see group business nearly fully back to 2019 levels, but it's obviously coming back at a very quick pace. And then, as I mentioned, leisure travel in many of our markets has eclipsed 2019 levels handily, particularly in Florida, Georgia, markets, North Carolina. We're well above the leisure demand that we saw in 2019, so it's helping fill that gap.
spk05: But big, Scott, big picture, you've laid out the good perspective for the group bucket. As a percentage overall, it's great that some of your markets are exceeding 2019, but in total, leisure is what? It's back to 80% of 2019, 90%?
spk02: Well, I mean, as Dave said, I mean, our third quarter rev par is forecasted to only be down 5% to 10% overall to 2019. So, you know, if we're going to be down, If we're going to be back to 60% of our group bookings for the third quarter, I mean, that means that leisure travel is in excess of 100% to fill that gap before we're going to be down 5% to 10% on the top line.
spk05: Okay, that's awesome. And then the final question, which segues to that, is the discussions with the mortgage holders on forbearance and modifications, you know, what they're seeing now that you have this uptick in REVPAR, et cetera, Are you and the lenders getting more optimistic that resolutions will be maybe in the next six to 12 months? Or is the sense that you get from the lenders is it's going to take longer than that to get these resolved?
spk03: Hey, it's Alex. It's Dave here. I mean, I think we have forbearance agreements on our mortgage, on our mortgages that we've inked over the past year. And we're in the process right now of simply repaying the deferred interest and principal, and that's going to take us to the end of next year. In terms of additional terms or additional modifications, I don't think the lender community is looking to do any such modifications. So we're-we are where we are with respect to our forbearance, and we have a schedule of repayment of deferred interest and principal. in our forecast model and that we know what it is and we've accounted for it.
spk05: Okay, okay. Dave, listen, thank you very much.
spk03: Yeah.
spk05: Thanks, Alex.
spk03: Thank you, Alex. Appreciate it.
spk00: As a reminder, if you have a question, please press star then 1 to be joined into the queue. That's star then 1 to be joined into the queue. This concludes our question and answer session. I would like to turn the conference back over to Dave Folsom, CEO, for any closing remarks.
spk03: Thank you for joining us on the call this morning. We look forward to speaking with everyone on the next quarterly call.
spk00: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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