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spk00: Welcome to today's Sovereign Hotels fourth quarter 2021 earnings call and webcast. My name is Jordan and I'll be coordinating your call today. If you'd like to register a question, you may do so by pressing star followed by one on your telephone keypad. I'm now going to hand over to Mac Sims, Vice President of Operations to begin. Mac, please go ahead.
spk02: 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. Thanks, Mac.
spk04: Good morning, everyone. I'll start off today's call with a review of our portfolio's key operating metrics for the quarter, which reflect another strong step forward in the recovery of our industry. Looking at the fourth quarter results for the composite portfolio, REVPAR was $85.80, driven by an occupancy of 53 percent and an ADR of $162. Fourth quarter REVPAR performance represents an increase of 122.6 percent over 2020. Looking at these figures versus the fourth quarter of 2019, REVPAR was down 16.1%, with occupancy down 19.3%, but ADR increasing 4.1%. For the year, REVPAR for the composite portfolio was $84.29, with occupancy of 52.5% and an ADR of $160.51. 2021's full-year REVPAR performance represents an increase of 90.4% over 2020. Looking at these figures versus the comparable period in 2019, REVPAR was down 25.4%, with occupancy down 25.1%, but ADR essentially flat. These operating metrics were ahead of the majority of our lodging rate peers that have reported thus far for the quarter and for the year. Overall, we are pleased with the fourth quarter results and believe the improvement throughout the quarter demonstrates that our portfolio is heading in the right direction, despite headwinds faced during the period. Examining composite portfolio results on a monthly basis, benchmarked against 2019, highlights the Corps' continuous improvement. October REVPAR was 78% of October 2019 REVPAR. November REVPAR grew to 82% of November 2019, while December REVPAR climbed further to 96% of December 2019 REVPAR. During October, our portfolio continued to experience impact from the Delta variant that started in the third quarter as group meeting planners showed hesitancy and major corporations pushed back return to the workplace dates and extended travel restrictions. Regardless of this impact, we saw an encouraging amount of business and group travel at our hotels during the month of October, the most in any month since the outset of the pandemic. November also saw a solid pickup from these segments as case counts from the Delta variant declined and demand increased at our group heavy hotels such as Wilmington and Savannah. Despite the impact of group and business travel demand caused by the emergence of the Omicron variant in early December, this impact was offset by the healthy leisure demand at our coastal drive-to markets such as Tampa, Jacksonville, and Savannah to close out the year. This strong leisure demand in December helped our portfolio outperform December 2019's Hotel EBITDA by more than 51 percent. Our portfolio's best performing hotels during the quarter were fueled by strong leisure travel and boosted by the return of group and business travel. Looking at some highlights across the portfolio, Hotel Alba in Tampa continued to be a standout among our portfolio and its competitive set. During the period, it produced rev par nearly 40% greater than fourth quarter 2019, with ADR growing over 12% and occupancy up more than 19%. This hotel achieved a rev par index of 126.3% in the quarter, strongly positioning itself as a leader in its comp set. The DeSoto Savannah continued its excellent performance during the quarter, again outpacing 2019 metrics with a 17.3% gain in REVPAR, fueled by strong rate growth of 14.2%. The hotel also continued to outperform its comp set, gaining more than 2,100 basis points in REVPAR share during the quarter. Hotel Ballast in Wilmington saw excellent results during the quarter as REVPAR surpassed 2019 levels by 12.6%. driven by substantial rate growth of over 34 percent. The property gained more than 6,000 basis points in share during the quarter as an encouraging level of group business returned to the hotel. Although the Delta and Omicron variants had a moderate impact on the group and business travel segments during the fourth quarter, we are witnessing continual improvement in these segments as national and regional companies steadily return to the workplace and continue to lessen travel restrictions. Examining recent booking trends demonstrates a steady acceleration in group and business travel at our hotels. In terms of group business, the fourth quarter produced an 11% improvement over the third quarter, while business travel improved more than 10%. Thus far during 2022, we've experienced further improvement to these segments and are projecting this trend to continue as the first quarter is shaping up nicely with citywide events, in-house meetings, and corresponding group room blocks holding strong. While still plenty of room to grow compared to 2019, this trajectory of group and business demand recovery is a promising indicator for our company. During the quarter, our managers combined prudent revenue management strategies with excellent expense controls to achieve strong flow-through and profit margins for the portfolio. Despite rising costs of goods and labor, our management teams achieved strong margins during the quarter, exhibited by hotel EBITDA margins more than 200 basis points above the fourth quarter of 2019. Many cost savings initiatives, such as clustered regional sales and HR positions, cross-training, just-in-time deliveries, and simplified F&B offerings are expected to become permanent SOPs for our properties moving forward. Meanwhile, our managers have been carefully ramping up staffing levels in relation to the return in travel demand. We expect that our ability to achieve strong rates will continue to offset the increase in labor and other rising costs associated with an inflationary environment. Turning to corporate activity, During the fourth quarter, the company entered into a purchase hotel person sale agreement to sell the Sheraton Louisville Riverside. The company recently announced the completion of the sale for a purchase price of $11.5 million. As we've stated before, the hotel no longer fit the long-term strategic objectives of the company. We believe the company garnered an attractive valuation for this asset in the current market, and this disposition will be immediately accretive to our cash flow. Also, during the quarter, we execute an agreement to exchange 85,000 shares of preferred stock for approximately 690,000 common shares. The execution of these exchanges fits with our long-term strategy to shore up our balance sheet while also preserving liquidity. This transaction eliminated approximately $335,000 of preferred dividend payments, as well as approximately $170,000 in annual preferred dividend payments going forward. And lastly, during the quarter, we entered into an agreement to sell the Doubletree by Hilton Raleigh Brownstone Hotel for a purchase price of $42 million. We anticipate a closing date no longer than June 1st. The company intends to use the net proceeds from the sale of the hotel to repay the existing mortgage of the property, repay a portion of the secured notes with Kemmons Wilson, to make any required distribution on the company's preferred stock related to maintaining the company's REIT status and for general corporate purposes. I will now turn the call over to Tony.
spk03: Thank you, Scott. Reviewing performance for the period ended December 31st. For the fourth quarter, total revenue was approximately $35.1 million, representing an increase of 140.5% over the same quarter in 2020. For the year, total revenue was approximately $127.6 million, representing an increase of 78.4% over the full year 2020, or the same period in 2020. Comparing fourth quarter results to the same period in 2019, total revenue fell short by approximately $9.2 million, or 20.8 percent. And comparing full year 2021 results to the full year 2019, total revenue fell short by $58.2 million, or 31.3 percent. Hotel EBITDA for the quarter was approximately $8.1 million, compared to a deficit of approximately $1.9 million for the same quarter in 2020. And for the year, hotel EBITDA was approximately $30.9 million, compared to a deficit of approximately $3.2 million in the same period, 2020. Comparing fourth quarter results to the same period in 2019, hotel EBITDA decreased by approximately $1.2 million, or 12.7%. And comparing full year 2021 results to the full year 2019, hotel EBITDA fell short by approximately $16 million, or 34.2%. For the quarter, adjusted FFO was a deficit of approximately $1.5 million, a vast improvement over the deficit of approximately $10.2 million in the same quarter of 2020. Year-to-date, adjusted FFO was a deficit of approximately $5 million, representing an improvement of 85.8% over the same period in 2020. 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 in 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 general and administrative expenses, the current portion of our income tax revision, and other items as well. Please refer to our earnings release for additional detail. Looking at our balance sheet, as of December 31st, 2021, the company had total cash of approximately $25.6 million, consisting of unrestricted cash and cash equivalents of approximately $13.2 million, as well as approximately $12.4 million, which was reserved for real estate taxes, capital improvements, and certain other items. Looking ahead to the first quarter, the company estimates the average monthly cash generated at the hotel level to range between $2.7 and $2.9 million. We expect corporate-level G&A expenses of approximately half a million dollars per month, and capital expenditures of approximately half a million dollars per month, and outlays for scheduled payments of principal and interest are expected to be approximately $2.35 million per month. Overall, we're expecting a total cash burn of between $450,000 and $600,000 per month. In the first quarter, as seasonally adjusted levels of hotel-level profitability slightly exceed our ability to meet debt service obligations. It's important to note that a portion of our current debt service includes scheduled repayment of deferred interest and principal originating from forbearance received during the pandemic. At the end of the year, we had principal balances of approximately $382.7 million at a weighted average interest rate of 4.66%. Approximately 87% of the company's debt carried a fixed rate of interest. At the outset of the pandemic, we significantly scaled back our capital projects. We anticipate the capital expenditures will consist primarily of the replacement of systems critical to the operation of our hotels. As we move forward towards a normalized operating environment, we anticipate capital expenditures to be more in line with historical norms and estimate capital expenditures will amount to approximately $6.5 million for calendar 2022. In March of 2020, we announced a suspension of our dividend and a deferral of payment of dividends on our common stock announced two months previous. The suspension and deferral eliminate a draw on the company's cash reserves of approximately $4.4 million per quarter. I will now turn the call over to Dave.
spk01: Thank you, and good morning, everyone. We were pleased with the continued progress of our portfolio during the fourth quarter and the overall progress we made as a company over the course of the year. Although 2021's recovery followed an uneven trajectory, the year brought a better-than-expected rebound in hotel demand, and our portfolio's results far exceeded our expectations. The first half of 2021 saw hotel fundamentals improve dramatically across many of our markets as the traveling public return to more normalized travel patterns. During the summer months, as pandemic restrictions were lifted across the nation, leisure travel dominated the landscape as a number of our resort and leisure hotels exceeded 2019 revenue production levels. Although the Delta variant moderately impacted the return of group and business travel during the fall months, we only witnessed these effects in hotels heavily oriented toward business travel. In general, the impact of business and group travel that occurred as a result of the Delta and Omicron variants were offset by robust leisure travel, which finished the year strong despite these disruptions. During the year, I was especially proud of our team's ability to navigate the challenging environment with quick and decisive decision making. We surpassed both top and bottom line budgeted expectations for the year. with bottom line results outstripping expectations by a substantial margin. We achieved this goal by working closely with our management team to reconfigure the operating models at our hotels. We were able to streamline operations by simplifying guest amenities and staffing models while utilizing dynamic revenue management strategies with a focus on driving strong rates. As a result of these measures, we were able to achieve significant improved flow through And in addition, our hotels performed well against our competitive sets, with the portfolio gaining nearly 800 basis points in revpar share for the year. Our ability to adapt to the new and changing lodging environment was pivotal in achieving our financial goals for the year. As we navigate the recovery, our industry continues to face challenges. Rising costs have been particularly difficult for our industry. Our management teams have focused on minimizing the impact of inflation on our operations by diligently controlling costs while focusing on driving rate. As a result of these efforts, hotel EBITDA margins exceeded the fourth quarter of 2019 by more than 200 basis points, while ADR increased more than 4 percent over the same period. We expect this pricing power in ADR to continue as consumer balance sheets remain strong despite ongoing inflationary pressures. We've seen labor shortages ease in many of our markets and our managers have worked diligently to adopt staffing models that match not only demand for hotel rooms, but also demand for other guest amenities. In January, the Supreme Court blocked the much discussed vaccine mandate for private sector companies with over 100 employees, which helped us avoid significant disruption at our hotels. With the impact of the Omicron variant fading in recent weeks, Most experts agree we are exiting the pandemic and entering a more manageable phase of the virus that allows a return to a level of normalcy we have not seen in over two years. With that change, we are experiencing a positive shift of momentum in the logic markets as booking trends, along with rising average daily rates, provide for a positive outlook for the remainder of 2022. Most markets have seen a complete reversal of COVID restrictions, which bodes well for travel. as pent-up leisure demand and returning group and business travel is evident in forward bookings. The positive momentum is especially evident in the booking trends at our urban business and group-centered markets, such as Arlington, Virginia, Atlanta, Georgia, and Houston, Texas, where these segments have lagged for much of the pandemic due to restrictive government mandates and stringent corporate travel restrictions. In addition, return-to-workplace rates have climbed significantly in recent weeks, indicating post-Omicron efforts to get employees back to the office. Evaluating the portfolio's group bookings for the year validates this shift in traveler behavior. Currently, our portfolio's group booking pace for 2022 is approximately 79 percent of the same booking pace in 2019. This is a significant improvement over last year when our group booking pace for 2021 was approximately half of the group booking pace in 2019. Meantime, we have 45% more tentative group bookings for 2022 than we did at the same time in 2019. In recent weeks, we've seen a meaningful increase in transient bookings, which were up nearly 20% over 2019 levels for the month of February. These encouraging trends combined with rapidly declining case counts steady improvement in the return-to-office rate, and continued pent-up leisure demand bring optimism for sustained recovery of our business. We believe our portfolio's high-quality product, diversified mix of business and ideal locations concentrated in southern coastal markets position the company well among its peer set. In addition, we remain optimistic that the U.S. is pressing beyond the pandemic and are hopeful that the high infection rates of the Omicron variant will accelerate the shift to post-pandemic travel norms. As a result of these factors, we're confident in our growth prospects for the remainder of the year and beyond. We remain dedicated to proactive investment strategies and making sound operational decisions to deliver long-term value for our shareholders. And with that, we can open up the call to questions.
spk00: As a reminder, if you'd like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by 2, and please ensure you're unmuted when speaking. Again, that's star followed by 1 to register a question. Our first question comes from Tyler Battery with Janie Montgomery Scott. Tyler, the line is yours.
spk06: Good morning. This is Jonathan. I'm for Tyler. Thanks for taking our questions. First one from me. I was wondering if you could provide some additional color on your red power assumptions for the first quarter. And I'm curious if that 20% estimate includes or necessitates any meaningful further recovery in March, or if that is just a continuation of the current trends you're seeing.
spk04: Yeah. Good morning, Jonathan. It's Scott. Thanks for the question. That estimate is based on the most recent forecast we have, which includes a pretty good draft number for February and updated forecasts for March. As we stated in our notes, we had a pretty rough start to the year with Omicron. January and the first part of February were not good compared to what we were hoping for, especially in February. Our southern markets, you know, southernmost markets, meaning Hollywood, Jacksonville, Savannah, some of those markets were really impacted by it. But things have really started to pick up now. So that's as good of an estimate as we can give at this point.
spk06: Okay, great. I appreciate all the detail. And then can you just remind us what a normalized mix of leisure versus corporate is and where that was in the fourth quarter and maybe discuss the opportunity and the recovery there for the overall portfolio?
spk01: Well, I think the, you know, on the mixed basis, you know, our transient is a combination of leisure and corporate business. And it really depends on hotel to hotel. Some of our more urban hotels like Arlington, which is in the suburban or in the urban DC area versus a, a hotel like Savannah, Georgia, which is a leisure market. So it's really dependent hotel to hotel. What we saw last year, including the fourth quarter, was a continued sustained leisure demand picture. What we thought we were going to see in the fourth quarter was a return to more business travel, to see an emergence of more business travel, corporate travel, and group And there was a lot of that on the books in the fourth quarter as we started, but as the Delta variant kind of took hold at the end of September and then later the Omicron, those bookings got stretched out into this year. I don't know if that necessarily answers your question in total or not, but it's a mix where it's really by property dependent.
spk06: Okay, got it. Very helpful. And then... Turning to the labor discussion, you guys walk through the costs that are running through the business very well. But I'm curious what the hiring market has been like. How many FTEs are you currently running versus normal? And more broadly on the cost side, any potential that you see there for long-term cost savings? I know you said that that rate you think will remain elevated, but long-term cost savings in the business, anything you see there?
spk01: Well, I think... Some of the brands have highlighted that there may be some long-term changes in operational standards, which may reflect in some cost savings for us. At the same time, you're seeing a more touchless guest impact environment, which will probably survive the pandemic. That imparts some cost savings for us. The labor markets have eased of late. So we're seeing more people back in the hotels and we're able to staff the hotels more appropriately as amenities are reintroduced at the assets. I think you're going to see costs continue to climb. There are things that are, you know, the variable cost structure at the hotel with respect to paying your utilities and all the other things you have to pay to operate the hotel, those costs are not fixed. They will go up. The rate will go up. It's just a measurement of prudent management that's going to allow us to continue to drop dollars to the bottom line and sustain our margins. And we've been successful so far in doing that. And I think as 2022 unfolds, we're continuing that trend.
spk06: Great. I appreciate all that detail. And then last one for me on the KW loan, any updated thoughts on the exit there and what would you need to see to get more aggressive on exiting the loan maybe later this year? Do additional asset sales make sense at the right price? Any color there?
spk01: Well, as Scott mentioned in his remarks, we entered into a purchase and sale agreement to sell our asset in Raleigh. And if that is successful, later in the year, in the next few months, that will go towards a significant pay down of that loan. Not complete, but a vast majority of it will be paid back through the sale of Raleigh. And let me pause just by, that's a broader balance sheet strategy. We've sold the Louisville asset. We intend to sell the Raleigh asset. And if we're successful on those counts, we will pay off the majority of that KWC liquidity note, and that will go towards really the removal of about $55 million worth of leverage on our balance sheet. And at the same time, selling those two hotels will allow us not to spend upwards of $22 million on required lifecycle capex that we would otherwise have to pay to relicense both of those hotels. So by mid-year, if we're successful on those strategic points, we'll remove about $55 million worth of debt and save about $22 million worth of capex. And that, you know, is a total amount of well over $75 million, which will really help us, you know, put our balance sheet in a better condition and have a more healthy balance sheet going forward.
spk06: Okay, great. Thank you for all the color this morning. That's all for me. Thank you.
spk00: Our next question comes from Alexander Goldfarb with Piper Sandler. Alexander, please go ahead.
spk05: Oh, thank you. Good morning. Just continuing on that, on the KWC, can you remind us of what the current balance is, including the additional kicker at the end. So what the current balance is on that note, including the full payout kicker.
spk01: The face amount is $20 million. The factor on the back end is 9.7. 9.4, excuse me. So Alex, this is Tony. It's at about $23 million as of the end of December.
spk05: And, Tony, the $23 million, that includes the kicker, or that's ... That includes the kicker, that.
spk03: That includes a prorated amount of the kicker that's been expensed. So, I mean, the kicker is payable, you know, whether we execute it today or a year from now. So, the amount to exit the loan is still 29 point ... The full exit price of the loan is $29.4 million.
spk05: Okay. Yeah, yeah. So, the $23 is not. So, what you would ... So, to the prior fellow's question, the proceeds from these hotel sales really have to pay down that basically $30 million in round numbers still. That's right, Alex.
spk04: $29.4 is the number, and the Raleigh sale, if successful, will pay off about two-thirds of that total.
spk05: Okay. In addition to the mortgage on the Raleigh.
spk04: Exactly. In addition to the mortgage on Raleigh and closing costs and Yeah.
spk05: Okay. And then as far as the hotels go, you mentioned Raleigh, there's Louisville. Are there other hotel sales that are planned or other hotels where, you know, Dave, as you mentioned, you know, future branding, CapEx, what have you, where it just doesn't make economic sense? Trying to get a sense for, you know, where the portfolio will be sort of a year from now on your holdings versus, no, these hotels that you've announced so far, that's it, there's nothing else in planning?
spk01: Well, I think I can better answer that when we consummate the sale of Raleigh. That's probably the way I would best answer that question. I don't foresee us selling any assets in the next two or three or four quarters if we're successful on all those fronts with Selling Raleigh, we've completed the sale of Louisville as planned. We've saved, you know, $21, $22 million in capex that would otherwise have needed to be paid over the next 36 months. Pay down all that debt. I don't foresee us liquidating any more assets. In fact, I think the equity component of a lot of our hotels is going up right now. And if we have to refinance or do some other financing activity, to pay off the final amount of the KWC loan, I think we'll be able to do that organically without having to sell a hotel or go back to the markets.
spk05: Okay, and then just can you remind us, is there a shot clock on the KWC? Is there like a fixed due date or that's open-ended at your discretion?
spk04: The end of 2023.
spk05: End of 2023, okay. And then the final question is, you know, you mentioned – You know, additional proceeds could pay the preferred. You know, you had the exchange on the preferred to common, so that alleviates some. But I think you have about 14.5 or 15 million of accrued dividends so far. How realistically, how soon or when do you think you'd be in a sort of positive tax position that you would start to have to pay those dividends? Do you think that that's something in 23? or is that based on what you see currently in your budgets?
spk01: Yeah, I can't really give you a projection on that, Alex. What I would tell you is the KWC note is the first priority for us, getting our debt paid down, deleveraging the company, and watching the portfolio respond to the recovery. We get demand back, we get flow through, we get additional EBITDA recovery and start to approximate those types of EBITDA levels we had pre-pandemic, that's when I think we would start to look at commencing the preferred dividend repayment and chipping away at that accrual. But I can't give you a date on when we think that will start right now.
spk05: Okay. And one final, forgive me. Scott, can you just remind the preferred to common conversion, can you just go over how much preferred was exchanged for how much common and then what the existing share count is that we should be using for modeling on the common shares.
spk04: Michael Heaney- Sure. We did 85,000 preferred shares for 690,000 common shares in December. And in terms of the share count, I defer to Tony on that one. He's pulling up his numbers.
spk03: Tony Guida- Yeah, let's see here. We got about $17.4 million, $17.4 million Shares are common outstanding right now. And then we've got another about a million one units. So on a combined basis, it's about 18 and a half.
spk05: Okay, so 18 and a half should be what we use for the first quarter. Yeah. Great. Okay, listen, thank you very much. Thanks, Alex. Thanks, Alex.
spk00: We have no further questions on the phone line, so I'll hand back for any closing remarks.
spk01: None here. Thank you, everyone, for joining us, and we'll speak next quarter. Thanks.
spk00: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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