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spk00: Hello everyone and welcome to the Southerly Hotels first quarter 2022 and in school. My name is Victoria and I will be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. If you wish to withdraw your question, please press star 2. If you have dropped this online, please press the red flag icon. When preparing to ask a question, please ensure that your line is unmuted locally. I'll now pass over to your host, Max, to begin. Please go ahead.
spk04: 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 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.
spk05: Good morning, everyone. I'll start off today's call with a review of our portfolio's key operating metrics for the quarter. Looking at the first quarter results for the composite portfolio, REVPAR was $100.89, driven by an occupancy of 53.9 percent and an ADR of $187.23. First quarter REVPAR performance represents an increase of 52.5 percent over the same period in 2021. Looking at these figures versus the first quarter of 2019, RevPAR was down 17.2%, with occupancy down 22.9%, but ADR increasing 7.5%. Overall, we were pleased with the first quarter results, despite headwinds faced at the start of the year due to Omicron variant, and believe the improvement throughout the quarter demonstrates that our portfolio is quickly advancing towards normalization. Examining composite portfolio RevPAR results on a monthly basis, benchmark against 2019 highlights the quarter's continuous improvement. January RevPAR was 66 percent of January 2019 RevPAR. February RevPAR grew to 77 percent of February 2019, while March RevPAR actually eclipsed 2019, with RevPAR representing just over 100 percent of March 2019's results. While the Omicron variant had a substantial impact on all travel segments during the start to the first quarter, We experienced a transformative shift in consumer behavior during the second half of the quarter, as rapidly declining case counts were combined with a significant increase in bookings, particularly from grouping corporate travel. We are encouraged by the performance of our urban market hotels, such as Arlington and Houston, which, despite the headwinds caused by Omicron, easily surpassed budgeted expectations for the quarter following nearly two years of underperformance. Our portfolio continued to benefit from the sustained recovery in leisure travel, which became even more robust due to pent-up demand from the Omicron variant in late December and January. In particular, our coastal markets such as Savannah, Tampa, Wilmington, and Hollywood experienced a renewed surge in leisure demand that was combined with the steady return of group demand during the second half of the quarter. Pricing power continues to be the major driver of profitability, especially for these leisure destinations. many of which attracted unprecedented rates during peak periods, such as President's Day weekend and spring break. Our portfolio's best-performing hotels during the quarter were again primarily driven by strong leisure travel, but also boosted by the return of group and business travel. Looking at some highlights across the portfolio, the DeSoto Savannah continued its excellent performance during the quarter, again outpacing 2019 metrics with an 8.4 percent gain in RevPar, fueled by a significant rate growth of nearly 35% over 2019, which led to outstanding flow through. The hotel also continued to outperform its comp set, gaining 850 basis points in REVPAR share during the quarter. Hotel Alba in Tampa continues to be a standout among our portfolio, and the hotel's competitive set. During the period, it produced REVPAR nearly 33% greater than the first quarter of 2019, with occupancy up nearly 2% and ADR growing more than 30%. Comparing these results to Q1 2021, which included the Super Bowl and the immediate market, also highlights the property's stellar results, as RevPAR increased nearly 34% year-over-year against a tough comparable. This hotel achieved a RevPAR index of 116% in the quarter, solidifying its position as the leader among its competitive set. Hotel Ballast in Wilmington saw excellent results during the quarter, with signals of sustained recoveries underway for this asset. Substantial rate growth of 20% over 2019 levels facilitated an impressive flow-through during the quarter. Notably, the property gained more than 2,600 basis points in share from its competitive set during the quarter, as the group business segment, which is vital to this hotel's performance, ramped up to pre-pandemic performance levels in the latter half of the quarter. Examining our portfolio's recent booking trends further demonstrates the steady acceleration in group and business travel at our hotels. During the first quarter, the group segment produced a 15% improvement over the fourth quarter of 2021, while business travel improved more than 20% over the fourth quarter of last year. Thus far, during the second quarter, we have experienced further improvement to these segments and are projecting this trend to continue as the balance of the year is shaping up nicely with strong attendance at citywide events, in-house meetings, and corresponding group room blocks. 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. Our managers execute a lean and flexible staffing model in order to control variable costs and achieve excellent flow-through, despite uneven demand and rising costs of goods and labor faced during the quarter. We continue to focus heavily on pricing power, not only for our room rates, but also for our F&B offerings, banquet rentals, and parking, for which consumers have shown minimal price sensitivity. Moving forward, 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 our corporate activity, as previously noted, the company has entered into an agreement to sell the Doubletree by Hilton Raleigh Brownstone Hotel for a purchase price of $42 million. During the first quarter, we entered into an amendment to this agreement with the buyer to extend the closing period in exchange for an additional cash deposit of $800,000, with the closing date now set for June 1st. Including this modification, the buyer has a total of $1.6 million in non-refundable deposits associated with this transaction. The company intends to use the net cash proceeds from the pending sale of the hotel to repay the existing mortgage on the property and to repay a portion of the secured notes with Kevin's Wilson. The company recently extended the maturity date on the existing mortgage of the Doubletree by Hilton Laurel with the existing lender by one year to May 2023. As part of the modification, the company paid down the principal balance of the loan by $400,000. The current loan balance is now approximately $7.6 million, or approximately $37,000 per key. Lastly, year to date, we have executed agreements to exchange approximately 50,000 shares of preferred stock for approximately 488,000 shares. The execution of these exchanges fits with our long-term strategy to shore up our balance sheet while also preserving liquidity. These transactions eliminated approximately $245,000 of deferred dividend payments, as well as approximately $100,000 in annual preferred dividend payments going forward. I will now turn the call over to Tony.
spk03: Thank you, Scott. Reviewing performance for the period ended March 31st, 2022. For the first quarter, total revenue was approximately $38.4 million, representing an increase of 69.4% over the same quarter in 2021. Comparing first quarter results to the same period in 2019, total revenue fell short by approximately $9 million, or 19.1%. Hotel EBITDA for the quarter was approximately $10 million, compared to approximately $4.2 million in the same quarter 2021. Comparing first quarter results to the same period in 2019, hotel EBITDA decreased by approximately $3.2 million, or 24.3%. And for the quarter, adjusted FFO was approximately $1.2 million, representing an increase of 126.6 million percent, or $5.9 million for the same quarter, 2021. Comparing first quarter results to the same period, 2019, adjusted FFO decreased by approximately $3.7 million, or 74.8 percent. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt gains and losses on derivative instruments, charges related to aborted or abandoned securities offerings, ESOP and stock compensation expense, as well as other items. Hotel EBITDA excludes these charges as well as interest expense, interest income, other corporate and G&A expenses, and the current 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 March 31st, 2022, the company had total cash of approximately $30.3 million, consisting of unrestricted cash and cash equivalents of approximately $20.2 million, as well as approximately $10.1 million, which was reserved for real estate taxes, capital improvements, and certain other items. Looking ahead to the second quarter, the company estimates the cash generated at the hotel level to range between $13.35 and $13.6 million. We expect corporate level G&A expenses of $1.5 million for the quarter. Capital expenditures are expected to range between $2 million and $2.05 million for the quarter, while outlays of scheduled payments of principal and interest are expected to be approximately $6.3 million for the second quarter. Overall, we're expecting cash use generated from our portfolio to range between $1.5 and $1.8 million for the second quarter. 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 quarter, we had principal balances of approximately $367.5 million outstanding debt at a weighted average interest rate of 4.74%. Approximately 86% of the company's debt carried a fixed rate of interest. As we move towards a normalized operating environment, we anticipate capital expenditures to be more in line with historical norms, and we estimate capital expenditures will amount to approximately $6.3 million for calendar year 2022. In March of 2020, we announced the suspension of our dividend and a deferral of payment for dividends on 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. And I'll now turn the call over to Dave.
spk01: Thank you, Tony, and good morning. As Scott remarked, the first six weeks of the quarter did not start well for our industry. Hotel demand was tempered by new COVID variants, but toward the end of February, traveler sentiment almost completely reversed as business and group travel rebounded and was combined with ongoing pent-up leisure demand. Despite the year's slow start, the quarter exceeded our expectations. March capped off a remarkable recovery for the quarter and was by far our best performing month since the start of the pandemic, as leisure, group, and business travel started to fire on all cylinders. Our portfolio achieved unprecedented room rates during the month of March, outpacing March 2019 by more than 14%. While these results are impressive, we believe we still have plenty of opportunities for growth, particularly at our locations that are more dependent on business travel, which are still in the early stages of recovery. These urban markets are still tracking significantly below 2019 REF PAR levels. That being said, since mid-February, there's been a noticeable shift in demand at these locations, especially during midweek. Our sales teams are reporting positive feedback from corporate travel planners in these markets, especially in Arlington, Virginia and Houston, where demand from our most important corporate clients has quickly returned following two years of absence. For example, our number one corporate client located adjacent to our hotel in Houston approached normalized transient production levels in April. Meanwhile, occupancy at the Hyatt Centric in Arlington, Virginia, which is a hotel focused on the business traveler has climbed rapidly from 25% occupancy in January to 37% in February, 69% in March, and to 78% occupancy in April, which was the highest occupancy month for this hotel since the start of the pandemic. While business travel demand in Arlington has improved drastically, we expect the pace of recovery in this segment to vary significantly by location. Evaluating the portfolio's group bookings for the year confirms there is a noticeable shift in traveler preference towards in-person meetings and events. In recent weeks, we've witnessed additional pent-up demand in this key segment as citywide conventions and group meetings of all sizes are taking place with greatly improved attendance numbers. Currently, our portfolio's group booking pace for 2022 is more than 72% of the same pace in 2019. This is a significant improvement over the same time last year when our group booking pace for 2021 was approximately 44% of the group booking pace in 2019. This equates to a 67% improvement in group business for 2022 versus 2021, which is a huge overall improvement. Looking at our strategic initiatives, our recent activities have focused on deleveraging our balance sheet while also improving the company's liquidity position. We believe the sale of our Louisville asset and pending sale of our Raleigh asset will help accomplish both of these goals. The disposition of these assets will allow us to repay significant mortgage debt and partially repay corporate debt. At the same time, selling these hotels saves approximately $25 million in brand-required lifecycle renovation capital over the next two to three years. In total, the sale of Louisville and Raleigh will remove approximately $48 million in debt from our balance sheet, including $30 million in mortgage debt. Our strategy to exchange preferred stock also aligns with our deleveraging strategy. By exchanging preferred stock, we remove not only the par amount of the preferred but also the legacy accrued dividends as well as future dividend payments. Looking forward, we are confident in our ability to source the additional cash needed to repay the remaining portion of our corporate debt, which will further reduce our leverage and allow the company to focus on its core operating strategies. In summary, strong booking trends characterized by the steady return of corporate and group business and continued pent-up leisure demand brings optimism for the sustained recovery of our business. And with that, operator, we'll now open the call for questions.
spk00: Thank you. We will now move on to the Q&A session. If you'd like to ask a question, please press Start, followed by 1 on your telephone keypad. If you have joined us online, please press the red flag icon. When preparing to ask your question, please ensure that your line is unmuted locally. And now our first question comes from Alexander Goldfarb at Piper Sandler. Please go ahead.
spk02: Hey, good morning down there. So a few questions here. First, obviously great to see a positive FFO and positive free cash flow in the quarter and your expectation for positive in the second quarter. Is your view now that earnings and free cash flow from here on out will be positive. I mean, assuming, you know, the world doesn't come to an end or something. I'm just talking about from what you see in your current operations, your current demand, your future bookings, everything that you guys see today currently, is it your view that FFO and free cash flow will remain positive for the balance of this year into next?
spk05: Yeah, Alex, good morning, Scott. Yeah, that's our expectation, you know, as we said. I mean, fundamentals have improved month over month to the point of March, you know, basically meeting 2019 levels. And, you know, there might be a little bit of ups and downs on a monthly basis, but overall going forward, we think we're, you know, kind of back to that normalized, you know, level of operation, which should produce, you know, positive free cash in FFO.
spk02: Okay. And then can you remind how much Our preferreds are remaining, are outstanding.
spk01: The par amount is approximately $100 million. Yeah, it's just over $100 million.
spk02: Which is what on the accrued base?
spk01: Well, it's 109. It was $109 million in par before we started the exchanges. So the par amount's been reduced to $100 million. And you're asking for the total unpaid accrued dividend? on top of that.
spk02: So wait, you still, hold on. So you have a hundred million remaining to buy, to hopefully buy back for exchange, correct?
spk01: Right. I mean, that's, that's the par amount that's remaining.
spk02: Okay. And okay. Then, then that's, then, then that makes sense. And I can, uh, and then what's the accrued balance right now?
spk03: As of March 31st, it was right around $20 million.
spk02: Okay. And then as you guys, it's wonderful to see return of group business, of leisure travel, drive, and all that. And you've spoke about no pricing issues with F&B, parking, room rate, what have you. Where is your op-ex at the property level? Are you commensurate with the level of demand, or do you feel that you're hitting the point where you're going to have to increase, you know, hire more people and we'll see CapEx increase. Like I'm just trying to think with where the operations are going, are you staffed appropriately or do you think there's going to be another increase in staffing that's necessary so that we may see the OpEx line actually go up on a relative sense?
spk01: Well, as pricing's gone up just in an inflationary environment, we've also seen operating expenses at the hotels go up. Part of that is labor, which is what you alluded to, and staffing conditions at the hotels have improved. More people are eager to come back to work. We're still having a lot of, you know, outsourced labor requirements at the hotels. I think if we can get back to permanent staffing, we'll remove some of the cost of those third-party staffing entities. But utilities, cost of goods sold, all of those things continue to rise in an inflationary environment. But what we're seeing, Alex, is that the rate structure at the hotels is providing just a very powerful flow-through to the bottom line, which is helping the margins. We have made a conscious decision not to layer in, over the past several quarters, not to layer in expenses until the REVPAR was there. And that has allowed us to manage our margins and go in the right direction. So I don't really see that. I don't see a blip about operating expenses that would change that unless we get a reversal in the rate structure growth. You got any comments? Okay.
spk03: No, I would agree. We're seeing stability in our margins, and if we've got increased labor costs, it's offset by empty positions that we can't fill because of the labor markets. So there's been a stability to our margins, and we're continuing to expect that.
spk02: Okay, and then just the final question. As far as potential further hotel sales or debt givebacks or what have you, is there anything else that you expect? I mean, obviously Raleigh was a great, great outcome, but do you expect any more dispositions or any more sort of need to give back a hotel for debt reasons or anything like that? Or the portfolio that you have is basically the one that you expect to keep?
spk01: Yeah, I think that's right. I mean, the sale of Louisville was, we've been trying to sell that hotel for five years. It was a non-core asset for us, and a lot of things happened in that market with respect to oversupply and the merger with Starwood and Marriott, which changed some of the reservation system dynamics for us. And as you said, Raleigh was kind of a once-in-a-blue-moon price opportunity. But we do not want to cut into bone or muscle here, so I don't see us looking to liquidate any other assets, and I don't think we need to complete the repayment of our corporate debt. I think we've got that covered with respect to the sale of Raleigh, the refinance of other assets, and or our available free cash.
spk02: Okay. Thank you.
spk00: Perfect. Thank you so much for your question, Alexander. And as a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. At this time, there are no further questions, and I would like to pass back over to Dave Folsom, CEO, for any final remarks.
spk01: Well, thank you, Operator, and thanks for everyone on the call, and we'll speak again next quarter. Thank you.
spk00: Thank you everybody for joining today's call. You may now disconnect.
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