Sotherly Hotels Q2 2024 results show steady growth

Comparing the year-to-date results for the composite portfolio to 2019, RevPAR increased by 4.5%, driven by ADR growth of 10.5% and a decline in occupancy of 5.3%. The occupancy gap compared to pre-pandemic levels indicates potential for further growth in the portfolio moving forward. Overall, the second quarter results for our portfolio showed strong occupancy growth, meeting our expectations. The continued growth in occupancy signals that lodging fundamentals have normalized, leading to a more balanced revenue outlook. While there was a 1.4% decline in ADR, mainly in South Florida, Atlanta, and Houston due to increased price sensitivity from travelers, the highlights across the portfolio were notable. The DeSoto in Savannah, Georgia showed outstanding performance, with RevPAR growing by 6.8% over the previous year and more than 33% over 2019. Similarly, Hotel Alba in Tampa posted commendable results, with a 7.8% growth in RevPAR over the previous year and nearly 63% over 2019. The Georgian Terrace in Atlanta and The Whitehall in Houston also saw significant growth in RevPAR driven by strong occupancy rates. Looking at profitability metrics, hotel EBITDA margins have stabilized, with an improvement of 69 basis points over the previous year in the second quarter. Corporate activity included securing a loan for the DoubleTree by Hilton Jacksonville Riverfront hotel and executing an extension on the first mortgage loan for the DoubleTree Philadelphia Airport Hotel. Total revenue for the second quarter was approximately $50.7 million, representing a 3.4% increase over the same quarter last year. Hotel EBITDA for the quarter was approximately $15.7 million, an increase of 5.8% over the same quarter in 2023. Adjusted FFO for the quarter was approximately $7.5 million, a 6.8% increase over the same quarter in 2023. Please be aware that our adjusted FFO excludes charges related to early debt repayment, unrealized gains and losses on derivative instruments, charges related to abandoned securities offerings, ESOP and stock compensation expenses, as well as other items. Hotel EBITDA also excludes these charges, as well as interest expense, interest income, corporate, general and administrative expenses, realized gains and losses on derivative instruments, the current portion of our income tax provision, and other items. For more details, please refer to our earnings release.

As of June 30, 2024, our company had total cash of approximately $37.3 million, with unrestricted cash and cash equivalents at around $18.9 million, and $18.4 million reserved for specific purposes like real estate taxes, insurance, and capital improvements. Our outstanding debt at the end of the quarter was approximately $323.2 million, with a weighted average interest rate of 5.68%. The majority of our debt, about 92.6%, carries a fixed interest rate when factoring in our interest rate hedges.

We anticipate routine capital expenditures of $7 million for furniture, fixtures, and equipment replacement and refurbishment in 2024. Additionally, we plan to begin a product improvement plan at the DoubleTree Hilton Philadelphia Airport, with expected capital expenditures of around $3 million for the year.

Our guidance for the full year 2024 remains unchanged from our previous disclosure in March, taking into account market conditions and expected performance within our portfolio. We forecast total revenue between $179 million to $182.6 million, representing a 4% increase over the prior year at the midpoint. Hotel EBITDA is projected to be between $46.1 million to $46.9 million, a 3.8% increase over the prior year at the midpoint. Adjusted FFO is estimated to be between $12.8 million to $13.8 million or $0.64 to $0.69 per share, an 8.7% decrease over the prior year at the midpoint of the guidance.

We are pleased with the second-quarter results of our portfolio, which met our expectations for both revenue and profitability. RevPAR growth of 4.3% was driven by strong occupancy growth, especially in our urban hotels in Atlanta and Houston. Group-centric properties performed well, with strong revenue growth and solid expense controls. We continue to see improvements in our urban markets, and we remain optimistic about future performance. Our group business has been a significant growth driver, with the DeSoto in Savannah and the Georgian Terrace in Atlanta delivering exceptional results. We have also successfully addressed mortgage refinancings and funding needs for hotel improvement plans. Our recent refinance and relicense of the DoubleTree Hotel in Jacksonville align with our strategy to drive rate and position the hotel for success in the market. As we move forward, our focus remains on managing our upcoming debt maturities in a conservative manner, spread out evenly over the next few years. Looking ahead to the second half of 2024, we are cautiously optimistic about the operating fundamentals for the remainder of the year. While leisure customers are showing price sensitivity and there may be signs of a slowing economy, forward booking trends, especially in the upscale and upper upscale lodging segments, remain strong. We anticipate that urban hotels will outperform the broader lodging market due to positive corporate and group travel trends. Our full year 2024 RevPAR forecast for our portfolio ranges between 104% and 106% of full year 2023 RevPAR. We believe that our well-positioned hotels, fueled by growth in the group and business transient segments, will continue to deliver strong results for our shareholders. With that, we are ready to take questions from our audience.

Operator: Thank you. Our first question is from Connor Mitchell of Piper Sandler. Connor, you may go ahead with your question.

Connor Mitchell: Good morning, thank you for taking my question. I wanted to ask about the repositioning and renovation plans for the Jacksonville property. Could you provide more details on this project and when it is expected to be completed?

Dave Folsom: Yes, the Jacksonville project is more than just a renovation, it is a complete repositioning and reenvisioning of the property. Similar to what we have done with other hotels like Hotel Alba in Tampa and Hotel Ballast in Wilmington. We see a significant market opportunity in Jacksonville, especially with the upcoming developments in the area. The project is expected to start at the beginning of 2025 and be completed by early 2027, with a total investment of $14.6 million.

Connor Mitchell: Thank you. And regarding leisure travel and ADR trends, do you anticipate a rebound in consumer and leisure travel, or do you foresee a potential impact from macroeconomic factors such as a recession?

Dave Folsom: While we did see a softening of ADR towards the end of the quarter, mainly driven by rate-conscious leisure travelers, we are seeing strong corporate and group booking trends that are offsetting this. We do not currently see any signs of a looming recession in the booking environment. Our strategy remains focused on managing expenses and maximizing revenue from all segments to navigate any potential market changes.

Scott Kucinski: I would add that the rate sensitivity seems to be coming primarily from individual leisure travelers, while our group bookings continue to show strong rates. Our portfolio is not heavily reliant on individual leisure travel, with our group bookings driving positive results.

Connor Mitchell: Thank you for the insights. Is the focus on ADR sensitivity in the ADR the primary metric you are concentrating on, given that occupancy has been steadily improving post-pandemic? While occupancy is still slightly below pre-pandemic levels, ADR has surpassed pre-pandemic levels. However, it appears that ADR may be facing some challenges now. Are you primarily focused on ADR in terms of outlook, believing that occupancy still has room for growth and not overly concerned about a decline in occupancy? Or am I placing more emphasis on one metric over the other?

Dave Folsom: Yes, you are viewing the situation correctly. There is still potential for growth in occupancy, both in our portfolio and across the industry. While the industry has not yet fully recovered to 2019 occupancy levels, ADR has seen significant growth post-pandemic. We may be reaching a point where ADR needs to stabilize. While rate drives profitability, achieving higher occupancy levels with the right rate can still lead to profitability as long as operating efficiencies are maintained. We believe there is room for growth in occupancy and it needs to be managed effectively.

Connor Mitchell: Thank you for that. Regarding guidance, it seems that you are expecting FFO to be similar to the previous year. Are there any potential factors that could push results towards the lower end of the range or potentially exceed the high end, such as improvements in ADR as discussed earlier? Are there any one-time items in the second half of 2023 that might impact 2024?

Dave Folsom: Weather-related events are always a concern this time of year, especially given the coastal and Florida nature of our portfolio. We are cautious until the end of September. Tony, do you have anything to add?

Tony Domalski: We are on a similar path as last year in terms of earnings. We typically see higher earnings in the first two quarters, breakeven in the third quarter, and some profit in the fourth quarter. We do not anticipate any significant one-time items this year.

Connor Mitchell: Thank you for the insights.

Operator: We currently have no further questions. Let’s now pass it back to Dave Folsom, CEO, for his closing remarks.

Dave Folsom: Thank you all for being on the call today, and we look forward to connecting again next quarter.

Operator: That wraps up today’s call. Thank you all for participating. You may now disconnect.