Earnings call transcript: Sotherly Hotels Q4 2024 misses revenue forecast

Sotherly Hotels Inc. (SOHO) reported its fourth-quarter 2024 earnings, revealing a revenue miss against forecasts. The company posted a revenue of $43.95 million, slightly below the forecasted $44.4 million. The earnings per share (EPS) was reported at -$0.16. Despite the revenue shortfall, the company’s stock showed a modest increase of 0.22% in pre-market trading. According to InvestingPro analysis, the company currently trades at a low EBITDA multiple, suggesting potential undervaluation relative to peers. InvestingPro’s comprehensive analysis includes 10+ additional insights available to subscribers.

Key Takeaways

• Sotherly Hotels reported Q4 2024 revenue of $43.95 million, missing forecasts.
• EPS stood at -$0.16 for the quarter.
• The stock price increased by 0.22% in pre-market trading.
• The company is planning significant renovations in Philadelphia and Jacksonville.
• Group travel continues to drive growth, with a 5.9% increase in 2024.

Company Performance

Sotherly Hotels demonstrated a mixed performance in Q4 2024. Total revenue increased by 4.3% year-over-year to $44 million, despite falling short of the forecast. The hotel EBITDA for the quarter rose by 3.6% year-over-year to $10.7 million. The company’s adjusted funds from operations (FFO) decreased by $850,000 compared to the previous year, reflecting higher interest costs. With a market capitalization of just $16.22 million and a beta of 1.53, InvestingPro data indicates the stock carries higher volatility than the broader market. The company’s current ratio of 0.3 suggests potential liquidity challenges ahead.

Financial Highlights

• Revenue: $44 million (+4.3% YoY)
• Full Year 2024 Revenue: $182 million (+4.6% YoY)
• Q4 Hotel EBITDA: $10.7 million (+3.6% YoY)
• Full Year Hotel EBITDA: $46.8 million (+4.5% YoY)
• Adjusted FFO: $2 million (decrease of $850,000 YoY)

Earnings vs. Forecast

Sotherly Hotels reported an EPS of -$0.16, aligning with expectations. However, the revenue of $43.95 million fell short of the forecasted $44.4 million, marking a minor miss. Historically, the company has shown steady growth, and this deviation is relatively small compared to past performances.

Market Reaction

Despite the revenue miss, Sotherly Hotels’ stock price increased by 0.22% in pre-market trading, closing at $0.81. This movement places the stock closer to its 52-week high of $1.537, indicating a resilient investor sentiment amidst the earnings report. InvestingPro analysis reveals the stock has experienced significant volatility, with a -31.63% return over the past six months. Subscribers to InvestingPro gain access to detailed valuation metrics, comprehensive financial health scores, and expert analysis through the Pro Research Report, available for over 1,400 US stocks.

Outlook & Guidance

Looking ahead, Sotherly Hotels projects total revenue for 2025 to be between $183.4 million and $188.2 million, reflecting a 2.1% increase at the midpoint. The company anticipates hotel EBITDA to range from $48.8 million to $49.6 million, with RevPAR forecasted to reach 103-105% of 2024 levels. These projections suggest a cautious optimism for the coming year.

Executive Commentary

• Dave, an executive at Sotherly Hotels, stated, "We continue to be cautiously optimistic about the lodging industry."
• Another executive highlighted, "Group travel continues to be the strongest driver of growth."
• Tony, the financial executive, remarked, "We’re seeing interest costs creep up," which has impacted the company’s FFO.

Risks and Challenges

• Rising interest costs could further impact the company’s profitability.
• Potential market saturation in key urban areas may limit growth.
• Economic uncertainties could affect travel demand and occupancy rates.
• The planned renovations could face delays or cost overruns.
• Competitive pressures in the upscale hotel segment could affect pricing strategies.

Q&A

During the earnings call, analysts inquired about the potential for a stock reverse split to maintain NASDAQ listing, which the company discussed as a possibility. Executives also addressed the impact of higher interest costs on declining FFO and confirmed that insurance recoveries from Hurricane Helene have been fully accounted for.

Full transcript - Sotherly Hotels Inc (SOHO) Q4 2024:

Carly, Call Coordinator: Good morning all and thank you for joining us for the Sotheby Hotels Q4 twenty twenty four Conference Call and Webcast. My name is Carly and I’ll be coordinating the call today. If you’d like to register a question during the call, you can do so by pressing star followed by one on your telephone keypad and to remove yourself at the line of questioning will be star followed by 2. I’d now like to hand over to your host, Max Sims, Vice President of Operations. The floor is yours.

Max Sims, Vice President of Operations, Sotheby Hotels: 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 tuckerlyhotels.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.

Scott, Executive (Likely Operations or Portfolio Management), Sotheby Hotels: Thanks, Mac. Good morning, everyone. I’ll start off today’s call through a review of our portfolio’s key operating metrics for the fourth quarter. Looking at the fourth quarter results for the actual portfolio compared to 2023, RevPAR increased 2.9% driven by a 7% increase in occupancy and a 3.7% decrease in ADR. Stripping out Tampa from the results due to hurricane impact, the fourth quarter’s actual portfolio RevPAR increased a healthy 5.8% compared to prior year.

Looking at the fourth quarter results for the actual same store portfolio relative to 2019, RevPAR increased 3.8% driven by ADR growth of 7.9% while occupancy was down 3%. For the full year 2024, RevPAR performance represents an increase of 3.5% over the same period in 2023, driven by a 6.1% increase in occupancy and a 2.5 decrease in rate. Again, stripping out Tampa from the results due to hurricane impact, the annual actual portfolio RevPAR increased 3.9% compared to 2023 levels. Looking at the annual results for the same store actual portfolio relative to 2019, RevPAR was up 1.3% driven by ADR growth of 8.6% and occupancy decline of 6.8%. Overall, our portfolio’s fourth quarter results driven by strong year over year occupancy growth were ahead of our budgeted expectations.

Occupancy growth was especially strong in our slower to recover urban markets, a positive indicator that lodging fundamentals have normalized following the uneven recovery period following the pandemic. As part of this normalization of lodging fundamentals, rates have settled down a bit following the revenge travel trends of the prior two years with an ADR decline of 2.5, partially offsetting the quarter’s 6.1% gain in occupancy. Hurricane Helene was struck during the third quarter, contributed to significant operational impact during the fourth quarter of twenty twenty four. As a result of the hurricane storm surge, Hotel Alba sustained water intrusion on the First Floor of the hotel causing damage to furniture, finishes and equipment in public areas and guest rooms as well as some building systems. Due to our operating team’s expeditious restoration efforts following the storm, the hotel remained fully operational.

To date, the work associated with this fully insured casualty has been efficiently executed and only final FF and E replacements and elevator work remain to be accomplished. We anticipate the impact of operations at Hotel Alba as a result of Hurricane Helene to continue through the second quarter of this year. From an accounting perspective, the company’s headline quarterly operating metrics, including occupancy, ADR and RevPAR reflect the impact of Hurricane Helene on Hotel Alba’s operations prior to business interruption insurance proceeds, while the company’s revenue and profitability metrics include business interruption insurance credits. Looking at some highlights across the portfolio. The DoubleTree Resort in Hollywood, Florida posted strong year over year results during the quarter, improving RevPAR by 13.8% fueled by 13.4% increase in occupancy and a slight increase in rate.

The hotel’s improvement in occupancy, which led to greater ancillary revenue capture, was a result of stronger than expected weekend demand as well as improved bookings. Driven by a 13% increase in occupancy share, the DoubleTree easily outperformed its competitive set during the quarter, growing its RevPAR index by 8.5%. The Whitehall and Houston continued to build momentum during the fourth quarter, growing RevPAR by nearly 50, driven by occupancy growth of 46.1% and rate growth of 2.7%. The hotel’s improved performance was predominantly driven by growth in the leisure transient segment. The Whitehall easily outperformed its competitive set during the quarter gaining more than 30% RevPAR share fueled by strong occupancy share improvement of nearly 34%.

Our DoubleTree Hotel in Philadelphia continued its streak of improved performance during the fourth quarter, posting a 9.4% increase in RevPAR, driven by a 16.2% increase in occupancy. The hotel submarket continues to trend positively during the quarter, benefiting from increased demand from special events as well as improved airport traffic. Meanwhile, the hotel’s strong occupancy growth, which is driven by increased business and group travel, contributed to a 5.2% RevPAR share gain during the fourth quarter. Hotel Ballast in Wilmington posted strong year over year results growing RevPAR by 7.1%, which was fueled by 1.9% increase in occupancy and a 5% increase in rate. Hotel balanced well balanced approach highlighted by group with strong banquet and catering contribution continues to drive the hotel’s revenue picture.

Looking at profitability metrics for the portfolio, while hotel EBITDA margin experienced slight year over year decline, the prior year includes $700,000 grant payment at the Georgia Terrace. Stripping out this one time event, fourth quarter hotel EBITDA margin improved by 150 basis points over prior year, a commendable effort considering the portfolio’s moderate rate decline during the quarter. Portfolio’s occupancy growth trend has allowed our managers to drive additional ancillary revenue, while also taking advantage of economies of scale, especially in our slower to recover markets in order to drive flow through. Moving forward, we expect normalized staffing and amenity levels along with stabilized wage costs to result in relatively stable margins for the portfolio. Turning to corporate activity, the company continues planning and preparation for two upcoming PIP renovations.

In Philadelphia, we have executed a new ten year franchise agreement with Hilton for the DoubleTree flag. The acquired PIP renovation has an $11,500,000 budget with an expected completion date of 05/01/2026. In Jacksonville, the company executed a new ten year franchise agreement with Hilton to convert the hotel to a soft branded concept under the name Hotel Bellamy. This $14,600,000 renovation has an expect completion date of 01/01/2027. I will now turn the call over to Tony.

Tony, Financial Executive (Likely CFO), Sotheby Hotels: Thank you, Scott. Reviewing performance for the period ended 12/31/2024. For the fourth quarter, total revenue was approximately $44,000,000 representing an increase of 4.3% over the same quarter 2023. Year to date, total revenue was approximately $182,000,000 representing an increase of 4.6% over full year 2023. Hotel EBITDA for the quarter was approximately $10,700,000 representing an increase of 3.6% from the same quarter last year.

Year to date hotel EBITDA was approximately $46,800,000 representing an increase of 4.5 over full year 2023. For the quarter, adjusted FFO was approximately $2,000,000 representing a decrease of about $850,000 from the same quarter in 2023. Year to date, adjusted FFO was approximately $14,300,000 representing a decrease of approximately $250,000 from the prior year. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, unrelated 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, corporate, general and administrative expenses, realized gains and losses on derivative instruments and the current portion of our tax provision as well.

Please refer to the earnings release for additional detail. Looking at our balance sheet as of 12/31/2024, company had total cash of approximately $28,700,000 consisting of unrestricted cash and cash equivalents of approximately $7,300,000 as well as approximately $21,400,000 which was reserved for real estate taxes, insurance, capital improvements and certain other items. At the end of the quarter, we had principal balances of approximately $319,300,000 in outstanding debt at a weighted average interest rate of 5.88%. Approximately 84.5% of the company’s debt carried a fixed rate of interest when taking into account the company’s interest rate hedges. We anticipate routine capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment will amount to approximately $7,200,000 for calendar year 2025.

Significant portion of our product improvement plans at the DoubleTree by Hilton Philadelphia Airport and the DoubleTree by Hilton Jacksonville will occur during the year. With anticipated capital expenditures related to these projects to total approximately $11,600,000,000 Turning to guidance. We’re publishing full year guidance for 2025 accounting for current and expected performance within the portfolio and taking into account market conditions. We’re projecting total revenue in the range of $183,400,000 to $188,200,000 for full year 2025. At the midpoint of this guidance, this represents a 2.1% increase over the prior year.

Hotel EBITDA is projected in the range of $48,800,000 to $49,600,000 and at the midpoint of the guidance, this represents a 5.2 increase over the prior year. Adjusted FFO is projected in the range of $11,500,000 to $12,300,000

Carly, Call Coordinator: or $0.57

Tony, Financial Executive (Likely CFO), Sotheby Hotels: to $0.61 per share. And at the midpoint of the guidance, this represents a 16.4% increase compared to the prior year. And I’ll now turn the call over to Dave.

Dave, Executive (Likely CEO), Sotheby Hotels: Thank you, Tony, and good morning, everyone. We were pleased with our portfolio’s fourth quarter results, which capped off a productive year characterized by improved operating fundamentals and continued occupancy growth. Our portfolio’s 6.1% occupancy improvement during the fourth quarter was particularly impressive given the challenges faced at our Tampa hotel following the major hurricane at the end of the third quarter. Additionally, the sustained recovery at two of our urban hotels in Houston and Philadelphia was an encouraging sign for the portfolio. The noteworthy rebound in demand at our DoubleTree Hotel in Hollywood, Florida, which was driven by a balance of strong weekend leisure pickup and weekday group business was also a positive catalyst for our portfolio during the quarter.

Despite some softening in rate during the quarter, we continue to be encouraged with our managers’ ability to utilize streamlined revenue management strategies in order to drive strong top line growth, gain RevPAR share versus our competitive sets, while delivering solid margins. As a result of these initiatives, we were able to achieve our full year guidance targets for revenue, hotel EBITDA and adjusted FFO, which were initiated last March. Occupancy growth continued during the quarter with many of our hotels delivering double digit occupancy growth over prior year. The Whitehall in Houston was a standout performer as its reenergized sales effort drove 46% occupancy growth over prior year, primarily through weekend leisure and group business, the latter of which improved more than 50% during the quarter. For the year, the Whitehall’s occupancy improved nearly 35% over prior year, while its RevPAR share grew more than 20%.

Similarly, our DoubleTree Hotel at the Atlanta Airport delivered at the Philadelphia Airport, excuse me, delivered excellent occupancy growth of 16% over prior year as the hotel outperformed its comp set during the quarter. Even with rate softness in this market, our manager was able to significantly improve that hotel’s profitability relative to prior year, growing hotel EBITDA by 7574% for the quarter. We believe there’s still significant opportunity for growth at this hotel as its occupancy remains nearly 600 basis points below 2019. As one of the largest revenue contributors in the portfolio, the improved performance at our Doubletree Hotel in Hollywood during the quarter was especially encouraging with occupancy growth of 13.4% and hotel EBITDA growth of 15% over prior year. Group revenue growth was also strong at this hotel growing 15% over prior year.

Looking at the total portfolio, group continues to be the strongest driver of growth for the portfolio, expanding by 5.9% for full year 2024 with additional upside opportunities for 2025. Looking at our balance sheet initiatives throughout 2024, Southerly continued to successfully navigate the mortgage markets despite ongoing challenges in the debt market from a borrower perspective. During the year, we completed refinancings or extensions at several hotels including the DoubleTree at the Philadelphia Airport, Hotel Alba in Tampa and the DoubleTree Hotel in Jacksonville, Florida. Concurrently, the company continues its efforts in executing lifecycle improvements in conjunction with the renewal of Hilton franchises and its DoubleTree locations in Philadelphia and Jacksonville. We believe the necessary upgrades to these properties will allow our managers to drive increased profitability through rate capture to deliver long term value.

Looking ahead, we will continue to conservatively approach upcoming debt maturities for our portfolio, which are spread evenly over the near term. Looking at 2025, we continue to be cautiously optimistic on the lodging industry as we believe upscale and upper upscale hotels will outperform the broader market this year, a positive indicator for our portfolio’s growth prospects. Despite the uncertain macro environment so far this year, we’ve been pleasantly surprised by our portfolio’s operating fundamentals with January’s results finishing well ahead of expectations. Preliminary January RevPAR highlighted by continued improvement at our urban hotels coupled with strong demand at our South Florida hotels showed a 12.8 improvement over prior year. Full year 2025 RevPAR for our portfolio is forecasted to range between 103105% of full year 2024 RevPAR.

Looking ahead, we believe that our portfolio of well positioned hotels driven by occupancy growth will continue to outperform. And with that, we will open the call up for questions.

Carly, Call Coordinator: Thank you very much. We’d now like to open the lines for Q and A. Our first question comes from Alexander Goldfarb of Piper Sandler. Alexander, your line is now open.

Alexander Goldfarb, Analyst, Piper Sandler: Hey, morning down there. Just a few questions. Looking at guidance, revenue is projected to be higher, EBITDA is expected to be higher. You guys spoke about a pretty good outlook, stable operating costs, yet FFO looks to decline. So, just want to get a bit more color on this.

Is this because of refinancing activities or interest? And also, what do you think the trajectory of FFO is if operations are improving but FFO is going down?

Tony, Financial Executive (Likely CFO), Sotheby Hotels: This is Tony, Alex. We’re seeing improvements in revenue and EBITDA as you said, but we have a bevy of loans that we originated five to ten years ago and the 4% to 5% interest rates that we’re now having to refinance. And so, we’re going to see interest costs creep up. We saw it creep up last year. We’re seeing it creep up again to 2025.

And I think until we complete these refinances, you’re going to they’ll slowly plateau as we complete all these refinances of those legacy mortgages.

Alexander Goldfarb, Analyst, Piper Sandler: Okay. And then, just following up on the eight ks you guys filed last month on the from NASDAQ on the stock trading below $1 It would seem like a reverse split is the easiest thing, but just curious how you guys are thinking about it. I think you have until August to get the stock above $1

Dave, Executive (Likely CEO), Sotheby Hotels: That’s right, Alex. It’s Dave here. We have one hundred

Tony, Financial Executive (Likely CFO), Sotheby Hotels: and eighty days upon notice

Dave, Executive (Likely CEO), Sotheby Hotels: to cure the deficiency and that’s normally accomplished as you said by executing a reverse split of some ratio to get above the dollar threshold or during that period if the stock price rises above that dollar it will cure itself.

Alexander Goldfarb, Analyst, Piper Sandler: Okay. And then as far as the hotels that you’re doing the repairs on, I think the Alba, is there anything in guidance for insurance recoveries? Like is any part of FFO enhanced by just recovering insurance dollars?

Scott, Executive (Likely Operations or Portfolio Management), Sotheby Hotels: Alex, this is Scott speaking. Our guidance assumes normal operations at the hotel where we’ve have business interruption proceeds from our insurance carriers to date. We’ve been doing those calculations on a monthly basis. So as I think I mentioned in my comments, Q4 of last year, our bottom line results our revenue results and our bottom line hotel EBITDA results reflect the collection of those business interruption proceeds to essentially make us whole and that’s our assumption going forward. The business interruption is fairly minimal at this point, since the hotel is pretty much all put back together, but every month that goes by any shortfall to expected operations will be filled with that business interruption proceeds.

So the guidance is just assuming we’re fully made whole.

Alexander Goldfarb, Analyst, Piper Sandler: Okay. So basically what you’re saying is the number for the guidance for 2025 is a good run rate for the portfolio. It’s not being enhanced at all by you? Okay. And then finally okay, cool.

And then just last question. You mentioned about refinancing this year. Obviously, debt load on the company, every asset encumbered. Given the steady rebounding in asset values, as you guys contemplate refinancing debt, especially to try and grow FFO, is there any thought, any of the assets that have a healthy amount of equity that you could see a path to maybe sell one or two, start to unencumber some of the other assets with the excess proceeds and try to get this company in a better spot leverage wise so that we can talk more about growing the equity? Is that something that you think is feasible or reasonable as you think about refinancing?

Dave, Executive (Likely CEO), Sotheby Hotels: Yes. I mean, we’re always looking at options on how to manage cash and manage the portfolio structurally. I don’t think we’ve really looked that hard at selling assets for the purpose you’re articulating. I mean, I do believe that as fundamentals continue to go up hopefully that we’re going to get better results on the refinancing picture. I mean, to date interest rates have come down since last year.

Some of the other structural aspects of refinancing and debt mortgaging as it is are still pretty sticky with debt yields and debt service coverage ratios. But our goal right now is to take each one of these mortgages that are coming due with legacy loan rates and legacy loan structures and get the best outcome we can from the markets. And I think that’s the strategy we’ve looked at with the Board and that’s what we’re going to pursue.

Alexander Goldfarb, Analyst, Piper Sandler: Okay. Listen, thank you for your time.

Tony, Financial Executive (Likely CFO), Sotheby Hotels: All right. Thank you very much.

Carly, Call Coordinator: Thank you very much. We currently have no further questions. So I’d like to hand back to Dave Folsom for any closing remarks.

Dave, Executive (Likely CEO), Sotheby Hotels: Thank you everyone for participating today and we look forward to our next earnings call. Thank you, Albert.

Carly, Call Coordinator: As we conclude today’s call, we’d like to thank everyone for joining. You may now disconnect your lines.

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