Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our current strategies, expectations, and future plans, are generally identified by our use of words, such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative, but the absence of these words does not necessarily mean that a statement is not forward-looking. All statements regarding our expected financial position, business and financing plans are forward-looking statements.
Factors which could have a material adverse effect on the Company’s future operations, performance and prospects include, but are not limited to:
•national and local economic and business conditions that affect occupancy rates and revenues at our hotels and the demand for hotel products and services;
•risks associated with the hotel industry, including competition and new supply of hotel rooms, increases in wages, energy costs and other operating costs;
•risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements, and, as necessary, to refinance or seek an extension of the maturity of such indebtedness or further modification of such debt agreements;
•risks associated with adverse weather conditions, including hurricanes;
•impacts on the travel industry from pandemic diseases, including COVID-19;
•the availability and terms of financing and capital and the general volatility of the securities markets;
•management and performance of our hotels;
•risks associated with maintaining our system of internal controls;
•risks associated with the conflicts of interest of the Company’s officers and directors;
•risks associated with redevelopment and repositioning projects, including delays and cost overruns;
•supply and demand for hotel rooms in our current and proposed market areas;
•risks associated with our ability to maintain our franchise agreements with our third party franchisors;
•our ability to acquire additional properties and the risk that potential acquisitions may not perform in accordance with expectations;
•our ability to successfully expand into new markets;
•legislative/regulatory changes, including changes to laws governing taxation of real estate investment trusts (“REITs”);
•the Company’s ability to maintain its qualification as a REIT and the limitations imposed on the Company's business due to such maintenance; and
•our ability to maintain adequate insurance coverage.
Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved.
Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the section titled “Risk Factors” in our Annual Report on Form 10-K.
32
These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, except as required by law. In addition, our past results are not necessarily indicative of our future results.
Overview
Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 and focused on the acquisition, renovation, up-branding and repositioning of upscale to upper-upscale full-service hotels in the southern United States. Sotherly may also opportunistically acquire hotels throughout the United States. Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP. We commenced operations in December 2004 when we completed our initial public offering and thereafter consummated the acquisition of the Initial Properties.
Our hotel portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels, comprising 2,786 rooms, as well as interests in two condominium hotels and their associated rental programs. The Company owns hotels that operate under well-known brands such as DoubleTree by Hilton, Tapestry Collection by Hilton, and Hyatt Centric, as well as independent hotels. We sometimes refer to our independent and soft-branded properties as our collection of boutique hotels. As of March 31, 2023, our portfolio consisted of the following hotel properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
Property |
|
of Rooms |
|
|
Location |
|
Date of Acquisition |
|
Chain/Class Designation |
Wholly-owned Hotels |
|
|
|
|
|
|
|
|
|
The DeSoto |
|
|
246 |
|
|
Savannah, GA |
|
December 21, 2004 |
|
Upper Upscale(1) |
DoubleTree by Hilton Jacksonville Riverfront |
|
|
293 |
|
|
Jacksonville, FL |
|
July 22, 2005 |
|
Upscale |
DoubleTree by Hilton Laurel |
|
|
208 |
|
|
Laurel, MD |
|
December 21, 2004 |
|
Upscale |
DoubleTree by Hilton Philadelphia Airport |
|
|
331 |
|
|
Philadelphia, PA |
|
December 21, 2004 |
|
Upscale |
DoubleTree Resort by Hilton Hollywood Beach |
|
|
311 |
|
|
Hollywood, FL |
|
August 9, 2007 |
|
Upscale |
Georgian Terrace |
|
|
326 |
|
|
Atlanta, GA |
|
March 27, 2014 |
|
Upper Upscale(1) |
Hotel Alba Tampa, Tapestry Collection by Hilton |
|
|
222 |
|
|
Tampa, FL |
|
October 29, 2007 |
|
Upscale |
Hotel Ballast Wilmington, Tapestry Collection by Hilton |
|
|
272 |
|
|
Wilmington, NC |
|
December 21, 2004 |
|
Upscale |
Hyatt Centric Arlington |
|
|
318 |
|
|
Arlington, VA |
|
March 1, 2018 |
|
Upper Upscale |
The Whitehall |
|
|
259 |
|
|
Houston, TX |
|
November 13, 2013 |
|
Upper Upscale(1) |
Hotel Rooms Subtotal |
|
|
2,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominium Hotels |
|
|
|
|
|
|
|
|
|
Hyde Resort & Residences |
|
|
77 |
|
(2) |
Hollywood, FL |
|
January 30, 2017 |
|
Luxury(1) |
Hyde Beach House Resort & Residences |
|
|
82 |
|
(2) |
Hollywood, FL |
|
September 27, 2019 |
|
Luxury(1) |
Total Hotel & Participating Condominium Hotel Rooms |
|
|
2,945 |
|
|
|
|
|
|
|
(1)Operated as an independent hotel.
(2)Reflects only those condominium units that were participating in the rental program, as of March 31, 2023. At any given time, some portion of the units participating in our rental program may be occupied by the unit owner(s) and unavailable for rental to hotel guests. We sometimes refer to each participating condominium unit as a “room.”
We conduct substantially all our business through our Operating Partnership. We are the sole general partner of our Operating Partnership, and we own an approximate 95.9% interest in our Operating Partnership, as of the date of this report, with the remaining interest being held by limited partners who were the contributors of our Initial Properties and related assets.
To qualify as a REIT, neither the Company nor the Operating Partnership can operate our hotels. Therefore, our wholly-owned hotel properties are leased to our MHI TRS Entities, which are indirect wholly-owned subsidiaries of the Operating Partnership. Our MHI TRS Entities then engage eligible independent hotel management companies to operate the hotels under a management
33
agreement. Our MHI TRS Entities have engaged Our Town to manage our hotels. Our MHI TRS Entities, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into each of our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.
Key Operating Metrics
In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories such as food, beverage, catering, parking, and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:
•Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;
•Average daily rate, or ADR, which is total room revenue divided by the number of rooms sold; and
•Revenue per available room, or RevPAR, which is total room revenue divided by the total number of available rooms.
RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities, room supplies, franchise fees, management fees, credit card commissions and reservations expense), but could also result in increased non-room revenue from the hotel’s restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all of the additional variable operating costs associated with higher occupancy.
When calculating composite portfolio metrics, we include available rooms at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences that participate in our rental programs and are not reserved for owner-occupancy.
We also use FFO, Adjusted FFO and Hotel EBITDA as measures of our operating performance. See “Non-GAAP Financial Measures.”
Results of Operations
The following tables illustrate the key operating metrics for the three months ended March 31, 2023, 2022 and 2019, respectively, for the Company’s wholly-owned properties (“actual” portfolio metrics). Accordingly, the actual data does not include the participating condominium hotel rooms of the Hyde Resort & Residences and the Hyde Beach House Resort & Residences. The ten wholly-owned properties in the portfolio that were under the Company’s control during the three months ended March 31, 2023 and the corresponding periods in 2022 and 2019 are considered same-store properties (“same-store” portfolio metrics). Accordingly, the same-store data does not reflect the performance of the Sheraton Louisville Riverside which was sold in February 2022, or the DoubleTree by Hilton Raleigh-Brownstone University which was sold in June 2022. The composite portfolio metrics represent the Company’s wholly-owned properties and the participating condominium hotel rooms at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences, during the three months ended March 31, 2023 and the corresponding periods in 2022 and 2019. The same-store (composite) portfolio metrics includes all properties with the exceptions of the Sheraton Louisville Riverside, DoubleTree by Hilton Raleigh-Brownstone University and the Hyde Beach House Resort & Residences, during the three months ended March 31, 2023, and the corresponding periods in 2022 and 2019.
Given the drastic and unprecedented impact of the COVID-19 pandemic on our operating results in 2021 and 2020, we believe that a comparison of our results through the three-month periods ending March 31, 2023, to both the March 31, 2022 and March 31,
34
2019 comparable periods in this overview section, allows for a better understanding of the full impact of the COVID-19 pandemic and the progress of our recovery.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2023 |
|
|
March 31, 2022 |
|
|
March 31, 2019 |
|
Actual Portfolio Metrics |
|
|
|
|
|
|
|
|
|
Occupancy % |
|
|
60.5 |
% |
|
|
53.7 |
% |
|
|
70.1 |
% |
ADR |
|
$ |
187.19 |
|
|
$ |
168.12 |
|
|
$ |
165.57 |
|
RevPAR |
|
$ |
113.27 |
|
|
$ |
90.36 |
|
|
$ |
116.01 |
|
Same-Store Portfolio Metrics |
|
|
|
|
|
|
|
|
|
Occupancy % |
|
|
60.5 |
% |
|
|
54.3 |
% |
|
|
71.0 |
% |
ADR |
|
$ |
187.19 |
|
|
$ |
171.72 |
|
|
$ |
170.18 |
|
RevPAR |
|
$ |
113.27 |
|
|
$ |
93.29 |
|
|
$ |
120.79 |
|
Composite Portfolio Metrics |
|
|
|
|
|
|
|
|
|
Occupancy % |
|
|
60.4 |
% |
|
|
53.9 |
% |
|
|
69.9 |
% |
ADR |
|
$ |
197.07 |
|
|
$ |
187.23 |
|
|
$ |
174.24 |
|
RevPAR |
|
$ |
119.06 |
|
|
$ |
100.89 |
|
|
$ |
121.86 |
|
Same-Store (Composite) Portfolio Metrics |
|
|
|
|
|
|
|
|
|
Occupancy % |
|
|
60.5 |
% |
|
|
54.6 |
% |
|
|
70.8 |
% |
ADR |
|
$ |
193.03 |
|
|
$ |
182.87 |
|
|
$ |
179.55 |
|
RevPAR |
|
$ |
116.80 |
|
|
$ |
99.77 |
|
|
$ |
127.08 |
|
Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022
Revenue. Total revenue for the three months ended March 31, 2023 increased approximately $5.1 million, or 13.4%, to approximately $43.5 million compared to total revenue of approximately $38.4 million for the three months ended March 31, 2022. There was an aggregate increase in total revenue of approximately $7.9 million from our ten wholly-owned properties, offset by decreases of approximately $0.6 million, at our Hyde Resort & Residences and at our Hyde Beach House & Resort, both in Hollywood Beach, Florida and a decrease of approximately $2.2 million as a result of the disposition of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. There were increases in leisure, small group and corporate business travel demand in the first quarter 2023 while demand in the same period in 2022 was negatively impacted by the Omicron variant of COVID-19.
Room revenue increased approximately $3.5 million, or 14.3%, to approximately $28.4 million for the three months ended March 31, 2023 compared to room revenue of approximately $24.9 million for the three months ended March 31, 2022. The increase in room revenue for the three months ended March 31, 2023 resulted from an aggregate increase of approximately $5.0 million from ten of our properties, offset by a decrease of approximately $1.5 million as a result of the sale of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. The improvement was mainly due to an increase in occupancy from 53.9% to 60.4% coupled with an increase in ADR from $187.23 to $197.07 resulting in an increase in RevPAR from $100.89 to $119.06. These improvements are mainly due to increases in leisure, small group and corporate business travel demand while demand in the same period in the prior year was negatively impacted by the Omicron variant of COVID-19.
Food and beverage revenues increased approximately $3.1 million, or 55.7%, to approximately $8.7 million for the three months ended March 31, 2023 compared to food and beverage revenues of approximately $5.6 million for the three months ended March 31, 2022. The increase in food and beverage revenues for the three months ended March 31, 2023, resulted from an aggregate increase of approximately $3.4 million from eight of our properties, offset by decreases of approximately $0.2 million, at two of our hotel properties and by the loss of food and beverage revenue of approximately $0.1 million during the quarter following the sale of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.
Revenue from other operating departments decreased approximately $1.5 million, or 19.5%, to approximately $6.3 million for the three months ended March 31, 2023 compared to revenue from other operating departments of approximately $7.8 million for the three months ended March 31, 2022. Moderate increases across our portfolio were offset by a decrease of approximately $0.6 million at our Hyde Resort and Residences and Hyde Beach House properties in Hollywood, Florida. Additionally, we received a one-time grant from the state of North Carolina of $1.0 million in the prior year period. The remainder of the decrease was the result of the disposition of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, increased approximately $3.0 million, or 10.7%, to approximately $31.4 million for
35
the three months ended March 31, 2023, compared to total hotel operating expenses of approximately $28.4 million for the three months ended March 31, 2022. The increase in hotel operating expenses for the three months ended March 31, 2023, resulted from an aggregate increase in total hotel operating expenses of approximately $4.6 million, offset by decreases of approximately $1.6 million as a result of the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. This increase in hotel operating expenses was directly related to the increase in revenue.
Rooms expense for the three months ended March 31, 2023 increased slightly by approximately 7.8%, to approximately $6.4 million, compared to rooms expense for the three months ended March 31, 2022 of approximately $5.9 million. The increase in rooms expense for the three months ended March 31, 2023, resulted from an aggregate increase of approximately $0.9 million from ten of our hotel properties, offset by a decrease of approximately $0.4 million mostly as a result of the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.
Food and beverage expenses for the three months ended March 31, 2023 increased approximately $2.0 million, or 53.0%, to approximately $5.9 million, compared to food and beverage expenses of approximately $3.9 million, for the three months ended March 31, 2022. The net increase in food and beverage expenses for the three months ended March 31, 2023, resulted from an aggregate increase of approximately $2.1 million, offset by a decrease of approximately $0.1 million as a result of the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. The increase was directly related to the increase in food and beverage revenue.
Expenses from other operating departments for the three months ended March 31, 2023 slightly decreased approximately $0.2 million or 6.8%, to approximately $2.3 million, compared to other operating departments expense for the three months ended March 31, 2022 of approximately $2.5 million. The decrease in other operating departments expense for the three months ended March 31, 2023, resulted from an aggregate decrease of approximately $0.3 million from seven of our properties, offset by an increase of approximately $0.1 million from seven of our properties, including the two disposed properties.
Indirect expenses at our wholly-owned properties for the three months ended March 31, 2023 increased approximately $0.7 million, or 4.3%, to approximately $16.8 million, compared to indirect expenses of approximately $16.1 million for the three months ended March 31, 2022. The increase in indirect expenses for the three months ended March 31, 2023, resulted from an aggregate increase in total indirect expenses of approximately $1.7 million, offset by a decrease of approximately $1.0 million as a result of the disposition of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.
Corporate General and Administrative. Corporate general and administrative expenses for the three months ended March 31, 2023 increased approximately $0.5 million, or 30.8%, to approximately $2.0 million compared to corporate general and administrative expenses of approximately $1.5 million, for the three months ended March 31, 2022. The increase in corporate general and administrative expenses was mainly due to increased salaries, audit, legal and other professional fees of approximately $0.5 million.
Interest Expense. Interest expense for the three months ended March 31, 2023 decreased approximately $1.6 million, or 28.0%, to approximately $4.1 million, as compared to interest expense of approximately $5.7 million, for the three months ended March 31, 2022. The decrease in interest expense for the three months ended March 31, 2023, was substantially related to decreases in the amount of corporate debt especially attributable to the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022 and the extinguishment of the Secured Notes in June 2022.
Unrealized (Loss)/Gain on Hedging Activities. As of March 31, 2023, the fair market value of our interest rate swap assets are approximately $0.9 million. The unrealized loss on hedging activities during the three months ended March 31, 2023, was approximately ($0.4) million and was approximately a $1.0 million gain during the three months ended March 31, 2022, the unrealized loss on hedging activities was driven by changes in expectation of short-term rates over the term of the hedging instruments.
Income Taxes. We had an income tax provision of $15,182 for the three months ended March 31, 2023 compared to an income tax provision of $9,654, for the three months ended March 31, 2022. MHI TRS realized operating losses for each of the three months ended March 31, 2023 and 2022.
36
Net Income (Loss). We realized a net income for the three months ended March 31, 2023 of approximately $1.4 million, compared to a net loss of approximately $0.8 million, for the three months ended March 31, 2022, because of the operating results discussed above.
Non-GAAP Financial Measures
We consider the non-GAAP financial measures of FFO available to common stockholders and unitholders (including FFO per common share and unit), Adjusted FFO available to common stockholders and unitholders, EBITDA and Hotel EBITDA to be key supplemental measures of the Company’s performance and could be considered along with, not alternatives to, net income (loss) as a measure of the Company’s performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting principles (“GAAP”) or amounts available for the Company’s discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by GAAP.
FFO and Adjusted FFO. Industry analysts and investors use Funds from Operations (“FFO”), as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, gains or losses from involuntary conversions of assets, plus certain non-cash items such as real estate asset depreciation and amortization or impairment, stock compensation costs and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.
We consider FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.
We further adjust FFO Available to Common Stockholders and Unitholders for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, gains on extinguishment of preferred stock, aborted offering costs, loan modification fees, franchise termination costs, costs associated with the departure of executive officers, litigation settlement, over-assessed real estate taxes on appeal, management contract termination costs, operating asset depreciation and amortization, change in control gains or losses, ESOP and stock compensation expenses and acquisition transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other REITs and is more
37
indicative than FFO of the on-going performance of our business and assets. Our calculation of adjusted FFO may be different from similar measures calculated by other REITs.
The following is a reconciliation of net income (loss) to FFO and Adjusted FFO, for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2023 |
|
|
March 31, 2022 |
|
Net income (loss) |
|
$ |
1,387,514 |
|
|
$ |
(810,944 |
) |
Depreciation and amortization - real estate |
|
|
4,564,625 |
|
|
|
4,550,376 |
|
Distributions to preferred stockholders |
|
|
(1,994,312 |
) |
|
|
(1,936,617 |
) |
Gain on disposal of assets |
|
|
— |
|
|
|
(29,542 |
) |
Gain on involuntary conversion of assets |
|
|
(16,476 |
) |
|
|
— |
|
FFO attributable to common stockholders and unitholders |
|
|
3,941,351 |
|
|
|
1,773,273 |
|
Amortization |
|
|
13,686 |
|
|
|
14,696 |
|
ESOP and stock - based compensation |
|
|
260,463 |
|
|
|
420,161 |
|
Unrealized loss (gain) on hedging activities |
|
|
442,464 |
|
|
|
(962,263 |
) |
Adjusted FFO attributable to common stockholders and unitholders |
|
$ |
4,657,964 |
|
|
$ |
1,245,867 |
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic |
|
|
18,635,004 |
|
|
|
17,107,820 |
|
|
|
|
|
|
|
|
Weighted average number of non-controlling units |
|
|
825,188 |
|
|
|
1,133,720 |
|
|
|
|
|
|
|
|
Weighted average number of shares and units outstanding, basic |
|
|
19,460,192 |
|
|
|
18,241,540 |
|
|
|
|
|
|
|
|
FFO per common share and unit |
|
$ |
0.20 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
Adjusted FFO per common share and unit |
|
$ |
0.24 |
|
|
$ |
0.07 |
|
EBITDA. We believe that excluding the effect of non-operating expenses and non-cash charges, and the portion of those items related to unconsolidated entities, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrued directly to shareholders.
Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or benefit, (4) depreciation and amortization, (5) impairment of long-lived assets or investments, (6) gains and losses on disposal and/or sale of assets, (7) gains and losses on involuntary conversions of assets, (8) unrealized gains and losses on derivative instruments not included in other comprehensive income, (9) loss on early debt extinguishment, (10) Paycheck Protection Program (PPP) debt forgiveness, (11) gain on exercise of development right, (12) corporate general and administrative expense, and (13) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control. We believe Hotel EBITDA provides investors with supplemental information on the on-going operational performance of our hotels and the effectiveness of third-party management companies operating our business on a property-level basis.
The following is a reconciliation of net income (loss) to Hotel EBITDA for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2023 |
|
|
March 31, 2022 |
|
Net income (loss) |
|
$ |
1,387,514 |
|
|
$ |
(810,944 |
) |
Interest expense |
|
|
4,113,597 |
|
|
|
5,713,205 |
|
Interest income |
|
|
(146,665 |
) |
|
|
(24,448 |
) |
Income tax provision |
|
|
15,182 |
|
|
|
9,654 |
|
Depreciation and amortization |
|
|
4,578,311 |
|
|
|
4,565,072 |
|
EBITDA |
|
|
9,947,939 |
|
|
|
9,452,539 |
|
PPP loan forgiveness |
|
|
(275,494 |
) |
|
|
— |
|
Gain on disposal of assets |
|
|
— |
|
|
|
(29,542 |
) |
Gain on involuntary conversion of assets |
|
|
(16,476 |
) |
|
|
— |
|
Subtotal |
|
|
9,655,969 |
|
|
|
9,422,997 |
|
Corporate general and administrative |
|
|
1,980,765 |
|
|
|
1,514,027 |
|
Unrealized loss (gain) on hedging activities |
|
|
442,464 |
|
|
|
(962,263 |
) |
Hotel EBITDA |
|
$ |
12,079,198 |
|
|
$ |
9,974,761 |
|
38
Sources and Uses of Cash
Our principal sources of cash are cash from hotel operations, proceeds from the sale of common and preferred stock, proceeds from the sale of secured and unsecured notes, proceeds of mortgage and other debt and hotel property sales. Our principal uses of cash are acquisitions of hotel properties, capital expenditures, debt service and balloon maturities, operating costs, corporate expenses and dividends. As of March 31, 2023, we had approximately $23.4 million of unrestricted cash and $8.6 million of restricted cash.
Operating Activities. Our net cash flow provided by operating activities for the three months ended March 31, 2023 was approximately $10.0 million generally consisting of net cash flow provided by hotel operations. The positive cash flow from operations during the quarter and increase from the prior year was due to the increase in occupancy at our hotels as a result of increases in leisure transient, small group and corporate business travel. Cash used in or provided by operating activities generally consists of the cash flow from hotel operations, offset by the interest portion of our debt service, corporate expenses and positive or negative changes in working capital.
Investing Activities. Our cash used in investing activities for the three months ended March 31, 2023, was approximately $1.1 million. Of this amount approximately $1.5 million was related to capital expenditures for improvements and additions to hotel properties. There were also insurance proceeds related to involuntary conversions of approximately $0.4 million.
Financing Activities. During the three months ended March 31, 2023, the Company and Operating Partnership made principal payments on its mortgages of approximately $1.9 million, payments on its unsecured notes of approximately $0.1 million, payments on deferred financing costs of approximately $0.1 million and paid preferred dividends of approximately $2.0 million.
Capital Expenditures
We intend to maintain all our hotels, including any hotel we acquire in the future, in good repair and condition, in conformity with applicable laws and regulations and, when applicable, with franchisor’s standards. Routine capital improvements are determined through the annual budget process over which we maintain approval rights, and which are implemented or administered by our management company.
From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotel, such as guestrooms, meeting space and restaurants, in order to better compete with other hotels in our markets. In addition, we may be required by one or more of our franchisors to complete a property improvement program (“PIP”) in order to bring the hotel up to the franchisor’s standards. Generally, we expect to fund renovations and improvements out of working capital, including restricted cash, proceeds of mortgage debt or equity offerings.
Historically, we have aimed to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue. In 2020, we postponed all major non-essential capital expenditures. As travel demand returned and occupancy, and RevPAR gradually increased, we increased the level of capital expenditures. We expect total capital expenditures for 2023 to be approximately $7.3 million.
We expect capital expenditures for the recurring replacement or refurbishment of furniture, fixtures and equipment at our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels. Except as temporarily provided through loan modifications and forbearance agreements, we deposit an amount equal to 4.0% of gross revenue for The DeSoto, the Hotel Ballast Wilmington, Tapestry Collection by Hilton, the DoubleTree Resort by Hilton Hollywood Beach, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree by Hilton Laurel, The Whitehall and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport on a monthly basis.
Liquidity and Capital Resources
As of March 31, 2023, we had total cash of approximately $32.0 million. During the three months ended March 31, 2023, we generated cash, cash equivalents and restricted cash of approximately $4.6 million. We expect that our cash on hand combined with our cash flow from our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of our mortgage debt).
On May 4, 2023, we secured a $10.0 million mortgage loan on the DoubleTree by Hilton Laurel hotel with Citi Real Estate Funding Inc. Pursuant to the loan documents, the loan has a maturity date of May 6, 2028; carries a fixed rate of interest of 7.35%;
39
required monthly payments of interest only; and cannot be prepaid until the last four months of the loan term. We used a portion of the proceeds to repay the existing first mortgage on the hotel and will use the balance of the proceeds for general corporate purposes.
As of the date of this report, we were current on all loan payments on all other mortgages per the terms of our mortgage agreements, as amended. We were in compliance with all loan covenants except the Debt Service Coverage Requirement (“DSCR”) covenant under the mortgage secured by the DoubleTree by Hilton Philadelphia Airport. We anticipate receiving a waiver from the lender of the mortgage on the DoubleTree by Hilton Philadelphia Airport. If we are unable to obtain a waiver, we may be required to reduce the outstanding balance with a prepayment of up to approximately $1.6 million per the terms of the loan agreement.
In October 2023, the mortgage on the DoubleTree by Hilton Philadelphia Airport matures. We intend to refinance the mortgage at the level of the existing indebtedness or request an extension at existing terms.
We intend to continue to invest in hotel properties as suitable opportunities arise. The success of our acquisition strategy depends, in part, on our ability to access additional capital through other sources, which we expect to be limited as a result of the continuing impact of the COVID-19 pandemic. There can be no assurance that we will continue to make investments in properties that meet our investment criteria or have access to capital during this period. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.
Over the long term, we expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment, investments in new joint ventures and debt maturities, and the retirement of maturing mortgage debt, through net proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited partnership interest in our Operating Partnership, secured and unsecured borrowings, the selective disposition of non-core assets, and cash on hand. We remain committed to a flexible capital structure and strive to maintain prudent debt leverage.
Financial Covenants
Mortgage Loans
Our mortgage loan agreements contain various financial covenants directly related to the financial performance of the collateralized properties. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, disruption caused by renovation activity, major weather disturbances, general economic conditions as well as the effects of the ongoing global pandemic.
As described in “Liquidity and Capital Resources”, as of March 31, 2023, we failed to meet certain financial covenants under the mortgage secured by the DoubleTree by Hilton Philadelphia Airport. We anticipate receiving a waiver from the lender of the mortgage on the DoubleTree by Hilton Philadelphia Airport.
Certain of our loan agreements also include financial covenants that trigger a “cash trap” requiring substantially all the revenue generated by the hotel to be deposited directly into a lockbox account and swept into a cash management account for the benefit of the lender until the property meets the criteria in the loan agreement for exiting the “cash trap”.
Dividend Policy
In March 2020, with the onset of the COVID-19 pandemic, we announced that the record date for the dividends on the Company’s Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, originally set for March 31, 2020, with a payment date of April 15, 2020, had been indefinitely deferred. We may not make distributions with respect to any shares of our common stock, unless and until full cumulate distributions on the outstanding preferred stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside.
On January 24, 2023, we announced that we will resume quarterly distributions to holders of our preferred stock and set a record date of February 28, 2023 with a payment date of March 15, 2023 for the preferred distribution declared in January 2020.
On April 24, 2023, we announced the declaration of another quarterly distribution to holders of our preferred stock with a record date of May 31, 2023 and a payment date of June 15, 2023.
As of March 31, 2023, the amount of cumulative unpaid dividends on our outstanding preferred shares as approximately $23.9 million. We expect that any reduction in the level of cumulative unpaid distributions will be made in the form of a series of special distributions. The amount, timing and frequency of distributions will be authorized by our board of directors and based upon a variety of factors deemed relevant by the directors. No assurance can be given that the distribution policy will not change in the future.
40
Off-Balance Sheet Arrangements
None.
Inflation
We generate revenues primarily from lease payments from our MHI TRS Entities and net income from the operations of our MHI TRS Entities. Therefore, we rely primarily on the performance of the individual properties and the ability of the management company to increase revenues and to keep pace with inflation. Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of the management company to raise room rates.
Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates that differ from the general rate of inflation.
Geographic Concentration and Seasonality
Our hotels are located in Florida, Georgia, Maryland, North Carolina, Pennsylvania, Texas and Virginia. As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses, local stay-at-home and business closure orders, and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.
The operations of our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as is October. The periods from mid-November through mid-February are traditionally slow with the exception of hotels located in certain markets, namely Florida and Texas, which typically experience significant room demand during this period.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liability at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. It is possible that the actual amounts may differ significantly from these estimates and assumptions. It is also possible that actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgment on an ongoing basis, based on information that is available to us, our business and industry experience, and various other matters that we believe are reasonable and appropriate for consideration under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes in these critical accounting policies or the methods or assumptions we apply.
Recent Accounting Pronouncements
For a summary of recently adopted and newly issued accounting pronouncements, please refer to the New Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.