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SOHO > SEC Filings for SOHO > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for SOTHERLY HOTELS INC.

Form 10-Q for SOTHERLY HOTELS INC.


7-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue opportunities in the full-service, primarily upper-upscale and upscale segments of the hotel industry located in primary and secondary markets in the Mid-Atlantic and Southern United States. We commenced operations in December 2004 when we completed our initial public offering (the "IPO") and thereafter consummated the acquisition of the initial properties.


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Our hotel portfolio currently consists of ten full-service, primarily upper-upscale and upscale hotels, with 2,424 rooms which operate under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. Nine of these hotels, totaling 2,113 rooms, are 100% owned by subsidiaries of the Operating Partnership. We also own a 25.0% indirect noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle. As of June 30, 2013, we owned the following hotel properties:

                                       Number
Property                              of Rooms           Location        Date of Acquisition   Chain Designation
Wholly-owned
Crowne Plaza Hampton Marina                 173     Hampton, VA          April 24, 2008        Upscale
Crowne Plaza Jacksonville
Riverfront                                  292     Jacksonville, FL     July 22, 2005         Upscale
Crowne Plaza Tampa Westshore                222     Tampa, FL            October 29, 2007      Upscale
DoubleTree by Hilton
Brownstone-University                       190     Raleigh, NC          December 21, 2004     Upscale
Hilton Philadelphia Airport                 331     Philadelphia, PA     December 21, 2004     Upper Upscale
Hilton Savannah DeSoto                      246     Savannah, GA         December 21, 2004     Upper Upscale
Hilton Wilmington Riverside                 272     Wilmington, NC       December 21, 2004     Upper Upscale
Holiday Inn Laurel West                     207     Laurel, MD           December 21, 2004     Upper Mid-Scale
Sheraton Louisville Riverside               180     Jeffersonville, IN   September 20, 2006    Upper Upscale

                                          2,113
Joint Venture Property
Crowne Plaza Hollywood Beach
Resort(1)                                   311     Hollywood, FL        August 9, 2007        Upscale

Total                                     2,424

(1) We own this hotel through a joint venture in which we have a 25.0% interest.

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 77.9% interest in our Operating Partnership, 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, we cannot operate hotels. Therefore, our wholly-owned hotel properties are leased to MHI Hospitality TRS, LLC (our "TRS Lessee"), which then engages an eligible independent hotel management company to operate the hotels under a management contract. Our TRS Lessee has engaged MHI Hotels Services to manage our wholly-owned hotels. Our TRS Lessee, and its parent, MHI Hospitality TRS Holding, Inc., are consolidated into 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 and room supplies), 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.


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Results of Operations

The following table illustrates the key operating metrics for each of the three
months and six months ended June 30, 2013 and 2012 for our nine wholly-owned
properties.



                                      Three months ended           Three months ended           Six months ended           Six months ended
                                        June 30, 2013                June 30, 2012               June 30, 2013              June 30, 2012
Occupancy %                                          73.7 %                       76.4 %                     69.7 %                     71.2 %
ADR                                  $             128.02         $             120.88         $           121.54         $           115.70
RevPAR                               $              94.40         $              92.35         $            84.72         $            82.43

Comparison of the Three Months Ended June 30, 2013 to the Three Months Ended June 30, 2012

Revenue. Total revenue for the three months ended June 30, 2013 increased approximately $0.2 million, or 0.6%, to approximately $25.3 million compared to total revenue of approximately $25.1 million for the three months ended June 30, 2012. Increases in revenue at our properties in Raleigh, North Carolina; Philadelphia, Pennsylvania; and Jeffersonville, Indiana partially offset decreases in revenue at the remainder of our properties.

Room revenue increased approximately $0.4 million, or 2.2%, to approximately $18.2 million for the three months ended June 30, 2013 compared to room revenue of approximately $17.8 million for the three months ended June 30, 2012. The increase in room revenue for the three months ended June 30, 2013 resulted from a 5.9% increase in ADR which was offset by a 3.5% decrease in occupancy as compared to the same period in 2012. Our property in Raleigh, North Carolina continues to experience a significant increase as a result of the rebranding to a DoubleTree by Hilton. Our property in Jeffersonville, Indiana also experienced significant increases in room revenue related to the Kentucky Derby and Thunder Over Louisville events.

Food and beverage revenues decreased approximately $0.2 million, or 3.3%, to approximately $6.0 million for the three months ended June 30, 2013 compared to food and beverage revenues of approximately $6.2 million for the three months ended June 30, 2012. Decreases in food and beverage revenue at our properties in Wilmington, North Carolina; Savannah, Georgia; Tampa, Florida; and Hampton, Virginia were partially offset by increases in banqueting revenue at our properties in Raleigh, North Carolina and Philadelphia, Pennsylvania.

Revenue from other operating departments decreased approximately $0.1 million, or 4.3%, to approximately $1.1 million for the three months ended June 30, 2013 compared to revenue from other operating departments of approximately $1.2 million for the three months ended June 30, 2012.

Hotel Operating Expenses.Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $17.1 million for the three months ended June 30, 2013, a decrease of approximately $0.2 million or 0.7% compared to total hotel operating expenses of approximately $17.3 million for the three months ended June 30, 2012.

Rooms expense for the three months ended June 30, 2013 increased approximately $0.1 million, or 2.1%, to approximately $4.6 million compared to rooms expense for the three months ended June 30, 2012 of approximately $4.5 million.

Food and beverage expenses for the three months ended June 30, 2013 decreased approximately $0.3 million, or 6.8%, to approximately $3.7 million compared to food and beverage expenses of approximately $4.0 million for the three months ended June 30, 2012. Most of the decrease in food and beverage expense was directly related to the decrease in food and beverage revenues. Despite the decrease in food and beverage revenue, cost control measures enabled us to increase food and beverage margins from 36.0% to 38.2%.

Indirect expenses at our wholly-owned properties for the three months ended June 30, 2013 increased approximately $0.1 million, or 0.6%, to approximately $8.8 million compared to indirect expenses of approximately $8.7 million for the three months ended June 30, 2012. While franchise fees increased directly in proportion to the increase in revenue, decreased energy and utility expenses due to lower energy prices, lower management fees due to a lower incentive management fee, and lower real estate taxes offset increases in other indirect expenses. Repairs and maintenance, sales and marketing expenses, insurance, personal property taxes as well as general and administrative costs at the property level are also included in indirect expenses.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended June 30, 2013 decreased approximately $0.2 million, or 7.5%, to $2.0 million compared to depreciation and amortization of approximately $2.2 million for the three months ended June 30, 2012.


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Corporate General and Administrative. Corporate general and administrative expenses for the three months ended June 30, 2013 increased approximately $0.1 million, or 16.7%, to approximately $1.1 million compared to general and administrative expenses of approximately $1.0 million for the three months ended June 30, 2012. Costs relating to the company name change as well as severance costs for a senior-level employee contributed to the increase.

Interest Expense. Interest expense for the three months ended June 30, 2013 decreased approximately $2.0 million, or 45.5%, to approximately $2.3 million compared to interest expense of approximately $4.3 million for the three months ended June 30, 2012. Most of the decrease related to the premium paid of approximately $0.8 million to redeem approximately 45% of the outstanding shares of Preferred Stock and the related write-off of unamortized issuance costs of approximately $0.7 million in the prior period. The remaining decrease related to a lower effective interest rate on our outstanding debt.

Equity Income (Loss) in Joint Venture. Equity income in joint venture for the three months ended June 30, 2013 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the three months ended June 30, 2013, we realized net income of approximately $0.1 million related to our 25.0% interest compared to net loss of approximately $0.1 million for the three months ended June 30, 2012. For the three months ended June 30, 2013, the hotel reported occupancy of 85.8%, ADR of $138.54 and RevPAR of $118.83. This compares with results reported by the hotel for the three months ended June 30, 2012 of occupancy of 80.5%, ADR of $133.47 and RevPAR of $107.45.

Unrealized Gain (Loss) on Warrant Derivative. The Company recognized an unrealized gain of approximately $0.1 million on the value of the warrant derivative issued in April 2011 to the purchasers of Preferred Stock for the three months ended June 30, 2013 compared to an unrealized loss of approximately $1.5 million for the three months ended June 30, 2012. The unrealized gains and losses are mostly attributable to the change in the market price of our common stock.

Income Taxes. The income tax provision for the three months ended June 30, 2013 increased approximately $0.1 million or 16.0% to approximately $1.1 million compared to an income tax provision of approximately $1.0 million for the three months ended June 30, 2012. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

Net Income (Loss) Attributable to the Company. The Company realized net income for the three months ended June 30, 2013 of approximately $1.3 million compared to a net loss of approximately $1.7 million for the three months ended June 30, 2012 as a result of the operating results discussed above.

Comparison of the Six Months Ended June 30, 2013 to the Six Months Ended June 30, 2012

Revenue. Total revenue for the six months ended June 30, 2013 increased approximately $0.3 million, or 0.7%, to approximately $45.4 million compared to total revenue of approximately $45.1 million for the six months ended June 30, 2012. Each of our properties experienced increases in revenue except our Laurel, Maryland; Jacksonville, Florida; Tampa, Florida; and Hampton, Virginia properties.

Room revenue increased approximately $0.7 million, or 2.2%, to approximately $32.4 million for the six months ended June 30, 2013 compared to room revenue of approximately $31.7 million for the six months ended June 30, 2012. The increase in room revenue for the six months ended June 30, 2013 resulted from a 5.1% increase in ADR which was offset by a 2.2% decrease in occupancy as compared to the same period in 2012. Our property in Raleigh, North Carolina continues to experience a significant increase as a result of the rebranding to a DoubleTree by Hilton.

Food and beverage revenues decreased approximately $0.4 million, or 3.1%, to approximately $10.8 million for the six months ended June 30, 2013 compared to food and beverage revenues of approximately $11.2 million for the six months ended June 30, 2012. Decreases in food and beverage revenue at our properties in Savannah, Georgia and Tampa, Florida were offset by increases in banqueting revenue at our property in Raleigh, North Carolina.

Revenue from other operating departments decreased approximately $0.1 million, or 2.2%, to approximately $2.2 million for the six months ended June 30, 2013 compared to revenue from other operating departments of approximately $2.3 million for the six months ended June 30, 2012.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $32.3 million for the six months ended June 30, 2013, a decrease of approximately $0.4 million, or 1.1%, compared to total hotel operating expenses of approximately $32.7 million for the six months ended June 30, 2012.

Rooms expense for the six months ended June 30, 2013 increased approximately $0.2 million, or 1.9%, to approximately $8.6 million compared to rooms expense of approximately $8.4 million for the six months ended June 30, 2012.


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Food and beverage expenses for the six months ended June 30, 2013 decreased approximately $0.5 million, or 6.0%, to approximately $6.9 million compared to food and beverage expenses of approximately $7.4 million for the six months ended June 30, 2012. Most of the decrease in food and beverage expense was directly related to the decrease in food and beverage revenues. Despite the decrease in food and beverage revenue, cost control measures enabled us to increase food and beverage margins from 34.2% to 36.1%.

Indirect expenses at our wholly-owned properties for the six months ended June 30, 2013 remained constant at approximately $16.6 million compared to indirect expenses for the six months ended June 30, 2012. While franchise fees increased directly in proportion to the increase in revenue, decreased energy and utility expenses due to lower energy prices, lower management fees due to a lower incentive management fee, and lower real estate taxes offset those and other increases in other indirect expenses. Repairs and maintenance, sales and marketing expenses, insurance, personal property taxes as well as general and administrative costs at the property level are also included in indirect expenses.

Depreciation and Amortization. Depreciation and amortization expense for the six months ended June 30, 2013 decreased approximately $0.3 million, or 6.7%, to $4.1 million compared to depreciation and amortization of approximately $4.4 million for the six months ended June 30, 2012.

Corporate General and Administrative. Corporate general and administrative expenses for the six months ended June 30, 2013 increased approximately $0.1 million, or 5.9%, to approximately $2.2 million compared to corporate and general administrative expenses of approximately $2.1 million the six months ended June 30, 2012.

Interest Expense. Interest expense for the six months ended June 30, 2013 decreased approximately $2.6 million, or 33.8%, to approximately $5.0 million compared to interest expense of approximately $7.6 million for the six months ended June 30, 2012. Most of the decrease related to the write-off of unamortized loan costs in conjunction with the extinguishment of the credit facility of approximately $0.5 million, the premium paid of approximately $0.8 million to redeem approximately 45% of the outstanding shares of Preferred Stock and the related write-off of unamortized issuance costs of approximately $0.7 million in the prior period which were offset by the premium paid to redeem 1,902 shares of Preferred Stock of approximately $0.2 million and the write-off of unamortized issuance costs related to the redeemed shares of approximately $0.1 million in the current period. The remaining decrease related to a lower effective interest rate on our outstanding debt.

Equity Income in Joint Venture. Equity income in joint venture for the six months ended June 30, 2013 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the six months ended June 30, 2013, our 25.0% share of the net income of the hotel increased approximately $0.4 million, or 213.5%, to approximately $0.6 million compared to net income of approximately $0.2 million for the six months ended June 30, 2012. For the six months ended June 30, 2013, the hotel reported occupancy of 87.2%, ADR of $173.14 and RevPAR of $150.97. This compares with results reported by the hotel for the six months ended June 30, 2012 of occupancy of 84.0%, ADR of $156.94 and RevPAR of $131.85.

Unrealized Loss on Warrant Derivative. The Company recognized an unrealized loss of approximately $2.7 million on the value of the warrant derivative issued in April 2011 to the purchasers of Preferred Stock for the six months ended June 30, 2013 as well as an unrealized loss of approximately the same amount for the six months ended June 30, 2012. The unrealized losses are mostly attributable to the change in the market price of our common stock.

Income Taxes. The income tax provision for the six months ended June 30, 2013 increased approximately $0.3 million, or 29.4%, to approximately $1.4 million compared to an income tax provision of approximately $1.1 million for the six months ended June 30, 2012. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

Net Loss Attributable to the Company. The net loss attributable to the Company for the six months ended June 30, 2013 decreased approximately $2.6 million, or 67.5%, to approximately $1.3 million as compared to a net loss of approximately $3.9 million for the six months ended June 30, 2012 as a result of the operating results discussed above.

Non-GAAP Financial Measures

We consider FFO, Adjusted FFO and Hotel EBITDA, all of which are non-GAAP financial measures, to be key supplemental measures of our performance and could be considered along with, not alternatives to, net income (loss) as a measure of our performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting principles ("GAAP") or amounts available for our 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 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


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with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, 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 for certain additional items that are not in NAREIT's definition of FFO, including any unrealized gain (loss) on its hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, aborted offering costs, costs associated with the departure of executive officers 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 indicative 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 and six months ended June 30, 2013 and 2012:

                                      Three Months          Three Months           Six Months            Six Months
                                          Ended                 Ended                 Ended                 Ended
                                      June 30, 2013         June 30, 2012         June 30, 2013         June 30, 2012
Net income (loss)                    $     1,701,050       $    (2,146,312 )     $    (1,654,717 )     $    (5,126,655 )
Depreciation and amortization              2,031,050             2,195,591             4,083,871             4,375,554
Equity in depreciation and
amortization of joint venture                133,387               182,930               268,489               320,742

FFO                                  $     3,865,487       $       232,209       $     2,697,643       $      (430,359 )
Unrealized (gain)/loss on hedging
activities(1)                                (18,252 )              22,446               (45,575 )              37,127
Unrealized (gain)/loss on warrant
derivative                                   (88,855 )           1,521,142             2,680,210             2,684,900
(Increase)/decrease in deferred
income taxes                               1,056,056               950,037             1,317,752             1,168,311
Loss on early extinguishment of
debt(2)                                           -              1,510,788               337,136             1,982,184

Adjusted FFO                         $     4,814,436       $     4,236,622       $     6,987,166       $     5,442,163

(1) Includes equity in unrealized loss on hedging activities of joint venture.

(2) Reflected in interest expense for the periods presented above.

Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding:
(1) interest expense, (2) interest income, (3) equity in the income or loss of equity investees, (4) unrealized gains and losses on derivative instruments not included in other comprehensive income, (5) gains and losses on disposal of assets, (6) realized gains and losses on investments, (7) impairment of long-lived assets or investments, (8) corporate general and administrative expense; (9) depreciation and amortization; and (10) 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 Company's calculation of Hotel EBITDA may be different from similar measures calculated by other REITs.


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The following is a reconciliation of net income (loss) to Hotel EBITDA for the three months and six months ended June 30, 2013 and 2012:

                                   Three Months          Three Months           Six Months            Six Months
                                       Ended                 Ended                 Ended                 Ended
                                   June 30, 2013         June 30, 2012         June 30, 2013         June 30, 2012
Net income (loss)                 $     1,701,050       $    (2,146,312 )     $    (1,654,717 )     $    (5,126,655 )
Interest expense                        2,332,644             4,283,732             5,013,191             7,572,362
Interest income                            (3,654 )              (3,169 )              (7,559 )              (7,852 )
Income tax provision (benefit)          1,111,818               958,146             1,374,873             1,062,721
Depreciation and amortization           2,031,050             2,195,591             4,083,871             4,375,554
. . .
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