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

Show all filings for SOTHERLY HOTELS INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SOTHERLY HOTELS INC.


7-Nov-2013

Quarterly Report


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

Overview

Sotherly Hotels Inc. is 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. Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP, formerly MHI Hospitality, L.P. 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 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 September 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 78.3% 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.


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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.

Results of Operations

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



                                Three months ended             Three months ended             Nine months ended              Nine months ended
                                September 30, 2013             September 30, 2012             September 30, 2013             September 30, 2012
Occupancy %                                    69.0 %                         71.0 %                         69.5 %                         71.2 %
ADR                            $             114.00           $             112.81           $             119.02           $             114.73
RevPAR                         $              78.66           $              80.15           $              82.68           $              81.67

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

Revenue. Total revenue for the three months ended September 30, 2013 decreased approximately $0.3 million, or 1.4%, to approximately $21.5 million compared to total revenue of approximately $21.8 million for the three months ended September 30, 2012. Increases in revenue at our properties in Wilmington, North Carolina; Savannah, Georgia; Raleigh, North Carolina; and Jeffersonville, Indiana were offset by decreases in revenue at the remainder of our properties.

Room revenue decreased approximately $0.3 million, or 1.9%, to approximately $15.3 million for the three months ended September 30, 2013 compared to room revenue of approximately $15.6 million for the three months ended September 30, 2012. The decrease in room revenue for the three months ended September 30, 2013 resulted from a 2.9% decrease in occupancy which was offset by a 1.1% increase in ADR 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 a significant increase in room revenue. During the three months ended September 30, 2013, our property in Tampa, Florida did not experience the benefit of high demand that it did in the three months ended September 30, 2012 from the Republican National Convention. All our properties were affected by the decline in demand from federal government and military related travel as a result of the sequester and impending shutdown of the federal government.

Food and beverage revenues remained at approximately $5.1 million for the three months ended September 30, 2013 compared to food and beverage revenues for the three months ended September 30, 2012. Increases in food and beverage revenue at our properties in Wilmington, North Carolina; Raleigh, North Carolina; Philadelphia, Pennsylvania and Jacksonville, Florida were offset by decreases in banqueting revenue at our other properties.

Revenue from other operating departments decreased approximately $0.1 million, or 6.5%, to approximately $1.0 million for the three months ended September 30, 2013 compared to revenue from other operating departments of approximately $1.1 million for the three months ended September 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 $16.2 million for the three months ended September 30, 2013, a decrease of approximately $0.2 million, or 1.4%, compared to total hotel operating expenses of approximately $16.4 million for the three months ended September 30, 2012.


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Rooms expense for the three months ended September 30, 2013 decreased approximately $0.1 million, or 1.9%, to approximately $4.3 million compared to rooms expense for the three months ended September 30, 2012 of approximately $4.4 million.

Food and beverage expenses for the three months ended September 30, 2013 decreased approximately $0.1 million, or 2.8%, to approximately $3.4 million compared to food and beverage expenses of approximately $3.5 million for the three months ended September 30, 2012. Most of the decrease in food and beverage expense was related to cost control measures which enabled us to increase food and beverage margins from 31.8% to 34.4%.

Indirect expenses at our wholly-owned properties for the three months ended September 30, 2013 decreased approximately $0.1 million, or 0.5%, to approximately $8.4 million compared to indirect expenses of approximately $8.5 million for the three months ended September 30, 2012. 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.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2013 decreased approximately $0.2 million, or 5.2%, to $2.0 million compared to depreciation and amortization of approximately $2.2 million for the three months ended September 30, 2012.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended September 30, 2013 decreased approximately $0.1 million, or 11.4%, to approximately $0.9 million compared to general and administrative expenses of approximately $1.0 million for the three months ended September 30, 2012. The decrease mostly relates to higher legal costs in the prior period.

Interest Expense. Interest expense for the three months ended September 30, 2013 increased approximately $1.5 million, or 59.6%, to approximately $3.9 million compared to interest expense of approximately $2.4 million for the three months ended September 30, 2012. Most of the increase related to the premiums paid of approximately $0.9 million to redeem the remaining outstanding shares of Preferred Stock and the related write-off of unamortized issuance costs of approximately $0.5 million. In addition, we realized additional cost related to the write-off of unamortized loan costs of the mortgage on the DoubleTree by Raleigh Brownstone-University of approximately $0.2 million. The costs offset a decrease in other interest expense 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 September 30, 2013 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the three months ended September 30, 2013, we realized a net loss of approximately $0.1 million related to our 25.0% interest compared to net loss of approximately $0.2 million for the three months ended September 30, 2012. For the three months ended September 30, 2013, the hotel reported occupancy of 73.9%, ADR of $120.57 and RevPAR of $89.11. This compares with results reported by the hotel for the three months ended September 30, 2012 of occupancy of 72.4%, ADR of $110.29 and RevPAR of $79.89.

Unrealized Gain (Loss) on Warrant Derivative. The Company recognized an unrealized loss of approximately $0.3 million on the value of the warrant derivative issued in April 2011 to the purchasers of Preferred Stock for the three months ended September 30, 2013 compared to an unrealized loss of approximately $1.7 million for the three months ended September 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 September 30, 2013 increased approximately $0.1 million to approximately $0.1 million compared to an income tax provision of approximately $0.0 million for the three months ended September 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 September 30, 2013 compared to the three months ended September 30, 2012.

Net Loss. We realized a net loss for the three months ended September 30, 2013 of approximately $2.1 million which remained constant compared to the three months ended September 30, 2012 as a result of the operating results discussed above.

Comparison of the Nine months ended September 30, 2013 to the Nine months ended September 30, 2012

Revenue. Total revenue for both the nine months ended September 30, 2013 and the same period in 2012 remained at approximately $66.9 million. Increases in revenue at our properties in Wilmington and Raleigh, North Carolina; Philadelphia, Pennsylvania and Jeffersonville, Indiana were offset by decreases in revenue at our other properties.


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Room revenue increased approximately $0.4 million, or 0.9%, to approximately $47.7 million for the nine months ended September 30, 2013 compared to room revenue of approximately $47.3 million for the nine months ended September 30, 2012. The increase in room revenue for the nine months ended September 30, 2013 resulted from a 3.7% increase in ADR which was offset by a 2.4% decrease in occupancy as compared to the same period in 2012. Our property in Raleigh, North Carolina continues to experience a significant increase in room revenue as a result of the rebranding to a DoubleTree by Hilton.

Food and beverage revenues decreased approximately $0.3 million, or 1.8%, to approximately $15.9 million for the nine months ended September 30, 2013 compared to food and beverage revenues of approximately $16.2 million for the nine months ended September 30, 2012. Decreases in food and beverage revenue at our properties in Savannah, Georgia; Hampton, Virginia and Tampa, Florida were partially offset by increases in banqueting revenue at our property in Raleigh, North Carolina.

Revenue from other operating departments decreased approximately $0.1 million, or 3.6%, to approximately $3.3 million for the nine months ended September 30, 2013 compared to revenue from other operating departments of approximately $3.4 million for the nine months ended September 30, 2012.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, were approximately $48.5 million for the nine months ended September 30, 2013, a decrease of approximately $0.6 million, or 1.2%, compared to total hotel operating expenses of approximately $49.1 million for the nine months ended September 30, 2012.

Rooms expense for the nine months ended September 30, 2013 increased approximately $0.1 million, or 0.6%, to approximately $12.9 million compared to rooms expense of approximately $12.8 million for the nine months ended September 30, 2012.

Food and beverage expenses for the nine months ended September 30, 2013 decreased approximately $0.5 million, or 5.0%, to approximately $10.3 million compared to food and beverage expenses of approximately $10.8 million for the nine months ended September 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 33.5% to 35.6%.

Indirect expenses at our wholly-owned properties for the nine months ended September 30, 2013 decreased approximately $0.1 million, or 0.5%, to approximately $25.0 million, compared to indirect expenses of approximately $25.1 million for the nine months ended September 30, 2012. 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.

Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30, 2013 decreased approximately $0.4 million, or 6.2%, to $6.1 million compared to depreciation and amortization of approximately $6.5 million for the nine months ended September 30, 2012.

Corporate General and Administrative. Corporate general and administrative expenses for both the nine months ended September 30, 2013 and the same period in 2012 remained constant at approximately $3.1 million.

Interest Expense. Interest expense for the nine months ended September 30, 2013 decreased approximately $1.1 million, or 11.0%, to approximately $8.9 million compared to interest expense of approximately $10.0 million for the nine months ended September 30, 2012. Most of the decrease related to a lower effective interest rate on our outstanding debt.

Equity Income in Joint Venture. Equity income in joint venture for the nine months ended September 30, 2013 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the nine months ended September 30, 2013, our 25.0% share of the net income of the hotel increased approximately $0.4 million to approximately $0.4 million compared to net income of approximately $0.0 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, the hotel reported occupancy of 82.7%, ADR of $157.32 and RevPAR of $130.12. This compares with results reported by the hotel for the nine months ended September 30, 2012 of occupancy of 80.1%, ADR of $142.78 and RevPAR of $114.41.

Unrealized Loss on Warrant Derivative. The Company recognized an unrealized loss of approximately $3.0 million on the value of the warrant derivative issued in April 2011 to the purchasers of Preferred Stock for the nine months ended September 30, 2013 as well as an unrealized loss of approximately $4.3 million for the nine months ended September 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 nine months ended September 30, 2013 increased approximately $0.4 million, or 34.7%, to approximately $1.5 million compared to an income tax provision of approximately $1.1 million for the nine months ended September 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 nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.


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Net Loss. The net loss for the nine months ended September 30, 2013 decreased approximately $3.4 million, or 47.8%, to approximately $3.8 million as compared to a net loss of approximately $7.2 million for the nine months ended September 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 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.


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The following is a reconciliation of net loss to FFO and Adjusted FFO for the three months and nine months ended September 30, 2013 and 2012:

                                       Three Months         Three Months          Nine months          Nine months
                                           Ended                Ended                ended                ended
                                       September 30,        September 30,        September 30,        September 30,
                                           2013                 2012                 2013                 2012
Net loss                              $    (2,117,808 )    $    (2,095,198 )    $    (3,772,526 )    $    (7,221,854 )
Depreciation and amortization               2,038,000            2,150,007            6,121,871            6,525,561
Equity in depreciation and
amortization of joint venture                 140,238              135,671              408,727              456,413

FFO                                   $        60,430      $       190,480      $     2,758,072      $      (239,880 )
Unrealized (gain)/loss on hedging
activities(1)                                 (25,734 )              5,308              (71,309 )             42,435
Unrealized (gain)/loss on warrant
derivative                                    340,750            1,659,750            3,020,960            4,344,650
(Increase)/decrease in deferred
income taxes                                   93,771               26,540            1,411,523            1,194,851
Loss on early extinguishment of
debt(2)                                     1,598,556                   -             1,935,692            1,982,184

Adjusted FFO                          $     2,067,773      $     1,882,078      $     9,054,938      $     7,324,240

(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.

Our 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 loss to Hotel EBITDA for the three months and nine months ended September 30, 2013 and 2012:

                                   Three Months          Three Months           Nine months           Nine months
                                       Ended                 Ended                 ended                 ended
                                   September 30,         September 30,         September 30,         September 30,
                                       2013                  2012                  2013                  2012
Net income (loss)                 $    (2,117,808 )     $    (2,095,198 )     $    (3,772,526 )     $    (7,221,854 )
Interest expense                        3,899,128             2,442,620             8,912,319            10,014,982
Interest income                            (3,579 )              (4,133 )             (11,139 )             (11,985 )
Income tax provision (benefit)             93,962                27,979             1,468,835             1,090,700
Depreciation and amortization           2,038,000             2,150,007             6,121,871             6,525,561
Equity in (earnings)/loss of
joint venture                             122,637               162,463              (434,479 )             (15,251 )
Unrealized (gain)/loss on
warrant derivative                        340,750             1,659,750             3,020,960             4,344,650
. . .
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