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SOHO > SEC Filings for SOHO > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for SOTHERLY HOTELS INC.

Form 10-Q for SOTHERLY HOTELS INC.


6-Aug-2014

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 upscale and upper-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.


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Our hotel portfolio currently consists of twelve full-service, primarily upscale and upper-upscale hotels, with 3,009 rooms which primarily operate under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. Eleven of these hotels, totaling 2,698 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, 2014, 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 Houston Downtown                        259     Houston, TX          November 13, 2013          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
Georgian Terrace                                     326     Atlanta, GA          March 27, 2014           Independent
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

                                                   2,698
Joint Venture Property
Crowne Plaza Hollywood Beach Resort(1)               311     Hollywood, FL        August 9, 2007             Upscale

Total                                              3,009

(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 79.0% 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 tables illustrate the key operating metrics for each of the three and six months ended June 30, 2014 and 2013 for our wholly-owned properties during each respective reporting period ("actual" properties) as well as the key operating metrics for the nine wholly-owned properties that were under our control during all of 2013 and the three months ended June 30, 2014 ("same-store" properties). Accordingly, the same-store data does not reflect the performance of the Crowne Plaza Houston Downtown, which was acquired in November 2013, or the Georgian Terrace, which was acquired in March 2014. Each table excludes performance data for the Crowne Plaza Hollywood Beach Resort, which was acquired through a joint venture and in which we have a 25.0% indirect interest.

                                               Three months ended       Three months ended       Six months ended       Six months ended
                                                 June 30, 2014            June 30, 2013           June 30, 2014          June 30, 2013
Actual Portfolio Metrics
Occupancy %                                                   77.1 %                   73.7 %                 72.5 %                 69.7 %
ADR                                           $             134.24     $             128.02     $           128.33     $           121.54
RevPAR                                        $             103.52     $              94.40     $            93.07     $            84.72
Same Store Portfolio Metrics
Occupancy %                                                   76.1 %                   73.7 %                 70.9 %                 69.7 %
ADR                                           $             133.37     $             128.02     $           125.80     $           121.54
RevPAR                                        $             101.47     $              94.40     $            89.21     $            84.72

Comparison of the Three Months Ended June 30, 2014 to the Three Months Ended June 30, 2013

Revenue. Total revenue for the three months ended June 30, 2014 increased approximately $11.0 million, or 43.9%, to approximately $36.3 million compared to total revenue of approximately $25.3 million for the three months ended June 30, 2013. Increases in revenue at our properties in Savannah, Georgia; Raleigh, North Carolina; Jacksonville, Florida; Jeffersonville, Indiana; Tampa, Florida, Hampton, Virginia; plus the newly acquired properties in Houston, Texas and Atlanta, Georgia, were offset by decreases in revenue at the three remaining wholly-owned properties.

Room revenue increased approximately $7.2 million, or 40.0%, to approximately $25.4 million for the three months ended June 30, 2014 compared to room revenue of approximately $18.2 million for the three months ended June 30, 2013. The increase in room revenue for the three months ended June 30, 2014 resulted mainly from the acquired properties in Houston, Texas and Atlanta, Georgia, accounting for an increase of approximately $5.9 million for the period. In addition, favorable results from our same-store properties reflected a 3.2% increase in occupancy, a 4.2% increase in ADR and a 7.5% increase in RevPAR, as compared to the same period in 2013. Our property in Raleigh, North Carolina continues to experience a significant increase as a result of the rebranding to a DoubleTree by Hilton. Our properties in Savannah, Georgia; Jacksonville, Florida; Jeffersonville, Indiana; and Tampa, Florida also experienced significant increases in room revenue, offset by decreases at our properties in Philadelphia, Pennsylvania, Wilmington, North Carolina and Laurel, Maryland.

Food and beverage revenues increased approximately $3.0 million, or 51.0%, to approximately $9.0 million for the three months ended June 30, 2014 compared to food and beverage revenues of approximately $6.0 million for the three months ended June 30, 2013. The increase in food and beverage revenues for the three months ended June 30, 2014 resulted principally from our recently acquired properties in Houston, Texas and Atlanta, Georgia, accounting for an increase of approximately $2.7 million for the period. Additional increases in food and beverage revenue at our properties in Savannah, Georgia; Tampa, Florida; Hampton, Virginia and Jacksonville, Florida were offset by decreases in banqueting revenue at our other properties.

Revenue from other operating departments increased approximately $0.8 million, or 69.4%, to approximately $1.9 million for the three months ended June 30, 2014 compared to revenue from other operating departments of approximately $1.1 million for the three months ended June 30, 2013.

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 $24.7 million for the three months ended June 30, 2014, an increase of approximately $7.6 million, or 44.4%, compared to total hotel operating expenses of approximately $17.1 million for the three months ended June 30, 2013. The increase in hotel operating expenses for the three months ended June 30, 2014 was substantially related to our recently acquired properties in Houston, Texas and Atlanta, Georgia, accounting for an increase of approximately $6.7 million in expenses for the three months ended June 30, 2014, coupled by an increase in hotel operating expenses at our same-store properties of approximately $0.9 million compared to the three months ended June 30, 2013.

Rooms expense for the three months ended June 30, 2014 increased approximately $1.7 million, or 37.6%, to approximately $6.3 million compared to rooms expense for the three months ended June 30, 2013 of approximately $4.6 million. The increase in rooms expense for the three months ended June 30, 2014 was substantially related to our recently acquired properties in Houston, Texas and Atlanta, Georgia, accounting for approximately $1.6 million of the increase.


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Food and beverage expenses for the three months ended June 30, 2014 increased approximately $2.2 million, or 60.8%, to approximately $5.9 million compared to food and beverage expenses of approximately $3.7 million for the three months ended June 30, 2013. The increase in food and beverage expenses for the three months ended June 30, 2014 was substantially related to our recently acquired properties in Houston, Texas and Atlanta, Georgia, which accounted for approximately $2.0 million of the increase.

Indirect expenses at our wholly-owned properties for the three months ended June 30, 2014 increased approximately $3.4 million, or 39.2%, to approximately $12.2 million compared to indirect expenses of approximately $8.8 million for the three months ended June 30, 2013. The increase in indirect expenses for the three months ended June 30, 2014 was substantially related to our recently acquired properties in Houston, Texas and Atlanta, Georgia, accounting for an increase of approximately $2.8 million in indirect expenses for the three months ended June 30, 2014.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended June 30, 2014 increased approximately $1.0 million, or 47.2%, to $3.0 million compared to depreciation and amortization of approximately $2.0 million for the three months ended June 30, 2013. The increase was mostly attributable to depreciation and amortization related to our properties in Houston, Texas and Atlanta, Georgia, which we acquired in November 2013 and March 2014, respectively.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended June 30, 2014 increased approximately $0.3 million, or 23.8%, to approximately $1.4 million compared to general and administrative expenses of approximately $1.1 million for the three months ended June 30, 2013. The increase primarily relates to additional legal and accounting fees.

Interest Expense. Interest expense for the three months ended June 30, 2014 increased approximately $1.6 million, or 68.3%, to approximately $3.9 million compared to interest expense of approximately $2.3 million for the three months ended June 30, 2013. The increase in interest expense for the three months ended June 30, 2014 was substantially related to the interest on the mortgage debt related to our recently acquired properties in Houston, Texas and Atlanta, Georgia, as well as the unsecured notes we issued in September 2013 offset by the interest on the cumulative redeemable preferred stock which was fully redeemed in September 2013.

Equity Income in Joint Venture. Equity income in joint venture for the three months ended June 30, 2014 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the three months ended June 30, 2014, we realized net income of approximately $0.0 million related to our 25.0% interest compared to net income of approximately $0.1 million for the three months ended June 30, 2013. For the three months ended June 30, 2014, the hotel reported occupancy of 83.1%, ADR of $149.90 and RevPAR of $124.53. This compares with results reported by the hotel for the three months ended June 30, 2013 of occupancy of 85.8%, ADR of $138.54 and RevPAR of $118.83.

Income Taxes. The income tax provision for the three months ended June 30, 2014 decreased approximately $0.5 million, or 49.3%, to approximately $0.6 million compared to an income tax provision of approximately $1.1 million for the three months ended June 30, 2013. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized lower operating income for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Net Income (Loss). We realized net income for the three months ended June 30, 2014 of approximately $2.8 million compared to total a net income of approximately $1.7 million for the three months ended June 30, 2013 as a result of the operating results discussed above.

Comparison of the Six Months Ended June 30, 2014 to the Six Months Ended June 30, 2013

Revenue. Total revenue for the six months ended June 30, 2014 increased approximately $16.0 million, or 35.0%, to approximately $61.4 million compared to total revenue of approximately $45.4 million for the six months ended June 30, 2013. Increases in revenue at our properties in Savannah, Georgia; Raleigh, North Carolina; Jacksonville, Florida; Jeffersonville, Indiana; Tampa, Florida and Hampton, Virginia; plus the newly acquired properties in Houston, Texas and Atlanta, Georgia, were offset by decreases in revenue at the three remaining wholly-owned properties.

Room revenue increased approximately $10.5 million, or 32.3%, to approximately $42.9 million for the six months ended June 30, 2014 compared to room revenue of approximately $32.4 million for the six months ended June 30, 2013 The increase in room revenue for the six months ended June 30, 2014 resulted mainly from the acquired properties in Houston, Texas and Atlanta, Georgia, accounting for an increase of approximately $8.8 million for the period. In addition, favorable results from our same-store properties reflected a 1.7% increase in occupancy, a 3.5% increase in ADR, and a 5.3% increase in RevPAR as compared to the same period in 2013. Our property in Raleigh, North Carolina continues to experience a significant increase as a result of the rebranding to a DoubleTree by Hilton. Our properties in Savannah, Georgia; Jacksonville, Florida; and Tampa, Florida also experienced a significant increase in room revenue, offset by decreases at our properties in Wilmington, North Carolina; Philadelphia, Pennsylvania; and Laurel, Maryland.

Food and beverage revenues increased approximately $4.5 million, or 41.1%, to approximately $15.3 million for the six months ended June 30, 2014 compared to food and beverage revenues of approximately $10.8 million for the six months ended June 30, 2013.


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The increase in food and beverage revenues for the six months ended June 30, 2014 resulted principally from our recently acquired properties in Houston, Texas and Atlanta, Georgia, accounting for an increase of approximately $3.9 million for the period. Additional increases in food and beverage revenue at our properties in; Savannah, Georgia; Tampa, Florida; Hampton, Virginia and Jacksonville, Florida were offset by decreases in banqueting revenue at our other properties.

Revenue from other operating departments increased approximately $1.0 million, or 45.1%, to approximately $3.2 million for the six months ended June 30, 2014 compared to revenue from other operating departments of approximately $2.2 million for the six months ended June 30, 2013.

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 $43.2 million for the six months ended June 30, 2014, an increase of approximately $10.9 million, or 33.9%, compared to total hotel operating expenses of approximately $32.3 million for the six months ended June 30, 2013. The increase in hotel operating expenses for the six months ended June 30, 2014 was substantially related to our recently acquired properties in Houston, Texas and Atlanta, Georgia, accounting for an increase of approximately $9.7 million in expenses for the six months ended June 30, 2014, coupled by an increase in hotel operating expenses at our same-store properties of approximately $1.2 million compared to the six months ended June 30, 2013.

Rooms expense for the six months ended June 30, 2014 increased approximately $2.4 million, or 28.6%, to approximately $11.0 million compared to rooms expense of approximately $8.6 million for the six months ended June 30, 2013. The increase in rooms expense for the six months ended June 30, 2014 was substantially related to our recently acquired properties in Houston, Texas and Atlanta, Georgia, accounting for approximately $2.3 million of the increase.

Food and beverage expenses for the six months ended June 30, 2014 increased approximately $3.1 million, or 44.7%, to approximately $10.0 million compared to food and beverage expenses of approximately $6.9 million for the six months ended June 30, 2013. The increase in food and beverage expenses for the six months ended June 30, 2014 was substantially related to our recently acquired properties in Houston, Texas and Atlanta, Georgia, which accounted for approximately $2.8 million of the increase.

Indirect expenses at our wholly-owned properties were approximately $21.7 million for the six months ended June 30, 2014, an increase of approximately $5.1 million, or 30.8%, compared to indirect expenses of approximately $16.6 million for the six months ended June 30, 2013. The increase in indirect expenses for the six months ended June 30, 2014 were substantially related to our recently acquired properties in Houston, Texas and Atlanta, Georgia, accounting for an increase of approximately $4.3 million in indirect expenses for the six months ended June 30, 2014, coupled by an increase in indirect expenses at our same-store properties of approximately $0.8 million compared to the six months ended June 30, 2013.

Depreciation and Amortization. Depreciation and amortization expense for the six months ended June 30, 2014 increased approximately $1.3 million, or 32.8%, to $5.4 million compared to depreciation and amortization of approximately $4.1 million for the six months ended June 30, 2013. The increase was mostly attributable to depreciation and amortization related to our properties in Houston, Texas and Atlanta, Georgia, which we acquired in November 2013 and March 2014, respectively.

Corporate General and Administrative. Corporate general and administrative expenses for the six months ended June 30, 2014 increased approximately $0.5 million, or 21.7%, to approximately $2.7 million compared to corporate and general administrative expenses of approximately $2.2 million the six months ended June 30, 2013. The increase primarily relates to additional legal and accounting fees as well as costs associated with the acquisition of the Georgian Terrace.

Interest Expense. Interest expense for the six months ended June 30, 2014 increased approximately $1.8 million, or 35.8%, to approximately $6.8 million compared to interest expense of approximately $5.0 million for the six months ended June 30, 2013. The increase in interest expense for the six months ended June 30, 2014 was substantially related to the interest on the mortgage debt related to our recently acquired properties in Houston, Texas and Atlanta, Georgia, as well as the unsecured notes we issued in September 2013 offset by the interest on the cumulative redeemable preferred stock which was fully redeemed in September 2013.

Equity Income in Joint Venture. Equity income in joint venture for the six months ended June 30, 2014 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the six months ended June 30, 2014, our 25.0% share of the net income of the hotel decreased approximately $0.2 million, or 27.3%, to approximately $0.4 million compared to net income of approximately $0.6 million for the six months ended June 30, 2013. The decrease primarily relates to higher mortgage interest expense within the joint venture related to the refinance of the mortgage in December 2013. For the six months ended June 30, 2014, the hotel reported occupancy of 86.3%, ADR of $179.69 and RevPAR of $155.13. This compares with results reported by the hotel for the six months ended June 30, 2013 of occupancy of 87.2%, ADR of $173.14 and RevPAR of $150.97.


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Unrealized Loss on Warrant Derivative. There was no warrant derivative for the six months ended June 30, 2014 compared to an unrealized loss of approximately $2.7 million for the six months ended June 30, 2013.

Income Taxes. We had an income tax benefit of approximately $0.2 million for the six months ended June 30, 2014 compared to an income tax provision of approximately $1.4 million for the six months ended June 30, 2013. The income tax benefit (provision) is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized a taxable operating loss for the six months ended June 30, 2014 compared to taxable income for the six months ended June 30, 2013.

Net Income (Loss). We realized net income of approximately $3.8 million for the six months ended June 30, 2014 compared to a net loss of approximately $1.7 million for the six months ended June 30, 2013, 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.

The following is a reconciliation of net income (loss) to FFO and Adjusted FFO for the three and six months ended June 30, 2014 and 2013:

                                                            Three Months Ended       Three Months Ended       Six Months Ended        Six Months Ended
. . .
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