Hello, everyone, and welcome to the Sotherly Hotels First Quarter 2022 Earnings Call. My name is Victoria, and I will be coordinating your call today. I'll now pass over to your host, Mack Sims to begin. Please go ahead.

Thank you, and good morning, everyone. If you did not receive a copy of the earnings release, you may access it on our website at sotherlyhotels.com. In the release, the company has reconciled all non-GAAP financial measures to most directly comparable GAAP measure in accordance with Reg G requirements. Any statements made during this conference call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained. Factors and risks that can cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in today's press release and from time to time in the company's filings with the SEC. The company does not undertake a duty to update or revise any forward-looking statements. With that, I'll turn the call over to Scott.

Thanks, Mack. Good morning, everyone. I'll begin today's call by reviewing our portfolio's key operating metrics for the quarter. In the first quarter, the composite portfolio's RevPAR was $100.89, supported by an occupancy rate of 53.9% and an ADR of $187.23. This RevPAR performance reflects a 52.5% increase compared to the same period in 2021. When we compare these figures to the first quarter of 2019, RevPAR is down 17.2%, with occupancy decreasing by 22.9%, but ADR saw an increase of 7.5%. Overall, we are satisfied with the first quarter results despite the challenges we faced at the beginning of the year from the Omicron variant. The progress made throughout the quarter indicates that our portfolio is swiftly moving towards normalization. Analyzing the composite portfolio RevPAR on a monthly basis against 2019 shows continuous improvement over the quarter. In January, RevPAR reached 66% of what it was in January 2019. By February, it increased to 77% of February 2019, and in March, RevPAR actually surpassed 2019 levels, exceeding 100% of March 2019 results. Although the Omicron variant significantly impacted all travel segments at the start of the first quarter, we noted a remarkable shift in consumer behavior in the second half of the quarter, as rapidly declining case counts coincided with a considerable rise in bookings, particularly in group and corporate travel. We are encouraged by the performance of our urban market hotels, such as those in Arlington and Houston, which exceeded budgeted expectations for the quarter after nearly two years of underperformance despite headwinds from Omicron. Our portfolio continues to benefit from the ongoing recovery in leisure travel, which intensified due to pent-up demand following the Omicron variant outbreak in late December and January. Specifically, our coastal markets, including Savannah, Tampa, Wilmington, and Hollywood, saw a renewed surge in leisure demand coupled with a steady return of group demand in the second half of the quarter. Pricing power remains a key driver of profitability, especially in these leisure destinations, many of which achieved unprecedented rates during peak times, such as President's Day weekend and spring break. The best-performing hotels in our portfolio this quarter were primarily driven by strong leisure travel, which was further supported by the return of group and business travel. Highlighting a few results from the portfolio, the DeSoto Savannah maintained excellent performance this quarter, again outperforming 2019 metrics with an 8.4% increase in RevPAR, fueled by a nearly 35% growth in rates compared to 2019, resulting in outstanding flow-through. The hotel also continued to outperform its competitive set, gaining 850 basis points in RevPAR share this quarter. Hotel Alba in Tampa stood out within our competitive set, achieving RevPAR nearly 33% higher than in the first quarter of 2019, with occupancy up nearly 2% and ADR increasing by over 30%. Compared to Q1 2021, which included the Super Bowl in the local market, the property's impressive results are highlighted, with RevPAR rising nearly 34% year-over-year despite a challenging comparable. This hotel reached a RevPAR index of 116% in the quarter, affirming its leadership in its competitive set. Hotel Ballast in Wilmington delivered excellent results this quarter, signaling a sustained recovery for this asset. A significant rate growth of 20% over 2019 levels led to impressive flow-through. Notably, the property increased its RevPAR share by more than 2,600 basis points over its competitive set during the quarter as group business, crucial to this hotel's success, ramped back up to pre-pandemic levels in the latter half of the quarter. Recent booking trends further indicate steady growth in group and business travel across our hotels. In the first quarter, the group segment saw a 15% increase compared to the fourth quarter of 2021, while business travel improved by over 20% compared to the same quarter last year. So far in the second quarter, we have observed further improvement in these segments and expect this trend to continue as the year unfolds with strong attendance at citywide events, in-house meetings, and corresponding group room blocks. While there remains significant room for growth compared to 2019, this recovery trajectory for group and business demand is a positive sign for our company. Our management team employed a lean and flexible staffing model to manage variable costs and achieve excellent flow-through despite inconsistent demand and rising costs of goods and labor. We are focused on maintaining pricing power not only for our room rates but also for food and beverage, banquet rentals, and parking, as consumers have shown minimal price sensitivity. Looking ahead, we anticipate that our ability to secure strong rates will continue to counterbalance the rising labor and other costs linked to inflation. Regarding our corporate activities, the company has reached an agreement to sell the DoubleTree by Hilton Raleigh Brownstone Hotel for $42 million. In the first quarter, we amended this agreement with the buyer to extend the closing period in exchange for an additional cash deposit of $800,000, with the new closing date set for June 1. With this modification, the buyer has a total of $1.6 million in nonrefundable deposits related to this transaction. The company plans to use the net cash proceeds from this pending sale to pay off the existing mortgage on the property and reduce a portion of the secured notes with Kemmons Wilson. We recently extended the maturity date on the existing mortgage of the DoubleTree by Hilton Raleigh - Laurel with the current lender by one year to May 2023. As part of the modification, we paid down the principal balance of the loan by $400,000, bringing the current loan balance to about $7.6 million, or approximately $37,000 per key. Finally, year-to-date, we have executed agreements to exchange approximately 50,000 shares of preferred stock for around 488,000 shares. These exchanges align with our long-term strategy to strengthen our balance sheet while maintaining liquidity. These transactions have eliminated around $245,000 in deferred dividend payments and approximately $100,000 in annual preferred dividend payments moving forward.

Thank you, Scott. Reviewing performance for the period ended March 31, 2022. For the first quarter, total revenue was approximately $38.4 million, representing an increase of 69.4% over the same quarter of 2021. Comparing first quarter results to the same period in 2019, total revenue fell short by approximately $9 million or 19.1%. Hotel EBITDA for the quarter was approximately $10 million compared to approximately $4.2 million in the same quarter 2021. Comparing first quarter results to the same period in 2019, hotel EBITDA decreased by approximately $3.2 million or 24.3%. And for the quarter, adjusted FFO was approximately $1.2 million, representing an increase of 126.6% or $5.9 million for the same quarter of 2021. Comparing first quarter results to the same period in 2019, adjusted FFO decreased by approximately $3.7 million or 74.8%. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, gains and losses on derivative instruments, charges related to aborted or abandoned securities offerings, ESOP and stock compensation expense, as well as other items. Hotel EBITDA excludes these charges as well as interest expense, interest income, other corporate and general and administrative expenses and the current portion of our income tax provision and other items as well. Please refer to our earnings release for additional detail. Looking at our balance sheet as of March 31, 2022, the company had total cash of approximately $30.3 million, consisting of unrestricted cash and cash equivalents of approximately $20.2 million as well as approximately $10.1 million, which was reserved for real estate taxes, capital improvements, and certain other items. Looking ahead to the second quarter, the company estimates the cash generated at the hotel level to range between $13.35 million and $13.6 million. We expect corporate level general and administrative expenses of $1.5 million for the quarter. Capital expenditures are expected to range between $2 million and $2.05 million for the quarter, while outlays of scheduled payments of principal and interest are expected to be approximately $6.3 million for the second quarter. Overall, we're expecting cash generated from our portfolio to range between $1.5 million and $1.8 million for the second quarter. It's important to note that a portion of our current debt service includes scheduled repayment of deferred interest and principal originating from forbearance received during the pandemic. At the end of the quarter, we had principal balances of approximately $367.5 million in outstanding debt at a weighted average interest rate of 4.74%. Approximately 86% of the company's debt carried a fixed rate of interest. As we move towards a normalized operating environment, we anticipate capital expenditures to be more in line with historical norms, and we estimate capital expenditures will amount to approximately $6.3 million for calendar year 2022. In March of 2020, we announced the suspension of our dividend and a deferral of payment for dividends on our common stock announced 2 months previous. The suspension and deferral eliminated draw on the company's cash reserves of approximately $4.4 million per quarter.

Thank you, Tony, and good morning. As Scott remarked, the first 6 weeks of the quarter did not start well for our industry. Hotel demand was tempered by new COVID variants, but toward the end of February, traveler sentiment almost completely reversed, as business and group travel rebounded and was combined with ongoing pent-up leisure demand. Despite the year's slow start, the quarter exceeded our expectations. March capped off a remarkable recovery for the quarter and was by far our best performing month since the start of the pandemic as leisure group and business travel started to fire on all cylinders. Our portfolio achieved unprecedented room rates during the month of March, outpacing March 2019 by more than 14%. While these results are impressive, we believe we still have plenty of opportunities for growth, particularly in our locations that are more dependent on business travel, which are still in the early stages of recovery. These urban markets are still tracking significantly below 2019 RevPAR levels. That being said, since mid-February, there's been a noticeable shift in demand at these locations, especially during midweek. Our sales teams are reporting positive feedback from corporate travel planners in these markets, especially in Arlington, Virginia, and Houston, where demand from our most important corporate clients has quickly returned following 2 years of absence. For example, our #1 corporate client located adjacent to our hotel in Houston approached normalized transient production levels in April. Meanwhile, occupancy at the Hyatt Centric in Arlington, Virginia, which is a hotel focused on the business traveler, has climbed rapidly from 25% occupancy in January to 37% in February, 69% in March, and 78% occupancy in April, which was the highest occupancy month for this hotel since the start of the pandemic. While business travel demand in Arlington has improved drastically, we expect the pace of recovery in this segment to vary significantly by location. Evaluating the portfolio's group bookings for the year confirms there is a noticeable shift in traveler preference towards in-person meetings and events. In recent weeks, we've witnessed additional pent-up demand in this key segment as citywide conventions and group meetings of all sizes are taking place with greatly improved attendance numbers. Currently, our portfolio's group booking pace for 2022 is more than 72% of the same pace in 2019. This is a significant improvement over the same time last year when our group booking pace for 2021 was approximately 44% of the group booking pace in 2019. This equates to a 67% improvement in group business for 2022 versus 2021, which is a huge overall improvement. Looking at our strategic initiatives, our recent activities have focused on deleveraging our balance sheet while also improving the company's liquidity position. We believe the sale of our Louisville asset and pending sale of our Raleigh asset will help accomplish both of these goals. The disposition of these assets will allow us to repay significant mortgage debt and partially repay corporate debt. At the same time, selling these hotels saves approximately $25 million in brand-required life cycle renovation capital over the next 2 to 3 years. In total, the sale of Louisville and Raleigh will remove approximately $48 million in debt from our balance sheet, including $30 million in mortgage debt. Our strategy to exchange preferred stock also aligns with our deleveraging strategy. By exchanging preferred stock, we removed not only the par amount of the preferred but also the legacy accrued dividends as well as future dividend payments. Looking forward, we are confident in our ability to source the additional cash needed to repay the remaining portion of our corporate debt, which will further reduce our leverage and allow the company to focus on its core operating strategies. In summary, strong booking trends characterized by the steady return of corporate and group business and continued pent-up leisure demand brings optimism for the sustained recovery of our business. And with that, operator, we'll now open the call for questions.

And our first question comes from Alexander Goldfarb at Piper Sandler.

So a few questions here. First, obviously, great to see a positive FFO and positive free cash flow in the quarter and your expectation for positive in the second quarter. Is your view now that earnings and free cash flow from here on out will be positive? I mean, assuming the world doesn't come to an end or something. I'm just talking about from what you see in your current operations, your current demand, your future bookings, everything that you guys see today currently. Is it your view that FFO and free cash flow will remain positive for the balance of this year into next?

Yes. Alex, it's Scott. Yes, that's our expectation. As we said, I mean, fundamentals have improved month over month to the point of March, basically meeting 2019 levels. And yes, there might be a little bit of ups and downs on a monthly basis. But overall, going forward, we think we're back to that normalized level of operation, which should produce positive free cash and FFO.

Okay. And then can you remind how much preferreds are remaining or outstanding?

The par amount is approximately $100 million.

Yes, it's just over $100 million.

It is $109 million. It is $109 million in par before we started the exchanges. So the par amount has been reduced to $100 million. And you're asking for the total unpaid accrued dividend on top of that?

So you have $100 million remaining to hopefully buy back or exchange, correct?

Right. I mean that's the par amount that's remaining.

Okay, that makes sense. What is the current accrued balance?

As of March 31, it was right around $20 million.

It's great to see the return of group business and the leisure travel drive. You mentioned that there are no pricing issues with SMB, parking, or room rates. Can you share where your operating expenses stand at the property level? Are they aligned with the current demand? Do you think you'll need to hire more staff, leading to an increase in operating expenses? I'm trying to understand if your operations are adequately staffed or if there's a need for additional staffing that could cause operating expenses to rise relatively.

As prices have increased in an inflationary environment, we have also seen a rise in operating expenses at the hotels. This includes labor costs, which you pointed out. Staffing conditions at the hotels have improved, with more people willing to return to work. However, we still rely on a significant amount of outsourced labor. If we can return to permanent staffing, we can reduce some costs associated with third-party staffing agencies. Utilities and the cost of goods sold continue to rise due to inflation. However, the rate structure at the hotels is creating strong contributions to our bottom line, which is improving our margins. We have made a deliberate choice not to increase expenses over the past few quarters until we saw growth in revenue per available room. This strategy has allowed us to manage our margins effectively. Therefore, I do not anticipate any significant changes to operating expenses unless there is a decline in the growth of the rate structure. Tony, do you have any thoughts on this?

No, I would agree. We're seeing stability in our margins. And if we've got increased labor costs, it's offset by empty positions that we can't fill because of the labor markets. And so there has been a stability to our margins, and we're continuing to expect that.

Okay. And then just the final question. As far as potential further hotel sales or debt givebacks or what have you, is there anything else that you expect? Or I mean, obviously, Raleigh was a great, great outcome. But do you expect any more dispositions or any more sort of need to give back a hotel for debt reasons or anything like that? Or the portfolio that you have is basically the one that you expect to keep?

Yes, I think that's right. The sale of Louisville has been a goal for us over the past five years. It was not a core asset, and various factors in that market, such as oversupply and the merger between Starwood and Marriott, affected our reservation system. As you mentioned, the Raleigh sale presented a rare pricing opportunity. However, we do not intend to make any drastic cuts. I don't foresee us liquidating any additional assets, and I believe we have sufficient resources to handle our corporate debt, thanks to the sale of Raleigh and the refinancing of other assets or our available free cash.

At this time, there are no further questions. I would like to pass it back to Dave Folsom, CEO, for any final remarks.

Well, thank you, operator, and thanks for everyone on the call, and we'll speak again next quarter. Thank you.

Thank you, everybody, for joining today's call. You may now disconnect.