Hello, everyone, and welcome to Sotherly Hotels Second Quarter 2023 Earnings Call and Webcast. My name is Devi, and I will be coordinating your call today. I would now like to hand over to your host, Mack Sims, Vice President of Operations to begin. Mack, 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 the 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 the 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 start off today's call with a review of our portfolio's key operating metrics for the quarter. Looking at the second quarter results for the same-store portfolio, RevPAR was $131.16, driven by an occupancy of 70.6% and an ADR of $185.82. Second quarter RevPAR performance represents an increase of 5% over the same period in 2022, driven by a 1.6% increase in occupancy and a 3.4% increase in rate. Year-to-date, RevPAR for the same-store portfolio was $122.27 with occupancy of 65.6% and an ADR of $186.45. Year-to-date, RevPAR performance represents an increase of 11.9% over the same period in 2022 driven by a 5.8% increase in occupancy and a 5.8% increase in rate. Overall, our portfolio's second quarter results are characterized by further recovery of group and corporate demand at our hotels, which were generally in line with our expectations. Despite softer-than-expected leisure demand at our South Florida properties on a year-over-year basis, our portfolio continued to shift to a more normalized mix of business, with strong RevPAR growth from our group and corporate transient segments. Compared to pre-pandemic metrics, RevPAR increased by 1.8% compared to the second quarter of 2019, despite occupancy being down by 8.7%, demonstrating there is still significant upside for the portfolio. Examining our portfolio's recent booking trends for business and group travel confirms our belief that demand in our hotels continues to progress towards a more normalized mix of business. For the group segment, our portfolio produced 8.7% more group business in the second quarter of 2023 compared to the same period in 2022, while business travel was slightly ahead of the second quarter of last year. These results were largely driven by our Washington, D.C. market hotels in Arlington, Virginia, and Laurel, Maryland, which are now outperforming 2019 results. While the Washington, D.C. market is nearing a full recovery, our hotels in Houston, Philadelphia, and Atlanta have plenty of upside potential as corporate travel in those markets is still significantly below pre-pandemic levels. We expect demand at these hotels to continue to improve during the corporate and group-heavy fall travel season, which should help close the gap to pre-pandemic occupancy for those hotels. Meanwhile, leisure demand across the portfolio remained strong as a whole, with encouraging booking trends moving forward. Looking at some highlights across the portfolio, the Hyatt Centric Arlington posted commendable performance during the quarter, fueled by a noteworthy recovery in group and business demand at the hotel. This property is hitting on all cylinders following the lagging recovery in the Washington D.C. market, outperforming last year's RevPAR by nearly 25%. ADR, which was up 16.6% compared to the second quarter of last year, was the primary driver of this improvement, while occupancy continues to grow as well. The property further solidified its position as the market leader among its competitive set, achieving a RevPAR index of over 121% during the quarter. Hotel Ballast in Wilmington, North Carolina, recorded excellent results during the quarter, beating prior year RevPAR by nearly 15%, fueled by an 11.1% improvement in occupancy and a 3% increase in rate. Results were driven by improved demand from the corporate group and transient business traveler segments, and continued strength from leisure demand. The DeSoto Savannah continued to deliver a well-balanced mix of leisure and group business during the quarter. The property easily outpaced the comparable period in 2019, with RevPAR improving nearly 25%, fueled by significant rate growth of nearly 19%. The property continues to improve versus its competitive set, gaining 730 basis points in fair share during the quarter. During the second quarter, our management team achieved commendable profitability metrics by controlling variable costs and executing revenue management strategies aimed at driving higher rates. Hotel EBITDA margins for the second quarter of 2023 were slightly ahead of the comparable period in 2019. We are pleased with these metrics, especially considering increased expense pressures from restaffing our hotels, higher utility rates, increased insurance costs, and expanded food and beverage offerings that have been layered into our properties. Moving forward, we expect margins to stabilize as we have reached normalized staffing and amenity levels at our hotels following the lean operating model during the pandemic. I will now turn the call over to Tony.

Thank you, Scott. Reviewing our performance for the period that ended on June 30, 2023, total revenue for the second quarter was about $49 million, marking a 3.9% increase compared to the same quarter in 2022. For the year-to-date, total revenue reached around $92.5 million, reflecting an 8.2% increase over the same period last year. Hotel EBITDA for the quarter was about $14.8 million, which is a 0.5% increase from the same quarter in 2022. Year-to-date, hotel EBITDA amounted to approximately $26.9 million, showing an 8.8% increase over the same period last year. For the quarter, adjusted FFO was around $7 million, indicating a 12.9% increase from the same quarter in 2022, while year-to-date adjusted FFO was about $11.7 million, representing a 56.5% improvement compared to the same period last year. Please note that our adjusted FFO excludes certain charges, including those related to early debt extinguishment, gains and losses on derivative instruments, abandoned securities offerings, ESOP, stock compensation expense, and other items. Similarly, Hotel EBITDA excludes these charges, along with interest expenses, interest income, corporate G&A expenses, the current portion of our income tax provision, and other items as well. For additional detailed information, please refer to our earnings release. As of June 30, 2023, the company's balance sheet showed total cash of approximately $32.2 million, which included unrestricted cash and cash equivalents of about $24.2 million and approximately $8 million reserved for real estate taxes, capital improvements, and other items. By the end of the quarter, the principal balances of our outstanding debt were roughly $322.7 million, averaging an interest rate of 5.11%. About 90% to 96% of the company’s debt had a fixed interest rate when considering our interest rate swap agreements. During the second quarter, we refinanced the mortgage on the DoubleTree by Hilton Hotel in Laurel, Maryland, with City Real Estate Funding. This interest-only loan, with a principal balance of $10 million, has a 5-year term maturing in May 2028 and maintains a fixed interest rate of 7.35%. Given the current lending environment’s challenges, we were satisfied with how this transaction was executed, resulting in approximately $2.5 million in cash proceeds to the company. As we transition into a more normalized operating environment, we expect capital expenditures to align more closely with historical trends, estimating them to be around $7.4 million for the calendar year 2023. Now, I’ll provide guidance for anticipated results for the third quarter, taking into consideration market conditions and expected performance within our portfolio. We project total revenue to fall within the range of $39.1 million to $41 million for the third quarter. Hotel EBITDA is expected to be between $8.5 million and $9 million. The year-over-year reduction in hotel EBITDA is mostly attributed to a benefit from last year stemming from successful real estate tax appeals of approximately $434,000, along with an increase in costs related to renewing our property and casualty policies, which rose by around $560,000 this quarter. Adjusted FFO is anticipated to be in the range of $0.6 million to $1.1 million, or $0.03 to $0.06 per share. I will now turn the call over to Dave.

Thank you, Tony. Our portfolio delivered solid results in the quarter. We outpaced prior year operating metrics despite moderate market-related headwinds faced in Atlanta and South Florida. Our portfolio's results benefited from the continued improvement of fundamentals at our urban hotels, which saw further recovery from the corporate and group segments, as well as weekend leisure travel. In addition, our coastal leisure-focused hotels in Tampa, Savannah, and Wilmington continue to perform well due to continued strength in leisure demand coupled with strong group pickup. Overall, the strength in both group and business traveler bookings is reflected in the market's continued demand normalization for these revenue segments. In the quarter, we saw demand soften in our South Florida markets, which followed the period of pent-up demand that benefited and characterized these markets immediately following the pandemic. Increased competition from international destinations and cruise lines were major contributors to this moderation in demand. We also faced a material reduction in demand via group bookings at our Atlanta location related to the ongoing Hollywood writers' and actors' strike. Revenues from film and television crew productions, which have been a mainstay source of revenue for many years at this hotel, were negatively impacted by approximately $300,000 during the second quarter and $900,000 year-to-date. Despite these headwinds, our portfolio achieved commendable hotel EBITDA, outperforming the same period last year, which at the time saw hotel operating expenses well below stabilized levels as full-service hotel amenities and services had not yet been fully reintroduced. Strong rates continue to be a critical factor in both RevPAR growth and overall profitability. During the quarter, our portfolio outpaced prior year's ADR by 3.4% and 2019's ADR by 11.5%. Meanwhile, occupancy showed sequential improvement, an important factor, which validates the continued recovery of the group and business travel segments at our hotels. As Scott mentioned, the most notable improvement in RevPAR occurred at our group and corporate-focused hotels and markets where return-to-office rates continue to climb following the pandemic. Our hotel in Arlington continues to surprise to the upside, easily outperforming its competitive set with a well-balanced mix of business that includes strong group, weekend leisure, and corporate travel revenue, surpassing pre-pandemic levels during the quarter. Moving forward, we believe there is still significant potential to be unlocked at our urban locations, which have historically been more dependent on corporate transient and group demand. Previously, we announced the reinstatement of quarterly dividend payments for our preferred shareholders. And during the second quarter, we also announced an additional catch-up payment for our three series of preferred stock, decreasing the amount owed on the unpaid cumulative preferred dividend by approximately $1.9 million. Reducing the unpaid dividend represents an ongoing priority for the company. Forward bookings for our portfolio continue to trend positively despite uncertainty surrounding a potential recession. We believe a decline in the rate of inflation, coupled with the possibility of a soft landing by the Fed, will provide an environment for ongoing demand growth. Our portfolio's outlook is pacing well for the balance of the year with 2023's group revenue pacing 24% ahead of last year, while the business transient segment is pacing 18% ahead of last year. We believe this segment still has plenty of opportunity for growth in the back half of the year. Overall, we are encouraged by the progress we are seeing in our operations with Q3 RevPAR forecasted to range between 103% and 109% of Q3 2022's RevPAR. We remain optimistic that improved market conditions and encouraging booking trends will continue to fuel growth prospects for our well-positioned portfolio. We will now open the call up for questions, operator.

Our first question today comes from Alexander Goldfarb from Piper Sandler.

I guess the first question is sort of a big picture. Do you guys feel that the portfolio is now back to sort of a normalized level? Or do you feel that there's more meaningful catch-up to occur from now versus what the level was before the pandemic?

Well, Alex, it's Dave. I think there's still some growth out there from a macro, what I'd call, macro-prepandemic. And both Scott and I, and our remarks, there's still some room to grow in some of our markets from both the group and BT segment basis. Some of these markets still have some opportunity to improve, the Philly market, the Houston market, the Atlanta market. These markets are not yet in the shape they need to be to get a fully normalized set of revenue for the hotel industry. So I think there is some opportunity there. And then on a property-by-property basis, there is definitely an opportunity for improvement. As you may or may not recall, last year, we had a significant casualty in Atlanta that has since been resolved and repaired. It was a water issue. Our year-over-year results are very, very good there because we had a problem last year with the hotel. So there are both selective hotel upsides, and I think there's some market upside at some of these locations, especially when we look at the group and the BT customer.

Okay. That's helpful. And then on the insurance, can you just remind us how much your premiums went up? And I believe, when we met at NAREIT, you said the second quarter would include the full impact of the new insurance. So can you just contrast how much the premiums are now versus previous? And then do you anticipate sort of a similar increase next year or from when you met with the insurance companies and brokers they were indicating that this year is probably the biggest one, hopefully, next year maybe the reserves that insurance companies and the reinsurers have is a little bit better. Just trying to get a sense if we're going to be in a multiyear substantial increase environment or if maybe you got some light at the end of the tunnel when you spoke to the brokers and the insurance companies?

We operate on an April 1 renewal schedule. I'll let Tony share the before and after numbers. The primary influence on property and casualty premiums was really driven by events in Florida, which significantly impacted the premium changes. When it comes to the outlook for next year, we expect to have a clearer picture in November after hurricane season concludes. The market is currently waiting to determine if there will be excess capacity and the volume of losses. If I had to make a prediction, I would say our agent is likely to suggest there won't be a significant decrease in premiums, but we also won't see another extreme increase like we did this year. So, Tony, would you like to add anything?

Yes. Year-over-year, our insurance premiums went up a little over $2 million, so it's about $500,000, $550,000 a quarter. And a small bit of that is just the normal increase in general liability, auto, cyber, and that kind of policy, but the bulk of the increase was property coverage. As you know, we have a lot of coastal properties there, Wilmington, Savannah, Jacksonville, South Florida, and Tampa, and even Houston. And so that's a large exposure for us and hence, a large increase in premium.

What's the percentage, the $2 million as a percentage?

The total premiums have increased by about 50%. If you consider all of our insurance costs, they were around $4 million a year and have now risen to $6 million.

Okay. Okay. And then the final question is, can you just update us on where you stand on the preferred for the still accrued but unpaid balance?

Yes, we made one catch-up payment in the last quarter. As you know, we're shareholders, and we're as eager as everyone else to receive a common dividend. So we want to get the catch-up payments paid up. Right now, we're being a little more cautious and prudent. I can't give you a window when that's all going to be done. As you mentioned in your interview yesterday with Bloomberg, a lot of the caution rests with the lending markets and how we're going to deal with mortgage refinancings and what the assumptions are and frankly, what's going to happen in the operating environment in the lodging industry over the next 4 to 8 quarters. So if market conditions warrant, we're going to make additional payments. I just can't give you the time and frequency of when those payments are going to be made.

Right. But what's the current balance that you still have?

The unpaid balance is $20 million.

$29 million. Okay. Great.

We currently have no questions. I would like to turn it back over to the management team for any additional comments.

Thank you, operator, and thanks to everyone listening in today. We look forward to speaking with you at the next quarterly review.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.