Hello, everyone. And welcome to the Sotherly Hotels Fourth Quarter 2023 Earnings Call and Webcast. My name is Bruno, and I will be operating your call today. I'll now hand over to your host and Vice President of Operations, Mack Sims. 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 and the year. Looking at the fourth quarter results for the same store portfolio compared to 2022, RevPAR increased 3%, driven by a 4.1% increase in occupancy and a 1.2% decrease in ADR. For the full year, RevPAR increased 7% over 2022, driven by a 3.8% increase in occupancy and a 3.2% increase in rate. Looking at the fourth quarter results for the same store portfolio relative to 2019, fourth quarter RevPAR was up 6.6%, driven by ADR growth of 17.7%, and occupancy down 9.4%. For the full year, RevPAR was up 5.5% over 2019, driven by a 17% increase in rate and a 9.8% decrease in occupancy. This occupancy gap reflects a significant upside for the portfolio moving forward. Overall, our portfolio's fourth quarter top line results were generally in line with expectations. These results were characterized by occupancy growth, particularly in markets where the group segment makes up a larger proportion of our revenue. Our hotels in Savannah and Wilmington, both of which possess large group components, continue to grow occupancy through substantial group bookings during the quarter. Certain leisure-focused markets also experienced improved results during the quarter, highlighted by our DoubleTree Hotel in South Florida, which saw a significant bounce in occupancy of nearly 1,400 basis points during the quarter, contributing to year-over-year RevPAR growth of 22%. Despite the improvement in occupancy during the quarter, our portfolio's overall occupancy is still well below the comparable period in 2019, demonstrating significant organic growth potential. While showing steady improvement, our urban markets generally have the most room for growth within our portfolio. For example, although The White Hall in Houston improved its occupancy more than 10% year-over-year, primarily through its meeting and banquet business, it has significant opportunity for growth, especially in the business transient and group segments. The Georgian Terrace, meanwhile, is showing positive signs of improvement. Due to the significant impact of the writers and actors' union strikes last year on the hotels and film and production industry business, management shifted its strategy towards growing group bookings. As a result of these efforts, the hotel grew its combined corporate association and social group business by 42% during 2023. Management's renewed focus on group bookings, coupled with the settlement of the actors' strike, should dramatically improve the Georgian Terrace's growth prospects moving forward. Looking at some highlights across the portfolio, The Hyatt Centric Arlington, driven by year-over-year growth in the group and corporate segments, continues its exceptional performance during the fourth quarter. Group business, in particular, has rapidly surpassed pre-pandemic levels, outperforming the fourth quarter of 2019 by 33%. The property outpaced prior year's RevPAR by 8%, driven by a 2% increase in occupancy and a 6% increase in rate. The property's 6.7% RevPAR growth versus a comparable period in 2019 demonstrates that this hotel has reached stabilization, while the gaps of pre-pandemic occupancy provide plenty of upside opportunity for this hotel moving forward. The DeSoto Savannah continued to outperform expectations during the fourth quarter, outpacing both prior year and pre-pandemic levels. Group business, which outpaced the comparable period in 2019 by 8%, continues to fuel the hotel's strong results. Fourth quarter RevPAR outperformed prior year by 5.6% with strong occupancy growth. Meanwhile, the DeSoto's RevPAR outpaced the comparable period in 2019 by more than 28%, fueled by a significant rate growth of 25.9%. The property continues to improve its position among its competitive set, gaining 250 basis points in fair share during the quarter. Hotel Ballast in Wilmington, North Carolina, coupled strong group and leisure demand to record impressive results during the quarter. The property outpaced prior year RevPAR by 6.7%, fueled by a 7.9% increase in occupancy. Comparing to the fourth quarter in 2019, the property outpaced pre-pandemic RevPAR by 12.3%, fueled by a 9.5% increase in rate and a 2.5% increase in occupancy. The property achieved strong results versus its competitive set, achieving a 110.5% RevPAR index while gaining 340 basis points in share over the prior year during the quarter. Looking at profitability metrics for the portfolio, while Hotel EBITDA margins for the fourth quarter of 2023 were 430 basis points below prior year, they were 350 basis points above the comparable period in 2019. The fourth quarter of 2022 included several one-time benefits to profitability that skew the year-over-year comparison. Stripping out these variations, Q4 Hotel EBITDA margins declined a more modest 247 basis points over prior year. The increase in expenses is attributed to increased property insurance costs as well as additional operating expenses due to the expansion of guest amenities and service levels which were not fully rolled out in Q4 2022, as well as increases in hourly wages over prior years. We view these amenity and service increases as necessary investments in our hotels, which allow us to remain competitive in our markets while maintaining strong rate growth. Moving forward, we expect margins to stabilize as we reach normalized staffing, wage, and amenity levels at our hotels, and we are also optimistic that the property insurance markets will begin trending more favorably in the near term. Turning to corporate activity, last month we announced that the company executed a $35 million secured loan with city real estate funding, collateralized by Hotel Alba in Tampa, Florida. The interest-only loan matures in March of 2029 and carries a fixed interest rate of 8.49%. Proceeds from the loan were used to repay the existing first mortgage and for general corporate purposes. I will now turn the call over to Tony.

Thank you, Scott. Reviewing performance for the period ended December 31, 2023. For the quarter, total revenue was approximately $42.1 million, representing an increase of 1.9% over the same quarter in the prior year. Year-to-date, total revenue was approximately $173.8 million, representing a 4.7% increase over full year 2022. Hotel EBITDA for the quarter was $10.3 million, representing a decrease of 13.4% for this same quarter in 2022. Year-to-date, Hotel EBITDA was about $44.8 million, representing a decrease of 3.6% over full year 2022. For the quarter, adjusted FFO was approximately $2.8 million, representing a decrease of approximately $5.2 million from the same quarter last year. In that quarter, we experienced a $4.7 million gain related to the partial forgiveness of one of the company's PPP loans. Year-to-date, adjusted FFO was approximately $14.5 million, representing a decrease of $3.3 million over full year 2022. 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 expenses, interest income, corporate general and administrative expenses, 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 December 31st, the company had total cash of approximately $26.2 million, consisting of unrestricted cash and cash equivalents of approximately $17.1 million, as well as approximately $9.1 million, which was reserved for real estate taxes, capital improvements, and certain other items. At the end of the quarter, we had principal balances of approximately $318.9 million in outstanding debt, and a weighted average interest rate of 5.42%. Approximately 83.4% of the company's debt carried a fixed rate of interest after taking into account the company's interest rate swap agreement. As we enter a more normalized operating environment, we anticipate that the recurring capital expenditures for the replacement of furniture, fixtures, and equipment will be more in line with historical norms and estimate that those expenditures will amount to $7 million for calendar year 2024. We're providing guidance with a forecast of anticipated results for the full year 2024. Our guidance considers market conditions and accounts for current and expected performance within the portfolio. We're projecting total revenue in the range of $179 million to $182.6 million, and at the midpoint of the range this represents a 4% increase over 2023. Hotel EBITDA is projected in the range of $46.1 million to $46.9 million, and at the midpoint of the range this represents a 3.8% increase over 2023. Lastly, adjusted FFO is projected in the range of $12.8 million to $13.8 million, or $0.64 to $0.69 a share. At the midpoint of the guidance, this represents an 8.7% decrease over 2023. The year-over-year decrease in adjusted FFO is mainly due to increased interest expenses in ‘24 and one-time benefits from successful real estate tax appeals at our properties in Savannah and Hollywood in the comparable period 2023. And I'll now turn the call over to Dave.

Thank you, Tony, and good morning. Overall, we were very pleased with our portfolio's operations during the fourth quarter, capping off a productive year at the company which achieved 7% RevPAR growth over the prior year. Several of our properties, including Savannah, Wilmington, and Tampa, continue to perform historically well during the quarter, characterized by strength in leisure and group demand coupled with strong rates. Although ADR growth has been the story of the recovery in the lodging industry since the pandemic, occupancy growth driven by the recovery in corporate group travel was the driver of RevPAR growth during the quarter. We view this as an encouraging sign that traveler behavior is normalizing as we move further from the demand trends that characterized the industry during the pandemic. While year-over-year occupancy growth accelerated during the quarter, there are still plenty of opportunities to increase occupancy within our portfolio, which was still 630 basis points below 2019 occupancy levels during the fourth quarter. We believe both transient and group business travel will fuel this growth, especially at our hotels located in urban markets such as Philadelphia, Atlanta, and Houston. While facing persistent market-related challenges, these hotels are making considerable headway in the corporate and group travel segments. The Georgian Terrace, for example, improved its production in the non-film group segment during the year and should benefit from the recent settlement of the film industry strikes, as film studios begin booking extended stay room blocks in the Atlanta market. It is also important to note that while performing historically well from a RevPAR standpoint, occupancy at the Hyatt Centric in Arlington was still 780 basis points below the comparable period in 2019. We believe this hotel still has substantial opportunities for growth as it continually surprises to the upside. Looking at our portfolio's group revenue picture, our full 2023 group revenue was 12% above 2022. Even with these strong gains, 2023 group revenue was still 10% below 2019, demonstrating that there's still considerable upside for this segment. The debt markets for the lodging sector continue to present distinct challenges as stricter underwriting standards translate to higher hurdles for borrowers. We are closely monitoring the changing environment and being conservative in our approach as we address upcoming debt maturities in our portfolio. At the same time, we're being opportunistic and refinancing assets to drive additional liquidity for the company for future needs. Recently, we successfully refinanced the mortgage loan for our Tampa hotel in advance of the original maturity date, representing the culmination of our repositioning strategy which created substantial value for the hotel and resulted in cash proceeds of over $10 million to the company. As previously discussed, we have been diligently working with the lender in Philadelphia on refinancing options for the asset. We recently agreed to a non-binding term sheet with the lender to further modify and extend the mortgage for two additional years. We’re proud of both of these recent refinancing events and the favorable outcomes, especially given the challenges in the current lending environment. Looking ahead, loan maturity scheduled for our portfolio is spread evenly over the next several years, with only one additional loan maturity in 2024. Looking ahead to 2024, while there continue to be pockets of economic uncertainty, the threat of a major recession appears to be shrinking, and lodging fundamentals have demonstrated continued resilience with additional growth anticipated in the near term. We anticipate urban hotels will outperform the total lodging market, led by corporate travel which continues to trend positively. Looking specifically at our hotel portfolio, Q1 2024's group revenue is pacing 20% ahead of last year, while the full year booking pace is 14% ahead of last year. Overall, we are encouraged by the booking trends for our portfolio, with full year 2024 RevPAR forecasted to range between 104% and 106% of full year 2023 RevPAR. We remain cautiously optimistic about the long-term growth prospects for our portfolio, which is well positioned to benefit from shifting traveler preferences toward unique product offerings, growth in corporate travel, and continued strength in leisure travel. With those comments, operator, we can open the call up for questions.

We have the first question registered from Alexander Goldfarb from Piper Sandler.

Hey, good morning, down there. Just a few questions. First, maybe going on the group travel. I realize that not every company has a dedicated travel effort to coordinate, some companies' people book their own travel on websites, et cetera. Some book it through their corporate travel department, but what are you guys doing to sort of drive more business to your hotels, especially since a lot of them are boutiques? Clearly, that's a positive for leisure travel, who are looking for that localized touch. But I'm thinking on a corporate level, it seems like a lot of people are brand-driven, they're Marriott, Hilton, Hyatt type, and just trying to understand how you guys plan to sort of drive more group within that sort of construct.

Hey, good morning, Alex. It's Scott. I'll attempt to answer that question for you. It really is probably our property for us, from an individual business traveler perspective. We really don't have many properties that are highly reliant on individual business travel. Arlington is one that is highly reliant, and we've seen that come back really with a vengeance in the past years, as you've seen through the metrics that we stated today and in the release. So we've seen that come back very, very strong. Philadelphia and Houston are two that have not seen business travel come back as quickly. So really our focus is on group, which comes in a variety of different forms and is not as reliant on brand loyalty from a group perspective. We have a very robust group sales effort, both at the individual property and the corporate levels. We have third parties that also assist. We have dedicated government group sales associates at the corporate level. So the robust group sales effort is something that we've grown over the past couple of years as we've added staffing back and repositioned and refocused on putting group business into the hotel. So I'm not sure if that really answers your question, but that's really where we look to drive additional occupancy to the portfolio, is really through our group sales effort.

That's helpful, Scott. The next question is just looking at the balance sheet and the Alba. It looks like you increased the... if I understood the commentary, you increased the loan by about $10 million. You're sitting on $17 million of unrestricted cash, and debt has been an issue for the company for, I mean, since I've been covering you guys. What are your thoughts on just paying down debt on encumbering? I mean, I'm not saying take cash to zero, but rather than increasing the mortgage balance on Alba, take a lower balance and plan to pay that off. Like, it just seems like the company needs to get out of this all the assets are encumbered and start to focus on the unencumbering driving free cash flow. So how are you guys thinking about that, especially as you're sitting on $17 million of unrestricted cash, that's separate and apart from the $9 million that's already allocated for various items.

Yes, Alex, it's Dave. Our debt picture we look at holistically throughout the whole portfolio. So yes, we did take some cash out of Tampa, but that's because we created a lot of value in Tampa over our repositioning efforts. And I think you would have seen that if the pandemic hadn't occurred. We would have exercised that value and taken that cash out of the property before this. But at the same time, we've got a debt picture globally in the commercial real estate industry that may actually require us to pay down some of the debt, as you mentioned, whether we want to or not. So the available cash we have on hand is a function of what we think may happen in the future. We want to be very conservative. And at the same time, as you recall, as our properties go through their multiple lifecycle improvement processes, we have to take some cash out of the box and maintain these assets. So we're just trying to be very conservative with our cash, look at each available asset, and what we think the mortgage refinancing markets are going to look like. And we can't know that, where they're going to be in six months or 12 months or 18 or 24 months. I agree that once the capital markets open, we might be able to take advantage of some additional capital opportunities. But right now, the capital markets for the public hotel REITs are essentially closed, or at least almost closed. So we need to have the public markets become more amenable to capital raising within the REIT space. And then we can maybe make some decisions on that front. But I don't think it would be wise right now to take all of our available unrestricted cash and start paying down debt, at least not in the near term.

And then I guess to that point, Dave, what do you estimate your free cash flow is for 2024? So I'm just trying to... I understand defensively husbanding cash, especially given the intensive nature of hotels. But what do you figure your free cash flow is after debt service, after normal—not the big R&M—but normal CapEx? What do you anticipate the free cash flow to be?

Yes, if you strip out the non-recurring CapEx, I think I'd have to ask Tony to kind of weigh in on a potential number there.

I have to go back and double-check. My guess off the top of my head is probably $5 million to $6 million a year. But it could be wrong. I have to go back and check.

A lot of it is going to depend on how these debt numbers flesh out with respect to interest expense and principal amortization. I think on some of these debt refinancings, we're going to get some interest-only periods up front where we're not going to have to spend a lot of cash on up-front principal amortization.

Okay. So that $5 million to $6 million is inclusive of amortization pay down or that's before?

That's inclusive. But to your point, it's non-inclusive of nonrecurring CapEx, so one-time PIP expenditures, which will have some coming in the future here.

Okay. And then just the final question, just going back to the OpEx and appreciate your time. It sounded like you guys are saying that in 2024, insurance, labor costs, full, basically the restoration of the full amenities and F&B, etc., it sounds like OpEx should be back to a normalized level. I don't know if that's 3%, 4% growth, but whatever. But is that the way we take that? And if it is back to a normalized level, sort of what is the new growth rate that we should expect in OpEx?

Well, I mean, operating expenses have been so volatile because of the insurance picture and the tax, the real estate tax picture, those have been the big drivers. And then as Scott mentioned in his remarks, just getting the hotels back into sync with their amenity levels and service levels that are demanded by their asset chain scale designation, that's created an abundance of operating expenses. But the theme for us is we're going to start normalizing all of those where they should be over this year, and whether it's 4% or 5% or 3%, I'm not quite sure what the operating expense growth is. We could get back to you on that number, but normalized back to pre-pandemic levels with margins is what we want to see. We've had a lot of rate growth, as you well know, but we've also had a lot of operating expense growth, specifically with respect to staffing and the cost of that staffing. And then the big outlier has been insurance and real estate taxes. We're in the middle of our renewal right now, and I would say for the first time in a couple of years or three years, I'm somewhat less nervous about the insurance renewal, as I think there's a lot of excess capacity in the market. I think we're going to see at least some nominal growth in cost, but not the 50%, 70%, 100% premium increase that the industry saw in prior periods.

Our next question comes from Brandon Boyd, Private Investor.

Thank you for taking my question. Would you speak to the payment of the deferred preferred stock dividends and what you foresee in that area?

Sure. Good morning. This is Scott speaking. We've stated on previous calls and anytime we've spoken, the deferred preferred dividend, it's certainly something that we're striving to get repaid. We've made one catch-up payment in the calendar of the year 2023. I think what we stated previously is that our goal, absent additional capital raising executions, will be to repay that through ongoing operations. As kind of Dave's comments to Alex’s previously alluded to right now, our main focus on the uses of our capital and our capital allocation for the company is going to be on how these debt refinancings unfold over the next year or two and how the debt markets behave. So that's a critical piece to the puzzle. We need to see how the debt markets reopen and how they are underwriting behavior, whether getting less restrictive or interest rates coming down to help that underwriting process and also the capital needs of our assets. We need to really put that at the forefront and hopefully as that unfolds in a positive fashion, we can take a look at the preferred dividend and getting that caught back up further.

Would that mean that you do not anticipate an additional preferred dividend, an extra preferred dividend this year?

We can't tell you when we prefer and what we consider a potential future payment. Again, our goal is to get it repaid but we need to really see how the debt markets move and move in our favor here in the short term. I think that's a critical focus for all commercial real estate companies right now. And as we get better visibility on that and better visibility on interest rates being reduced by the Fed, we'll have a better understanding of what our free cash flow is and the potential to repay the preferred dividend.

I think we do not have any further questions, so I would like to hand the call back to Dave Folsom, Chief Executive Officer for closing remarks. Dave, over to you.

Thank you, operator. And thank you, everyone, for joining and listening in today. We look forward to speaking with everybody again on our next quarterly call.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.