Good morning, and welcome to the Sotherly Hotels First Quarter 2021 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mack Sims, Vice President of Operations. 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 the 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, which we are pleased to report exceeded our expectations and provide us some initial confidence that sustained recovery is now underway for our industry. Looking at results for the composite portfolio, RevPAR decreased 26% over the prior year, reflecting a 21.1% decrease in occupancy and a 6.1% decrease in ADR. Looking at RevPAR versus the comparable period in 2019, RevPAR decreased 45.7% over Q1 2019, reflecting a 40.2% decrease in occupancy and a 9.1% decrease in ADR. These metrics were ahead of the U.S. lodging industry, the upper upscale segments, and most of our REIT peers that have reported thus far for the quarter. The results were also better than our market competitors as our portfolio gained 630 basis points in RevPAR share from their competitive sets in the quarter with a solid mix of occupancy and ADR share capture at most hotels. Despite the lingering impact from the pandemic on our industry, we are pleased to see that leisure travel business and group demand all demonstrated steady improvement throughout the quarter. Examining RevPAR results on an absolute basis for our composite portfolio highlights the quarter's continuous improvement, as RevPAR in January increased 39.9% month-over-month to $50.38. February RevPAR increased 25.8% month-over-month to $63.38. And then March RevPAR increased 33.4% month-over-month to $84.52. January results finished stronger than expected, fueled by leisure demand in our warm weather locations and the significant government contract in our two Washington DC area properties. Moving into February, the Super Bowl and Tampa provided a boost for Hotel Alba, but that was just the beginning of the improved results as several of our coastal leisure destinations showed strong pickup, and some properties started to see small pockets of group and business travel return. March results exhibited similar improvement as more of our portfolio began to benefit from warmer spring weather throughout the Southern U.S., which further fueled leisure travel. I will also note that April results have continued to follow the trend seen in the first quarter, with RevPAR for the composite portfolio increasing an estimated 8.6% over March up to nearly $92. While the continued strength in leisure demand has provided a tailwind to start the recovery, we are encouraged by the improvement in the group and business travel segments, which we believe suggests that we are entering a sustained recovery as a company and as an industry. While we believe transient leisure travel will provide a considerable base of business through the fall, we firmly believe bookings for the group and business traveler segments will stick and strengthen during the second half of the year as more of the population becomes vaccinated and meeting planners and corporations feel more comfortable to travel. Dave will provide more detail in this regard later in the call. Next, I would like to take a moment to recognize our management's commendable operating results during the quarter in regard to margin control. Our operators maintained tight cost control measures in order to mitigate the impact of lost revenue and increase flow through savings. Despite the challenges of the current labor market due to enhanced unemployment benefits, our managers were able to align hiring and payroll to the massive recovery in demand. Our operators gradually rolled out guest amenities relative to the return of business while focusing on higher profit revenue drivers. As a result of these strategic measures, our portfolio exhibited strong flow through savings, as the composite portfolio’s Hotel EBITDA declined only 17% over last year on 39.2% less revenue for the quarter. This resulted in Hotel EBITDA margins expanding 500 basis points year-over-year. When referencing these year-over-year comparisons, I think it's important to remind everyone that January and February of 2020 was a pre-pandemic period, or otherwise normal for our industry, thus making the comparisons difficult and making some of these quarterly results even more impressive. Turning to corporate activity, we've continued to work with our lenders to successfully complete a variety of modification and forbearance agreements across a majority of the portfolio, which generally allows us to defer principal and/or interest payments for periods that began back in April 2020 and then extend through various dates ending between February 2021 and December 2021. They also waived or modified covenants in order to keep the loans in compliance. To that end, on April 30, we entered into a loan modification agreement with a mortgage lender and special servicer for the Doubletree Resort by Hilton Hollywood Beach, which brought that loan back into compliance. This is the only loan that had previously unresolved lender negotiations, so we are pleased to put this one behind us and ensure that all of our mortgages are in good standing going forward. As we enter the recovery phase, we believe it is likely that we are nearing the end of additional forbearance in the lending community. However, we will continue to evaluate on a case-by-case, property-by-property basis and address those matters with individual lenders depending on the circumstances. Regardless, we believe the modifications reached with our lending partners over the past 14 months have been critical to the health of the company and have positioned us to be able to take advantage of the recovery moving forward.

Thank you, Scott. Reviewing performance for the period ended March 31, 2021. For the first quarter, total revenue was approximately $22.6 million, representing a decrease of approximately $14.6 million, or 39.2% over the same quarter a year ago. Hotel EBITDA for the quarter was approximately $4.2 million, representing a decrease of approximately $0.9 million, or 17% over the same quarter a year ago. And adjusted FFO for the quarter was a deficit of approximately $5.2 million, a decrease of approximately $1.5 million, or 42.7% over the same quarter a year ago. 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, changes to the deferred portion of our income tax provision, and other items. Hotel EBITDA excludes these charges, as well as interest expense, interest income, corporate G&A 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 the end of the quarter, the company had total cash of approximately $33 million, consisting of unrestricted cash and cash equivalents of approximately $21.1 million, as well as approximately $11.9 million that was reserved for real estate taxes, capital improvements, and certain other items. Looking at cash burn, for the first quarter, the company's total cash burn was approximately $2.3 million compared to the forecast on our call in February of approximately $4.5 million. The sizable outperformance was driven by stronger than expected cash flow at the property level. Looking ahead to the second quarter, the company estimates that the average monthly cash generated at the hotel level will range between $1.7 million and $1.85 million. We expect corporate level G&A expenses to range between $450,000 and $550,000 per month. Capital expenditures are expected to range between $300,000 and $350,000 per month. And outlays for scheduled payments of principal and interest are expected to be approximately $2.25 million per month. Overall, we're projecting a total cash burn of approximately $5.1 million in the second quarter, as higher levels of hotel profitability are offset by scheduled debt service as we begin repaying some of the forbearance received last year. Included in our total cash burn for the quarter is a one-time payment of approximately $1.3 million related to the scheduled payments for the month of January through March 2021, made in conjunction with the loan modification agreement with the mortgage lender and special servicer for the Doubletree Resort at our Hollywood Florida property. At the end of the quarter, we had principal balances of approximately $389.1 million and outstanding debt at a weighted average interest rate of 4.66%. Still, approximately 87% of the company's debt carries a fixed rate of interest. We have also significantly scaled back our capital projects and anticipate that capital expenditures, which primarily represent the replacement of systems critical to the operation of our hotels, will amount to approximately $4 million for calendar 2021. As a result of the majority of our wholly-owned guestrooms undergoing renovation over the last five years, we feel our portfolio is in a good position with no required renovations through the end of 2022. Last March, we announced the suspension of our dividend and a deferral payment of dividends for our common stock announced two months previous. The suspension and deferral eliminate a draw on the company's cash reserves of approximately $4.25 million per quarter. And I'll now turn the call over to Dave.

Thank you, Tony. And good morning, everyone. We're pleased to report that our operating results for the quarter far exceeded expectations and believe that the lodging industry has entered a sustained recovery period, as demand increases across all segments of our business. Our Q1 results represent an important milestone for the company, as our portfolio had positive Hotel EBITDA for the first time since the first quarter of 2020. While we continue to face the lingering impacts of the pandemic, since we last spoke a little over two months ago, we've experienced a number of positive trends from a health, economic, and travel industry standpoint. Most importantly, we are encouraged by the reduction in our country's case counts and deaths, as well as the rate of the rollout of the vaccine program, which is fully vaccinated approximately 40% of the U.S. population. We believe the swift rollout of the vaccination program and the subsequent improvement to case counts act as the primary catalysts in the recovery of the lodging industry, as consumers gained confidence in their ability to be safe while traveling, and government authorities relaxed restrictions that previously hamstrung our industry. The first phase of the recovery, which we experienced during the first quarter, was characterized almost entirely by domestic leisure travel, as evidenced by strong weekend demand. We believe leisure travel will continue as the near-term force behind the recovery into the second and third quarters, driven by pent-up demand and increased consumer savings during the pandemic. Looking towards the second half of the year, we believe the continued strength of the leisure segment should be aided by the return of major demand generators and events, which should boost leisure travel and more heavily impacted urban markets, such as Atlanta, Raleigh, Washington DC, and Houston. For example, the historic Fox Theater, which is located directly across the street from our Georgian Terrace hotel, and serves as a major demand generator for the hotel, will reopen its normal schedule of events in September. There are several comparable examples of this across our portfolio that should support the continued strength of leisure travel into the third quarter. Although the leisure traveler remains the primary demand segment entering the second quarter, we saw promising signs for group travel during the first quarter, primarily characterized by essential meetings, weddings, and other small or social events and film contract business. We believe our stay open strategy for the portfolio proved successful from a sales standpoint as it allowed an uninterrupted sales effort throughout the course of last year. Since the beginning of 2021, our sales teams have reported continuous improvement in activity related to site visits, leads, and overall bookings. As a result, group booking pace for the second half of the year continues to improve. As of late April, our group booking pace for the second quarter was approximately 32% of the revenue on the books at the same time in 2019. This metric improves dramatically during the back half of the year. Third quarter booking pace is approximately 62% of revenue on the books in Q3 2019 and Q4 bookings are 82% of 2019 Q4 group revenue. These numbers confirm our belief that a sustained recovery is underway. We believe major events and group room blocks will continue to materialize during the second half of the year, as meeting planners gain confidence in their ability to host larger scale events, following the increase in vaccine distribution and the lifting of gathering restrictions. During the latter half of the quarter, we also started to experience positive indicators for business travel. As we have seen growth in business travel from small to medium-sized companies, as well as sales-oriented businesses, that have eased corporate travel restrictions. Business travel remains very location dependent, as major gateway markets such as Houston and Washington DC remain depressed due to continued corporate travel and government restrictions. However, the opposite is true in our Florida markets, which have experienced a faster than expected initial phase of recovery in business travel due to the more relaxed government restrictions and policies in that state. While there are clear positive indications that our industry is entering a sustained recovery, the new operating environment does not come without challenges, particularly regarding property level staffing. As Scott mentioned, as lodging demand ramps up, our hotel operating teams are working to overcome labor market challenges across the portfolio. We expect these headwinds to remain in place until supplementary unemployment benefits expire, and public schools resume normal in-person operations. Of note, certain states have decided to exit supplementary unemployment benefits programs, which could lead to improvements in labor conditions in our markets. In addition, the reduced booking window experienced since the start of the pandemic has exacerbated the staffing challenges. Although showing some improvement in recent weeks, approximately 70% of our transient bookings are within a one to three day booking window, which creates a challenging environment for operators to forecast staffing needs. Despite the lingering challenges caused by the pandemic, there are plenty of reasons for optimism as we move towards a more normalized operating environment. Entering the recovery, we believe our portfolio's Southern-centric locations provide a competitive advantage and uniquely position us to outperform our peers. In particular, economic activity in our Florida and Georgia markets has been months ahead of the Northeast and West Coast markets, which have taken longer to reopen businesses and relax restrictions. Meanwhile, economic indicators such as consumer confidence and TSA airline data continue to trend positively. The combination of these factors, along with the continued success of the vaccine program, supports a clear path to a sustained recovery for the lodging industry and our portfolio. As always, we remain dedicated to making sound operational decisions while delivering long-term value for our shareholders. And with that, operator, we'll open the call up for questions.

Our first question today comes from Tyler Batory with Janney.

Hi, good morning. This is Jonathan on for Tyler. Thanks for taking our questions. First one for me: very helpful commentary on the labor pressures. But I was wondering if you could provide some additional color there, in terms of what you're seeing and how hiring has been as occupancy has ramped? And also, how are you thinking about staffing needs, given such a short booking window?

Yes, that's a good question. I mean, what we're doing is we're accessing every available source of labor we can, including multiple temp labor agencies, at every hotel and every location. We're trying to provide some near-term benefits that normally we wouldn't, while still trying to maintain margin control of the properties. It is a challenge. We're trying to match the increase in revenues appropriately with margin control. And unfortunately, it's just difficult right now. I think that these problems will begin to abate as some of the government stimulus programs start to wind down. In some cases, though, it's allowed us to flow a lot more to the bottom line simply because we're having to be more creative with respect to the day-to-day operations of the asset.

Okay, great. I appreciate that color. And then just wanted to follow up. Dave, you gave some helpful color in your prepared remarks. But I'm wondering if you could provide some additional color on corporate and group demand in the back half of the year. And, Dave, I believe you said 32% of revenue compared to 2019 is on the books. I'm curious about the cadence on that and how that compares to a normal year?

Yes, I mean, that was for the second quarter. What I was trying to do in my prepared remarks is show the increase in the booking pace. So in the second quarter, we're probably looking at about 30%, 35% of where we were in 2019, second quarter. Third quarter, I believe the number…

Is 63%.

Yes, it was 60-plus percent of where we were in the third quarter of 2019. And our booking pace is above 80% of where we were in the fourth quarter of 2019. So, I mean, what we're looking at is an interest from our typical different demand segments on the group key, coming back to the hotels in the aggregate.

And it's important to know, Jonathan, I mean, that's what's on the books right now. Typically, a lot of our hotels are booking in the year for the year, still at this point, we're early in May, for the latter half of the year. To have 82% of the group business on the books that we had in 2019 and still have seven months to go to book business for the fourth quarter, I mean, that's a pretty impressive number. Just as an aside, I think I might have said this on our last call. We have a couple of hotels that are typical big group hotels that simply don't have any more space to book large group business in the back half of the year. So if all these groups continue to show up, which is now occurring, we're simply full on group.

Okay, great, that's extremely helpful. And then turning to ADR, held up quite nicely in the quarter. I believe Scott, you said down only 9% versus 2019. Can you talk about your revenue management strategy broadly? And how you're thinking about driving rate as we go into the summer months?

Yes, certainly. It's a delicate line to walk on rate management right now. You're seeing certain markets being a little more sensitive to rate, us having to play some more games against our competitors to make sure we don't drop too far. But in the leisure markets that have been very strong, the rate has held and, in some cases, been extremely positive. South Florida, for example, our rates are far in excess of what we had previously been doing down there pre-pandemic. So it really is a multiple tale of two different stories on when you look at some of our markets compared to the leisure markets. Our focus is on driving length of stay on the weekends for one, is our first goal, to try to get those three and four day leisure travelers and extend their stays at high rates for the weekends versus what typically pre-pandemic would be a two-day stay. That's one of the biggest focuses from a revenue management standpoint.

Okay, that's very helpful. And then lastly, if I could just turn to the second quarter burn that you anticipate. Just curious if you could talk about what's implied in some of those assumptions, especially in the property level cash flow that you're expecting to see. I mean, is it seeing an environment that's similar to today, or are you assuming a ramp into this summer?

In terms of property level operations, what we're forecasting is just a continued ramp. At this point, we have a pretty good look at the second quarter. So as I noted in my remarks, April, RevPAR is up about almost 9% of March. So that's already in the books, and it's our forecast going forward. It’s a similar trend to what we've seen thus far this year. We do believe that we're in a recovery, and we're seeing that booking pace prove that out. And that's what we're forecasting when we look at our cash burn numbers.

Okay, great. Thank you for all the detail. That's all from me.

Thanks.

Our next question comes from Daniel Santos with Piper Sandler.

Hey, good morning. Thank you for taking my questions. So my first one is on the dividend. Based on the release, it sounds like you can't reinstate the common dividend until you make the preferred owners current and get them caught up. So maybe first, is that accurate? And then if so, perhaps walk us through the numbers, how far behind are you and what the timeline looks like to maybe get caught up and reinstate the common dividend?

Yes, you are correct. The cumulative preferred that we carry on our balance sheet has a statutory prohibition where we can't pay a common until we are current on the preferred. So that is consistent with similar securities that practically every hotel REIT or REIT in general has regarding when we will get current on the common and reinstated. I just don't have a timeline for you now. As Tony mentioned in his remarks, in 2021, we have a significant amount of forbearance that requires our attention. We have to work through that, and we have some other unsecured debt that you are aware of on our balance sheet that we took in 2020. That was basically rescue capital that provided needed liquidity for us to get through the tail end of the pandemic. Those are our first priorities. We're concerned about the common as well as everyone because we're all shareholders. But right now, I just can't give you a forecast of when we could be looking at a resumption of common dividends.

Okay, that is fair and helpful. My next question would be if you could sort of go into maybe more of the nuances on specific markets. I know you mentioned that on the last call, you talked about how certain hotels, you just sort of alluded to in your last answer, don't have space. Just wondering if you can maybe remind us what those hotels are, why you think those hotels or those markets in particular are outperforming and what you see the rest of the year looking like for them?

Yes, I mean, our Florida assets in general have performed very well. If you go to Miami, Tampa, or Jacksonville, it's pretty wide open. The restrictions have been lifted, and things are generally back to normal. That's resulting in a significant amount of bookings near term and group. Some of our other markets are not doing as well; Houston Texas is one of those, which is still suffering from government restrictions and other economic conditions. Washington DC is a market that is still generally underperforming, and our market in Raleigh, North Carolina is challenged due to the location of the hotel next to NC State University, which has its own issues with respect to student attendance and the restrictions due to the Coronavirus and the state government being closed. There are kind of bookends here: we have several assets in markets like Florida and some of our drive markets, in Wilmington, North Carolina, and in Savannah, Georgia, which have performed very well in the leisure segment. On the other hand, we have some assets that I just mentioned that are not doing well, and it's mostly a function of market dynamics and government restrictions total corporate activity.

Okay, that is helpful. And then I guess just one last quick one, if I may. Can you remind us a bit on the terms of the DC government contracts? How long did that last? And should we expect that sort of revenue to go away anytime soon?

Yes, that was really isolated to the month of January. It was revenue that we received at our Hyatt Centric and our Laurel Maryland Doubletree hotel, and it was government business and that pretty much burned off by February.

It was just surrounding the inauguration.

Okay, awesome. Thank you for taking my questions.

This concludes our question-and-answer session. I'd like to turn the call back over to Dave Folsom for any closing remarks.

Thank you for joining us today, and we look forward to speaking with everyone on the next call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.