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 will 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 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 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 start off today's call with a review of our portfolio's key operating metrics for the quarter. Looking at the first quarter results for the composite portfolio, RevPAR is $100.89 driven by an occupancy of 53.9% and an ADR of $187.23. First quarter RevPAR performance represents an increase of 52.5% over the same period in 2021. Looking at these figures versus the first quarter of 2019, RevPAR was down 17.2% with occupancy down 22.9%, but ADR increasing 7.5%. Overall, we were pleased with the first quarter results despite headwinds faced at the start of the year due to the Omicron variant and believe the improvement throughout the quarter demonstrates that our portfolio is quickly advancing towards normalization. Examining composite portfolio RevPAR results on a monthly basis benchmarked against 2019 highlights the quarter's continuous improvement. January RevPAR was 66% of January 2019 RevPAR. February, RevPAR grew to 77% of February 2019, while March RevPAR actually eclipsed 2019 with RevPAR representing just over 100% of March 2019 results. While the Omicron variant had a substantial impact on all travel segments during the start of the first quarter, we experienced a transformative shift in consumer behavior during the second half of the quarter as rapidly declining case counts were combined with a significant increase in bookings, particularly from group and corporate travel. We are encouraged by the performance of our urban market hotels such as Arlington and Houston, which despite the headwinds caused by Omicron easily surpassed budgeted expectations for the quarter following nearly two years of underperformance. Our portfolio continues to benefit from the sustained recovery in leisure travel, which became even more robust due to pent-up demand from the Omicron variant in late December and January. In particular, our coastal markets such as Savannah, Tampa, Wilmington, and Hollywood experienced renewed surge in leisure demand that was combined with a steady return of group demand during the second half of the quarter. Pricing power continues to be the major driver of profitability, especially for these leisure destinations, many of which attracted unprecedented rates during peak periods, such as President's Day weekend and spring break. Our portfolio's best-performing hotels during the quarter were again primarily driven by strong leisure travel, but also boosted by the return of group and business travel. Looking at some highlights across the portfolio. The DeSoto Savannah continued its excellent performance during the quarter, again outpacing 2019 metrics with an 8.4% gain in RevPAR fueled by a significant rate growth of nearly 35% over 2019, which led to outstanding flow-through. The hotel also continued to outperform its comp set, gaining 850 basis points in RevPAR share during the quarter. Hotel Alba in Tampa continues to be a standout among our portfolio in the hotel's competitive set. During the period, it produced RevPAR nearly 33% greater than the first quarter of 2019 with occupancy up nearly 2% and ADR growing more than 30%. Comparing these results to Q1 2021, which included the Super Bowl in the immediate market, also highlights the property's stellar results as RevPAR increased nearly 34% year-over-year against a tough comparable. This hotel achieved a RevPAR index of 116% in the quarter, solidifying its position as the leader among its competitive set. Hotel Ballast in Wilmington saw excellent results during the quarter with signals of sustained recoveries underway for this asset. Substantial rate growth of 20% over 2019 levels facilitated an impressive flow-through during the quarter. Notably, the property gained more than 2,600 basis points in share from its competitive set during the quarter as the group business segment, which is vital to this hotel's performance ramped up to pre-pandemic performance levels in the latter half of the quarter. Examining our portfolio's recent booking trends further demonstrates steady acceleration in group and business travel at our hotels. During the first quarter, the group segment produced a 15% improvement over the fourth quarter 2021, while business travel improved more than 20% over the fourth quarter of last year. Thus far, during the second quarter, we have experienced further improvement to these segments and are projecting this trend to continue as the balance of the year is shaping up nicely with strong attendance at citywide events, in-house meetings, and corresponding group room blocks. While still plenty of room to grow compared to 2019, this trajectory of group and business demand recovery is a promising indicator for our company. Our managers executed a lean and flexible staffing model in order to control variable costs and achieve excellent flow-through despite uneven demand and rising cost of goods and labor faced during the quarter. We continue to focus heavily on pricing power, not only for our room rates but also for our F&B offerings, banquet rentals, and parking for which consumers have shown minimal price sensitivity. Moving forward, we expect that our ability to achieve strong rates will continue to offset the increase in labor and other rising costs associated with an inflationary environment. Turning to our corporate activity. As previously noted, the company has entered into an agreement to sell the DoubleTree by Hilton Raleigh Brownstone Hotel for a purchase price of $42 million. During the first quarter, we entered into an amendment to this agreement with the buyer to extend the closing period in exchange for an additional cash deposit of $800,000, with the closing date now set for June 1. Including this modification, the buyer has a total of $1.6 million in nonrefundable deposits associated with this transaction. The company intends to use the net cash proceeds from the pending sale of the hotel to repay the existing mortgage on the property and to repay a portion of the secured notes with Kemmons Wilson. The company recently extended the maturity date on the existing mortgage of the DoubleTree by Hilton Raleigh - Laurel, with the existing lender by one year to May 2023. As part of the modification, the company paid down the principal balance of the loan by $400,000. The current loan balance is now approximately $7.6 million or approximately $37,000 per key. Lastly, year-to-date, we have executed agreements to exchange approximately 50,000 shares of preferred stock for approximately 488,000 shares. The execution of these exchanges fits with our long-term strategy to shore up our balance sheet while also preserving liquidity. These transactions eliminated approximately $245,000 of deferred dividend payments as well as approximately $100,000 in annual preferred dividend payments going 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 of 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 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 G&A 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 G&A 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 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 two 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 six 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 two years of absence. For example, our number one 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 the 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 two to three years. In total, the sale of Louisville and Raleigh will remove approximately $48 million 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.

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 kind of back to that normalized level of operation, which should produce positive free cash and FFO.

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

The par amount is approximately $100 million.

Yes, it's just over $100 million, which is approximately.

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

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

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

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

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

It's great to see the return of group business and leisure travel. You mentioned there are no pricing issues with SMB, parking, or room rates. Can you tell me about your operating expenses at the property level? Are they aligned with the level of demand? Do you think you'll need to hire more staff, which could lead to an increase in operating expenses? I'm trying to understand if your operations are adequately staffed or if additional staffing will be necessary, which might affect the operating expenses.

As prices have risen in the current inflationary environment, we've also observed an increase in operating expenses at our hotels. A significant factor in this is labor, which you've mentioned. The staffing situation has improved, with more individuals eager to return to work. However, we still rely heavily on outsourced labor. If we can achieve permanent staffing levels, we will eliminate some costs associated with third-party staffing agencies. Additionally, utilities and the cost of goods sold continue to increase due to inflation. However, the rate structure at our hotels is generating a strong flow-through to our bottom line, aiding our margins. We have made a deliberate choice not to add expenses over the past few quarters until RevPAR was adequate. This approach has allowed us to maintain our margins and move in a positive direction. I don't anticipate any significant changes to operating expenses unless there's a downturn in rate structure growth. Tony, do you have any thoughts?

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 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, that's correct. We have been attempting to sell the Louisville hotel for five years as it was not a core asset for us. The market faced issues like oversupply and the merger between Starwood and Marriott, which affected our reservation system dynamics. As you mentioned, the sale of Raleigh presented a rare pricing opportunity. However, we do not intend to further reduce our assets significantly. Therefore, I do not foresee us liquidating any additional assets. I also believe we have adequately addressed our corporate debt repayment through 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 now 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.