Good morning everyone, and thank you for being with us for the Sotherly Hotels Q2 2025 Conference Call and Webcast. My name is Karl and I will be leading the call today. Now, I would like to pass it over to our host, Mack Sims, Vice President of Operations. The floor is yours.

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. I'll start off today's call with a review of our portfolio's key operating metrics for the second quarter. Looking at the second quarter results for the composite portfolio compared to 2024. RevPAR decreased 5.4%, driven by a 3.5% decrease in occupancy and a 1.9% decrease in ADR. Stripping out Tampa from the results due to continued impact of the property from Hurricane Helene, which struck Tampa in late September 2024, the second quarter's composite portfolio RevPAR decreased slightly better 5% compared to prior year, driven by a 2.3% decrease in occupancy and a 2.8% decrease in ADR. Year-to-date RevPAR performance for the composite portfolio represents a decrease of 0.5% from the same period in 2024 driven by 0.9% increase in occupancy and a 1.5% decrease in rate. Once again, stripping out Tampa from the results, composite portfolio delivered slightly better results decreasing 0.1% compared to prior year, driven by a 2.1% increase in occupancy and a 2.1% decrease in rate. During the second quarter, our portfolio of hotels underperformed expectations against the backdrop of growing economic uncertainty and softening demand. While certain leisure destinations showed pockets of stability, overall performance was impacted by a pullback in government-related travel due to DOGE program spending cuts as well as more cautious consumer behavior in the face of persistent inflation and economic unease. DOGE-related spending cuts had a notable impact on group and business traveler demand at our Washington, D.C. MSA properties in Arlington and Laurel. Our hotels in Savannah and Atlanta, where association business represents a meaningful share of group room nights were also adversely affected. Additionally, uncertainty around national tariff policies contributed to hesitancy among business travelers, particularly in several of our secondary and drive to markets. These factors create a more challenging operating environment than we had anticipated, and we remain focused on disciplined cost management and targeted revenue strategies as we navigate the remainder of the year. Despite these macroeconomic headwinds, our portfolio's ADR remained resilient, reflecting the strength of higher-end travelers as well as our overall pricing strategy. As previously noted, Hotel Alba in Tampa continues to experience some operational disruption in the second quarter due to elevated repairs following flood damage from Hurricane Helene. While restoration is ongoing, we are making steady progress and anticipate a full return to normal operations later this month. Importantly, our headline operating metrics, occupancy, ADR and RevPAR reflect the temporary impact on a pre-insurance basis, while our reported revenue and profitability benefited from business interruption insurance proceeds, helping to mitigate the financial effects during the quarter. Looking at some highlights from a few key assets in the portfolio during the quarter. Hotel Ballast in Wilmington posted another solid performance in the quarter, exceeding budgeted expectations. RevPAR increased 1.3% year-over-year, driven by a 2.7% gain in average rate partially offset by a modest 1.3% decline in occupancy. The hotel benefited from continued strength in group demand along with strong banquet and catering revenue. Hotel Ballast remained a market leader, finishing the quarter with a RevPAR index of 119.6% versus competitive set. The DoubleTree Philadelphia Airport delivered a solid second quarter performance surpassing budget expectations despite ongoing softness in market ADR. While RevPAR declined 5.3% year-over-year, driven by a 6% decrease in ADR, this decline primarily reflects the absence of several one-time events that boosted results in the prior year. Looking ahead, we remain optimistic about the hotel's outlook, reported by improving group bookings and strengthening citywide demand drivers. The Hyde Beach House delivered strong results in the second quarter, outperforming both budgeted and prior year expectations. RevPAR increased 12.7%, driven by an 18.5% gain in occupancy, partially offset by a 4.9% decline in ADR. Performance was bolstered by robust spring break leisure demand and increased demand related to the FIFA Club World Cup. Profitability remained solid, supported by diversified revenue streams, including centralized housekeeping and parking operations. Looking at portfolio profitability. Hotel EBITDA margin declined by 2.5% year-over-year for the quarter, primarily due to RevPAR softness in Savannah, Atlanta and Jacksonville. While these results came in below our expectations, we believe the outsized impact from DOGE-related spending cuts and tariff policies is temporary in nature. Encouragingly, our operators were able to maintain rate discipline despite these headwinds, signaling that demand among higher-income customers remains resilient. Looking ahead, we expect margin trends to remain relatively stable, supported by normalized staffing levels, steady mend offerings and easing wage pressures across the portfolio. Turning to corporate activity, we are proactively managing upcoming debt maturities tied to our assets in Atlanta and Hollywood. While broader debt market conditions remain uncertain, we are confident in our ability to work constructively with our lending partners. As disclosed in early July, we engaged a consultant that is in the process of helping us negotiate the loan extension with a special servicer for The Georgian Terrace Hotel in Atlanta. Looking ahead, we are also confident in our ability to address the upcoming maturity of the mortgage loans secured by the DoubleTree in Hollywood, Florida. We remain committed to a disciplined and conservative approach to capital management supported by a well-staggered maturity schedule that offers meaningful flexibility in the current financing environment.

Thank you, Scott. Reviewing performance for the period ended June 30, 2025. For the second quarter, total revenue was approximately $48.8 million, representing a decrease of 3.7% over the same quarter in 2024. Year-to-date, total revenue was approximately $97.1 million, representing a decrease of 0.1% from the same period last year. Hotel EBITDA for the quarter was approximately $13.9 million, representing a decrease of 11.5% from the same quarter in 2024. Year-to-date, hotel EBITDA was approximately $26.8 million, representing a decrease of 4.4% over the same period last year. For the quarter, adjusted FFO was approximately $4.8 million, representing a decrease of approximately $2.7 million from the same quarter in 2024. And year-to-date adjusted FFO was approximately $9.3 million, representing a decrease of $3.4 million from the same period last year. Please note that our adjusted FFO excludes charges related to the early extinguishment of debt, unrealized 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, corporate, general and administrative expenses, realized gains and losses on derivative instruments, 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 June 30, 2025, the company had total cash of approximately $26.5 million, consisting of unrestricted cash and cash equivalents of approximately $10.5 million as well as approximately $16.5 million, which was reserved for real estate taxes, insurance, capital improvements and certain other items. At the end of the quarter, we had principal balances of approximately $315.8 million in outstanding debt at a weighted average interest rate of 5.89%, approximately 84.4% of the company's debt carried a fixed rate of interest when taking into account the company's interest rate hedges. We anticipate routine capital expenditures for the replacement and refurbishment of furniture fixtures and equipment will amount to approximately $7.1 million for calendar year 2025. Significant portions of our product improvement plans at the DoubleTree by Hilton Philadelphia Airport and the DoubleTree by Hilton Jacksonville Riverfront will occur during the year with anticipated capital expenditures related to both these projects totaling $5.6 million for calendar year 2025. Turning to guidance, we're issuing updated guidance to reflect full year 2025 accounting for current and expected performance within the portfolio, taking into account market conditions as well. We're projecting total revenue in the range of $185.2 million to $188.2 million for full year 2025 and at the midpoint of the guidance, that represents a 2.6% increase over the prior year. Hotel EBITDA is projected in the range of $45.3 million to $45.8 million. At the midpoint of the guidance, this represents a 2.6% decrease from the prior year. And adjusted FFO is projected in the range of $6.9 million to $7.5 million or $0.34 to $0.37 per share. And I'll now turn the call over to Dave.

Thank you, Tony. Good morning, everyone. In the second quarter, we experienced a modest reduction in hotel demand across the portfolio with the majority of our competitive set properties reporting year-over-year RevPAR declines. This softening aligns with broader macroeconomic headwinds including elevated interest rates and the continued impact of tariff-related policies. Despite these pressures, business transient demand remained relatively steady with only a slight year-over-year dip, underscoring the resilience of this high-value segment. Group booking pace for the remainder of the year also remains intact with only minor reductions compared to 2024 supporting our expectation for a gradual recovery as market conditions stabilize. From a macro standpoint, recent federal policies introduced a higher level of uncertainty, contributing to reduced near-term visibility across the lodging sector, this backdrop has weighed on consumer sentiment and resulted in softer overall demand; government-related travel has also slowed particularly at our hotels in the Washington, D.C. area, Savannah and Atlanta markets where government and association business represent a meaningful share of revenue. We believe tariff-related policies have had a direct impact on the leisure segment, particularly among price-sensitive and international travelers, inflationary pressures and rising costs on consumer goods have constrained discretionary spending, leading to shorter booking windows, lower average lengths of stay and more cautious travel behavior overall. These effects were especially pronounced in our drive to leisure markets where weekend demand has historically been strong. Savannah, in particular, saw an outsized impact during the quarter with RevPAR down nearly 10% year-over-year. Despite these results, we remain confident in the long-term fundamentals of the Savannah market and expect performance to recover as macro pressures ease. On the group side, total production declined 7% in the second quarter. That said, group pace for the remainder of the year remains healthy, and we have not seen the widespread cancellations that typically accompany more severe economic downturns. In some markets such as Arlington, where second quarter group revenue increased 42% over prior year, our operators were able to offset declines in government business by backfilling with additional group bookings. As overall demand trends for our portfolio have moderated, we're approaching the back half of the year with a more measured outlook. Still, we remain confident in our operators' ability to adapt quickly and execute targeted sales and revenue strategies to navigate the current environment effectively. As Scott referenced in his prepared remarks, the mortgage markets continue to challenge borrowers as loans mature and refinancing assets remain difficult. We continue to navigate this environment with loan restructuring, extensions, modification and asset sales. For example, as we recently disclosed, we have entered into a purchase and sale agreement to sell our parking garage in Atlanta adjacent to The Georgian Terrace hotel. This sale, coupled with a new mortgage loan on the hotel, will allow for the extinguishment of the existing CMBS loan that matured in the second quarter. We further expect a change in interest rates will provide a much-needed lift to commercial real estate lending. Sotherly will benefit from such developments as well as an environment characterized by more stable macroeconomic conditions. As we look toward the second half of the year, we remain cautiously optimistic about the overall trajectory of the lodging industry. While elevated interest rates, persistent inflationary pressures and geopolitical uncertainty continue to weigh on consumer and corporate sentiment, we're taking a more measured view of the near-term pace of hotel demand. That said, our portfolio is well positioned to navigate these challenges. We believe our concentration in upscale and upper upscale assets will allow us to outperform the broader market in 2025. Booking trends remain relatively healthy. And at this time, we anticipate full year 2025 RevPAR for the actual portfolio to be approximately flat compared to last year. Supported by continued proactive asset management, we remain confident in our ability to deliver strong relative performance in a complex operating environment. And with that, operator, we can open the call up to questions.

Dave, I have a few questions here. The first one, though, I was interested, I think if I heard you correctly, you said Savannah was the hardest hit hotel in the quarter. And I can understand Arlington and Laurel given DOGE. But can you just talk a little bit more about Savannah? Maybe there's more government there than I thought. But that comment stuck out to me for why that hotel would have been the hardest hit, again, if I heard you correctly.

I don't believe I stated it was the hardest hit, but it did experience a significant negative impact. The quarterly RevPAR decreased notably in the market. One contributing factor was a decline in transient travel. Interestingly, we also saw a considerable amount of government business affected by the DOGE-related activities this quarter. Scott, do you have anything to add?

Yes. It's twofold. Leisure travel in Savannah has likely peaked. We've seen incredible growth in the leisure segment there over the past five years, but now it seems to have plateaued for the time being. On the group side, as Dave pointed out, we were somewhat surprised by how far government-related funding goes and the kinds of group business we usually book at hotels outside of the D.C. metropolitan area that benefit from this funding. In Savannah, Atlanta, and Jacksonville, we are experiencing group cancellations or a reduction in certain groups that are related to government funding, which isn't typically recognized as government-related business. This includes education associations and similar organizations that, while not immediately considered government groups, ultimately receive their funding from the government.

Okay. Along those lines, as you evaluate your portfolio, what percentage is related to government? Is it around 20%, 30%, or 10%? If we were to categorize your portfolio into government, group business, and transient segments, what would the distribution look like among these three areas?

Yes, Alex. I don’t want to provide a specific number, as we typically have a distinct government group number to share. What we are observing is probably in the high single digits for government-related business, particularly focused on D.C. hotels, with some contribution from the rest of the portfolio. Currently, our group bookings, while not officially tied to the government, reflect a funding situation where government-related funding has been restricted, leading to a slowdown in near-term bookings or lead generation. It’s not necessarily that groups have had their funding cut; rather, they seem hesitant to proceed until they have a clearer understanding of their future funding.

Yes, Alex, it's similar to having a private consulting firm with a group booking at a hotel, where all revenues stem from the federal government. When there's a pullback, that corporate account cancels its booking, but everything is ultimately linked to the government. However, it's challenging to break that down and provide a specific percentage.

Yes, I think the final point to mention is that we're not really experiencing cancellations. Instead, groups that are attending meetings are being more cautious about overspending on banquets and catering like they usually do. We observed a significant amount of this impact in Savannah compared to last year. Last year, many groups purchased everything they could in terms of banquet and catering services. This year, they spent less because they are uncertain about their funding prospects, and the lead generation for future bookings has temporarily slowed down. I believe this is only a short-term impact that will rebound soon.

And then your guidance reduction, that reflects further government-related pullback? Or you think that this level where you're at in the second quarter is the new level?

From a revenue perspective, that reflects our most recent forecast for the entire year. We have reforecasted the entire portfolio for the balance of the year considering all the trends we are currently observing on both the group and leisure sides. I believe that represents our best outlook based on the current trends.

But directionally, Scott, you think between government group and leisure, do you think that they'll maintain second quarter that sort of annualized pace or you're expecting further declines across all 3, maybe just government? I'm just trying to get a little bit sort of like Thomas' milks and crannies. I'm just trying to get the little Nooks & Crannies on those 3 different buckets for the balance of the year.

Yes. We're not expecting further pullback necessarily. We actually have pretty solid group bookings for the back half of the year. So we're seeing some growth from a group perspective for the back half of the year on a year-over-year basis.

And what about leisure and government?

And government has declined, and we expect it to remain stable for the rest of the year until conditions improve. Leisure will require a market-by-market analysis, but we do not anticipate any further growth beyond what we have experienced so far.

Okay. So really group, you expect to rebound?

That's correct. The second quarter, unfortunately, showed a decline compared to last year for the group. However, we anticipate improvement in the second half of the year based on our current bookings and revenue in the pipeline.

Okay. Perfect. And then going on sources of capital. Obviously, you announced the parking garage at Georgian Terrace, are there other asset sales planned whether it's perhaps a hotel, but more likely another type of parking lot or something that's tangential to a hotel that you may be able to sell.

Yes. There are options that we are always looking at. So the parking garage in Atlanta is a good example of an option like that, but also we have a lot of equity in some of our hotels that also we can tap into and we plan to tap into for refinancing to raise liquidity. But there are things here and there, whether it's a parking garage or a parking lot in various hotels or sale of assets may be online if that's necessary for the company, although we certainly don't want to do that.

Okay. And then just final question. I appreciate your time. In other property sectors, even like office, we're seeing the mortgage market come back for office, not all office, but obviously, if it's a good quality asset. Presumably, hotels have fully recovered since the pandemic, why is the mortgage market for hotels still challenged? Is it that the lenders still don't view the industry as recovered? Or was it just LTVs back in the day were still meaningfully higher than where terms are today? I'm just trying to get a better sense for why the hotels would still be challenged in the debt markets.

We continuously monitor the situation, and regardless of whether they are conduit lenders, insurance companies, or banks, debt yields remain high compared to the levels seen before the pandemic. There's still a noticeable gap between the underwriting practices from that period and what we observe today. Interest rates are elevated but have started to come down, and we anticipate further decreases. The requirements for debt service coverage ratios and covenants have become much stricter, and this cautious stance from lenders is influential. When considering all these factors, the lodging industry still struggles to gain favor with lenders or is in the process of recovering from a more favorable lending situation from 5 or 6 years ago. However, we are observing some positive changes; debt service coverage ratios are easing in underwriting, we are underwriting numerous properties at present, and debt yields have stopped rising. We are seeing signs of stabilization and a reduction in rates. Overall, as I mentioned earlier, the lending environment seems to be improving for lodging borrowers, and we believe this trend will persist.

We currently have no further questions. I would like to hand it back to David Folsom for any additional remarks.

Thank you, operator, and thank you for everyone who dialed in today, and I wish everybody a good day, and we'll talk to you next quarter.

As we conclude today's call, we'd like to thank everyone for joining. You may disconnect your lines.