Sotherly Hotels Inc.

Gentlemen, this lovely hotel's G2 2025 company call and webcast will begin shortly with your host, Mike Simms. We appreciate your patience as we repay your sessions today. During the call, we encourage participants to raise any questions they may have. You can raise a question by pressing star followed by 1 on the telephone keypad, and to move yourself along with questioning, we'll be star followed by 2. As a reminder, to raise a question, we'll be star followed by 1. We will begin shortly. Good morning all and thank you for joining us in this lovely hotel. My name is Carly and I'll be coordinating your call today. If you have a question during the call, you can do so by pressing start or by 1 on the telephone keypad to move yourself around the question. Please start the device here. I'd like to hand over to our host, Maxine, who is our president of operations. The floor is yours.

Thank you. Good morning, everyone. If you did not receive a copy of the earnings release, you may access it on our website at southerlyhotels.com. In the release, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg. 2 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 FDC. 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, Mac. I'll start off today's call with a review of our portfolio's key operating measures for the second quarter. Looking at the second quarter results of the composite portfolio compared to 2024, WebCorp 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 composite portfolio of 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 a 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 rates. During the second quarter, our portfolio of hotels underperformed expectations against the backdrop of growing economic uncertainty and softening demand. While certain leisure destinations shared pockets of stability, overall performance was impacted by 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., MFA properties in Arlington and Laurel. Our hotels in Savannah and Atlanta, where association business represents a meaningful share of groups and nights, were also adversely affected. Additionally, uncertainty around national tariff policies contributed hesitancy among business travelers, particularly in several of our secondary and drive-thru markets. These factors created a more challenging operating environment than we had anticipated, and we remained focused on disciplined cost management and targeted revenue strategies as we navigated 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 and Tampa continue to experience some operational disruption in the second quarter due to elevator 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 Redcar, reflect a temporary impact on a pre-insurance basis, while our reported revenue and profitability benefited from business interruption insurance proceeds. helping to mitigate 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. The rev part 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 bank and catering revenue. Hotel Dallas remained a market leader, finishing the quarter with a red card index of 119.6% versus contended set. The Doubletree Philadelphia airport delivered a solid second quarter performance, surpassing budget expectations despite ongoing softness in market ADR. While red card 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, supported 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 remains 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 the Red Park softness in Savannah, Atlanta, and Jacksonville. While these results came in below our expectations, we believe the outside impact on those 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 Mendi 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 a 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 loan secured by the Double Street in Hollywood, Florida. We remain committed to a disciplined, conservative approach to capital management, supported by a well-staggered maturity schedule that offers meaningful flexibility in the current financing environment. With that, I'll now turn the call over to Tony.

Thank you, Scott. Reviewing performance for the period ended June 30th, 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 includes 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, exclusive 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 details. Looking at our balance sheet as of June 30th, 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 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 portion of the 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 for 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 to $188.2 million for full year 2025, And at the midpoint of the guidance, this represents a 2.6% increase over the prior year. Poteliva is projected in the range of $45.3 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. They're 34% to 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 a majority of our competitive set properties reporting year-over-year rev part 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 policy has 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 outside impact during the quarter with RETPAR 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 turns for our portfolio 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, modifications, 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 that a change in interest rates will provide a much-needed lift to commercial real estate lending. so that we 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, relevant performance in a complex operating environment. And with that, operator, we can open the call up to questions.

Thank you very much. We'd like to open the line for Q&A. If you'd like to ask a question, please speak up. If you'd like to remove yourself from the line of questioning, please start to look by two. As a reminder, to raise a question, please start to look by one. Our first question comes from Alexander Goldstaff from Pakistan. Alexander, your line is not open.

Hey, good morning down there. Good morning. Hey, I have a few questions here. The first one, though, was interesting. 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.

Well, I don't think I'd say it was the hardest hit. It had some outsized negative impact. The quarterly red bar was down significantly in the market. Part of it was transient travel was off, and we do have, surprisingly, there is a lot of government business that was impacted by the Doge related activities. in the quarter, and Scott, you got anything to add?

Yeah, I mean, that's, you know, twofold. Again, I think leisure travel in Savannah has reached a crest of a bit. I think we've really seen a tremendous growth from the leisure segment there over the past five years, and then we've topped out for at least the time being. But on the group side, as Dave mentioned, I think what we've been, you know, a bit surprised by as the Doge cuts have really unfolded, how far that money goes and the type of group business that we typically book at hotels outside of the DC MSA that benefit from government-related funding. So Savannah and Atlanta, I think as we mentioned, and a bit of Jacksonville as well, you know, we're seeing group cancellations or just a pullback in certain group leads that ultimately are related to government funding that you wouldn't traditionally expect to be government-related business. Yeah, I think it's associating school, you know, education associations, those type of things that you don't immediately think of as a government group, but ultimately with the funding from the government.

Okay, and maybe along that line, again, this is all, you know, sort of learning more about the portfolio and the reach of government. What percent of your, as you look at your portfolio, what percent is government? Is it like 20%, 30%, 10%? Like, What – you know, if we had to break out your portfolio between government, you know, group, business, and transient, what would be the mix between those three segments?

Yeah, Alex, and I don't want to give you a firm number because, again, it's – you know, we would traditionally have a firm government group number that I could probably tell you. But what we're seeing – and that's probably – you know, in the high single digits, low doubles, probably high single digits, I would guess. Again, mainly focused on those CCO doubles. That is truly government group-related business. And then a little bit, you know, throughout the rest of the portfolio. What we're seeing now are group bookings that, again, nobody would ever tie them directly to the government, and they aren't officially government-tied. It's just the funding, the way that the flow of funds has been coming through the government and has been restricted. You may pull back in year-terms, booking pay for lead generation. So again, I don't think it's necessarily people that have gotten their funds cut. There are groups that I think are hesitant to proceed forward until they have a clear picture on what all funding they're going to be getting on a foreseeable future.

Yeah, Alex, it's like having a private consulting firm that has a group booking at a hotel, but all of its revenues come from the federal government. So when they have a pullback, then that corporate account cancels its bookings. But it's all ultimately tied to the government. And it's kind of difficult to disaggregate all that and give you a percentage number.

And I think the final piece on there, again, we're not really seeing cancellations per se. It's been either groups that follow through with their meeting but are more hesitant to overspend on banking and catering. like they've traditionally done. I think that we saw a lot of that impact in Savannah on a year-over-year basis. You know, we've had a lot of groups in-house. Last year, they, you know, bought the kitchen sink in terms of banking and catering amenities. This year, they spent less because they weren't sure, you know, what their full, you know, funding outlook looks like. Or the lead generation has just temporarily stalled for kind of any year, 40-year bookings. And I think that's certainly a temporary impact that's going to just burn back up here.

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

From a revenue perspective, that reflects our most recent forecast for the entire year. So we've reforecast the entire portfolio for the balance of the year. with all the trends that we're currently seeing, both on group and leisure, you know, side of the equation. And, you know, I think that's our best outlook based on the trends we're currently seeing.

So 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 three, maybe just government? I'm just trying to get a little bit, you know, for my promises, nooks and crannies. I'm just trying to get the little, you know, nooks and crannies on those three different pockets for the balance of the year.

Yeah, we're not expecting further pullback necessarily. We actually have a pretty solid group looking 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 you know government i think is again it's declined and we're we assume it's going to kind of stay state-of-state going forward for the balance of the year until things are unlocked and leisure is a market-by-market uh analysis but you know we're not expecting that to further grow beyond what we've seen so far okay so really group you expect the rebound that's right second quarter the second quarter unfortunately was a step backwards on a year-over-year basis for group we expect that to step forward Okay.

Perfect. And then going on, you know, sources of capital, obviously you announced the parking garage at George and Ferris. Are there other asset sales plans, whether it's perhaps a hotel but more likely, you know, another type of parking lot or something that's tangential to a hotel that you may be able to sell?

Yeah, 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, you know, 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 at the very first time. Okay. And then just final question, appreciate your time.

You know, 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 big 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 LTGs 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.

Alex, we look at that all the time, and Lenders, whether they are conduit lenders or insurance companies or banks, debt yields are still stubbornly high, at least compared to the debt yield climate that existed before the pandemic. So there are still several hundred bases of variance between the underwriting that occurred prior to the pandemic and what we're seeing now. Interest rates obviously are elevated, but they have come in and we expect them to come in further. Debt service coverage ratios and covenants are simply a lot tougher than they used to be and it's the lender's caution that creates that environment. You add up all of those various factors and the lodging industry is still either not in favor with the lending community or just having to recover from a more buoyant lending environment that occurred five or six years ago. I think we're seeing cracks there. We're seeing debt service coverage ratios ease in underwriting. We're underwriting a lot of properties right now. We're seeing debt yields stop rising. So we're seeing some stabilization there, and we're seeing rates come in. So I think things, as I mentioned in my prepared remarks, we're seeing the climate alter for the better, at least for lodging borrowers. We think that will continue. Okay. Thank you.

Thank you.

Thank you very much. As a reminder, if you would like to raise a question, please take it. We're passing it off. If I want, we'll ask for any further questions to fill through. We currently have no further questions, so I'd like to hand that to David Folsom for any further remarks.

Thank you, Operator, and thank you for everyone who's dialed in today. And I wish everybody have 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 in my dispatch online.