Sotherly Hotels Inc. (NASDAQ:SOHOB): A Resilient Hospitality Play Poised for Continued Growth

Published on September 24, 2024 | Ticker: SOHOB

Sotherly Hotels Inc. (NASDAQ:SOHOB) is a self-managed and self-administered lodging real estate investment trust (REIT) that has demonstrated remarkable resilience in the face of industry challenges. With a diverse portfolio of upscale and upper-upscale full-service hotels primarily located in the southern United States, Sotherly Hotels has navigated the uneven post-pandemic recovery period and is now well-positioned to capitalize on the ongoing rebound in travel demand.

For the fiscal year ended December 31, 2023, Sotherly Hotels reported annual net income of $3,941,421, annual revenue of $173,838,057, annual operating cash flow of $21,400,462, and annual free cash flow of $13,218,967. These strong financial results underscore the company's ability to generate consistent profitability and cash flow, even in the face of macroeconomic headwinds.

During the first quarter of 2024, Sotherly Hotels continued to build on its momentum, reporting a 7% increase in total revenue to approximately $46.5 million compared to the same period in the prior year. Hotel EBITDA for the quarter rose 2.3% to approximately $12.4 million, while adjusted FFO increased 11.2% to approximately $4.5 million. These quarterly results highlight the company's operational excellence and its ability to drive top-line growth and profitability.

Business Overview

Sotherly Hotels' portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels, comprising 2,786 rooms, as well as interests in two condominium hotels and their associated rental programs. The company's properties operate under well-known brands such as DoubleTree by Hilton, Tapestry Collection by Hilton, and Hyatt Centric, as well as independent hotels.

The company's geographic footprint is primarily concentrated in the southern United States, with hotels located in Florida, Georgia, Maryland, North Carolina, Pennsylvania, Texas, and Virginia. This regional focus has allowed Sotherly Hotels to capitalize on the strong demand for leisure travel in the Sun Belt states, while also positioning the company to benefit from the gradual recovery in business and group travel in its urban markets.

Operational Highlights

Sotherly Hotels' first quarter 2024 results were driven by strong occupancy growth across its portfolio, which outperformed both top and bottom-line budget expectations. The company's group-focused properties, such as the Hyatt Centric Arlington and The DeSoto in Savannah, Georgia, were particularly noteworthy, with the latter achieving a 32% increase in RevPAR compared to the first quarter of 2019.

The company's urban hotels in Atlanta and Houston also demonstrated significant improvements, with the Georgian Terrace and The Whitehall recording RevPAR growth of 21% and 25%, respectively, over the prior year period. These gains were driven by increased corporate and association business, as well as a recovery in the film industry segment for the Georgian Terrace.

While the company's South Florida properties experienced a 3.3% decline in ADR during the first quarter, this was largely offset by strong occupancy growth at the majority of Sotherly Hotels' properties. The company's management team remains cautiously optimistic about the continued recovery in these markets, as the leisure travel segment normalizes following the post-pandemic surge.

Financials

Sotherly Hotels' balance sheet remains strong, with total cash of approximately $39.6 million as of March 31, 2024, including $29.3 million in unrestricted cash and cash equivalents and $10.3 million reserved for various operational and capital needs. The company's outstanding debt had a weighted average interest rate of 5.43%, with approximately 83.9% of the debt carrying a fixed rate of interest.

The company's liquidity position is further bolstered by its ability to generate consistent operating cash flow. For the fiscal year ended December 31, 2023, Sotherly Hotels reported annual operating cash flow of $21,400,462 and annual free cash flow of $13,218,967, providing ample resources to fund ongoing operations, capital expenditures, and debt service.

Looking ahead, the company anticipates routine capital expenditures for the replacement and refurbishment of furniture, fixtures, and equipment to be approximately $7 million for the 2024 calendar year. Additionally, the company has announced a $11.5 million renovation project at its DoubleTree by Hilton Philadelphia Airport hotel, which is expected to be completed by April 2026.

Guidance and Outlook

Sotherly Hotels has reiterated its full-year 2024 guidance, projecting total revenue in the range of $179 million to $182.6 million, representing a 4% increase over the prior year at the midpoint. Hotel EBITDA is expected to range between $46.1 million and $46.9 million, a 3.8% increase over the prior year at the midpoint. Adjusted FFO is forecasted to be in the range of $12.8 million to $13.8 million, or $0.64 to $0.69 per share, reflecting an 8.7% decrease from the prior year at the midpoint.

The year-over-year decrease in adjusted FFO is primarily attributable to increased interest expense in 2024 and one-time benefits in the prior year related to successful real estate tax appeals. Despite this, the company remains cautiously optimistic about its ability to deliver strong results for shareholders, driven by continued growth in the group and business transient segments, as well as the gradual recovery in its urban markets.

As of May 1, 2024, Sotherly Hotels' group bookings for the second quarter and full year 2024 are pacing approximately 7% ahead of the prior year. Additionally, the company forecasts full-year 2024 RevPAR to range between 104% and 106% of the full-year 2023 level, further underscoring the company's confidence in its ability to capitalize on the ongoing industry recovery.

Risks and Challenges

While Sotherly Hotels has demonstrated resilience in the face of industry challenges, the company is not without its risks. The company's geographic concentration in the southern United States, particularly in urban markets, exposes it to regional economic fluctuations and potential oversupply of hotel rooms. Additionally, the company's reliance on group and business travel demand, as well as its exposure to the film industry in Atlanta, could make it vulnerable to changes in these demand segments.

The company also faces risks related to its debt maturities and the ongoing challenges in the lending environment. However, Sotherly Hotels has proactively addressed these concerns, as evidenced by the recent extension and refinancing of its DoubleTree by Hilton Philadelphia Airport hotel loan.

Conclusion

Sotherly Hotels Inc. (NASDAQ:SOHOB) has demonstrated its ability to navigate the complexities of the hospitality industry, delivering strong financial results and positioning itself for continued growth. With a diverse portfolio of upscale and upper-upscale hotels, a focus on group and business travel, and a prudent approach to capital management, Sotherly Hotels is well-equipped to capitalize on the ongoing recovery in the lodging sector. As the company continues to execute on its strategic initiatives and leverage its operational expertise, it remains a compelling investment opportunity for those seeking exposure to the resilient hospitality industry.

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