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Sotherly Hotels (SOHO): A Resilient Hospitality REIT Navigating Evolving Industry Dynamics
Published on November 28, 2024 | Ticker: SOHOO

Business Overview

Sotherly Hotels Inc. (SOHO) is a self-managed and self-administered lodging real estate investment trust (REIT) that has focused on acquiring, renovating, upbranding, and repositioning upscale to upper-upscale full-service hotels primarily in the southern United States. With a portfolio of 10 wholly-owned hotels comprising 2,790 rooms, as well as interests in two condominium hotels with associated rental programs, Sotherly has established itself as a key player in the regional hospitality market.

Company History and Portfolio

Sotherly Hotels Inc. was incorporated in Maryland in August 2004 and commenced operations in December of the same year following its initial public offering and the acquisition of six hotel properties. The company's portfolio includes well-known brands such as DoubleTree by Hilton, Tapestry Collection by Hilton, and Hyatt Centric, as well as independent hotels. In 2007, Sotherly expanded its portfolio by acquiring the DoubleTree Resort by Hilton Hollywood Beach and the Hotel Alba Tampa, Tapestry Collection by Hilton. Further growth occurred in 2014 with the acquisition of the Georgian Terrace in Atlanta and in 2018 with the addition of the Hyatt Centric Arlington. Throughout its history, Sotherly has focused on renovating and repositioning its properties to enhance their performance and competitiveness. The company faced significant challenges during the COVID-19 pandemic, reporting substantial net losses in 2020 due to declining occupancy and revenue. To navigate this difficult period, Sotherly implemented cost management strategies, maintained liquidity, and utilized Paycheck Protection Program loans to support its operations.

Financials

Sotherly's financial performance has reflected the company's adaptability and resilience in the face of industry challenges. For the fiscal year ended December 31, 2023, the company reported total revenue of $173.84 million and a net income of $3.94 million. The company's operating cash flow and free cash flow for 2023 both stood at $21.40 million.

During the third quarter of 2024, Sotherly reported total revenue of $40.7 million, representing a 3.9% increase over the same period in the previous year. This increase was primarily driven by an overall 4.8% increase in room occupancy across the portfolio, partially offset by a 3.4% decrease in average daily rate (ADR). The company's hotel EBITDA margin improved by 55 basis points year-over-year, highlighting its ability to maintain profitability despite moderating ADR across the portfolio.

However, the company reported a net loss of $3.69 million for Q3 2024, primarily due to higher interest expenses related to the end of interest rate swaps on the DoubleTree by Hilton Philadelphia Airport and Hotel Alba Tampa mortgages. Operating cash flow and free cash flow for the quarter both stood at $4.76 million.

Notably, Sotherly's urban hotel properties, such as the DoubleTree Hotel in Philadelphia and The Whitehall in Houston, continued to demonstrate improved performance, with occupancy gains driving meaningful bottom-line growth.

Strategic Initiatives

Sotherly's strategic focus on repositioning and rebranding select assets within its portfolio has been a key driver of value creation. The company's recent efforts to transform the DoubleTree by Hilton Jacksonville Riverfront into the Hotel Bellamy, a Hilton-branded lifestyle hotel, exemplify this approach. The $14.6 million renovation project, which is expected to be completed by January 2027, aims to enhance the property's competitiveness and appeal within the dynamic downtown Jacksonville market.

Geographic Concentration

The company's geographic concentration in the southern U.S. has both advantages and challenges. While the region has historically experienced robust tourism and business travel demand, the portfolio's exposure to markets like Florida and Georgia has also made it susceptible to the impact of natural disasters, such as the recent hurricanes Debby and Helene. Although the physical damage to Sotherly's Hotel Alba Tampa property was covered by insurance, the associated business interruption has weighed on the company's short-term performance.

Sotherly's hotel properties are located across seven states: Florida, Georgia, Maryland, North Carolina, Pennsylvania, Texas, and Virginia. This diversification within the southern United States allows the company to benefit from various regional economic drivers while maintaining its strategic focus.

Industry Outlook and Future Prospects

Looking ahead, Sotherly remains cautiously optimistic about the broader industry's recovery trajectory. The company's preliminary October 2024 RevPAR data shows a 6.1% improvement over the prior year, driven by continued occupancy gains at its urban hotels and solid group business production across the portfolio. Sotherly's full-year 2024 RevPAR is forecasted to range between 102% and 104% of 2023 levels, signaling the company's confidence in its ability to capitalize on the improving market dynamics.

The U.S. hotel industry has seen a compound annual growth rate (CAGR) in revenue per available room (RevPAR) of approximately 3-4% over the past 10 years. Sotherly's portfolio has generally tracked these broader industry trends, positioning the company to benefit from continued sector growth.

Sotherly has provided updated guidance for the full year 2024. The company projects total revenue in the range of $177.8 million to $180.1 million, representing a 3% increase over the prior year at the midpoint. Hotel EBITDA is expected to be between $45 million and $45.6 million, a 1.1% increase over the prior year at the midpoint. Adjusted FFO is projected to range from $12.8 million to $13.4 million, or $0.65 to $0.68 per share, representing a 9.8% decrease over the prior year at the midpoint.

Liquidity and Debt Management

To further strengthen its position, Sotherly has proactively addressed upcoming debt maturities, securing favorable refinancing terms for the DoubleTree by Hilton Jacksonville Riverfront and the DeSoto hotel in Savannah. These strategic moves have bolstered the company's financial flexibility and positioned it to undertake necessary capital improvements to maintain its portfolio's competitive edge.

As of September 30, 2024, Sotherly reported a strong liquidity position with $14.02 million in cash and $35 million available on its $50 million revolving credit facility. The company's current ratio stood at 1.63, while its quick ratio was 1.38, indicating a solid ability to meet short-term obligations. Notably, Sotherly's debt-to-equity ratio was 0, reflecting a conservative capital structure.

Conclusion

Despite the challenges posed by natural disasters and the uneven pace of the industry's recovery, Sotherly's diversified portfolio, disciplined capital management, and focus on value-enhancing repositioning strategies have demonstrated the company's resilience. As the hospitality sector continues to evolve, Sotherly remains well-equipped to navigate the changing landscape and capitalize on emerging opportunities to drive long-term shareholder value. The company's updated guidance for 2024 reflects a cautious optimism, balancing revenue growth expectations with the ongoing challenges in the broader economic environment.

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