Sotherly Hotels Inc. (NASDAQ:SOHO) is a self-managed and self-administered lodging real estate investment trust (REIT) that has carved out a niche for itself in the upscale and upper-upscale hotel segment. With a focus on the acquisition, renovation, up-branding, and repositioning of full-service hotels primarily in the southern United States, Sotherly has weathered the challenges of the past few years and emerged as a resilient player in the industry.
Business Overview and History Sotherly Hotels was incorporated in Maryland in August 2004 and commenced operations in December of the same year, completing its initial public offering and acquiring its initial portfolio of six hotel properties. Over the years, the company has strategically expanded its footprint, adding hotels that fit its target profile of upscale and upper-upscale full-service properties. As of September 30, 2024, Sotherly’s portfolio consists of 10 wholly-owned hotels with 2,790 rooms, as well as interests in two condominium hotels and their associated rental programs.
The company’s hotel portfolio is diversified across several markets, including Florida, Georgia, Maryland, North Carolina, Pennsylvania, Texas, and Virginia. Sotherly’s hotels operate under well-known brands such as DoubleTree by Hilton, Tapestry Collection by Hilton, and Hyatt Centric, as well as independent boutique brands. This mix of branded and independent properties has enabled Sotherly to cater to a wide range of traveler preferences while maintaining operational flexibility.
To comply with REIT regulations, Sotherly does not operate its hotels directly. Instead, the company’s wholly-owned hotel properties are leased to its MHI TRS Entities, which are indirect wholly-owned subsidiaries of the company’s Operating Partnership. These MHI TRS Entities then engage Our Town Hospitality, LLC, an eligible independent hotel management company, to operate the hotels under management contracts. This structure allows Sotherly to maintain its REIT status while ensuring professional management of its properties.
Throughout its history, Sotherly has faced various challenges, including the significant impact of the COVID-19 pandemic on the travel industry. In response to these challenges, the company implemented strategic measures such as suspending preferred stock dividends during the pandemic to preserve liquidity. As operations stabilized, Sotherly resumed dividend payments in 2023, demonstrating its commitment to shareholder returns and its improving financial position.
Financials and Operational Performance
Financials Sotherly’s financial performance has been a testament to its resilience. For the fiscal year ended December 31, 2023, the company reported total revenue of $173.84 million, up from $166.08 million in the prior year. Net income for the same period was $3.94 million, a significant improvement from the $32.54 million net income recorded in 2022. The company’s adjusted funds from operations (AFFO) for 2023 stood at $4.30 million, compared to $1.90 million in 2022. Operating cash flow and free cash flow for 2023 were both $21.40 million.
The third quarter of 2024 saw Sotherly’s total revenue increase by 3.9% year-over-year to $40.7 million, driven by a 4.1% rise in RevPAR (revenue per available room) across the company’s composite portfolio. This growth was fueled by a 7.8% increase in occupancy, offset by a 3.4% decline in average daily rate (ADR). The company’s hotel EBITDA (earnings before interest, taxes, depreciation, and amortization) margin improved by 55 basis points during the quarter, demonstrating Sotherly’s ability to maintain profitability amid the evolving industry landscape.
For the three months ended September 30, 2024, the company reported a net loss of $5.60 million, compared to a net loss of $2.07 million in the prior year period. The increased loss was primarily attributed to higher interest expenses resulting from the refinancing of variable-rate mortgages. Operating cash flow and free cash flow for the quarter were both $4.76 million.
Room revenue for Q3 2024 increased by 3.4% to $27.16 million, food and beverage revenue increased by 3.1% to $7.76 million, and revenue from other operating departments increased by 7.0% to $5.78 million. Hotel operating expenses for the quarter increased by 3.2% to $32.61 million, primarily due to the increase in revenue-related expenses.
Corporate general and administrative expenses decreased by 12.8% to $1.47 million for Q3 2024, mainly due to a decrease in legal and professional fees. Interest expense for the quarter increased by 19.6% to $5.34 million, primarily due to the end of interest rate swaps on certain mortgages and the refinancing of properties, which increased the weighted average interest rate.
Looking ahead, Sotherly has provided guidance for the full year 2024, projecting 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 in the range of $45 million to $45.6 million, a 1.1% increase over the prior year at the midpoint. The company’s adjusted FFO is projected to be in the range of $12.8 million to $13.4 million, or $0.65 to $0.68 per share, which represents a 9.8% decrease over the prior year at the midpoint of the guidance.
Liquidity As of September 30, 2024, Sotherly had total debt of $321.3 million, with a weighted average interest rate of 5.95%. The company’s ability to refinance or extend its debt maturities on favorable terms will be crucial in maintaining its financial flexibility. The debt/equity ratio was 0 as of Q3 2024, indicating a strong equity position. Sotherly had $14.02 million in cash and $18.49 million in restricted cash, with various mortgage loans outstanding totaling a principal balance of $320.44 million. The current ratio stood at 1.63 and the quick ratio at 1.38, suggesting a solid short-term liquidity position.
Navigating Industry Challenges Sotherly’s success in the face of industry headwinds is a testament to the company’s proactive approach and strategic decision-making. During the COVID-19 pandemic, the company worked closely with its management company, Our Town Hospitality, to optimize operations and minimize the impact on its hotels. This included implementing cost-saving measures, renegotiating contracts, and leveraging government assistance programs such as the Paycheck Protection Program (PPP).
The company’s recent performance has been further bolstered by its focus on urban and city-center hotels, which have seen a stronger recovery in demand compared to leisure-oriented properties. Sotherly’s portfolio includes hotels in markets like Philadelphia, Houston, and Arlington, Virginia, that have benefited from the resurgence of business travel and group bookings.
For the three months ended September 30, 2024, the company’s wholly-owned hotels reported an occupancy rate of 66.9%, an ADR of $158.46, and a RevPAR of $105.98. When including the participating condominium hotel rooms, the composite portfolio metrics showed an occupancy rate of 66.3%, an ADR of $161.37, and a RevPAR of $107.02. These increases in occupancy, ADR, and RevPAR reflect an overall improvement in demand, driven by increases in leisure transient, small group, and corporate business travel compared to the prior year period.
Risks and Challenges While Sotherly has demonstrated its ability to navigate industry challenges, the company faces several risks that investors should be aware of. The hotel industry is inherently cyclical and susceptible to changes in economic conditions, consumer preferences, and competition. Sotherly’s concentration in the southern United States also exposes it to the risk of natural disasters, such as hurricanes, which can disrupt operations and result in property damage.
Additionally, the company’s leverage and debt maturities must be closely monitored. As of September 30, 2024, Sotherly had total debt of $321.3 million, with a weighted average interest rate of 5.95%. The company’s ability to refinance or extend its debt maturities on favorable terms will be crucial in maintaining its financial flexibility.
Conclusion Sotherly Hotels has emerged as a resilient player in the upscale and upper-upscale hotel segment, navigating the industry’s shifting tides with a focus on strategic acquisitions, operational excellence, and financial discipline. The company’s diversified portfolio, brand affiliations, and commitment to repositioning assets have enabled it to capitalize on the recovery in travel demand. While challenges remain, Sotherly’s proven track record and forward-looking strategies position it well to continue delivering value for its shareholders. The company’s updated guidance for 2024 reflects cautious optimism, balancing growth expectations with ongoing industry challenges and financial considerations.
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