Executive Summary / Key Takeaways

• Sotherly Hotels is a self-managed REIT focused on acquiring, renovating, and operating upscale to upper-upscale hotels primarily in the Southern U.S., leveraging brand partnerships and regional expertise.
• Recent operational performance shows solid recovery, particularly in urban markets, driven by strong occupancy growth (6.4% actual portfolio in Q1 2025) and a rebound in group and business transient demand, leading to Hotel EBITDA growth (4.5% in Q1 2025, 9.4% excluding prior year grant).
• Despite top-line and hotel-level profitability improvements, Adjusted FFO is projected to decrease in 2025 (midpoint $0.59/share, down 16.4% from prior year) primarily due to significantly higher interest costs from refinancing legacy low-rate debt in the current challenging mortgage market.
• The company faces significant debt maturities in the near term (Georgian Terrace, Hollywood Beach, Philadelphia Airport) and requires substantial capital for mandated renovations (Philadelphia $11.5M, Jacksonville $14.6M), necessitating careful capital management and potentially leveraging equity in other assets.
• SOHO is actively addressing these challenges through seeking loan extensions and exploring refinancing options, while also working to cure a NASDAQ listing deficiency via a potential reverse stock split.

A Southern Focus in a Recovering Market

Sotherly Hotels Inc. (SOHO) operates as a self-managed and self-administered lodging REIT, carving out a niche in the upscale to upper-upscale full-service hotel segment, predominantly across the Southern United States. Since its inception and initial public offering in late 2004, SOHO's core strategy has centered on the acquisition, renovation, and strategic repositioning of properties. This involves leveraging established brand partnerships, notably with Hilton (HLT) and Hyatt (H), for seven of its ten wholly-owned hotels, while also managing a portfolio of independent and soft-branded properties. The operational model utilizes a taxable REIT subsidiary (TRS) structure, engaging an independent management company, Our Town Hospitality, LLC, to run the day-to-day hotel operations. This structure allows SOHO to maintain its REIT status while benefiting from integrated management expertise, particularly given the close ties between Our Town's ownership and SOHO's executive team.

In an industry increasingly influenced by technology, SOHO's approach differs from larger, more asset-light competitors like Hilton, Marriott (MAR), and Hyatt, who invest heavily in proprietary digital platforms, mobile apps, and loyalty program technology to enhance customer experience and operational efficiency. While SOHO benefits from access to the reservation systems, brand standards, and loyalty programs provided by its franchisors, its competitive edge is not derived from developing or deploying unique, differentiated technology. Instead, SOHO's strategic focus lies in the physical asset itself – identifying value-add opportunities through targeted renovations and repositioning, and driving performance through operational execution at the property level, managed by Our Town. This model allows SOHO to potentially achieve cost efficiencies in property improvements and maintain strong regional market positioning, as evidenced by specific properties gaining RevPAR share against their competitive sets. However, it also means SOHO relies on its brand partners for technological infrastructure and may not capture the same level of direct customer data or benefit from cutting-edge digital operational tools as its larger, tech-investing rivals. The success of this strategy is therefore heavily dependent on the quality of its physical assets, the effectiveness of its management company, and the strength of its brand affiliations, rather than a proprietary technological moat.

The portfolio, comprising 2,786 rooms across ten hotels and interests in 131 participating condominium units, has shown encouraging signs of operational recovery following the pandemic. The first quarter of 2025 saw total revenue increase by 3.8% year-over-year to $48.31 million, primarily fueled by a 5.2% rise in rooms revenue. This top-line growth was a direct result of a significant 6.4% increase in occupancy for the actual portfolio (3.9% for the composite portfolio), indicating continued momentum and a normalization of lodging fundamentals, particularly in urban markets that were slower to rebound. Properties like The Whitehall in Houston and the DoubleTree Philadelphia Airport demonstrated notable RevPAR and occupancy share gains against their competitors, highlighting the effectiveness of localized sales efforts and benefiting from increased business transient and group demand, as well as special events.

Hotel-level profitability also saw improvement. Hotel EBITDA for the first quarter of 2025 grew by 4.5% to $12.92 million. Excluding a one-time grant received in the prior year period, Hotel EBITDA increased a healthy 9.4%. This margin expansion (100 basis points excluding the grant) reflects the benefits of operating leverage gained from higher occupancy, enabling operators to drive incremental ancillary revenue and improve flow-through as staffing levels and amenities have normalized and wage pressures eased.

Navigating Financial Crosscurrents

Despite the positive operational momentum, SOHO faces significant financial challenges, primarily related to its debt structure and upcoming maturities in the current high-interest-rate environment. As of March 31, 2025, the company had approximately $317.2 million in total mortgage principal balance. While recent refinancings for Hotel Alba Tampa ($35M at 8.49% fixed), DoubleTree Philadelphia Airport (amended, $35.9M floating SOFR + 3.50%), and DoubleTree Jacksonville Riverfront ($26.25M initial tranche floating SOFR + 3.00%) have addressed some near-term needs and provided capital for renovations, they highlight the increased cost of debt compared to legacy loans.

The most pressing challenge is the series of upcoming debt maturities: The Georgian Terrace in June 2025, DoubleTree Resort by Hilton Hollywood Beach in October 2025, and DoubleTree by Hilton Philadelphia Airport in May 2026. Management is actively seeking extensions for these CMBS loans, which appears to be a common outcome in the current market, but acknowledges that refinancing may be required. Refinancing in the current environment could necessitate reducing the level of indebtedness, potentially by up to $3.9 million for the Georgian Terrace, $10.3 million for Hollywood Beach, and $13.9 million for Philadelphia Airport, based on property performance and market conditions.

Compounding the capital needs are significant mandated product improvement plans (PIPs) tied to franchise renewals. The DoubleTree Philadelphia Airport requires an estimated $11.5 million renovation by May 2026, partially funded by a $5 million reserve already established and a potential $1.2 million release from other reserves. The DoubleTree Jacksonville Riverfront, which is being repositioned as Hotel Bellamy, requires a more extensive $14.6 million renovation by January 2027, with $9.49 million available from the new mortgage loan. The remaining capital expenditures for these projects, along with potential debt reductions, will need to be funded from working capital or other sources. SOHO is exploring the possibility of refinancing assets with significant built-up equity, such as The DeSoto in Savannah and Hotel Ballast in Wilmington, to extract cash and buttress liquidity for these needs.

This confluence of rising interest rates on refinanced debt and significant capital requirements for PIPs is expected to pressure bottom-line profitability, specifically Adjusted FFO. The full year 2025 guidance projects Adjusted FFO in the range of $11.5 million to $12.3 million, or $0.57 to $0.61 per share. At the midpoint, this represents a 16.4% decrease compared to the prior year, despite projected increases in total revenue (midpoint +2.1%) and Hotel EBITDA (midpoint +5.2%). Management explicitly attributes this decline to the increased interest expense from refinancing legacy low-rate mortgages.

Furthermore, the company has a significant balance of cumulative unpaid preferred dividends, totaling approximately $21.9 million across its Series B, C, and D preferred stock as of March 31, 2025, representing 11 quarters in arrears. While SOHO has resumed paying current preferred dividends, management is prioritizing capital needs for debt maturities and PIPs, and cannot provide a timeline for clearing the arrearage until the mortgage markets stabilize and upcoming debt obligations are successfully addressed.

The company also faces a NASDAQ listing deficiency due to its stock trading below $1. While the stock price could recover organically, management is preparing for a reverse stock split to regain compliance by the August 2025 deadline, a process involving legal and administrative complexities.

Outlook and Risks

Management maintains a cautiously optimistic outlook for 2025, forecasting full year RevPAR for the actual portfolio to range between 103% and 105% of 2024 levels. This optimism is grounded in the continued operational momentum observed in Q1 2025, particularly the strength in occupancy and group business, and the expectation that upscale and upper-upscale assets will outperform the broader market. Preliminary results for January 2025 showed a strong 12.8% RevPAR improvement, reinforcing this view.

However, management also acknowledges potential headwinds. Macroeconomic uncertainty, weakened consumer sentiment leading to price sensitivity among transient travelers, compressed booking windows, and a pullback in government demand are noted risks. A "pause in group lead conversions" observed in late March and April 2025 has led to a more measured view on operating fundamentals for the second half of the year. Additionally, the portfolio's geographic concentration in the Southern U.S. makes it susceptible to adverse weather events, such as hurricanes, which have caused operational disruptions and physical damage (like at Hotel Alba Tampa from Hurricane Helene), although business interruption insurance is expected to mitigate the financial impact.

The most significant risks to the investment thesis remain the successful execution of upcoming debt refinancings and the funding of mandated PIPs. Failure to secure favorable terms or sufficient capital could necessitate further debt reduction or impact property performance if renovations are delayed. The accumulation of preferred dividend arrearages also represents a potential constraint on future capital flexibility and the ability to resume common dividends.

Conclusion

Sotherly Hotels is demonstrating solid operational recovery, driven by strong occupancy gains and a rebound in key demand segments like group and business transient, particularly in its urban markets. The company's strategy of leveraging brand partnerships and executing targeted renovations is yielding positive results at the property level, contributing to Hotel EBITDA growth and margin stability. However, the current investment narrative is dominated by the significant financial challenges posed by upcoming debt maturities in a high-interest-rate environment and the substantial capital required for mandated property improvements. The projected decline in Adjusted FFO for 2025 underscores the impact of rising interest costs on the bottom line. While management is actively pursuing strategies to address these balance sheet pressures, including seeking loan extensions and exploring asset-level refinancings, the successful navigation of these near-term hurdles is critical. For investors, SOHO represents a play on the continued recovery of the upscale hotel segment in its target markets, coupled with the potential for value creation through property renovations, but this is tempered by the considerable risks associated with its debt load and the need for careful capital management in the face of macroeconomic uncertainty and rising financing costs. The ability to successfully refinance maturing debt and fund necessary renovations will be key determinants of future value creation and the potential to address the preferred dividend arrearage and eventually resume common dividends.