Sotherly Hotels Inc. (SOHO) is a self-managed and self-administered lodging real estate investment trust (REIT) that has been making waves in the hospitality industry. With a focus on the acquisition, renovation, up-branding, and repositioning of upscale to upper-upscale full-service hotels primarily in the Mid-Atlantic and Southern United States, Sotherly has carved out a unique niche for itself.
Business Overview and History
Sotherly Hotels was incorporated in Maryland on August 20, 2004, and commenced operations on December 21, 2004, when it completed its initial public offering and subsequently acquired six hotel properties, known as the Initial Properties. The company has historically focused on the southern United States for its acquisitions and development activities. As of September 30, 2024, Sotherly's portfolio consisted of investments in ten hotel properties, comprising 2,790 rooms, as well as two hotel commercial condominium units and their associated rental programs.
The company's growth strategy has included strategic acquisitions over the years. In 2007, Sotherly acquired the DoubleTree Resort by Hilton Hollywood Beach in Florida and the Hotel Alba Tampa, Tapestry Collection by Hilton. The Hotel Ballast Wilmington, Tapestry Collection by Hilton, was added to the portfolio in 2004. Sotherly also expanded into the condominium hotel business, acquiring the Lyfe Resort Residences in 2017 and the Hyde Beach House Resort Residences in 2019.
Sotherly has demonstrated resilience in the face of industry challenges, particularly during the COVID-19 pandemic. The company took steps to preserve liquidity, including the suspension of preferred stock dividends. However, as business conditions improved, Sotherly was able to resume preferred dividend payments in 2023. The company has also navigated through volatile interest rate environments, successfully refinancing several of its properties to secure favorable terms.
Sotherly's hotel 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 categorizes its independent and soft-branded properties as its "collection of boutique hotels."
Financial Performance and Ratios
Sotherly's financial performance has been characterized by a mix of growth and resilience. Over the past three years, the company's annual revenue has fluctuated, ranging from $127.59 million in 2021 to $173.84 million in 2023. Similarly, the company's net income has seen ups and downs, reporting a loss of $28.54 million in 2021, a gain of $33.96 million in 2022, and a more modest profit of $3.94 million in 2023.
For the three months ended September 30, 2024, Sotherly reported total revenue of approximately $40.70 million, an increase of 3.9% compared to $39.20 million in the prior year period. This increase was driven by an overall 4.8% rise in occupancy across Sotherly's portfolio, leading to a 4.1% improvement in revenue per available room (RevPAR) to $107.02. The increase in revenue was primarily driven by growth across the portfolio, particularly at 8 of Sotherly's properties. While occupancy increased by 4.8%, the average daily rate (ADR) declined by 3.4%.
Room revenue, which accounts for the majority of Sotherly's top line, grew 3.4% to $27.16 million, while food and beverage revenues increased 3.1% to $7.76 million and revenues from other operating departments rose 7.0% to $5.78 million. The company attributed the increases to higher demand from small group and corporate business travel, as well as improved performance at the restaurant outlets and banqueting/catering operations at several of its hotels.
Hotel operating expenses for the quarter increased 3.2% to $32.61 million, largely in line with the rise in revenues. This included a 2.5% increase in room expenses to $6.60 million, a 3.3% rise in food and beverage expenses to $5.79 million, and a 5.5% uptick in other operating department expenses to $2.32 million. Indirect hotel expenses, which include items such as sales and marketing, general and administrative, and property taxes, increased 3.1% to $17.91 million.
Corporate general and administrative expenses declined 12.8% to $1.47 million, primarily due to lower legal and professional fees compared to the prior year period. However, interest expense increased 19.6% to $5.34 million, largely attributable to the termination of interest rate swaps on the mortgages for the DoubleTree by Hilton Philadelphia Airport and Hotel Alba Tampa properties, which led to higher variable interest rates on those loans.
For the nine months ended September 30, 2024, Sotherly reported total revenue of $137.94 million, an increase of 4.7% from $131.69 million in the same period of 2023. This was driven by a 4.4% rise in occupancy, leading to a 4.1% improvement in RevPAR to $122.71. Room revenue grew 4.1% to $91.48 million, food and beverage revenues increased 6.4% to $27.41 million, and other operating department revenues rose 5.8% to $19.05 million.
Hotel operating expenses for the nine-month period increased 4.7% to $101.80 million, with room expenses up 3.7% to $20.60 million, food and beverage expenses higher by 4.8% at $18.80 million, and other operating department expenses increasing 10.1% to $7.51 million. Indirect hotel expenses grew 4.4% to $54.89 million. Corporate general and administrative costs declined 9.0% to $4.97 million, while interest expense rose 18.4% to $15.23 million.
In terms of financial ratios, Sotherly's current ratio stood at 1.63 as of the most recent quarter, indicating a healthy current liquidity position. The company's debt-to-equity ratio, a measure of financial leverage, was 0.50 as of the same period, suggesting a moderate level of debt financing. Additionally, Sotherly's return on assets (ROA) and return on equity (ROE) for 2023 were -0.08% and -6.80%, respectively, highlighting the need for improved operational efficiency and profitability.
Solvency and Cash Flows
Sotherly's solvency position appears stable, with a cash and cash equivalents balance of $14.02 million as of September 30, 2024. The company's operating cash flow for the year 2023 was $21.40 million, while its free cash flow stood at $21.40 million, indicating a strong ability to generate cash from its core operations.
However, the company's total debt of $317.53 million as of the end of 2023 raises some concerns about its long-term solvency. Sotherly will need to carefully manage its debt maturities and explore refinancing options to ensure a sustainable capital structure going forward.
The company's quick ratio of 1.38 further supports its ability to meet short-term obligations, demonstrating that Sotherly has sufficient liquid assets to cover its immediate liabilities.
Guidance and Outlook
Sotherly has provided updated guidance for the full year 2024. The company expects total revenue to be in the range of $177.8 million to $180.1 million, representing a potential increase of up to 3.6% compared to 2023. Hotel EBITDA is projected to be between $45.0 million and $45.6 million, reflecting a modest improvement of up to 1.1% year-over-year. Adjusted FFO, a key performance metric for REITs, is forecasted 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.
This updated guidance takes into account current and expected performance within the portfolio, market conditions, the refinance of the mortgage on the DoubleTree by Hilton Jacksonville Riverfront, the second trust on the DeSoto Hotel in Savannah, and weather-related events, including Hurricane Helene.
Sotherly's management has expressed cautious optimism about the company's future, citing the continued stabilization of its urban hotel properties and the growth potential in its group and business transient segments. However, the company will need to closely monitor external factors, such as macroeconomic conditions and the ongoing impact of the COVID-19 pandemic, which could pose challenges to its performance.
Risks and Challenges
Sotherly, like other hospitality-focused REITs, faces a range of risks and challenges that could impact its future performance. These include:
1. Competitive Landscape: The hotel industry is highly competitive, with Sotherly competing against both national and regional hotel chains, as well as independent hotels, for guests and market share.
2. Dependence on Franchisors: Seven of Sotherly's hotels operate under franchise licenses, exposing the company to the risk of non-renewal or termination of these agreements.
3. Macroeconomic Conditions: Changes in economic conditions, consumer spending patterns, and travel demand can significantly affect Sotherly's occupancy rates, average daily rates, and revenue per available room.
4. Regulatory Risks: As a REIT, Sotherly must comply with various regulations and maintain its qualified REIT status, which could be impacted by changes in tax laws or other regulatory developments.
5. Leverage and Debt Maturities: Sotherly's moderate level of debt and upcoming debt maturities will require careful management to ensure financial stability and access to capital.
6. Geopolitical Tensions and Natural Disasters: Unexpected events, such as geopolitical conflicts or natural disasters, could disrupt travel patterns and negatively impact Sotherly's hotel operations.
7. Geographic Concentration: Sotherly's hotels are located in Florida, Georgia, Maryland, North Carolina, Pennsylvania, Texas, and Virginia. This concentration makes the company susceptible to adverse market conditions in these specific geographic areas.
Conclusion
Sotherly Hotels Inc. (SOHO) is a resilient hospitality REIT that has navigated the challenges of the past few years with a strategic focus on portfolio diversification and operational efficiency. While the company's financial performance has been mixed, its ability to generate stable cash flows and maintain a moderate debt profile provides a solid foundation for future growth.
The company's recent financial results demonstrate its ability to capitalize on improving market conditions, with increases in occupancy and RevPAR driving revenue growth across its portfolio. Sotherly's focus on upscale and upper-upscale properties in key southern U.S. markets positions it well to benefit from the ongoing recovery in both leisure and business travel segments.
However, Sotherly will need to address its leverage concerns, closely monitor external risks, and continue to innovate its hotel offerings to stay competitive in the ever-evolving hospitality landscape. The company's updated guidance for 2024 reflects a cautiously optimistic outlook, balancing expected growth in revenue and EBITDA with potential challenges in the broader economic environment.
Investors should closely follow the company's progress in executing its strategic initiatives, managing its debt profile, and navigating the various risks it faces in its target markets. As Sotherly continues to refine its portfolio and operational strategies, it remains an interesting player in the hospitality REIT sector, offering potential for growth and value creation in the coming years.