Sotherly Hotels: On The Road To Recovery

Summary

• The lodging industry was one of the first and worst pandemic casualties.
• Sotherly Hotels’ debt heavy capitalization proved particularly damaging when travel stopped in early 2020.
• SOHO just reinstated payment of the preferred dividends and, with a little cooperation from the economy, there may be more upside ahead.
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Conchi Martínez

Perhaps no other sector was struck more instantly, defenselessly, and absolutely than hotels and lodging at the advent of the COVID pandemic. Universally, properties were shuttered, operations ceased, revenue streams evaporated, but expenses continued to accrue. If an operator was encumbered with significant debt (as many, both public and private, were), extreme triage was in order. Cash was conserved, forbearances were sought, and any life preserving accommodation was pursued.

In March of 2020, many hotel REITs found themselves in this exact predicament. From the closing of the Nation’s economy, through development of effective vaccines, through stutter-stepped reopenings, to the present recovery to regain 2019 operating levels, hotel REITs managed to survive. Sotherly Hotels, Inc. (NASDAQ:SOHO) was among them.

On 01/24/23, SOHO announced that its Board of Directors has authorized the reinstatement of payment of preferred stock dividends that had been suspended since March 2020. In response, SOHO’s common shares jumped 25.9%. In this article we will examine the state of today’s travel industry, how Sotherly Hotels is operating within it, and whether SOHO presents an investment opportunity.

Sotherly Hotels – Past, Present, and Future

We first started looking at this microcap hotel REIT in early 2012 when it was called MHI Hospitality and traded under the symbol MDH. In April of 2013, to better reflect the company’s trajectory, MHI rebranded as Sotherly Hotels.

SOHO

At that time, they were building an eclectic portfolio of southern hotel properties that would be rebranded and repositioned to create a unique hospitality experience. You can check out their portfolio here and if you want a more immersive experience, click on Sotherly Audio.

SOHO

I recall repeatedly hearing Drew Simms, then SOHO CEO, say, “I’m really more of a hotel guy than a real estate guy”. I’ve stayed at and toured a number of Sotherly properties and those visits convince me that he has consistently been a pretty good hotel guy.

Today

Fast forward to SOHO’s 3Q22 financial results and earnings call and you will learn that much progress has been made since the darkest early days of the pandemic. By many metrics, operations now exceed pre-COVID 2019 performances and margins have hit record levels. This is excellent news and very encouraging from an investment perspective, but significant uncertainty remains.

Though it was anticipated all fees related to deferred interest granted through earlier forbearance would be repaid by the close of 2022, and debt levels have been reduced by more than $50MM since December 2020, SOHO still carries a significant debt service schedule. In response to an analyst’s questions about how significantly cashflow positive SOHO would be in 2023, CFO Tony Domalski pointed out that satisfaction of all deferred and forbearance costs would free up millions of dollars in cashflow going forward. This is obviously what has enabled the reinstatement of preferred dividend payments.

Tomorrow

The economy is in such a state of flux, business forecasting is difficult regardless of which sector you are examining. Earlier this week a Wall Street Journal article described how hotels were successfully adapting to changes in the way small businesses and workers were traveling. A “Boardroom Outlook” panel at the recent 2023 Americas Lodging Investment summit described that remote work and a growing retiree population continue to drive hotel demand.

All this sounds positive for the hospitality sector but will one interest rate hike too many unravel the trend? Will the spate of tech sector mass layoffs become a contagion and spoil the hoped for soft landing?

Though Sotherly’s common shares trade at just 4.5x estimated forward FFO/share and less than 50% of estimated NAV, success under their debt levels require nearly flawless execution. An uncertain future and debt can combine to add risk to any investment proposition. I would like to own SOHO common, but choose to wait for a clearer picture.

The Preferreds

As previously mentioned, SOHO common shares soared on the preferred dividend reinstatement announcement and the preferred shares joined the enthusiasm by running up from $22 to their $25 par prices. Purchased at par, each preferred series provides a dividend yield approximating 8%, but wait, there’s more.

2MCAC

The table above describes SOHO’s current equity capitalization. The equity stack is pretty preferred heavy in that there is a nominal liquidation preference of just over $99MM of preferreds vs. an ~$47MM market cap for the common. Of particular interest to preferred shareholders today is that the dividends suspended since 2020 have accrued and the new aggregate liquidation preference now tops $121MM. The 01/24/23 reinstatement only authorized payment of a current quarter’s dividend. If and when the accrued dividends are paid, that is an additional 20% return on investment.

In Summary

All business is difficult today. While the hotel industry has shown impressive resilience in recent periods, it remains vulnerable to whichever way economic winds blow. We have taken mostly a wait and see stance on the whole sector.

Sotherly Hotels is a strong operator led by an experienced and capable management team. We will continue to monitor progress as time evolves and hold the preferred shares in the interim.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SOHOO, SOHON either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

All articles are published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person. Readers should verify all claims and do their own due diligence before investing in any securities, including those mentioned in the article. NEVER make an investment decision based solely on the information provided in our articles. It should not be assumed that any of the securities transactions or holdings discussed were profitable or will prove to be profitable. Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Commentary may contain forward-looking statements which are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article. S&P Global Market Intelligence LLC. Contains copyrighted material distributed under license from S&P 2nd Market Capital Advisory Corporation (2MCAC) is a Wisconsin registered investment advisor. Ross Bowler is an investment advisor representative of 2nd Market Capital Advisory Corporation.

Comments

[theheckwithtech]

I think its time for an update here from the author. Anyone else still holding and collecting the dividends like myself???

[GuyRien1]

@theheckwithtech You are smarter than me my friend. I thought they would never ever pay the accrued dividends on the preferred so I bailed out at $19 and never collected a single dividend. I bought in at $5 so I'm not complaining.

As I mentioned downstream their IR department is excellent. They gave me lots of details on their debt which was useful.

[GuyRien1]

Question to the group. I owned SOHO preferred which I bought at $5 way back in the middle of the pandemic and unfortunately sold at $20 as I thought they would never pay the accrued dividends. But to their credit the company stuck to their principles (or something) and are paying them back.

So where does that leave the common? I recall they had an odorous loan (Kemmons Wilson). Has that been taken care of?

Also, just so you know, their IR is excellent. A pereson called Mack Simms would answer questions promptly and well researched.

[NewToThis2015]

@GuyRien1 As of 12/15/23, they will have made 5 payments on the preferred dividends during 2023 and will still owe 10 payments with the 11th payment accruing on 1/15/2024. So there is still a ways to go to catch up in that area, but progress was made in 2023. The Kemmons Wilson loan has been paid off.

[GuyRien1]

@NewToThis2015 Damn. I feel like such a fool now! I blame @Ian Fellows! Ian and I reached the conclusion SOHO would never pay it off.

Ian did you hear that SOHO is paying of ALL the accrued payments on their preferred stocks?

[NewToThis2015]

@GuyRien1 The race isn't over yet. You may pan out to be the smart one if soho goes bankrupt.

[AnimeSnoopy]

Yikes. What an unfortunate set of circumstances. I think this company is RIP.

Unfortunately they are recovering from COIVD just in time to refinance 50 mil of debt in 2023 at record rates.
So far it seems they entered into a 7 and change % deal through 2028 for part of it.
I don't see them surviving without asset dispositions.
Unfortunately they are not the hotel in this situation... Far from it...

Which brings down the market value of the assets at the same time as the market it flooded with hotels for sale, rates are very high making banks hesitate to fund buyers...

As so many have said, real shame for a quality company to get taken out like this...
The Q1 results weren't even bad but the commons have started the death spiral because they really needed a miracle given all of this.
RIP SOHO.

[det.sci]

@AnimeSnoopy WTF are you talking about? They're making double payments on the preferred catching up right now.

[AnimeSnoopy]

@det.sci
This one is RIP, unfortunately.
Best to get out while others struggle to accept...

China manufacturing? Gone.
German manufacturing? Gone.
US treasury demand? Gone
Domestic Q1/2 retail demands? Gone.

This company will not survive.
I'm sorry for your losses.
Get out now while you can...
The biggest issue at the start of these things is the cognitive dissonance they always have...

Those who hold on to the reality they want over the reality at hand are usually wiped out.

[det.sci]

@AnimeSnoopy So you're just copy pasting this comment into every article

[Stevesvt]

To pay the back divs is the call date extended (if called) or is the amount added on top of the quarterly payments until paid in full?? I’m naive with this stuff and I couldn’t even find a current yield to current price anywhere. Thanks. Seems like you can’t find much on the common anywhere so it seems like the investment potential obviously almost exclusively with the preferred you could argue..

[det.sci]

@Stevesvt There are certain restrictions on the company until the preferred dividends are caught up, for example they can't pay a common dividend. They don't have to follow any specific catch-up schedule. The "call" date won't move, this is the date after which the company is allowed to optionally call the preferred shares. There's not much risk of that happening right now. There is no mandatory call or mandatory call date. If the company did want to call these, they would need to catch up the deferred dividends as part of the call.

[stuyoung]

Great article, thank you! Can anyone explain to me how the deferred dividend payments on the preferred shares will be paid in terms of ownership…in other words, when the deferred dividends are paid do they go to the current holders of the preferred shares or whomever owned the shares at the time that they were to be regularly paid?

[NewToThis2015]

@stuyoung They will go to whoever owns the shares on the announced record date.

[det.sci]

@stuyoung Agree with @NewToThis2015. When you buy a preferred you're buying the rights to the cumulative dividends, they travel with the shares.

[stuyoung]

@det.sci @NewToThis2015 Thanks to both of you. I own SOHOO and wondered how the deferred dividend would be paid. I’ll hold for further news.