SOHO - Sotherly Hotels

[JM]

SOHO – Sotherly Hotels

 

I’m sure there are people here who are knowledgeable about real estate investments. It would be helpful if you could play the devil’s advocate here and comment about the valuation in particular.

 

Summary:

 

• Trading at ~4.5x Forward P/FFO while peer average is 9x

• Yield 6.4%, payout ratio ~30% of FFO

• Discrepancy between book value and market value of real estate

• Possibility of realizing hidden value from assets

 

 

Overview:

 

Here is the profile of the company from Reuters:

 

Sotherly Hotels Inc., incorporated on August 20, 2004, is a self-managed and self-administered lodging real estate investment trust (REIT). The Company operates hotels under the brands, such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. The Company conducts its business through Sotherly Hotels LP, its operating partnership, of which the Company is the general partner.

 

As of December 31, 2014, the Company's portfolio consisted of 12 full-service, primarily upscale and upper-upscale hotels located in eight states with an aggregate of 3,009 rooms and approximately 160,928 square feet of meeting space.

 

Key Figures and Valuation:

 

Mcap: $75M

Total assets: $395M

“Total Adjusted Asset Value” (From 3-Q, Nov 2015): $581M

Total Liabilities: $339M

Equity: $55M

FFO guidance 2016: $1.2 – 1.26 per share

P/FFO: 4.4x, or a theoretical equity cash flow yield of 22%

 

 

In their recent 10-Q they reported “Adjusted Total Asset Value” of $581M using a 7.5% capitalization rate. I don’t know what the appropriate cap rate for SOHO should be since $581M sounds very high.

 

Using $581M would mean $242M for equity (vs. mcap of $75M) [$581M less total liabilities $339M = $242M]. This would represent a 200%+ upside, which seems very optimistic.

 

My question for the real estate experts is what would a realistic cap rate be for SOHO?

 

Still, without selling any assets the equity owner gets $1 – 1.2 cash flow per share while the share is now $5.3.

 

Catalysts:

 

In their Q3 2015 conference call they were questioned about asset sales and a stock buyback. The CEO said that they are considering selling non-core hotels. The markets remained skeptical – and rightly so – since they issued shares despite claiming otherwise in 2015.

 

The CEO did make a small purchase (15k shares) for his private account in December at $6.24.

 

Dividend increases. The payout ratio is now ~30% and the dividend has been raised steadily. At some point the yield will act as a floor but not yet since there are REITs yielding substantially more.

 

Why is it cheap:

 

They diluted shareholders in the summer 2015 when they needed cash quickly to buy out their joint venture partner in the Hollywood Beach Hotel. The management had ruled out an equity raise previously so the markets got upset.

 

Recently, their competitor LaSalle had a profit warning and the markets are worried that margins might be at a peak:

http://seekingalpha.com/article/3810776-hotel-reits-tumble-on-misappropriated-data

 

Also, the recent growth figures for the industry are not very high: http://www.hotelnewsnow.com/SubCategory/62/US-Weekly

 

Risks:

 

• Debt is high compared to book value plus there is refinancing risk.

• Management could make poor capital allocation decisions.

• Peak lodging cycle?

• Interest rate hikes bringing asset values down and interest expenses will go up.

 

 

Links:

 

http://seekingalpha.com/article/3004986-sotherly-hotels-another-dirt-cheap-reit

http://reminiscencesofastockblogger.com/2015/04/13/week-197-make-your-money-while-you-can/

Company_Presentation_-_January_2016.pdf

[KJP]

Here another write up on the company, though it's a few years old:  http://otcadventures.com/?p=1048

[Radio Free Cash Flow]

I hold this one (and wrote that old post on OTC Adventures) and agree that it is cheap. Just a few things to nitpick. First, market cap is more like $90 million. The REIT doesn't own 100% of the operating partnership, so you have to account for the non-owned units when computing market cap.

 

In my view the discount is almost entirely based on the high leverage and investor distrust of management. Investors fear management diluting them again next time an attractive acquisition is in view. I didn't love the acquisition they did, but management stressed that they are the largest holder of the company's stock and would not have done the deal if they didn't think it would ultimately benefit the company. I'll give them the benefit of the doubt.

 

Combine those factors with fears that the lodging cycle is peaking and you get a severely discounted valuation for Sotherly.

[whiterose]

I am unfortunately also a small holder. There are several issues with this company but most important is the complete lack of managements capital allocation skills. They are paying and even raising a relativly large dividend in spite of the mounting debt burden in the background and below book value valuation of equity.

 

If you look closely, the amount of every new (mortgage)refinancing or issuance of preferred shares (8% rate?) is higher than the one which is replaced, they always say the remainder is for general business purposes. Which is a bit fishy in my opinion. Why issue unsecured debt via preferred shares, when you pay 5% on mortgages? Maybe the properties as such are already way too levered?

 

Management could't answer simple questions on the analysts calls like expected total interest payments for the year. If you substract all costs from EBITDA, there is essentially not much free cash flow left, once you provision for renovation-costs etc. They position themselves as great long-term value generators but AFFO/share is shrinking.

 

Their WACC is too high in relation to ROI. The business needs cash to delever. It's kind of reflexive: while raising equity, low valuation leads to dilution. The high debt-burden leads to higher interest-rates (more risky). Maybe the hotel-operating costs are just too high? Somebody needs to take them over or at least gets activist to put pressure on the incompetent board.

[JayGatsby]

Is there any analysis that people can point me to on the "peak lodging cycle" risk? Thanks