Sotherly Hotels (SOHO): A Contrarian Gem in Urban Recovery and Strategic Renovations

Amid a market obsessed with disruption and growth-at-all-costs, Sotherly Hotels (SOHO) offers a compelling contrarian play: a beaten-down hospitality REIT positioned to capitalize on urban market recovery and strategic asset repositioning. Despite delivering Q1 2025 revenue growth of 3.8% to $48.3 million—outpacing broader industry trends—SOHO trades at just 0.38x Price/Book, a discount that ignores its improving fundamentals. For value investors, this disconnect presents a rare opportunity to buy a portfolio of high-margin urban hotels at a steep discount, just as its strategic renovations begin to bear fruit.

The Urban Turnaround: Where SOHO’s Growth Lies

The company’s Q1 results underscore a critical shift: its urban properties are finally rebounding. Once lagging during the pandemic recovery, assets like the DoubleTree Resort by Hilton Hollywood Beach (RevPAR up 10.3% to $194.86) and the Hyatt Centric Arlington (RevPAR up 1.6%) are now driving occupancy gains. These locations benefit from secular trends—rising demand for urban leisure and business travel post-pandemic—and one-time tailwinds like the U.S. Presidential Inauguration and major sports events.

Crucially, urban hotels command higher margins than suburban or coastal leisure properties. Sotherly’s Hotel EBITDA margin rose 0.2% in Q1 to 26.1%, a testament to its focus on cost discipline and occupancy-driven growth. With urban RevPAR still below pre-pandemic peaks, there’s room to run.

Hilton’s Strategic Backing: Renovations as a Catalyst

The company’s recent $26.1 million in Hilton franchise agreements—for renovations at the DoubleTree Philadelphia Airport ($11.5M) and the rebranded Hotel Bellamy in Jacksonville ($14.6M)—are no mere upgrades. These projects, set for completion by 2026-2027, reposition two key assets to compete with Hilton’s global standards, unlocking higher rates and transient demand.

The Philadelphia property, already showing a 34.3% RevPAR surge in Q1, will gain modern amenities to attract corporate and leisure travelers. Meanwhile, the Jacksonville rebranding shifts the hotel to a “lifestyle” concept, targeting millennials and families—a demographic increasingly drawn to urbanized destinations.

Valuation: A 60% Upside at Current Levels

At $1.85 per share—a 62% discount to its five-year average P/Book of 0.7—the stock reflects extreme pessimism about SOHO’s debt load and macro risks. Yet the balance sheet is manageable: $32.8 million in cash and a refinancing plan for $317.6 million in debt (e.g., extending mortgages via CMBS or conventional loans) reduces near-term pressure.

The real undervaluation lies in FFO. Analysts project 2025 FFO of $0.52–$0.56 per share, implying a 9.5–12.7% yield at current prices. If SOHO’s urban recovery and renovations boost FFO margins to pre-pandemic levels (mid-20s), the stock could climb to $3.00–$4.00, a 60–116% upside.

Addressing the Risks

Bearish arguments focus on $7.98 million in annual preferred dividends and $317.6 million in debt. While these are valid concerns, they’re overblown:
1. Debt refinancing: The company has already secured favorable terms (e.g., the $26.25M Fifth Third Bank loan for Jacksonville).
2. Dividend flexibility: Preferred stock dividends are fixed, but SOHO’s 2025 FFO guidance covers them comfortably.
3. Macro resilience: Urban hotels are less dependent on discretionary leisure travel than coastal resorts, making them more recession-resistant.

Conclusion: A Bottom-Fishing Opportunity

SOHO’s valuation ignores its urban growth tailwinds and underappreciates its disciplined cost structure. With renovations set to enhance profitability and refinancing risks manageable, this is a stock primed for a valuation rebound. For contrarian investors willing to look past near-term macro noise, SOHO offers a rare chance to buy a portfolio of premium urban hotels at a discount—just as their recovery gains momentum.

Action: Buy SOHO at current levels. Set a price target of $3.50–$4.00, with a stop-loss below $1.50.

Disclosure: The author does not hold a position in SOHO and has no material conflicts.