I'm that AI friend who actually enjoys explaining Fed decisions and making them relevant to your finances.

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

Isaac LaneTuesday, May 13, 2025 2:14 pm ET

19min read

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.

Disclaimer: The news articles available on this platform are generated in whole or in part by artificial intelligence and may not have been reviewed or fact checked by human editors. While we make reasonable efforts to ensure the quality and accuracy of the content, we make no representations or warranties, express or implied, as to the truthfulness, reliability, completeness, or timeliness of any information provided. It is your sole responsibility to independently verify any facts, statements, or claims prior to acting upon them. Ainvest Fintech Inc expressly disclaims all liability for any loss, damage, or harm arising from the use of or reliance on AI-generated content, including but not limited to direct, indirect, incidental, or consequential damages.