Unlocking the Dividend Stability of Sotherly Hotels' Series C Preferred Stock: A High-Yield Defense in a Volatile REIT Market

In an era of rising interest rates and sector-wide volatility, income-focused investors are increasingly drawn to securities that balance yield with resilience. Sotherly Hotels Inc.'s 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock (SOHOO) has emerged as a compelling candidate for such a defensive income strategy. With a current yield of 12.15%—a stark contrast to the 5%+ yields of many corporate bonds—this preferred stock offers a unique value proposition in the high-yield REIT space. But does its stability justify the risk? Let's dissect the numbers.

A Fixed Dividend with Cumulative Protection

The Series C preferred stock pays a quarterly dividend of $0.4921875 per share, based on a 7.875% annual rate of the $25 liquidation preference. This translates to an annualized payout of $1.96875 per share. The cumulative nature of the dividends ensures that any missed payments accrue and must be settled before common shareholders receive distributions—a critical feature for income investors. Since 2018, Sotherly has maintained a consistent quarterly payment schedule, with the most recent dividend paid on June 16, 2025, to shareholders of record as of May 30, 2025.

The stock's current market price of $16.20—a 35.2% discount to its $25 liquidation preference—amplifies its yield appeal. At this price, the 12.15% yield becomes a compelling contrast to the broader REIT sector, where many high-yield alternatives trade at par or above.

Sotherly's Financial Health: A Mixed Picture

Sotherly Hotels Inc. (SOHO) operates as a self-managed REIT with a portfolio of upscale hotels in the mid-Atlantic and southern U.S. Its Q1 2025 results highlight both strengths and vulnerabilities:
- Revenue Growth: Total revenue increased to $48.3 million in Q1 2025, up from $46.5 million in Q1 2024, driven by a 68.8% occupancy rate and $129.74 RevPAR (revenue per available room).
- Debt Load: The company carries $317.6 million in debt with a 5.88% weighted average interest rate. At Q1 2025's trailing EBITDA of $12.9 million, its leverage ratio stands at 24.6x debt-to-EBITDA—a high but not uncommon figure for REITs. However, full-year guidance projects Hotel EBITDA of $48.8–$49.6 million, which would reduce the leverage ratio to 6.4x–6.5x on an annualized basis.
- Liquidity: Sotherly holds $32.8 million in cash, with $11.5 million unrestricted, providing flexibility for refinancing and capital expenditures. Upcoming debt maturities in Atlanta and Hollywood, however, could test its ability to secure favorable terms in a higher-rate environment.

While the company's operational performance—particularly its 4.5% year-over-year Hotel EBITDA growth—suggests resilience, rising interest costs and inflationary pressures on operating expenses (e.g., utilities, labor) remain headwinds.

Sector Volatility: A Double-Edged Sword

The broader hospitality REIT sector, including Sotherly's peers like American Hotel Income Properties (AHIP), has faced volatility in 2025 due to shifting demand patterns and economic uncertainty. Leisure travel has outpaced corporate demand, while government-related bookings have declined. AHIP, for instance, reported a 16% drop in government group revenue in Q1 2025.

Sotherly's focus on secondary markets—such as Tampa, Savannah, and Jacksonville—offers some insulation from primary market volatility. These locations benefit from diverse economic drivers (e.g., healthcare, tech hubs) and are less exposed to short-term shocks. However, rising new hotel supply in key markets could erode occupancy gains.

The Case for a Defensive Income Play

Despite its challenges, the Series C preferred stock merits consideration for a defensive income portfolio due to three key factors:
1. High Yield with Cumulative Dividends: The 12.15% yield is rare in today's market, and the cumulative structure ensures that even during periods of financial stress, dividends must be paid eventually.
2. Seniority in the Capital Structure: As a cumulative preferred security, the Series C ranks senior to common stock and pari passu with Series B preferred shares in liquidation. This hierarchy prioritizes income payments over equity holders.
3. Strategic Portfolio Optimization: Sotherly's recent franchise agreements with Hilton and planned renovations at properties in Philadelphia and Jacksonville signal a commitment to long-term value creation.

Risks to Consider

• Debt Refinancing Challenges: With $317.6 million in debt and rising interest rates, refinancing costs could strain cash flow.
• Interest Rate Sensitivity: Preferred stocks like SOHOO, which lack maturity dates, are sensitive to rate hikes. A sharp increase in yields could further depress the stock's price.
• Sector-Specific Risks: Economic downturns or prolonged travel disruptions could reduce occupancy and RevPAR, impacting Sotherly's ability to sustain dividends.

Investment Thesis

For income investors seeking a high-yield alternative to bonds, Sotherly's Series C preferred stock offers an attractive risk-reward profile. The 12.15% yield, coupled with the cumulative dividend feature, provides a defensive edge in a sector prone to volatility. However, investors should monitor the company's debt management strategies and sector dynamics.

Action Plan:
- Buy for Yield: Investors comfortable with the risks should consider adding SOHOO at current levels to capitalize on the 12.15% yield.
- Diversify: Pair SOHOO with lower-volatility REITs or bonds to balance the portfolio.
- Watch for Refinancing: Track Sotherly's progress on Atlanta and Hollywood debt maturities and its ability to maintain liquidity.

In a rising rate environment where traditional income assets struggle, Sotherly's Series C preferred stock stands out as a rare combination of yield and defensive features. While not without risks, its cumulative structure and high yield make it a compelling addition to a well-diversified income portfolio.

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