A few years back I put Sotherly Hotels SOHO on the blog in a brief post. I added it a long time ago to my long-term account for the dividend. The common stock used to yield something like 7% years back. After 2020 Covid really hurt their business. They ended up having to cut out the dividend on the common stock. I sold the stock as the future was looking pretty bleak and the dividend was no longer there. I see better opportunity today from a share price appreciation standpoint.
Here is what the business is from the SEC.gov filing: Sotherly Hotels is a self-managed and self-administered lodging real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004. The Company historically has focused on the acquisition, renovation, up-branding and repositioning of upscale to upper-upscale full-service hotels in the southern United States.
The Company’s portfolio, as of March 31, 2023, consisted of investments in ten hotel properties, comprising 2,786 rooms and two hotel commercial condominium units and their associated rental programs. Seven of our hotels operated under the Hilton, DoubleTree, and Hyatt brands, and three are independent hotels.
I found it interesting they have seven hotels with strong brand recognition. I recently noticed Marriot MAR hotels hit a new 52 week high last week. So the likelihood of other companies in the industry performing well is a likely scenario in the near-term as sector rotation takes effect. We saw that happen with Royal Carribean Cruises RCL and Carnival CCL. Royal Carribean went on a massive run and is up 106% year to date. Carnival has done the same and is up 136% YTD.
I mention these two because they relate to travel/leisure and hospitality. Airline stocks have done incredibly well recently also. With super low unemployment none of this is surprising. It’s not much of a stretch in my mind for Hilton stock to catch up in performance or Sotherly.
Sotherly has net tangible asset value of $53.1 million and at $1.95 a share a market capitalization of $37.6 million. If you include preferred shares its still just $45 million.
The company has series B,C and D preferred stock with tickers SOHOB, SOHOO and SOHON respectively. SOHON has a current 8.2% dividend yield. It has very low trading volume as a heads up and limit orders would be the safest bet with it hypothetically. It’s wise to keep order amounts at a max of 1%-2% of total daily volume with thin volume stocks.
Sotherly 2022 Q4 earnings surprised 485% to the upside according to Nasdaq.com. Q1 of this year earnings surprised 84% up. Q2 is forecasted to be $.40 then Q3 $.14, Q4 $.20, 2024 has Q1 $.25 and Q2 $.40. So it’s going pretty well for the company while the valuation stays suppressed. The share price sentiment is as though we are in recession and cyclical stocks aren’t up 100% this year.
The earnings valuation is maybe even more compelling. The current trailing twelve month PE ratio of Sotherly is 1.77. Yes a 1.77 PE ratio.
Sotherly sports a whopping $8.4 million in free cash flow. Price to free cash flow multiple is 4.5. I don’t think the comparative valuation makes any sense with this stock. I think it is just too undervalued. Granted it is a small-cap and other smaller REIT’s are not doing well. This isn’t an office space REIT or anything like that though. I believe this stock is deserving of a fuller valuation and could catch some sector rotation. The preferreds look good too.
Disclosure: I don’t have a position at this time but may take one in the future.