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Buy This Real Estate Investment Trust

February 04, 2014 | About:

SoTherely Hotels (SOHO) is a real estate investment trust (REIT) that owns and operates 11 high quality full-service hotels throughout high gowth markets in the southern U.S. The company also has a minority interest in another hotel in Miami. SOHO properties produce almost twice the EBITDA they produced in 2005. The company has replaced high cost financing with mortgage debt, improved its operation and improved its balance sheet. SOHO offers investors a higher distribution cash flow yield than its competitors.  

List of the company's high quality assets:

  • Hilton Philadelphia Airport PA: 331 rooms, and 10,000 square foot of meeting space.
  • Hilton Wilmington Riverside NC: Underwent a $10 million renovation in 2008 and has 272 rooms and 20,000 square feet of meeting space.
  • Hilton Savannah DeSoto GA: Underwent a $12 million renovation in 2008 and has 245 rooms and 20,000 aquare feet of meeting space.
  • Doubletree By Hilton Raleigh Brownstone Univeristy NC: Underwent a $5 million renovation in 2011 and has 190 rooms and 15,000 square feet of meeting space.
  • Sheraton Louisville Riverside KY: Unerwent a $15 million renovation in 2006 and has 180 rooms and 7,600 square feet of meeting space. 
  • Crowne Plaza Hampton Marina VA: Underwent a $5 million renovation in 2008 and has 173 rooms and 7,600 square feet of meeting space. Also has an adjacent 300 space parking garage and more than 21,000 feet of leasable retail space.
  • Crowne Plaza Jacksonville Riverfront FL: Underwent a $3 million renovation in 2006 and has 292 and 12,000 square feet of meeting space.
  • Crowne Plaza Hollywood Beach FL: Underwent a joint venture with Carlyle Group in 2007 and has 311 rooms and 10,000 square feet of meeting space.
  • Crowne Plaza Tampa Westshore FL: Underwent a $22 million renovation in 2009 and has 222 rooms and 10,000 square feet of meeting space.
  • Holiday Inn Laural West MD: Underwent a $4 million renovation in 2005 and has 207 rooms and 8,000 square feet of meeting space.
  • Crowne Plaza Houston Downtown TX: Underwent a $25 million redevelopment in 2001 and has 259 rooms and 12,000 square feet of meeting space. Is connected to a skywalk to over 2 million square feet of Class A office space with major tenants such as KBR, Chevron and United Airlines.

Corporate Structure 

SOHO corporate structure is its biggest weakness. Like most real estate companies, the company conduct its operations through a limited partnership. The company's limited partnership is called MHI Hospitality LP. SOHO is the general partner and holds a 77% interest in the partnership. The rest of the units are held by the management, mainly the family that founded the company in the 1950s. They cannot directly operate or manage the properties they own because they are a REIT. To deal with this restriction, the company leases their hotels to one of their subsidiaries, MH Hospitality TRS LLC. The subsidiary is required to pay federal income tax, which is rolled over to SOHO, which is unsual for a REIT.

SOHO Financials 

Growth in the hotels' earings has been increased by portifio additions and increased occupancy. In 2006 pre-financial crisis the hotel had an average occupancy of 69.7% and a daily revenue per available room of $78.26. In 2009 the hotel's ocupancy rate fell to 60.4% and a daily revenue per available room of $64.71. Since 2009 the occupancy rate and daily revenue per available room has increase but is still below pre-crisis levels, until 2012 when the company achieved an 68.9% occupancy rate and a daily revenue per available room of $78.65. SOHO hotels drove operating income to a record level of $10.31 million and in 2013, its operating income increased even higher to $11 million. The company has made huge strides in replacing expensive financing with cheap financing. At the end of 2011 it reduced its debt load by 131 basis points, from 6.76% to 5.45%. For the 12 months ended Sept. 30, SOHO hotels produced 92 cents per share/units in adjusted funds from operations, giving the firm a 26% increase from 2012. 

Valuation

The company has a rich AFFO of 19.70% higher than any of SOHO's public competitors. On cash flow the company trades much cheaper than its peers. In 2012 SOHO produced a 12% free cash flow yield  higher than its peers after taking capital expenditures into account. WIth a solid balance sheet, low-cost debt finacing, strong cash flow and high adjusted funds from operations make the company a long-term play on the U.S. economy.

Sources:

http://investors.sotherlyhotels.com/Cache/1001174046.PDF?Y=&O=PDF&D=&FID=1001174046&T=&IID=4095174

https://www.snl.com/Cache/1500040363.PDF?Y=&O=PDF&D=&FID=1500040363&T=&IID=4095174​

http://investors.sotherlyhotels.com/FinancialDocs.aspx?iid=4095174

About the author:

Cody Eustice

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