Picking up cheap shares

With REIT prices broadly dropping to start the year, it is difficult to sell our positions as they are all trading well below intrinsic value.  However, the stream of dividend income still affords purchase of new shares.  Today, we used our built-up cash to buy Sotherly Hotels (SOHO) which we like in the long and short run.

The long run strength comes from the sheer value of its properties which we estimate at $11-$12 per share, while the short term opportunity lies in the upcoming 4Q17 earnings report.

Houston and Miami have spent many weeks in the past few months at the top of the hotel performance charts and SOHO is disproportionately exposed with roughly 30% of their room revenue from those markets.  Timing of insurance payments bodes well for 2018 guidance as both the property damage reimbursement and business loss payment are expected to be received in 2018.

Beyond these more temporary tailwinds SOHO’s portfolio is poised to grow RevPAR as an increasing portion of it is freshly renovated and upscaled.  A few years back, SOHO’s portfolio averaged in the upscale segment with a couple midscale hotels balanced out by a couple upper upscale.  As of today, they no longer have midscale and instead the portfolio is dominated by the upper upscale and luxury segments.

Higher end hotel REITs generally trade at higher multiples, so as SOHO’s RevPAR figure increases we anticipate multiple expansion in addition to the direct revenue growth.

Regarding the REIT sell-off, it is fairly common for REITs to perform poorly when tech stock multiples are getting lofty.  The same thing happened in 2015 and during the dot com bubble.  In each historical case, value REITs bounced back as soon as the exuberance ended.  We see no reason why this time will be any different.  Compared to those points in history, REIT properties are higher quality on average and their balance sheets are lower leverage.

Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.

2CHYP Portfolio Snap Shot

1/18/18 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report