Sotherly Hotels 7.25% Baby Bonds Trading in Good Buy Area

Little lodging REIT Sotherly Hotels (NASDAQ:SOHO) has a debt issue outstanding with a coupon of 7.25% and a maturity date in 2021.

The issue which came public on 2/8/2018 was eagerly bought at the time of the IPO was floated is an excellent holding for those looking for a pretty darned good return with modest volatility.   The share price of $25.33 represent an excellent holding.  The issue just went ex-dividend on October 31 and has a yield to maturity of about 7% for holding the issue to maturity in 2/2021–just a short 27 months from now.

The issue trades thinly with only 800-1000 shares traded per day so one should be patient if interested in the issue.

The issues ticker is SOHOK and further details and charts are here.

An interesting and helpful feature of this baby bond is that even though it has an early redemption available to the company starting 2/1/2019–but if it is called between 2/1/2019 and 2/15/2021 it is at 101% of liquidation preference ($25) thus eliminating the call risk for the most part.

The baby bonds are unrated (thus we consider them junk rated).

SOHO recently released earnings which were a bit soft because of storms in the areas where they have some hotels, but for the 9 month period ending 9/30 FFO was strong at 83 cents/share–the common dividend is easily covered as they are paying just 12.5 cents per quarter (thus their payout ratio is less than 50%).  Earnings can be reviewed here.

Here is the chart of the SOHOK issue.




DISCLOSURE–we have held some of these baby bonds since the IPO and may buy just a little more.

 

 

17 thoughts on “Sotherly Hotels 7.25% Baby Bonds Trading in Good Buy Area”

  1. Hi Tim,

    A few comments on SOHO’s financials –

    First and foremost, I don’t feel it’s correct to state in the article that the dividend is covered. Yes, FFO is greater than the dividend. However, dividend coverage by its very definition is based upon net income. Technically speaking, both preferred & common dividend coverage is negative YTD, i.e. they’re currently *not* covered.

    While on the topic of coverage, interest coverage should be followed closely here. SOHO’s has been bouncing above and below 1.0 since 2015. YTD they’ve added an additional ~$100M in debt, and interest coverage fell sharply below 1.0 in Q3. Longer-term, if they’re not able to maintain an interest coverage ratio over 1.0, then they’ll fall under the definition of a ‘zombie company’ (12% of global developed companies and growing according to the BIS..).

    Lastly, debt/EBIT is literally off the charts here. A debt/EBIT ratio over 5x is generally considered high risk. YTD 2018, SOHO’s debt/EBIT is currently north of 100x! (if one includes Q4 2017, that brings 12-month EBIT to basically $0, thus making debt/EBIT incalculable)

    Overall I find their financial metrics rather alarming. Granted SOHOK is a short-ish maturity, but based upon current cash levels, their only hope is to roll it. Personally, I’d there are much safer 7% coupons out there..

    1. Sorry, that last sentence was meant to read, “Personally, I’d say there are much safer 7% coupons out there than this..”

      1. Hi Tigerbond—we obviously look at these things differently–but that is what the website is all about and all perspectives are welcomed.

        Feel free to list any other safer bonds with 27 months to maturity with a 7% YTM as all readers would be interested.

      2. Tiger, I’ll bite since you stated “I’d say there are much safer 7% coupons out there than this”… please share with us what companies and their short term baby bonds you are speaking of. Time flies over us but leaves it’s shadow behind, Nomad

        1. Tim & Nomad, apologies, I should have clarified, “safer 7% yields out there (agnostic to maturity & product type)”.

          Better metrics while still earning a 7%+ yield along with a 2021 maturity, that does certainly limit the options, but I’m happy to give it a shot! I’m not sure about baby bonds, but a quick scan of the OTC space reveals at least a few options:

          GENWORTH FINL INC
          CUSIP: 37247DAN6

          MARTIN MIDSTREAM PARTNERS LP
          CUSIP: 573334AD1

          CHS / CMNTY HEALTH SYS INC
          CUSIP: 12543DAU4

          R R DONNELLEY & SONS CO
          CUSIP: 257867AC5

          UNIT CORP
          CUSIP: 909218AB5

          Please note, the above aren’t personal recommendations, they’re simply some of the results of a screen of 2021 bond maturities with 7%+ YTM and companies with better than SOHO’s rather poor financial metrics (prev 12-month EBIT > $0, debt/EBIT 1.0). In any event, a 7%+ yield with under 3 years to maturity is a sign of significant risk (ex, GE’s 2021 bonds just broke 7%), thus treat due diligence accordingly.

          1. Sorry, not sure why that didn’t paste/post correctly. My previous last paragraph corrected:

            Please note, the above aren’t personal recommendations, they’re simply some of the results of a screen of 2021 bond maturities with better than SOHO’s rather poor financial metrics (prev 12-month EBIT > $0, debt/EBIT 1.0). In any event, a 7%+ yield with under 3 years to maturity is a sign of significant risk (ex, GE’s 2021 bonds just broke 7%), thus treat due diligence accordingly.

              1. Hi Tim,

                Sure. I seem to be getting into a mess trying to get those bond search parameters to post correctly, I think it’s the greater than/less than signs. It keeps getting cut off here:

                Prev 12-months debt/EBIT less than 12x
                Prev 12-months interest coverage more than 1.0

                You can go ahead and append the above to my original comment and delete my other correction comments if you want to clean this up a bit. My apologies for the mess.

            1. Happened again, must be some kind of HTML formatting issue with all the symbols I’m using. I’ll try it this way instead, the bond scan was as follows:

              Yield >7%
              Maturity 2021
              Prev 12-month EBIT > $0
              Prev 12-month debt/EBIT 1.0

              1. Tigerbond—haven’t had issues before with any comments – sorry for that. I will check the formatting page and see if there are any parameters that need changing.

                There are just a few parameters that I personally mess with–some I leave to the tech people that built the site.

          2. Due diligence necessary for sure. For example, RR Donnelley and Sons common stock price over the past 5 years has dropped ~70% ! Yikes.

            1. Yes G–no one should ever take anothers word for anything when investing (that includes anything I write) as we all know our own tolerances best.

              1. Yes and some have deteriorating finances that need to be factored in. I have seen Donnelly ETD issue and wouldnt touch it personally. The credit rating keeps declining…Look at GE…Everybody could see for months what is going on, and it took forever for the bond market to begin to adjust to its risk. It also depends on the purpose of the trade too. A flip and rip, or a long term hold… I have done three different types this week…A hopeful flip and rip (SCE-G), A long term hold (KTH), and a I dont know what I will do with it and hang on for now trade (ALLY-A).

          3. I would have to look at the CUSIP to see if it is exactly the same one but that sounds like the Genworth issue I have.

            They have a little hinky-dinky-do going on with wanting to be bought out and a nonperforming unit issue, but it suited a need I had at the time of purchase and has done what I needed it to do.

            I really need to peel off some risk though since I tend to load up on it a bit more than I should.

  2. I had this one for almost year and turned it for a profit. The reason… high levels of debt. Thats the simple version.. the better version is what Tigerbond wrote above.

    1. Hi Dave–I still hold it and will continue until the economy heads south–certainly plenty of debt in this one (and way too many others).

  3. I am with Girdbird on this, what is happening to GE is just the tip of the iceberg. I am deeper into my option writing nowadays. Wrote a call contract (ITM) on 100 shares I own. Expires on 11/23/18. If I get called and have to sell the stock, I make $366.53, if it does not get called I keep the entire $516.53 premium. If the value of the stock falls, and I have to hold it, its a dividend bearing stock(will collect that) and I will keep writing OTM calls on it picking up $20-$100 bucks a week.

    Options are not the boogeyman I was always told they were.

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