Sotherly Hotels has defaulted on a $49.2 million loan for the DoubleTree Resort by Hilton Hollywood Beach, a 10-story property located at 4000 South Ocean Drive in Hollywood, Florida. The loan entered special servicing after Sotherly missed the October 1 deadline to pay off the debt, according to Morningstar Credit and the company’s second quarter filing with the Securities and Exchange Commission.
The publicly traded real estate investment trust, based in Williamsburg, Virginia and led by CEO Dave Folsom, has been dealing with overdue and upcoming maturities on several hotel loans. This situation has led Sotherly to seek extensions from lenders or consider large principal paydowns amid a challenging refinancing environment. Rising interest rates have made it more difficult for borrowers like Sotherly to secure new loans or refinance existing ones as lenders become more cautious.
Sotherly did not respond to requests for comment. However, its public filings provide insight into its strategy for addressing these financial challenges.
On Monday, Sotherly announced it will be acquired through a merger agreement by Kemmons Wilson Hospitality Partners of Memphis and Ascendant Capital Partners of Los Angeles. The buyers will pay $2.25 per share for all outstanding Sotherly common stock—a 152.7 percent premium over Friday’s closing price—valuing the deal at $425 million according to Hotel Investment Today.
In its second quarter filing, Sotherly said it plans to request an extension from its lender regarding the Hollywood hotel loan maturity. If unsuccessful, it would attempt to refinance; however, this could require paying down up to $12.3 million of principal “based on current and anticipated financial performance” of the property.
The recent merger may help address these obligations. Under the agreement terms, Kemmons Wilson will immediately provide Sotherly with a $25 million revolving line of credit at a floating interest rate.
The DoubleTree Resort is situated in an area known for upscale hotels and condo-hotels between the Atlantic Ocean and Intracoastal Waterway. Nearby properties owned by Sotherly include Lyfe Resort & Residences and Hyde Beach House Resort & Residences.
Sotherly purchased the DoubleTree in 2007 for $74 million. The building was constructed in 1973 and underwent renovations in 2000, 2008, and most recently in 2017 when it became part of Hilton’s DoubleTree brand.
The company originally secured a $57 million loan from Bank of America in 2015—later increased to $60 million—and refinanced again in 2021 with Morgan Stanley, Bank of America, and Merrill Lynch at an interest rate of 4.9 percent.
Over recent years, Sotherly has experienced ongoing debt issues related to this property. At the end of last year, Morningstar Credit reported that the property had a debt service coverage ratio (DSCR) for net cash flow of 0.97x—a figure below breakeven—but this improved to 1.15x by June.
After initially entering special servicing during pandemic lockdowns in 2020 before exiting such status in 2021, performance issues triggered further complications last year including activation of a “cash trap” provision requiring all revenue be deposited into an account controlled by lenders until conditions improved this summer.
According to Morningstar Credit data from last year, average occupancy at the hotel was about 68 percent.
This summer also saw Sotherly default on another major loan: nearly $38 million tied to its Georgian Terrace hotel in Atlanta where it is seeking a one-year extension or may need to pay down about $4 million if forced into refinancing.
Looking ahead, loans on two other properties—DoubleTree by Hilton Philadelphia Airport and The DeSoto hotel in Savannah—are scheduled to mature next year.
